贝恩－业绩评估-CorporatePerformanceMeasurement

Author: Patrick Cote Contributors: Kate McGreevy Julian Critchlow bc Corporate Performance Measurement April 1999 Copyright 1999 Bain & Company, Inc. bc Corporate Performance Measurement LON 2 CorporatePerf ormanceMeasurement Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo Agenda bc Corporate Performance Measurement LON 3 CorporatePerf ormanceMeasurement Corporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit that measure impact on shareholder value many firms have devised their own variations of economic profit Stern Stewarts Economic Value Added (EVA)TM is best known of these measures Holt/BCGs Cash Flow Return on Investment (CFROI) is a similar concept presented in % return format Both ROE and EP are business metrics, tools used to measure the performance of the business separate from fundamental business drivers, the actual factors that influence shareholder value, and output measures the backward-looking records of overall company performance Focusing on EP instead of ROE decreases the likelihood of destructive behavior by managers By evaluating managers based on EP, manager behavior can be altered such that only projects that add value (with NPV0) are undertaken, which does not always occur with ROE Executive Summary (1 of 2) bc Corporate Performance Measurement LON 4 CorporatePerf ormanceMeasurement Executive Summary (2 of 2) End goal of EP exercises is consistent with traditional Bain focus of maximising shareholder value Bain has measured historical performance with Total Shareholder Return Stern Stewart devised Market Value Added (MVA)TM as means of measuring market expectations of EP that managers will add in the future managers objective should be to maximise MVA All economic profit measures deduct charge for use of equity capital from accountings typical net income or profit after tax to reflect the opportunity cost associated with equity investments Stern Stewart has trademarked EVATM by specifying adjustments to make to EP bc Corporate Performance Measurement LON 5 CorporatePerf ormanceMeasurement Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo bc Corporate Performance Measurement LON 6 CorporatePerf ormanceMeasurement Objectives There are three objectives of the Corporate Performance Measures Module: To define the most popular measures of corporate performance To explain the significance of these measures in the corporate environment and potential applications in Bains strategy work To outline calculations of each performance measure bc Corporate Performance Measurement LON 7 CorporatePerf ormanceMeasurement Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo bc Corporate Performance Measurement LON 8 CorporatePerf ormanceMeasurement With the rise of conglomerates, most companies focused on Return on Equity, or ROE, as their primary measure of performance led most managers to undertake acquisitions solely to manipulate accounting figures 1960s/70s 1980s/90s With the increased focus on delivering shareholder value, managers have accepted systems that measure the change in value managers realised equity is not free economic profit (EP) meets these needs by telling managers where value has been created and where it has been destroyed As aligning interests between owners and managers has become more important, tying management compensation to EP provided a popular solution Corporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit (EP) that measure impact on shareholder value Background Corporate Performance Evaluation bc Corporate Performance Measurement LON 9 CorporatePerf ormanceMeasurement Bain was the first of major consulting firms to focus on creating shareholder value To achieve this, Bain has used the output measure of Total Shareholder Return and the accounting measures of ROE and ROI Modified accounting measures, such as EP, provide an alternative means of measuring the creation of shareholder value Background Relevance to Bain bc Corporate Performance Measurement LON 10 CorporatePerf ormanceMeasurement To illustrate the role of corporate performance measures and resource allocation to strategy work, an examination of Marakons “program” is useful Marakon applies the following program, which can take several years to complete, to all of its clients: assess the economic profit of all customer segments and product lines compare company performance to industry performance investigate three or more strategies for each business every planning cycle shift resource allocation from economically unprofitable products/customers to economically profitable leads to yield loss for Marakon and clients since additional scenarios frequently evaluated Marakon has made economic profit (EP) the central focus of the program they apply to every case Background Link to Strategy bc Corporate Performance Measurement LON 11 CorporatePerf ormanceMeasurement EVA is a registered trademark of Stern Stewart A century ago, Alfred Marshall explained that for a company to have genuine profits, the profits must be sufficient to cover the cost of capital as well as the firms operating costs Stern Stewart has re-packaged the concept into EVA, which is essentially a more palatable form of the same idea McKinsey has been using economic profit for many years BCG uses Cash Flow Return on Investment (CFROI) for a similar analysis To avoid infringing upon Stern Stewarts trademark, many consulting firms have developed their own terms for the same concept How new is Economic Value Added (EVA)? EVATM is one variation of EP Background Economic Value Added bc Corporate Performance Measurement LON 12 CorporatePerf ormanceMeasurement Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo bc Corporate Performance Measurement LON 13 CorporatePerf ormanceMeasurement Measures * For a discussion of WACC and discount rates, please see the Investment Appraisal Module in the BVU Description: EVA/MVA,EP,and CFROI are modified accounting measures used to measure the performance of the business Inputs/ Measures: Fundamental Business Drivers Business Metrics Output Measures Primary business-specific factors influencing shareholder value Tools used to measure performance of business Backward-looking measures of overall company performance as viewed by market Operating profits volume price costs Financial Cost of Capital Employed fixed assets working capital WACC* Accounting ROE ROA Modified accounting EVA/MVA EP CFROI CVA Total Shareholder Return (TSR) Total Business Return (TBR) Framework bc Corporate Performance Measurement LON 14 CorporatePerf ormanceMeasurement The fundamental business drivers provide a framework for identifying the sources of shareholder value creation or destruction Shareholder Value Creation/Destruction Operating Profit Cost of Capital Volume Price Costs Working Capital WACC Fixed Assets X + X Direct costs material labour Indirect costs SG & A Depreciation Average selling price # of units sold Weighted average cost of capital based on market values of debt and equity Use after-tax cost of debt Current assets less current liabilities Property, plant & equipment Intangibles LIFO vs FIFO Depreciation estimates Cost of equity for private firms Intangible measurement Components: Issues: Framework Fundamental Business Drivers bc Corporate Performance Measurement LON 15 CorporatePerf ormanceMeasurement * Sometimes referred to as Return on Investment (ROI) ROE measures returns to shareholders, while ROA measures returns to investors of all forms of capital Formula: Measures: ROA Profitability of all capital employed, including debt Uses: Return on Assets (ROA)* Return on Equity (ROE) Net Income Assets = ROE Net Income Equity = Profitability of equity invested in business (net equity issued plus retained earnings) Returns of enterprise as a whole Returns to shareholders Framework Accounting Business Metrics bc Corporate Performance Measurement LON 16 CorporatePerf ormanceMeasurement The DuPont formula is used to separate ROE into its components in order to assess the performance of the business ROE Net Income Equity = Net Income Sales = Sales Assets Assets Equity X X ROS Asset Turnover Leverage ROE = Profitability Asset Turnover Leverage X X = ROA Framework Accounting Business Metrics - DuPont Formula bc Corporate Performance Measurement LON 17 CorporatePerf ormanceMeasurement * EVA=EVA with depreciation added back Many consulting companies attempt to brand the modified accounting business metrics they use Economic Profit Measure Consulting Companies Bain McKinsey Marakon (through Value-Based Management) LEK EVA / MVA Stern Stewart AT Kearney Accounting firms BCG Holt BCG Cash Value Added* (CVA) Cash Flow Return on Investment (CFROI) Framework Modified Accounting Business Metrics bc Corporate Performance Measurement LON 18 CorporatePerf ormanceMeasurement * only backward -looking The modified accounting business metrics, which include EP, enable relatively accurate levels of corporate performance measurement at lower levels of decision making in the organisation Accuracy as Measure of Corporate Performance Level of Decision Making High Low Low High MVA Modified Accounting Business Metrics TSR* ROE/ROA Fundamental Business Drivers EP/EVA/CFROI Role in Organisation Framework bc Corporate Performance Measurement LON 19 CorporatePerf ormanceMeasurement * Adjusted for all stock splits and assuming all dividends reinvested While TSR calculates return to shareholders for publicly-listed companies, BCGs TBR calculation estimates equivalent returns for privately-held firms Total Shareholder Return (TSR) in CAGR Format Market value of share at end of period * Market value of share at beginning of period = Total Business Return (TBR) = Estimated market value of shares of privately-held company at end of period* number of years 1 number of years 1 1 1 Estimated market value of shares of privately-held company at beginning of period* Framework Output Measures bc Corporate Performance Measurement LON 20 CorporatePerf ormanceMeasurement Bains client stock performance slide is calculated using TSR, which is used to measure the shareholder value created B a i n c l i e n t sS & P 5 0 0?0 ?1 ?2 ?3 ?4 ?5 ?6 ?7 ?8 ?9 ?0 ?1 ?2 ?3 ?4 ?5 ?6 ?7 ?8N o t e : M e t h o d o l o g y a n d d a t a a t t e s t e d t o b y P r i c e W a t e r h o u s e L L P t h r o u g h D e c e m b e r 1 9 9 805001 , 0 0 01 , 5 0 02 , 0 0 02 , 5 0 03 , 0 0 03 , 5 0 0Point Change in Indices (1980=0)Framework Output Measures bc Corporate Performance Measurement LON 21 CorporatePerf ormanceMeasurement Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo bc Corporate Performance Measurement LON 22 CorporatePerf ormanceMeasurement 020406080100%Market Value Added (MVA) Invested Capital Goal of Managers should always be to create more shareholder value, or maximise MVA Total Market Value of Firm (includes all debt and equity) Bains focus has always been to help the management of the firm to maximise shareholder value, which is equivalent to maximising MVA Market Value Added Definition (1 of 2) bc Corporate Performance Measurement LON 23 CorporatePerf ormanceMeasurement MVAI nv estedCa pi t alST NIB L*Ne tAsse t sEx cessCa shWorki ngC api talR equ ireme ntsNe t Fix edAssets (nodi stin ct io nbe t w ee nt an gi bl es andin t an gi bl es)S hor t -T ermDe btLong-T ermDe btS hareho ld ersEqui tyM a r k e t V a l u eo f C o m p a n y( D e b t & E q u i t y )T o t a l A s s e t s N e t A s s e t s I n v e s t e d C a p i t a lo r C a p i t a l E m p l o y e d020406080100%MVA equals the total market value of the company less invested capital or net assets. Either the Operating or Financing Approach can be used, but Bain typically uses the Operating approach Note: *Short-term non-interest bearing liabilities Operating Approach (Typically used by Bain) Financing Approach Market Value Added Definition (2 of 2) bc Corporate Performance Measurement LON 24 CorporatePerf ormanceMeasurement O p e r a t in gCa sh T o t a l C a s hC a s h R e q u i r e d i nO p e r a t i n g C y c l eE x c e s s C a s hThe first step required to calculate Net Assets with the Operating Approach is to identify excess cash, which is total cash less cash required in the operating cycle Note: *Short-term non-interest bearing liabilities Amount ($) Market Value Added Operating Approach - Excess Cash bc Corporate Performance Measurement LON 25 CorporatePerf ormanceMeasurement O pe rati ng Ca shPre pa id Ex pen se s an dOt he r Cu rren t Asse t sI nv en t ori esRe cei vab le sAd van ce Pay me ntsAcco un t sPay ab leAccru edEx pe ns es an d O the r Cu rren tLi ab il itie s T o t a l I n v e s t m e n t si n O p e r a t i n g C y c l eL i a b i l i t i e s I m p l i c i ti n O p e r a t i n g C y c l eN e t I n v e s t m e n t si n O p e r a t i n g C y c l eNext, The working capital requirements are the firms net investments in the operating cycle, or the net amount of short-term investment required to fund operations Amount ($) Working Capital Requirements Market Value Added Operating Approach - Working Capital Requirements bc Corporate Performance Measurement LON 26 CorporatePerf ormanceMeasurement When calculating MVA, Net Fixed Assets is defined as Net PP&E plus other Investment (tangible and intangible). The third and final step to calculate Net Assets is Net PP&E, which is the amount of long-term investment required to fund operations N e t F i x e dA s s e t sP r o p e r t y , P l a n t a n d E q u i p m e n tA c c u m u l a t e dD e p r e c i a t i o nO t h e rI n v e s t m e n t sAmount $ Net PP&E Market Value Added Operating Approach - Net Fixed Assets bc Corporate Performance Measurement LON 27 CorporatePerf ormanceMeasurement Market V al ueAd de d (MVA)I nve stedCa pi t alPV of EPsBe y on d Y ea r 5P V of E PYear 5P V of E PYear 4P V of E PYear 3P V of E PYear 2P V of E PYear 1M a r k e t V a l u e o f t h eC o m p a n y ( D e b t + E q u i t y )M a r k e t V a l u e A d d e d( M V A )0204060801 0 0 % Market value added (MVA) reflects the markets expectations of the EP managers will add in the future Percent of Total MVA is the markets expectation of discounted future EPs Market Value Added Link to EP bc Corporate Performance Measurement LON 28 CorporatePerf ormanceMeasurement After extensive work by a diligent Bain team, Acme Industries is expected to generate $25M in economic profits next year, which is expected to grow at 3% forever. If the cost of capital is 13% and the invested Capital is $100M, what is the MVA and the market value of the company? Market Value Added Link to EP - Example bc Corporate Performance Measurement LON 29 CorporatePerf ormanceMeasurement After extensive work by a diligent Bain team, Acme Industries is expected to generate $25M in economic profits next year, which is expected to grow at 3% forever. If the cost of capital is 13% and the invested Capital is $100M, what is the MVA and the market value of the company? MVA = PV of EPs = $ 25 M 13% - 3% = $ 250 M = MVA + Invested Capital = $ 250 M + $100 M = $350M Market Value of the Company Market Value Added Link to EP - Solution bc Corporate Performance Measurement LON 30 CorporatePerf ormanceMeasurement EP measures managers performance in the past, since it represents the market value added created over one year Note: *Assumes Invested Capital Constant M a r k e t V a l u eA d d e d * T o d a yM a r k e t V a l u eA d d e d * L a s t Y e a rE c o n o m i c P r o f i tO v e r L a s t Y e a rMarket Value Added Link to EP (1 of 2) bc Corporate Performance Measurement LON 31 CorporatePerf ormanceMeasurement EP is used to evaluate manager performance because the change in MVA over a period of time is measured Goal of companys managers should always be to maximise MVA When managers make any investment decisions, if the project is: value-creating NPV 0 MVA increases value-destroying NPV 0 MVA decreases Reason that EP is the focus of most attention is because MVA is a stock or wealth measure, so MVA will show how much value has been added at that point in time EP measures the amount of value added over a period of time, which is far more useful when measuring manager performance Market Value Added Link to EP (2 of 2) bc Corporate Performance Measurement LON 32 CorporatePerf ormanceMeasurement Which UK sectors would you expect to have the highest market value added? and the lowest? Which UK companies would you expect to have the highest market value added? and the lowest? Market Value Added Actual Performance bc Corporate Performance Measurement LON 33 CorporatePerf ormanceMeasurement B a n k s I n t e g r a t e d O i lD r u g sM e d i aF o o dM a n u f a c t u r e r sT e l e c o m sR e t a i l e r sG r o c e r sE l e c t r i c i t yD r i n k s1 0 2 . 59 4 . 38 9 . 34 2 . 93 8 . 73 6 . 13 3 . 81 8 . 51 7 . 2 1 6 . 802550751 0 0 1 2 5 B Banks, integrated oil and drugs were the UK sectors with the highest market value added Source: Stern Stewart, Sunday Times Sector Market Value Added (Sept 98) Market Value Added UK Sector Performance - 10 Best bc Corporate Performance Measurement LON 34 CorporatePerf ormanceMeasurement O i le x p l o r a t i o nC h e m i c a l sM o t o r E n g i n e e r i n gH o u s e h o l dG o o d s / T e x t i l e sW a t e rH e a l t h c a r eM i n i n gD i s t r i b u t o r sP r i n t a n d P a c k a g i n gC o n s t r u c t i o n4 . 6 4 . 0 3 . 52 . 7 2 . 4 2 . 2 1 . 8 1 . 61 . 1 0 . 902550751 0 01 2 5 Distributors, print and packaging and construction had the lowest market value added in the UK Source: Stern Stewart, Sunday Times Sector Market Value Added (Sept 98) Market Value Added UK Sector Performance - 10 Worst bc Corporate Performance Measurement LON 35 CorporatePerf ormanceMeasurement S h e l lG l a x o W e l l c o m eL l o y d s T S BS m i t h K l i n eB e e c h a mU n i l e v e rBPH S B CZ e n e c aD i a g e oB a r c l a y s6 9 . 54 1 . 63 0 . 6 3 0 . 02 8 . 42 3 . 41 8 . 41 5 . 31 4 . 31 3 . 50204060 8 0 B Shells 69.5B of market value added is the largest in the UK Source: Stern Stewart, Sunday Times Company Market Value Added (Sept 98) 1998 EVA (B) (1.506) 0.416 0.803 0.710 0.402 (0.024) 1.400 0.231 n/a 0.098 Market Value Added UK Company Performance - 10 Best bc Corporate Performance Measurement LON 36 CorporatePerf ormanceMeasurement W a s t eM a n a g e m e n tM e d e v aB C CC a r a d o nA r j oW i l l i a m sI n c h c a p eC o a t s V i y e l l a B r i t i s hE n e r g yP i l k i n g t o nB r i t i s h S t e e l( 0 . 1 ) ( 0 . 1 ) ( 0 . 1 )( 0 . 3 ) ( 0 . 3 ) ( 0 . 3 )( 0 . 4 )( 0 . 5 )( 0 . 6 )( 3 . 0 )( 4 .0 )( 3 .5 )( 3 .0 )( 2 .5 )( 2 .0 )( 1 .5 )( 1 .0 )( 0 .5 )0 . 0 0 . 5 B British Steels 3B of market value destroyed was the worst of Britains 200 largest companies Source: Stern Stewart, Sunday Times Company Market Value Added (Sept 98) 1998 EVA (B) (0.071) (0.012) (0.054) (0.087) (0.050) (0.108) (0.120) (0.320) (0.284) (0.352) Market Value Added UK Company Performance - 10 Worst bc Corporate Performance Measurement LON 37 CorporatePerf ormanceMeasurement Agenda Executive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo bc Corporate Performance Measurement LON 38 CorporatePerf ormanceMeasurement Definition Advantages/Disadvantages Framework Use in Strategy Work Economic Profit Agenda bc Corporate Performance Measurement LON 39 CorporatePerf ormanceMeasurement Definition (1 of 2) Note: Economic Profit (EP) =Operating Profit - (Cost of Capital * Amount of Equity Capital Invested) Re ve n u e sO p e r a t in gCo sts &O ve r h e a d sPr o f itBe f o r eT a xT a x Pr o f itAf te rT a xEq u ityCa p ita lCh a r g eEc o n o m icPr o f it0204060801 0 0Economic Profit (EP) is a residual profit concept accounting for the opportunity cost of holding capital Amount ($) Traditional accounting concept of profits Economic Profit bc Corporate Performance Measurement LON 40 CorporatePerf ormanceMeasurement Definition (2 of 2) Note: NOPAT = Net Operating Profit After Tax (See Appendix for details) WACC = Weighted Average Cost of Capital Economic Profit determines a companys value creation or destruction Easy to use, based on accounting records (for historical values) Not prisoners of GAAP Can be used to show relative performance of products, segments, regions, etc. in a given year Can be calculated for future years and discounted to show value creation When Economic Profits are positive over time value creation is positive market price per share is more than book value per share growth creates value EP NOPAT $ Charge for Capital Employed Operating Profit Effective Taxation Invested Capital WACC Gross Profit A&P Net Working Capital Net Fixed Assets Overheads Economic Profit bc Corporate Performance Measurement LON 41 CorporatePerf ormanceMeasurement In order to understand EP it is important to go back to the basic income statement 020406080100What did we earn? (using what we own) Income Statement (%) Who gets access to these earnings? $100 $100 EBIT PAT Tax Interest Observations Debt providers have first access to the interest payments due on money lent Governments tax corporate profits Shareholders (equity providers) have access to all residual profits (after paying interest and tax) Note: Economic Profit (EP) = Operating Profit - (Cost of Capital * Amount of Capital Invested) Key Principles: Access to Company Earnings Economic Profit bc Corporate Performance Measurement LON 42 CorporatePerf ormanceMeasurement Note: NIBL = Non-interest bearing liabilities Assets are a companys economic resources, items which have the potential to provide future benefits to the organisation NIBLs represent a free source of funds to the company. It is money lent to a firm with no charge or expected return Debt is any interest bearing capital, including preferred stock Shareholders Equity is the accountants estimate of the value of the shareholders investment in the company total assets less total liabilities Key Observations Balance Sheet Makeup What do we own? Assets NIBLs Debt Shareholders Equity How did we pay for it? $500 $500 100% Balance Sheet The balance sheet separates what is owned by the firm from how it was paid for Understanding the Balance Sheet Economic Profit bc Corporate Performance Measurement LON 43 CorporatePerf ormanceMeasurement Ca shReceivables+ Inv en tor ies+ Pr e-pay me ntsF ix ed Asse t sSh ort-termNIBLSh ort-term De btLo ng -t erm De btLo ng -t erm NIBLSh are -ho ld ersEqu ityNe t Worki ngCa pi t alNe t Fix edAsse t s (Nodi stin ct io nbe tw ee ntan gi bl es andin t an gi bl es)Sho rt-t erm De btLo ng -t erm De bi tSh are -ho ld ers Equ ityA s s e t s L i a b i l i t i t e s & S h a r e h o l d e r s E q u i t yN e t A s s e t sI n v e s t e d C a p i t a l o r C a p i t a l E m p l o y e d 0204060801 0 0Economic Profit Balance Sheet Note: NIBL= Non-interest bearing liabilities In order to develop the EP balance sheet, short-term non-interest bearing liabilities must be removed and adjustments for accounting distortions must be made Short-term NIBL are removed from the EP balance sheet since capital returns are not expected on the amounts owed (e.g. wages payable) EP Balance Sheet Net Assets amount may be much larger than the traditional accounting value after adjustments for accounting distortions (e.g., adding internally-generated intangible assets) are made Regular Balance Sheet EP Balance Sheet Financing Approach Operating Approach Economic Profit bc Corporate Performance Measurement LON 44 CorporatePerf ormanceMeasurement Dividend Policy The traditional linkage of the Income Statement and Balance Sheet is the connection between net income and retained earnings or dividends Income attributable to shareholders (EBIT - Interest - Tax) Cash “in” from shareholders perspective Cash “out” from shareholders perspective Net Income Retained Earnings Dividends Management Decision Reinvest it in the Company Distribute it to Shareholders Income Statement and Balance Sheet Traditional Link (1 of 2) Economic Profit bc Corporate Performance Measurement LON 45 CorporatePerf ormanceMeasurement Economic Consequence The traditional linkage of the Income Statement and Balance Sheet is the connection between net income and retained earnings or dividend