LECTURE SEVEN: REVIEWING RELEVANT FINANCIAL AND

buttermilkbouncyManagement

Nov 10, 2013 (3 years and 11 months ago)

84 views

LECTURE SEVEN: REVIEWING RELEVANT FINANCIAL AND
MARKETING MODELS


Subject

Page

1.

Introduction

2

2.

The Enterprise Value Model

3

3.

The Du Pont Planning and Control Model

5

4.

Economic Value Added

6

5.

Value Return On Investment

7

6.

Net Present Value Analysis

8

7.

Sum
mary

9

8.

Discussion Questions

9

9.

References / Reading List

9


1.

Introduction

While the models we are about to review have been covered in lecture one, we will
revisit them here for the sake of prudence. Each model captures aspects of the
business that incl
ude marketing management, financial management and operations
management.


2.

The Enterprise Value Model

Walters (2002) illustrates the business enterprise model.


Enterprise =
f


Value



Tangible Assets


Intangible Assets


Effi
cient Use Of
Existing Asset
Infrastructure



Capacity expansion
of products which
retain leadership
characteristics:

-

Product/ market
penetration

-

Product/ market
extension

-

Product/ market
development

Shared assets with
specialist partners



Reinforce
distincti
ve
capabilities



Brands, image and
reputation



Reinforce impact
of brand influence

-

Product/ market
extension

-

Product/ market
development



Focus R & D

-

Product technology

-

Process technology



Invest in
management and
workforce expertise



Use relationship
managemen
t to
create and extend
partnership
linkages that
develop
reproducible
capabilities that:

-

Expand market
reach and influence

-

Strengthen
customer loyalty
linkages

-

Strengthen supplier
loyalty linkages




Increase capacity
utilisation



Value analysis:

-

Processes

-

Pr
oducts



Process
development

-

Modularisation

-

Inventory
management

-

Lead time
management

-

Flexibility

Manufacturing/
distributing for external
organisations





(Source: Walters et al 1997)

Growth
Management
Options
Through
Investment

Latent
Value

Premium
Value

Tangible
Value

+

+

The Enterprise Value Model provides managers with an opportunity to lin
k strategic
and operational areas of the company by dealing with areas of the business that can be
linked to each area. Tangible value reflects the company’s ability to operate
efficiently. Intangible assets reflect the company’s ability to operate effecti
vely, while
building long term/ strategic capabilities such as the brand, R & D etc. Latent Value
refers to the company’s future value. Thus, strategic and operational areas of the
company are accounted for by the Business Enterprise Model.

3.

The Du Pont Pl
anning and Control Model

As cited in Walters et al (1997), the Du Pont Company developed an approach to
planning and control which was designed to monitor divisional performance. Its
system of financial analysis brings together the activity ratios, which m
easure how
effectively a firm or its strategic business units (SBU’s) employ the resources they
control, with the profit margin on sales. It also shows how these ratios interact and
determine the assets profitability.


The (DuPont) Strategic profit model







x = =







Source: Walters et al 1997


The strategic profit model lets us relate management activity components
quantitative
ly, and as Walters et al (1997) explain, helps with managerial decisions in
four ways;

1.

Identifies the principal objective of the business ie. To maximise shareholder
return.

2.

Identifies the growth and profit paths available to a business (improve margins
ea
rned, increase asset productivity, increase gearing).

3.

Highlights principal areas of decision making ie. Asset management, margin
management and financial management.

4.

Provides a useful model for appraising the marketing and financial aspects of
strategy opt
ions.

Margin management

Profit

Sales Revenue

Sales Revenue

Net assets

Profit

Ne
t assets

Net assets

Equity

Profit

Equity

Return to

Shareholders

RONA

Return on
net assets

Gearing
investment
and financial
management

ROE

Return on
Equity

Asset management


4.

Economic Value Added

Economic value added is a performance measure that was initially proposed by Stern
Stewart and Co. Stewart & Co maintained that economic value added was equivalent
to the operating profit minus taxes minus(capital employed mult
iplied by the cost of
capital(risk adjusted)).


Walters et al (1997) explains: Capital is a comprehensive calculation, which includes
fixed assets, working capital, and can included intangibles such as capitalised
expenses to maintain brands, R & D and man
agement development expenditure if
they are deemed to be of significance. Financial performance is indicated by the
value of EVA components. A positive value indicates that wealth or value is being
created for the shareholder, while negative values indicat
e that value has been
destroyed. Essentially, this model subtracts the cost of capital from the after tax
operating profit for the period, and is oriented toward the current period or recent
past.


5.

Value Return On Investment

Rappaport (as cited in Walte
rs et al 1997) developed a performance indicator based
upon the discounted cash flow (DCF) means of calculating ‘value’. This method
gives the advantage of breaking the companies activities into a series of projects, for
which revenues and costs can be sep
arated. It is thus particularly useful for
evaluating strategic alternatives.



Rappaport’s theory was that the VROI was created by dividing the post
-
strategy
value minus the pre
-
strategy value by the present value of the projected investmen
ts.


Rappaport’s approach is thus a measure of the value created per discounted dollar of
investment. It provides a means by which to identify which alternative offers the
largest benefit. VROI must be greater than zero if shareholder value is to be create
d.


6.

Net Present Value Analysis

One of the most commonly used discounted cash flow (DCF) methods is the net
present value method (NPV). From the argument that a dollar received today is
worth more than a dollar to be received in ten years from now (becaus
e the dollar
received immediately can be invested and earn a return) we can say that an amount to
be received in the future has a present value, which can be found by discounting
future income values.


Future amount




Or:




F .


PV = (1 + r)t


Where:


PV

= present value


F

= future amount


r

= interest rate / discount rate


t

= time period over which value is to be calculated


Deducting the initial investm
ent from the present value arrives at the net present
value (NPV):






NPV = ∑

Ft .

-

I


T = 1 (1 + r) t


Where:


NPV = net pres
ent value


n



∑ = the summation over years


t



t = 1, 2…n

n

Present value =

Interest rate x time in years

Ft= the forecast net cash flow arising at the end of year t. This represents
the difference between operational cash receipts and expenditures
(incl
uding capital replenishment during the life of the project)




r = required rate of return on the discount rate


n = project life in years


I = the initial cost of the investment


7.

Summary

Value chain
management is all about taking a holistic approach to the strategy and
operations of component companies within it. Models such as EVA, VROI, DuPont
Planning and Control etc. all provoke a holistic mind frame when planning value
chain activities. This is w
here their value lies.

8.

Discussion Questions

1.

Provide a critique of the DuPont planning and Control model. How does this
model help to promote a holistic planning and control mentality?

2.

Draw a table with each of the models outlined in these notes showing the

advantages and disadvantages of each model from your viewpoint.

3.

Select three of these models and illustrate how each model can be used for the
marketing, finance and operations ares of the company.


9.

References/ Reading List



Walters, D., 2002, “Operations

Strategy”, Palgrave Macmillan