1 capitalideasonline.com INTEGRATING CORPORTE STRATEGY AND FINANCE WITH VBM TO DELIVER GOOD SHAREHOLDER VALUE Chetan J Parikh

2 capitalideasonline.com Maximising shareholder value Framework for analysing competitive strategy Strategy valuation process Importance of investor communications Integrating Corporate Strategy ~Introduction Themes

3 capitalideasonline.com Maximising Shareholder Value

4 capitalideasonline.com Integrating Corporate Strategy ~Maximising Shareholder Value Link between operating value drivers, value factors and competitive analysis

5 capitalideasonline.com Framework for Analysing Competitive Strategy

6 capitalideasonline.com Five forces – industry analysis Value chain analysis – choice of activities Disruptive technology – innovation Information rules – information economy Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy The Framework

7 capitalideasonline.com 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 Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Five Forces - Industry Analysis

8 capitalideasonline.com Barriers to entry Substitution threat Buyer power Supplier power Firm rivalry Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Five Forces - Industry Analysis

9 capitalideasonline.com Useful for two kinds of industries –Vertically integrated industries –Activities susceptible to technological change Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Value Chain Analysis

10 capitalideasonline.com Customer priorities Channels Offerings Inputs/Raw materials Asset/Core competancy Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Value Chain Analysis

11 capitalideasonline.com Relevant for the following kinds of companies –Technology rich –Market leaders –Organisationally centralised Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Disruptive Technology

12 capitalideasonline.com Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Disruptive Technology Time Product Performance Performance demanded at high end of the market Performance demanded at the low end of the market Progress due to sustaining technologies Disruptive technological innovation Source: ‘The Innovator’s Dilemma’, Clayton Christensen

13 capitalideasonline.com High upfront and low incremental costs First mover advantage The economics of networks Tipping points Lock-in Role of knowledge is wealth creation Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Information Rules – Information Economics

14 capitalideasonline.com Economic webs Evolution/Co-evolution Punctuated Equilibrium Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Information Rules – Information Economics

15 capitalideasonline.com Increasing returns Monopoly rents Inferior products can dominate Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Outcome of the New Economy

16 capitalideasonline.com Cash Flow Risk Sustainability of excess returns Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy The Three Economic Value Drivers

17 capitalideasonline.com Giveaways Link-and-leverage Adaptation, not optimisation Pshycological warfare Integrating Corporate Strategy ~Framework for Analysing Competitive Strategy Evaluating knowledge-based companies

18 capitalideasonline.com Strategy Valuation Process

19 capitalideasonline.com 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? Integrating Corporate Strategy ~Strategy Valuation Process Key Macro Questions

20 capitalideasonline.com Integrating Corporate Strategy 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? ~Strategy Valuation Process

21 capitalideasonline.com Integrating Corporate Strategy 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? ~Strategy Valuation Process

22 capitalideasonline.com Integrating Corporate Strategy Environmental Factors and its Effects ~Strategy Valuation Process

23 capitalideasonline.com Importance of Investor Communications

24 capitalideasonline.com Unnecessary volatility in stock price Difference between management’s valuation based on future projections and market price External threats like takeovers Integrating Corporate Strategy ~Importance of Investor Communications Results of poor communication

25 capitalideasonline.com 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 Integrating Corporate Strategy Right communication strategy ~Importance of Investor Communications

26 capitalideasonline.com Thank You