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Corporate Finance Value Management

Corporate Finance: Course overview. 18.09. Fundamentals (4 hours)M. Neuhaus

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Corporate Finance Value Management

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    1. Winter Term 2009 1 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Corporate Finance Value Management Dr. Markus R. Neuhaus, CEO PricewaterhouseCoopers Franco Monti, Leader Strategy & Operations, PricewaterhouseCoopers Remo Schmid, Partner HRS Consulting, PricewaterhouseCoopers

    2. Corporate Finance: Course overview 18.09. Fundamentals (4 hours) M. Neuhaus & M.Schmidli 25.09 Investment Management M. Neuhaus & P. Schwendener 02.10. Business Valuation (4 hours) M. Neuhaus & M. Bucher 09.10. No Lecture No Lecture 16.10. Value Management M.Neuhaus, R.Schmid & F.Monti 23.10. No Lecture No Lecture 30.10. No Lecture No Lecture 06.11. No lecture No Lecture 13.11. Mergers & Acquisitions I&II (4 hours) M. Neuhaus & D. Villiger 20.11 Tax and Corporate Finance (4 hours) Markus Neuhaus 27.11. Legal Aspects R. Watter 04.12. Financial Reporting M. Neuhaus & M. Jeger 11.12. Turnaround Management M. Neuhaus & Markus Koch

    3. 3 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch

    4. 4 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch

    5. Winter Term 2009 5 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch

    6. Winter Term 2009 6 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Learning targets

    7. Winter Term 2009 7 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Pre lecture reading Mandatory Slides incl. cases Optional Kim, W. Chan, and Mauborgne, Renée: Blue Ocean Strategy. Harvard Business School Press, 2005, pp 3-44. Koller, Tim, Goedhart, Marc and Wessels, David: Valuation, 4th edition. John Wiley & Sons Inc., 2005, pp. 3-46. Weilenmann, Rolf: Value Based Compensation Plans. Paul Haupt, 1999, pp 29-32, 35-58, 59-74, 87-95, 181-220. Volkart, Rudolf: Corporate Finance. Versus, 2008, pp , 314-341, 507-513 Brigham, Houston: Fundamentals of Financial Management. 12th edition. South-Western CENGAGE learning, 2009, pp 100 - 101

    8. Winter Term 2009 8 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Content

    9. Winter Term 2009 9 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Value Management aims at maximising the long-term value creation of a company in a sustainable way…

    10. Winter Term 2009 10 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch … and aligns the interests of Management and stakeholders *

    11. Winter Term 2009 11 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Content

    12. Winter Term 2009 12 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch The Value Management framework comprises four successive steps to maximise value-creation

    13. Winter Term 2009 13 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Each step uses specific instruments to assess and enhance the value-creation

    14. Winter Term 2009 14 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Step 1: Strategic and operational assessment to increase transparency of current situation

    15. Winter Term 2009 15 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Broad and quick strategic and operational assessment to invest resources in consecutive steps

    16. Winter Term 2009 16 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Analysis of the market situation… Blue Ocean Strategy: The book has sold more than a million copies in its first year of publication and is being published in 39 languages. The metaphor of red and blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans. Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. The authors criticise Michael Porter's idea that successful business are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.Blue Ocean Strategy: The book has sold more than a million copies in its first year of publication and is being published in 39 languages. The metaphor of red and blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans. Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. The authors criticise Michael Porter's idea that successful business are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.

    17. Winter Term 2009 17 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch … to improve own strategic market position with application of the Blue Ocean Strategy Blue Ocean Strategy: The book has sold more than a million copies in its first year of publication and is being published in 39 languages. The metaphor of red and blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans. Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. The authors criticise Michael Porter's idea that successful business are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.Blue Ocean Strategy: The book has sold more than a million copies in its first year of publication and is being published in 39 languages. The metaphor of red and blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans. Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. The authors criticise Michael Porter's idea that successful business are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.

    18. Winter Term 2009 18 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Scrutinised strategic ownership decisions for business units with the MACS* framework Macs framework: Achsen: Relative Wertschöpfungsfähigkeit (des Mutterunternehmens für die betrachtete Geschäftseinheit) Wertschöpfungspotential der Geschäftseinheit (auf Standalone Basis) Macs framework: Achsen: Relative Wertschöpfungsfähigkeit (des Mutterunternehmens für die betrachtete Geschäftseinheit) Wertschöpfungspotential der Geschäftseinheit (auf Standalone Basis)

    19. Winter Term 2009 19 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Step 2: Valuation of specific business areas to obtain a sound basis for further decisions

    20. Winter Term 2009 20 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Financial transparency by using valuation to identify strong and weak business areas…

    21. Winter Term 2009 21 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch … with future value-creating potential (DCF) and past value-creating activities (EVA) as key instruments

    22. Winter Term 2009 22 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Determination of company-specific key value drivers to identify key impact areas

    23. Winter Term 2009 23 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Step 3: Development of value-creating business scenarios for identified areas

    24. Winter Term 2009 24 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Application of different approaches for different value improvement fields

    25. Winter Term 2009 25 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch (Re)design of organisational structure according to the needs of value-creation

    26. Winter Term 2009 26 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Example: Redesign of organisational structure from a holding to a divisional structure

    27. Winter Term 2009 27 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Analysis of business processes for efficiency optimisation potential

    28. Winter Term 2009 28 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Alignment of business processes to improve value-creation Six Sigma is a business management strategy, originally developed by Motorola, that today enjoys wide-spread application in many sectors of industry. Six Sigma seeks to identify and remove the causes of defects and errors in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts" etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction or profit increase). Six Sigma has two key methodologies: DMAIC and DMADV. DMAIC is used to improve an existing business process; DMADV is used to create new product or process designs. DMAIC The basic methodology consists of the following five steps: Define process improvement goals that are consistent with customer demands and the enterprise strategy. Measure key aspects of the current process and collect relevant data. Analyze the data to verify cause-and-effect relationships. Determine what the relationships are, and attempt to ensure that all factors have been considered. Improve or optimize the process based upon data analysis using techniques like Design of Experiments. Control to ensure that any deviations from target are corrected before they result in defects. Set up pilot runs to establish process capability, move on to production, set up control mechanisms and continuously monitor the process. Six Sigma is a business management strategy, originally developed by Motorola, that today enjoys wide-spread application in many sectors of industry. Six Sigma seeks to identify and remove the causes of defects and errors in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts" etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction or profit increase). Six Sigma has two key methodologies: DMAIC and DMADV. DMAIC is used to improve an existing business process; DMADV is used to create new product or process designs. DMAIC The basic methodology consists of the following five steps: Define process improvement goals that are consistent with customer demands and the enterprise strategy. Measure key aspects of the current process and collect relevant data. Analyze the data to verify cause-and-effect relationships. Determine what the relationships are, and attempt to ensure that all factors have been considered. Improve or optimize the process based upon data analysis using techniques like Design of Experiments. Control to ensure that any deviations from target are corrected before they result in defects. Set up pilot runs to establish process capability, move on to production, set up control mechanisms and continuously monitor the process.

    29. Winter Term 2009 29 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Establishing Project Portfolio Management (PPM) for current and potential new projects

    30. Winter Term 2009 30 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Implementation of PPM instruments to select the right projects and control value-creation

    31. Winter Term 2009 31 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Step 4: Using Change Management and Compensation to implement Value Management

    32. Winter Term 2009 32 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Change Management to enable and drive a value-oriented culture

    33. Consider use of appropriate instruments to allow people to cope with change Impact of Communication The major goal of communication is to explain the meaning and impact of change and to help people evaluate their personal / professional goals in the context of organisational change. Ultimately, the desired end result is the alignment of employee goals with the organisational vision. Impact of Communication The major goal of communication is to explain the meaning and impact of change and to help people evaluate their personal / professional goals in the context of organisational change. Ultimately, the desired end result is the alignment of employee goals with the organisational vision.

    34. Media instruments must be aligned with desired degree of communication

    35. People drive value - change management is crucial to realise full potential

    36. Winter Term 2009 36 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Compensation aligns leadership activities and decisions on value-creation

    37. Winter Term 2009 37 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Linking performance management to bonus as a short-term incentive (STI)

    38. Winter Term 2009 38 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Allowing Management to participate in effective value-creation as a long-term incentive (LTI)

    39. Winter Term 2009 39 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Content

    40. Winter Term 2009 40 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Project ‘Value’ with our client ‘Eurotransco’

    41. Winter Term 2009 41 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Strategic and operational assessment

    42. Winter Term 2009 42 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Strategic and operational assessment

    43. Winter Term 2009 43 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Strategic and operational assessment

    44. Winter Term 2009 44 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Strategic and operational assessment

    45. Winter Term 2009 45 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Business valuation

    46. Winter Term 2009 46 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Business valuation

    47. Winter Term 2009 47 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Business valuation

    48. Winter Term 2009 48 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Value improvement

    49. Winter Term 2009 49 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Value improvement

    50. Winter Term 2009 50 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch Case study: Change Management and Compensation

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