BCG’S VALUE MANAGEMENT FRAMEWORK.pptVIP

BCG’S VALUE MANAGEMENT FRAMEWORKAN OVERVIEW FOR MBA STUDENTS By Rawley Thomas Director of Research WHAT GETS MEASURED GETS DONE MANY ASSETS FOLLOW THE SAMEUSEFUL OUTPUT PATTERN AS A CAR ... THE MARKET EXPECTS THE PERFORMANCEOF MERCK TO FADE ...(REGRESS TOWARD MEAN PERFORMANCE) APPROACH TO IMPLEMENTATIONWhat Full Effort Might Look Like COMPARISON OF COST OF CAPITAL MEASUREMENT METHODS STUDIES USING MARKET DERIVED METHODS BCG/HOLT RESEARCH USING MARKET DERIVED METHODSby Rawley Thomas MARKET DERIVED DISCOUNT RATE BCG’S METHOD FOR DERIVING INVESTOR DISCOUNT RATES (WACC’s) DIFFERS FROM TRADTIONAL CAPM METHODS.WE START WITH A SAMPLE AND A VALUATION MODEL TO DERIVE A WACC. THEN WE SPLIT THE WACC INTO ITS DEBT AND EQUITY COMPONENTS. FROM THE EQUITY RATE, WE CALCULATE THE RISK PREMIUM OVER GOVERNMENT BOND RATES. CFROI’S CORRELATE HIGHLY WITH THE FUNDAMENTALS OF INFLATION, AND CORPORATE TAXES1996 DISCOUNT RATE SAMPLE TO SMOOTH ECONOMIC CYCLES, BUT INCORPORATE STRUCTURAL SHIFTS, BCG’S VALUATION MODEL ASSUMES CURRENT CFROI LEVELS FADE TOWARD THE 5-YEAR PAST MEDIAN OF THE DISCOUNT RATE SAMPLE AT A 10% RATE BCG’S VALUATION MODEL ANTICIPATES THAT THE GROSS ASSET GROWTH RATE OF ALL COMPANIES IN THE USA FADE TOWARD THE LONG TERM ECONOMY AVERAGE THE INVESTORS’ DISCOUNT RATE IS THAT RATE WHICH EQUATES THE PRESENT VALUE OF CASH FLOWS FROM BCG’S VALUATION MODEL TO THE MARKET VALUE OF DEBT AND EQUITY CALCULATION OF FUTURE CASH FLOWS AND PRESENT VALUES1996 DISCOUNT RATE SAMPLE PAST RESOURCES COMMITTED1996 DISCOUNT RATE SAMPLE CALCULATION OF ASSET ADDITIONS1996 DISCOUNT RATE SAMPLE BCG DECOMPOSES THE WEIGHTED AVERAGE REAL COSTS OF CAPITAL INTO THEIR DEBT AND EQUITY COMPONENTS USING MARKET WEIGHTS MARKET % DEBT/TOTAL CAPITAL HAS DECLINED SIGNIFICANTLY SINCE 1990 Real Equity Discount Rates Decompose into the Fundamentals of Tax Premiums, Leverage Risk Premiums, CFROI’s Sub-Par ReturnsUSA - 1950-1997 CFROI’S NORMALLY EXCEEDTHE MARKET DERIVED DISCOUNT RATES1996 DISCOUNT RATE