4. The World’s Most Valuable Companies: Performance Under Different Profitability Measures 7.2 6.4 13.7 17.3 8.7 190 Procter & Gamble (11.8) 1.0 16.3 23.0 15.9 190 HSBC n.a. 7.1 9.8 28.1 7.3 196 Gazprom (22.1) 4.8 13.0 10.7 12.1 197 Toyota Motor (10.3) 8.1 21.4 5.5 11.2 197 Wal-Mart 11.8 11.6 26.7 14.7 25.3 211 Royal Dutch Shell 2.4 1.2 14.1 27.0 16.5 212 Bank of America 10.2 10.7 27.9 9.9 22.3 233 BP 4.6 1.5 21.9 22.0 24.6 239 Citigroup (0.9) 18.8 30.0 40.3 12.3 281 Microsoft (1.5) 14.7 22.2 10.7 16.4 363 General Electric 11.7 17.8 34.9 19.9 36.1 372 Exxon Mobil RETURN TO SHARE-HOLDERS (%) RETURN ON ASSETS (%) RETURN ON EQUITY (%) RETURN ON SALES (%) NET INCOME ($BN) MARKET CAP. ($BN.) COMPANY
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7. OPTION VALUE Financial options Real options Stock price Exercise price Uncertainty Time to expiry Dividends Risk-free Interest rate Risk-free interest rate Value lost over duration of option Duration of option Uncertainty Investment cost Present value of returns to the investment = = = = = = The greater the NPV, the higher the option value The higher the cost, the lower the option value Higher volatility increases option values T ime = opportunity to learn about outcomes Loss of cash flow t o f ully - committed competitors lowers option value H igher interest rate increases option value by increasing value of deferring investment Comments
8. OPTION VALUE Financial options Real options Stock price Exercise price Uncertainty Time to expiry Dividends Risk-free Interest rate Risk-free interest rate Value lost over duration of option Duration of option Uncertainty Investment cost Present value of returns to the investment = = = = = = Higher NPV raises option value Higher cost lowers option value Higher volatility increases option value More time allows more information to be taken into account As profit is lost to rivals, option value is lowered A higher interest rate increases option value by increasing the value of deferring investment Comments The six levers of financial and real options
9. ROCE Margin (Return on Sales) Asset productivity (Sales/Capital Employed) COGS/Sales Depreciation/Sales SGA expense/Sales Fixed asset turnover (Sales/PPE) Inventory Turnover (Sales/Inventories) Creditor Turnover (Sales/Receivables) Turnover of other items of working capital Performance Diagnosis: Disaggregating Return on Capital Employed
10. Shareholder value creation ROCE Economic Profit Margin Capital Turnover Sales Targets cogs/ sales Development Cost/Sales Inventory Turnover Capacity Utilization Cash Turnover Order Size Customer Mix Sales/Account Customer Churn Rate Deficit Rates Cost per Delivery Maintenance cost New product development time Indirect/Direct Labor Customer Complaints Downtime Accounts Payable Time Accounts Receivable Time CEO Corporate/Divisional Functional Departments & Teams Linking Value Drivers to Performance Targets
11. Balanced Scorecard for Mobil N. American Marketing & Refining F I N A N C I A L F1 Return on Capital Employed F2 Cash Flow F3 Profitability F4 Lowest Cost F5 Profitable Growth F6 Manage risk Strategic Objectives Financially Strong * ROCE * Cash Flow * Net Margin * Full cost per gallon delivered to customer * Volume growth rate Vs. industry * Risk index Strategic Measures C O U M S E T R - C1 Continually delight the targeted consumer C2 Improve dealer/distributor profitability * Share of segment in key markets * Mystery shopper rating * Dealer/distributor margin on gasoline * Dealer/distributor survey Delight the Consumer Win-Win Relationship I1 Marketing 1. Innovative products and services 2. Dealer/distributor quality I2 Manufacturing 1. Lower manufacturing costs 2. Improve hardware and performance I3 Supply, Trading, Logistics 1. Reducing delivered cost 2. Trading organization 3. Inventory management I4 Improve health, safety, and environmental performance I5 Quality I N T E R N A L * Non-gasoline revenue and margin per square foot * Dealer/distributor acceptance rate of new programs * Dealer/distributor quality ratings * ROCE on refinery * Total expenses (per gallon) Vs. competition * Profitability index * Yield index Delivered cost per gallon .Vs. competitors * Trading margin * Inventory level compared to plan & to output rate * Number of incidents * Days away from work * Quality index L E & A G R R N O I W N T G H L1 Organization Involvement L2 Core competencies and skills L3 Access to strategic information * Employee survey * Strategic competing (?) availability * Strategic information availability Safe and Reliable Competitive Supplier Good Neighbor On Spec On time Motivated and Prepared
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