Value Based Management

Value Based Management or VBM, is an ideology directed towards creating maximum value for shareholders of a company. It seeks to integrate financial theory with strategic thinking and apply it to corporate planning decisions. The VBM approach can be categorised into the following stages,

1) Identification of Goals- For a company that follows VBM, its goal is to deliver maximum value to investors.
2) Adopting suitable strategies- A well-defined strategy is the key to creating value. It defines the process of how you are going to achieve your goal.
3) Measuring Performance- Along with financial performance measures, strategic performance measures can have a profound impact on the ability of a company to create long-term value.
4) Managing Processes- Management processes are the critical link, which help the management team initiate the necessary changes.
5) Operating/Decision making- Value based management becomes a reality when value management becomes the chief consideration in the operating and investment decisions taken by the company

VBM provides a structured system for distributing power down to the level of every employee in the company. VBM also offers employees an opportunity to participate as first-class shareholders in the company's equity growth, and in monthly and annual profits on a profit centre basis. A VBM system typically incorporates the following features: -

• An employee stock ownership plan (ESOP),
  
• Individual and team performance feedback (i.e. frequent and formula-based cash profit sharing),
  
• Ownership education and sharing of financial information, and structured participatory management and governance.

VBM also reinforces ongoing information and education programs, provides a broad understanding for all employee-shareholders, of the interdependency among every person, department, and profit centre in serving the customer and competing in the marketplace.

Tools of Value based Management: -
VBM embraces methodologies such as strategy development, Balanced Scorecard, Activity Based Costing, and best practices in process management. VBM relates to the use of concepts such as Economic Value Added, Shareholder Value Added or Market Value Added. All these factors determine the relative value of earnings to the cost of money. In other words, VBM is all about maximising the company’s financial performance.

Advantages of Value based Management: -
Experience has shown that when a Value-Based Management system is reinforced, workers feel empowered to take better decisions, discipline their behavior, and work together more effectively as a team. As each person contributes, risks and shares as an owner as well as an employee, VBM helps integrate the individual employee’s interests with those of the company's bottom-line requirements and corporate values.

The purpose of VBM is to create a holistic measurement and management mechanism that is designed to enhance organisational performance. VBM, as a management system, offers a logical framework for designing the company's structures and processes to instil a sense of ownership among employees, which enables the organisation to achieve its mission most effectively.