【正文】 ent pensation to EP provided a popular solution 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 8 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON ?Bain was the first of major consulting firms to focus 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 9 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON ?To illustrate the role of corporate performance measures and resource allocation to strategy work, an examination of Marakon?s “program” is useful ?Marakon applies the following program, which can take several years to plete, to all of its clients: –assess the economic profit of all customer segments and product lines –pare pany 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 yield 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 10 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON EVA is a registered trademark of Stern Stewart ?A century ago, Alfred Marshall explained that for a pany to have genuine profits, the profits must be sufficient to cover the cost of capital as well as the firm?s operating costs ?Stern Stewart has repackaged the concept into EVA?, which is essentially a more palatable form of the same idea ?McKinsey has been using economic profit for many years ?BCG uses Cash Flow Return on Investment (CFROI) for a similar analysis ?To avoid infringing upon Stern Stewart?s 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 Background Economic Value Added 11 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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 12 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON 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 Metrics Output Measures ?Primary businessspecific factors influencing shareholder value ?Tools used to measure performance of business ?Backwardlooking measures of overall pany performance as viewed by market ?Operating profits –volume –price –costs ?Financial Cost of Capital Employed –fixed assets –working capital –WACC* ?Accounting –ROE –ROA ?Modified accounting –EVA?/MVA? –EP –CFROI –CVA ?Total Shareholder Return (TSR) ?Total Business Return (TBR) Framework 13 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON The fundamental business drivers provide a framework for identifying the sources of shareholder value creation or destruction 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 debt and equity ?Use aftertax 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 14 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * 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 Ine Assets = ROE Net Ine Equity = Profitability of equity invested in business ( equity issued plus retained earnings) Returns of enterprise as a whole Returns to shareholders Framework Accounting Business Metrics 15 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON The DuPont formula is used to separate ROE into its ponents in order to assess the performance of the business ROE Net Ine Equity = Net Ine 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 16 CorporatePerformanceMeasurement bc Corporate Performance Measurement LON * EVA=EVA with depreciation added back Many consulting panies attempt to brand the modified accounting business metrics they use ?Economic Profit Measure Consulting Companies ?Bain ?McKinsey ?Marakon