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Divisional performance appraisal and transfer pricing

Value-based management (VBM)

This is a slight aside but is covered here since it carries on from our discussion of
EVA.

7.1 What is VBM?

VBM is an approach to management where by the company’s
strategy, objectives and processes are aligned to help the company
focus on key drivers of shareholder wealth and hence maximise
this value.

 VBM takes the interests of its shareholders as its primary focus.

 It begins with the view that the value of a company is the total value of its
discounted cash flows.

 Therefore, effort should be made at all levels (strategic, tactical and operational)
to increase the value of these discounted cash flows.

Value drivers include:

1 Revenue

2 Operating margin

3 Cash tax rate

4 Incremental capital expenditure

5 Investment in working capital

6 Cost of capital

7 Growth period

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