CREATING SHAREHOLDER VALUE DURING ECONOMY DOWNTURN WITH VBM TOOLS AND STRATEGIES

CREATING SHAREHOLDER VALUE DURING ECONOMY DOWNTURN WITH VBM TOOLS AND STRATEGIES Chetan J Parikh
Cost leadership strategy and supporting tactics
Creating Shareholder Value
capitalideasonline.com
Shrinking competitive advantage periods (CAPs) means that an investor has to understand
The dynamics of organizational change
The mental models that owners need to have to keep up
with change
Develop systems thinking based on feedback loops

Risks can be reduced/ eliminated
Risk management Strategy
Spreading the risks

Sheet1
Through:
Dominance
structurally
Planning
Forecasting
Standards for measuring CEO’s performance are easy to
manipulate, makes a CEOs performance harder to measure
Relations between CEOs and board of directors are very
congenial
Meet the quarterly numbers
Disjointed the interests of shareholders from those of other stakeholders
Valuation/ Resource Allocation
High (Ownership of Production
The Upside – Down Corporation
Economic Paradigms of the 20th and 21st Centuries
Industry Clockspeeds
~Using Finance to Determine Shareholder Value
“What remains of his profits after deducting interest on his capital at the current rate may be called his earnings at undertaking or management”.
- Alfred Marshall
EP = NOPAT - $ Capital Charge
Wealth Creator :NPV>0, EP>0, RROC>0 *

* RROC = ROIC - wacc
Determining Wealth Creators
V = C + NPV
V/C = 1 + NPV/C
Key
PV : Present Value
V : Corporate Value
EP : Economic Profit
Source: James L Grant & James A Abate,’ Focus on Value’
Sheet1
Valuation
Profitability
Source :James L Grant &James A Abate,’Focus on Value’
Excess Returns Relative to Capital Growth Rate
’Economically’ Profitable Reinvestment
Is the company a major force in a growing market?
Is the company holding or increasing its shares on those segments?
Is it resulting in increasing cash flows?
Is the cash flow being used in a wise manner?
Does the management walk the talk?
Questions Shareholders Ask..
Maintain competitive prices
Pursue market share opportunities to gain scale economies in production and distribution
Sales Growth Rate
Introduce mechanisms to improve rate of learning
Search for cost reducing linkages with suppliers
Eliminate overhead that does not add value to the product
Operating Profit Margin
Working Capital Investment
Obtain productivity-increasing assets
Fixed Capital Investment
Select least-cost debt and equity instruments
Reduce business risk factors in manner consistent with strategy
Cost of Capital
Data processingKnowledge management
Zero sumPositive sum
Through:Affecting market developments
Superior competitive capability
structurally
PlanningForecasting
examplemafia
Athletic footwear<1 year5-155-15
Wealth NeutralityV/ C =1EP/C=0 , RROC=0
Wealth WasterV/ C <1EP/C<0 , RROC<0
RROC > 0 EP > 0 NPV > 0
RROC = 0 EP = 0 NPV = 0
RROC < 0 EP < 0 NPV < 0
RROC > 0 EP< 0 NPV < 0
RROC = 0 EP= 0 NPV = 0
RROC < 0 EP > 0 NPV > 0
Capital Expansion (C > 0):
Capital Contraction (C < 0):

CREATING SHAREHOLDER VALUE DURING ECONOMY DOWNTURN WITH VBM TOOLS AND STRATEGIES

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