The connections between the financial statement items and the main value drivers of a firm are graphically shown in a value driver tree. The tree aids analysts in determining which factors are most crucial to the company’s total value and in monitoring the effects of changes to those factors. You can use the value driver tree to help the firm discover possible risks and opportunities.
How Can You Create A Value Driver Tree (VDT)?
The firm is broken down into its core business units or products, and then each business unit is further broken down into its primary value drivers to create the tree.
Most importantly, In his deep dive post “Value Driver Modelling“, Reuben Kearney lists the different uses of a Value Driver Tree (VDT) and offers a template to build your own VDT. Here are the different uses.
- Identify where the biggest constraints are in an organization’s ability to create value.
- You can use it in conjunction with sensitivity analysis to show which areas are at greatest risk for failing to deliver value.
- Different investment options to find the optimal combination for creating value.
- To provide transparency at the individual employee level to see how they contribute to the creation of value.
- Allows you to benchmark operations that were previously too distinct to compare through traditional benchmarking methodologies.
Some software provide a tool to create a dynamic visualization of the VDT of a company. Therefore, here is an example from SAP :
And here is a concrete example with a comparison between two different scenarios:
The Bottom Line – VDT can Assist You in Many Ways
It takes time and effort to implement Value Driver Trees. But I’ve discovered it’s one of the best tools for developing a more comprehensive understanding of how your organization operates. This is a crucial component in developing product teams that can concentrate on value creation rather than just feature delivery.
Additionally, they serve as a communication artifact that will aid in creating alignment among your stakeholders.
Finally, if you want to learn more finance tools and techniques, you can take my course.