Value based management focuses on the intended beneficiaries of an organization.
Let me remind you of what these terms beneficiary and benefit refer to in relation to corporate objectives.
I have explained elsewhere that the form of a corporate purpose for any organization is set by asking these two simple questions -
This gives you the two most vital pieces of a statement of corporate purpose: beneficiaries and benefit. Any organization’s purpose has this form -
< Your organization> exists
to provide <name the benefit> to <name the Intended Beneficiaries>
A purpose has nothing about being ‘excellent’, ‘world class’, ‘leader’ of anything, and so on!
In a business, the purpose for publicly traded companies is to increase the value of the firm for investors.
For non-profit organizations, it will be something different.
You will notice I said improve, not maximize.
There are problems with ‘maximizing shareholder value ‘ -
The purpose of the business is to generate wealth at levels the owners see as ‘satisfactory’, and with a low risk of failure. Value based management works to improve the value drivers throughout the firm, which at a minimum will seek to avoid harm to any stakeholders, and comply with all relevant laws.
It is unhelpful to put shareholder value against corporate social responsibility. Shareholder benefits and behaving well while doing this are two linked responsibilities of top managers.
Among the strengths of managing for value to the Intended Beneficiary are the following -
Management involves streams of decisions. Managers in larger entities make hundreds of decisions every day. These involve complex tradeoffs. For example -
Managers need clear decision criteria.
It helps to compare the value impact of alternatives and choose the option that creates the most value for shareholders. Other criteria, such as industry leadership, or product excellence, could lead to overinvestment, profitless growth, or value destroying disinvestment.
Another virtue of this approach to management is the positive feedback when
the firm enhances its ability in value creation. Achieving this usually
requires improved information and strategic analysis. In addition,
improved organizational design and business processes can produce a
stronger capacity for both learning and strategic decision-making.
The advantage emerges in many forms, such as -
This strengthens competitive advantage, which produces better results for the shareholders.
When it is clear what the purpose of the organization is, then mapping the value drivers assists decision making about allocation of resources, as shown in the following diagram.
For more on this subject see this site.
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