Deloitte Conference Warsaw

8/3/2019 Deloitte Conference Warsaw

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The ultimate test of management is value creation

Top quality CEOs deliver consistently superior shareholder returns

New fangled measures like EBITDA and EVA are not enough. There are

no magic methodologies

Each management team needs to set out on a journey of learning

together which will transform their beliefs, their behaviour and their

performance

Focusing onShareholder

Value

Transforming

Beliefs

Transforming

Behaviour

TransformingManagement

Performance

SHAREHOLDER VALUE: A JOURNEY OF LEARNING


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Old Beliefs

We must achieve multiple

objectives

We must balance the demandsof multiple stakeholders

Global growth

Best in industry

New Beliefs

Our single purpose and

governing objective is to

maximise shareholder value

Maximising shareholder value

maximises value for all the

stakeholders: there is no

conflict

Selective market leadership

If world class means anything, it

means world class in value

creation

TRANSFORMING BELIEFS


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The governing objective of the company should be to maximise

shareholder value, not growth

Maximising good growth and eliminating bad growth is essential to

achieving the governing objective

Maximising strategic and organisational effectiveness is essential to

achieving the governing objective

RESTATING THE GOVERNING OBJECTIVE


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Common Issues

Competing goals

Strategies which focus on growth not value

Management processes which focus on growth not value

Management remuneration, rewards and recognition which reflect a

focus on growth not value

Lack of good information

Reluctance to lose a customer or product

Management beliefs

FOCUS ON MAXIMISING VALUE NOT GROWTH


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GOOD GROWTH AND BAD GROWTH

GOOD GROWTH

When ROE exceeds COE, a business will

create value by growing

forgo value by not growing

BAD GROWTH

When ROE is less than COE, a business will

create value by eliminating underperforming investments

destroy value by growing

Maximising value is about maximising good growth


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Replace the concepts of balance and diversity with the concepts of focus

and competitive advantage

It used to be thought that diversifying your risk reduces your risk. Not if

it ends up in weak market positions and low, or negative, cash flow

The real risk is that you enter markets in which you dont have

competitive advantage

Chasing market share frequently ends in tears. Profitability and

competitive advantage result in high growth and share - not the otherway round

Companies with high multiples have chosen focus over diversity

Outsource diversification to shareholders

ATTITUDE TO RISK


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Move from focusing on achieving balance to focusing on achieving

competitive advantage

Dispose of companies (and parts of companies) which cannot earn areturn above the cost of equity

Reallocate equity away from the businesses which cannot create

enough value (where you cannot be distinctive enough)

Acquire companies which broaden and strengthen competitiveadvantage

MANAGING THE PORTFOLIO


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Alternative strategies represent different choices for one or more of five

dimensions of any (Value Centres) strategy

1. Business proposition: How the business will achieve a profitable

strategic position (in terms of marketeconomics and competitive position)

2. Participation strategy: What product market segments to target for

continued participation, entry or exit

3. Offering strategy: Whether and how to differentiate (customer

perspective)

4. Operating strategy: Whether and how to differentiate (operating

perspective)

5. Pricing strategy: How to price for improved market economics

or competitive position (or both)

GENERATING ALTERNATIVE STRATEGIES


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Change organisation structure to ensure clarity of accountability for

value e.g, accountability for market segments

Change organisation structure to ensure new learning about new

sources of competitive advantage

Delegate accountability for value as close as possible to the customer

and competition

Avoid excessive centralisation

SingleBusiness

Market-Based

Segmentation

Multiple

Product

Specialist

Value Centres

Value Centres

for Products

and Customer

Relationships

Move from managing the value of the Group as one business,

to managing the value of the Group through multiple value centres

Organisation

Structure

ORGANISATION STRUCTURE


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Observations

Most companies do not have the

information needed to measurethe value of their individual

businesses

Value tends to be concentrated

Cross-subsidisation is common

In which products and markets are we creating value?

Value creation

A

BC

D

EF

G

H

DIAGNOSIS


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Economic Profit tells us how much value is being created

Economic Profit is the profit attributable to shareholders less a notional

charge for the equity invested in the business

It is the only measure that brings together both the growth in equity andthe return on that equity

Because Economic Profit measures the value being created, it allows us

to evaluate alternative strategies that might create more value

Senior management incentive awards based on Economic Profit

ECONOMIC PROFIT


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A FINANCIAL DISCIPLINE

Economic Profit measures are an integral part of the strategy

development process

The strategy development process creates the conditions and enforces

the financial standards for developing the highest-value strategies on a

continuous basis in every business unit

The strategy development process, using Economic Profit measures,

instils a financial discipline into the company:

To avoid investing resources in areas of poor growth prospects or

poor returns

To encourage a continuous review of existing and alternative

strategies that deliver demanding performance targets


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Insist upon alternative, higher value, business strategies

Each value centre needs as a strategy showing how they will obtain a

competitive advantage and the effect on economic profit

In any given year, some value centres may be growing rapidly while

others are stable or declining

For the group as a whole, the reallocation of resources by value

centre, by product, by customers, by channel increases economic

profit substantially when process fully implemented

SUSTAINABLE GROWTH IN ECONOMIC PROFIT


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Creating value via external growth requires a combination of three critical

elements:

Beware: - Traditional measures of industry/market attractiveness

- Revenue side synergies

- Acquisition proposals with little or no integration plan

Good Strategic FitGood Acquisition

Economics

Pro-active and Rapid

IntegrationHighest odds ofcreating value

VALUE CREATING EXTERNAL GROWTH


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1. Look actively, systematically.

2. Look for synergies at several levels. Dont overestimate their value.

3. Analyse in depth financing, synergies, market, hidden values.

4. Look for pitfalls. Insist on open books.

5. Large synergies require a lot of work afterwards this means

resources.

6. Dont get carried away with the price before the closing.

7. Middle management and analysts are often too eager to acquire.

8. Have patience in approaching target can take years.

9. Very profitable purchases are seldom found; be ready to respond

quickly when the opportunity occurs.

GUIDELINES FOR ACQUISITIONS


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POST MERGER MANAGEMENT

The key to success

The deal is won or lost after the deal is done

A compelling, ambitious vision shared by the shareholders and

management alike

Meticulous preparation for integrating organisational structures,

processes and cultures

Speedy execution


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Mergers and acquisitions can transform a business, but they can alsobe a risky, uncertain means of achieving shareholder value

Poor due diligence

Hidden merger costs

Massive leadership challenge

Unpredictable events

Some lessons

Does it fit with our current strategy? Is it a manifestation of it?

Is it capable of integration with our existing business?

Will it enhance our competitive advantage?

Do the economics stand up to the test? Most acquisitions are killedby the premium required, which cannot be recaptured.

A merger or acquisition only creates an opportunity. It is execution thatcreates value.

CONCLUSIONS


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THE RIGHT BEHAVIOUR

Constant pursuit of higher value

alternatives

Organisational alternatives Structure

Processes

Information

Capabilities

Strategic alternatives

Participation

Offering

Operating

Pricing

Portfolio

Affiliation benefits

Managing to maximise profitable growth of the business

Superior discipline for eliminating

unprofitable use of resources

Unprofitable products

Unprofitable customers

Unprofitable markets

Unprofitable activities

R&D

Manufacturing

Distribution

Central services


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THE ROLE OF THE CENTRE

Create a Superior Growth Organisation Establish the right objectives at all levels

Establish the boundaries that maximise clarity and accountability

Establish value based management processes

Establish value based information systems

Develop management capabilities for creating value

Lead by example

Constantly pursue higher value portfolio strategies

Constantly pursue ways to exploit affiliation benefits

Constantly prune unprofitable activities at the Centre

Enforce the Governing Objective Intervene with business units to stimulate higher value alternatives

Intervene with business units to eliminate unprofitable use of

resources

Intervene with business units to ensure there are consequences for

non-conforming behaviour


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MANAGING FOR VALUE: THE JOURNEY OF

LEARNING

Over the 17 years ended December 2000, Lloyds Bank shareholders sawthe value of their investment, with dividends reinvested, increase over

65 times, doubling and redoubling total shareholder return every 35

months

There were no a priori prescriptions and no magic methodologies

It involved a journey of learning together

Focusing onShareholder

Value

Transforming

Beliefs

Transforming

Behaviour

TransformingManagement

Performance


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USING SHAREHOLDER VALUE TO RAISE

MANAGEMENT PERFORMANCE

What wouldnt

I change:

Dont try to proceed ahead of

changes in fundamental beliefs

Accept disagreement as the

necessary step to agreement

Use consultants to accelerate

learning; dont use them to

change your beliefs

Define world class in terms of

world class value creation

If I started the journey today

I would:

Create a map for the journey

Conduct more formal training

Give it a label

Go faster


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CONCLUSION

Managing for value is different

Managing for value must be tailored to each companys needs and style

Managing for value works

BUT

Generating consistently superior shareholder returns is the most

challenging task a company can set for itself

It is a tough discipline to accept

People will wriggle like mad to escape the discipline

It requires extraordinary commitment and belief to stick to it over the

long haul


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Deloitte Conference Warsaw

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