What is a value driver tree?

What is a value driver tree?

The value driver tree (also value factor tree) is a visual model that can be used to examine the overall result of a company in more detail. For this purpose, the result is broken down in a tree-like structure according to so-called value drivers (also known as value sources). These are all parameters that have a relevant influence on the financial result of a company (or division). Thanks to this approach, decision-makers can assess how certain changes affect the key parameters (value drivers) that can be influenced. This in turn enables value-oriented corporate management, also known as value driver planning.

What are examples of value drivers?

Many factors influence the company value and the financial result. However, for an influencing factor to be classified as a value driver, it must fulfill the following two basic requirements:

1. It is a factor that can be influenced.
2. The factor is highly relevant to the financial result of a company (or business unit).

Furthermore, value drivers can be divided into two categories: financial and operational value drivers. Examples of financial value drivers are key figures such as investments, cost of capital, sales growth and return on sales. Operational value drivers, on the other hand, are variables that are upstream of financial factors. These success levers can be influenced at various levels of a company. One example would be product quality, insofar as it has a significant influence on sales.

How value driver trees work

Value driver trees generally follow a certain structure: the starting point is always a root node (e.g. the company value or shareholder value). The value drivers that have a direct influence on it are then linked to this root node. The logic is continued at the next level. Value factor tree users progress from relatively abstract (generic) influencing factors to their business-specific, influenceable value drivers. Or to put it another way: The value driver tree helps companies to break down abstract variables into concrete success factors.

For example, the value driver "EBITDA" is at an abstract level that can hardly be influenced directly. The factor must therefore be broken down further until levers that can be influenced become apparent. These can be influencing factors such as the margin of units sold, production costs, prices per unit, product quality, market share and a few others.

When is a value driver tree used?

The value driver tree is used in various scenarios. Some typical examples are the following:

• Strategic planning and decision making: Value driver trees make transparent how different strategic decisions can influence the overall value of the company.
• Performance management: Value driver trees show which areas of the company are working well and where improvements are needed. They make it possible to diagnose the causes of performance problems.
• Budgeting and financial forecasting: When preparing budgets and financial forecasts, value driver trees help to understand and communicate the assumptions behind the figures. They show how changes in operational drivers affect financial results.
• Operational optimization: By analyzing the lower levels of the value driver tree, companies identify areas where their operational efficiency can be improved.

Furthermore, the value driver tree is also used to evaluate investment opportunities. This applies to both internal investments and M&A transactions, where the company value should be closely examined.

What is the value driver tree used for?

The value driver tree is used to simplify various analysis and planning scenarios in the company. Until recently, however, it was difficult to implement value driver planning with IT systems. This is because trees with several hundred or even over a thousand nodes, which are also called up by several users at the same time, require considerable computing power. However, thanks to new technologies such as in-memory computing and computing resources from the cloud, complex value driver trees can now be built without difficulty.

Today, value driver trees are therefore being used more and more frequently in various areas of a company - for example in sales, finance and controlling. They are particularly popular because of their intuitive, visual arrangement of nodes, which illustrate relationships. Many tools now support the self-service concept. This means that users can create their own value driver trees without the need for IT support.

In practice, the value driver tree primarily helps to make corporate planning more dynamic and intuitive. This is achieved because the approach makes it possible to quickly generate new forecasts and thus improve responsiveness. All in all, planning and budgeting cycles can be shortened and streamlined.

How can a value driver tree be mapped with SAP?

Value driver trees are a standard functionality of the SAP Analytics Cloud (SAC). In this cloud-based analysis and planning environment, value driver trees (VDT) can be created very easily and used for simulations.

How is the value driver tree set up?

Value driver trees are created in the SAP Analytics Cloud as part of a story (a self-service data visualization). Only a few steps are required to do this. First, the user selects a model, then assigns the desired nodes either manually or automatically and configures them. Finally, the individual nodes are linked to form a diagram. Each node is automatically visualized by SAP SAC and provided with values for each period.

A detailed description of the procedure is available here in the SAP Help Portal. This can be accessed here.