1 capitalideasonline.com INTEGRATING CORPORTE STRATEGY AND FINANCE WITH VBM TO DELIVER GOOD...

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INTEGRATING CORPORTE STRATEGY AND FINANCE

WITH VBM TO DELIVER GOOD SHAREHOLDER VALUE

Chetan J Parikh


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• Maximising shareholder value

• Framework for analysing competitive strategy

• Strategy valuation process

• Importance of investor communications

Integrating Corporate Strategy

~Introduction

Themes


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Maximising Shareholder Value


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~Maximising Shareholder Value

Link between operating value drivers, value factors and competitive analysis

Operating Value Driver Value Factor Key Issues

Sales Growth Volume Industry GrowthMarket Share

Price and Mix Price ChangesMix Changes

Operating Profit Margin Price and Mix Price ChangesMix Changes

Operating Leverage Preproduction CostsPosition in Investment CycleDivisiblility of Investment

Econimics of Scale PurchasingProductionDistributionLearning Curve

Cost Efficiencies Process ReconfigurationTechnologyOutsourcing

Incremental Investment Investment Efficiencies TechnologyFacilities ReconfigurationWorking-capital Management


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Framework for Analysing Competitive Strategy


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• Five forces – industry analysis

• Value chain analysis – choice of activities

• Disruptive technology – innovation

• Information rules – information economy


~Framework for Analysing Competitive Strategy

The Framework


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• The five forces analysis of Michael Porter is useful for businesses with the following characteristics

– Defined boundaries

– Mature and stable industry structure

– Emphasis on tangibles



Five Forces - Industry Analysis


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• Barriers to entry

• Substitution threat

• Buyer power

• Supplier power

• Firm rivalry



Five Forces - Industry Analysis


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• Useful for two kinds of industries

– Vertically integrated industries

– Activities susceptible to technological change



Value Chain Analysis


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• Customer priorities

• Channels

• Offerings

• Inputs/Raw materials

• Asset/Core competancy



Value Chain Analysis


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• Relevant for the following kinds of companies

– Technology rich

– Market leaders

– Organisationally centralised



Disruptive Technology


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Disruptive Technology

Time

Pro

du

ct

Perf

orm

an

ce

Performance demanded at high end of the market

Performance demanded at the low

end of the marketProgress

due to

sustaining te

chnologies

Progress due to

sustaining te

chnologies

Disruptive technological

innovation

Source: ‘The Innovator’s Dilemma’, Clayton Christensen


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• High upfront and low incremental costs

• First mover advantage

• The economics of networks

• Tipping points

• Lock-in

• Role of knowledge is wealth creation



Information Rules – Information Economics


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• Economic webs

• Evolution/Co-evolution

• Punctuated Equilibrium



Information Rules – Information Economics


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• Increasing returns

• Monopoly rents

• Inferior products can dominate



Outcome of the New Economy


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• Cash Flow

• Risk

• Sustainability of excess returns



The Three Economic Value Drivers


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• Giveaways

• Link-and-leverage

• Adaptation, not optimisation

• Pshycological warfare



Evaluating knowledge-based companies


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Strategy Valuation Process


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• How would alternative strategies affect shareholder value creation?

• Which strategy is likely to create maximum value?

• For the selected strategy, how sensitive is value to internal and external business factors not contemplated in the ‘most likely’ scenario?


~Strategy Valuation Process

Key Macro Questions


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Key Micro Questions

• Which business units in the corporate portfolio are creating the most value for shareholders?

• Which business units have limited value creation potential and thereby should be candidates for divestiture?

• Which combination of strategies will generate the most total value?

• Which business units are cash generators and which are cash drains?



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Key Micro Questions

• To what extent can the corporation fund its proposed strategies from internal sources, and how much additional debt or equity might have to be raised?

• Are your projections consistent with industry averages forecast by investment firms and industry experts?

• If yes, is it realistic to assume that the firm will perform at the ‘average’ level?

• If no, where do your projections deviate from those of the industry as a whole? (sales growth rate, operating profit margins, fixed capital investment?) Are those divergences realistic?



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Environmental Factors and its Effects

Environmental factorsValue drivers most likely to

be affected

Entry of new competitors Sales growth rateOperating profit margin

Introduction of new products and technologies Sales growth rate Operating profit margin

Fixed capital investment

Competitors’ strategic action (price-cutting Operating profit margintactics, major advertising campaigns, etc.)

Regulatory actions (changes in income tax Operating profit marginlaws, pollution control laws, or safety Fixed capital investmentprocedures) Cash income tax



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Importance of Investor Communications


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• Unnecessary volatility in stock price

• Difference between management’s valuation based on future projections and market price

• External threats like takeovers


~Importance of Investor Communications

Results of poor communication


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• Explain business and environment in detail

• Emphasis on future prospects rather than historical performance

• Focus on strategies and opportunities for long term value creation rather than short-term outlook

• Caution against hype and creation of ‘over-expectations’

• Open admission of bad news


Right communication strategy

~Importance of Investor Communications


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Thank You

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