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Agenda for today‟s session

• Structured Problem Solving – using the 7 step methodology

• Conducting Analysis

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Problem solving is the essence of consulting……

Essence of a good consultant How????

•Understanding and articulating the


client problem that the project will
solve.
Taking complex problems, analysing them
•Thinking creatively about innovative,
and communicating findings so that
value-adding way to solve the client
clients want to take action
problem

•Decomposing the problem into key


issues to analyze and hypotheses to
test
The 7-step problem solving methodology is a structured approach
to problem solving and makes use of logical tools at each step….

Think disaggregation and Think IMPACT and


early hypothesis: what EFFICIENCY: which
Think impact: what
could be the key elements parts of the tree are
do I need to know
of the problem and do most important for
and how do I frame
they create early insight me to focus on?
the problem?
into the answer?

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
Think next iteration:
7 analyses
what are user/team‟s Communication and
next priorities? Develop
recomm work
endations 5
6 Think effectiveness:
Synthesise Conduct How can the
findings Analyses resources be utilized
and work optimally?
xxxx xxxxxx
xxxxxx xxxxxx

Think buy-in and Think “So what”: how do Think answers not xxxxxx xxxxxx
xxxxxx xxxxxxxx
xxxxxx xxxxxxxx

actionable solution I use the findings to tell a analysis: what is the


: Is it clear what the compelling story? simplest fact-based
client needs to do approach that will prove/
and how to do it? disprove each issue?

3
Step 1: Problem Definition

Think impact: what


do I need to know?

2 3
Client 1
problem
structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Develop and
recomme- work
ndations 6 5
Synthesis findings Conduct
analyses

SOURCE: McKinsey
4
Problem definition worksheet is a tool that consultants use
during the problem definition stage

Basic question to be resolved


Defines what must be resolved to deliver impact for the client. The question should Think
be SMART. The more specific the statement the better, provided it is not so narrow
that the “wrong” problem is addressed
SMART

Perspective and context Stakeholders


Spells out the situation and complication Identifies primary decision makers (e.g.,
facing the client e.g., trends in the CEO, Division Manager) as well as internal
industry, relative position in the industry and external parties can support( or derail)
etc the project (e.g., shareholders, regulatory
authorities, SBU managers).

Criteria for success Scope of solution space


Defines success for the project. Must be Indicates what will and will not covered
shared by client and the engagement by the engagement team. Including
team. Should include relevant accuracy and quality expectation.
quantitative and qualitative measures
e.g. visible improvements, effect on staff
mindset, market share growth, etc

Constraints within solution space Key sources of insight


Defines the limits of the set of solutions Research on where expertise,
that can be considered – e.g. team can knowledge, engagement methodology
only consider organic growth and not exist both internally (within the firm) and
inorganic externally (client, specialist firms etc)
e.g. Practice databases,
5
“SMART” stands for…..

• Specific

• Measurable

• Action-oriented

• Relevant (to the key problem)

• Time-bound

6
PROBLEM STATEMENT WORKSHEET – EXAMPLE

Basic question to be resolved


How can ABC Bank close the N1 billion profitability gap in 2 years and create a sustainable economic
platform for the future?

1 3
Perspective/context Decision makers/stakeholders
• Consolidation • CEO of ABC Bank
• Deregulation leading to many new non-traditional • ABC Board of Directors
players e.g. microfinance banks • Shareholders
• Banking crisis • CBN
• Emergence of internet and electronic-banking
2 4
Criteria for success Scope of solution space
Close the N1billion gap within 2 years • Focus on retail banking only
• Focus on Nigeria only

5 6
Constraints within solution space Key sources of insights
Keep operating the bank as an independent Pass studies on banking, CBN website, Financial
company and banking databases and journals etc
Step 2: Problem Structuring

Think disaggregation and


early hypothesis: what
could be the key elements
of the problem and do
they create early insight
into the answer?

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Communication and
Develop
recomm work
endations 5
6
Synthesise Conduct
findings Analyses
and work

8
Principle of structured problem solving

Key advantages
• Facilitates problem-solving
– Parts of problem easier to
handle
– Ensures completeness
– Focus topics more easily
recognisable

• Facilitates planning
– Working in parallel possible
– Difficulties easier to detect
– Scheduling more transparent
– Goal-oriented approach

• Facilitates communication
– Concentration on key topics
– Context clearer

SOURCE: McKinsey
Logic trees are tools that help to systematically structure a problem

Second line
of support
Problem First line
Statement of support

Consistent
Worksheet

Basic Relevant
Mutually
question to Exclusive
be resolved
Collectively
Exhaustive

Consistent
Logic trees are the link between the problem statement worksheet
and a list of manageable questions
Why use logic trees?

1. To break a problem into component


Sub-issue parts so that
Issue/ • Problem-solving work can be
hypothesis 1 divided into intellectually
manageable pieces
Sub-issue • Priorities can be allocated to
individuals

Sub-issue 2. To maintain the integrity of the


problem-solving approach
Problem Issue/ • Solving the parts will really solve
statement hypothesis 2 the problem
Sub-issue • The parts are mutually exclusive
and collectively exhaustive
(i.e., no overlaps, no gaps)

Sub-issue 3. To build a common understanding


Issue/ within the team of the problem-
hypothesis 3 solving framework
Sub-issue
4. To help focus the use of organizing
frameworks and theories
Difference between issue tree and hypothesis tree

Data-Driven – “Why?”

Starts with the problem and


decompose it to arrive at a Problem/Issue
solution.

Hypothesis-Driven – How?

Starts with a potential


solution and develop a
rationale to validate or Problem/Issue

disprove it
“MECE” means – a problem that has no overlaps and presented
in its entirety

M utually
Mutually exclusive:
Statements do not overlap
in content
E xclusive

C ollectively Collectively exhaustive:


Statements jointly fully describe the
problem and/or the statement at the

E xhaustive
next highest level

SOURCE: McKinsey
FRAMING THE PROBLEM – ISSUE TREE EXAMPLE

Which
Product How? How? How?
Lines?

From Decrease
Widgets raw
material
How can Increase costs
Acme Revenues
increase Negotiate wage concessions
From
profits from
Thrum-mats
existing Decrease
Decrease Negotiate higher productivity
business labor
Expenses quotas
lines? costs

Implement a labor-saving
From
production process
Grommets Decrease
overhead
costs
Most times, we need to deep dive to get to the root cases of problem.
5-why‟s is a useful tool that underpins the issue tree framework in the
investigation of root causes….
1 ILLUSTRATIVE
Why has the 2
machine stopped?
Why did the over- 3
load fuse blow?
Why wasn‟t there 4
enough oil?
Why doesn‟t the 5
oil pump work
Why has the shaft
properly?
worn?

• The overload
fuse has blown
• There was not
enough oil on • The oil pump
the shaft doesn‟t pump
enough oil
• Because the • Because the oil
shaft has worn strainer is
blocked with
Ask „Why?‟ until metal swarf
you get to the bottom
of the problem

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Step 3: Prioritisation of issues

Think IMPACT and


EFFICIENCY: which
parts of the tree are
most important for
me to focus on?

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Communication and
Develop
recomm work
endations 5
6
Synthesise Conduct
findings Analyses
and work

16
Eliminated issues
Eliminate nonessential issues
• First step in constant, iterative
refinement process
Issue 1
– Porpoise between
hypotheses/theories and data
– Use 80/20 thinking

Issue 2
• „High grades‟ your effort on what is
Problem most important
statement

Issue 3 • Always ask „so what‟ … but also


ask what you‟ve forgotten

• Eliminating nonessential issues is


the key to having a reasonable
lifestyle on a difficult study
Use the 80/20 philosophy

Use judgement/intuition Involve the team

Be practical!

20

Polishing 80

80

Focusing on
20
impact
Time and Benefit for
effort problem
solving

Do back-of-the-
envelope calculations Take risks
18
Benefits of the 80/20 rule for problem solving

Benefits for
problem-solving
Efforts to structure the
100% problem

80%
Requirements for analysing problems
• Focus on the main starting points of
the problem
• No gaps, no overlaps (MECE)
No cost • Logical hierarchy of levels
efficienc • Logical elements are consistent on
y individual levels

Time and effort invested


20% 100% in analysing the problem

Attempt to Attempt to be perfect


be MECE
Developed solutions can be prioritised along 2 dimensions through
the prioritisation matrix

High
Ease of implementation

Low

Low High

Impact

20
Step 4: Plan analyses and work

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Communication and
Develop
recomm work
endations 5
6 Think effectiveness:
Synthesise Conduct How can the
findings Analyses resources be utilized
and work optimally?
xxxx xxxxxx
xxxxxx xxxxxx
xxxxxx xxxxxx
xxxxxx xxxxxxxx
xxxxxx xxxxxxxx

21
Best practice work planning

Early Do not wait for data, critical mass, or anything else

Often Revise, update, and improve as you porpoise


through the data

Specific Be very specific on analysis and source

Syndicated Test with team members, try alternative hypotheses

Realistic Make it manageable and realistic otherwise it will not


be used
Developing the analysis sheet

Yes or no? How or why?

Responsibility/
Issue Hypothesis Analysis Source timing End product

Description • An issue is typically • The hypothesis is a • The analysis defines • The source • Responsibility • The end
an important statement of the the work necessary identifies the identifies the products is a
unresolved question, likely resolution of and sufficient to likely location or person who will statement of
phrased so that it the issue; it prove or disprove the means of obtain the data the output from
can be answered includes the reason hypothesis or resolve obtaining data to and undertake the analysis
“yes” or “no” for answering yes the issue undertake the analysis.
or no analysis Also the
completion due
date

Should ABC • Yes, Virgin Bank is • Assessment of • Analyst reports • Financial • April 3, Tunde
Bank invest the best option for organic options for on Nigerian forecast and
N200 M in ABC Bank to growth – time, risk banking industry value of
acquiring establish skills and etc • In-house investment
Virgin assets quickly • Comparison of other financial and
Bank? compared with both local banks in the banking
organic growth and market as well as specialists
other acquisition acquisition options • M&A valuation
options. • Cash flow, NPV methodology
DESIGNING THE ANALYSIS – WORKPLAN EXAMPLE

Issue/Hypothesis Analyses Data Sources End Product Responsibility Due dates

Can we implement
the new production
process? Yes

Does the process Technical Articles, interviews Chart Tom 3-Jun


require new specifications
facilities? No List of facilities that Facilities management, List Tom 5-Jun
meet new criteria interviews

If it does require Map of “facilities Facilities management, Chart Belinda 7-Jun


new facilities, can gap” thrum-mat line
we acquire them supervisors, interviews
economically? Sources of required Operations, trade List Belinda 7-Jun
Yes facilities/equipment publications
Cost to fill gaps Operations, contractors, Table Belinda 10-Jun
interviews
Effect on project Finance department, Spreadsheet Terry 12-Jun
rate of return prior analysis
4 – Workplan
Timetable (weeks)
Analysis (main study steps) Key end products 1 2 3 4 5 6 7 8 9 10 11 12

1. Complete overview of the Assessment of


market and industry attractiveness of the
• Gather market and industry foreign market and
data industry
• Conduct trade interviews
• Analyse data and formulate
initial view of industry

2. Carry out an assessment of Critical review of ABG‟s


ABG‟s competitive position strengths
• Complete analysis of trends and weaknesses
in market share, pricing and compared to
distribution competitors The final
• Complete comparative cost workplan should
analysis correspond to
• Interview sample of buyers the project
• Interview McKinsey contacts timing and
in the retail industry scope agreed to

3. Estimate potential for ABG‟s Financial evaluation


future performance of ABG‟s milling and
• Define alternative scenarios baking interests
• Establish most likely case
scenario
• Conduct sensitivity analysis
• Assess maximum
improvement potential

Progress reviews with XYZ management


Step 5: Conduct analysis

Details on analyses will be


discussed later

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Communication and
Develop
recomm work
endations 5
6
Synthesise Conduct
findings Analyses
and work

Think answers not


analysis: what is the
simplest fact-based
approach that will prove/
disprove each issue?

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Step 6: Synthesis findings

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Communication and
Develop
recomm work
endations 5
6
Synthesise Conduct
findings Analyses
and work

Think “So what”: do the


findings tell a compelling
story?

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6 – Synthesise findings and build argument……

and/o
Use situation, complication, Pyramid structure
r
resolution
Main assertion

Situation State the conditions


at point of problem

Sub-assertion Sub-assertion

Complication Flesh out difficulties


in making situation
better

Supporting Supporting Supporting Supporting


data data data data

Resolution Lay out possible


solution path
….. Using the Pyramids Principle – built from the bottom,
communicated from the top

Decisive
Decisive questions:
question: "What?"
"So what?" "Why?"
"How?"
Governing
thought

Particular insights,
reasons, steps, Chapters
benefits, etc.

Analysis
Subchapters
results

Facts,
assump-
Bullet points
tions,
etc.
Coherence1

1 Same level of abstraction at each level

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SAMPLE: Synthesis (Note difference between summary and synthesis)

Lagos is a great Decisive

Synthesis
place to have fun
?
question:
„So what?‟
of the facts

Summary
of the facts It has many places It has many places
to go in the evening to go during the day

▪ There are many ▪ There are many


restaurants shops
Facts about ▪ There are many ▪ There is a National
Lagos
theatres museum
▪ There are many ▪ There are many
clubs beauty spots

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Synthesis exercise – what are the characteristics of a great
project manager?
1 He is results-oriented

2 Able to work well in a team

3 Sufficient knowledge of subject area


Please sort these
4 His leadership skills are excellent statements and create a
logical pyramid with 3 levels.
5 Conflict management Formulate suitable overarching
conclusions („so what's‟) that
6 Familiarity with the organisation synthesise the details, and come
up with a governing thought that
7 He has the ability to delegate synthesises all your
conclusions
8 Understanding of market requirements

9 Good time management

10 Can handle disagreements

11 Coaching

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Solution to synthesis exercise

One governing
thought at the top
(key message)

Good project
managers possess
Overall management,
conclusions professional and
in complete interpersonal
sentence capabilities

Their professional
They possess a set qualifications are
They have polished
of broad outstanding
interpersonal skills
management skills (specialised
expertise)

Suffi-
Famili- Under-
Good cient
Leader- arity with standing Able to Conflict
Results- Ability to time know- Coach-
ship the of market work well manage-
oriented delegate manage- ledge of ing
skills organi- require- in a team ment
ment subject
sation ments
area
1 4 7 9 3 6 8 2 5 11

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Step 7: Develop recommendations

High impact communication which


is designed to take care of
“Developing Recommendations” will
be handled as a separate module

2 3
Client 1
problem
Structure Prioritize
Define problem
problem issues 4
Plan
7 analyses
Communication and
Develop
recomm work
endations 5
6
Synthesise Conduct
findings Analyses
and work

Think buy-in and


actionable solution
: Is it clear what the
client needs to do
and how to do it?

33
• Conducting Analyses (Internal and external)
• Power of Excel
• Market analysis
• Financial Analysis and Accounting

34
Excel is a powerful tool for conducting analyses…….

Knowing what you want Implement what you


Finding out how to do it
to do want to do

• What do I want to • Excel probably has some • Allow yourself to try and
accomplish with my functionality that helps you fail! It does not have to be
analysis? do what you need to right the first time

• What type of calculations • Use formulas and • If you are having trouble,
do I need to include in my functions that you are seek help
analysis? familiar with
• Make sure analysis is
• How do I need to modify • Seek information on how done correctly
the data so that I can use to do things:
it? – Use Excel‟s formula
builder
– Use Excel‟s help
function (F1 key)
– Use the internet to
search for help
– Ask a friend for tips
Pivot tables are one of Excel‟s most useful features

A PivotTable is an important feature of MS Excel. It is an interactive table that quickly


summarizes large amounts of data, based on multiple conditions that have intersecting
points

You can use PivotTables to:


• Calculate different summaries (e.g. list the total number of customers per division)
• Analyze related totals (e.g., calculate the total spent per account)
• Sum a long list of figures and compare details (e.g., number of suppliers with sales
largers larger than NGN 1 million)

Creating pivot tables


• To create a pivot table, highlight the data you want to include, and click on the pivot table
icon on the Insert menu
Pivot tables can also be created
with the following keybaoard
shortcuts

• Alt + D + P
• Alt + N + V + T

• Try it, it WILL make you faster!


….. Also the use of basic formulas

Basic formulas in Excel have these two main syntax forms:

= A1 + B2 = SUM ( A1 : B2 )

Equal sign Cell Operator Equal sign Formula Parenthesis Cell


references name references or
range

Examples of basic formlulas include:


• AVERAGE – returns the average of a cell range
• SUM – returns the sum of a range of cells
• MEDIAN – returns the median number in a cell range
• MAX – returns the highest number in a cell range
• MIN – returns the lowest number in a cell range
• And many more – use Excel‟s help function to learn more about them
More advanced formulas often have more elements

Separator for
formula
arguments (, in
some Excel
versions)

= IF ( A1 > 1 ; “Yes” ; B2 )

Equal sign Formula Parenthesis Formula Formula Formula


name input input input
(for IF: (for IF: (for IF:
logical test) value if true) value if false)

Excel 2007 helps you understand the syntax of your formulas as you
write them!
Other examples of advanced formulas

Function/
What does it do? How do we use it? Additional Comments
Functionality
To count entries using mathematical
operators, use "<32" in the <criteria>
Counts the number of cells
COUNTIF(cell range you are looking in,criteria - parameter field, to count the number of
COUNTIF within a range that meet the
value; cell reference - you are looking for) values in the range <32
given criteria
Wildcard Usage: COUNTIF(C2:C40,"*te")
will tell you how many words end with "te"

SUMIF(cell range you are looking in,criteria -


To sum entries using mathematical
Adds the cells within a range value; cell reference - you are looking
SUMIF specified by a given criteria for,Sum_range; the actual cells to add if their
operators, criteria can be expressed as 32,
"32", ">32", or "apples"
corresponding cells in range match criteria)

Searches for a value in the first VLOOKUP(cell reference of the value to be Type of Match:
column of a table array and looked up,table array range where the first 0, False : Gives an exact match
VLOOKUP returns a value in the same column contains the value being looked 1, True : Gives an approximate or exact
row from another column in the up,position of the column data needs to be match (be sure to sort your data in
table array retrieved from,type of match) ascenfding order before trying this)

Searches for a value in the first VLOOKUP(cell reference of the value to be Type of Match:
row of a table array and returns looked up,table array range where the first row 0, False : Gives an exact match
HLOOKUP a value in the same column contains the value being looked up,position of 1, True : Gives an approximate or exact
from another row in the table the row data needs to be retrieved from,type of match (be sure to sort your data in
array match) ascenfding order before trying this)
Market analysis: Helps you understand how a market works, which
impacts the behavior and performance of market participants

S C P

Feedback
Structure Conduct Performance

The structure of the . . . drives the way Their strategy determines


market . . . companies behave and their economic
compete with each other in performance
response to events

By understanding the structure of the


market, we can understand why companies
behave the way they do and why some firms
are successful, while others fail
Porter‟s Five Forces model provides a simple framework through
which we can understand the structure and interaction in the market

Barriers to entry

Can new companies easily


Economics of
enter the market and
supply
increase competition?

Bargaining power of input Competition between Bargaining power of


suppliers producers consumers

Can those who supply raw Can consumers exert power


materials force producers to to force lower prices?
pay more?

Substitute products

Can consumers push down Economics of


prices by buying other demand
products to do the same job?
Finance and Accounting: The basic principle of finance is called
the time value of money

Time value of “Money you have today is worth


money more than money tomorrow”

Why is this the case?

Fundamental valuation is about applying the concept of time


value of money to expected cash flows in the future
Information about a company‟s financial position is found in the
financial statements – the balance sheet, income and cashflow
statements

Balance sheet

• Portrays the financial position of the company by showing


what the company owns and what it owes at a reporting date
• Can be thought of as a snapshot since it reports the
company‟s financial position at a specific point in time.

Income statement
• Shows whether the company‟s operation has resulted in a
profit or loss as of a defined time period
• Can be thought of like a motion picture since it reports how
a company has performed during the period(s) presented

Cash Flow Statement


▪ Reports on company‟s cash generation during the period(s)
separating it by operating, investing and financing activities
Balance sheet
NOT EXHAUSTIVE
Balance sheet item definitions

Assets Liabilities and shareholders’ equity


Accounts Money owned from Accounts payable Money owed to vendors for
receivable customers products purchased
Notes receivable Money owned from loans Accrued liabilities Expenses incurred but not
made (financial) yet paid (e.g. salaries)
Inventory Assets that are held for sale
Capital lease Payments on a lease
(or in the process of being
obligations treated as a loan
produced for sale)
Prepaid Expenses that are paid in Deferred credits Income received but not yet
expenses advance (e.g., rent) reported as income

Property, plant Land, building, and Reserves for Money owed to employees
and equipment equipment owned by the employee benefits (usually pensions and
company; shown before and plans health benefits)
after depreciation
Minority interested Third party ownership in
Deferred Asset used to reduce future company subsidiary
charges income (usually tax)
Goodwill Intangible asset created upon Stockholders‟ Interest in assets after all
an acquisition equity liabilities are paid
Income statement
Income statement item definitions NOT EXHAUSTIVE

Operating items Non-operating items


Sales and other Money received for goods and Other income May include operating and
operating services provided non-operating income (best to
revenues check financials)
Income from Share of earnings in affiliated Taxes Taxes paid or provisions made
equity affiliates companies for taxes to be paid
Operating All operating costs (e.g. costs Interest and debt Interest paid on debt
expenses required for lifting oil and gas expense
to the surface)
Minority interest Portion of earnings of
Selling, general Selling cost and non- subsidiary allocated to minority
and production overhead costs investor
administrative such as sales and marketing,
expenses and R&D
Exploration Costs incurred in the
expenses exploration for oil and gas
Depreciation, Non-cash charge for the use of
depletion and a fixed asset (depreciation),
amortization mineral resource (depletion) or
intangible (amortization)
Statement of cash flows

• Cash flow originating from the firm’s operating activities;


Operating
sales of goods and services, purchase of supplies, SG&A,
cash flow
taxes

• Cash flow originating from the firm’s investing activities;


Investing cash sale of fixed assets, sale of long-term financial assets,
flow collection of interest acquisitions, long-term financial
investments

• Cash flow originating from the firm’s financing activities;


insurance of stocks and bonds, long-term borrowings, short-
Financing
term borrowings, repurchase of stocks and bonds,
cash flow
repayment of long-term debt, repurchase of short-term debt,
interest payment, dividend payment
Statement of cash flows
The financial statements are linked NOT EXHAUSTIVE

Cash flow statement


Cash from operations
Cash from investing
Cash from financing

Net change in cash


Beginning Ending balance
balance sheet Statement of sheet
shareholder’s equity
Cash Cash
+ Other assets Investment and divestment by + Other assets
owners
Total assets Net income and other Total assets
- Liabilities earnings - Liabilities
Shareholder’s equity Net change in owner equity Shareholder’s equity

Income statement
Revenue
Expenses

Net income
50
Basic accounting equation…..

Assets = Liabilities + Equity

What a company What a company What’s leftover


/ business owns = / business owes + for the owners of
the business

• This equality must always be true

• For example, any increase in an asset must be


offset by a decrease in an asset or an increase
in a liability or equity
The financial statements can be used to calculate margins that
measure cost efficiency of business activities

Metric Formulae Measures

Gross Profit Ability of a company to control


Gross Margin
Sales “direct”(1) costs

EBIT Overall operating efficiency;


EBIT(2) Margin
Sales accounts for all operating expenses

Net Profit Proportion of sales available for


Net Profit Margin
Sales distribution to shareholders

(1) Costs that can be directly attributed to the goods & services produced (i.e., cost of goods sold)
(2) Earnings before interest and taxes

52
The fundamental value of your company is set by growth, ROIC, and
cost of capital

Growth How much additional capital I am able


to invest

Value Return on The money I make


Invested
Capital The money I invested to make money

Cost of How much my capital costs me


Capital
Return on invested capital is the fundamental driver of a company‟s
value; to have value ROIC must be higher than your cost of capital

The money I make


ROIC =
The money I invested to make money

After tax earnings from operations*


ROIC =
The amount of operating capital
invested in the company (I.C.)

The opportunity cost of employing


Cost of capital =
capital to your business (for
example interest cost)

*Often called “Noplat” or “Nopat” (Net Operating Profit Less Adjusted Taxes)
Understanding what impacts the ROIC
Cost of Goods Sold
/ Revenues
+
Operating margin =
EBITA/revenues SG&A / Revenues
OR EBITA
1– +
Depreciation /
Pre-tax return Revenues
on invested X
capital
Operating working
Return on capital / Revenues
invested X
capital +
Capital Turnover = Property, plant and
Revenues / equipment /
1– Invested Capital Revenues
Cash tax rate
Times
1/ +
Other operating
assets, net /
Revenues
How to create value
Increase Improve return
growth if returns are on capital
higher than cost • Increase margin
of capital • Increase capital
turnover

Growth
Sales
margin

ROIC
Value x

– Capital
turnover
Economic
WACC
Profit x

Invested
Capital

Invest in Reduce
businesses with WACC via capital
returns above cost structure
of capital

56