Institut for Regnskab, Tom Hansen Corporate Valuation , p. 1 Agenda Workshop groups/leftovers/teams/companies work plans Exercise:2.7, 2.9, 2.10 Lecture previous lecture CKM ch. 1,2,3 Grunert Donaldson Myers 2 # Kaplan & Norton NEXT

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 2 CKM ch.1 Value and Mission “How - to” book Formerly McKinsey and S.Stern Measuring and managing value Shareholder versus stakeholder view

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 3 CKM ch.2 Manage Value Focus on the long-run cash flow return Outsider’s view Act aggressively on opportunities 6 step restructuring hexagon (fig. 2.2) Current market value Value as is Value with internal improvements Value with internal improvements and disposals Value with internal improvements, disposals and growth Total potential value ? Is step 1 or 2 or …6 “the correct value” ?

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 4 CKM ch.2 Manage Economic Profit = (Invested capital * (ROIC-opportunity cost of capital)) incorporates both return on invested capital AND growth Discounted future EP + current invested capital = discounted free cash flows (DCF) hence maximizing EP maximizes DCF value Translate EP targets into specific operational performance measures - integrating financial results with operating measures (like BSC) EG case and the Evode case

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 5 CKM ch.3 Fundamental principles Fred and Sally’s stores Maximize Economic Profit (EP) evades value destructing growth like Sally’s (non-profitable growth) Short term versus long term when investing ? use DCF for long term (remember EP and DCF equals up) The market price values the investors expectations The performance of shares depends more on changes in expectations than on changes in actual performance You need to manage both the investors expectations and the intrinsic value of the company

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 6 Grunert: Key Success Factors Relative costs and perceived value Skills and resources core (failure preventers) slack KSF (see p.267 on skills and market characteristics) ·conjunctive (necessary) or compensatory ·changeability 2nd order factors are auxiliary factors

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 7 Kaplan & Norton: Linking BSC.. BSC is a comprehensive, quantified model of a business’s value creating process BSC provides a picture of current operating performance drivers of future performance BSC has 4 perspectives: financial, customer, internal processes, learning & growth and is balanced financial-nonfinancial short term-long term drivers-outcome hard-soft measures internal-external

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 8 Kaplan & Norton: Linking BSC.. Its purpose is to direct attention on the factors expected to lead to competitive breakthroughs The scorecard describes and “translates” the vision and strategy for the entire organization into concrete measures and goals, making communication easier The scorecard creates shared understanding of the strategy and the vision The “translation” of vision and strategy into concrete concepts and goals creates organized learning at the executive level.

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 9 Kaplan & Norton: Linking BSC.. The Financial perspective presumes: 3 financial stages rapid growth sustain harvest each with different financial objectives classified in 3 financial themes revenue growth & mix cost reduction asset utilization

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 10 Kaplan & Norton: Linking BSC.. The customer perspective has 5 generic core measures share retention acquisition satisfaction profitability based on 3 categories of value propositions product attributes customer relationship image & reputation

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 11 Kaplan & Norton: Linking BSC.. The Internal business process perspective focuses on the measures regarding Short wave of value creation: control and improve existing operations. (Quality and time based measures). Long wave of value creation: Innovation cycle: identify customer needs, identify the market, create the service offering. These are the processes the organization must excel to meet customer and financial objectives

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 12 Kaplan & Norton: Linking BSC.. The learning and growth perspective identifies the infra-structure needed to create long-term growth and improvements concerning 3 sources: people systems procedures Gaps within these 3 sources revealed under the other perspectives must be filled - this is the objective for this perspective

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 13 Kaplan & Norton: Linking BSC.. - overview Financial Customer Internal business process Learning and Growth Strategy & Vision Defining measures starts from strategy and vision and cascades downward Results are created from bottom and up (cause and effect)

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 14 Kaplan & Norton: Using BSC.. BSC track financial results + monitor progress in building capabilities and acquisition of intangible assets needed for future growth BSC links today's actions with tomorrows goals - it is a central part in the strategic management system The linking is through cause-effect relations Between unique performance drivers and outcome measures

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 15 Kaplan & Norton: Using BSC.. through 4 processes translating the vision communicating and linking business planning - integration of business plans (change programs) and financial plans. feedback and learning - gathering info, testing hypothesizes on which strategy is based, making adjustments

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 16 Donaldson: Financial goals Are the strategic and the financial goals consistent ? (Financial) Goals are interdependent, making trade-off is a necessity as is creation of boundaries on management choice Growth rate of sales Growth rate of earnings and cash flows Stay number one in product quality and technology Superior return on investments Conservative debt policy High & steady dividends

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 17 Donaldson: Self-sustained growth Growth rate of sales (%) Return on net assets (%) Deficit of funds Slope = f(dividend payout target (30%) & debt/equity target (50%)) Surplus of funds

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 18 Myers 4 problems in using DCF in strategic analysis estimating the discount rate (opportunity cost of capital) estimating the future cash flow projects may be interrelated valuing the opportunities created by new investments

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 19 Myers Extensive (past) evidence on cost of capital Long run (cash flow) forecasts often end up as mechanical extrapolations of short-run trends. It is easy to overlook the long run pressures of competition, inflation, and technical change. (interrelation) Defining business units properly is one of the tricks of successful strategic planning (opportunities) - the second stage is an option. Intangible assets value is usually option value

Institut for Regnskab, Tom Hansen Corporate Valuation , p. 20 Myers When opportunities created by new investments are important, it’s better to think of strategy as managing the firms portfolio of real options Value = EPS/cc + PVGO where O is opportunities being valued as options Financial planning / strategic management may be thought of as: acquiring options abandoning options exercising valuable options