Without targets, organizations do not know where to go. Developing business-unit strategy does not have to become a bureaucratic time sink; indeed, the time and costs associated with planning can even be reduced if VBM is introduced simultaneously with a reengineering of the planning process. A small improvement here had a big impact on the value of the company without affecting the quality of customer service. Chemicals Finally, delivery costs are determined by the number of trips per transaction, the cost per trip, and the number of transactions. It focuses on better decision making at all levels in an organization.
At the corporate level, strategy is primarily about deciding what businesses to be in, how to exploit potential synergies across business units, and how to allocate resources across businesses.
A production manager might work to targets for cost per unit, quality, and turnaround time. Analyzing alternative scenarios to assess the effect of competitive threats or opportunities. When VBM is working well, an organization's management processes provide decision makers at all levels with the right information and incentives to make value-creating decisions. A value-based manager is as interested in the subtleties of organizational behavior as in using valuation as a performance metric and decision-making tool. For about two hours we listened to details of how each business unit had been valued, complete with cash flow forecasts, cost of capital, separate capital structures, and the assumptions underlying the calculations of continuing value. The primary reasons for any client or consultant to commission a VM study is to achieve value improvements and/or monetary savings.
It had been underinvesting and taking cash out of the business. Line managers and supervisors, for instance, can have targets and performance measures that are tailored to their particular circumstances but driven by the overall strategy. The focus of VBM should not be on methodology. Consequently, its capital turnover (sales divided by invested capital) was only 1.8, versus 2.4 for its competitors.
Diversity Target setting is highly subjective, yet its importance cannot be overstated. The value of consolidating operations was about $364 million. Generic value drivers, such as sales growth, operating margins, and capital turns, might apply to most business units, but they lack specificity and cannot be used well at the grass roots level.
An 11 percent return destroys value, and a 13 percent return creates value. None of the company's significant strategic or operating issues were on the table. Assessing the results of the valuation and the key assumptions driving the value of the strategy.
The first step in VBM is embracing value maximization as the ultimate financial objective for a company.
However, we do recommend using DCF in conjunction with economic profit to establish benchmarks and reward performance at the business-unit level. Management believed this was high for the industry and thought it should be reduced to 1.2. Identifying key value drivers can be difficult because it requires an organization to think about its processes in a different way. The value of a company is determined by its discounted future cash flows. At the chief executive level in a publicly-held company, increases in stock prices are directly observable, and therefore a CEO's bonus can take the form of stock options or stock appreciation rights. In Company X, a large consumer products company, the performance of each of its 50 business units was measured by its operating margin or return on sales (ROS). Traditional financial performance measures, such as earnings or earnings growth, are not always good proxies for value creation. It has to act on things it can influence—customer satisfaction, cost, capital expenditures, and so on. The factors are tiered.The 7 top tier factors are: 1. health and safety 2. security 3. environment 4. risk / hazard reduction 5. socio-economic impacts 6. finance 7. enabling the missionAround 50 detailed factors are identified beneath these headings:The Value … Managers' performance should be evaluated by a combination of metrics that reflects their organizational responsibilities and control over resources (Exhibit 6). This needs to be done with some care since those sources may have vested interests in the present way of doing things.Many regard this step as being the heart of Value Management. To ensure transparency in our decision-making, we have established the factors that we consider when assessing options.