value based mgt..pptx

7/29/2019 Value Based Mgt..pptx

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STRATEGIC FINANCIAL MANAGEMENT

BOOKS RECOMMENDED:-

1.FM-PRASANNA CHANDRA

2.Financial Analysis and Financial Mgt:-R.P.Rustagi

3.FM-Khan and Jain4.FM and Policy-Van Horne

5.FM-S.N.MAHESWARI

6.FM-SHARMA AND GUPTA

7.SFM-A.N.SRIDHAR

8.SFM-RAVI M KISHORE

9.S F M - SOFAT, RAJNIHIRO, PREETI


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Strategic Financial Management

Capital investment is the springboard for wealth creation.In a world of economic uncertainty, the investors want tomaximize their wealth by selecting optimum investmentand financial opportunities that will give them maximum

expected returns at minimum risk. Since management isultimately responsible to the investors, the objective ofcorporate financial management should be implementinvestment and financing decisions which should satisfy

the shareholders by placing them all in an equal, optimumfinancial position.


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The satisfaction of the interests of the shareholdersshould be perceived as a means to an end, namelymaximization of shareholders wealth. Since capital isthe limiting factor, the problem that the managementwill face is the strategic allocation of limited fundsbetween alternative uses in such a manner, that thecompanies have the ability to sustain or increaseinvestor returns through a continual search forinvestment opportunities that generate funds for theirbusiness and are more favourable for the investors.


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All businesses need to have the following threefundamental essential elements:

A clear and realistic strategy, The financial resources, controls and systems to

see it through and

The right management team and processes to

make it happen.


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Strtegic financial management is a combination of thethree terms:-

Strategy Finance Management

Strategy: a carefully devised plan of action to achieve agoal, or the art of developing or carrying out such aplan

Finance: the business or art of managing the

monetary resources of an organisation Management: the organising and controlling of the

affairs of an organisation or a particular sector of anorganisation


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The term strategy is popularly used in military andpolitics.It comes from the Greek word Stratos

(Army) and Agein (to lead). Strategy is the science of planning and directing

military operations.

Strategy is the art and science of combining the

many resources available to achieve the best matchbetween an organization and its environment.


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Strategy may be defined as, the long term directionand scope of an organization to achieve competitiveadvantage through the configuration of resources

within a changing environment for the fulfillment ofstakeholders aspirations and expectations.

In an idealized world, management is ultimatelyresponsible to the investors. Investors maximize their

wealth by selecting optimum investment andfinancing opportunities, using financial models thatmaximize expected returns in absolute terms atminimum risk.


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A strategy is a unified, comprehensive and integrated planthat relates the strategic advantage of the firm to thechallenges of the environment. It is designed that the basic

objectives of an enterprise are achieved through properexecution by the organization.

Mitzberg defines strategy as a pattern of decisions asactions

Anybody who comes up with a new product or a newmarket, or is able to integrate different parts of those thingsis a strategist.-Mintsberg


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STRATEGIC MANAGEMENT

S/M is defined as the set of directions and actionsresulting in formulation and implementation ofstrategies designed to achieve the objectives of anorganization.

S/M involves deciding and implementing strategieswith the use of resources for ensuring existence andexpansion of an enterprise.


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STRATEGIC MANAGEMENT Aset of managerial decisions and actions that determines

the long run performance of a corporation Monitoringand evaluating of external threats and opportunities in the

light of corporations strength and weaknesses.Elements (A basic model)

1.Strategic planning

2.Environmental scanning(external & internal)

3.Strategy formulation

4.Strategy implementation

5.Evaluation and control

6.Feed back / learning proces


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Strategic planning involves allocation of resources toachieve the mission and long run objectives of theorganization.

S/P involves the following:-

1.Deciding the vision, mission, objectives and goals

2.Environmental scanning or analysis

3.Internal analysis 4.Exploring strategic alternatives

5.Strategic analysis and choice of strategy


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FINANCE

Finance is the life blood of any business. In moderncompetitive business world, finance is the key store ofeach and every operational activities of the business.No business can be started without adequate finance.Modern business needs money to make more money-to multiply money.

Generally financing of sole trader or partnership formsof organizations are easy and the financial resourceswill also be limited to them.


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Finance means allocation of money at the particularmoment of time when it is wanted. Finance functionrefers to that procurement of funds and their effectiveutilization.

Financial management refers to the management offinance. According to Ezra Soloman, FM is concernedwith the efficient use of an important economicresource called capital funds.


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According to Weston and Brigham, FM is an area offinancial decision making, harmonizing individualmotives and enterprise goals.

FM is the operational activity of a business that isresponsible for obtaining and effectively using thefunds necessary for effective operations-Joseph andMossie.


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STRATEGIC FINANCIAL MANAGEMENT SFM-the application of financial techniques to strategic

decisions in order to help achieve the decision-maker'sobjectives

Strategic Financial Management is the portfolioconstituent of the corporate strategic plan thatembraces the optimum investment and financingdecisions required to attain the overall specified

objectives. Strategic Financial Management refer to both the

financial implications or aspects of various businessstrategies and the strategic management of finances.


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strategic financial management is the function of fourmajor components based on the mathematicalconcept of expected NPV (net present value)maximization, which are:

1. Investment decision

2. Dividend decision

3. Financing decision and 4. Portfolio decision.


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The key decisions falling within the scope of financialstrategy include the following:

1. Financial decisions: This deals with the mode offinancing or mix of equity capital and debt capital. If itis possible to alter the total value of the company byalteration in the capital structure of the company, then anoptimal financial mix would exist - where the market valueof the company is maximized.

2. Investment decision: This involves the profitable

utilization of firm's funds especially in long-termprojects (capital projects). Because the future benefitsassociated with such projects are not known with certainty,investment decisions necessarily involve risk.


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. The projects are therefore evaluated in relation totheir expected return and risk.

These are the factors that ultimately determine themarket value of the company. To maximize the marketvalue of the company, the financial manager will beinterested in those projects with maximum returnsand minimum risk. An understanding of cost ofcapital, capital structure and portfolio theory is aprerequisite here.


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3. Dividend decision: Dividend decision determinesthe division of earnings between payments toshareholders and reinvestment in the company.Retained earnings are one of the most significantsources of funds for financing corporate growth,dividends constitute the cash flows that accrue toshareholders. Although both growth and dividends are

desirable, these goals are in conflict with each other.


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A higher dividend rate means rate means less retainedearnings and consequently slower rate of growth in futureearnings and share prices. The finance manager must

provide reasonable answer to this conflict. 4. Portfolio decision: Portfolio Analysis is a method of

evaluating investments based on their contribution to theaggregate performance of the entire corporation ratherthan on the isolated characteristics of the investments

themselves. When performing portfolio analysis,information is gathered about the individual investmentsavailable, and then chooses the projects that help to meetall of our goals in all of the years that are of concern.


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Functions of Strategic Financial

Management The investment and financial decisions functions

involve the following functions1:

Continual search for best investment opportunities

Selection of the best profitable opportunities

Determination of optimal mix of funds for theopportunities

Establishment of systems for internal controls Analysis of results for future decision-making.


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UNIT-II-CAPITAL BUDGETING What is capital budgeting?

It is a process of making investment decisions in capitalexpenditure. It is long term planning for making and

financing proposed capital outlays. It is an evaluation ofcapital expenditure decisions.

Why capital budgeting decisions are consideredimportant?

Capital budgeting decisions are considered importantbecause:-1.Large investments 2.Long term commitment offunds 3.Irreversible decisions 4.Long term effect onprofitability 5.Difficulties of investment decisions.


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What are the methods of evaluating profitability of capitalinvestment proposals?

1.Traditional Methods:- (i) Pay back period (ii) Average

Rate of Return Method (or) Accounting Rate of ReturnMethod.

2.Discounted cash Flow (DCF) Methods: (i) Net PresentValue method (ii) Profitability Index method (iii) Internal

Rate of Return method.


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Risk and uncertainty in capital budgeting All the techniques of c/b require estimation of future cash

inflows and cash outflows. But future is highly uncertain andrisky and cannot be predicted correctly.

In such a situation, the following methods are suggested for

accounting for risk in capital budgeting . I-General techniques:- 1.Risk adjusted cut off rate or Rate of Varying Discount Rate 2.Certainity Equivalent method II-Quantitative techniques:- 3.Sensitivity technique 4.Probability Technique 5.Standard deviation method 6.Co-efficient of variation method 7.Decision Tree analysis


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METHODS OF ACCOUNTING FOR RISK AND UNCERTAINITY IN

CAPITAL BUDGETING

1.Risk adjusted cut off rate or Rate of Varying Discount Rate

This is the simplest method of accounting for risk incapital budgeting. Under this method, the cut-off rate

or the discount factor is increased by certainpercentage on account of risk. The projects which arerisky and having greater variability in returns arediscounted at a higher rate.

(Problems for this method, refer another slide)


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2.Certainity Equivalent method:-

Under this method, the expected cash inflow is reducedby certain amounts. It can be employed by multiplying

the expected cash inflows by certainty equivalent co-efficients as to convert uncertain cash flows to certaincash flows.

3.Sensitivity technique:- When cash inflows are very

sensitive under different circumstances, more than oneforecast of the future cash inflows may be made. Theseinflows may be graded as 1.Optimistic (very high) 2.MostLikely (Moderate) and 3.Pessimistic (Very low).


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The cash inflows may be discounted to find out the netpresent values under these different situations. If thepresent values under these three situations differ widely, it

implies that there is a great risk in the project and theinvestors decision to accept or reject a project will dependupon hid risk bearing abilities.

(For problems under this method, refer another slide)

4.Probability Technique:- A probability is the relativefrequency with which an event may occur in the future.


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When future estimates of cash inflows have differentprobabilities, the expected monetary value can be computed bymultiplying cash inflows with the probability assigned. Themonetary values so arrived can further be discounted to calculate

the present value. The project that gives higher NPV may beaccepted.


5.Standard Deviation method:- If two projects have the samecost and their NPVs are also the same, S.D. of the expected cashinflows of the two projects may be calculated to judge thecomparative risk of the two projects. The project having a higherSD is said to be more risky as compared to the other.



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6.Co-efficient of variation method:- If two projects havethe same cost but different NPVs, relative measure i.e.,Co-efficient of variation should be compared to judge the

relative position of risk involved. It can be calculated as C.V.= Std.deviation X 100

Mean


7.Decision Tree analysis:- In modern business, there arecomplex investment decisions which involve a sequence ofdecisions over time. Such sequential decisions can behandled by plotting decisions trees.


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A decision tree is a graphic representation of therelationship between present decisions and future events ,future decisions and their consequences. The sequence of

events is mapped out over time in a format representingbranches of a tree and hence the analysis is known asDecision tree analysis.



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The various steps involved in the decision tree analysis are:-

1.identification of the problem

2.Finding out the alternatives

3.Exhibiting the decision tree indicating the decisionpoints, chance events and other relevant data4.Specification of probabilities and monetary values forcash inflows and

5.Analysis of alternatives


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UNIT-IV-CORPORATE VALUATION

(Refer FM-book by Prasanna Chandra-Chapters 32&33-

Pages 771-862 Value maximization is the central theme in FM.

It is widely accepted that the primary aim of the firm is tomaximize the wealth or it is generally agreed that the goal of

the firm should be Shareholders Wealth Maximization From the economist's viewpoint, value is created when

management generates revenues over and above the economiccosts.

Costs come from four sources: employee wages and benefits;material, supplies, and economic depreciation of physicalassets; taxes; and the opportunity cost of using the capital.

It is therefore more important to know the variables whichinfluence value addition.


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Today, financial managers play a dynamic role in solving

complex problems like

Shaping the fortunes of the enterprise,

Decisions regarding allocation of capital,

Raising of funds most economically and using them in the

most efficient and effective manner.

Because of this change , the descriptive treatment of the

subject of financial management is being replaced by growing

analytical contents.


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Today, financial managers play a dynamic role in solving

complex problems like

Shaping the fortunes of the enterprise,

Decisions regarding allocation of capital,

Raising of funds most economically and using them in the

most efficient and effective manner.

Because of this change , the descriptive treatment of the

subject of financial management is being replaced by growing

analytical contents.


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The subject now accords a far greater importance to

management decision-making and policy.

Hence new tools in financial management emerged. Itcomprises of

Tools and techniques in Financial Analysis, Profit

Planning and Control

Long-term Investment or capital budgeting DecisionsWorking Capital Management


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Creating value for shareholders is now a widelyaccepted corporate objective. The interest in valuecreation has been stimulated by several developments.

Performance measurement (qualitative or quantitative)is the key to value addition

Capital markets are becoming increasingly global.Investors can readily shift investments to higheryielding, often foreign, opportunities.


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Institutional investors, which traditionally were passiveinvestors, have begun exerting influence on corporatemanagements to create value for shareholders.

Corporate governance is shifting, with owners now demandingaccountability from corporate executives. Manifestations of theincreased assertiveness of shareholders include the necessityfor executives to justify their compensation levels, and well-

publicized lists of under performing companies and overpaidexecutives.

Greater attention is being paid to link top managementcompensation to shareholder returns.


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Creating shareholder value is the key to success intoday's marketplace.

There is increasing pressure on corporate executives tomeasure, manage and report the creation ofshareholder value on a regular basis.

In the emerging field of shareholder value analysis,

various measures have been developed that claim toquantify the creation of shareholder value and wealth.


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There are four broad approaches to appraising thevalue of the company.

1.Adjusted book value approach

2.Stock and debt approach

3.Direct comparison approach

4.DCF approach


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Methods of Corporate Valuation 1.Adjusted book value approach:-This is the

simplest approach to value a firm. There are twoequivalent ways of using the B/S information to

appraise the value of the firm. First the bookvalues of the investor claims may be summeddirectly. Second, the assets of the firm may betotaled and from this, the total non-investor

claims may be deducted. (For problems on this approach, view another

slide)


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2.Stock and debt approach:- Under this appr0ach, thevalue of the firm is obtained by merely adding themarket value of all its outstanding securities. This

method is also known as Market approach. For example, X Ltd., has 15 lakh shares at a market

value of Rs.20 per share and a debt with a market valueof Rs.210 lakhs. Then the value of the firm under thismethod is:- MV of shares-15 lakh X Rs.20=300 lakhs

MV of debt--------------------- 210 lakhs

Total value of the firm-----------------------510 lakhs


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3.Direct comparison approach:- Under this method, acompanys data are compared with other companies.

The following are the steps in this approach.

1.Analyse the economy 2.Analysis the industry 3.Analyzethe subject company 4.Select comparable companies5.Analyze multiples 6.Value the subject company

4.DCF approach:- This method calls for forecasting

cash inflows over an indefinite period of time for anentity that is expected to grow.


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The value of the firm is separated in two time periods.

Value of the firm:-PV of CI during an explicit forecastperiod + PV of CI after the explicit forecast period

Steps:-1.Analyze the historical performance2.Estimating the cost of capital 3.Forecastingperformance 4.Determine the continuing value

5.calculate the firm value and interprete the results


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VALUE BASED MANAGEMENT In the last decades, management accounting faced

increasing challenges to adopt new approaches, designedto fit the changes in the economic environment and tocorrect perceived inefficiencies in existing controllingstructures.

In the 1950s and 1960s an important debate focused on thecharacter of information for decision-making. Anothergroup of scholars addressed the issue whether the

contribution margin approach was superior to systems thatfully allocated overheads. In the 1970s several researchersflocked around the topic of residual income and theoptimal control of relatively autonomous divisions.


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More recently with new developments in managementaccounting it appears that the three letter acronyms arebecoming very popular. Some of the most fashionable are:

SMA (strategic management accounting), ABC, ABM &ABB (activity-based costing and its variants; activity basedmanagement and activity-based budgeting), BPR (businessprocess re-engineering) and


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BSC (balanced scorecard). A common element,which distinguishes the later managementaccounting tools from the earlier ones, is that themore recent approach have emergedpredominantly from practice and fromconsultants. Another modern-day .hot. topic in

practice, which is claimed to be changing financialmanagement at the highest level in some of theworlds largest companies, (Bromwich, 1998) isvalue-based management (VBM).


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VALUE-BASED MANAGEMENTValue-based Management is essentially a management

approach whereby companys driving philosophy is tomaximize shareholder value by producing returns in

excess of the cost of capital. (Simms, 2001) Value-based Management is a framework for

measuring and, more importantly, managingbusinesses to create superior long-term value for

shareholders that satisfies both the capital andproduct markets.


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Value-based management is a framework formeasuring and managing businesses to create superiorlong-term value for shareholders. Rewards are

measured in terms of enhanced share priceperformance and dividend growth.

Value-based Management is a managementphilosophy which uses analytical tools and processesto focus an organization on the single objective ofcreating shareholder value.


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Value-based Management is a new way for managing,focused on the creation of real value not paper profits.Real value is created when a company makes returns

that fully compensate investors for the total costsinvolved in the investment, plus a premium that morethan compensates for the additional risk incurred.

Value-based Management is a term that describes amanagement philosophy based on managing a firmwith Economic Value Creation principles.


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Value-based management is a management control systemthat measures, encourages and supports the creation ofnet worth.

Value-based management is a managerial approach inwhich the primary purpose is shareholder wealthmaximization.

Value Based Management is a management approachwhich puts shareholder value creation at the centre of the

company philosophy. The maximization of shareholdervalue directs company strategy, structure and processes, itgoverns executive remuneration and dictates whatmeasures are used to monitor performance.


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Value-based Management is a different way offocusing an organization strategic and financialmanagement processes. In order to maximize value,

the whole organization must be involved. Features of VBM:-

Management:- VBM is a management tool, a controlsystem; an apparatus that is used to integrateresources and tasks towards the achievement of statedorganizational goals.


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Approach:-

VBM is a prescribed and usually repetitious way of carryingout an activity or a set of activities that propagate its values

all over the organization. It is a robust disciplined processthat is meant to be apparent in the heart of all businessdecisions.

Maximizing shareholder value:-

VBM.s purpose is to generate as much net worth aspossible. Or put in another way: to distribute the givenresources to the most valuable investments. Maximizationalso implies a forward vision, based on expected outcomes.


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Methods and key premises of VBM 1.Free cash flow method-proposed by Mckinsey and Alcar

group

2.The Economic Value Added and Market Value Added

(EVA and MVA) by Stern Stewart and company 3.The Cash Flow Return On Investment(CFROI) and Cash

Value Added (CVA)

There are some common premises / assumptions/ in the

above methods. They are:- 1.The value of any company is equal to the PVs of the

future cash flows expected to be produced by thecompany .


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A well designated performance measure measurement andincentive management compensation system is essential tomotivate employees to focus their attention on creatingshareholder value.

There are different approaches to the VBM. 1.Marakon approach

2.Alcar approach

3.Mckensey approach

4.Stern Stewart approach (or)EVA-Economic Value Addedapproach

5.BCG-Boston Consulting Group approach (OR)CFROI approach

Cash Flow Return On Investment


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MARAKON APPROACH Marakon Associates, an international management-consulting

firm founded in1978, has done pioneering work in the area ofvalue-based management.

This measure considers the difference between the ROE andrequired return on equity (cost of equity) as the source of valuecreation.

The key steps in this approach are:-

1.Specify the financial determinants of value

2.Understand the strategic drivers of value

3.Formulate higher value strategies and

4.Develop superior organizational capabilities


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1.Specify the financial determinants of value:-

This method is based on market to book ratio model.According to this model, shareholder wealth creation is

measured as the difference between the market value andbook value of a firms equity. The book value-B, measuresapproximately the capital contributed by the shareholders,

whereas the market value of equity-M, reflects how

productively the firm has employed the capital contributedby the shareholders, as assessed by the stock market.


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Therefore, the Mgt. creates value for shareholders if Mexceeds B, reduces the value of M is less than B andmaintains the value if M is equal to B.

According to Marakon Model, the market-to-book valuesratio as a function of the return on equity, the growth rateof dividends and the cost of equity.

M = r-g M=Market value of equity : r=return on equity

B k-g B=Book value of equity g=Growth rate in dividends and k is the cost of equity


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1. X Ltd., earns a return on equity of 25%. Its dividendpayout ratio is 0.40. Equity share holders of X Ltd., requirea return of 18%. The book value per share is Rs.50.

(a)What is the market price per share, according toMarakon Model ?

(b)if the return on equity falls to 22%, what should be thepayout ratio to ensure the market price per share remains

unchanged?


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2.Understand the strategic drivers of value:- The following areconsidered as the primary determinants of growth and value-(i)market economics and (ii)Competitive position

(i)Market economics:- It refers to the structural factors whichdetermine average equity spread as well as the growth rate asapplicable to all competitors in a particular market segment.The following are the key forces which shape marketeconomics/ profitaboility.1.Intensity of indirect competition

2.Threat of entry 3.Supplier pressures 4.Regulatory pressures5.Intensity of direct competition 6.customer pressures.Marakon refer to the first four as limiting forces and the othertwo as direct forces.


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(ii)Competitive position:- It refers to the relative position in

terms of equity spread and growth rate of the average

competitor in nits product market segment. It is shaped by two

factors-product differentiation and economic cost position. Afirm is successful in its product differentiation if the customers

value its particular offering and are willing to pay a premium

for the same. The offering is capable of commanding a price

premium relative to competitor offerings. The firm can raise

the price, leaving the market share unchanged or increase its

market share, without raising the price.


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For some products, successful product differentiation maynot be possible. In such cases, higher profitability may arisefrom a relative economic cost advantage i.e., the cost will be

lower than the market average. Some of them are:- 1.Accessto cheaper raw materials 2.Efficient process technology3.Access to low cost distribution channels 4.superiormanagement 5.Economies of scale in some markets

3.Formulate higher value strategies:-Value is created byparticipating in attractive markets and / or building a

competitive advantage. Thus the key elements of a firms

strategy are its participation strategy and competition strategy.


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The participation strategy defines the product markets inwhich it will compete.-in which it should enter and fromwhich existing businesses it should exit ? In which

unserved markets it should enter and from which existingmarket centers it should exit?

The competition strategy spells out the means themanagement will employ to build competitive advantage

and /or overcome competitive disadvantage in the marketsserved by it?


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4.Develop superior organizational capabilities:- Higher value

strategies are designed to overcome the forces of competition.

This should be combined with superior organizational

capabilities which enable a firm to overcome the internalbarriers to value creation and counter institutional

imperative. The Key organizational capabilities are:-1.A

competent and energetic CEO who is fully committed to the

gaol of value maximization

2.A Corporate Governance mechanism that promotes the

highest degree of accountability for creation and destruction of

value.


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3.A Top mgt. compensation plan which is guided by theprinciple of relative pay for the relative performance

4.A Resource allocation system which is based on (i)the

principle of zero based resource allocation (ii)the principleof funding strategies but not projects (iii)the principle ofno capital rationing and (iv)the principle of zero tolerancefor bad growth

A performance mgt. process is founded on two basic

principles(i)the performance targets are driven by the plans(ii)the process should have integrity implying that theperformance contract must be fully honored by both sides,the chief executive and each business unit head.


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ALCAR APPROACH The Alcar Inc., is a management education and soft ware

company. It developed an approach to VBM based on DCFanalysis. Mr.Alfred Rappaport has fully described Alcar

approach in his book- Creating shareholder value:Aguidefor managers and investors.

According to Mr.Alfred Rappaport , the following sevenfactors which are called as Value Drivers-affect

shareholder value. 1.Rate of sales growth 2.Operating Profitmargin 3.Income tax rate 4.Investment in working capital5.Fixed capital investment 6.cost of capital 7.Value growthduration


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Steps in the Assessment of the shareholder value

impact of a strategy-Alcar Approach Steps:- 1.Forecast the operating cash flow stream for the

strategy over the planning period

2.Discount the forecasted operating cash flow stream using

the weighted average cost of capital 3.Estimate the residual value of the strategy at the end of

the planning period and find its present value

Perpetuity cash flow

Cost of capital4.Determine the total shareholder value with the following

formula:-


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PV of the operating cash flow stream + PV of the residualvalue market value of debt

5.Establish the pre-strategy value

Cash flow before new investment Minus MV of debtCost of capital

6.Infer the value created by the strategy:-

Total shareholder value Minus pre-strategy value

The following diagram explains the concept of shareholdervalue management cycle.


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A successful implementation of shareholder value mgt.means that the firm (i)selects a strategy that maximizes theexpected shareholder value (ii)finds the highest valued use

for all assets (iii)bases performance evaluation andincentive compensation on shareholder value added and(iv)returns cash to shareholders when value creatinginvestments do not exist.

(For problem under this approach, refer Page 855 PC)


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McKinsey Approach McKinsey, an International consultancy firm, has

developed an approach to VBM. According to that:-

VBM is an approach to mgt, whereby the companys overall

aspirations, analytical techniques and mgt. processes areall aligned to help the company maximize its value byfocusing decision making on the key drivers of the value.

Value Thinking:-To make value happen, a companys

actions should have be based on a foundation of valuethinking. It has two dimensions namely 1. value metrics2.value mindset


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1Value metrics:-Does the mgt. understand how companiescreate value? Does the mgt. know how the stock market

values companies? Does the company include opportunity

cost of capital in its measurements? Do the metricsrepresent economic results or accounting results?

2.Value Mindset:-How does the mgt. care aboutshareholder value creation? Does the CEO strive to seek as

much value for shareholders as possible? According to Mckinsey approach, there are six areas where

a company must focus to make the value happen. Theyare:-


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1.Aspirations and targets:-The company must develop abroad statement of purpose that inspires employees andspecify value-linked quantitative targets that provide somedegree of stretch

2.Portfolio mgt:-The company must build a portfolio ofbusinesses which exploits its strategic advantages,improves its performance and provides profitable growthavenues.

3.Organizational design:-An org. design with well definedperformance units and individual accountabilities isessential to translate value creation aspirations andstrategy into disciplined achievements.


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4.Value Driver identification:-A value driver is aperformance variable such as customer satisfaction oremployee productivity which has a bearing on the results of

the company. The metrics used for measuring value driversare called key performance indicators- for eg., revenue peremployee, customer retention rate etc., Value drivers mustbe identified, prioritized and institutionalized.

5.Business Performance Mgt:-It involves setting targets forperformance units and reviewing periodic progress withthe objective of enhancing performance.


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6.Individual performance mgt:-It is on motivating andrewarding strong individual performance and aligning theinterest of managers with those of shareholders. Individual

performance mgt. involves setting targets, reviewingperformance and giving appropriate rewards.


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EVA (Economic Value Added) Approach (OR0

Stern Stewart Approach This approach was originally proposed by the consulting

firm Stern Stewart &Co., Peter Drucker has referred to it asa measures of total factor productivity. It is considered as

To-days hottest financial idea and getting hotter. EVA is the surplus left after making an appropriate charge

for the capital employed in the business.

For calculating EVA, we should know the following.

1.NOPAT-Net Operating Profit After Tax.

value based mgt..pptx

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