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CorporateStrategyandValueCreation

C‐SuiteThinking

C‐SuiteThinking:

TheStrategicDriversofValueCreation

2019 ProfessorDavidWessels©.

TheWhartonSchooloftheUniversityofPennsylvania 3620LocustWalk,PhiladelphiaPA19104

1

CorporateStrategyandValueCreation

C‐SuiteThinking

DrivingV DrivingValueCr alueCr alueCrea ea eation:TheC‐SuiteP tion:TheC‐SuiteP tion:TheC‐SuitePer er ersspective Valuecreationisdrivenbyaclever balance ofgrowth,returnon capital,costofcapital,andthe abilitytosustainperformanceover time.

Portfolio Momentum Organic Growth

Market share

KeyValueDrivers: 1. Organicrevenuegrowth

Value creation

Economic spread

2. Ahealthyreturnoncapital 3. Sustainabilityofperformance

Sustainability

Returnon capital

_

Costof capital

4. Abilitytomanagerisk

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

2

CorporateStrategyandValueCreation

C‐SuiteThinking

Piv PivotT otT otTow ow oward ard ardsMom sMom sMomentum entum entum:Cosmetics :Cosmetics MODERNLIFESMELLSSOGOOD IT’SKILLINGTHEPERFUME INDUSTRY The fast growth of specialized scents in fabric softeners, household cleaners and body sprays has helped make America, and the typical American, smell sweeter and cleaner than ever. Even storefronts and airlines are rigging up scent machines to bathe customers in the companies’ trademarked aromas. It’s good news for our noses but terrible news for a once-bountiful business: The nation’s perfume and cologne industry. Sales in the United States of mass fragrances, those non-designer scents bottled for a middle-class clientele, have dropped by half since 2000, to about $600 million last year, data from market researcher Euromonitor International show. - The Washington Post

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

Changingt ChangingtheFr heFr heFrame– ame– TooI ooInw nw nwaardFocused? • Acommonfrustrationamongstseniorexecutivesistheobsessionwith“theplan.”While importantformanagingday‐to‐day,thisobsessionencouragesaninternalfocus. • Takeforexample,thefollowing“chipset”company,ChipCo.Thecompany’sinternaltarget was$10.7billionbyYear3,andtheyjustachieved$11billion.Comeyear‐endreview,how doyoubelievethelocalteamfeels?

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

4

CorporateStrategyandValueCreation

C‐SuiteThinking

CorrectingtheFr CorrectingtheFrame:AnExt ame:AnExt ame:AnExternalFocus ernalFocus • AprominentCEOontheBoD demandsthatcompanyrefocusitsbenchmarking externally.Sheaskshowfastthecompanyisgrowing,notversusplan,but comparedtopeers. • Eachofherquestionslookforimprovement,notjustversusthecompany's internaltargets,butwhetherthecompanyisgaininggroundversuspeers. Revenue $billions

"Share"

Year1

Year2

Year3

Year1

Year2

Year3

ChipCo

10.0

10.5

11.0

41.7%

38.5%

36.1%

RivalCo

8.0

10.0

12.0

33.3%

36.6%

39.3%

Otherplayers

6.0

6.8

7.5

25.0%

24.9%

24.6%

24.0

27.3

30.5

100.0%

100.0%

100.0%

Industry

Fromashareperspective,whatdoesthedatatellus?

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

CorrectingtheFr CorrectingtheFrame:AGr ame:AGr ame:AGranularF anularF anularFocus ocus Movingfromaninternalfocustoanexternalfocusimprovestheframe,butdoes notcorrectitentirely.Thechipsetmarketisnotasinglemarket,butrathera largecollectionofsubmarkets,eachwiththeirowncompetitivedynamics. SetTopBoxes $billions

"Share"

Year1

Year2

Year3

Year1

Year2

Year3

ChipCo

9.1

9.3

9.5

65.2%

65.7%

66.1%

RivalCo

2.1

2.1

2.0

15.0%

14.8%

14.3%

Otherplayers Sub‐market

2.8

2.8

2.8

19.8%

19.5%

19.6%

14.0

14.2

14.3

100.0%

100.0%

100.0%

WirelessChipsets $billions ChipCo

"Share"

Year1

Year2

Year3

Year1

Year2

Year3

0.9

1.2

1.5

8.7%

8.9%

9.6%

RivalCo

5.9

7.9

10.0

59.0%

60.3%

61.5%

Otherplayers

3.2

4.0

4.7

32.3%

30.8%

29.0%

10.0

13.1

16.2

100.0%

100.0%

100.0%

Sub‐market

Calculatemarket shareagain,but thistimeonamore granularbasis, whatdoyoufind?

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

6

CorporateStrategyandValueCreation

C‐SuiteThinking

Dri DrivingLong‐termSus vingLong‐termSus vingLong‐termSusttainabl ainableGr eGr eGrowth owth Recentresearchshowsthatcompanies drivegrowththroughthreeprimary sources:

8.6%

1. Portfoliomomentum 2. Marketshare 3. Mergersandacquisition

Atahighlevel,anydifferencesinrevenue growthacrossanindustryappear tobe drivenbycapturingshare.Amoregranular approachshowsgrowthisaboutwhere,not share.

Source:GranularityofGrowth, McKinseyQuarterly

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

ProductMark oductMarketSelection etSelection SetTopBoxes TheGlobalSetTopBoxmarketisbecomingmoreversatileand dynamicasitprovidesseveralbenefitstocustomers,suchas pauseandstorefacilitiesandeasydeploymentoptions. DemandforSTBsareexpectedtogrowataCAGRof2.1%for the2014‐2018period.Source:Technavio

“Moststrategicplansarereallyrolling resourcebudgetsandmarket‐share projectionsthatwon’ttransform corporateperformance.Strategyreally meansunderstandinghowtoexploit changesinthebusinessenvironment.”– McKinseyQuarterly

Trends

Buildnew Capabilities Create Productsand Services

Definenew Roles

WirelessChipsets CombiningtherevenueofWi‐Fi,Wireless Display/Video,Mobile,WiMAX,MobileLTE,and ZigBee,theoverallwirelesschipsetsshipments areexpectedtoreach4.86billionunitsby2017, ataCAGRmorethan29%from2012to2017. Source:MarketsandMarkets.

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

Cap Capab ab abilityT ilityT ilityTrran ansition sition

• Asyouevaluateadjacenciesto yourcorebusiness,consider yourcurrentcapabilityset,as wellasthenewcapabilities requiredtomeettheneedsof yournewcustomersegment.

Leverageexisting best‐in‐class capabilities

Newcapabilities requiredfor success

• Existingcapabilitiesgiveyou thepermissiontocompete, newcapabilitiesgiveyou chancetowin.

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

Ex Exercise:T ercise:T ercise:TransitioningChannels ransitioningChannels • Youleadthefinanceorganizationfora largeglobalbrewer.Localtrendshave movedconsumersoutofthelocalpuband intothesupermarkettopurchasebeer. Youdecidetorefocustowardsyour channeleffortstowardsthesupermarket inorderto“pivottowardsgrowth.” • Tobuildanewcomprehensivestrategy, youengageeachseniorleaderinyour businesstodeveloptheirownfunctional strategy.Whatchangeswouldyousuggest forthefollowingfunctions?

CorporateFunction Procurement Manufacturing Marketing Sales Distribution Finance

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

10

CorporateStrategyandValueCreation

C‐SuiteThinking

TheGr TheGranularityofGro anularityofGro anularityofGrowth:Ca wth:Ca wth:Cattchingt chingtheW heW heWaave Segmentationistypicallydonetobetterservethecustomer.Researchalsoshows thatvariousmarketsegmentsgrowatdifferentspeeds,andthatacompany’sgrowth willbedeterminedbywhereitplays,morethanhowmuchshareitcapturesina givensegment.

Increasingly Granular

Level

Industry Example

Description

Lineof Business

Telecommunications

Smartphonesversus landlines

Geography

ConsumerProducts

UnitedStatesversus emergingmarkets

Channel

Insurance/Beer

Aggregatorsversusagents/Supermarkets&Bars

Consumer

Retail

Contractorsversusconsumers

Application

HardCandies

BreathFreshenersversusBoredom! Workinghardateverylevel:EsteeLauderCompanies

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

11

CorporateStrategyandValueCreation

C‐SuiteThinking

AComprehensiv AComprehensivePr ePr eProcess ocess

Definethe segments

Asimplesegmentationby productlineand geographycangenerate gooddiscussionabout focus.Abest‐in‐practice analysiswillbecreative aboutsegmentation, focusingoncustomer typesandpurchasehabit.

Estimategrowth bysegment

Trenddataisnever clearandrequires judgment.Shouldyou collectdatafromthe consultingbooksor thefrontlines?

Identify customerneeds andevaluate thepotentialfor success

Doesthecompanyhave thecapabilitiestomeet customerneedsinthat segment?Assegments shift,isthecompany activelybuildingskillsin thenewsegment,orisit onlyhappening organically?

Place the Bet

Projectingthefutureisanoisy processandthe“financial decision”isreallyabet.If sidesdisagree,itwillbe criticaltoenticeeveryoneto jointhestrategy.One strategymightbeaseffective asanother,butan inconsistentstrategycould derailprogress.

Build capabilities

Define Roles

Whatproduct, production,and/or distribution capabilitiesneedto bereinforced and/oraugmented?

Doeseveryonein thecompany understandtheir roleinthe strategy?Does marketingknow? Humanresources?

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

12

CorporateStrategyandValueCreation

C‐SuiteThinking

ReturnonCapit eturnonCapital al Fromastrategic perspective…

“DistinctiveAdvantage”

Doyoureallyknow whatsetsyour businessapartfrom itscompetitors?

Fromatactical perspective….

“LivingwithinYourMeans”

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

13

CorporateStrategyandValueCreation

C‐SuiteThinking

Qu Qualit alit alitaativ tivev ev ever er ersus sus susQu Qu Quan an antit tit titat at ativ iv iveA eA eAssessm ssessm ssessmen en entt Greatreturnsoncapitalarenotgeneratedfromaspreadsheet,butrathera distinctiveofferingthatmeetstherightcustomerneed.Withthatsaid,a spreadsheetisrequiredtovetcriticalassumptionsanddeterminepriorities. Measuring&ManagingValue

CreatingValue

NewProduct

CustomerNeedversusCompetitiveOffering

ProductFinancials

RelativeAdvantageversusPeer 100

Importance

80

Importanceto Customer 70

60

Company relati veto competitors

45

40

40

$millions

Year1

Year2

Year3

Revenue

850.0

910.4

975.0

Year4

Costofsales

(725.0)

(757.6)

(791.7)

(827.3)

Operatingprofits

125.0

152.8

183.3

216.9

Operatingtaxes After‐taxoperatingprofits

(75.0) 50.0

(91.7) 61.1

(110.0) 73.3

(130.1) 86.8

1,044.2

25 20

10

0 Attribute1

Attribute2

Attribute3

Attribute4

Attribute5

Workingcapital

134.4

141.8

149.6

157.8

Plantandequipment Investedcapital

375.6 510.0

386.9 528.7

398.5 548.1

410.5 568.3

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

Sus Susta ta tainabilityofP inabilityofP inabilityofPerf erf erforma orma ormance nce Theheadofbuildingoperationswalksthehallsofthebusinessschooland noticesthecarpetisdated...

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

15

CorporateStrategyandValueCreation

C‐SuiteThinking

Slow SlowBurn Burn BurnofCap ofCap ofCapab ab ability ility ilityDec Dec Decaay Considertwoconveniencestore chains.Oneresetsitsstores everysevenyears,completely redesigningthespace,asifwith awhitesheetofpaper.

RevenueperStore 500 450 400

$thousands

Itscompetitorprovidesbasic maintenancebutnever redesignsthestore.Instead,it reliesonthecurrentdesign.

GrowththroughReinvestment

350 300 250 200 Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year 10

FormoreonWharton&McKinseythinkingregardinglong‐termthinking,seethebook: GoLong:WhyLong‐TermThinkingIsYourBestShort‐TermStrategybyDennisCarey,BrianDumaine,MichaelUseem,andRodneyZemmel

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

16

CorporateStrategyandValueCreation

C‐SuiteThinking

TooLit ooLittle,T tle,T tle,TooLat ooLat ooLate? e? “Idon’tknowhowmuchtime[Lampert’srestructuringplan]canbuywithashare priceof76cents.Itmightbuysometime,butit’snotgoingtobeverymuch.At somepoint,Searsisgoingtogooutofbusinessandnobody’sgoingtonotice.” saysThomasS.Robertson,Whartonmarketingprofessoranddirectorofthe school’sBakerRetailingCenter. Robertsonpointedoutthattheoptimaltimetomountaturnaroundplanfor Searswas20or25yearsago,whenthe125year‐oldbrandstillhadthecachetof beinga“greatAmericancompany.”“Theworldchangedandtheycontinuedto buildstoresandappealtoAmericansmovingtosuburbia,”hesaid.“Thatworked verywellforalongtime,butithasn’tworkedfor[thepast]20yearsandthey haven’tadapted.”

Source:http://knowledge.wharton.upenn.edu/article/sears‐restructuring/

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateStrategyandValueCreation

C‐SuiteThinking

Concludi ConcludingThough ngThough ngThoughts ts Thevalueofacompanycanbetracedtothreekeydrivers– organicrevenuegrowth,healthy returnsoncapital,andinvestingforthelong‐term. • Todriverevenuegrowth,getgranularaboutyourmarkets. Usetrendstoidentifyproducts, geographies,channels,andcustomersthathaveanaturalmomentum. Buildcapabilitiesthat allowyoutowininthesegmentsthathavemomentumandbestfitwithyourstrategy. • Tomanagehealthyreturnsoncapital,createadistinctiveadvantageinthemarket place. Creatingbest‐in‐classadvantagesrequiresfocus,solearnwhatmattersmosttoyour customerandinvesttherefirst. • Tocreateabusinessforthelong‐term,continuallyreinventyourcorebusinessthrough reinvestment.Stealingfromthecoreiseasy,butwithoutreinvestment,thecorelosesrelevance asmarketschange.

Valuecreationisaboutevaluatingtradeoffs. Althoughanactioncanleadtoanimprovement inonemetriclikerevenuegrowth,itmayhaveanadverseimpactonothermetrics,like returnoncapital. Alwaysidentifyandmanagethetradeoffstoeverydecision!

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateValuation

ACriticalAnalysisofGrowth

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ValueCreation: ACriticalAnalysisofGrowth ProfessorDavidWessels©2019 TheWhartonSchooloftheUniversityofPennsylvania 3620LocustWalk,PhiladelphiaPA19104

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CorporateValuation

ACriticalAnalysisofGrowth

SessionOv SessionOver er erview view Thevalueofacompanycanbetracedtofourkeyvaluedrivers:after‐taxoperating profit,returnoncapital,costofcapital,andabilitytogroworganically. Butchasingthewrongkindofgrowthcanleadtovaluedestruction.Inthis presentationweexamineattwoexamplesofgrowth. • Inthefirstexample,H&RBlockinvestsheavilyinorganicgrowth,butfaces “persistentandsubstantialunderperformance”asitgrowsthebusiness.What needstochange? • Inthesecondexample,“SoutheastBank”usesacapitalmarkettransactionto repositionthecompanytowardsgrowth,hopingtogenerateahighermultipleon earnings.Butdoesit?

ProfessorDavidWessels TheWhartonSchooloftheUniversityofPennsylvania

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CorporateValuation

ACriticalAnalysisofGrowth

TacticalGr acticalGrowth:H&RBlo owth:H&RBlo owth:H&RBlock ck H&RBlockExpectstoMeetEarningsOutlook KANSASCITY,Mo.(Reuters)‐ H&RBlockInc.(HRB)said Thur...