cfo vision 2014 navigate your world - deloitte united states · cfo vision 2014 navigate your world...

CFO VISION 2014

Navigate your world November 19–21 | Washington, D.C.

Director

Deloitte Consulting LLP

Mike Armstrong

Portfolio realignment:

What should stay, what should go

Gavin McTavish Senior Manager

Deloitte Canada

Jonathan Goodman Partner

Deloitte Canada

Copyright © 2014 Deloitte Development LLC. All rights reserved.

The challenge with existing portfolio frameworks

What is an advantaged portfolio?

What is the process for creating an advantaged portfolio?

Contents

3


A portfolio is a collection of assets

managed by its owner with the intent to

make the value of the whole worth more

than the sum of the parts.

In a corporate-level portfolio, the unit

of analysis is the strategically distinct

business (SDB).

SDBs are businesses with different

competitors, bases of competition,

and/or geographies that may or may not

correspond to organizational business

units.

An effective portfolio maximizes

sustainable risk-adjusted value,

consistent with the goals of the owner.

We call this an “advantaged portfolio.”

A portfolio’s value should be more than the sum of its parts

4

Portfolio of strategically

distinct businesses

BU BU

SDB SDB SDB SDB SDB

Corporation

SDBs may be very different

from the organizational units


Traditional portfolio design frameworks have been helpful, but

they have meaningful drawbacks

5

Despite their benefits, traditional two- and three-dimensional portfolio models

generally are not sufficient to evaluate a portfolio’s strength.

Incomplete

• In the pursuit of simplicity, traditional models rely

on only two or three strategic or financial

dimensions, overlooking several tests of

advantage.

One size

fits all

• Traditional models apply the same evaluation

criteria to different businesses, implying that these

businesses all define value or attractiveness in the

same way.

Component-

focused

• Traditional models focus primarily on the strength

of the individual portfolio parts, but provide little

guidance on the optimal portfolio combination.

• These models can be seen as single-level

frameworks, focusing on the component level.

Traditional models


Our framework addresses these drawbacks

6

The advantaged portfolio framework has three benefits:

Broad-based

• To increase sustainable risk-adjusted value, the

advantaged portfolio must be strategically sound,

value-creating, and resilient at the system level.

• Each of these three characteristics requires testing

across a range of criteria.

Tailored

• To be “advantaged,” a portfolio must also meet the

owner’s goals and aspirations for the firm.

• Some of these criteria are quite company-specific;

consequently, the set of criteria, not just the values for

each criterion, should be tailored for each firm.

System-

focused

• An advantaged portfolio has to have strong

components, but act as a strong system as well.

• Consequently, an effective approach tests the

attractiveness of the portfolio on both levels, with

particular emphasis on the system or portfolio level.

Advantaged Portfolios


Contents

7





The advantaged portfolio

Characteristics

8

To maximize sustainable risk-adjusted value, an advantaged portfolio needs

to be strategically sound, value-creating, and resilient.

It is difficult to optimize all criteria simultaneously. An advantaged portfolio will make

tradeoffs across these criteria in search of the most compelling balance.


Strategically sound

Competitively positioned

9

An advantaged portfolio requires a strong weighting of competitive businesses

in attractive markets.

Advantaged portfolio perspective

• An advantaged portfolio should skew toward the

upper right.

Question

• Are my businesses competitively positioned in

attractive industries?

Ability to win

Ind

us

try A

ttra

cti

ve

ne

ss

Low

High

High

Competitive advantage matrix


Strategically sound

Balances innovation

10

An advantaged portfolio will have an appropriate mix of businesses and investments

across the innovation spectrum, and therefore across the right time horizons.


• The right mix of innovation investment depends on

the type of company, but as a rule of thumb,

innovation investment should be balanced at 70%

core, 20% adjacent, and 10% transformational.

Question

• Does the portfolio have the appropriate mix of core,

adjacent, and transformational innovation investments?

Create new

markets and

customers

Enter new

markets and

customers

Serve

existing

markets and

customers

Existing offers

and assets

Extended offers

and assets

New offers

and assets

Offers and assets

Ma

rke

ts a

nd

Cu

sto

me

rs

Transformational

Adjacent

Core

70%

20%

10%

20%

70%

X%

X%

Typical innovation investment

Typical innovation returns

Innovation ambition matrix

10%

Source: Ten Types of Innovation Framework, Doblin


Strategically sound

Creates synergies

11

In an advantaged portfolio, synergies must ensure that the whole is worth more

than the sum of the parts.

Management

oversight benefits

Horizontal synergy

benefits

Downward synergy

benefits

Portfolio system

benefits

Synergy types

Executive perspective

“Synergies are not only about cost reduction. Synergies

can be access to markets, exchange of products,

avoiding overlaps, exchange of best practices.”

– Carlos Ghosn, CEO and Chairman, Renault-Nissan


• An advantaged portfolio is one whose aggregate

value is greater than the sum of its individual parts.

• Failure to create this “portfolio premium” means

there is no justification for the businesses being

under common ownership.

Question

• Do I have synergies that ensure the value of the

portfolio is greater than the sum of the parts?


Value-creating

Maximizes intrinsic value

12

An advantaged portfolio is one that maximizes intrinsic value, i.e., the value of

discounted free cash flows, which is driven principally by growth and returns on

invested capital (ROIC).


“Intrinsic value [is] an all-important concept that offers the only

logical approach to evaluating the relative attractiveness of

investments and businesses. Intrinsic value can be defined

simply: It is the discounted value of the cash that can be taken out

of the business during its remaining life.”

– Warren Buffet, CEO, Berkshire Hathaway


• Shareholder value will align with intrinsic value

(i.e., discounted cash flows) over time, so

companies should focus on driving the intrinsic value

of the portfolio and let share price follow.

• The two principal drivers of intrinsic value are

revenue growth and ROIC.

Question

• Does the portfolio, as a system, maximize intrinsic

value? If not, can we alter the portfolio or change the

growth/ROIC profile of the components to do so?

Return on Invested Capital (ROIC)

As

se

t G

row

th

Low

+

High

Creating intrinsic value

SDB X

WACC

0%

_

Stop value

destruction

Improve profitability Expand asset base

Maximize value

creation


Value-creating

Finds the right owner

13

In an advantaged portfolio, the portfolio as a whole and its component

businesses create the most value in the hands of the current owner.

Value to different owners


“NBC Universal does not fit in the GE portfolio, and therefore

we see this move as an important step in portfolio

streamlining…Selling NBC Universal lets [GE] shift resources

to the company's main businesses and engines of future

growth: power generation, aviation, rail, and medical-imaging

equipment, [and] GE Capital.”

– Jeffrey Immelt, CEO, General Electric


• If another owner (strategic or financial) could

extract more value from the portfolio or a

component of it, the owner should consider selling

that asset to maximize value.

Question

• Are we the value-maximizing owner of each

portfolio component?


Value-creating

Addresses capital markets

14

Although intrinsic value is the most important measure of value creation for an

advantaged portfolio, sometimes capital markets value must be taken into account in

shaping the portfolio.

Executive perspective “As separate publicly traded entities, each company should

benefit from enhanced management focus, more efficient

capitalization, and increased financial transparency. In addition,

shareholders will have a more targeted investment opportunity,

and incentives for management and employees will be more

closely aligned with company performance and shareholder

interests. Given these advantages, we are confident that this

transaction will enable BHS and Brink's, Inc., to more quickly

realize the valuations they deserve.”

– Michael Dan, Chairman, President, and CEO, The Brink's Company


• Where market value (share price) diverges

meaningfully and persistently from intrinsic value,

the portfolio may have to address capital markets

value drivers as well as intrinsic value.

Question

• Is there a disconnect between intrinsic value and

market value that the portfolio will have to address?

Examples of drivers

of value disconnects

Addressable

through portfolio

change?

Market value > Intrinsic value

Takeover premium/bidding war Yes

Market bubble/sector bubble Yes

Excessively positive investor guidance No

Market value < Intrinsic value

Holding company discount Yes

Undervalued higher-multiple

businesses Yes

Poor/negative investor guidance No

Liquidity discount due to bloc

shareholding No

Poor governance No

Suboptimal capital structure/ financial

policy No


Resilient

Weighs feasibility and risk

15

A resilient portfolio is one whose feasibility and risk is consistent with the owner’s risk

tolerance and the expected upside.

Feasibility and risk assessment


“The critical size needed to remain a player in the

pharmaceutical industry has increased lately. 3M's

[pharmaceutical business], with annual sales estimated at USD

800M, was under-sized in that regard. 3M would have needed

to do acquisitions as well, but that would have been a risky

strategy to pursue.”

– Chris Kummer, M&A expert at Webster University in Vienna,

Austria


• Risks must be identified and assessed across a

number of dimensions and measured against the

risk tolerance of the organization

Key question

• Does the portfolio appropriately balance risk and

feasibility against the upside potential, consistent

with the risk-tolerance of the organization?

Sample dimensions Portfolio

option X

Portfolio

option Y

Feasibility (pre-build)

Ability to finance LOW HIGH

Availability of targets MEDIUM MEDIUM

Antitrust barriers LOW HIGH

Management bandwidth LOW LOW

Risk (post-build)

Competitive reaction LOW LOW

Technology risk MEDIUM MEDIUM

Regulatory risk HIGH HIGH

Capital markets reaction MEDIUM HIGH

M&A integration LOW LOW

Macroeconomic risk MEDIUM LOW


Resilient

Survives scenarios

16

A resilient portfolio is one that can perform well across a range of plausible

industry futures.

0

10

20

30

40

50

60

DCF

$M

Industry

scenario 1

Industry

scenario 2

Industry

scenario 3

Industry

scenario 4

Portfolio

option 1

Status

quo

Portfolio

option 2

Portfolio

option 3

Options:

Current

company

share price

Evaluation across scenarios


“Managers know from experience how inaccurate forecasts

can be. On this point, there is probably a large consensus…

the way to solve this problem is not to look for better

forecasts…The better approach is to accept uncertainty, try

to understand it, and make it part of our reasoning.”

– Andra Benard, Former Group Managing Director, Shell


• Given that portfolios typically are designed for a

minimum three- to five-year planning period, the

portfolio should be robust enough to thrive in

different futures.

• Scenario planning is a critical tool for ensuring

the robustness of a portfolio over time.

Question

• Will the portfolio thrive if the world around us

evolves differently than expected?


Portfolio with optionality

If event B occurs

If event A occurs

If event C occurs

Resilient

Creates optionality

17

A resilient portfolio has “optionality,” which gives the company flexibility to change strategic

course depending on how critical near-term events unfold.

Portfolio

option


“I can’t take the risk of choosing path A or path B today. I need

to know whether I can get the deals done before I commit one

way or the other. I need the option to go either way depending

on what we learn.”

– Electronic Materials Company CEO


• A resilient portfolio keeps open a number of

alternate strategic paths in the event that an

expected or desired future event does

not occur.

Question

• Does the portfolio allow the flexibility to change

strategic course in response to uncertain market or

company outcomes?


Resilient Value-creating Strategically sound

Bringing it together — Disney’s advantaged portfolio

18

a) Competitively positioned

Acquisitions re-establish Disney as a world leader in studio entertainment and strengthen its leadership in parks, resorts, and consumer products. Although not yet a leader, it strengthens their position in media networks.

a) Maximizes intrinsic value

Improvement of both ROA and net income demonstrate the value-creating nature of the portfolio move. The acquisition enabled reversal of revenue declines in studio entertainment and consumer products.

a) Weighs feasibility and risk

External risk is mitigated through business-unit diversification, while execution risk is mitigated through a focus on core competencies. Calculated transaction risks have been taken to enhance the portfolio.

b) Balances innovation

Disney production had become “stagnant,” but Pixar and Marvel enhanced the innovation pipeline.

b) Finds the right owner

Business units have a strong fit and generate significant synergy with strategy and core competencies.

b) Survives scenarios

The portfolio is robust across scenarios where power lies with content creators, distributors, curators, or downstream marketers.

c) Creates synergy

Content is leveraged to create significant synergy across the media networks, parks and resorts, consumer products, and interactive media sectors.

c) Addresses capital markets

Disney has continued to satisfy markets, demonstrating share price growth that easily surpasses an index of its peers.

c) Creates optionality

The range of opportunities across relatively broad, but strongly related, business units creates optionality through a range of scenarios.

1 2 3

“Our acquisition of Marvel was clearly an intellectual property play. The management team at Marvel…

simply did not have the bandwidth, the touch points, the machine [of] Disney. We thought that taking

[Marvel’s] great capabilities and putting it into the Disney apparatus, the machine that takes our product all

over the world, (that) would be a very profitable partnership.”

– Jay Rasulo, Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company


Contents

19





• What is our

declared strategy

versus our strategy

in use?

• How can we better

communicate our

strategy to various

stakeholders?

• What strategic

tensions exist and

what can we learn

from them?

The process: StrategyByDesign

20

StrategyByDesign is a proprietary, workshop-driven process to assist in

designing and implementing a new portfolio strategy.

• What individual

opportunities for

value creation are

open to us?

• What integrated

portfolio options

can we design from

these

opportunities?

• What are the

primary evaluation

criteria, and how do

our portfolio options

compare based on

these criteria?

• How do we frame

choices in a way

that prevents

paralysis?

• How can reach

alignment on final

choices?

• How well is our

strategy

performing relative

to our

expectations?

• How well do we

think our strategy

positions us for the

future?

• What are the big

opportunities and

threats to our

current strategy?

• How do we best

galvanize the

organization?

• How quickly can we

move toward the

new strategy?

• How will we know

whether our

strategy

implementation is

on track?

• How can we

translate our new

strategy

into a discrete set

of high-impact,

actionable

initiatives?

• What specific areas

of transformation are

implied by the new

strategy?

• How prepared

is the organization?

Express Assess Develop Choose Detail Act

Options Current strategy Future or emergent strategy


Mike Armstrong

Director

Deloitte Consulting LLP, United States

[email protected]

Jonathan Goodman

Partner

Deloitte Canada

[email protected]

Gavin McTavish

Senior Manager

Deloitte Canada

[email protected]

Contact info

21

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities.

DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see

www.deloitte.com/about for a detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte

LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.


36 USC 220506

Member of Deloitte Touche Tohmatsu Limited

http://www.deloitte.com/about

http://www.deloitte.com/us/about

cfo vision 2014 navigate your world - deloitte united states · cfo vision 2014 navigate your world...

Documents