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Hi,
I would like ask about VBM method as applied in the answer to Q1 Jun’14 about Cantor group
I am not very sure about key value drivers mentioned in the answer?
I thought that this should have more to do with having targets for non financial aspects like customer satisfaction, faster service, innovation ie. nr of promotions, new type of dishes, increasing efficiency, etc – all that drives value I think
but the answer mentions gross margin, I was thinking that this would be obvious and that we need to focus on what would possibly drive these margins ?
I would see value drivers in terms of value adding activities, more like Value Chain, am I confusing two different methods here?
Thank you
VBM begins from the view that the value of a company is measured by its discounted future cash flows.
The answer does say that “key value drivers must be identified and then performance targets (for both the short and long term) are defined for those value drivers.”
Certainly, as you say, the value chain can identiify those as well as KPIs relating to customer satisfaction. However, these drivers must ultimately create gross margins, net margins and profits as these are directly responsible for generating positive cash flows.
VBM keeps its eye on generating future cash flows and asks what we have to do now to create those.
So in practice, how would that ensuring future c/fs looked like?
for example, if Cantor decided that upskilling the staff was good for the business, under VBM, would they need to perform provisional NPV, taking into account extra costs for training to ensure that this really adds value, ie. returns positive NPV?
it seems recalculating valuation would go always first before calling anything “value driver”?
Thank you
In theory no investment should be undertaken without some regard as to whether it is worthwhile or not.
For investments like training, benefits are very hard to estimate especially if it is thought that they would yield larger cash flows because of better customer service and better reputation. In practice many companies will look at the cost of the training and then make assumptions about sales, saying that the sales are not possible without better trainiing, advertising and better products. Sometimes they might have some evidence about the pay-offs received from previous similar expenditure.
Often a precise NPV would contain so many assumptions that you could almost get whatever figure you want. This is where management judgement comes in.
Thank you
I have better understanding of this method now and I hope I should be able to say something meaningful if the question about VBM comes up again
Just last question on it,
how does VBM relate to other models like Performance Prism, Pyramid, Balanced Scorecard, etc? I study from BPP book and VBM is in the same chapter as these models, so I assumed it all must come together somehow
Prism, pyramid and balanced scorecard have lots on non-financial performance and indicators. Hitting the right non-financial performances should result in better financial returns, cash flows and value.
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