“putting business strategy into ir presentation” workshop · realized strategy source: harvard...
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where strategy meets finance
22 May 2013
“Putting Business Strategy
into IR Presentation” Workshop
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
4. Conclusion
1. Why do we need to communicate strategy?
Value creation framework: PYI’s framework to create shareholder value
Decode strategy from management Translate strategy into numbers
• Value drivers• Valuation• Resource allocation• Capital structure• Raising capital
• Value-driven strategy• Strategy map
Execution
Translate to execution
CorporateFinancial
Value DrivenStrategy
Performance management
Capital Market Communication
IR
• Operational effectivenesso Performance measuremento Balanced scorecard/ KPIso Cost managemento Maximize productivity
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Corporate Strategy Communication Financial Markets Assessment Valuation of Shares
Projected returns
Projected growth
Projected cash flows
Cost of capital
Shareholder
value
Option 1
Option 2
Option 3
Economic forecasts performance assessment
Industry Economics
Competitive position
Accurate
communication
of our strategy
to the market
Analysts and fund managers cannot accurately value the firm without systematic and clear strategy communication from company’s management
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Key issues that participated companies do not communicate their strategies very well because they have unclear future plans and growth strategies
Often change in management
Business model is not convincing
Unclear explanation on business
Thin margin
Business rely on bidding process
Low Return on Investment
Reliance on specific customers
Lack of IR department
Lack of attention from management
Inconsistence in earning
Limited management accessibility
Lack of outstanding performance
Limited disclosure to investors
Small market capitalization
Low liquidity
Insufficient information provided
Insufficient communication channels
Limited communication of strategy
Unclear growth strategy
Ambiguous future plan
Small Cap. Medium Cap. Large Cap.All
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Key issues
Source: Balanced Scorecard CollaborationRenaissance Worldwide in 1996
Only 5-8% of employees understand strategy, this leads to failure in strategy execution
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The People Barrier
Only 25% of managers have incentives linked to overall strategy
The Management Barrier
85% of executive team spend less than one hour a month
discussing strategy
The Vision Barrier
5‐8% of the workforceunderstand the strategy
The Resource Barrier
60% of organizations do notlink budgets to strategy
9 of 10 companies fail to execute strategy
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
4. Conclusion
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Strategy as aspiration
‐ My strategy is 20/20 plan. Revenues were to grow at 20% a year, and the profit margin was to be 20% or higher.
‐ I will grow the market cap by 4 folds by 2015.‐ We want to be number one or two in all the markets we operate in.‐ Our strategy is to provide superior returns to our shareholders
Strategy as action
‐ Our strategy is to merge the whole industry‐ Our strategy is to expand our new customer base and product categories‐ Our strategy is to outsource‐ Our strategy is to double our R&D budget
‐ Our fundamental strategy is one of customer-centric intermediation.‐ Our strategy is to provide superior products and services‐ We are pursuing global strategy
Source: Adapted from What is Strategy?, Michael Porter
Strategy as vision
This is not a strategy
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What unique advantage can we get and sustain over time-Michael Porter
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Good definitions description of Strategy
A framework within which decisions are made which establish the nature and direction of the business
-Tregoe and Zimmerman
A systematic process for achieving long term goals-Osama El-Kadi
The direction and scope of an organization over the long-term; which achieves advantage… Through its configuration of resources… to meet the needs of markets and to fulfill stakeholder expectations
-Johnson and Scholes
Source: What is Strategy?; Michael Porter
So, what is strategy??
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• A unique value proposition compared to other organizations
• Clear tradeoffs, and choosing what not to do
• Activities that fit together and reinforce each other
• Strategic continuity with continual improvement in realizing the strategy
What is a strategy?
• Best practice improvement
• Execution
• Aspirations
• A vision
• Learning
• Flexibility
• Action
• Etc…
What is NOT a strategy?
Corporate
Business Unit
STRATEGIES CAN BE VIEWED IN TWO LEVELSCorporate Strategy vs Business Strategy
Business Unit Business Unit
• Which business should we be in?• How does being in these businesses create synergy
and/or add competitive advantage to the company as a whole?
Corporate Strategy
• How to successfully compete in each distinct business or industry?
• It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
Business Strategy
Source: Harvard Business School by Michael E. Porter 11
• Does your strategy embrace uncertainty?‐ You should try to characterize what variety you face
and focus on early analysis on removing as much uncertainty as you can
• Does your strategy rest on privileged insights?‐ Data is widely available to rivals‐ You should develop insights by searching for
problems, collecting data through different method
• Does your strategy put you ahead of trends?‐ The emergence of new trends is the norm‐ Many strategies place too much weight of the
status quo; the cost of delay is steep
Ten Tests For Your Strategy
• Will you strategy beat the market?‐ Good strategy emphasizes difference‐ You should capture and retain economic surplus
(Competitive advantage)
• Does your strategy tap a true source of advantage?‐ Competitive advantage comes from
Positional advantage and Special capabilities
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Source: McKinsey Quarterly January 2011
• Is your strategy granular about where to compete?‐ The need to beat the market begs the question of
which market‐ Company should shift attention toward “where”
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• Does your strategy balance commitment and flexibility?
‐ Strategy is to make the right trade‐offs over time
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• Does your strategy contaminated by bias?‐ You may think you have a market‐beating strategy
but forces beyond your control may change‐ You should examine the possibility of being wrong
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• Is there conviction to act on your strategy?‐ Many good strategies fall short in implementation
because of an absence of conviction in the organization
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• Have you translated your strategy into an action plan?
‐ It’s imperative to define clearly what you are moving from and where you are moving to
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TEN TESTS FOR GOOD STRATEGYGood strategy will pass the ten tests, though it is possible to succeed without passing all
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
4. Conclusion
Communicating Strategy
Financial Model
• A a financial representation of some, or all, aspects of the firm
• The model is usually characterized by performing calculations based on that information regarding possible actions or alternatives
Business Model
• The logic of the firm, the way it operates and how it creates value for its stakeholders
• A reflection of the firm’s realized strategy
Source: Harvard Business School by R. Masanell, J.RicartStrategy refers to the choice of business model through which the firm will compete in the marketplace
Strategy Map
• A diagram that is used to document the primary strategic goals being pursued by an organization or management team.
• Connect strategic objectives in explicit cause‐and‐effect relationship
There are three ways to communicate strategy
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
Strategy Map
4. Conclusion
Strategy Map (Kaplan & Norton 2004)
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Customer Value Proposition
SelectionAvailabilityQualityPrice
Organization Capital
•Supply•Production•Distribution•Risk Management
Operational ManagementProcesses
•Selection•Acquisition•Retention•Growth
Customer ManagementProcesses
•Opportunity ID•R&D Portfolio•Design/Develop•Launch
InnovationProcesses
•Environment•Safety and Health•Employment•Community
Regulatory and SocialProcesses
InternalPerspective
Human Capital
Information Capital
Culture Leadership Alignment Teamwork
Learning andGrowthPerspective
CustomerPerspective
FinancialPerspective
Functionality Service Partnership Brand
Product / Service Attributes Relationship Image
Improve CostStructure
Increase AssetUtilization
Long-TermShareholder Value
Expand RevenueOpportunities
EnhanceCustomer Value
Productivity Strategy Growth Strategy
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
Business Model
4. Conclusion
Business Model
• The proprietary method used to acquire, service , and retain customers
• The way the firm operates and how it creates value for its stake holder
• A reflection of the firm’s realized strategy
• A business model is like a blueprint for a strategy to be implemented. It describes the rationale of how an organisation creates, delivers, and captures value
Source: Harvard Business School by R. Masanell, J.Ricart; Business Model Generation By Alexander Osterwalder and Yves Pigneur
What is business model?
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Source: Business Model Generation By Alexander Osterwalder and Yves Pigneur
BUSINESS MODEL PERSPECTIVEThere are nine components in business model
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BUSINESS MODEL COMPONENTS EXAMPLEWhat are the nine components of Nespresso’s business model?
Source: Business Model Generation By Alexander Osterwalder and Yves Pigneur 20
BUSINESS MODEL COMPONENTS EXAMPLEZara
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BREAK OUT SESSIONIdentify real estate development business model for Condo, SDH and TH
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
Financial Model
4. Conclusion
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What is a value driver?Factors and measures that determine the earnings and value of a company. A company’s value drivers can be measured by financial and non-financial performance indicators.
Sample
Goal
Value Drivers
PerformanceIndicators (KPIs)
Other measures
The genericdrivers of value
Business specificmeasures explicitlylinked to value
MaximiseValue of Business
Key
FINANCIAL MODEL PERSPECTIVEWhat is value driver?
Revenue
Variable
Fixed
Labor
Utilities
Price
Net Profit
Cost
Supply
Demand
Production Volume
Raw Material
Rent
Quantity
Net Profit Value Driver
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DuPont Model
Profit Margin
ROE Asset Turnover
Equity Multiplier
Profit
Sales
Asset
Sales
Total Asset
Equity
VALUE DRIVER EXAMPLEDuPont model value driver for ROE
Operating Profit
Interest
Tax
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Economic Value Added Model (EVA) Value Driver
NOPAT
EVA
Total Capital Cost
Operating Profit
Tax
Invested Capital
WACC
Revenue
Cost
Working Capital
Fixed Capital
VALUE DRIVER EXAMPLEValue driver for Economic value added (EVA)
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Cost of Equity
Cost of Debt
Tax Rate
Level of value drivers
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NOPAT
EVA
Total Capital Cost
Operating Profit
Tax
Invested Capital
WACC
Revenue
Cost
Working Capital
Fixed Capital
Level 1: Financial Driver Level 2: Business Specific Level 3: Operational Driver
• Customer mix• Sale force Productivity• Market share• Customer retention
• Per cent accounts revolving• Dollars per visit• Units revenues
• Fixed cost• Capacity management• Operational yield• Unit cost
• Percept capacity utilized• Cost per delivery
• Accounts receivable terms and timing
• Accounts payable terms and timing
• Inventory size
• Fixed asset turn over• Capacity utilization &
rationalisation
Source: Adapted from What is value-based management? McKinsey Quarterly 1994
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AGENDA :
1. Why do we need to communicate strategy?
2. What is strategy?
3. Systematic approach to identify your strategy
4. Conclusion
Combination of business model and financial model to communicate strategy
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Business Model Value Driver
Business Unit A
Cost
Revenue
Revenue
Net Profit
Business Unit B
Value Propositions
Customer Segments
Key Activities
Cost
Combination of business model and financial model to communicate strategy
Channel
Customer Relationship
Key Resources
Key Partners
Business Unit C
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Financial Driver Business Model
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Effective communication of strategy
What is our economic/ financial
return?
Where will the company be compete?
Which product categories?Which market segments?Which geographic areas?
How we will win the market?
Customer value propositionPrice?Operation effectiveness?Product differentiation?Innovation?
How will the company get there?
Mean to attaining identified arenasOrganic & Internal?M&A?Joint ventures?Franchising? What will be our
sequence of the move?
Allocation of resourcesSequence of initiativeSpeed of expansion32
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