2. Content
Introduction
Value Definition
The Stakeholder Theory
The Stakeholders
Creating Value for the Stakeholders
Corporate valuation Model
Value-Based Management
Measuring Shareholder Value – The Metrics
Understanding the Drivers of Value
The Four Fundamental Value Drivers
References
3. Introduction
• Value creation has been expressed in the business writings
as the main objective of Organizations
• an organization must create value for its owners or
shareholders whereas some insist that value must be created
not just for shareholders, but for stakeholders
4. Value Definition
Value is the capacity of a good, service, or an activity, or
activities of an organization to satisfy a need, or provide a
benefit to a person or legal entity.
5. The Stakeholder & Stakeholder
Theory
"A stakeholder in an organization is any group or individual
who can affect or is affected by the achievement of the
organization's objectives."
6. The Stake (1/2)
we consider a private company that produces goods
and/or services from facilities based in one or more
communities assuming that each stakeholder group
exists and has some significance for the survival and
well-being of the company.
7. The Stake (2/2)
1. Investors “Stockholders”
2. Employees
3. Customers
4. Suppliers
5. Society
8. Creating Value for the Stakeholders (1/3)
• The model presented describes how a private firm may create
value for each of its stakeholder groups.
• It also describes the activities, practices or conditions that may
destroy value for the stakeholders of a firm, or what value
stakeholders may have to give up in their relationships with the
firm.
• The model does not make a normative statement, or defend a
moral position; it simply lays out possible courses of action for
managers if they want to create value for the stakeholders of
the firm, or at least avoid actions that destroy value for them.
9. Creating Value for the Stakeholders (2/3)
• The major benefit of this model is in identifying the activities and
practices that may create value and those that can destroy value.
• Another contribution of the model is in introducing a usually
neglected dimension, time, when scholars study the stakeholder
management issues.
• Time is not a resource in the usual sense of the word, in that it
cannot be accumulated, multiplied, or stored.
• However, when managers are conscious of the benefits that can
be provided along the time dimension, they may become more
effective in creating value for the stakeholders.
10. Creating Value for the Stakeholders (3/3)
• The value definition involves satisfaction of a need or provision
of a benefit. Some activities of the firm may create benefits or
rewards for one group (value creation), while reducing, or
taking away, benefits from another group, or increasing risks
for them (value destruction).
• Therefore, we propose to study this process with respect to its
dual character: value creation and value destruction.
11. Value Creation & Destruction
• Value Creation: Benefits and rewards
• Financial
• Non Financial
• Time
• Value Destruction : Costs and risks
• Financial
• Non Financial
• Time
12. Corporate valuation Model
• It shows how corporate decisions affect stock holders
however decisions made by managers not by stockholders, and
maximizing shareholders wealth is not the same as individual
managers maximizing their own satisfaction
• The value of operations is the present value of all the future
free cash flows expected from operations when discounted at
the weighted average cost of capital and could be calculated as
follow:
13. Value-Based Management (1/3)
• Value-Based Management is the systematic application of
the corporate valuation model to all corporate decisions and
strategic initiatives.
• The objective of VBM is to increase Market Value Added
(MVA)
14. Value-Based Management (2/3)
• Corporate assets consist of:
Operating assets
Financial, or no operating, assets.
• Operating assets take two forms:
Assets-in-place (include the land, buildings, machines,
and inventory that the firm uses in its operations to
produce products and services)
Growth options refer to opportunities the firm has to
increase sales. They include opportunities arising from
R&D expenditures, customer relationships, and the like.
15. Value-Based Management (3/3)
• Financial, or non-operating, assets are distinguished from
operating assets and include items such as investments in
marketable securities and non-controlling interests in the
stock of other companies and its value is usually close to the
figure reported on the balance sheet.
16. Measuring Shareholder Value
The Metrics
The concept of shareholder value and how this can be
created and sustained this has, in turn, led to the
development of a number of “value metrics”, the most
significant of which are:
Shareholder value analysis (SVA)
Economic profit (EP) and economic value added (EVA)
Cash flow return on investment (CFROI)
Total business returns (TBR)
17. Understanding the Drivers of Value
The process of value driver definition has three phases
1. identification
2. prioritization
3. Institutionalization
21. The Four Fundamental Value
Drivers
1. Sales growth (g)
2. Operating profitability (OP=NOPAT/Sales)
3. Capital requirements (CR=Operating capital / Sales)
4. Weighted average cost of capital WACC
22. Improvements in MVA due to the
Value Drivers
• MVA will improve if: WACC is reduced
• operating profitability (OP) increases
• the capital requirement (CR) decreases
23. The Impact of Growth
• The second term in brackets can be either positive or negative,
depending on the relative size of profitability, capital requirements, and
required return by investors.
• If the second term in brackets is negative, then growth decreases MVA.
In other words, profits are not enough to offset the return on capital
required by investors.
• If the second term in brackets is positive, then growth increases MVA.
24. Expected Return on Invested
Capital (EROIC)
• The expected return on invested capital is the NOPAT
expected next period divided by the amount of capital that is
currently invested
• If the spread between the expected return, EROIC, and the
required return, WACC, is positive, then MVA is positive and
growth makes MVA larger. The opposite is true if the spread
is negative.
25. References
1. A model for corporate value creation by Rider university
2. Damodaran, Aswath - Investment Valuation 2nd edition
3. Valuation measuring and managing the values of companies 3rd
edition
4. Creating Value through financial Management by Matt H. Evans
5. CIMA article :Maximizing Shareholder Value “ Achieving clarity in
decision making”
6. CIMA article :Understanding corporate value “managing and
reporting intellectual capital”
7. Financial Management Theory and Practice 12th edition chapter 15
8. Dr Hussein Saudi Presentation for corporate valuation
