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APERTASVCA Workshop14 January 2019
Agenda VCA Workshop
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I. Setting the Scene and Introduction
II. Value Chain Analysis: Visualization
Techniques & Infographics per industry
III. VCA Case Studies
Appendices
Agreements and
rulings
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Real time access and validation
Information request based on outliers
Horizontal supervision
ICAP
Multilateral audits
Transaction Year-end Return filing Audit MAP
Uncertain tax positions (UTP) -
FIN 48/ IAS 12
Change of paradigmChange of paradigm
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Holistic versus Transactional: Valuation of Intangibles
Holistic view
Transactional view
Years Income stream
1 x2 x3 x4 x5 x
Inbound Logistics Operations Outbound Logistics
Marketing Sales
(Brand and Patents )
Services & After Sales
Support
M ultiple years connected between transactional, Holistic and fair m arket value of intangibles
Discounted Cash Flow of intangibles
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II. VALUE CHAIN ANALYSIS: VISUALIZATION TECHNIQUES & INFOGRAPHICS PER INDUSTRY
Value Chain Analysis: Visualisation Techniques
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• The various techniques to visualize the value chain of a company are:
o Pie Chart visualization;
o Porter’s style visualization;
o Process contribution analysis/ Balanced score card; and
o Canvas/ Intangible approach
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VCA Technique 1:How to analyze and align the operating model
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Alignm ent Between G ross Margin, Operating Margin, and F T E sIllustrative
Misalignment is visible when expressed as the ratio of country and total group for gross margin, operating margin, and
F T E s . The higher the delta, the greater the need to provide explanations to the Tax authorities.
G r o s s M a r g i n ( G M ) R a t i o
Country GM to Total G roup GM
O p e r a t i n g M a r g i n ( O M ) R a t i o
Country O M to Total G roup O M
F u l l T i m e E m p l o y e e ( F T E ) R a t i o
Country FTE s to Total G roup FTE s
The Netherland
s33%
Germany19%
China17%
United Kingdom
31%
The Netherland
s60%
Germany5%
China5%
United Kingdom
30%
The Netherland
s6%
Germany13%
China23%
United Kingdom
58%
VCA Technique 2:Basic Approach to divide the residual profit
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Legal Entities
Residual: Other: Cost Plus: Cost Plus or Percentage of Operating Margin:
IP Owner Match making
Finance Activities (cash pool)
Contract manufacturing Contract R&D
Local sales or marketingoffices
Support Services (admin, legal, HR etc.)
Starting PointDeterm ine EBIT%
Key People FunctionsAllocation of EBIT% Allocation of People
Functions and EBIT%
ResidualInvestm ent C enter P ro fit C ente r
ü C apita l m arke t/cus tom er d riven ac tiv itiesü M ostly perfo rm ed fo r s takeho lders /M N E as a w ho leü C ore A ctiv itye .g ., IP O w ners
ü C apita l m arke t/cus tom er d riven ac tiv itiesü M ostly perfo rm ed fo r ex te rna l cus tom ersü M ostly coree .g ., D is tribu tion C enters
D E M P E F u n c t io n s o + F i l t e r M a t c h - M a k in g
Source: TPA Global. - a Development Enhancement Maintenance Protection Exploitation Functions.
VCA Technique 3(A):Fully Integrated Approach (Process Contribution Analysis)
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Design to build (products)
Key functions performed (and entities responsible for performing)
Unit Unit Unit Unit License HQ OPCOs
Order to cash
Demand to supply (operational infrastructure)
Purchase to pay (vendor)
Finance to manage
Total # of FTEs in each unit
Total cost for each unit
P rim ary B u sin ess P ro cesses
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VCA Technique 3(B):Balanced Scorecard Approach
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Exemplary Balanced Score CardDetermination of contribution to value add
Functions Sub-Function Characterization
Function 1 Sub-Function 1 Routine
Function 1 Sub-Function 2 Non-routine
Function 1 Sub-Function 3 Non-routine
Function 2 Sub-Function 1 Routine
Risks
Risk 1 _ Non-routine
Risk 2 _ Routine
Scoring (absolute)
Scoring as split ratio to be applied to the residual gross m argin
D eterm in ed b ased o n in terv iew sF act rev iew
2013 - 2016
UK DE CH
X
X
X
X
X
X
2017
UK CH
X
X
X
X
X
X
Weight(characterization)
1
2
3
1
2
1
Score 2010 - 2016
UK DE CH
1 0 0
0 2 0
0 0 3
1 0 0
2 0 0
1 0 0
5 2 3
50% 20% 30%
Score 2017
UK CH
1 0
0 2
0 3
1 0
2 0
1 0
5 5
50% 50%
D eterm in ed b ased o n th e literatu re an dd iscu ssio n s w ith th e co m p an y
VCA Technique 4(A):Canvas Approach BMO Strategy
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The Business Model Canvas
K ey P artners K ey A ctiv ities
K ey R esources
C ost S truc tu re
V a lue P ropos itions C ustom erR e la tionsh ips
C hanne ls
C ustom er S egm ents
R evenue S tream s
VCA Technique 4(B):
Intangible Capital Canvas
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Peers8-Which organizations do you consider to be your peers?
Competencies:6 - What are the core
competencies your people
need to support your value creation?
Processes:4a - What are key
processes that supportyour value creation
Value Proposition:3 - What do you do to create
value for your customersand stake holders?
Brand:
→START HERE:(numbers correspond to
Icounts Inventory Questions)
1 – What is your brand?
Customers:2a – Who are your paying
customers?
Production Partners5a - Who are the key
partners who support your value creation
Knowledge/IP4b - What are the keyknowledge, data or IP
needed to support your value creation Partners – Channels::
5b – Who are the key
partners who support your value delivery?
Stakeholders:2b – Who are your
non-paying customersand/or key stakeholders?
Culture7 - What are the key
elements of the culture your
organization needs to support the system?
Tangible Assets:4c – What are key tangible
assets needed to supportYour value creation?
OpCosts + Tangible + Intangible Capex: Profits: Revenues:
Reputation:
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III. VCA Case Studies
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Case Study 1: Five Forces in Porter’s ModelApple Inc
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The five forces as identified by the Porter’smodel are listed below:
• Bargaining power of suppliers• Threat of substitute products or suppliers• Rivalry among existing competitors• Threat of new entrants• Bargaining power of buyers
QUESTION Case Study: Please discuss the business model of Apple and define 3 “value drivers”.
I/C CP+(Flagship store)
Kick back for IP
Suppliers for hardware
10% grossmargin paid
Bermuda Irish
Ireland
Apple owned store
Foxconn and Others
Third partyauthorisedresellers
Customers
Case Study 2: Technique 1Value Chain of a Pharmaceutical Company
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QUESTION Case Study:• The picture describes the value chain of a pharmaceutical company.
• The numbers presented are sales, GM, OM and FTEs. Please visualize a value chain analysis showing distribution of value/ profits among various group entities.
Third party transactions
Contract manufacturing
services
Cost Plus
Return
Intercompany Services
Return for Intercompany Services
Provision of R&D services
Sales
and Marketing
support services
Cost Plus
Return
% of net sales revenue or cost
plus return
Flow of goods
Principal Contract
manufacturer
Contract R&D
provider
Limited risk
distributor
Sales 300 100 120 150
GM 200 80 90 100
OM 150 30 70 80
FTEs 6.5 44.5 14 35
C ontrac t M anufac tu re r
(C N )
C ontrac t R & D C enter(P L)
Loca l S a les and
M arke ting en tities –LR D s
(various loca tions)
P rinc ipa l (N L)T h ird P arty
C ustom ers
Case Study 3: Technique 2Value Chain of a Real estate developer
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C om pany A U S A
(H o ld ing com pany)
X H ote lS pa in
C om pany BS pa in
(subs id ia ry )
100%
100%
Facts:
ABC group is a USA headquartered group, which is involved in the long-term investment and development of commercial real estate and hotels through its subsidiaries.
The process of hotel development involves the following two phases:
• Phase 1: Pre-development and development
This involves activities such as site analysis and selection, market study, feasibility analysis regarding the market feasibility and financial analysis, architecture design, financing, construction and marketing.
In this regard, Company A is involved in Phase 1 of the hotel development process.
• Phase 2: Operations
This involves activities that are required in the running of the hotel such as negotiations with vendors for food services and entertainment facilities.
In this regard, Company B is involved in Phase 2 of the hotel development process.
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2 2
STEPS
STEP 1.Value Chain
Analysis
Each person is a proxy for group-wide headcount involved in the activity
STEP 2.People
Functions
STEP 2.Risks
STEP 2.Assets
Strategic Operational
Technology-relatedintangibles
Marketingintangibles
STEP 3.Entities Define roles of the entities in the joint value creation and responsibilities in respect of the different value drivers and related risks
STEP 2.Functions
Case Study 3: Technique 2 (conti…)Value Chain of a Real estate developer
Please visualise the value chain of ABC group below using Porter’s visualisation technique and also identify the functions, assets and risks assumed by Company A and B.
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Local Sales & MarketingEntities (various EU
countries)
Toll Manufacturer
Case Study 4: Technique 3Value Chain of an Apparel Company
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T oll m anufac tu ring
serv ices
R eturn on asse ts
P rov is ion o f d is tribu tion serv ices
S a les and
M arke ting
support se rv ices
A dm in is tra tive support se rv ices
C ost P lus R eturn
C ost P lus R eturn
% o f ne t sa les revenue (fo r sa les ac tiv ities)
C ost p lus re tu rn (fo r m arke ting)
F low o f goods
F low o f goods
T h ird party transactions
In te rcom pany S erv ices
R eturn fo r In te rcom pany S erv ices
Third PartyCustomers
Third PartySuppliers
Principal (Cyprus)
Shared Services Centers(various EU countries )
Limited Risk Distributor (NL)
QUESTION Case Study:Please visualize a value chain analysis showing the distribution of value/ profits among various group entities.
Case Study 4: Technique 3, continuedValue Chain of an Apparel Manufacturing Company
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# Key Process # Sub-process Definition
1 Management ofPortfolio of IP
1a Design / Licenseto Build
This process refers to the activities of market research, brand strategy development, constructing product lines for each region, development of marketing approach and content, and IP protection and licensing.
1bLicensed Brand
Partner Relationship Management
This process is a derivative of the first process and refers to the management of relationships with the enterprises such as third party owners of brands (with whom the company enters into a licensing arrangement for right to design its products) and development of a storyline around brands using multimedia platforms to enrich brands.
2 Management ofSupply Chain
2a Supply Chain ManagementThis process refers to internal management activities of the company starting from transferring the productsfrom the manufacturing entities to the distribution centers and liaising with local sales units to ensure productsare in the retail shops as per the company’s business strategy.
3a Manufacturing Resource Planning
This process refers to estimating the requirements of the market, estimating the determining the amount of raw materials required, estimating the costs associated with it and planning the budget by keeping these in mind.
3 CommercialExecution
3b Financial Management/ Order to Cash
This process refers to order placement, fulfilment, shipping, invoicing and payment
2b Customer Engagement & Relationship Management
This process starts with engaging with customers through sales and marketing efforts, ensuring timely deliveryand managing customer complaints.
The main value creating processes in this company’s business are shown in the table above.
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Q&A
Any questions?