8/7/2019 Corporate Value Creation 1

1/24

Corporate Value CreationCorporate Value Creation

Dr Sheeba KapilDr Sheeba Kapil

8/7/2019 Corporate Value Creation 1

2/24

AA-- Pharma co: 500 cr economic profitPharma co: 500 cr economic profit

BB-- Steel co: 250 cr economic lossSteel co: 250 cr economic loss

8/7/2019 Corporate Value Creation 1

3/24

Industry level Competitive ForcesIndustry level Competitive Forces

8/7/2019 Corporate Value Creation 1

4/24

Pharma industry: more attractive than steelPharma industry: more attractive than steelPatent protection, product differentiation,Patent protection, product differentiation,

expanding demand, users hesitate to switchexpanding demand, users hesitate to switch

products & brands, labour costs lessproducts & brands, labour costs less

Steel industry:Steel industry:

users switch easily to get better price, labour costsusers switch easily to get better price, labour costs

high, excess capacity, ltd difference acrosshigh, excess capacity, ltd difference across

products, slow growthproducts, slow growth

8/7/2019 Corporate Value Creation 1

5/24

Profit level of firms across industries differProfit level of firms across industries differ

Within industry differences in profitabilityWithin industry differences in profitabilitymay be larger thanmay be larger than

differences across industriesdifferences across industries

8/7/2019 Corporate Value Creation 1

6/24

RRumelt, how much does industryRRumelt, how much does industrymatter?, strategic mngt journal, 1991, ppmatter?, strategic mngt journal, 1991, pp

167167--185185

Mcgahan, porter, how much doesMcgahan, porter, how much does

industry matter really?", strategic mngtindustry matter really?", strategic mngtjournal, 1997, summer special issue,journal, 1997, summer special issue,

pp15pp15--30.30.

8/7/2019 Corporate Value Creation 1

7/24

8/7/2019 Corporate Value Creation 1

8/24

Competitive AdvantageCompetitive Advantage

8/7/2019 Corporate Value Creation 1

9/24

Cos try to create a Wide wedge between:Cos try to create a Wide wedge between:

willingness to pay & cost incurredwillingness to pay & cost incurred

Wider wedge than its competitorsWider wedge than its competitors

This Wider wedge helps the firm toThis Wider wedge helps the firm toearn superior profits within its industryearn superior profits within its industry

How to create this W W?How to create this W W?

8/7/2019 Corporate Value Creation 1

10/24

Added value: unique and valuableAdded value: unique and valuable

Integrated set choices that distinguish itIntegrated set choices that distinguish it

competitorscompetitors

8/7/2019 Corporate Value Creation 1

11/24

More is firms added value: greater potentialMore is firms added value: greater potentialprofitprofit

Firm can boost its added value by wideningFirm can boost its added value by wideningthe wedgethe wedge

Firm with

wider wedgehas C

Ain its industryFirm wit

hwider wedge

has C

Ain its industry

Firm with CAhas added value & potential forFirm with CAhas added value & potential for

profitprofit

8/7/2019 Corporate Value Creation 1

12/24

Firm can achieve C

AbyFirm can ac

hieve C

Aby

raise willingness to pay with slightraise willingness to pay with slight

increase in costs (differentiation strategy)increase in costs (differentiation strategy)

Reap large cost savings with only slightReap large cost savings with only slight

decrease in customer willingness to paydecrease in customer willingness to pay(low cost strategy)(low cost strategy)

8/7/2019 Corporate Value Creation 1

13/24

8/7/2019 Corporate Value Creation 1

14/24

8/7/2019 Corporate Value Creation 1

15/24

Activity analysisActivity analysis

Catalog major elements of value chainCatalog major elements of value chain

Calculate costs associated with each classCalculate costs associated with each class

of activity (variable costing & absorptionof activity (variable costing & absorptioncosting)costing)

Determine the cost drivers associated withDetermine the cost drivers associated with

each activityeach activityCost drivers help in estimatingCost drivers help in estimating

competitor's cost positioncompetitor's cost position

8/7/2019 Corporate Value Creation 1

16/24

Activities do not just generate costsActivities do not just generate costs

They make customers willingness to payThey make customers willingness to pay

Differences in activities account forDifferences in activities account forcustomers willingness to paycustomers willingness to pay

Any activity in value chain can effectAny activity in value chain can effectcustomers willingness to paycustomers willingness to pay

Willingness to pay calculator?Willingness to pay calculator?

How much customers would pay for anyHow much customers would pay for any

combination of activity.combination of activity.

8/7/2019 Corporate Value Creation 1

17/24

Globalization vs consolidationGlobalization vs consolidation

Economies of scaleEconomies of scale

Herfindhal indexHerfindhal index

8/7/2019 Corporate Value Creation 1

18/24

Herfindhal indexHerfindhal index

Relative degree of industry concentrationRelative degree of industry concentration

Sum of square of market share of cos inSum of square of market share of cos in

an industryan industry

8/7/2019 Corporate Value Creation 1

19/24

GROWTHGROWTH

8/7/2019 Corporate Value Creation 1

20/24

Organic growthOrganic growth

Inorganic growthInorganic growth

8/7/2019 Corporate Value Creation 1

21/24

CompanyCompany 9595--0000

cagrcagr

Inter gInter g AcqtAcqt Price InPrice In CoreCore

gg

JPMorgan chase

JPMorgan chase 31.3%31.3% 9.

49.

412.

312.

3 4.5

4.5 5.15.1

BoeingBoeing 21.121.1 4.84.8 6.76.7 1.71.7 7.97.9

DisneyDisney 15.915.9 1.31.3 6.36.3 1.61.6 6.76.7

Exxon mobilExxon mobil 13.413.4 6.96.9 3.03.0 10.510.5 --7.07.0

AlcoaAlcoa 12.912.9 2.02.0 6.26.2 +1.0+1.0 5.75.7

Emerson electricEmerson electric 9.29.2 3.33.3 2.52.5 +2.8+2.8 6.26.2

Georgia pacificGeorgia pacific 9.29.2 0.70.7 3.93.9 4.74.7 --0.10.1

MetlifeMetlife 7.97.9 +3.0+3.0 5.45.4 4.54.5 1.01.0

GilletteGillette 6.56.5 1.91.9 3.33.3 1.41.4 --0.10.1

CaterpillarCaterpillar 5.55.5 2.32.3 0.60.6 1.71.7 0.90.9

P&GP&G 3.63.6 1.51.5 0.70.7 1.41.4 00

8/7/2019 Corporate Value Creation 1

22/24

8/7/2019 Corporate Value Creation 1

23/24

SABMILLERSABMILLER

African brewer:

Int. conglomerate

International acquisitionsUS, central Europe, Africa,

Asia

2000: Narang Breweries : Lucknow

2001: Mysore Breweries Ltd, Rochees Breweries Ltd

2003: Shaw Wallace: Beer Division (Strong Brand Haywards)

2006: Fosters India: Maharashtra

Mohan Meakins Acquisition Attempt

8/7/2019 Corporate Value Creation 1

24/24

A Firms Internal and External GrowthA Firms Internal and External Growth

StrategiesStrategies

Corporate

And Business

Strategies

Market/Customer

Insights

M&A/JVs

(External Growth)

Value Chain:

Core

Competencies

Identification

Increased

Capabilities

(Internal

Growth)

Increased

Performance

Outsourcing (Non-

Core

Competencies)

External

Market

and Other

Forces

Commercial

Organizational

Team/Individuals

Technological