Why Value Based Management? Benefits

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted”.

(Albert Einstein 1879 - 1955, American theoretical physicist)

Organizations serve a purpose. They exist to deliver certain value(s). Organizations also use a tremendous amount of time, effort, investments, assets and resources.

So it makes perfect sense to ensure, manage, measure, monitor, encourage and support that maximum value is realized. This is what Value Based Management is all about.

Another way to explain why Value Based Management is important is to realize that your organization is operating and competing in four markets:

1. the market for its products and services

2. the market for corporate management and control (competition on determining who is in charge of an organization, threat of takeovers, restructuring and/or leveraged buyouts)

3. the capital markets (competition for investors' favor and savings)

4. the employee and managers market (competition for company imago and ability to attract top talent)

Value Based Management can help organizations to win in each of these 4 markets. Failure to be competitive on one or more of these markets will seriously jeopardize the survival chances of a corporation.

In recent years, accounting metrics have turned out to be very unreliable. This also supports the emergence of new value-based metrics such as Economic Value Added, CFROI, Market Value Added and other valuation mechanisms.

The following comprehensive list of benefits of Value Based Management clearly demonstrates why Value Based Management is by far the most powerful mechanism existing today to manage corporations:

VBM can maximize value creation consistently,
VBM increases corporate transparency,
VBM helps organizations deal with globalized and deregulated capital markets,
VBM aligns the interests of (top) managers with the interests of share- and stakeholders,
VBM facilitates communication with investors, analysts and communication with stakeholders,
VBM improves internal communication on strategy,
VBM prevents undervaluation of the stock,
VBM sets clear management priorities,
VBM facilitates to improve decision making,
VBM helps to balance short-term, mid-term and long-term trade-offs,
VBM encourages value-creating investments,
VBM improves the allocation of resources,
VBM streamlines planning and budgeting,
VBM sets effective targets for compensation,
VBM facilitates the use of stock for mergers or acquisitions,
VBM prevents takeovers,
VBM helps to better deal with increased complexity and greater uncertainty and risk.

Compare: Drawbacks of VBM | What is Value Based Management | History of VBM

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