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Sep 18, 2002
Managing for Value: Implementing Value-Based Management Strategies
Implementing a Value-Based Management (VBM) Strategy is seen as one of the key drivers of corporate success. However, studies show that many companies fail completely in their efforts. This Harvard Business Review article from 2001 - based on a broad study - examines and highlights what it takes to successfully implement VBM. In the end, this can be used as a guide to any corporate change effort, I guess.
We found that putting VBM into practice was far more complicated than many of its proponetns make it out to be, requiring a great deal of patience, effort, and money. A successful VBM program is really about introducing fundamental changes to a big company's culture.All of the successful VBM efforts, as it showed, share a few common traits:
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As Lloyds's chairman Pitman puts it: "Anyone who thinks that implementing shareholder value is a matter of changing a few accounting systems and people will follow is fooling themselves…. You are going to get opposition from every corner." Our survey confirms his opinion: By far, the reason most often cited for VBM's failure was cultural resistance to change. Indeed, simply understanding that VBM is about cultural rather than financial change may itself be part of the answer."
Following, please find a more detailed summary of these key success factors for value-based management strategies.
An Explicit Commitment to Value
- The first challenge in implementing VBM is to jolt the company out of the existing mind-set.
- To do that, CEOs of the successful companies have nearly always kicked off their programs by making public an explicit commitment to shareholder value.
Example: Cadbury promised to investors to double share price every 5 years.
- Explicit commitment serves two purposes:
- Communicates to the outside world that the company recognizes the need to break with a prevailing culture.
- Energizes internal constituencies and employees in general.
- Communicates to the outside world that the company recognizes the need to break with a prevailing culture.
Intensive Training
- "Successful VBM companies invest a great deal of time, effort, and money in training large numbers of their employees."
- Covering a large number of employees and taking enough time.
Example: Dow Chemical retrained ca. 75% of all 40,000 employees. Training involved a first part of 1.5 days of training in the basics of VBM ("how to calculate the economic profit metric, how to develop the key value drivers for a given value center or smaller organizational unit, and how to interpret the results") and a second part of 3 days geared toward specialized functions.
Shaking Out the Team
- Effective VBM-training programs can - and probably should - lead to a shakeout among senior managers.
Example: At Cadbury after the VBM implementation, 50% of the 150 top managers left the company or were assigned to new positions.
Building Ownership
- Successful VBM programs almost always involve increasing everyone's ownership stake in the company.
- Interestingly, we found that the size of the compensation package was not a factor in determining success, only how wide the program was in its coverage.
Example: Cadbury top managers must purchase Cadbury stock in proportion to their positions and salaries. E.g. the executive team is expected to own Cadbury shares equal to four times their salary.
Empowering Business Units
- VBM leaders are willing to reorganize their companies completely if that will help turn their frontline employees into strategic planners in their own value centers.
- Especially important is to make the company's cost structure more transparent, largely by reducing the overhead and shared costs.
Broad Process Reforms
- Most unsuccessful VBM companies focus their programs almost entirely on changing their accounting and control systems, typically investing much of their time and effort in developing and applying complex measures of performance. Leading VBM practitioners take a much more comprehensive view of their companies' business processes.
- They avoid accounting complexity.
- A major overhaul of their accounting systems, which some experts advocate, would create two sets of accounts running in parallel, potentially a very confusing situation.
- Identify value drivers…
- ... to focus frontline employees' activities on value creation.
- ... to push management to develop strategies with much greater clarity.
- ... to focus frontline employees' activities on value creation.
- Integrate budgeting with strategic planning.
- Invest heavily in information systems
- As a senior Dow executive explains: "Before VBM, we didn't have the data, and we couldn't even agree that we didn't have the data. Now we can pinpoint performance - including economic value - by product, market, and customer. It took us four years to put this system fully in place, and it was driven entirely by VBM's requirement to gather good data to allow the analysis to take place. I can't see that it would have been done otherwise."
Creating a Virtuous Circle
- The reforms spur companies to reshuffle their business portfolios, redefine relationships between corporate leaders and their business units, and eventually transform their frontline employees.
- The most immediate result from a VBM program appear in the company's business portfolio. In many cases, VBM programs trigger a series of value-creating divestments.
- Acquisition is typically a later stage phenomenon for successful VBM implementers, resumed only after they've cleaned up their portfolios.
- Successful VBM usually fundamentally changes the relationship between a company's headquarter and its operating units.
- Before VBM, the typical company has a large corporate center that intervenes frequently at the operating level, creating a command-and-control relationship.
- As the VBM program takes hold, however, the corporate center scales back its involvement in operating decisions.
- Rather than fund discrete projects as part of an annual capital approval parade, over the time the corporate centers begin to approve and fund complete strategies stretching out over several years.
- Before VBM, the typical company has a large corporate center that intervenes frequently at the operating level, creating a command-and-control relationship.
Source: "Managing for Value: It's Not Just About the Numbers" by Philippe Haspeslagh, Tomo Noda, and Fares Boulos. Article in HBR, 07-08/2001, p. 65-73.
Posted by Stefan Smalla on Sep 18, 2002 at 15:34 | Permalink