Valuation
Measuring and Managing the Value of Companies
5th Edition
Chapter 20 Solutions
Performance Management
Chapter 20
Question 1
Commentary
The value-driver approach establishes a set of short-term to long-term metrics,
which is tailored to the industry and strategy. It should define how the inputs
and initial targets eventually influence the financial inputs ROIC, growth and
the cost of capital to determine intrinsic value. The balanced scorecard
approach focuses on other aspects of the firm rather than on the financial
success. The other aspects might be customer satisfaction, internal business
processes, learning, and revenue growth.
Chapter 20
Question 2
Commentary
Setting targets helps in the understanding of value drivers and keeping focus on
the goals that safeguard the company’s health. It can help give insights into
ways to improve in the future. A drawback is that sometimes firms set point
targets, which may be realistic but do not give an idea of an acceptable range.
Setting a range can be more useful, e.g., a base acceptable level and a higher
level for which there is additional compensation; however, this can be more
complicated. Also, there is the risk of focusing too hard on the targets and
ignoring the bigger picture or even setting the wrong targets.
Chapter 20
Question 3
Commentary
Short-term value drivers fall into three categories: sales productivity, operating
cost productivity, and capital productivity. An example would be a fast-food
restaurant that would try to boost its daily sales while minimizing the costs of
labor while keeping an optimal inventory of food and petty cash.
Chapter 20
Question 4
Commentary
Medium-term value drivers fall into three categories: commercial health, cost
structure health, and asset health. An example would be a car brand where
the commercial health is the brand loyalty and reputation for quality and
service, the cost structure health is the ability to make cars at a reasonable
price, and asset health is the potential for innovation in the future.
Chapter 20
Question 5
Fast Food Restaurant
Traditional
Growth
Revenue
Value ROIC Costs
Capital
WACC
Customer Value Tree
Number
Advertising
Value Loyalty Quality and price
Cost of quality
Profit
Branch Value Tree
Variety of meals
Value per meal
Margin of each type
Value
Management costs
Number of meals