• 1. Author: Patrick CoteContributors: Kate McGreevy Julian Critchlow bcCorporate Performance MeasurementApril 1999Copyright© 1999 Bain & Company, Inc. CorporatePerformanceMeasurement
    • 2. 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 Agenda2CorporatePerformanceMeasurement
    • 3. 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 Stewart’s Economic Value Added (EVA)TM is best known of these measures Holt/BCG’s 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 NPV>0) are undertaken, which does not always occur with ROEExecutive Summary (1 of 2)3CorporatePerformanceMeasurement
    • 4. 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 accounting’s 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 4CorporatePerformanceMeasurement
    • 5. AgendaExecutive 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 5CorporatePerformanceMeasurement
    • 6. ObjectivesThere 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 Bain’s strategy work To outline calculations of each performance measure6CorporatePerformanceMeasurement
    • 7. AgendaExecutive 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 7CorporatePerformanceMeasurement
    • 8. 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 figures1960s/70s1980s/90sWith 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 solutionCorporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit (EP) that measure impact on shareholder valueBackgroundCorporate Performance Evaluation8CorporatePerformanceMeasurement
    • 9. 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 valueBackgroundRelevance to Bain9CorporatePerformanceMeasurement
    • 10. To illustrate the role of corporate performance measures and resource allocation to strategy work, an examination of Marakon’s “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 evaluatedMarakon has made economic profit (EP) the central focus of the ‘program’ they apply to every caseBackgroundLink to Strategy10CorporatePerformanceMeasurement
    • 11. EVA is a registered trademark of Stern StewartA 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 firm’s 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 Stewart’s trademark, many consulting firms have developed their own terms for the same conceptHow new is Economic Value Added (EVA)?EVATM is one variation of EPBackgroundEconomic Value Added11CorporatePerformanceMeasurement
    • 12. AgendaExecutive 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 12CorporatePerformanceMeasurement
    • 13. Measures* For a discussion of WACC and discount rates, please see the Investment Appraisal Module in the BVUDescription:EVA/MVA,EP,and CFROI are modified accounting measures used to measure the performance of the businessInputs/ Measures:Fundamental Business DriversBusiness MetricsOutput MeasuresPrimary business-specific factors influencing shareholder value Tools used to measure performance of business Backward-looking measures of overall company performance as viewed by marketOperating profits volume price costs Financial Cost of Capital Employed fixed assets working capital WACC*Accounting ROE ROA Modified accounting EVA/MVA EP CFROI CVATotal Shareholder Return (TSR) Total Business Return (TBR)Framework13CorporatePerformanceMeasurement
    • 14. The fundamental business drivers provide a framework for identifying the sources of shareholder value creation or destructionShareholder Value Creation/DestructionOperating ProfitCost of CapitalVolumePriceCostsWorking CapitalWACCFixed AssetsX+XDirect costs material labour Indirect costs SG & A DepreciationAverage selling price# of units soldWeighted average cost of capital based on market values of debt and equity Use after-tax cost of debt Current assets less current liabilitiesProperty, plant & equipment Intangibles LIFO vs FIFO Depreciation estimatesCost of equity for private firms Intangible measurementComponents:Issues:FrameworkFundamental Business Drivers14CorporatePerformanceMeasurement
    • 15. * Sometimes referred to as Return on Investment (ROI)ROE measures returns to shareholders, while ROA measures returns to investors of all forms of capitalFormula:Measures:ROAProfitability of all capital employed, including debtUses:Return on Assets (ROA)*Return on Equity (ROE)Net IncomeAssets=ROENet IncomeEquity=Profitability of equity invested in business (net equity issued plus retained earnings)Returns of enterprise as a wholeReturns to shareholdersFrameworkAccounting Business Metrics15CorporatePerformanceMeasurement
    • 16. The DuPont formula is used to separate ROE into its components in order to assess the performance of the businessROENet IncomeEquity=Net IncomeSales=SalesAssetsAssetsEquityXXROSAsset TurnoverLeverageROE=ProfitabilityAsset TurnoverLeverageXX=ROAFrameworkAccounting Business Metrics - DuPont Formula16CorporatePerformanceMeasurement
    • 17. * EVA=EVA with depreciation added backMany consulting companies attempt to brand the modified accounting business metrics they useEconomic ProfitMeasureConsulting CompaniesBain McKinsey Marakon (through Value-Based Management) LEKEVA  / MVA Stern Stewart AT Kearney Accounting firmsBCGHolt BCGCash Value Added* (CVA)Cash Flow Return on Investment (CFROI)FrameworkModified Accounting Business Metrics17CorporatePerformanceMeasurement
    • 18. * only backward -lookingThe modified accounting business metrics, which include EP, enable relatively accurate levels of corporate performance measurement at lower levels of decision making in the organisationAccuracy as Measure of Corporate PerformanceLevel of Decision MakingHighLowLowHighMVAModified Accounting Business MetricsTSR*ROE/ROAFundamental Business DriversEP/EVA/CFROIRole in OrganisationFramework18CorporatePerformanceMeasurement
    • 19. * Adjusted for all stock splits and assuming all dividends reinvested While TSR calculates return to shareholders for publicly-listed companies, BCG’s TBR calculation estimates equivalent returns for privately-held firmsTotal Shareholder Return (TSR) in CAGR FormatMarket 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 years1number of years111Estimated market value of shares of privately-held company at beginning of period*FrameworkOutput Measures19CorporatePerformanceMeasurement
    • 20. Bain’s client stock performance slide is calculated using TSR, which is used to measure the shareholder value createdFrameworkOutput Measures20CorporatePerformanceMeasurement
    • 21. AgendaExecutive 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 21CorporatePerformanceMeasurement
    • 22. Market Value Added (MVA)Invested CapitalGoal of Managers should always be to create more shareholder value, or maximise MVATotal Market Value of Firm (includes all debt and equity)Bain’s focus has always been to help the management of the firm to maximise shareholder value, which is equivalent to maximising MVAMarket Value AddedDefinition (1 of 2)22CorporatePerformanceMeasurement
    • 23. 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 approachNote: *Short-term non-interest bearing liabilitiesOperating Approach (Typically used by Bain)Financing ApproachMarket Value AddedDefinition (2 of 2)23CorporatePerformanceMeasurement
    • 24. The 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 cycleNote: *Short-term non-interest bearing liabilitiesAmount ($)Market Value AddedOperating Approach - Excess Cash24CorporatePerformanceMeasurement
    • 25. Next, The working capital requirements are the firm’s net investments in the operating cycle, or the net amount of short-term investment required to fund operationsAmount ($)Working Capital RequirementsMarket Value AddedOperating Approach - Working Capital Requirements25CorporatePerformanceMeasurement
    • 26. 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 operationsAmount $Net PP&EMarket Value AddedOperating Approach - Net Fixed Assets26CorporatePerformanceMeasurement
    • 27. Market value added (MVA) reflects the markets expectations of the EP managers will add in the futurePercent of TotalMVA is the market’s expectation of discounted future EPsMarket Value AddedLink to EP27CorporatePerformanceMeasurement
    • 28. 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 AddedLink to EP - Example28CorporatePerformanceMeasurement
    • 29. 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 M13% - 3%= $ 250 M= MVA + Invested Capital= $ 250 M + $100 M= $350MMarket Value of the CompanyMarket Value AddedLink to EP - Solution29CorporatePerformanceMeasurement
    • 30. EP measures managers’ performance in the past, since it represents the market value added created over one yearNote: *Assumes Invested Capital ConstantMarket Value AddedLink to EP (1 of 2)30CorporatePerformanceMeasurement
    • 31. EP is used to evaluate manager performance because the change in MVA over a period of time is measuredGoal of company’s 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 performanceMarket Value AddedLink to EP (2 of 2)31CorporatePerformanceMeasurement
    • 32. 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 AddedActual Performance32CorporatePerformanceMeasurement
    • 33. Banks, integrated oil and drugs were the UK sectors with the highest market value added Source: Stern Stewart, Sunday TimesSector Market Value Added (Sept 98)Market Value AddedUK Sector Performance - 10 Best33CorporatePerformanceMeasurement
    • 34. 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 AddedUK Sector Performance - 10 Worst34CorporatePerformanceMeasurement
    • 35. Shell’s £69.5B of market value added is the largest in the UK Source: Stern Stewart, Sunday TimesCompany Market Value Added (Sept 98)1998 EVA (£B)(1.506)0.4160.8030.7100.402(0.024)1.4000.231n/a0.098Market Value AddedUK Company Performance - 10 Best35CorporatePerformanceMeasurement
    • 36. British Steel’s £3B of market value destroyed was the worst of Britain’s 200 largest companies Source: Stern Stewart, Sunday TimesCompany 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 AddedUK Company Performance - 10 Worst36CorporatePerformanceMeasurement
    • 37. AgendaExecutive 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 37CorporatePerformanceMeasurement
    • 38. Definition Advantages/Disadvantages Framework Use in Strategy Work Economic ProfitAgenda38CorporatePerformanceMeasurement
    • 39. Definition (1 of 2)Note: Economic Profit (EP) =Operating Profit - (Cost of Capital * Amount of Equity Capital Invested)Economic Profit (EP) is a residual profit concept accounting for the opportunity cost of holding capitalAmount ($)Traditional accounting concept of profitsEconomic Profit39CorporatePerformanceMeasurement
    • 40. Definition (2 of 2)Note: NOPAT = Net Operating Profit After Tax (See Appendix for details) WACC = Weighted Average Cost of CapitalEconomic Profit determines a company’s value creation or destructionEasy 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 valueEPNOPAT$ Charge for Capital EmployedOperating ProfitEffective TaxationInvested CapitalWACCGross ProfitA&PNet Working CapitalNet Fixed AssetsOverheadsEconomic Profit40CorporatePerformanceMeasurement
    • 41. In order to understand EP it is important to go back to the basic income statement What did we earn? (using what we own)Income Statement (%)Who gets access to these earnings?$100$100EBITPATTaxInterestObservationsDebt providers have first access to the interest payments due on money lentGovernments tax corporate profitsShareholders (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 EarningsEconomic Profit41CorporatePerformanceMeasurement
    • 42. Note: NIBL = Non-interest bearing liabilitiesAssets are a company’s 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 Shareholder's Equity is the accountant's estimate of the value of the shareholder's investment in the company total assets less total liabilitiesKey ObservationsBalance Sheet MakeupWhat do we own?AssetsNIBLsDebtShareholder's EquityHow did we pay for it?$500$500100%Balance SheetThe balance sheet separates what is owned by the firm from how it was paid forUnderstanding the Balance SheetEconomic Profit42CorporatePerformanceMeasurement
    • 43. Economic Profit Balance SheetNote: NIBL= Non-interest bearing liabilitiesIn 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 madeRegular Balance SheetEP Balance SheetFinancing ApproachOperating ApproachEconomic Profit43CorporatePerformanceMeasurement
    • 44. Dividend PolicyThe traditional linkage of the Income Statement and Balance Sheet is the connection between net income and retained earnings or dividendsIncome attributable to shareholders (EBIT - Interest - Tax)Cash “in” from shareholders perspectiveCash “out” from shareholders perspectiveNet IncomeRetained EarningsDividendsManagement DecisionReinvest it in the CompanyDistribute it to ShareholdersIncome Statement and Balance Sheet Traditional Link (1 of 2)Economic Profit44CorporatePerformanceMeasurement
    • 45. Economic ConsequenceThe traditional linkage of the Income Statement and Balance Sheet is the connection between net income and retained earnings or dividends= Retained Earnings= Net Income- DividendsRevenue- CostsIncome StatementBalance SheetAssetsLiabilitiesCurrent AssetsNet Fixed AssetsOther AssetsNIBLsDebtEquityIncome Statement and Balance Sheet Traditional Link (2 of 2)Economic Profit45CorporatePerformanceMeasurement
    • 46. If you could buy the same factory for £100K, but could only finance 70% with debt and required equity for the remaining 30%, how much after-tax profit would you require to break-even? assume tax rate = 40% assume cost of equity = 15%Break-Even Example - 70% Debt / 30% Equity RevisitedEconomic Profit46CorporatePerformanceMeasurement
    • 47. If you could buy the same factory for £100K, but could only finance 70% with debt and required equity for the remaining 30%, how much after-tax profit would you require to break-even? assume tax rate = 40% assume cost of equity = 15%Debt:Equity:£70K @ 7%(£30 @ 15%) (1 -40%) £4.9K£7.5K (cover interest payments)(cover equity charge, which is not tax-deductible) Therefore £12.4K is required to break-even with 30% equity, compared to £7K with 100% debt financing Any after-tax profits beyond £12.4K will be economic profits£12.4K Break-Even Example - 70% Debt / 30% Equity - SolutionEconomic Profit47CorporatePerformanceMeasurement
    • 48. Economic ProfitAgendaDefinition Advantages/Disadvantages Framework Use in Strategy Work 48CorporatePerformanceMeasurement
    • 49. AdvantagesSource: Stern StewartEP is more successful than other measures in explaining shareholder returnsTMEconomic Profit49CorporatePerformanceMeasurement
    • 50. Advantages (1 of 3)A manager with high ROE will not undertake projects with ROE greater than required but lower than current ROE, creating missed opportunitiesManagers are typically evaluated based on maximising ROE A manager with ROE level of R will not undertake any projects with ROE < R1 Any projects with ROE > R0 but ROE < R, will still have positive NPV but will not be undertaken by manager creates missed opportunitiesNPV00R1R0 (after equity charge)ROEEP > 0Economic Profit50CorporatePerformanceMeasurement
    • 51. Advantages (2 of 3)A manager with low ROE will undertake any project that increases ROE, even if it is below required level. If project ROE is below required level, value is destroyed00Ro (After equity Charge)A manager with ROE level of R2 will undertake any project that increases ROE If any projects with ROE < Ro are undertaken, value is destroyedNPVR2EP >0ROEEconomic Profit51CorporatePerformanceMeasurement
    • 52. Advantages (3 of 3)Note: * Some projects may have negative EP in early years but large positive EP in later years. To adjust for this, MVA, or PV and EP can be usedBy evaluating managers based on EP, their incentives will be to focus on all projects that create value00Ro (After equity Charge)By evaluating managers based on EP, manager behaviour can be altered such that only projects with NPV > 0 are undertakenNPVEP <0 Do not undertake project*EP >0 Under take projectROEEconomic Profit52CorporatePerformanceMeasurement
    • 53. DisadvantagesCritics of EP cite under-investment by managers and size bias as reasons to use different measures to evaluate managersUnder-investment by ManagersSize BiasEP discourages new investments that do not generate positive returns in initial phases because manager will be charged for any capital used from the start of project solution is to under-charge capital at start of projectEP generally rewards larger divisions because performance measured by $ generated, not % Divisional managers argue that % return is better measure of their skills than $ return $ return is the important measure for shareholders Diageo looks at Operating Economic Profit per case of spirits to normalise ROCE basisEconomic Profit53CorporatePerformanceMeasurement
    • 54. Even measures that tie in the asset side of a company's financial performance need to be understood carefully...Asset revaluations (especially in Australia) In general accounting ratios will tend to bias performance upwards in relation to true economic returns because they ignore inflation, asset life and asset mixROE tends to increase due to inflation, which may be contrary to actual economic performance in real terms Furthermore, the other issue to be aware of is that older PPE assets tend to generate higher returns (RONA, ROC, even ROE) because they are more fully depreciated One consequence of this is that companies growing assets quickly will appear to have a lower return than those with slow growthEconomic ProfitBeware: Capital is in the Ratio Formula54CorporatePerformanceMeasurement
    • 55. By avoiding common pitfalls with EP, managers can prevent significant over or under-investmentLooking at absolute EP levels instead of changes in EP business with high EP may under invest and/or become complacent Focusing on current EP levels in highly cyclical businesses may lead to significant over or under investment Ignoring natural trends in EP that occur in certain businesses e.g. high-tech startup would have low or negative initial EP that increases over timeEconomic ProfitCommon Pitfalls55CorporatePerformanceMeasurement
    • 56. AgendaEconomic ProfitDefinition Advantages/Disadvantages Framework Use in Strategy Work 56CorporatePerformanceMeasurement
    • 57. Framework Note: *Net Operating Profit After TaxBoth the Operating and Financing Approaches can be applied to the EP framework. These approaches will give identical EP figures, but Bain typically uses the Operating Approach Operating Approach:EP = NOPAT - (Net Assets & WACC*)Estimate Weighted Average Cost of Capital (WACC)Calculate Net AssetsAdjust Operating Income (EBIT)Calculate NOPATAdjust Balance SheetEstimate Cost of CapitalCalculate EPFinancing Approach:EP = NOPAT - (Invested Capital WACC*)Estimate Weighted Average Cost of Capital Calculate Capital Employed or Invested CapitalAdjust Net IncomeEconomic Profit57CorporatePerformanceMeasurement
    • 58. NOPATNote: *Adjustment discussed in Accounting Adjustments sectionThe Operating and Financing Approaches adjust different income figures to calculate the same level of NOPAT Operating ApproachFinancing ApproachNOPAT CalculationNOPAT = Operating income (EBIT) + Non-operating income/(loss) + Accounting adjustments* - Cash operating taxesNOPAT = Net income + After-tax interest expense + Financing adjustments + Accounting adjustmentsEconomic Profit58CorporatePerformanceMeasurement
    • 59. Note: NOPAT = Net operating profit after tax; Invested capital = All debt equity invested in format at book value; WACC = Weighted average cost of capital ROIC = Return on invested capital = (NOPAT / invested capital) also known as: Return on Net Assets (RONA) or Return on Capital employed (ROCE) EP can be calculated beginning with either profits, NOPAT, or returns, ROIC, depending on the availability of data. The NOPAT method is more commonly usedEP CalculationUsing ROICUsing NOPATEP = NOPAT - Capital ChargeEP = (ROIC - WACC) * Invested CapitalSpread between what is achieved and what is requiredInvested Capital * WACCDiscount Rates - FrameworkEconomic Profit59CorporatePerformanceMeasurement
    • 60. * May be referred to as Return on Capital (ROC) or Return on Investment (ROI)There are two different frames of reference for calculating the “economic value” of any business - analogous to the perspectives used in ROI and ROE analysisTotal Capital PerspectiveEquity Capital PerspectiveBanks and ShareholdersShareholdersEP = NOPAT - (Assets x WACC)... the "profitability" of the business from the frame of reference of the debt and equity holders"... profitability" of the business from the frame of reference of the equity holdersOpportunity cost of the (blended) debt and equity capitalOpportunity cost of the equity capital"Profitability" is measured as income earned less the opportunity cost of total capital invested"Profitability" is measured as income earned less the opportunity cost of equity capital investedStakeholder:EP definition:Perspective:. . . given that, what is the frame of reference?Accordingly:Performance Measurement Linkages: - Ratio: - EP:Total Capital Spread = ROA - WACC EP = Total Capital * (ROC-WACC)Equity Capital Spread = ROC - Ke EP = Equity Capital * (ROC-Ke)Return on Assets (ROA)*Return on Equity (ROE)Key Ratio:Discount Rates - Two Different Definitions of EPEconomic Profit60CorporatePerformanceMeasurement
    • 61. Discount RatesCalculate WACCCalculate Firm Tax RateCalculate Industry Average for Unlevered bDetermine Appropriate Market Risk PremiumDetermine Market Value of Debt and EquityDetermine Appropriate Cost of Debt, KDRe-Lever Target Leverage for your Firm to Calculate KeUse 10 year T-Bond or 30 Year T-Bond less liquidity premium (of 1.7% for US) for appropriate country Only use government bonds if little or no risk of default for country in questionUse long-term average of difference between expected market rate of return and risk-free rate E(Rm) - Rf For US, Copeland, Koller and Murrin recommend 5% to 6% based on geometric average from 1926-1993Find comparable firms for industry in question and unlever b based on formula* Use average of bu of comparable firmsUse target leverage in formula* to calculate bL Once bL calculated, use CAPM formula Ke = Rf + bL [E(Rm) - Rf] to calculate KeKD is not necessarily equal to coupon rate of bond (e.g. IBM 2005 7.5% does not necessarily have KD = 7.5% Must calculate or obtain yield on outstanding debt If not available, use KD of firms with similar rating from agencies such as Moody’s or S&PBook value of debt can generally be used a proxy for market value of debt Market value of equity = current share price multiplied by # of shares outstanding** If firm not publicly traded use P/E ratios of comparable firmsDivide income tax payable (not income tax expense) by net earningsUse WACC formula: Where : E = market value of equity D = market value of client KE = cost of equity KD = cost of debt T = corporate tax rate Determine Appropriate Risk-Free RateUse Published Estimates of bTake average of highest quality sources For US firms BARRA publishes estimates of b( )( )E D+ED D+EKe +KD (I-T)Publicly traded:Non-publicly traded:Note: ** Since invested capital is calculated based on book value of debt + equity, WACC can be calculated for EVA purposes with book value weighting*Bu = Unlevered Beta = BL 1 + (1 tax rate) (market value ÷ of debt market value of equity) Economic Profit61CorporatePerformanceMeasurement
    • 62. EVA and MVA measures differ from other more standard Economic Profit and Market/Book measures primarily due to adjustments to book capital and earnings advocated by Stern/Stewart ...Source: The Quest for ValueStern Stewart’s Stated ObjectiveKey AdjustmentsMake NOPAT a more realistic measure of the actual cash yield from recurring business activities Turn capital into a more accurate measure of the base upon which investors expect returnsConvert from accrual accounting to cash accounting Reserves, deferred taxes Convert from successful efforts to full-cost accounting Cumulative unusual items Do not discriminate between tangible and intangible assets Capitalize R&D Value brand equity Capitalize goodwill (never write off) Convert off balance sheet financing to debtEconomic ProfitAccounting Adjustments62CorporatePerformanceMeasurement
    • 63. High inventory industries Consumer goods and services (bad debt) Industries with large deferred tax reserves (eg. natural resources companies) Industries with short product life cycles (inventory obsolescence)R&D intense industries Industries with large upfront marketing investments (eg. development of geographic markets)Restructuring industries Cyclical industriesDiscovery industries (natural resources, research - intense industries, entertainment, etc.)Key AdjustmentsHighest Impact IndustriesAcquisitive industriesReservesGoodwillCapitalisation of OutlaysFull-cost AccountingUnusual ItemsCapitalisation of LeasesCapital intense industriesFor instance, certain adjustments to capital and earnings may be necessary to normalise industry-specific accounting treatments and may make comparisons across industries more meaningful.Accounting Adjustments - Stern StewartEconomic Profit63CorporatePerformanceMeasurement
    • 64. Equity equivalent reserves gross up the standard accounting book value for common equity; the period-to-period change flows through the income statementNote: NOPAT is net of depreciation; depreciation is considered a true conomic expense because assets need to be replenished Source: ‘The Quest for Value’Additions to Book Capital: Equity equivalentsAdditions to NOPAT: Change in Equity EquivalentsDeferred Tax Reserve LIFO Reserve Other Reserves Cumulative Goodwill Amortisation Unrecorded Goodwill (Net) Capitalised Intangibles Full-Cost Reserve Cumulative Unusual Loss (Gain) after TaxIncrease (decrease) in ReservesEliminate Goodwill AmortisationIncrease in (net) capitalised intangiblesIncrease in full-cost reserveUnusual loss (gain) after taxNon-capitalised leases are capitalised and form debt equivalents; the interest expense is added back to NOPATAccounting Adjustments - Stern Stewart’s MechanicsEconomic Profit64CorporatePerformanceMeasurement
    • 65. Source: INSEADIs it likely to have a material impact on EP? Can managers influence the outcome? Can operating managers understand it? Is the required information relatively easy to track or derive? If the adjustment is made, will manager behaviour improve ?The following five criteria should be used to determine whether an adjustment should be made Basic Principle: Eliminate distortions to the extent that it is practical to do soEconomic ProfitAccounting Adjustments - Selection Criteria65CorporatePerformanceMeasurement
    • 66. The following short-cut approach provides a quick means of calculating EP, but does not include the appropriate adjustmentsOperating Income (EBIT) +Interest Income +Equity Income (or - equity loss) +Other Investment Income - Cash operating taxes - Tax shield on interest* =Net Operating Profit After Tax (NOPAT) Total Assets - Short-Term Non-Interest Bearing Liabilities (ST NIBL)** =Invested Capital (IC) Average IC = (IC Beginning + IC End) ÷ 2 Note: Sometimes IC Beginning, not IC Average used NOPAT - Capital Charges (Average IC * Cost of Capital) =EP* Operating income x marginal statutory tax rate (gives no credit for tax shield on interest) ** STNIBL = Current liabilities less all interest bearing liabilities, such as short-term notes payable Source: INSEADEconomic ProfitShort-Cut Approach (Excludes Adjustments)66CorporatePerformanceMeasurement
    • 67. AgendaEconomic ProfitDefinition Advantages/Disadvantages Framework Use in Strategy Work 67CorporatePerformanceMeasurement
    • 68. Use in Strategy WorkEP works effectively for manufacturing companies, but is generally not appropriate for service firmsManufacturing SectorService SectorUse of EP/MVACapital - intensive industries benefit most from EP forces managers to consider capital invested in business e.g. Coca-Cola spinning off bottlers UDV spinning off wine production assets to focus on blendingEP generally not appropriate due to difficulty in measuring human capital (typically most valuable asset) Structure of balance sheet precludes use of EP in Financial Services sectorEconomic Profit68CorporatePerformanceMeasurement
    • 69. An organisation needs to establish the optimum level of information complexity in order to create the most valueOptimum level of adjustment and analysis will be determined by:Absolute sensitivity of value measures to adjustments Level of the organisation that is using the (economic value added) information Strategic use of information Ability of management to make decisions on the informationValue to the Organisation* Level of Complexity (Adjustment and Analysis)Optimal Adjustments and AnalysisOrganisation below full potential as a result of too simplistic a measurement/decision making processDiminishing value to organisation as cost of adjustment/analysis Outweighs incremental gain on decisions made Maximum value to organisation from 'economic value-added' Note: Value defined as incremental value created from management decision less cost of the information base/decion making processEconomic ProfitOptimum Information Level69CorporatePerformanceMeasurement
    • 70. Use in Strategy WorkEP can be improved in a number of waysImproving EPAchieving economically profitable growthExiting uneconomic activitiesRaising the efficiency of current operationsGenerating incremental gains in EP from existing capital investmentsGenerating incremental positive EPs from new capital investmentsImmediate exit from activities generates proceeds > subsequent cash flow foregoneEconomic Profit70CorporatePerformanceMeasurement
    • 71. The following guidelines should be considered when setting up EPLink to CompensationKeep it SimpleSenior Managers should be both evaluated and compensated based on their EP results Aligns incentives of Shareholders and Management Use change in EP as basis for evaluation to incent managers to create additional valueThe more complex the EP system is, the less likely it is to be used Accounting adjustments must be sufficient to eliminate major distortions from economic value, but not too complicated for management to understand or utilise on long-term basisEconomic ProfitGuidelines71CorporatePerformanceMeasurement
    • 72. AgendaExecutive 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 72CorporatePerformanceMeasurement
    • 73. Cash Flow Return on Investment (CFROI), also known as the Holt method, is a return on investment measure that adjusts for deficiency in typical IRR calculations CFROI uses cash flows and investments stated in constant monetary units Once calculated, CFROI compared to benchmark, the firm’s cost of capital to evaluate management performance Two firms use the Holt Method Holt Value Associates, LP for portfolio management BCG/Holt for Corporate ManagementCFROI is an adjusted IRR that is compared to the firm’s WACCCFROIDefinition73CorporatePerformanceMeasurement
    • 74. Determine average life of firms assets Approximate by median of Gross Plant Depreciation Expense over last 3 yearsCalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkCash Flow Return on Investment - CFROI Framework (1 of 6)CFROI74CorporatePerformanceMeasurement
    • 75. Start with Net Income (after taxes) Add back non cash operating expenses Add back financing expenses Use monetary inflation adjustment to restate in current dollarsCalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkCash Flow Return on Investment - CFROI Framework (2 of 6)CFROI75CorporatePerformanceMeasurement
    • 76. Gross up book assets with accumulated depreciation of value of operating bases Discount operating leases over life of assets period using real rate of interest of firms’ debtCalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkCash Flow Return on Investment - CFROI Framework (3 of 6)CFROI76CorporatePerformanceMeasurement
    • 77. Terminal value consists of non depreciating assets, including: land net working capital investments in marketable securities Use inflation adjustment to restate in current dollarsCalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkCash Flow Return on Investment - CFROI Framework (4 of 6)CFROI77CorporatePerformanceMeasurement
    • 78. Calculate CFROI using IRR methodology: Present Value = Gross Cash Investment Payments = Gross Cash Flow Future Value = Sum of Nondepreciating assets Number of Periods = Life of AssetsCalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkCash Flow Return on Investment - CFROI Framework (5 of 6)CFROI78CorporatePerformanceMeasurement
    • 79. Use firms cost of capital (WACC) for benchmark Must restate WACC in real terms to be able to compare to CFROICalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkCash Flow Return on Investment - CFROI Framework (6 of 6)CFROI79CorporatePerformanceMeasurement
    • 80. EPCalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkAdd back goodwill amortisation Adjust tax expense to actual cash taxes Add back interest portion of operating rental expensesAdd back accumulated goodwill Only use assets net of depreciationWACC in nominal termsTarget AudienceMethodologyManagement External InvestorsNPVCash Flow Return on Investment - EP/CFROI Differences (1 of 2)CFROI80CorporatePerformanceMeasurement
    • 81. CFROICalculate Life of AssetsCalculate Gross Cash InvestmentCalculate Sum of Non Depreciating AssetsCalculate CFROICalculate Gross Cash FlowCompare CFROI to BenchmarkAdd back goodwill amortisation + depreciation No tax expense adjustment Add back operating rental expensesAccumulated goodwill is normally not added back Assets grossed up for accumulated depreciationWACC restated in real termsTarget AudienceMethodologyExternal InvestorsIRRCash Flow Return on Investment - EP/CFROI Differences (2 of 2)CFROI81CorporatePerformanceMeasurement
    • 82. AgendaExecutive 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 82CorporatePerformanceMeasurement
    • 83. Source: Harnischfeger’s 1996 Annual Report, INSEAD47,598,340 common shares outstanding Market Value of common shares: $40 Since Market Value of debt and minority interest not reported assume market value = book value Assume operating cash equal to 1% of total salesInformation Required:Exercise:Calculate Harnischfeger’s MVA at October 31, 1996MVA ExerciseMarket Value Added Exercise (1 of 3)83CorporatePerformanceMeasurement
    • 84. Source: Harnischfeger’s 1996 Annual Report, INSEADDollars amounts in thousands19961995AssetsCurrent AssetsCash and cash equivalents36,936239,043Accounts receivable – net667,786499,953Inventories547,115416,395Business held for sale26,152-Other current assets132,2657,9991,410,2501,213,390Property, plant and equipmentLand and improvements48,37131,571Buildings301,010233,788Machinery and equipment776,332676,5461,125,713941,905Accumulated depreciation(491,668)(454,249)634,045487,656Investments and other assetsGoodwill512,693147,943Intangible assets39,17366,796Other assets93,868124,982645,734339,721$2,690,029$2,040,767Harnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996Market Value Added Exercise (2 of 3)MVA Exercise84CorporatePerformanceMeasurement
    • 85. Source: Harnischfeger’s 1996 Annual Report, INSEADHarnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996Liabilities and Shareholders’ EquityCurrent Liabilities:Short-term notes payable49,63322,802Trade accounts payable346,056263,750Employee compensation and benefits160,488100,041Advance payments and progress billings155,199154,401Accrued warranties50,71843,8011,077,127723,303Long-term obligations657,765459,110Liability for post retirement benefits 78,814101,605Accrued pension and related costs39,90252,237Other liabilities14,36420,820Deferred income taxes54,92034,805Minority Interest188,000209,467Shareholders Equity:93,65289,611Common stock51,40751,118Capital in excess of par value615,089603,712Retained earnings148,17553,560Cumulative translation adjustments(37,584)(42,188)Less: Stock Employee Compensation Trust Treasury Stock (42,242)(46,513)673,485559,276$2,690,0292,040,767(61,350)(60,483)Other Liabilities:Other current liabilities315,033138,508Market Value Added Exercise (3 of 3)MVA Exercise85CorporatePerformanceMeasurement
    • 86. Harmishfeger’s market value at 31 October, 1996 was $2,704.984 MMarket Value ($ M)Market Value Added - Solution (Market Value)MVA Exercise86CorporatePerformanceMeasurement
    • 87. Harnishfeger’s excess cash at October 31, 1996 was $8,296 MAmount ($ K)Market Value Added - Solution (Excess Cash)MVA Exercise87CorporatePerformanceMeasurement
    • 88. Harnischfeger’s working capital requirements at October 31, 1996 were $374.46 MAmount ($ K)Working Capital RequirementsMarket Value Added - Solution (Working Capital Requirements)MVA Exercise88CorporatePerformanceMeasurement
    • 89. Harnischfeger’s net fixed assets at October 31, 1996 were $1.28 BAmount ($ Thousands)Net PP&EMarket Value Added - Solution (Net Fixed Assets)MVA Exercise89CorporatePerformanceMeasurement
    • 90. Harmishfeger’s invested capital at 31 October, 1996 was $1,662.535 MInvested Capital ($ M)Market Value Added - Solution (Invested Capital)MVA Exercise90CorporatePerformanceMeasurement
    • 91. Harnischfeger’s market value added at October 31, 1996 was $1042.44 MMarket Value Added - Solution (Market Value Added)MVA Exercise91CorporatePerformanceMeasurement
    • 92. AgendaExecutive 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 92CorporatePerformanceMeasurement
    • 93. Exercise:Calculate Harnischfeger’s EP for the year ended October 31, 1996Information Required: Interest income $6.505 million WACC equals 12%Economic Profit ExerciseEP Exercise93CorporatePerformanceMeasurement
    • 94. Assets 1996 1995Property, Plant and Equipment: Land and improvements Buildings Machinery and equipment Accumulated depreciation48,371 301,010 776,332 1,125,713 (491,668) 634,04531,571 233,788 676,546 941,905 (454,249) 487,656Investment and Other Assets: 512,693 39,173 93,868 645,734 $2,690,029147,943 66,796 124,982 339,721 $2,040,767Source: Harnischfeger’s 1996 Annual Report; INSEADHarnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996Economic Profit ExerciseCurrent Assets:Other current assetsBusiness held for saleInventoriesAccounts receivable - netCash and cash equivalents1,213,39057,999-416,395499,953$239,0431,410,250132,26126,152547,115667,786$36,936Other assetsIntangible assetsGoodwillEP Exercise94CorporatePerformanceMeasurement
    • 95. Source: Harnischfeger’s 1996 Annual Report; INSEADLiabilities and Shareholders’ Equity 1996 1995 $22,802 263,750 100,041 154,401 43,801 138,508 723,303 459,110Long-term Obligations78,814 101,605 52,237 20,820 34,805 209,467 89,611Minority Interest 51,118 603,712 53,560 (42,118 (60,483 (46,513 559,276 $ 2,040,767 ) ) )Harnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996Economic Profit ExerciseOther current liabilitiesAccrued warrantiesAdvance payments and progress billingsEmployee compensation and benefitsTrade accounts payableShort-term notes payableCurrent Liabilities:657,7651,077,127315,03350,718155,199160,488346,056$49,633Deferred income taxesOther liabilitiesAccrued pension and related costsLiability for post-retirement benefitsOther Liabilities:93,652188,00054,92014,36439,902Treasury StockLess: Stock Employee Compensation TrustCumulative translation adjustmentsRetained earningsCapital in excess of par valueCommon stockShareholders’ Equity:$ 2,690,029673,485(42,242)(61,360)(37,584)148,175615,08951,407EP Exercise95CorporatePerformanceMeasurement
    • 96. Dollar amounts in thousands Sales Cost of Sales Product Development, Selling and Administration Expenses Restructuring Charge $2,887,570 2,166,775 433,776 43,000Operating Income Interest Expense - Net244,019 (62,258)Income before Taxes and Minority Interest Provision for Income Taxes Minority Interest 181,761 (63,600) (3,944)Source: Harnischfeger’s 1996 Annual Report; INSEADNet Income$114,217Harnischfeger Industries Inc. Consolidated Balance Sheet - Year Ended 31 October 1996Economic Profit Exercise EP Exercise96CorporatePerformanceMeasurement
    • 97. 63.600 181.761Harnischfeger’s 1996 NOPAT was $162.857 MOperating Income + Interest Income +Equity Income + Other Investment Income - Income Taxes - Tax shield on interest* = Net Operating Profit After Tax (NOPAT) *Tax shield on interest = $244.019 6.505 0 0 (63.600) (24.067) $162.857$ MProvision for income taxes Income before taxes and minority interestNet Interest Expense + Interest Income62.258 +6.50524.067x=x=Economic Profit - Exercise SolutionEP Exercise97CorporatePerformanceMeasurement
    • 98. Harnischfeger’s 1996 average Invested Capital was $1,501.40 MTotal Assets - ST NIBL* = Invested Capital2,690.029 (1,027.494) 1,662.5352,040.767 (700.501) 1,340.266* ST NIBL = Current Liabilities - Short-Term Notes Payable =1,077.127 (49.633) 1,027.494723.303 (22.802) 700.5011996199519961995$ MAverage Invested Capital1,501.401Economic Profit - Exercise SolutionEP Exercise98CorporatePerformanceMeasurement
    • 99. Harnischfeger’s 1996 EP was ($17.311 M)NOPAT - Capital Charges* EPNote: * Capital Charges = Average IC * WACC = 1,501.401 x 12% = 180.168162.857 (180.168) (17.311)$ MHarnischfeger was approximately value-neutral in 1996, which contrasts sharply with the $1 billion MVA (see MVA section). The discrepancy indicates that despite adding no value in 1996, the market expects management to deliver value in the future. The large MVA implies that future EPs will be much higher than 1996.Economic Profit Exercise SolutionEP Exercise99CorporatePerformanceMeasurement
    • 100. AgendaExecutive Summary Objectives Background Performance Measurement Framework Market Value Added (MVA) Economic Profit (EP) Cash Flow Return on Investment (CFROI) Exercises MVA Economic Profit Case Study - Diageo 100CorporatePerformanceMeasurement
    • 101. Lower grape costs purchasing on spot market long-term contractual supply contracts Blending techniques used to ensure consistent qualityThe success of New World wine producers can be attributed to three initiatives, of which the reduction in capital intensity was most closely linked to the EP analysisDecreased Importance of AppellationReduction in Capital IntensityPremium Positioning and Varietal DominanceNew World Wine EconomicsWider range of outsourcing opportunities third-party grape sourcing and production reduces need to own and operate vineyards and production facilities New technology enabling reduction in stock holding timeMore premium the wine, higher the returns Scale achieved through varietal dominance leads to higher returnsLowHighLowLink to EP AnalysisCase Study - DiageoDrivers of Value101CorporatePerformanceMeasurement
    • 102. By focusing solely on bottling, only Glen Ellen generated positive economic profits for the wine producedSource: HWG Strategic Position AssessmentCost per Case ($)$1.00$ EP/Case:($1.80)($0.80)($6.60)($2.38)($16.28)As a non-vertically integrated Vintner with bottling facility only, Glen Ellen maintains a low asset base and capital chargeAs a vertically integrated Vintner with vineyard and crushing facilities, BV has a large asset base and capital chargeCase Study - DiageoBrand Performance102CorporatePerformanceMeasurement
    • 103. The Glen Ellen system is more efficient than the BV systemSource: HWG Strategic Position AssessmentMaturing Stock as % of NSVTotal Inventory TurnsGlen Ellen SystemBeaulieu Vineyard1.073%1.551%Maturing Stock as % of NSVTotal Inventory TurnsMaturing Stock as % of NSVTotal Inventory TurnsCase Study - DiageoAsset Utilisation103CorporatePerformanceMeasurement
    • 104. Analysis of the components of ROCE highlights the different economics of the two systemsMargins price mix grape costs production costs selling/ distribution costs VolumeTax rateAccounting policiesDegree of vertical integrationWine mix colour quality dry vs. sweet Ageing technologyTrade relation-shipsAccounting policiesDrivers:ROCECapital EmployedNOPATOperating ProfitCash Operating TaxesOther Adjustments -+/-Other AdjustmentsOther Net Working CapitalInventoryNet Fixed Assets+/-++¸Case Study - DiageoComponents of ROCE104CorporatePerformanceMeasurement
    • 105. The traditional wine making process is very capital intensive. Through selective outsourcing, New World wine producers have been able to significantly reduce their asset baseTraditional old world wine producer activitiesVertically integrated New World wine producer activities (Robert Mondavi)Non vertically integrated wine producer activities (Glen Ellen)Activities systematically performedActivities performed only for super/ultra premium winesSource: Literature search, Expert interviewsNotes: ¹ Ageing can be done in oak barrels or in stainless steel vatsGrapes Culture & ProductionHarvestGrapes CrushingAlcoholic Fermen- tationMatur- ationMalolactic Fermen- tationAgeing¹BlendingBottlingBottle Stock KeepingDistri- butionVineyardVinificationAgeing Process(Outsourced activities)Case Study - DiageoBreakthrough Strategies: Change the Rules105CorporatePerformanceMeasurement
    • 106. Ignoring the capital requirements necessary under different business models can mask the true profitability of each product the only wine that was economically profitable was the Glen Ellen product that Diageo bottled but did not grow from the vineyard A fresh approach to the business may be necessary in order to devise more economically profitable business models less prestige in only performing bottling, but many vineyards driven by non-economic factorsCase Study - DiageoLessons Learned106CorporatePerformanceMeasurement