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Value Based Management (VBM) or Stern Stewart's EVA is used to determine the
"real" shareholder value creation (or destruction) contributed by
each business unit or division. Rather than simply taking a profit or earnings
number, VBM/EVA assigns a capital charge. The intent is to move managers away
from fixating on market share or revenue growth and other traditional measures,
and instead focus managers on creating shareholder value as the
"ultimate" objective. In terms of planning then, the question becomes
"How much shareholder value can this division contribute over the planning
horizon, and how will it achieve that goal?"
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Can focus the organization on creating
shareholder value, and thereby greatly increase the likelihood of achieving
that goal.
Stock analysts generally view the adoption of a VBM/EVA program very
positively.
Can create an understanding among all managers of how they contribute to
creating shareholder value and focus their efforts accordingly.
Creates one defining, overriding priority - creating shareholder value. All
projects, goals and initiatives can be evaluated in this light.
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Calculations VBM/EVA can be very complex and
difficult to explain to managers. Lack of commitment and buy-in can result.
Without a whole host of supporting factors, below,
it's likely to be ignored by the organization and fall into disuse.
Management reporting systems often need considerable reconfiguration in order
to report monthly VBM/EVA results.
Business Unit heads often reject allocations, and since allocations are often
part of VBM/EVA calculations, bottom line results are frequently contested.
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Can
this work for my company?
Value Based Management/EVA, in theory, is the best thing that ever happened to
shareholders. Why? Because shareholders often underwrite a whole host of money
losing propositions - like throwing good money after bad chasing market share.
VBM/EVA can change all that by focusing on and reporting on shareholder value
creation (it gets very complicated very quickly, but you can think of it as
earnings after a capital charge). So rather than focus on revenue growth, or
"being #1 in the market", or any one of a number of common goals,
VBM/EVA companies will pursue those goals only if they will result in increased
shareholder value. In fact, all proposed projects, initiatives and programs are
judged by this yardstick. Want to build an on-site daycare center? Fine, as
long as you can build a compelling case that it will increase shareholder value
(lets say by reducing turnover and recruiting fees).
The problem is that VBM/EVA tends to get stuck at the senior management level.
The reason why that's a problem is that it's the decisions that workers make on
the front lines every day that really drive shareholder value. Sure, Senior
Management can make a "big bang" decision to sell a division or enter
into a strategic alliance. But the fact is that line employees and frontline
supervisors make dozens of business decisions every day. Whether to throw out
or remachine a problem part. How hard to pursue that new prospect. Whether to
get maintenance to investigate the funny noise the truck motor is making or
just wait till it breaks. Whether the irate customer on the phone is entitled
to a refund. Not to mention those little decisions like what hotel to stay in.
If managers don't understand the VBM/EVA measure, or what they do every day
that influences it, they'll stop caring about it. They'll do what they need to
get by and no more.
That's why the successful implementation of VBM/EVA requires a lot of support;
in the form of across the board business literacy, robust management reporting
systems, and integration with the compensation and bonus policies.
In light of this, you may want to consider implementing VBM/EVA if your company
meets this criteria:
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You have a data warehouse, or have implemented an
Enterprise Application System (such as SAP or Peoplesoft). |
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You are prepared to undertake an organization wide business
literacy program to teach VBM/EVA. |
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Your senior management is prepared to make difficult, even
unpopular decisions given the shareholder value implications (if not, don't
waste you time). |
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Compensation and bonus polices can be updated to support
shareholder value creation goals. |
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