1. Jeremiah Worthington Finance 609
Making Value Happen
Jeremiah Worthington
Finance 609

2. Focus of Chapter 6
Show how a company should create value in an organization, not why it should

3. Questions to Answer
How can companies set targets that reinforce our overall goal of creating shareholder value?
How can we align our management processes with the goal of value creation?
How should we structure our incentive programs?
How can we promote a value emphasis throughout our corporate culture?

4. Value Thinking Two components to value thinking: Value Metrics
Does management really understand how companies create value and how the stock market values companies?
Value Mindset
Refers to how much management cares about shareholder value creation. Do they really want to pursue value creation, is a long term commitment or short term fad?

5. Six Areas of Value Focus
1. It must combine an inspiring aspiration with tough quantitative targets linked to value creation.
2. It should adopt a rigorous approach to managing its portfolio of businesses for maximum value creation, including radical restructuring if necessary.
3. It must ensure that its organizational design and culture reinforce the value creation imperative.
4. It must develop superior insight into the key value drivers of each of its businesses.
5. It must establish an effective approach to managing the performance of it business units through sophisticated target setting and rigorous performance reviews.
6. It must find ways to motivate managers and employees to work toward value creation through financial rewards and other incentives.

6. Areas of Activity for Making Value Happen
Source: Reproduction of Exhibit 6.01 in the book, Valuation - Measuring and Managing the Value of Companies

7. Setting Aspirations and Targets
Inspiration Statement of Intent
Value-Linked Quantitative Targets

8. Managing the Corporate Portfolio
Three perspectives on portfolio management follow:
1. Strategy: Corporate Theme Analysis
2. Performance: Outside-In Restructuring Analysis
3. Growth: Three Horizon Analysis

9. Strategy: Corporate Theme Analysis
There are seven corporate themes
The Industry Shaper
The Deal Maker
The Scarce Asset Allocator
The Skill Replicator
The Performance Manager
The Talent Agency
The Growth Asset Attractor

10. Performance: Outside-In Restructuring Analysis
The hexagon helps quantify the impact of value creation levers: investor communication; internal improvements; disposal; growth opportunities, and financial engineering.

11. Growth: Three Horizon Analysis
An analysis of companies with sustained above-average growth indicates that they manage their business portfolios across three horizons.
Horizon 1 includes current core businesses, which generally account for the greatest part of current profits and cash flow
Horizon 2 includes emerging opportunities, the “rising star” businesses of the company that already have customers and revenues, even if they do not yet generate positive cash flow
Horizon 3 includes future options, which are opportunities where initial activity has already begun, be it a pilot project, minority stake, or memorandum of understanding

12. Orienting the Organization Toward Value
Having the correct organizational structure in place is crucial to making value happen. There are hard and soft areas of organization design.
Hard areas:
Structure
Decision Rights
People
Coordination Mechanisms
Soft areas:
Beliefs
Values

13. Understanding the Drivers of Value
The process of defining value drivers can help managers in three ways:
It can help both business unit managers and their staff understands how value is created and maximized in the business
It can help in prioritizing these drivers and thus in determining where resources should be placed (or removed)
It can align business unit managers and employees around a common understanding of top priorities.

14. Definitions Value Driver:
A performance variable that has impact on the results of a business
Key Performance Indicators (KPIs):
Metrics associated with the value drivers

15. Three principles in defining value drivers:
Value drivers should be directly linked to shareholder value creation and cascade down throughout the organization.
Value drivers should be targeted and measure by both financial and operational KPIs.
Value drivers should cover long-term growth as well as operating performance.

16. Three Phases of processing value driver definitions:
Identification
Prioritization
Institutionalization

17. Identification
The first task is creating value trees that systematically link the operating elements of the business to value creation.

18. Prioritization Two steps in prioritization:
building a discounted cash flow model for testing sensitivity to change in each driver
Analyzing a limited number of value drivers to determine the “real life” potential and ease of capture for each improvement action

19. Institutionalization
Value drivers are incorporated into the targets and scorecards of on-going business performance management

20. Managing Business Performance
Business Performance Management
is the process of setting targets for a performance unit and regularly reviewing progress against them, with the goal that different layers of the company will work together for enhanced performance

21. Components of successful business performance management
A business unit must have a clear strategy for creating value
It should set targets with a clear link to specific value drivers
It needs a structured calendar of performance reviews to discuss results against value-linked KPIs.

22. Crafting Business Strategy to Create Value
Strategic planning is essential to creating value. There are great benefits of making a direct link between strategy and valuation.

23. Setting Value-Linked Targets
Some approaches for setting Value -Linked Targets:
Set targets based on actual opportunities available by benchmarking competitors; industry analysis; theoretical limits such as capacity utilization, and, where appropriate, benchmarking against comparable business units within the same company.
Adjust the targets to reflect the changing environment if your key drivers are influenced by externalities.
In order to find the right balance, goals must be negotiated by top management and lower staff. Interaction between the two groups is key to finding the right fit for the organization.
Once targets are agreed upon, the organization can formalize this commitment in a performance contract. This contract should contain the milestones and quantitative and qualitative goals that each business unit needs to achieve.
These targets and information on how to achieve them needs to disseminate throughout the organization

24. Regularly Reviewing Performance
A company needs a structured calendar of performance reviews
Create a scorecard incorporating value metrics and KPIs from the value driver analysis to help with performance reviews
A scorecard should be different for each business unit

25. RCCU Scorecard
KPIs

26. Managing Individual Performance
Two value creation imperatives:
Make managers think like owners by linking manager’s rewards to behavior that creates overall shareholder value.
An increasingly knowledge-based economy, management talent is itself an important source of value, and therefore companies must attract and retain talent by offering attractive incentives.

27. Three Types of Motivation Levers:
1. Financial Incentives
High compensation and bonus schemes
2. Opportunities
Fast track career paths that rotate strong performers through positions of increasing responsibility
3. Values and Beliefs
Employees gain inherent satisfaction from lining up to a distinctive “XYZ way” of doing business

28. Making Value Happen
There is no one right way to construct your organization to create value. However, there are factors for success:
Visible top management commitment is needed sot that employees realize that this is not just the latest fad, but an effort to change fundamental attitudes and behaviors
Extensive participation by business units mangers, particularly in value driver analysis, is critical, both to capture insight and to ensure that they have a feeling of ownership
Links to existing processes are essential to ensure that the efforts to make value happen can have impact on the strategic planning, capital allocation, and promotion and compensation decisions of the company.
A pragmatic, action oriented approach ensures that making value happen is inspiring, rather than paper-generating and bureaucratic.

29. Questions?