Value Creation Thinking: Powerpoint Presentation

Bartley J. Madden
DePaul University – Center for Strategy, Execution and Valuation

May 30, 2016

Abstract:

Long-term value creation begins with clarity about the purpose of the firm and about management’s core responsibilities. Value creation is critically tied to how well management develops and maintains a knowledge-building culture. These ideas are plainly communicated in this PowerPoint presentation which summarizes my book, Value Creation Thinking. The presentation is well suited for classroom discussion and includes an explanation of the life-cycle valuation model, which is used extensively by money management firms worldwide. Also included are long-term, life-cycle charts of major firms that illustrate how managerial skill and competition interact to determine firms’ long-term financial performance and, ultimately, shareholder returns.

Value Creation Thinking: Powerpoint Presentation – Introduction

For many, it is all too easy to lose sight of the primary benefit to society from business firms which is the value to customers that use their products and services. While America is losing trust in capitalism, cronyism (think how business is done in Italy and Greece) is on the rise. Cronyism removes a level competitive playing field and puts a premium, not on efficiency and innovation, but on lobbying skill in Washington to seek special treatment. We should all want free-market capitalism to triumph over crony capitalism. America needs a level competitive playing field in which value created is shared in approximate proportion to the contribution made, thereby nurturing an opportunity rich society in which people can rise as high as their skills and determination can take them.

We need an insightful understanding of how business firms create value over the long term and how that value is reflected in stock prices. The thrust of this book, displaying long-term track records of value creation and dissipation, is to promote the life-cycle valuation framework, which is used extensively worldwide by institutional portfolio managers, as the sensible way to meet these needs. A way that enables us to better understand history as well as improve management practices. The ideas in this book offer a path forward for managements and boards to deliver enhanced firm performance, driven by employees who trust in, and share a purpose with, management. All of a firm’s stakeholders would benefit.

The Interrelated Components Of Purpose

Value Creation

We will strive to fulfill the firm’s vision while instilling high ethical standards throughout the firm. We will survive and prosper by delivering a level of efficiency and innovation that earns customer loyalty and rewards long-term shareholders. We will strive for win-win relationships that provide value for those who partner with us in serving our customers. We will take care of future generations by designing our products and services, and using our assets, consistent with environmental sustainability.

Management’s Core Responsibilities

Value Creation

  1. To integrate an operationally useful valuation framework
  2. To use resources efficiently and organize for continuous improvement
  3. To sustain a knowledge-building culture focused on innovation

Life-Cycle Valuation Framework

Value Creation

The rate at which a firm’s profitability fades over time depends primarily on management’s skill relative to competitors.

The Key Benefits Of The Life-Cycle Valuation Framework

  • Understanding investor expectations implied in current stock prices,
  • making insightful forecasts of plausible future scenarios within the context of firms’ past performance, and
  • judging the impact of management’s strategy and capital outlays in terms of how much wealth is likely to be created or dissipated.

A Firm’s Life-cycle Track Record Has Three Panels

The top panel displays economic returns calculated as a CFROI (cash-flow-return-on-investment). CFROIs are inflation adjusted, sometimes referred to as real as opposed to nominal. They remove a variety of accounting distortions so the result is a more accurate readout of “true” economic returns than the conventional RONA (return-on-net-assets). Importantly, real CFROIs are directly comparable for levels and changes over long time periods that include varying inflation rates. The top panel also displays the long-term corporate average CFROI as a dark horizontal line at 6 percent to approximate the real cost of capital.

The middle panel reflects a firm’s reinvestment rate calculated as a real asset growth rate. The bottom panel indicates a firm’s total shareholder return (dividends plus price appreciation) relative to the S&P 500 index. Out-performance is seen as a rising trend for the relative wealth line; market-matching performance is shown as a flat trend; and underperformance shows as a declining trend. Shareholder returns above or below the S&P 500 Index are driven by firms delivering life-cycle performance (economic returns and reinvestment rates) that exceed or fall short of investors’ expectations at the beginning of the time period.

EASTMAN KODAK dominated the film and camera market for decades but failed to adapt to changing technology (digital photography).

Value Creation

See full PDF below.