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How can the value driver tree enhance structure and investment decisions?

Valsight4. July 2019
4 min Lesezeit
  • Controlling

Valsight pflegt den aktiven Austausch mit diversen Universitäten und Hochschulen in ganz Deutschland. Im Juni durften wir ein Projekt mit dem Finance, Accounting Controlling und Taxation Master der Hochschule für Wirtschaft und Recht machen. Prof. Dr. Schönbohm hat uns eingeladen, uns in seinem Kurs vorzustellen und einen ganzen Nachmittag mit seinen Studierenden ihre selbst entwickelten Geschäftsmodelle in Valsight zu simulieren. Im Nachgang sollten die Studierenden einen Essay zum Thema Werttreibermodelle schreiben – den Besten finden Sie hier:

Author

Huu Khanh Nguyen
Master student in Finance, Accounting, Controlling and Taxation at Hochschule für Wirtschaft und Recht Berlin

To manage and improve organizational performance is never an easy task, it requires a lot of time as well as manpower to achieve a decent result. Despite all the efforts, many companies are still dissatisfied with their management process. As performance manager or controller, you might have these questions: What happens if I change one variable related to a KPI? What are the connections between the KPIs and their relationship to the overall company value?

A Value driver tree (VDT) is the key to describe the relationship of your business areas (Natalie Davis, 2008). Furthermore, it also enables a strategic overview for budgeting, forecasting and planning based on different scenarios, thus empowering decision making in the organization. For instance, a company VDT represents the flow of key values through its primary activities (Hwang, 2005). In this way, top management can ensure no elements are double counted when considering improvements or investments to company. Up to this point, it is obvious that a VDT is a powerful tool for decision makers but in real-life business, it is not always that simple since there are many KPIs to consider; their related variables will be changing constantly and are interconnected to each other. So, should you start from scratch every time major changes happen? Of course not, it will create too much of a hassle to recreate the model every time. Fortunately, innovative Fintech companies nowadays have come up with the right solution in order to support management level with real-time decision-making process.

Figure 1: Value driver tree – a conceptual example

Among them there is a Berlin-based start-up named Valsight that provides an agile performance management software to enable companies to make better, faster and more transparent management decisions. The software provided by Valsight allows companies to have a real-time overview of their business areas, but one of the most prominent features is to create various simulation for different scenarios in the fastest and most convenient way possible (Valsight, 2019). The outcome of situational simulation will not only be shown for each individual value driver, but also for all value drivers connected to it. All key figures are streamlined and structured according to a uniform scheme, which makes it much easier to concentrate on the essentials. Even with such powerful tools, creating a perfect VDT model is not as simple a task as it might seem. In order to create a comprehensive VDTs, it is necessary to define the key objects first, which can be difficult and complex (Fay M, 2014). For example, if you want to create the VDT for a car company, there are certain factors that need to be considered, such as value of a different car series, and how are these cars targeted? How much influence does the car brand have in certain markets etc.? Only until all the objects, perspectives and priorities are clear, you can start sketching the value drivers. Determining and plotting the value drivers are just the first step, the more important thing is how to report and monitor these value drivers because it will directly influence the company success factors (Phil Noble, 2014). The performance manager or the controller will have the mission to align a logical flow into the business vision based on defined objectives from company value driver tree. For each objective, it is essential to find a measure, because objectives should be SMART (Specific, Measurable, Achievable, Relevant and Timebound) in order for each business area to reach its goal (Wanderlust Worker, 2019). All in all, the benefits, gained by implementation of a value driver tree and its correspondent software, can be summarized as below (Kearney, 2016):

  • Determine and build consensus across multiple business units about what is essential.
  • Prioritize investments and initiatives of the company for different periods.
  • Eliminate redundancies and narrow the gaps in information flows.
  • Serve as a comprehensive source of (planning) information for employees at all levels.
  • Accelerate management decisions process and automation of controlling.

Implementing the concept of value driver trees is one of the most important milestones to embrace the idea of value and performance maximization. The VDT itself together with associated software is the ultimate “What-If Analysis” tool to enhance the process of decision making in company.

References

  • Fay M, G. V. (2014, January 1). IT investments justification based on the business driver tree. Retrieved from Reserach Gate: https://www.researchgate.net/publication/279177539
  • Hwang, E. (2005, January 5). Using the Value Driver Tree to Align IT with Business Goals. Retrieved from csoonline: https://www.csoonline.com/article/2118121/using-the-value-driver-tree-to-align-it-with-business-goals.html
  • Kearney, R. (2016, June 24). Value Driver Trees. Retrieved from Reuben Kearney Analytics and Insight: https://reubenkearney.com/tag/value-driver-trees/
  • Natalie Davis, S. G. (2008, December 8). Shaping strategy in a highly uncertain macro-economic environment. Retrieved from www.mckinsey.com: https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Risk/Working%20papers/8_Shaping_strategy_in_an_uncertain_macroeconomic_environment.ashx
  • Phil Noble, S. W. (2014, Febuary 1). Understanding value-drivers for major projects. Retrieved from spp.com.au: https://2bjqij1n5txx2jt1203y6fo4-wpengine.netdna-ssl.com/wp-content/uploads/2015/11/Understanding-value-drivers-for-major-projects_v2.pdf
  • Valsight. (2019, May 2). Valsight. Retrieved from Valsight: https://www.valsight.com/en/home/
  • Wanderlust Worker. (2019, May 2). Setting S.M.A.R.T.E.R. Goals: 7 Steps to Achieving Any Goal. Retrieved from Wanderlust Worker: https://www.wanderlustworker.com/setting-s-m-a-r-t-e-r-goals-7-steps-to-achieving-any-goal/