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1、Author: Patrick Cote,Contributors: Kate McGreevy Julian Critchlow,bc,Corporate Performance Measurement,April 1999,Copyright 1999 Bain & Company, Inc.,2,CorporatePerformanceMeasurement,Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (
2、EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo,Agenda,3,CorporatePerformanceMeasurement,Corporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit that measure impact on shareholder value many fi
3、rms have devised their own variations of economic profit Stern Stewarts Economic Value Added (EVA)TM is best known of these measures Holt/BCGs Cash Flow Return on Investment (CFROI) is a similar concept presented in % return format Both ROE and EP are business metrics, tools used to measure the perf
4、ormance of the business separate from fundamental business drivers, the actual factors that influence shareholder value, and output measures the backward-looking records of overall company performance Focusing on EP instead of ROE decreases the likelihood of destructive behavior by managers By evalu
5、ating 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 2),4,CorporatePerformanceMeasurement,Executive Summary (2 of 2),End goal of EP exercises is consistent with trad
6、itional Bain focus of maximising shareholder value Bain has measured historical performance with Total Shareholder Return Stern Stewart devised Market Value Added (MVA)TM as means of measuring market expectations of EP that managers will add in the future managers objective should be to maximise MVA
7、 All 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 investments Stern Stewart has trademarked EVATM by specifying adjustments to make to EP,5,CorporatePerformanceMeasureme
8、nt,Agenda,Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo,6,CorporatePerformanceMeasurement,Objectives,There are three objectives of the Co
9、rporate Performance Measures Module:,To define the most popular measures of corporate performance To explain the significance of these measures in the corporate environment and potential applications in Bains strategy work To outline calculations of each performance measure,7,CorporatePerformanceMea
10、surement,Agenda,Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo,8,CorporatePerformanceMeasurement,With the rise of conglomerates, most comp
11、anies focused on Return on Equity, or ROE, as their primary measure of performance led most managers to undertake acquisitions solely to manipulate accounting figures,1960s/70s,1980s/90s,With the increased focus on delivering shareholder value, managers have accepted systems that measure the change
12、in value managers realised equity is not free economic profit (EP) meets these needs by telling managers where value has been created and where it has been destroyed As aligning interests between owners and managers has become more important, tying management compensation to EP provided a popular so
13、lution,Corporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit (EP) that measure impact on shareholder value,Background,Corporate Performance Evaluation,9,CorporatePerformanceMeasurement,Bain was the first of major consulting firms to foc
14、us on creating shareholder value To achieve this, Bain has used the output measure of Total Shareholder Return and the accounting measures of ROE and ROI Modified accounting measures, such as EP, provide an alternative means of measuring the creation of shareholder value,Background,Relevance to Bain
15、,10,CorporatePerformanceMeasurement,To illustrate the role of corporate performance measures and resource allocation to strategy work, an examination of Marakons “program” is useful Marakon applies the following program, which can take several years to complete, to all of its clients: assess the eco
16、nomic profit of all customer segments and product lines compare company performance to industry performance investigate three or more strategies for each business every planning cycle shift resource allocation from economically unprofitable products/customers to economically profitable leads to yiel
17、d loss for Marakon and clients since additional scenarios frequently evaluated,Marakon has made economic profit (EP) the central focus of the program they apply to every case,Background,Link to Strategy,11,CorporatePerformanceMeasurement,EVA is a registered trademark of Stern Stewart,A century ago,
18、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 costs Stern Stewart has re-packaged the concept into EVA, which is essentially a more palatable form of the same idea McKinsey has been usi
19、ng economic profit for many years BCG uses Cash Flow Return on Investment (CFROI) for a similar analysis To avoid infringing upon Stern Stewarts trademark, many consulting firms have developed their own terms for the same concept,How new is Economic Value Added (EVA)?,EVATM is one variation of EP,Ba
20、ckground,Economic Value Added,12,CorporatePerformanceMeasurement,Agenda,Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo,13,CorporatePerform
21、anceMeasurement,Measures,* For a discussion of WACC and discount rates, please see the Investment Appraisal Module in the BVU,Description:,EVA/MVA,EP,and CFROI are modified accounting measures used to measure the performance of the business,Inputs/ Measures:,Fundamental Business Drivers,Business Met
22、rics,Output Measures,Primary business-specific factors influencing shareholder value,Tools used to measure performance of business,Backward-looking measures of overall company performance as viewed by market,Operating profits volume price costs Financial Cost of Capital Employed fixed assets working
23、 capital WACC*,Accounting ROE ROA Modified accounting EVA/MVA EP CFROI CVA,Total Shareholder Return (TSR) Total Business Return (TBR),Framework,14,CorporatePerformanceMeasurement,The fundamental business drivers provide a framework for identifying the sources of shareholder value creation or destruc
24、tion,Shareholder Value Creation/Destruction,Operating Profit,Cost of Capital,Volume,Price,Costs,Working Capital,WACC,Fixed Assets,X,+,X,Direct costs material labour Indirect costs SG & A Depreciation,Average selling price,# of units sold,Weighted average cost of capital based on market values of deb
25、t and equity Use after-tax cost of debt,Current assets less current liabilities,Property, plant & equipment Intangibles,LIFO vs FIFO Depreciation estimates,Cost of equity for private firms,Intangible measurement,Components:,Issues:,Framework,Fundamental Business Drivers,15,CorporatePerformanceMeasur
26、ement,* Sometimes referred to as Return on Investment (ROI),ROE measures returns to shareholders, while ROA measures returns to investors of all forms of capital,Formula:,Measures:,ROA,Profitability of all capital employed, including debt,Uses:,Return on Assets (ROA)*,Return on Equity (ROE),Net Inco
27、me,Assets,=,ROE,Net Income,Equity,=,Profitability of equity invested in business (net equity issued plus retained earnings),Returns of enterprise as a whole,Returns to shareholders,Framework,Accounting Business Metrics,16,CorporatePerformanceMeasurement,The DuPont formula is used to separate ROE int
28、o its components in order to assess the performance of the business,ROE,Net Income,Equity,=,Net Income,Sales,=,Sales,Assets,Assets,Equity,X,X,ROS,Asset Turnover,Leverage,ROE,=,Profitability,Asset Turnover,Leverage,X,X,=,ROA,Framework,Accounting Business Metrics - DuPont Formula,17,CorporatePerforman
29、ceMeasurement,* EVA=EVA with depreciation added back,Many consulting companies attempt to brand the modified accounting business metrics they use,Economic Profit,Measure,Consulting Companies,Bain McKinsey Marakon (through Value-Based Management) LEK,EVA / MVA ,Stern Stewart AT Kearney Accounting fir
30、ms,BCG,Holt BCG,Cash Value Added* (CVA),Cash Flow Return on Investment (CFROI),Framework,Modified Accounting Business Metrics,18,CorporatePerformanceMeasurement,* only backward -looking,The modified accounting business metrics, which include EP, enable relatively accurate levels of corporate perform
31、ance measurement at lower levels of decision making in the organisation,Accuracy as Measure of Corporate Performance,Level of Decision Making,High,Low,Low,High,MVA,Modified Accounting Business Metrics,TSR*,ROE/ROA,Fundamental Business Drivers,EP/EVA/CFROI,Role in Organisation,Framework,19,CorporateP
32、erformanceMeasurement,* Adjusted for all stock splits and assuming all dividends reinvested,While TSR calculates return to shareholders for publicly-listed companies, BCGs TBR calculation estimates equivalent returns for privately-held firms,Total Shareholder Return (TSR) in CAGR Format,Market value
33、 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 years,1,number of years,1,1,1,Estimated market value of shares of privately-held company at beginning of pe
34、riod*,Framework,Output Measures,20,CorporatePerformanceMeasurement,Bains client stock performance slide is calculated using TSR, which is used to measure the shareholder value created,Framework,Output Measures,21,CorporatePerformanceMeasurement,Agenda,Executive Summary Objectives Background Performa
35、nce Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo,22,CorporatePerformanceMeasurement,Market Value Added (MVA),Invested Capital,Goal of Managers should always be to create more shareholder v
36、alue, or maximise MVA,Total 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 MVA,Market Value Added,Definition (1 of 2),23,CorporatePerformanceMeasurement,MVA equals the
37、 total market value of the company less invested capital or net assets. Either the Operating or Financing Approach can be used, but Bain typically uses the Operating approach,Note: *Short-term non-interest bearing liabilities,Operating Approach (Typically used by Bain),Financing Approach,Market Valu
38、e Added,Definition (2 of 2),24,CorporatePerformanceMeasurement,The 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 cycle,Note: *Short-term non-interest bearing liabilities,Amount ($),Market Va
39、lue Added,Operating Approach - Excess Cash,25,CorporatePerformanceMeasurement,Next, The working capital requirements are the firms net investments in the operating cycle, or the net amount of short-term investment required to fund operations,Amount ($),Working Capital Requirements,Market Value Added
40、,Operating Approach - Working Capital Requirements,26,CorporatePerformanceMeasurement,When 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 investme
41、nt required to fund operations,Amount $,Net PP&E,Market Value Added,Operating Approach - Net Fixed Assets,27,CorporatePerformanceMeasurement,Market value added (MVA) reflects the markets expectations of the EP managers will add in the future,Percent of Total,MVA is the markets expectation of discoun
42、ted future EPs,Market Value Added,Link to EP,28,CorporatePerformanceMeasurement,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
43、 $100M, what is the MVA and the market value of the company?,Market Value Added,Link to EP - Example,29,CorporatePerformanceMeasurement,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. I
44、f the cost of capital is 13% and the invested Capital is $100M, what is the MVA and the market value of the company?,MVA = PV of EPs,= $ 25 M,13% - 3%,= $ 250 M,= MVA + Invested Capital,= $ 250 M + $100 M,= $350M,Market Value of the Company,Market Value Added,Link to EP - Solution,30,CorporatePerfor
45、manceMeasurement,EP measures managers performance in the past, since it represents the market value added created over one year,Note: *Assumes Invested Capital Constant,Market Value Added,Link to EP (1 of 2),31,CorporatePerformanceMeasurement,EP is used to evaluate manager performance because the ch
46、ange in MVA over a period of time is measured,Goal of companys managers should always be to maximise MVA When managers make any investment decisions, if the project is: value-creating NPV 0 MVA increases value-destroying NPV 0 MVA decreases Reason that EP is the focus of most attention is because MV
47、A is a stock or wealth measure, so MVA will show how much value has been added at that point in time EP measures the amount of value added over a period of time, which is far more useful when measuring manager performance,Market Value Added,Link to EP (2 of 2),32,CorporatePerformanceMeasurement,Whic
48、h UK sectors would you expect to have the highest market value added? and the lowest? Which UK companies would you expect to have the highest market value added? and the lowest?,Market Value Added,Actual Performance,33,CorporatePerformanceMeasurement,Banks, integrated oil and drugs were the UK secto
49、rs with the highest market value added,Source: Stern Stewart, Sunday Times,Sector Market Value Added (Sept 98),Market Value Added,UK Sector Performance - 10 Best,34,CorporatePerformanceMeasurement,Distributors, print and packaging and construction had the lowest market value added in the UK,Source: Stern Stewart, Sunday Times,Sector Market Value Added (Sept 98),Market Value Added,UK Sector Performance - 10 Worst,35,CorporatePerformanceMeas