Value Based Management History
history and development of Value Based Management (VBM) and the
growth of internal and external corporate complexity over time are highly
interrelated (figure). This is only logical if one realizes that VBM is
basically a philosophy enabling and supporting maximum value creation in
Before the industrial revolution, companies were relatively small and their
internal complexity was low. Also the external environment of companies was
relatively stable and clear. Value creation was relatively straightforward, simple and obvious.
There was no need for VBM.
Implicit Value Management (±1800-1890)
The earliest forms of implicit "VBM" date
back to the end of the 18th century, when, by
mechanizing and by the industrial revolution, it becomes possible to
achieve economies of scale through investing in machines and hiring
production workers. The dislocation of facilities is making direct supervision
harder, and insight in the efficiency and productivity of the production
process becomes more important. Efficiency and productivity methods are
being developed. During the 19th century, these methods are gradually
improved, using improved transportation and communication mechanisms that
become available. These systems are aimed at promoting and evaluating
the efficiency and productivity of decentralized production processes and
not yet on measuring and managing value creation as such.
Explicit Value (Based)
At the end of the
19th century, Alfred Marshall sees profit as the residual income accruing to
a firm's owner, a return to the investment of his own capital and to the
pains he suffers in exercising his 'business power' in planning, supervision
and control. Frederick Taylor (1911) and Harrington Emerson develop Scientific
Management (using detailed physical manufacturing standards, enabling a
simple translation to financial standards).
more complex, because they now have a diversified product assortment and
often have several types of company activities instead of just one.
Allocation of assets over the various activities and, as a result, better
information on these activities becomes more important. Management
Accounting introduces Return on Investment (ROI),
at first only at top management level for allocating resources and judging
In 1938, Grant makes
some references to using the time value of money for deciding about
investment projects. In 1954 Dean publishes an article in the HBR about
using Discounted Cash Flow (DCF) practically
for valuing investment proposals and other decisions. Later, also methods
are introduced such as residual income, responsibility accounting and
investing. In 1964, Sharpe introduces the Capital Asset Pricing Model (CAPM) and in 1973 Black and Scholes introduce
their formula for calculating the value of financial options.
In 1964 Peter
Drucker writes "Managing for Results" and in 1986,
Alfred Rappaport writes his
"Creating Shareholder Value".
In 1994 Jim McTaggart uses the term
"value based management" in his book The Value Imperative
: Managing for Superior Shareholder
Returns. From now
on, thinking in financial/shareholder value terms is firmly rooted in
business and corporate Strategy. MVA,
TSR, EVA, and
CFROI are developed in order to determine
the value of corporations and investments.
The world of
Corporate Finance is also rapidly professionalizing, also leading to
increased attention for managing value creation in
and Acquisitions. Leveraged buy-outs
became very popular
in the 1980s, as public debt markets grew rapidly and opened up to
borrowers that would not previously have been able to raise loans worth
millions of dollars to pursue what was often an unwilling target. This
presented a major stimulus for managers that ran their companies in ways
that mainly served their own private interests (improved authority, control
and compensation), often at the expense of the companies’ owners,
shareholders, and long-term strength to change their behavior.
From the eighties
Activity Based Costing (ABC) and similar
concepts (Activity Based Management, Transaction-Based Costing) are
developed, enabling more precise and more future-oriented measurement of
profitability and economic value by products, channels, markets, processes
methods such as RAROC (1970) are becoming
more popular in the nineties, combining
risk management and economic profit
valuation for allocating capital in financial institutions.
Following the birth
of the WWW in 1994, many new strategic information / knowledge related
opportunities and technologies arise, simultaneously increasing the
complexity of the internal and external environment of modern corporations.
A spectacular value increase of intellectual capital in
corporations is the consequence. New intangible asset valuation models
such as the Skandia Navigator.
Change Management is
developing as a way to deal with increasing discomfort levels in ever faster
In 1998 Luehrman
transfers the formula for determining the value of options into dealing with
uncertainty over time in strategic decision
making (Real Options).
Scenario Planning and
Game Theory are also developing to
deal with strategic complexity and agility.
Balanced Scorecard model
(published by Kaplan and Norton in 1992) becomes most popular, enabling
organizations to translate a company's vision and strategy into
implementation, working from both the financial perspective as well as the
customer, business process, and learning and growth perspective.
such as Business Performance Management, Business Intelligence and Business
Simulation are arriving to support the ever more complex decision making and
management processes in corporations. Many companies struggle with the
large-scale implementation of these technologies.
Holistic Value Based
At the beginning of
the third millennium, what appears to have been the Internet bubble bursts,
and in 2001 the Enron accounting
crisis hits the media, followed by several more corporate scandals
throughout the world.
Accountants, stock analysts, top management, business
schools, media, shareholders and investors are all blamed.
Among the most prominent
ideas to prevent further disasters in the future are:
Strict accounting practices and rules,
Improved corporate governance,
analysts from other banking activities,
More attention for business ethics
and corporate social responsibility,
Rules for executive
Protection of shareholders interests,
Attention for stakeholders interests,
A long term view towards
Despite their good
intentions, many of these ideas also further increase the complexity of both
the internal and external environment of corporations, causing renewed
interest to holistic
Value Based Management in corporations to support and ensure their core
value creation processes.
What is Value Based
Benefits of VBM |
Drawbacks of VBM |
Performance Prism |
Dialectical Inquiry | Intrinsic
Stakeholder Commitment |