“Putting Business Strategy into IR Presentation” Workshop · into IR Presentation” Workshop. 1 ... What are the nine components of Nespresso’s business model? Source: Business

where strategy meets finance

22 May 2013

“Putting Business Strategy

into IR Presentation” Workshop

1

AGENDA :

1. Why do we need to communicate strategy?

2. What is strategy?

3. Systematic approach to identify your strategy

4. Conclusion


Value creation framework: PYI’s framework to create shareholder value

Decode strategy from management Translate strategy into numbers

• Value drivers• Valuation• Resource allocation• Capital structure• Raising capital

• Value-driven strategy• Strategy map

Execution

Translate to execution

CorporateFinancial

Value DrivenStrategy

Performance management

Capital Market Communication

IR

• Operational effectivenesso Performance measuremento Balanced scorecard/ KPIso Cost managemento Maximize productivity

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3

Corporate Strategy Communication Financial Markets Assessment Valuation of Shares

Projected returns

Projected growth

Projected cash flows

Cost of capital

Shareholder

value

Option 1

Option 2

Option 3

Economic forecasts performance assessment

Industry Economics

Competitive position

Accurate

communication

of our strategy

to the market

Analysts and fund managers cannot accurately value the firm without systematic and clear strategy communication from company’s management

4

Key issues that participated companies do not communicate their strategies very well because they have unclear future plans and growth strategies

Often change in management

Business model is not convincing

Unclear explanation on business

Thin margin

Business rely on bidding process

Low Return on Investment

Reliance on specific customers

Lack of IR department

Lack of attention from management

Inconsistence in earning

Limited management accessibility

Lack of outstanding performance

Limited disclosure to investors

Small market capitalization

Low liquidity

Insufficient information provided

Insufficient communication channels

Limited communication of strategy

Unclear growth strategy

Ambiguous future plan

Small Cap. Medium Cap. Large Cap.All

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7

8

8

11

7

4

4

5

6

6

5

4

3

2

3

3

3

3

2

5

5

3

1

5

3

1

0

0

5

1

3

3

1

0

2

1

1

2

1

5

1

3

5

5

3

2

0

1

1

3

2

1

1

0

1

1

2

1

1

2

1

2

2

1

1

1

4

4

0

2

0

0

1

2

0

1

0

0

0

Stra.

Commu.

Fund

.

Key issues

Source: Balanced Scorecard CollaborationRenaissance Worldwide in 1996

Only 5-8% of employees understand strategy, this leads to failure in strategy execution

5

The People Barrier

Only 25% of managers have incentives linked to overall strategy

The Management Barrier

85% of executive team spend less than one hour a month

discussing strategy

The Vision Barrier

5‐8% of the workforceunderstand the strategy

The Resource Barrier

60% of organizations do notlink budgets to strategy

9 of 10 companies fail to execute strategy

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AGENDA :




4. Conclusion

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Strategy as aspiration

‐ My strategy is 20/20 plan. Revenues were to grow at 20% a year, and the profit margin was to be 20% or higher.

‐ I will grow the market cap by 4 folds by 2015.‐ We want to be number one or two in all the markets we operate in.‐ Our strategy is to provide superior returns to our shareholders

Strategy as action

‐ Our strategy is to merge the whole industry‐ Our strategy is to expand our new customer base and product categories‐ Our strategy is to outsource‐ Our strategy is to double our R&D budget

‐ Our fundamental strategy is one of customer-centric intermediation.‐ Our strategy is to provide superior products and services‐ We are pursuing global strategy

Source: Adapted from What is Strategy?, Michael Porter

Strategy as vision

This is not a strategy

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What unique advantage can we get and sustain over time-Michael Porter

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Good definitions description of Strategy

A framework within which decisions are made which establish the nature and direction of the business

-Tregoe and Zimmerman

A systematic process for achieving long term goals-Osama El-Kadi

The direction and scope of an organization over the long-term; which achieves advantage… Through its configuration of resources… to meet the needs of markets and to fulfill stakeholder expectations

-Johnson and Scholes

Source: What is Strategy?; Michael Porter

So, what is strategy??

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• A unique value proposition compared to other organizations

• Clear tradeoffs, and choosing what not to do

• Activities that fit together and reinforce each other

• Strategic continuity with continual improvement in realizing the strategy

What is a strategy?

• Best practice improvement

• Execution

• Aspirations

• A vision

• Learning

• Flexibility

• Action

• Etc…

What is NOT a strategy?

Corporate

Business Unit

STRATEGIES CAN BE VIEWED IN TWO LEVELSCorporate Strategy vs Business Strategy

Business Unit Business Unit

• Which business should we be in?• How does being in these businesses create synergy

and/or add competitive advantage to the company as a whole?

Corporate Strategy

• How to successfully compete in each distinct business or industry?

• It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

Business Strategy

Source: Harvard Business School by Michael E. Porter 11

• Does your strategy embrace uncertainty?‐ You should try to characterize what variety you face

and focus on early analysis on removing as much uncertainty as you can

• Does your strategy rest on privileged insights?‐ Data is widely available to rivals‐ You should develop insights by searching for

problems, collecting data through different method

• Does your strategy put you ahead of trends?‐ The emergence of new trends is the norm‐ Many strategies place too much weight of the

status quo; the cost of delay is steep

Ten Tests For Your Strategy

• Will you strategy beat the market?‐ Good strategy emphasizes difference‐ You should capture and retain economic surplus

(Competitive advantage)

• Does your strategy tap a true source of advantage?‐ Competitive advantage comes from

Positional advantage and Special capabilities

1

2

4

5

6

Source: McKinsey Quarterly January 2011

• Is your strategy granular about where to compete?‐ The need to beat the market begs the question of

which market‐ Company should shift attention toward “where”

3

• Does your strategy balance commitment and flexibility?

‐ Strategy is to make the right trade‐offs over time

7

• Does your strategy contaminated by bias?‐ You may think you have a market‐beating strategy

but forces beyond your control may change‐ You should examine the possibility of being wrong

8

• Is there conviction to act on your strategy?‐ Many good strategies fall short in implementation

because of an absence of conviction in the organization

9

• Have you translated your strategy into an action plan?

‐ It’s imperative to define clearly what you are moving from and where you are moving to

5

TEN TESTS FOR GOOD STRATEGYGood strategy will pass the ten tests, though it is possible to succeed without passing all

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AGENDA :




4. Conclusion

Communicating Strategy

Financial Model

• A a financial representation of some, or all, aspects of the firm

• The model is usually characterized by performing calculations based on that information regarding possible actions or alternatives

Business Model

• The logic of the firm, the way it operates and how it creates value for its stakeholders

• A reflection of the firm’s realized strategy

Source: Harvard Business School by R. Masanell, J.RicartStrategy refers to the choice of business model through which the firm will compete in the marketplace

Strategy Map

• A diagram that is used to document the primary strategic goals being pursued by an organization or management team.

• Connect strategic objectives in explicit cause‐and‐effect relationship

There are three ways to communicate strategy

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AGENDA :




Strategy Map

4. Conclusion

Strategy Map (Kaplan & Norton 2004)

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Customer Value Proposition

SelectionAvailabilityQualityPrice

Organization Capital

•Supply•Production•Distribution•Risk Management

Operational ManagementProcesses

•Selection•Acquisition•Retention•Growth

Customer ManagementProcesses

•Opportunity ID•R&D Portfolio•Design/Develop•Launch

InnovationProcesses

•Environment•Safety and Health•Employment•Community

Regulatory and SocialProcesses

InternalPerspective

Human Capital

Information Capital

Culture Leadership Alignment Teamwork

Learning andGrowthPerspective

CustomerPerspective

FinancialPerspective

Functionality Service Partnership Brand

Product / Service Attributes Relationship Image

Improve CostStructure

Increase AssetUtilization

Long-TermShareholder Value

Expand RevenueOpportunities

EnhanceCustomer Value

Productivity Strategy Growth Strategy

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AGENDA :




Business Model

4. Conclusion

Business Model

• The proprietary method used to acquire, service , and retain customers

• The way the firm operates and how it creates value for its stake holder

• A reflection of the firm’s realized strategy

• A business model is like a blueprint for a strategy to be implemented. It describes the rationale of how an organisation creates, delivers, and captures value

Source: Harvard Business School by R. Masanell, J.Ricart; Business Model Generation By Alexander Osterwalder and Yves Pigneur

What is business model?

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Source: Business Model Generation By Alexander Osterwalder and Yves Pigneur

BUSINESS MODEL PERSPECTIVEThere are nine components in business model

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BUSINESS MODEL COMPONENTS EXAMPLEWhat are the nine components of Nespresso’s business model?

Source: Business Model Generation By Alexander Osterwalder and Yves Pigneur 20

BUSINESS MODEL COMPONENTS EXAMPLEZara

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BREAK OUT SESSIONIdentify real estate development business model for Condo, SDH and TH

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AGENDA :




Financial Model

4. Conclusion

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What is a value driver?Factors and measures that determine the earnings and value of a company. A company’s value drivers can be measured by financial and non-financial performance indicators.

Sample

Goal

Value Drivers

PerformanceIndicators (KPIs)

Other measures

The genericdrivers of value

Business specificmeasures explicitlylinked to value

MaximiseValue of Business

Key

FINANCIAL MODEL PERSPECTIVEWhat is value driver?

Revenue

Variable

Fixed

Labor

Utilities

Price

Net Profit

Cost

Supply

Demand

Production Volume

Raw Material

Rent

Quantity

Net Profit Value Driver

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DuPont Model

Profit Margin

ROE Asset Turnover

Equity Multiplier

Profit

Sales

Asset

Sales

Total Asset

Equity

VALUE DRIVER EXAMPLEDuPont model value driver for ROE

Operating Profit

Interest

Tax

26

Economic Value Added Model (EVA) Value Driver

NOPAT

EVA

Total Capital Cost

Operating Profit

Tax

Invested Capital

WACC

Revenue

Cost

Working Capital

Fixed Capital

VALUE DRIVER EXAMPLEValue driver for Economic value added (EVA)

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Cost of Equity

Cost of Debt

Tax Rate

Level of value drivers

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NOPAT

EVA

Total Capital Cost

Operating Profit

Tax

Invested Capital

WACC

Revenue

Cost

Working Capital

Fixed Capital

Level 1: Financial Driver Level 2: Business Specific Level 3: Operational Driver

• Customer mix• Sale force Productivity• Market share• Customer retention

• Per cent accounts revolving• Dollars per visit• Units revenues

• Fixed cost• Capacity management• Operational yield• Unit cost

• Percept capacity utilized• Cost per delivery

• Accounts receivable terms and timing

• Accounts payable terms and timing

• Inventory size

• Fixed asset turn over• Capacity utilization &

rationalisation

Source: Adapted from What is value-based management? McKinsey Quarterly 1994

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AGENDA :




4. Conclusion

Combination of business model and financial model to communicate strategy

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Business Model Value Driver

Business Unit A

Cost

Revenue

Revenue

Net Profit

Business Unit B

Value Propositions

Customer Segments

Key Activities

Cost

Combination of business model and financial model to communicate strategy

Channel

Customer Relationship

Key Resources

Key Partners

Business Unit C

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Financial Driver Business Model

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Effective communication of strategy

What is our economic/ financial

return?

Where will the company be compete?

Which product categories?Which market segments?Which geographic areas?

How we will win the market?

Customer value propositionPrice?Operation effectiveness?Product differentiation?Innovation?

How will the company get there?

Mean to attaining identified arenasOrganic & Internal?M&A?Joint ventures?Franchising? What will be our

sequence of the move?

Allocation of resourcesSequence of initiativeSpeed of expansion32

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PYI Consulting Company Limited26th Floor, Capital TowerAll Seasons Place87/1 Wireless RoadBangkok 10330 Thailand

Pathom Yongvanich, Director & Partner:[email protected]+6681-866-1449

Pornthep Srisa-an, Director & Partner:[email protected]+6681-840-4088

Sarit Chokchainirand, Director & [email protected]+66818552564

Office Tel. +662-685-3838

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“Putting Business Strategy into IR Presentation” Workshop · into IR Presentation” Workshop. 1 ... What are the nine components of Nespresso’s business model? Source: Business