In the first decade of the 21st century, we have witnessed two economic crises that led to the complete destruction of some large and important companies.
What is value-based management?
This led the organization’s leaders to think about how they could perform effectively in these critical situations so that they could survive successfully.
But what does ” success ” really mean? Does it mean higher profits or shareholder value is? Or does it mean being more efficient, forward-thinking, and working in a way that ensures the survival of the company in times of crisis?
If your strategy for success is based on profit, you probably will not pay enough attention to the long-term effects of your decisions. For example, you can increase the price of your products to increase your profits, or increase your seasonal profits with a sudden drop in prices and keep your company’s investors and shareholders satisfied.
These kinds of decisions are likely to affect your market share, your ability to compete, and the quality of your products in the long run. It also has a huge impact on your ability to attract and retain smart professionals and talented employees in your organization.
Everyone wants to have a profitable and effective performance by having cost-effective teams and projects. No one wants to ignore their short-term goals, but sacrificing long-term profitability for short-term profits is not a good strategy. Ultimately, you need to build and maximize your ability to be profitable in the long run. One way to achieve this goal is to use value-based management (VBM).
In this article, we will look at the concept of value-based management and identify strategies that you can use to increase the overall value of your organization. We will also look at VBM’s weaknesses and drawbacks and see when using VBM may not be appropriate.
Principles of value-based management.
In the value-based management (VBM) approach, the overall goal is to maximize the value of the organization, which means that the decisions that are made today are not just for short-term gain. If you consider the long-term effects of your decisions on the profitability and sustainability of your organization, you will see its reflection in the future and in the cash flow generated by the organization.
VBM urges individuals and employees to think like the owners of the company and make their decisions in a way that ultimately benefits the company.
Managers must constantly seek to grow opportunities and invest in opportunities that lead to value creation and use the company’s capital in a way that ensures its long-term success.
One of the fundamental principles of VBM is the belief that cash flow and future growth are the sources of an organization’s value. Proponents of the VBM approach do not make their decisions solely on the basis of financial scales and accounting metrics (such as quarterly earnings, earnings per share. the ratio of earnings per share to earnings).
VBM is both a philosophy and a method of identification. This approach makes it clear that the decisions you make on a daily basis all play a role in the value of the organization.
Weaknesses of VBM.
Although a value-based management approach can enhance an organization’s value, you need to remember that it is not for everyone. Because it is a long-term approach that builds on predictions and assumptions about what can increase the value of the organization; Relies on on.
For example, when you are confident that upgrading a company’s software system will increase value by increasing the effectiveness of processes, and this has great potential for increasing market share, anticipate the effects of a new technology that completely disrupts your services and puts them out of competition. It is very difficult.
If you use VBM as the only measure of decision-making and performance, you may have to distance yourself from projects and strategies that have a lot of uncertainty about their outputs. But on the other hand, it can have a huge impact on the long-term growth and sustainability of your organization. For this reason, this approach may not be suitable, for example, for new technologies that are in the early stages of entering the market.
Also, using this approach may not be appropriate for companies that are well-established and have successfully used a particular business model for a long time. For example, companies in the commodity sector, such as the wood and steel industries, which have stable markets and stocks, may conclude that applying a value-based approach to the workflow can do more than potentially benefit them.
They disrupt. So when creating new organizational values, you need to keep in mind that the projects you choose as part of the value-based management process should not diminish the value of the work you are currently doing.
The VBM approach can also cause you to lose sight of your business issues or ignore your non-financial metrics for corporate success. It can be of great value for your company to carry out its social and human missions well. Costly projects to reduce the negative impact of the company’s activities on the environment may not be to the liking of shareholders and may not add value to the company, but if you look at these projects from a broader perspective, you will see that they can really.
Be fruitful in creating sustainable and long-term value. Similarly, for some industries, prioritizing the needs of shareholders over the needs of other stakeholders (such as customers, employees) can have the opposite effect, ultimately to the detriment of the company.
Therefore, it is very important to use approaches such as VBM on a scale and from a specific perspective that is consistent with the overall goals and mission of the organization.
