Capital value drivers

Perfect capital markets should see through the cycle and the reaction of valuations to purely cyclical fluctuations in the industry return on capital should be insignificant. To examine this, we again compared the actual valuation level to a fundamental predicted valuation level for commodity chemical companies. To pinpoint the effects of cyclicality, however, we used a slightly different approach. As we wanted to evaluate capital market expectations, we compared the actual valuation level with a fundamental valuation level based on perfect foresight , i.e., assuming that the capital market knew the actual development of the key value drivers for the next 8 years and evaluated this information in line with its implied fundamental value creation.4 Furthermore, we used a capital structure-adjusted market-to-book ratio instead of an earnings-based metric for the valuation level. 

On the business unit level, regardless of the type of business, chemical companies should focus on capital productivity as the key value driver of ROIC besides margins. 

Value creation 11-21, 26-35 Value-driver trees 156, 159 Vendor managed inventory (VMI) 84 Ventro 34 Venture capital funds biotechnology 67, 77 corporate 117-118 innovation 32, 114 Venture capitalists 31, 66-67, 118 Vertical integration 37, 40-42 Vestolit 39 Victrex 98 Vinnolit 39 Virtual crackers 43 Virtual organization 122 Vopak 34, 35... 

It is vitally important to translate the various outward-looking perspectives into measurable and concrete technical targets for production managers and front-line personnel. Detailed value-driver trees are an excellent tool for establishing a direct link between financial indicators at the corporate level - such as Return on Invested Capital - and hands-on technical indicators that mean something to a production unit, such as tonnes of steam per tonne of product (Fig. 12.3). 

There are three basic elements to entrepreneurship in chemical production (Fig. 12.6). The first - estabhshing entrepreneurial focus - means that performance targets have to be set which are driven by the capital markets in a participative process starting from the top - that is, at the business unit or divisional level -and which follow through a transparent value-driver tree in order to determine targets for the front line (see Section 12.2.1). The desired end product is a balanced scorecard for each operational unit with a clear Hnk to the overall profitability of the business unit... 

Companies can assess the potential value of any deal by considering how much scope they have to capitalize on five important value drivers, which are described below. 

Corporate responsibility auditing can also identify how capital has been allocated across departments and business units of the company and the level and types of risks to which the capital is exposed. An experienced audit team will advise on whether risks in one part of the company may exacerbate or ameliorate those in another and, in consultation with employees and managers, recommend process improvements, which the audit will undoubtedly yield, where risks are too high. This information can provide management with a clearer understanding of acceptable tolerance levels for key value drivers, and reliable data with which to respond proactively to shifts in the work environment, key markets, and in society. 

The largest element of the economic benefit comprises die journey benefits (in terms of reduced wait, in-vehicle or interchange time, improved comfort, quality of service and safety etc) as perceived by the existing public transport users as a result of the capital investment Non-user benefits (that is benefits to non-public transport users such as car drivers passengers) normally account for a small share of the total economic benefit for LUL projects. This is because a large proportion of the projects appraised are either relatively small scale in capital value or perceived to have limited influence on overall modal share between public and private transport particularly during the peak. 

The stated challenges require an analytical connection of the operational changes caused by the implementation of the SCI and an adequate business metric, such as the economic value added (EVA). In general, SCIs have a financial affect by influencing costs, revenues and capital commitment (Christopher Ryals, 1999 3f D Avanzo et al, 2003 43 Lambert Burduroglu, 2000 13 Pohlen Coleman, 2005 45f). In this context, the distinction between direct and indirect value drivers is important... 

Within the intra-organizational delimitation of the EVA factors, a scope of influence is given. The extent to which adjustments of the operating capital and the NOPAT can be made depends on the accounting standards upon which the company s annual financial statement is based. Dependently of the adjustments, the result of the EVA calculation can be influenced and, as a consequence, knowledge of the based accounting standards is necessary for the interpretation of the EVA. In the context of SCIs, the selection of the cost charges, for example, influences the relevance of the capital commitment in comparison with the other two value drivers. 

This chapter addresses the correlation between revenues and SCM. Thus, it goes further into the question of the extent to which SCIs contribute to a company s revenues. Quite contrary to costs and capital commitment, the impact of SCIs on revenues is of an indirect nature. In respect of SCM, the central value driver for revenues is logistics customer service, which provides a basis for customer satisfaction (e.g., Ballou, 2006 Ellram Liu, 2002 Pohlen Coleman, 2005). Customer satisfaction in turn affects the financial performance and the revenues of a company (e.g., Dresner Xu, 1995 Yeung, 2008). The known relations between logistics customer service and customer satisfaction, customer satisfaction and customer loyalty and customer loyalty and revenues is used to derive the nature of the correlation between logistics customer service and customer satisfaction. 

SCIs unfold their financial impact along the supply chain via the value drivers costs, capital commitment and revenues. Reproducing this mechanism, the quantification gqjproach introduced in the work at hand comprises three components The effect of SCIs on revenues is computed by a fiizzy logic model, which on costs and capital commitment is determined by a system dynamics-based simulation. Both models are embedded in a conceptual extrapolation framework that makes it possible to consider individual shiftings of SCIs on company-specific supplier and customer bases along the supply chain. The business metric used for measuring the value of an SCI is the EVA. 

The starting point for an advanced SHV orientation is a clear understanding of the company s capital market valuation. This may appear an obvious point, but in our experience many companies rarely go beyond tracking TRS in comparison with competitors and talking regularly to analysts and I-banks. There is more to it than that chemical companies need to develop a superior understanding of the drivers of their capital market valuation and potential gaps to their own best estimate of fundamental value. 

The project team must detail all past costs that the project has incurred since its inception (start of EvP) on an annual basis. In addition, an annual project financial information table (ProFIT) data sheet should be presented. This sheet contains the revenue and cost forecasts for the upcoming ten-year period. It computes net present value (NPV) of future cash flows and return on capital employed (ROCE) automatically. At this stage, the team is expected to include detailed production costs data as well as estimates of plant costs (based on an engineering estimate, for example). The ten-year projection should be provided for three scenarios base, optimistic, and pessimistic. These cases are not meant to be simple percentage changes of the sales projections. Instead, the team should try to identify the drivers of the project s success and construct alternatives for the future that lead to different results for the project. The base case should be the most likely case. The optimistic scenario should be based on the positive development of some (not all) key success factors. The pessimistic scenario is usually the minimum feasible case, meaning a situation where the organization would still prusue the project, but some factors do not develop in a positive way. 

Another important driver is the point about market cap. Capital markets value a stock more to the extent it earns profits beyond the certain return of a government bond. However, few companies have the means in place to ensure that threshold is reached. 

The five basic drivers of enhanced shareholder value are shown in Figure 3.4. They are revenue growth, operating cost reduction, fixed capital efficiency, working capital efficiency and tax minimisation. All five of these drivers are directly and indirectly affected by logistics management and supply chain strategy. 

Reductions in working capital will have a beneficial effect on an organisation s ROI. For example, inventory reductions increase both prohtability (reduced costs) and capital (increased asset utihsation). Supply chain decisions have an impact on costs and assets, so they affect both the drivers of ROI. Understanding the trade-offs involved is key to increasing value. 

---