Managing for Shareholder Value

Preparation, Performance, Output and Grading

SCHEDULE

The emphasis of this course is primarily on integrating within a shareholder value framework what you have already learnt in other courses. The course will be delivered in 10 sessions. The first eight sessions will be held on May 10 and 11, from 8:30 am to 4.30 pm, with appropriate breaks. The final two sessions will be held on June 1, from 8.30 am to 12.30 pm. Given the format of the course, it is extremely important that you prepare ahead for the sessions.

GROUPS

The groups will be formed during the first day of classes (or earlier).

FINAL PRESENTATION

You should come prepared to present your analyses in every session. June 1 sessions will be devoted largely to group presentations.

WRITTEN REPORT

Each group will E-submit a written report, and also provide a hard copy. The report may consist simply of a set of transparencies that are self-explanatory, along with an executive summary.

GRADING

Your performance will be evaluated on the basis of your class contributions and team-based contributions. I shall seek team inputs regarding each member’s team-based contribution.

Text materials (available in Balmer Copycenter)

Optional K. V. Ramanathan, Accounting and Managing for Shareholder Value Creation.

Required K. V. Ramanathan, Managing for Shareholder Value--Readings and Cases.

Required K. V. Ramanathan, Managing for Shareholder Value—Handouts.

Text materials (available on internet)

Required A. Damodaran, Value Creation and Enhancement: Back to the Future.

The article can be accessed at:

http://www.stern.nyu.edu/~adamodar/pdfiles/papers/valcre.pdf

Illustrative Internet sites for corporate financial data

http://www.sec.gov/Archives/edgar/data/12927/0000012927-01-000004.txt

http://www.boeing.com/companyoffices/financial/

http://www.cfo.com/Pge_Channel_Article_Detail/1,4635,1|4|AD|2514|6,00.html

http://www.cfo.com/cfo_home

http://edgarscan.pwcglobal.com/servlets/getCompanyDetail?Name=BOEING+CO

http://edgarscan.pwcglobal.com/recruit/edu.html

http://www.freeedgar.com/Search/BeginSearch.asp

http://www.etrade.com/cgi-bin/gx.cgi/AppLogic+Home

http://cnnfn.cnn.com/markets/

http://www.quicken.com/

http://yahoo.marketguide.com/mgi/ratio/A16E8.html

http://finance.yahoo.com/

http://www.nasdaq.com/

http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm

http://finance.yahoo.com/q?s=^NDX&d=1y

Assignments

Sessions 1 # 2

Topic: THE ROE FRAMEWORK FOR MEASURING AND MANAGING VALUE CREATION

Objectives: Learn how businesses use financial models to measure and plan value creation in business.

Enhance your understanding of the ‘language of business’ used in financial statements.

Explore the Internet to track your company’s financial and management information.

Learn the usefulness of ROE (Return on Equity), ROA (Return on Assets), RONA (Return on Net Assets), and EP (Economic Profits) as integrated frameworks to direct and evaluate business performance.

Understand the limitations of ROE, ROA, RONA, and EP measures.

Learn to differentiate between profits and cash flows, and between book values and market values.
Learn how to use published reports to analyze a company's management policies and business performance.

Preparation

Guide: Access The Boeing Company financial statements from the Internet

K. V. Ramanathan, Accounting and Managing for Shareholder Value Creation..

Study Chapters 1,2, and 3: Refer to Glossary as needed

Assignment (See green booklet, Readings and Cases):

Use the worksheet labeled “Balance Sheet Changes” and compute key changes in the company’s financial position for the most recent two years. Evaluate the change data.

Use the Financial Ratios Worksheet to calculate financial ratios for the most recent two years. Enter your results in the accompanying ROE Scoreboard worksheet. Evaluate the firm’s financial performance. Could the firm’s performance during the most recent year have been better? What specific improvements would you suggest?

Using data for the most recent two years, analyze key financial changes at the corporate and segment levels. Evaluate the potential impact of these changes in the company’s future profitability, cash flows, growth, and market value. What conclusions would you draw?

Please come prepared to present (in ten minutes or less) your analysis.

Session #3

Topic: MANAGING GROWTH AND CASH FLOW FOR VALUE CREATION

The Cash Flow Model

Objectives: Understand the effect of typical business decisions on profitability, cash flow, and financial position.

Learn why firms can be profitable and yet go broke.

Learn why firms can grow broke.

Learn how cycle time and lean manufacturing affect cash flow.

Enhance your skills in planning and managing profitable and

financially affordable growth.

Preparation

Guide: K. V. Ramanathan, Accounting and Managing for Sharehgolder Value Creation.

Study Chapters 4, 5, and 6. Refer to Glossary as needed

Assignment: (See green booklet, Readings and Cases):

Case: Datamation Disk Protectors
After reading "Datamation Disk Protectors," use the accompanying worksheets to develop your analysis.

Compare your answers against those in the accompanying solution.

How would you propose to manage the company's growth?

Estimate The Boeing Company’s actual average annual growth rate.

Should the company grow faster? Slower? Why?

Session #4

Topic: MANAGING FOR SHAREHOLDER VALUE

Valuation and Performance Evaluation Models

Objective: Learn how investors estimate the market value of bonds and stocks.

Learn to estimate the impact of a company’s plans on its market value and shareholder value.

Learn the relationship between Market Value Added (MVA), Shareholder Value Added, Economic Value Added (EVA), and (projected) ROE, ROA, and RONA

Preparation

Guide: K. V. Ramanathan, Accounting and Managing for Shareholder Value Creation..

Study Chapter 8: Notes on Valuation Models.

Study A. Damodaran, A. “Value Creation and Enhancement: Back to the Future.”

The article can be accessed at:

http://www.stern.nyu.edu/~adamodar/pdfiles/papers/valcre.pdf

Study N. Fera,

“Using Shareholder Value to Evaluate Strategic Choices,” in Management Accounting, November 1997.

Study Chapter 3 “Shareholder Value Approach,” in Alfred Rappaport, Creating Shareholder Value: The New

Standard for Business Performance, The Free Press, 1998.

Assignment: Evaluate the strengths and weaknesses of the Shareholder Value Analysis Model presented by Rappaport.

What are the pros and cons in using shareholder value changes as a basis for rewarding managers and employees?

Session #5

Topic: MANAGING CAPACITY FOR VALUE CREATION

Cost Models to Aid Value-Based Performance

Objectives: Enhance your understanding of price, cost, and volume data for:

product profitability analysis;

production planning;

managing capacity, bottlenecks, and waste.

Enhance your skills in integrating process data with financial data

for analysis of management decisions.

Focus on the importance of aligning performance measures

and incentives with desired performance outcomes.

Enhance your understanding of:

the structure of formal cost systems, and

how to interpret cost data

Preparation Study: K. V. Ramanathan, Aerospace Manufacturing Company.

Guide: (See green booklet, Readings and Cases)

Assignment: Using data from the Aerospace Manufacturing Company,

complete the worksheet "Product Profitability Analysis."

Which product is more profitable?

Compute a break-even point using weekly data.

Develop a weekly production plan that will yield the maximum weekly profits.

Suggest ways to improve the company's profit performance.

How would you measure and reward worker productivity?

Session #6

Topic: MANAGING PROCESSES FOR VALUE CREATION

Activity based Models

How Many Micro-businesses Make up Your Value Chain?

Objectives: Become familiar with the methodology and usefulness of Process and Activity Analysis for:

(a) Continuous quality improvement;

(b) Strategic cost analysis;

(d) Driving down responsibility for profitability.

Enhance your knowledge of how process improvement leads to customer value and shareholder value improvement.

Preparation

Guide: Review M.E. Beischel, "Improving Production with Process Value Analysis: The Foundation for Activity Based Costing," in Journal of Accountancy, September 1990, pp. 53-57. (See green booklet, Readings and Cases.)

Review J. F. Castellano, et. al, “Minicompanies: The Next Generation of Employee Empowerment,” in

Management Accounting, March 1998.

Assignment: (See green booklet, Readings and Cases)

Case: The Boeing Company: Propulsion Systems Division (A)

Please come prepared to present (in ten minutes or less) your analysis as required at the end of the case and, particularly, in response to the question below.

What are the strong and week points of the PSD approach to process improvement?

Sessions #7

Topic: PROCESS IMPROVEMENT FOR VALUE CREATION

Objectives: Become familiar with the methodology and usefulness of Process and Activity Analysis in a Continuous Quality Improvement environment.

Learn to develop integrated performance scoreboards using financial and nonfinancial measures of performance.

Preparation

Guide: Review M. E. Beischel, "Improving Production with Process Value Analysis: The Foundation for Activity Based Costing," in Journal of Accountancy, September 1990, pp. 53-57. (See green booklet, Readings and Cases)

Assignment: Case: The Boeing Company: Propulsion Systems Division (B)

Complete the analysis as required at the end of the case.

Sessions #8

Topic: ENHANCING THE VALUE CREATION POTENTIAL OF NEW PRODUCTS

Target Costing Methodology

Objectives: Learn why managing upstream is critical to competitive success.

Enhance your familiarity with the methodology of designing products and processes to target performance, costs, and profitability.

Preparation

Guide: Study K. V. Ramanathan, Ricoh Company, Ltd., 1996. (See green booklet, Readings and Cases)

Assignment: What strategic issues and competitive pressures led to a renewed emphasis on better management of new product development and target costing in RICOH? How well did the new approach solve the particular problems addressed by the management? --and other broader issues faced by RICOH?

Summarize the key steps in RICOH’s new product development approach? Explain the rational behind each step?

Discuss the strengths and weaknesses in RICOH’s approach?

Discuss the strengths and weaknesses in The Boeing Company’s approach to new product development?

What lessons can be drawn from RICOH’s experience for The Boeing Company?

What initiatives would you propose to improve The Boeing Company practices in the area of new product design and process design? Estimate the likely impact of these initiatives upon the company’s future sales and profitability.

Sessions #9 & #10

Topic: SHAREHOLDER VALUE PERSPECTIVES FOR STRATEGIC PLANNING AND CONTROL

Objectives: Demonstrate how you would use shareholder value models to improve business planning and managerial performance.

Become familiar with key drivers of shareholder value.

Learn how to use shareholder value perspectives to develop strategic initiatives and a personal performance improvement plan.

Preparation

Guide: Access Internet data to develop the required financial and other relevant data.

K. V. Ramanathan, Accounting and Managing for Shareholder Value Creation..

Study Chapter 8: Notes on Valuation Models.

Study A. Damodaran, A. “Value Creation and Enhancement: Back to the Future.”

The article can be accessed at:

http://www.stern.nyu.edu/~adamodar/pdfiles/papers/valcre.pdf

Study N. Fera,

“Using Shareholder Value to Evaluate Strategic Choices,” in Management Accounting, November 1997.

Study Chapter 3 “Shareholder Value Approach,” in Alfred Rappaport, Creating Shareholder Value: The New

Standard for Business Performance, The Free Press, 1998.

Assignment: Each group will submit a brief written report. (See detailed instructions in page 1 of these assignments.)

Each group will also come prepared to make an oral presentation of its report covering the following:

Estimates of key value drivers for the Boeing Company (or the company of your choice). Present the underlying rationale.

Using your estimates of key value drivers, compute the likely shareholder value for the company.

Compare your results against the reported market price of the company shares. How would you account for the difference?

How sensitive is the company’s share price to changes in the estimates of key value drivers? What conclusions would you draw from the sensitivity analysis?

How congruent are the company’s performance measurement and incentive systems with the goal of shareholder value creation?

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