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HBR Review: Managing Shareholder Value - From Top to Bottom


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A review of a HBR masterpiece: Managing Shareholder Value, from Top to Bottom

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HBR Review: Managing Shareholder Value - From Top to Bottom

  1. 1. HBR Review Managing for Shareholder Value – From Top to Bottom David L. Wenner and Richard W.LeBer What does being successful mean? It means different things to different people! Swarnali Choudhury Saurabh Ranadive Neetha Joy Sarang Bhutada
  2. 2. Situation <ul><li>Appraisal Criteria in Industry </li></ul><ul><li>What is SVA? </li></ul><ul><li>Why SVA? </li></ul><ul><li>Organizations and SVA </li></ul><ul><li>Key Value Drivers and the disconnect </li></ul><ul><li>Satyam Maytas Fiasco – Real challenges in identifying key drivers </li></ul>06/07/09 Presented by: Saurabh 700 300 200 800 600 1400 900 500 Price of acquiring business Investments in acquired business Dividends Repaid Net Investments PV of Net Investments PV of acquired business Time Value of Net Investments Value Destroyed Shareholder Value Return - Cost of Capital Cost of Capital - Growth = 1 + Positive Economic Profit Stable Earnings Sustainable Growth
  3. 3. <ul><li>‘ Learning Anxiety’ in organisations </li></ul><ul><li>Lack of skills/motivation </li></ul><ul><li>Software tools & techniques </li></ul><ul><li>The 80/20 rule </li></ul><ul><li>Complexities in the Indian Context- </li></ul><ul><ul><li>Family-run businesses (The Britannia Story) </li></ul></ul><ul><ul><li>Tata JLR Deal: Complexities factored in? </li></ul></ul>Complexities How do we build SV-driven organizations? 06/07/09 Presented by: Neetha 65 Percentage of total economic value Org <ul><li>Strategy </li></ul><ul><li>Mission/Vision </li></ul><ul><li>Strategy maps </li></ul><ul><li>Targets </li></ul><ul><li>Initiatives </li></ul><ul><li>Organization Alignment </li></ul><ul><li>Corporate Role </li></ul><ul><li>Corporate – Divisions </li></ul><ul><li>Common services </li></ul><ul><li>External Partners </li></ul><ul><li>Everyone’s job </li></ul><ul><li>Strategic awareness </li></ul><ul><li>Goal alignment </li></ul><ul><li>Linked Incentives </li></ul><ul><li>Continual Process </li></ul><ul><li>Linked to budgeting </li></ul><ul><li>Linked to operations </li></ul><ul><li>Feedback Systems </li></ul><ul><li>Learning Process </li></ul><ul><li>Executive Leadership </li></ul><ul><li>Co-opted decisions between CEO/Board </li></ul><ul><li>Performance Culture </li></ul>11 3 -2 14 5 3 2 -1 100 85 Sector A Sector B Sector C Total Market Value
  4. 4. <ul><li>Setting a management agenda </li></ul><ul><li>Restructuring the corporation </li></ul><ul><ul><li>portfolio, financial and asset redeployment </li></ul></ul><ul><li>Managing Individual Businesses </li></ul><ul><li>The MindTree example </li></ul><ul><li>Breaking the barriers: </li></ul><ul><ul><li>Skill </li></ul></ul><ul><ul><li>Motivation </li></ul></ul>Solutions 06/07/09 Presented by: Swarnali CORPORATE OBJECTIVE Shareholder Value Added (SVA) <ul><li>Total Shareholder </li></ul><ul><li>Return </li></ul><ul><li>Dividends </li></ul><ul><li>Capital gains </li></ul>VALUATION COMPONENTS KEY VALUE DRIVERS KEY MANAGEMENT DECISIONS Cash flow from operations Discount rate Debt Value growth duration <ul><li>Working capital </li></ul><ul><li>investments </li></ul><ul><li>Fixed capital </li></ul><ul><li>investments </li></ul><ul><li>Sales growth </li></ul><ul><li>Operating profit </li></ul><ul><li>margin </li></ul><ul><li>Income tax rate </li></ul>Cost of capital Operating Investment Financing
  5. 5. <ul><li>Fundamentals of a business should be a part of ‘key drivers’ for SVA </li></ul><ul><li>SVA is a comprehensive methodology, to benchmark organizations </li></ul><ul><li>SV concepts should drive not just strategic , but tactical decisions as well </li></ul><ul><li>Conclusion </li></ul><ul><li>In the interest of shareholders, SV should be the foundation of all important business decisions. Although technical capability exists, the key is to build skill and motivation to use SVA consistently and well. </li></ul>Research on Forbes 15 firms in India Only 4 companies have ‘shareholder value’ embedded in companies’ values Tata group companies did not show a surprise! 06/07/09 Presented by: Sarang Results and Conclusion Sr No Company Industry M/V/Goals 1 Reliance Industries Oil & Gas Operations No 2 Oil & Natural Gas Oil & Gas Operations Yes 3 State Bank of India Group Banking No 4 Indian Oil Oil & Gas Operations No 5 National Thermal Power Utilities No 6 Icici Bank Banking Yes 7 Steel Authority of India Materials No 8 Tata Steel Materials No 9 Tata Consultancy Svcs Business Services & Supplies No 10 Tata Motors Capital Goods No 11 Bharti Airtel Telecommunications Services No 12 Wipro Business Services & Supplies No 13 GAIL (India) Utilities No 14 ITC Food, Drink & Tobacco Yes 15 Infosys Technologies Business Services & Supplies Yes
  6. 6. Thank you Questions, any?