Deloitte Conference Warsaw
Transcript of Deloitte Conference Warsaw
-
8/3/2019 Deloitte Conference Warsaw
1/28
-
8/3/2019 Deloitte Conference Warsaw
2/28
The ultimate test of management is value creation
Top quality CEOs deliver consistently superior shareholder returns
New fangled measures like EBITDA and EVA are not enough. There are
no magic methodologies
Each management team needs to set out on a journey of learning
together which will transform their beliefs, their behaviour and their
performance
Focusing onShareholder
Value
Transforming
Beliefs
Transforming
Behaviour
TransformingManagement
Performance
SHAREHOLDER VALUE: A JOURNEY OF LEARNING
-
8/3/2019 Deloitte Conference Warsaw
3/28
Old Beliefs
We must achieve multiple
objectives
We must balance the demandsof multiple stakeholders
Global growth
Best in industry
New Beliefs
Our single purpose and
governing objective is to
maximise shareholder value
Maximising shareholder value
maximises value for all the
stakeholders: there is no
conflict
Selective market leadership
If world class means anything, it
means world class in value
creation
TRANSFORMING BELIEFS
-
8/3/2019 Deloitte Conference Warsaw
4/28
The governing objective of the company should be to maximise
shareholder value, not growth
Maximising good growth and eliminating bad growth is essential to
achieving the governing objective
Maximising strategic and organisational effectiveness is essential to
achieving the governing objective
RESTATING THE GOVERNING OBJECTIVE
-
8/3/2019 Deloitte Conference Warsaw
5/28
Common Issues
Competing goals
Strategies which focus on growth not value
Management processes which focus on growth not value
Management remuneration, rewards and recognition which reflect a
focus on growth not value
Lack of good information
Reluctance to lose a customer or product
Management beliefs
FOCUS ON MAXIMISING VALUE NOT GROWTH
-
8/3/2019 Deloitte Conference Warsaw
6/28
GOOD GROWTH AND BAD GROWTH
GOOD GROWTH
When ROE exceeds COE, a business will
create value by growing
forgo value by not growing
BAD GROWTH
When ROE is less than COE, a business will
create value by eliminating underperforming investments
destroy value by growing
Maximising value is about maximising good growth
-
8/3/2019 Deloitte Conference Warsaw
7/28
Replace the concepts of balance and diversity with the concepts of focus
and competitive advantage
It used to be thought that diversifying your risk reduces your risk. Not if
it ends up in weak market positions and low, or negative, cash flow
The real risk is that you enter markets in which you dont have
competitive advantage
Chasing market share frequently ends in tears. Profitability and
competitive advantage result in high growth and share - not the otherway round
Companies with high multiples have chosen focus over diversity
Outsource diversification to shareholders
ATTITUDE TO RISK
-
8/3/2019 Deloitte Conference Warsaw
8/28
Move from focusing on achieving balance to focusing on achieving
competitive advantage
Dispose of companies (and parts of companies) which cannot earn areturn above the cost of equity
Reallocate equity away from the businesses which cannot create
enough value (where you cannot be distinctive enough)
Acquire companies which broaden and strengthen competitiveadvantage
MANAGING THE PORTFOLIO
-
8/3/2019 Deloitte Conference Warsaw
9/28
-
8/3/2019 Deloitte Conference Warsaw
10/28
Alternative strategies represent different choices for one or more of five
dimensions of any (Value Centres) strategy
1. Business proposition: How the business will achieve a profitable
strategic position (in terms of marketeconomics and competitive position)
2. Participation strategy: What product market segments to target for
continued participation, entry or exit
3. Offering strategy: Whether and how to differentiate (customer
perspective)
4. Operating strategy: Whether and how to differentiate (operating
perspective)
5. Pricing strategy: How to price for improved market economics
or competitive position (or both)
GENERATING ALTERNATIVE STRATEGIES
-
8/3/2019 Deloitte Conference Warsaw
11/28
Change organisation structure to ensure clarity of accountability for
value e.g, accountability for market segments
Change organisation structure to ensure new learning about new
sources of competitive advantage
Delegate accountability for value as close as possible to the customer
and competition
Avoid excessive centralisation
SingleBusiness
Market-Based
Segmentation
Multiple
Product
Specialist
Value Centres
Value Centres
for Products
and Customer
Relationships
Move from managing the value of the Group as one business,
to managing the value of the Group through multiple value centres
Organisation
Structure
ORGANISATION STRUCTURE
-
8/3/2019 Deloitte Conference Warsaw
12/28
Observations
Most companies do not have the
information needed to measurethe value of their individual
businesses
Value tends to be concentrated
Cross-subsidisation is common
In which products and markets are we creating value?
Value creation
A
BC
D
EF
G
H
DIAGNOSIS
-
8/3/2019 Deloitte Conference Warsaw
13/28
Economic Profit tells us how much value is being created
Economic Profit is the profit attributable to shareholders less a notional
charge for the equity invested in the business
It is the only measure that brings together both the growth in equity andthe return on that equity
Because Economic Profit measures the value being created, it allows us
to evaluate alternative strategies that might create more value
Senior management incentive awards based on Economic Profit
ECONOMIC PROFIT
-
8/3/2019 Deloitte Conference Warsaw
14/28
A FINANCIAL DISCIPLINE
Economic Profit measures are an integral part of the strategy
development process
The strategy development process creates the conditions and enforces
the financial standards for developing the highest-value strategies on a
continuous basis in every business unit
The strategy development process, using Economic Profit measures,
instils a financial discipline into the company:
To avoid investing resources in areas of poor growth prospects or
poor returns
To encourage a continuous review of existing and alternative
strategies that deliver demanding performance targets
-
8/3/2019 Deloitte Conference Warsaw
15/28
Insist upon alternative, higher value, business strategies
Each value centre needs as a strategy showing how they will obtain a
competitive advantage and the effect on economic profit
In any given year, some value centres may be growing rapidly while
others are stable or declining
For the group as a whole, the reallocation of resources by value
centre, by product, by customers, by channel increases economic
profit substantially when process fully implemented
SUSTAINABLE GROWTH IN ECONOMIC PROFIT
-
8/3/2019 Deloitte Conference Warsaw
16/28
-
8/3/2019 Deloitte Conference Warsaw
17/28
-
8/3/2019 Deloitte Conference Warsaw
18/28
Creating value via external growth requires a combination of three critical
elements:
Beware: - Traditional measures of industry/market attractiveness
- Revenue side synergies
- Acquisition proposals with little or no integration plan
Good Strategic FitGood Acquisition
Economics
Pro-active and Rapid
IntegrationHighest odds ofcreating value
VALUE CREATING EXTERNAL GROWTH
-
8/3/2019 Deloitte Conference Warsaw
19/28
1. Look actively, systematically.
2. Look for synergies at several levels. Dont overestimate their value.
3. Analyse in depth financing, synergies, market, hidden values.
4. Look for pitfalls. Insist on open books.
5. Large synergies require a lot of work afterwards this means
resources.
6. Dont get carried away with the price before the closing.
7. Middle management and analysts are often too eager to acquire.
8. Have patience in approaching target can take years.
9. Very profitable purchases are seldom found; be ready to respond
quickly when the opportunity occurs.
GUIDELINES FOR ACQUISITIONS
-
8/3/2019 Deloitte Conference Warsaw
20/28
-
8/3/2019 Deloitte Conference Warsaw
21/28
POST MERGER MANAGEMENT
The key to success
The deal is won or lost after the deal is done
A compelling, ambitious vision shared by the shareholders and
management alike
Meticulous preparation for integrating organisational structures,
processes and cultures
Speedy execution
-
8/3/2019 Deloitte Conference Warsaw
22/28
Mergers and acquisitions can transform a business, but they can alsobe a risky, uncertain means of achieving shareholder value
Poor due diligence
Hidden merger costs
Massive leadership challenge
Unpredictable events
Some lessons
Does it fit with our current strategy? Is it a manifestation of it?
Is it capable of integration with our existing business?
Will it enhance our competitive advantage?
Do the economics stand up to the test? Most acquisitions are killedby the premium required, which cannot be recaptured.
A merger or acquisition only creates an opportunity. It is execution thatcreates value.
CONCLUSIONS
-
8/3/2019 Deloitte Conference Warsaw
23/28
THE RIGHT BEHAVIOUR
Constant pursuit of higher value
alternatives
Organisational alternatives Structure
Processes
Information
Capabilities
Strategic alternatives
Participation
Offering
Operating
Pricing
Portfolio
Affiliation benefits
Managing to maximise profitable growth of the business
Superior discipline for eliminating
unprofitable use of resources
Unprofitable products
Unprofitable customers
Unprofitable markets
Unprofitable activities
R&D
Manufacturing
Distribution
Central services
-
8/3/2019 Deloitte Conference Warsaw
24/28
THE ROLE OF THE CENTRE
Create a Superior Growth Organisation Establish the right objectives at all levels
Establish the boundaries that maximise clarity and accountability
Establish value based management processes
Establish value based information systems
Develop management capabilities for creating value
Lead by example
Constantly pursue higher value portfolio strategies
Constantly pursue ways to exploit affiliation benefits
Constantly prune unprofitable activities at the Centre
Enforce the Governing Objective Intervene with business units to stimulate higher value alternatives
Intervene with business units to eliminate unprofitable use of
resources
Intervene with business units to ensure there are consequences for
non-conforming behaviour
-
8/3/2019 Deloitte Conference Warsaw
25/28
MANAGING FOR VALUE: THE JOURNEY OF
LEARNING
Over the 17 years ended December 2000, Lloyds Bank shareholders sawthe value of their investment, with dividends reinvested, increase over
65 times, doubling and redoubling total shareholder return every 35
months
There were no a priori prescriptions and no magic methodologies
It involved a journey of learning together
Focusing onShareholder
Value
Transforming
Beliefs
Transforming
Behaviour
TransformingManagement
Performance
-
8/3/2019 Deloitte Conference Warsaw
26/28
USING SHAREHOLDER VALUE TO RAISE
MANAGEMENT PERFORMANCE
What wouldnt
I change:
Dont try to proceed ahead of
changes in fundamental beliefs
Accept disagreement as the
necessary step to agreement
Use consultants to accelerate
learning; dont use them to
change your beliefs
Define world class in terms of
world class value creation
If I started the journey today
I would:
Create a map for the journey
Conduct more formal training
Give it a label
Go faster
-
8/3/2019 Deloitte Conference Warsaw
27/28
CONCLUSION
Managing for value is different
Managing for value must be tailored to each companys needs and style
Managing for value works
BUT
Generating consistently superior shareholder returns is the most
challenging task a company can set for itself
It is a tough discipline to accept
People will wriggle like mad to escape the discipline
It requires extraordinary commitment and belief to stick to it over the
long haul
-
8/3/2019 Deloitte Conference Warsaw
28/28