Driving Your Company's Value: Strategic Benchmarking for Value / Edition 1 available in Hardcover
Driving Your Company's Value: Strategic Benchmarking for Value / Edition 1
- ISBN-10:
- 0471648558
- ISBN-13:
- 9780471648550
- Pub. Date:
- 12/16/2004
- Publisher:
- Wiley
Driving Your Company's Value: Strategic Benchmarking for Value / Edition 1
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Overview
Product Details
| ISBN-13: | 9780471648550 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 12/16/2004 |
| Pages: | 193 |
| Product dimensions: | 6.32(w) x 9.17(h) x 0.76(d) |
About the Author
Michael J. Mard, CPA/ABV, ASA, is a Managing Director of The Financial Valuation Group (FVG) in Tampa, Florida. He was founding president of The Financial Consulting Group, a national association of professional service firms dedicated to excellence in valuation, litigation, and financial consulting. Mr. Mard has been a full-time business appraiser and expert witness for over 19 years. He is author of Valuation for Financial Reporting: Intangible Assets, Goodwill, and Impairment Analysis, SFAS 141 and 142, contributing author of Financial Valuation: Applications and Models and coauthor of Financial Valuation Workbook, all published by John Wiley & Sons, Inc. Mr. Mard has coauthored over 20 courses and published over 60 articles. He has been a presenter, speaker, and instructor more than 70 times.
Edi Osborne, CSPM, CPBA, is CEO of Mentor Plus in Pleasanton, California. Ms. Osborne is coauthor and primary facilitator/trainer of The Profit Equation(SM) seminar and Performance Measurement PLUS Skills and Systems Workshop offered in cooperation with the American Institute of Certified Public Accountants (AICPA). Ms. Osborne is also coauthor of the Strategic Performance Management credential program. As a nationally recognized public speaker, she has spoken at many conferences sponsored by the AICPA, state societies, and international associations. She has been published in Accounting Today and the Journal of Accountancy. She has conducted client and team advisory boards and team/client training programs as well as strategic planning processes for over 100 accounting firms. In addition to facilitating business development roundtables for business owners throughout the state of California, Ms. Osborne developed the Group Mentoring program at San Jose State University’s Center to Develop Women Entrepreneurs.
James S. Rigby, Jr., CPA/ABV, ASA, is a Managing Director of The Financial Valuation Group (FVG) and current President of the Financial Consulting Group. Mr. Rigby has over 25 years of professional experience. He has provided consulting services related to strategic planning, international expansions, mergers and acquisitions, and intellectual property; and expert testimony related to valuations. Mr. Rigby has served on various business valuation/litigation committees of the AICPA, American Society of Appraisers (ASA), and other professional associations. He is the coauthor of multiple continuing education courses and articles published in a variety of professional journals.
Read an Excerpt
Driving Your Company's Value
By Michael J. Mard
John Wiley & Sons
ISBN: 0-471-64855-8Chapter One
STEP 1Current State
QUALITATIVE ANALYSIS OF THE COMPANY'S CURRENT STATE
To understand the current state of a company, management must look at both its qualitative and quantitative attributes. Historically, management has focused on the quantitative side of the analysis, because the information is verifiable from the company's historical accounting information, which is centered primarily on financial statement numbers and cost accounting numbers. But the qualitative analysis of the company generally provides more insight about the company and its future prospects. This step will focus on some of the common frameworks used to analyze a company, its industry, and its position in the marketplace. Without an understanding of the industry, it is impossible to develop an effective strategy for the company, determine the company's critical success factors, or develop a meaningful performance measurement system designed to create value.
It is a common belief that management should develop its strategies around the company's mission statement. Recently, in a conversation with friends, a statement was made that "a company does not own its mission, rather, the marketplace gives it to you." The conversation continued and the concept was amplified with "a company's mission is to do what it does best better."
Although we often think we set our mission, the marketplace reallysets it for us and ultimately determines our success or failure depending on how we respond to the marketplace and its many influences. As management, our responsibility is to read the marketplace, sort of like tea leaves, to determine the company's mission and how we can do what we are doing better than any other company. To accomplish this task management needs to have a complete understanding of the marketplace or industry it operates in.
ANALYZING THE INDUSTRY
There are several frameworks that are often used for looking at the company, the marketplace, and the industry. We will talk about two such frameworks: The Porter Model and the McKinsey & Company's 7-S Model.
The Porter Model
One of the first really structured analyses was presented in a Harvard Business Review article by Michael Porter in 1979 and expanded on in the early 1980s in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors. Porter, a Harvard Business School professor, developed an analytical approach known as The Porter Model by which to analyze and assess company risk associated with industry structure.
Porter divides industry structure into five forces:
1. Rivalry between current incumbents.
2. Threat of new entrants.
3. Bargaining power of customers.
4. Bargaining power of suppliers.
5. The threat of substitute products.
This model, used thoughtfully in a company analysis, can provide valuable information regarding the relative risk to the future market position, growth, and profitability of the subject company.
The following is a simplistic example of the Five Forces analysis of the Porter Model as applied to Ales' Distributing, a beer manufacturer:
Rivalry between current incumbents-The industry is segmented by distributorships affiliated with one or more of the three major domestic manufacturers. As a result, competition between distributorships within a given region or sales territory is intense.
Threat of new entrants-Since all distributorships operate under agreements with one or more of the three dominant domestic manufacturers and are assigned defined sales territories, the threat of new entrants into the marketplace is minimal.
Bargaining power of customers-Due to the intensely competitive nature of the business, customers tend to possess significant bargaining power. Customers in the on-premise segment of the market require high service levels and on-site displays (bar signage, etc.). Off-premise customers also require high service levels, including assistance in product placement and point-of-sale displays to obtain higher product turn, in exchange for greater shelf space.
Bargaining power of suppliers-Distribution agreements with all manufacturers are extremely restrictive. The manufacturer sets product pricing, and distributor inventories are determined by the manufacturer's need to move product, given its short shelf life.
Threat of substitute products-The increased acceptance of premium import products from foreign beer manufacturers poses a potential threat to future unit sales of domestic distributors.
The McKinsey & Company's 7-S Model
A second model for analyzing industry conduct and its impact on a given company is the McKinsey & Company's 7-S framework, which analyzes competitors using seven categories:
1. Strategy
2. Structure
3. Systems
4. Skills
5. Staff
6. Style
7. Superordinate goals
The following is a brief example analyzing Acme Corporation's (a furniture distributor) ability to remain flexible and to adapt to changes in the seven categories:
Strategy-In response to the competitive nature of the industry and profit pressure exerted by the manufacturer by the transferring of certain expenses to distributors, Acme is looking seriously into acquiring neighboring distributorships (wholesaler consolidation), a strategy encouraged by the manufacturer.
Structure-As a sales-focused company, Acme has decentralized the sales process, training its drivers as well as its on-premise and off-premise sales staff to create unique value to the customer by consulting with the customer on product placement, point-of-sale strategy, and inventory management.
Systems-Acme possesses sophisticated sales training systems, including its involvement as a beta test site for the manufacturer's nationwide interactive satellite sales network, making it one of the more technologically advanced distributorships in the wholesaler network. Skills-Acme possesses the most experienced sales and warehousing staff of any distributor within a 75-mile radius, giving the company an enormous competitive advantage.
Staff-Acme personnel exhibit great pride in their product, to the point of identifying closely with the manufacturer and its national advertising presence, with a deep conviction that they market the finest product in the industry.
Style-Top management exudes teamwork in everything it does, a feeling that pervades the entire organization, resulting in a remarkably cohesive and satisfied workforce.
Superordinate goals-Acme operates on the fundamental principal that is best expressed in its president's motto: "Ensuring our customer's success will ensure our success." The company, therefore, looks beyond the sales mentality to focus on providing value to the customer, which sets it apart from its competitors.
Macroenvironmental Analysis
Further removed from the subject company than industry forces, but still affecting it significantly, are five macroenvironmental sources of risk:
1. Technological risk
2. Sociocultural risk
3. Demographic risk
4. Political risk
5. Global risk
While the company has little or no influence on these risk factors, an assessment of them can be critical in determining the company's (and industry's) future profitability. Shifts in one or more of these risk factors can (and often do) have a material effect on an industry or a company's future fortunes. Therefore, it is prudent for management to perform a thorough analysis of such factors and to, at least once a year, update the analysis.
Analysis of the five macroenvironmental risk factors on the fictional Ale's Distributing reveals:
Technological risk-The company is recognized as a cutting-edge distributor by its competition and its supplier. It has harnessed new technology to track all delivery vehicles at all times, to maximize route organization, and to ensure productivity.
Sociocultural risk-Consumer trends toward premium import products pose a potential risk to the company's product as they gain a stronger foothold in the domestic market.
Demographic risk-The company's territory is composed of three mature counties that possess an aging population with little future growth prospects. Since the company's product is preferred by younger consumers, this is a threat to the company's ability to maintain its past earnings stream.
Political risk-The alcohol industry watched the federal legal action against the tobacco industry with interest, and fears of future regulation or judicial action exist.
Global risk-The three major domestic manufacturers are fighting to make inroads into the global marketplace, with European counterparts looking to the U.S. marketplace to claim market share from existing competitors.
A more expansive example of industry and macroenvironmental analysis was provided by Warren Miller of Beckmill Research (see Exhibit 1.1). This illustration, from the fourth quarter of 2003, was used in a discussion group on strategic planning and covers both the microenvironmental level and the industry level of analysis.
ANALYZING THE COMPANY
The key to analyzing the company's current state is to understand the company itself and how it relates to the industry and the macroenvironment it operates in. To understand the company, management needs to understand many factors about the company including: its business strategy, its development stage, its intangible assets, and its critical success factors (CSF) and the key performance indicators (KPI) related to those CSFs.
Every privately owned company goes through various stages of development to reach maturity. As management must change, the company goes through various stages to react to the environment it operates in. The chart in Exhibit 1.2 shows the three stages of development: infancy, adolescence, and maturity, along with the typical characteristics of the company related to finance, management, operations, marketing, sales, and the owner's personal needs in each stage.
Company's Corporate Strategy
In addition to understanding the company's stage of development, management must understand the company's business strategy. Michael Porter outlined three generic strategies that all businesses must choose from to develop their business strategy. If they do not select one of the strategies, and focus on it over the long term, they will not be effective and will find themselves in the ineffective state he refers to as being "stuck in the middle." The three strategies are:
* Overall cost leadership, (also called Cost Efficiencies or Organizational Effectiveness).
* Differentiation from competitors, (also called Product Innovation).
* Focus on a particular buyer group, segment of the product line, or geographic area, (also called Customer Intimacy).
Each of these strategies requires the existence of certain characteristics related to common skills and resources and common organizational requirements. The basic concept is that the resulting strategic position will provide the company with above-average returns in the industry despite having strong competitors. We believe these three strategies are most appropriate for middle-market businesses and thus are core strategies used in Strategic Benchmarking for Value.
Overall Cost Leadership
Pursuing overall cost leadership, or Cost Efficiencies, as a strategy requires that management pursue a course of action that:
* Aggressively constructs facilities that are of a scale to have maximum efficiency.
* Focuses on cost reductions gained through experience.
* Includes tight control on costs and overhead.
* Eliminates marginal customer accounts.
* Minimizes costs in areas like service, sales teams, advertising, and research and development.
Even though these companies aggressively work to reduce all costs, they cannot allow their management actions to negatively affect quality, customer service, or new product development.
The Cost Efficiencies strategy's commonly required skills and resources include:
* Continual capital investments and access to capital to fund the investments.
* An engineering team with skills in process engineering.
* High level of labor supervision.
* Designing products for manufacturing simplicity and ease.
* Use of a low-cost distribution system or network.
In addition, the strategy requires the development of many organizational characteristics including:
* The ability to maintain tight cost controls.
* An information infrastructure capable of providing frequent, detailed cost control reports.
* A highly structured organization and defined responsibilities.
* Compensation incentives based on meeting quantitative goals.
Differentiation from Competitors
Differentiation from competitors, or Product Innovation, as a strategy requires management to create something that is perceived industry wide as being unique. This strategy allows premium pricing over the competition due to the brand loyalty of the customers. Generally, this strategy precludes the company from obtaining a high market share and is often associated with the concept of exclusivity. Products tend to be more costly due to the product design requirements, the additional research and development required, the high-quality materials used, or the level of customer service provided.
Uniqueness related to Product Innovation can be created via many approaches such as:
* Developing a design or brand image.
* Technology leadership.
* Product features provided.
* Level of or type of customer service provided.
* A strong dealer network.
Highly successful product innovators generally differentiate themselves by using more than one approach. The differentiation strategy's commonly required skills and resources include:
* Possessing high-quality marketing skills.
* Strong product-engineering capabilities.
* A creative flair.
* A highly competent basic research team.
* A reputation for technological or quality leadership.
* Known tradition in the industry or a unique combination of skills drawn from related industries.
* A high level of cooperation from the channel of distribution.
In addition, the strategy requires the development of many organizational characteristics including:
* Incentives based on subjective measures instead of definitive quantitative goals.
* A high level of cooperation and coordination between the research and development, product development, and marketing departments.
* Facilities and amenities capable of attracting scientist, engineers, creative individuals, or a highly skilled labor force.
Focus on a Particular Buyer Group
Focus on a particular buyer group, segment of the product line or geographic area, or Customer Intimacy, as a strategy is based on being able to serve its highly focused target group more effectively or efficiently than its competitors. The competitors are assumed to be marketing to a more diverse market, geographic market, or with a broader product line.
Companies with this strategy have a low-cost position or a high degree of differentiation with its strategic target market or both. Differentiation for these companies will come from being better at meeting the needs of the target market or from a low-cost position related to the target market (although they may not be the low-cost provider for the industry as a whole).
A focus strategy for Customer Intimacy will require a combination of the same skills, resources, and organizational characteristics that are required for the Product Innovation strategy. Each of these strategies often need very different styles of leadership and usually evolve into their own unique corporate cultures. In addition, each of these strategies requires the use of different performance measures. Being a cost-efficient provider would necessitate a focus on performance measures related to manufacturing, while a strategy based on Product Innovation would focus on performance measures related to customer satisfaction and perceptions.
(Continues...)
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Table of Contents
Preface.Acknowledgments.
Overview.
Understanding Value.
Free Cash Flow.
The Five Dimensions of Value.
A Holistic Approach.
SBfV or EVA.
Return on Equity.
Economic Value Added.
The SBfV Process.
Step 1: Current State.
Qualitative Analysis of the Company’s Current State.
Analyzing the Industry.
Analyzing the Company.
Quantitative Analysis of the Company’s Current State.
Step 2: Desired Future State.
Future State.
Core Strategy.
Critical Success Factors.
Key Performance Indicators.
Benchmarking.
Step 3: Strategic Benchmarking Keys.
How Strategy Alignment Builds Value.
Grand Strategy, Strategy, or Tactics?
Translating Grand Strategy into Strategy Execution.
Grand Strategy Alignment Maps.
Alignment Thesis and Value Propositions.
Achieving Strategic Alignment.
A Strategy Alignment Model That Works—SBfV.
Step 4: Alignment Execution.
Alignment Execution.
Putting it Together.
Step 5: Benchmark and Monitor Return on Strategic Effectiveness.
Benchmark and Monitor Return on Strategy Execution.
Closing.
Appendix: Websites of Interest.
Index.