The VBM or value-based management 

VBM or value-based management is an approach towards strategic performance management system of the company based on the philosophy of EVA™ (economic value add) towards shareholders wealth maximization. The entire business process, activities, deliverables of the company should be targeted towards shareholders wealth maximization.

The VBM could be implemented based on a four-step model as follows: 
Step 1: Strategy development
Step 2: Target setting
Step 3: Operational measures
Step 4: Performance measurement & control

EVA is a trade-marked technique, developed by consultants called Stern Stewart and Co.

Value-based management (VBM) is a management approach that focuses on creating and maximizing long-term shareholder value. It involves aligning the strategic decisions and actions of a company with the goal of generating value for its shareholders.

The basic premise of VBM is that a company’s success should be measured not only by its financial performance but also by the value it creates for its shareholders. It emphasizes the idea that the primary objective of a company is to enhance shareholder wealth over the long term, rather than focusing solely on short-term financial metrics.

VBM encompasses various principles and practices aimed at achieving value creation. Some of the key elements of VBM include:

• Value Creation: VBM places a strong emphasis on generating sustainable value for shareholders. This involves making strategic decisions and executing actions that increase the intrinsic value of the company over time.
• Performance Measurement: VBM relies on rigorous performance measurement techniques to evaluate the value created by different business units or projects within a company. Financial metrics like return on investment (ROI), economic value added (EVA), or cash flow return on investment (CFROI) are often used to assess performance.
• Value Drivers: VBM focuses on identifying and managing the key drivers of value within an organization. These drivers can include factors such as revenue growth, cost management, capital efficiency, and risk management. By understanding and optimizing these drivers, companies can enhance their overall value creation potential.
• Incentives and Compensation: VBM promotes the use of performance-based incentives and compensation systems that align the interests of employees and managers with shareholder value creation. This can involve linking executive bonuses or stock options to long-term value-based metrics.
• Capital Allocation: VBM emphasizes efficient capital allocation to ensure that resources are deployed in projects or investments that generate the highest returns and create the most value for shareholders. This involves evaluating investment opportunities based on their potential to enhance long-term shareholder value.
• Communication and Transparency: VBM advocates for clear communication of the company’s value creation strategy and performance to shareholders and other stakeholders. It promotes transparency in financial reporting and encourages regular updates on the progress towards value creation goals.

By adopting a VBM approach, companies aim to create a culture of value creation throughout the organization, aligning decision-making processes, and fostering long-term sustainability and growth.