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A quick look at… accounting for value – defining value

Most people will know something about Value Based Management (VBM). It is a management philosophy that, basically, focuses on the creation of value rather than just profits.

July 2016

Sometimes there is, however, confusion about just what we mean by ‘value’ in this context. In this article we will look first at what definition of value isn’t used in VBM. We will then look at what definition of ‘value’ is actually used in VBM. We will then conclude by exploring the various issues, some fairly controversial, in using the chosen definition of ‘value’.
First, what it is not. It is not value added, where companies are attempting to increase profits by adding customer/company value at a product level. An obvious example of this is where potatoes (which often sell at less than 50p per kilo) are turned into crisps and then sold at more than £20 per kilo.
It is also not added value. This is mostly a measure used by governments and other organisations to measure the economic viability of whole industries. It looks at how industries contribute to the economy by measuring employee wages and benefits, taxes paid, dividends paid and the amounts reinvested in the future of the industries.
So how is ‘value’ defined for the purposes of VBM? It goes by several names but the one we shall use here is stakeholder value. But here is where the problems start. As you will know, companies have many stakeholders and creating value can be a very testing and conflicting process. It is often the case that by creating value for one class of stakeholders often can end up destroying value for others. So what often happens is that the definition of value becomes not stakeholder value but shareholder value, and this can be where the controversy starts.
• John Foster is an AIA Achieve e-tutor. The AIA Achieve team is producing a series of ‘A Quick Look at….’ articles and more can be found on the AIA website: www.aiaworldwide.com/

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