Is Value-Based Management a Good Choice for Your Business?

Maximizing the value of your business is the focus of a good exit strategy. It logically follows that a focus on value optimization should be built into your overall business strategy and how you run your business.

Leading management consulting firm, McKinsey & Company, has developed a model for a comprehensive approach to value-based management (VBM). They assert that the failure of other management plans is often because performance targets were unclear or not aligned with the ultimate goal of creating value. McKinsey’s VBM concept identifies value as the precise metric upon which an entire organization can be built.

The Value-Based Management Concept

The basic concept behind VBM is that the value of a company is determined by its discounted future cash flows – investing capital so that returns exceed the cost of that capital. VBM extends this thinking to use the company’s key value drivers to inform both major strategic and everyday operating decisions.

This approach starts with the company embracing value maximization as their ultimate financial objective. These steps should follow:

  1. Identify and prioritize value drivers specific to the company.
  2. Develop a strategy to optimize value.
  3. Translate this strategy into short- and long-term performance targets, defined in terms of the key value drivers, and tailored to different levels of the company.
  4. Develop action plans and budgets to define the steps that will be taken over the next year to achieve these targets.
  5. Put performance measurement and incentive systems in place to monitor performance against targets and to encourage employees to meet their goals.

Consistency and Culture are Key.

According to McKinsey, strategies, performance targets, and processes must be consistent throughout the organization and linked across the company at all functional levels in order to achieve value creation goals. VBM involves restructuring to achieve maximum value on a continuing basis. Companies also need nonfinancial goals around product innovation and both customer and employee satisfaction. These objectives don’t contradict value optimization, but rather serve to establish values and guides for the organization and its culture.

If your company adopts value-based management, the mindset must be integrated into company culture. All staff members need to understand the VBM concept and their roles in the practices that make it work. McKinsey points out that the focus of VBM should not be “strictly on methodology but also on the why and how of changing culture.” For example, a manager should consider organizational behavior as much as valuation as a performance metric and decision-making tool.

Value-Based Management and Exit Planning

When a business owner chooses their exit date and starts to plan for their eventual departure from the business, my recommended next steps are:

  1. Determine the gap between the current business value and the value needed to meet your financial objectives upon your exit.
  2. Identify and prioritize company value drivers and develop a plan to address these value drivers to close the value gap.

VBM is the melding of a value creation mindset and the management processes and systems that are necessary to translate that mindset into action. Alone, neither element is sufficient, but together, they can have a tremendous and sustained positive impact on a business. This management method may be a great choice, especially for those who have an exit strategy in place or are considering starting an exit plan.

I’d welcome the opportunity to help you assess whether VBM may be a fit for your business or to discuss starting or building out your exit plan. A highly effective way to develop your exit plan, with the benefit of sharing challenges and solutions with other business owners, is to join one of our Exit Planning Peer Advisory Boards (PAB). Contact me for a complimentary consultation or to be a guest at our next PAB meeting.

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