Value-based management at the customer- and product level

Abstract

The creation of shareholder wealth has become a key measurement of corporate success. Value-based management (VBM) is a powerful management framework with the aim to focus all managerial processes on shareholder wealth creation. It therefore encourages all staff levels within the organisation to focus on value creation. Various metrics have been developed to measure the value creation process within the organisation. Discounted cash flow to the present value at the weighted average cost of capital lies at the heart of these metrics. The application of VBM principles at the lower levels within the organisation is critical to ensure that lower level staff applies value-creating principles in their daily jobs. Through the use of value mapping, underlying value drivers are linked to the overall strategy of value creation. The application of VBM within the financial services industry is critical for survival within a continuous changing environment. For organisations to be value creators it is imperative to apply VBM principles at the customer- and product level for decision-making and rewarding. The usage of VBM tools, such as embedded value (EV) and customer lifetime value (CLV), provide an understanding of the impact that a product or customer has on the value of the organisation. These tools do not only provide information on the profitability of customers today, but also provides information on the potential value of a customer or product. Despite the agreement that shareholder value and the use of EV's for sales rewards should take centre stage, management within First National Bank (FNB) is still inclined towards traditional metrics, creating scenario's where the business unit and short-term performance takes preference over the intent of the organisation and long-term sustainable shareholder value. With international organisations entering the South African financial market, local financial institutions cannot be managed as they have been managed previously within a protected market. South African financial institutions need to adjust themselves to become world-class value creating organisations, where the shareholder comes first.