Valuation maximizing corporate value phần 2 doc

the strategic building blocks at your disposal and is the first step toward setting sound business goals and maximizing your organization’s strategic value in the future. It is important to remember that it is impossible for the organization’s leader to know all aspects of the organization as well as those who deal with them on a daily basis. Accordingly, the most effective way to utilize the material presented in this and the following chapters is to involve all key members of the management team. An outside facilita- tor is generally retained to conduct the various exercises. However, it is not uncommon for the organization’s leader to play this role or to assign another member of the management to do so. HIGHLIGHT EXISTING STRENGTHS It is best to start with a qualitative look at your organization. This involves identification of its key processes, historical focus, and environmental positioning. The understanding you develop will enhance your ability to make sense of the num- bers when you begin the quantitative phase of the strategic audit. The three procedures used to highlight existing strengths require the involvement of all the key members of the management team. Key Processes Requirements You will need a large board on which to draw. Methodology Diagram each activity in which your organization engages from the time the outside world first makes con- tact with it until a transaction (such as the delivery of a product or service) is complete. Change the diagram until the 2 CONDUCT STRATEGIC AUDIT team reaches agreement or a consensus that the activities shown represent the sum total of the value added by the organization during its normal course of business. Then combine and/or eliminate activities to create a diagram highlighting the critical few, key processes in which your organization engages. For an example of what this might look like, see Exhibit 1.1. Result You have reached an understanding of the important activities your organization performs and all those who par- ticipated have a better understanding of the role they play in the overall success of the organization. You also now have a document that can be used to measure how effectively your management information system (manual or electronic) tracks the internal information needs of the organization as transactions flow from one key process to another during the course of a typical business day. Historical Focus Requirements You will need scratch paper to develop a questionnaire, blank paper on which to print and make copies of the questionnaire, and graph paper to display the results of the questionnaire. Methodology—Preparation Select six or seven key areas in which you and your organization have spent a fair amount of time and resources over the last five years. Use the output from the Key Processes exercise to assist you in creating this list if desired. Write down two or three specific activities which have taken place on a more or less regular basis under each area, starting each with an action verb (e.g., opening new outlets, achieving low costs, enhancing sales training). For an example of what this might look like, see Highlight Existing Strengths 3 [...]... Year 1 Year 2 Year 3 Year 4 Year 5 ABC Company $ in MM 70.5 75.8 97.9 122 .3 1 62. 2 Industry Composite $ in BB 14.3 16.4 21 .5 28 .7 37.3 ABC Company Index 100 108 139 173 23 0 Industry Composite Index 100 115 150 20 1 26 1 Note: To convert from dollars to the index, divide yearly data by year one data and multiply by 100 For example, for ABC Company Year 1/Year 1 = 70.5/70.5 = 1 ϫ 100 = 100; Year 2/ Year 1 =... industry as a whole As shown in Exhibit 1.9, ABC Company is not growing as fast as the industry in which it participates Plot Growth Performance 15 28 0 26 0 24 0 (27 % per year) Index 22 0 20 0 180 Industry Composite (23 % per year) 160 140 ABC Company 120 100 1 2 3 4 5 Years EXHIBIT 1.9 Revenue Growth Years 1 to 5 What this means is that over the last five years, it has been losing market share If your organization... return on equity— note how the industry average line slopes up and to the right, indicating an increase in the market value to book Maarket Value/ Book Value 7 6 5 BETTER WORSE 4 3 ABC Company 2 1 0 10 15 20 25 Return on Equity (%) EXHIBIT 1.11 Relative Value 30 35 20 CONDUCT STRATEGIC AUDIT value premium when return on equity increases This relationship generally holds true regardless of the industry in... 40 Unit A 35 Unit B 30 25 Cash Negative (Cash User) 20 Cash Positive (Cash Provider) 15 10 5 Unit C 0 0 EXHIBIT 1.6 5 10 15 20 25 30 Return on Net Assets (%) Implicit Business Unit Strategy 35 40 45 Plot Growth Performance 13 45 East Net Assets Growth Rate (%) 40 Cash Negative (Cash User) 35 North 30 Canada South 25 20 Cash Positive (Cash Provider) 15 10 West 5 0 0 5 10 15 20 25 30 35 40 45 Return on... each: 1 Market value 2 Book value 3 Five year average return on equity5 Once these are assembled a chart is created For each company, the market value is divided by the book value and plotted on the y or vertical axis, and the return on equity is plotted on the x or horizontal axis A regression line (easily calculated by most spreadsheet software) indicates the aver- Determine Relative Value 19 age relationship... regression line increases the ABC Company market value to book value ratio from about 2. 8 to over 4.0 CHAPTER 2 Calculate Current Value aluation knowledge allows an organization to grow and prosper It empowers everyone in your organization to work together to achieve common goals in a disciplined, compassionate, effective manner When they understand how value is created and have a clear understanding... below the line This indicates the market value to book value premium which it should receive if it were “average,” is well above that it actually is receiving Accordingly, management has two opportunities to increase the organization’s value First, it can improve the perception of the organization in the public market to the average level, which would increase its value by over 40%.6 Second, it can improve... relative to the competition DETERMINE RELATIVE VALUE The final step in the strategic audit is to determine the relative value of your organization When taken together with the rest of the above analysis, the calculation of relative value plants a stake in the ground that clearly indicates the size and the nature of the opportunities you have to enhance the value of your organization To undertake this... and vertically going up until you reach the line, you can, at that point, read the average market value to book value premium indicated for organizations in your industry with your return on equity To estimate your market value, therefore, simply multiply the premium indicated on the y axis times your book value (shareholders’ equity account) SUMMARY Once you have completed the steps involved in the strategic... Company is shown in Exhibit 1.10, which clearly indicates Unit B is losing share, Unit A CONDUCT STRATEGIC AUDIT 16 Industry Segment Sales Growth 40 Unit A 35 Unit C Unit B 30 LOSING SHARE 25 20 GAINING SHARE 15 10 10 15 20 25 30 35 40 Business Unit Sales Growth EXHIBIT 1.10 Business Unit Market Share Trends (right on the line) is holding share and only Unit C is gaining market share As it turns out, Unit . your disposal and is the first step toward setting sound business goals and maximizing your organization’s strategic value in the future. It is important to remember that it is impossible for. complete. Change the diagram until the 2 CONDUCT STRATEGIC AUDIT team reaches agreement or a consensus that the activities shown represent the sum total of the value added by the organization during. understanding of the role they play in the overall success of the organization. You also now have a document that can be used to measure how effectively your management information system (manual