The VDF Tool
One of the major challenges facing strategic planners is to bridge the gap between strategizing and building a performance measurement system (Balanced Scorecard). Despite attempts to bridge this gap, strategic thinking is often isolated or apart from those who develop measurement systems such as the Balanced Scorecard. In an effort to close this gap, we can focus on assets; i.e. identify those assets that we must develop for meeting strategic goals and objectives.
Similar to how the structure of a balanced scorecard allows us to reframe strategy into four or five perspectives, we can structure our strategic assets into a framework known as the Value Dynamics Framework (VDF). VDF is an organized approach to categorizing all assets that are required for strategic execution. Assets can fall into several categories, such as the following:
· Physical Assets such as inventory, facilities, equipment, vehicles, etc.
· Customer Assets such as strategic partners, suppliers, distributors, and other assets needed to service customers.
· Organizational Assets such as employees, executives, board members, organizational structures, culture, processes, reputation, etc.
· Financial Assets such as cash flow, revenues, debt, equity, and other financial resources needed for the strategy.
In his article, “Putting Strategy into the Balanced Scorecard” , Peter Brewer outlines four steps to building the VDF:
1. Identify the assets you will need to execute your strategy.
2. Map your assets into a framework, making sure everything relates to one another resulting in one cohesive model.
3. Do SWOT (Strengths, Weaknesses, Opportunities, Threats) Analysis of your VDF - make sure it works against the current competitive environment.
4. Connect critical success factors in the strategy to the assets within the VDF.
Once we have the VDF established, we can now select the appropriate measurements for the Balanced Scorecard. Measurement selection becomes easy since assets are the focal point of measurement. Therefore, the VDF Tool connects assets that drive strategy to measurements that populate the Balanced Scorecard.
Arthur Andersen, once a major accounting firm, has described the VDF Tool as a means of “cracking the value code.”
“ . . companies in today's superheated economies are in a race to discover the underlying code of value creation. That is, they are trying to find out which combination of assets – tangible and intangible – create the greatest economic value and to avoid those combinations that destroy it. How do companies create value today? Our answer: To succeed, they need to see what matters – all of the assets contributing to value creation.”
- Cracking the Value Code by Richard E.S. Boulton, Barry D. Libert, and Steve M. Samek
By using the VDF Tool, we can help ensure that we invest in those assets that have the biggest strategic impact. Once we know where to invest, we can budget our resources accordingly. This in turn links our budgets to our strategy, something that often escapes the strategic process. Overall, the VDF Tool can be a powerful technique for exposing those assets that require major emphasis for value creation.
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756
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