The ultimate objective for operating an organization is to serve its markets that can be fairly clubbed under four categories- "market for products and services", "capital markets", "corporate management market" and "market of managers and employees"
Serving and taking care of these sections of stakeholders is the responsibility of each company. This is because all these groups contribute (in some or the other way) their resources to the firm. For instance, employees devote their time and efforts to carry out the day-to-day operations; investors provide the financial support and customers give the hard-earned money. Consequently, the organization is answerable to all these classes regarding the usage of their inputs.
Value Based Management (VBM) takes ahead this very underlying principle for existence of organizations, i.e. "proliferation of shareholders" value". It comprises initiating steps that "generate", "manage" or "measure" the value developed. This idea compels organizations to shed the "short-sightedness" behaviour often found to be responsible for a group"s downfall. It makes the managers look beyond targets for the next 5 or so years.
The benefits accruing from adoption of this concept include "facilitated and better communication among employees"; "setting of well-defined management priorities and goals"; "shielding against takeovers and undervaluation of stocks" and "improved tackling of complex situations".
However, owing to the enormously expanded domain and scope of "VBM", the task can turn awfully entangled and cumbersome. The challenges faced in the way of VBM comprise "huge investment of time and resources needed for implementation of this practice" and "extensive support from top-managerial level". Lack of interest from any group can play havoc to the operations of the organization and can mislead the whole team.
Moreover, yet another difficulty that comes "within" this concept is the "change needed in culture of the organization". This is an immensely qualitative subject so calls for even greater commitment from all directions.
This makes it necessary to utilize a "monitoring and feed-back mechanism" for ensuring that a consistent check on the movements made by the organization in this direction is possible. A logical methodology can be summarizing the "areas that matter to stakeholders" groups" in terms of "metrics that can be quantified". Here comes the role of a 1990s thought developed by Norton and Kaplan; that was popularized as BSC (Balanced Scorecard).
VBM introduces consistency in organizational "mission", "governance", "culture" and "strategy". Sustenance of this consistency is materialized by culmination of VBM and BSC.
Moving on, the parameters that can serve the purpose in case of VBM are- "cost per unit decrease", "market growth rate", "return on sales" and "return on sales" to have the financial standing. Further, Customer satisfaction and Value
Perspective can be had via metrics like "customer retention ratio", "proportion of customer base that finds the products and services beyond expectation", "level of customer service" and "re-purchase probability". Efforts to add Innovation and value to products can be quantified in the form of parameters such as "fall in product defect rate", "number of new products developed" and "decline in the new product development timeframe". Finally Employee satisfaction and learning attempts can be measured using "motivation level", "number of training sessions held in one year" and "decrease in the number of accidents at workplace". By drawing help from these parameters, one can formulate an accurate strategy for monitoring and evaluating the "Value based Management" occurring in organization.