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Value Based Management System

1. Value based management (VBM) is a management approach that aligns a company's goals, processes, and decisions with creating shareholder value. It focuses on investing capital in ways that generate returns above the cost of capital. 2. VBM aims to provide consistency between a company's mission, strategy, governance, culture, communication, organization, and performance management, all with the goal of maximizing shareholder value. 3. Benefits of VBM for companies include improved employee and customer satisfaction, leading to increased sales and profits. Benefits for employees include feeling a sense of responsibility and shared rewards. However, implementing VBM fully can be difficult and expensive.

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Uma Maheswari Balaji
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934 views7 pages

Value Based Management System

1. Value based management (VBM) is a management approach that aligns a company's goals, processes, and decisions with creating shareholder value. It focuses on investing capital in ways that generate returns above the cost of capital. 2. VBM aims to provide consistency between a company's mission, strategy, governance, culture, communication, organization, and performance management, all with the goal of maximizing shareholder value. 3. Benefits of VBM for companies include improved employee and customer satisfaction, leading to increased sales and profits. Benefits for employees include feeling a sense of responsibility and shared rewards. However, implementing VBM fully can be difficult and expensive.

Uploaded by

Uma Maheswari Balaji
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

VALUE BASED MANAGEMENT SYSTEM

[Link] Maheswari, [Link]. Scholor, Department of Management studies, Anna Malai University, Chidambaram. Lecturer, Department of Business Administration, [Link], Sivakasi INTRODUCTION: Work in most companies today follows the "scientific management" philosophy of Frederick Winslow Taylor. Writing in 1911, Taylor proposed that systemizing efficiency should be the primary focus of corporate managers. He declared: "In the past, man was first. In the future, the system will be first." Frederick Winslow Taylor

Recent years have seen a plethora of new management approaches for improving organizational performance: total quality management, flat organizations, empowerment, continuous improvement, reengineering, kaizen, team building, and so on. Many have succeededbut quite a few have failed. Often the cause of failure was performance targets that were unclear or not properly aligned with the ultimate goal of creating value. Value-based management (VBM) tackles this problem head on. It provides a precise and unambiguous metricvalueupon which an entire organization can be built. VBM aligns a company's overall aspirations, analytical techniques, and management processes with the key drivers of value The thinking behind VBM is simple. The value of a company is determined by its discounted future cash flows. Value is created only when companies invest capital at returns that exceed the cost of that capital. VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating decisions. Properly executed, it is an approach to management that aligns a company's overall

aspirations, analytical techniques, and management processes to focus management decision making on the key drivers of value. WHAT IS VBM? This system has been mainly designed to ingrain a feeling of ownership in the company. It presents organization workers with the opportunity to act as Ace-shareholders and actively be a part of the companys equity growth, and even in its monthly and yearly profits. It considers the interests of its shareholders while making business-related decisions. More so, there have been instances which show that by instilling VBM culture, people often stand in a better position to make more effective decisions, and also work more effectively and efficiently as a team. DEFINITION: First Definition of value based management: Value Based Management is the management approach that ensures corporations are run consistently on value (normally: maximizing shareholder value).

It is useful to understand that Value Based Management includes all three of the following: 1. Creating Value: ways to actually increase or generate maximum future value strategy. Value Based Management VBM 2. Managing for Value: (governance, change management, organizational culture, communication, leadership 3. Measuring Value: valuation. Second Definition of value based management: Value Based Management aims to provide consistency of:

the corporate mission (business philosophy), the corporate strategy (courses of action to achieve corporate mission and purpose), corporate governance (who determines the corporate mission and regulates the activities of the corporation), the corporate culture, corporate communication, organization of the corporation, decision processes and systems, performance management processes and systems, and reward processes and systems,

with the corporate purpose and values a corporation wants to achieve (normally: maximizing shareholder value). THE BASIC ELEMENT OF VBM In order to gain a better insight into Value Based Management it may be helpful to analyze its three notions of value:

Shared ethical values include the trust and confidence in the inbuilt and intrinsic value of each individual associated with the company; be it the worker, customer or supplier.

Ability to successfully deliver maximum value (higher quality at a lesser price) to the customer. The outcome gained in the form of rewards based on the value people have contributed to the organization. This contribution to the company could have been done as a part of a team, as a worker, or even as an owner.

Value-Based Management can also be described as an ethical framework for succeeding in business. As such, VBM balances moral values with material values. VBM' s three components of value are realized in: 1. A foundation of universal moral values, starting with the intrinsic value of each person-each employee, customer and supplier. 2. Success in the marketplace based on delivering maximum value-higher quality at lower prices-to the customer. 3. Rewards based on the value people contribute to the company-as individuals and as a team, as workers and as owners. Within a VBM system, these aspects of value can be implemented in a business by: 1. Creating structures of corporate governance and management based on shared moral values, as expressed in a written set of: a. company core values (ethical principles which define the culture and clarify the social purposes and mission of the organization); and b. a code of ethics (describing a set of virtues or "habits" to be encouraged, which guide individual behavior toward strengthening the company's culture and interpersonal harmony).

Ideally these core values and code of ethics are agreed upon by consensus by every person in the company, and are subject to periodic review and improvement (as with Herman Miller Inc.'s "renewal process"). These serve as the "compass" for guiding corporate objectives, policies, and other decisions; they also provide a basis for judging people's behavior. 2. Maximizing value for the customer. VBM expresses a simple formula for any business to follow for succeeding in the competitive marketplace: V = Q/P where V=Value, Q=Quality, and P=Price This states that Value delivered to the customer increases as Quality of the good or service increases, and/or its Price decreases. Within a VBM culture, everyone in the company has a self-interest in providing "service to the customer," because ultimately it is the customer who "signs" every employee's paycheck. 3. Structuring the company's compensation and reward system to enable every person in the company to be rewarded for the value of their contributions to the company. This is one of the fundamental aspects of ownership. It reflects the "correct" principle of distributive justice contained within the Kelso-Adler theory of economic justice, where a person's returns are based on performance and contribution, not charity. Basic VBM compensation and reward systems would include: a. monthly, bimonthly or quarterly bonuses linked to each worker's profit center within the company, b. annual, corporate-wide performance bonuses based on formulas tying each worker's contributions to overall company profits, and c. a structured, profit-based program of share ownership (i.e. annual ESOP contributions), supplemented by cash dividend payouts to reinforce long-term ownership consciousness.

BUILDING SYSTEMS FOR SHARING RISKS, RESPONSIBILITIES AND REWARDS: VBM is designed to "institutionalize" shared responsibility, shared risks and shared rewards within the company's ongoing structures and processes. The key management areas affected by the VBM transformation process include:

Corporate values and vision Leadership style and skills Corporate governance Open Book Management Operations (policies and procedures) Communications and information sharing Training and education Pay and rewards Grievances and adjudication Collective bargaining with labor unions Employee shareholder education and participation Future planning

BENEFITS OF VBM: It has been signified that the greater the self-interests of people have been unified by a management-following-VBM-principles, the greater an employee and customer satisfaction will be experienced. Thus, resulting in improved sales, greater cost savings and increased profit ratios.

Benefits for Management: Transformation from an authoritarian mode to a more participatory, value-based mode could help managers distribute their archetypical operational problems. This in turn leaves them with more time to concentrate on the organizations more pressing issues.

Benefits for Employees: VBM can succeed when everyone linked with the company (the owners, the employees, the workers, etc.) feel that they are also

responsible and accountable for the process and share the outcome as a member of the VBM team. Using Value Based Management principles gives rise to a comfortable, satisfying and economically rewarding ambience for its employees.

Benefits for Labor Unions: In addition to transforming various other sections of the organization for the better, VBM can also be held responsible for modifying labor unions within a company. This new transformation allows the union representatives to play roles greater than what they had played before in the system.

DRAWBACKS: Like the two sides of a coin, Value Based Management has various advantages as well as certain disadvantages:

Search for a flawless valuation model with impeccable results can be quite a gruesome task. Every valuation model has its own share of loopholes and setbacks.

VBM is a holistic management philosophy which most of the time may need a change in culture. This, in turn could result in the consumption of huge amounts of resources and time in order to reach the desired end.

Treading down the wrong path by measuring the wrong things can lead to an inevitable loss of value(s). Although training and consulting support may prove to be beneficial for Value Based Management, they can turn out to be highly priced and expensive.

CONCLUSION: VBM brings with itself an approach that looks upon the values of a company and its related-parties as a plus point. Companies, on a whole, have to implement and come up with moral, true and honest values that will cover and satisfy the requirements of the people involved in the process (employees, workers, suppliers, etc.). However, it is of utmost importance to have a clear idea of value systems and not end up measuring the wrong things that can lead to value destruction.

Common questions

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The primary challenges associated with implementing a Value-Based Management (VBM) system include the difficulty of developing a flawless valuation model due to inherent loopholes and setbacks . The cultural change required for holistic VBM adoption can demand significant resources and time, making it an exhaustive process . Additionally, misalignment in measuring the wrong metrics can lead to value destruction rather than creation. Despite its benefits, the initial costs for training, consulting, and system setup are high, making VBM a demanding management shift that requires careful planning and execution .

The primary components of Value-Based Management (VBM) include creating value, managing for value, and measuring value. 'Creating Value' involves strategies to maximize future value, ensuring that investments yield returns exceeding the cost of capital. 'Managing for Value' involves governance, change management, organizational culture, communication, and leadership to align company practices with value maximization. 'Measuring Value' involves the evaluation of performance in terms of value contribution, helping in setting clear performance targets and alignment of activities with shareholder value maximization . These components help align a company's overall aspirations and processes to focus decision-making on value drivers, ensuring that corporate actions support long-term value creation for shareholders .

From a management perspective, the adoption of a Value-Based Management (VBM) approach transitions the organizational structure to a participatory, value-based model, allowing managers to focus on strategic issues instead of operational problems . This participatory approach promotes efficiency, innovation, and alignment of operations with strategic goals. From an employee perspective, VBM creates a satisfying and economically rewarding environment by involving them in decision-making and rewarding their contributions to value creation . Employees also benefit from increased engagement, satisfaction, and ownership of their work, resulting in higher motivation and productivity .

Value-Based Management (VBM) ensures organizations focus on maximizing shareholder value by integrating the corporate mission, strategy, governance, culture, communication, decision-making processes, and performance management with the principle of value maximization . VBM employs consistent measures of performance that align managerial actions with key drivers of shareholder value. It ingrains a sense of ownership among employees by considering their interests, thereby motivating them to contribute effectively to organizational goals . By prioritizing measurable value creation, VBM aligns long-term corporate strategies and day-to-day decision-making with the overarching goal of creating shareholder value .

Ethical values are central to the application of Value-Based Management (VBM) within an organization, serving as the foundation for governance and decision-making. Core ethical principles define the company's culture and social purpose, guiding individual behaviors to strengthen corporate culture and interpersonal harmony . VBM requires the establishment of a code of ethics agreed upon by consensus to provide a 'compass' for guiding corporate objectives and judging behaviors . By ensuring alignment between moral and material values, VBM helps in achieving a balance that contributes positively to long-term shareholder value while fostering an inclusive and ethical workplace environment .

The implementation of a Value-Based Management (VBM) approach significantly enhances employee engagement and satisfaction by fostering a sense of ownership and accountability. In a VBM culture, employees are considered key stakeholders and are rewarded based on their contributions to the organization's value . This participatory approach empowers employees to be active decision-makers, aligns their personal goals with organizational objectives, and provides financial incentives through structured reward systems. Such an environment increases motivation, satisfaction, and loyalty, leading to improved teamwork, productivity, and value creation .

A Value-Based Management (VBM) system transforms the management style from an authoritarian mode to a participatory and value-based approach . This change emphasizes shared responsibility and accountability, encouraging employees to engage actively in decision-making processes. It also facilitates open communication and information sharing, fostering transparency and trust throughout the organization. By aligning compensation and reward systems with performance and contribution, VBM motivates employees to focus on value creation. This approach not only addresses traditional operational issues more collaboratively but also allows managers to concentrate on strategic, value-driven goals .

A Value-Based Management (VBM) system ensures alignment with a company’s mission and purpose by integrating value creation across all aspects of corporate functioning, including governance, strategy, communication, and performance management . VBM requires that corporate goals and actions be derived from a foundational set of core values and ethical principles agreed upon by consensus within the company. These guide the decision-making processes, ensuring that every action taken reinforces the company's mission of maximizing shareholder value . By continuously measuring and managing value, VBM holds the organization accountable to its mission, enabling effective alignment of day-to-day operations with long-term goals .

Shared responsibility is embedded within a Value-Based Management (VBM) system by institutionalizing structures and processes that distribute risk, responsibility, and rewards throughout the organization. This involves transforming corporate governance to include leadership styles that promote participatory decision-making and open communication . Employees are given ownership stakes and are involved in profit-sharing schemes, aligning their interests with the company's value maximization goals. The implications for organizational governance are profound, as it shifts from a top-down authority model to a more inclusive one, fostering teamwork, transparency, and accountability, ultimately leading to improved organizational performance and sustainability .

Value-Based Management (VBM) influences the dynamics of labor unions by transforming their role within the company. In a VBM system, labor unions become integral to the shared governance approach, participating in decision-making and representing workers' interests more effectively . This participative model fosters collaboration rather than confrontation and allows union representatives to have a greater say in policies impacting employee compensation and corporate governance. The shift towards open communication and shared values enhances the unions' bargaining power and can lead to more equitable outcomes for both employees and the company .

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