1、1CorporatePerformanceMeasurement Executive SummaryObjectivesBackgroundPerformance Measurement FrameworkMarket Value Added(MVA)Economic Profit(EP)Cash Flow Return on Investment(CFROI)Exercises MVAEconomic ProfitCase Study-DiageoAgenda2CorporatePerformanceMeasurement Corporate performance evaluation h
2、as evolved from the 1960s focus on ROE to the current variations of economic profit that measure impact on shareholder valuemany firms have devised their own variations of economic profitStern Stewarts Economic Value Added(EVA)TM is best known of these measures Holt/BCGs Cash Flow Return on Investme
3、nt(CFROI)is a similar concept presented in%return formatBoth ROE and EP are business metrics,tools used to measure the performance of the businessseparate from fundamental business drivers,the actual factors that influence shareholder value,and output measures the backward-looking records of overall
4、 company performanceFocusing on EP instead of ROE decreases the likelihood of destructive behavior by managersBy evaluating managers based on EP,manager behavior can be altered such that only projects that add value(with NPV0)are undertaken,which does not always occur with ROE Executive Summary(1 of
5、 2)3CorporatePerformanceMeasurementExecutive Summary(2 of 2)End goal of EP exercises is consistent with traditional Bain focus of maximising shareholder valueBain has measured historical performance with Total Shareholder ReturnStern Stewart devised Market Value Added(MVA)TM as means of measuring ma
6、rket expectations of EP that managers will add in the futuremanagers objective should be to maximise MVAAll economic profit measures deduct charge for use of equity capital from accountings typical net income or profit after tax to reflect the opportunity cost associated with equity investmentsStern
7、 Stewart has trademarked EVATM by specifying adjustments to make to EP 4CorporatePerformanceMeasurement AgendaExecutive SummaryObjectivesBackgroundPerformance Measurement FrameworkMarket Value Added(MVA)Economic Profit(EP)Cash Flow Return on Investment(CFROI)Exercises MVAEconomic ProfitCase Study-Di
8、ageo5CorporatePerformanceMeasurementObjectives There are three objectives of the Corporate Performance Measures Module:To define the most popular measures of corporate performanceTo explain the significance of these measures in the corporate environment and potential applications in Bains strategy w
9、orkTo outline calculations of each performance measure6CorporatePerformanceMeasurement AgendaExecutive SummaryObjectivesBackgroundPerformance Measurement FrameworkMarket Value Added(MVA)Economic Profit(EP)Cash Flow Return on Investment(CFROI)Exercises MVAEconomic ProfitCase Study-Diageo7CorporatePer
10、formanceMeasurement With the rise of conglomerates,most companies focused on Return on Equity,or ROE,as their primary measure of performance led most managers to undertake acquisitions solely to manipulate accounting figures1960s/70s1980s/90sWith the increased focus on delivering shareholder value,m
11、anagers have accepted systems that measure the change in value managers realised equity is not freeeconomic profit(EP)meets these needs by telling managers where value has been created and where it has been destroyedAs aligning interests between owners and managers has become more important,tying ma
12、nagement compensation to EP provided a popular solutionCorporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit(EP)that measure impact on shareholder valueBackgroundCorporate Performance Evaluation8CorporatePerformanceMeasurement Bain was
13、the first of major consulting firms to focus on creating shareholder valueTo achieve this,Bain has used the output measure of Total Shareholder Return and the accounting measures of ROE and ROIModified accounting measures,such as EP,provide an alternative means of measuring the creation of sharehold
14、er valueBackgroundRelevance to Bain9CorporatePerformanceMeasurement To illustrate the role of corporate performance measures and resource allocation to strategy work,an examination of Marakons“program”is usefulMarakon applies the following program,which can take several years to complete,to all of i
15、ts clients:assess the economic profit of all customer segments and product linescompare company performance to industry performanceinvestigate three or more strategies for each business every planning cycleshift resource allocation from economically unprofitable products/customers to economically pr
16、ofitableleads to yield loss for Marakon and clients since additional scenarios frequently evaluatedMarakon has made economic profit(EP)the central focus of the program they apply to every caseBackgroundLink to Strategy10CorporatePerformanceMeasurement EVA is a registered trademark of Stern StewartA
17、century ago,Alfred Marshall explained that for a company to have genuine profits,the profits must be sufficient to cover the cost of capital as well as the firms operating costsStern Stewart has re-packaged the concept into EVA,which is essentially a more palatable form of the same ideaMcKinsey has
18、been using economic profit for many yearsBCG uses Cash Flow Return on Investment(CFROI)for a similar analysisTo avoid infringing upon Stern Stewarts trademark,many consulting firms have developed their own terms for the same conceptHow new is Economic Value Added (EVA)?EVATM is one variation of EPBa
19、ckgroundEconomic Value Added11CorporatePerformanceMeasurement AgendaExecutive SummaryObjectivesBackgroundPerformance Measurement FrameworkMarket Value Added(MVA)Economic Profit(EP)Cash Flow Return on Investment(CFROI)Exercises MVAEconomic ProfitCase Study-Diageo12CorporatePerformanceMeasurementMeasu
20、res*For a discussion of WACC and discount rates,please see the Investment Appraisal Module in the BVUDescription:EVA/MVA,EP,and CFROI are modified accounting measures used to measure the performance of the businessInputs/Measures:Fundamental Business DriversBusiness MetricsOutput MeasuresPrimary bus
21、iness-specific factors influencing shareholder value Tools used to measure performance of business Backward-looking measures of overall company performance as viewed by marketOperating profitsvolumepricecostsFinancial Cost of Capital Employedfixed assetsworking capitalWACC*Accounting ROEROAModified
22、accountingEVA/MVAEPCFROICVATotal Shareholder Return(TSR)Total Business Return(TBR)Framework13CorporatePerformanceMeasurement The fundamental business drivers provide a framework for identifying the sources of shareholder value creation or destructionShareholder Value Creation/DestructionOperating Pr
23、ofitCost of CapitalVolumePriceCostsWorking CapitalWACCFixed AssetsX+XDirect costsmateriallabourIndirect costsSG&ADepreciationAverage selling price#of units soldWeighted average cost of capital based on market values of debt and equityUse after-tax cost of debtCurrent assets less current liabilitiesP
24、roperty,plant&equipmentIntangibles LIFO vs FIFODepreciation estimatesCost of equity for private firmsIntangible measurementComponents:Issues:FrameworkFundamental Business Drivers14CorporatePerformanceMeasurement*Sometimes referred to as Return on Investment(ROI)ROE measures returns to shareholders,w
25、hile ROA measures returns to investors of all forms of capitalFormula:Measures:ROAProfitability of all capital employed,including debtUses:Return on Assets(ROA)*Return on Equity(ROE)Net IncomeAssets=ROENet IncomeEquity=Profitability of equity invested in business(net equity issued plus retained earn
26、ings)Returns of enterprise as a wholeReturns to shareholdersFrameworkAccounting Business Metrics15CorporatePerformanceMeasurement The DuPont formula is used to separate ROE into its components in order to assess the performance of the businessROENet IncomeEquity=Net IncomeSales=SalesAssetsAssetsEqui
27、tyXXROSAsset TurnoverLeverageROE=ProfitabilityAsset TurnoverLeverageXX=ROAFrameworkAccounting Business Metrics-DuPont Formula16CorporatePerformanceMeasurement*EVA=EVA with depreciation added backMany consulting companies attempt to brand the modified accounting business metrics they useEconomic Prof
28、itMeasureConsulting CompaniesBain McKinseyMarakon(through Value-Based Management)LEKEVA /MVA Stern StewartAT KearneyAccounting firmsBCGHoltBCGCash Value Added*(CVA)Cash Flow Return on Investment(CFROI)FrameworkModified Accounting Business Metrics17CorporatePerformanceMeasurement*only backward-lookin
29、gThe modified accounting business metrics,which include EP,enable relatively accurate levels of corporate performance measurement at lower levels of decision making in the organisationAccuracy as Measure of Corporate PerformanceLevel of Decision MakingHighLowLowHighMVAModified Accounting Business Me
30、tricsTSR*ROE/ROAFundamental Business DriversEP/EVA/CFROIRole in OrganisationFramework18CorporatePerformanceMeasurement*Adjusted for all stock splits and assuming all dividends reinvested While TSR calculates return to shareholders for publicly-listed companies,BCGs TBR calculation estimates equivale
31、nt returns for privately-held firmsTotal Shareholder Return(TSR)in CAGR FormatMarket value of share at end of period*Market value of share at beginning of period=Total Business Return(TBR)=Estimated market value of shares of privately-held company at end of period*number of years1number of years111E
32、stimated market value of shares of privately-held company at beginning of period*FrameworkOutput Measures19CorporatePerformanceMeasurement Bains client stock performance slide is calculated using TSR,which is used to measure the shareholder value createdBai n cl i ent sS&P 500 80 81 82 83 84 85 86 8
33、7 88 89 90 91 92 93 94 95 96 97 98N ot e:M et hodol ogy and dat a at t es t ed t o by Pri ce W at erhous e LLP t hrough D ecem ber 199805001,0001,5002,0002,5003,0003,500Poi nt C hange i n Indi ces (1980=0)FrameworkOutput Measures20CorporatePerformanceMeasurement AgendaExecutive SummaryObjectivesBack
34、groundPerformance Measurement FrameworkMarket Value Added(MVA)Economic Profit(EP)Cash Flow Return on Investment(CFROI)Exercises MVAEconomic ProfitCase Study-Diageo21CorporatePerformanceMeasurement 020406080100%Market Value Added(MVA)Invested CapitalGoal of Managers should always be to create more sh
35、areholder value,or maximise MVATotal Market Value of Firm(includes all debt and equity)Bains focus has always been to help the management of the firm to maximise shareholder value,which is equivalent to maximising MVAMarket Value AddedDefinition(1 of 2)22CorporatePerformanceMeasurement MVAInvestedCa
36、pitalST NIBL*NetAssetsExcessCashWorkingCapitalRequirementsNet FixedAssets(nodistinctionbetweentangibles andintangibles)Short-TermDebtLong-TermDebtShareholdersEquityMarket Valueof Company(Debt&Equity)Total AssetsNet AssetsInvested Capitalor Capital Employed020406080100%MVA equals the total market val
37、ue of the company less invested capital or net assets.Either the Operating or Financing Approach can be used,but Bain typically uses the Operating approachNote:*Short-term non-interest bearing liabilitiesOperating Approach(Typically used by Bain)Financing ApproachMarket Value AddedDefinition(2 of 2)
38、23CorporatePerformanceMeasurement OperatingCash Total CashCash Required inOperating CycleExcess CashThe first step required to calculate Net Assets with the Operating Approach is to identify excess cash,which is total cash less cash required in the operating cycleNote:*Short-term non-interest bearin
39、g liabilitiesAmount($)Market Value AddedOperating Approach-Excess Cash24CorporatePerformanceMeasurementOperating CashPrepaid Expenses andOther Current AssetsInventoriesReceivablesAdvance PaymentsAccountsPayableAccruedExpenses and Other CurrentLiabilities Total Investmentsin Operating CycleLiabilitie
40、s Implicitin Operating CycleNet Investmentsin Operating CycleNext,The working capital requirements are the firms net investments in the operating cycle,or the net amount of short-term investment required to fund operationsAmount($)WorkingCapitalRequirementsMarket Value AddedOperating Approach-Workin
41、g Capital Requirements25CorporatePerformanceMeasurementWhen calculating MVA,Net Fixed Assets is defined as Net PP&E plus other Investment(tangible and intangible).The third and final step to calculate Net Assets is Net PP&E,which is the amount of long-term investment required to fund operationsNet F
42、ixedAssetsProperty,Plant and EquipmentAccumulatedDepreciationOtherInvestmentsAmount$Net PP&EMarket Value AddedOperating Approach-Net Fixed Assets26CorporatePerformanceMeasurementMarket ValueAdded(MVA)InvestedCapitalPV of EPsBeyond Year 5PV of EPYear 5PV of EPYear 4PV of EPYear 3PV of EPYear 2PV of E
43、PYear 1Market Value of theCompany(Debt+Equity)Market Value Added(MVA)020406080100%Market value added(MVA)reflects the markets expectations of the EP managers will add in the futurePercent of TotalMVA is the markets expectation of discounted future EPsMarket Value AddedLink to EP27CorporatePerformanc
44、eMeasurement After extensive work by a diligent Bain team,Acme Industries is expected to generate$25M in economic profits next year,which is expected to grow at 3%forever.If the cost of capital is 13%and the invested Capital is$100M,what is the MVA and the market value of the company?Market Value Ad
45、dedLink to EP-Example28CorporatePerformanceMeasurement After extensive work by a diligent Bain team,Acme Industries is expected to generate$25M in economic profits next year,which is expected to grow at 3%forever.If the cost of capital is 13%and the invested Capital is$100M,what is the MVA and the m
46、arket value of the company?MVA=PV of EPs=$25 M13%-3%=$250 M=MVA +Invested Capital=$250 M +$100 M=$350MMarket Value of the CompanyMarket Value AddedLink to EP-Solution29CorporatePerformanceMeasurement EP measures managers performance in the past,since it represents the market value added created over
47、 one yearNote:*Assumes Invested Capital Constant Market ValueAdded*TodayMarket ValueAdded*Last YearEconomic ProfitOver Last YearMarket Value AddedLink to EP(1 of 2)30CorporatePerformanceMeasurement EP is used to evaluate manager performance because the change in MVA over a period of time is measured
48、 Goal of companys managers should always be to maximise MVA When managers make any investment decisions,if the project is:value-creatingNPV 0MVA increasesvalue-destroyingNPV 0MVA decreases Reason that EP is the focus of most attention is because MVA is a stock or wealth measure,so MVA will show how
49、much value has been added at that point in timeEP measures the amount of value added over a period of time,which is far more useful when measuring manager performanceMarket Value AddedLink to EP(2 of 2)31CorporatePerformanceMeasurement Which UK sectors would you expect to have the highest market val
50、ue added?and the lowest?Which UK companies would you expect to have the highest market value added?and the lowest?Market Value AddedActual Performance32CorporatePerformanceMeasurement Banks Integrated OilDrugsMediaFoodManufacturersTelecomsRetailersGrocersElectricityDrinks102.594.389.342.938.736.133.
