Strategy/Business Transformation/Competitiveness Achievement Plan

Competitiveness Achievement Best Practice:

Building Economic Profit (BEP) Framework

THe corporate framework for strategy development and implementation

Needing to refocus your business? The world is moving into a new era and manufacturing companies must restructure to better focus on what they do to perform well in the evolving environment. ConsultEP uses BEP framework to help clients to refocus their businesses into organisations that can compete effectively in the right places at the right times and deliver sustainable superior profit and cash generation.

Managing Change

Change is an integral part of a Competitiveness Achievement Programme (CAP). It consists of set of projects focused on important business targets with time and performance monitoring milestones. A formal and disciplined project organisation structure is necessary to achieve results.

Although design and implementation of these projects is vital, they are not enough to ensure long lasting positive change. To establish these changes, new organisational mechanism need to be adopted. These include setting up carefully designed meetings, installing new managed and auditable procedure, and implementing continuous improvement practices. The overall task is large and takes time and patience. Without well managed support from trained and motivated project teams, success is impossible.

Economic Profit

Economic Profit (EP) is a way of measuring the return created for the stakeholders (commonly the shareholders) that invested capital in the organisation. Economic Profit is created when the operations, investments or projects produce a risk-adjusted return to shareholders greater than what they can earn on their capital elsewhere. EP therefore does not only focus on returns, but also takes the total cost of the operation's capital into account. The appeal of EP lies in the fact that various companies have been able to increase their value to their shareholders and that stock prices seem to track very closely with EP.

The concept of Economic Profit Added is used for various reasons:

Performance Assessment
Executive Incentive Plans
Optimisation and improvement decisions.

Evaluating Investment Decision

Most companies have a written capital investment justification process. In any investment decision, there are two basic risks to avoid:

Accepting an investment that reduces shareholder value
Rejecting an investment that enhances shareholder value

In some cases, management's measurement techniques may lead to inappropriate investments. If it becomes apparent that management's measurement criteria may be lacking, it is up to the team to make appropriate interpretations. "Although your return on equity (ROE) improves somewhat in the first year, discounted cash flow (DCF) or economic profit (EP) measures indicate that the decision may significantly erode shareholder value." For internal purpose only, use the net present value (NPV) as the primary tool to prioritise the improvement agenda.

There are five basic determinants in net present value (NPV) and economic profit (EP) calculations: investment, investment life, cash flow, discount rate and timing. At least one, and frequently all, of these factors can be stated as a range. Therefore, assess each item in the improvement agenda to see which determinants are most properly stated as ranges. The outcome of such analyses is a range of alternative answers for each item in the improvement agenda. The full value creation opportunities of initiatives need to be looked at in a wider frame to capture the iterative, or ripple, effects of revenue enhancements or cost saving initiatives.

Financial Measurement Techniques

There are a number of choices available to measure the performance of a division, business unit, or entire company. The key is to measure those aspects of the entity's operations that are directly controllable by its managers

Revenue and expense center
Profit center
Investment center

Growth is once again on top of business executive agenda. As executives turn their attention from just improving the operational performance of their companies to making those companies grow and improve, many of them will seek radical transformation of their business units at pace with the minimal capital expenditure to achieve dramatic improvement in shareholder value. The level of transformation required is considerable. There is no doubt – proof is irrefutable – that making changes to move orders through the business more quickly leads to increasing revenue at a rate faster than the growth of GDP. It is virtually automatic. If you get everything moving three times as fast, you will make about three times the money you do now.

By combining a strategic perspective with a disciplined execution, we help our clients to transform their businesses to improve cashflow by 10%, to lower cost by 20%, and to reduce the time to market by 40% at pace. We make the ‘LINKS between the mission target (competitive performance) and what our client’s people need to do. We identify the ‘LEVERS’ that will deliver fast and positive impact. We develop the ‘ENABLERS’ – capabilities – that give our client’s people the means to execute the actions successfully. We draw on expertise from across our international network to ensure that we provide a deep insight into our client’s industry dynamics and functional best practices. We use an approach that is backed by proprietary tools, is proven and resulted-oriented. Learn more below about Economic Profit Building, which is our transformation methodology.

The Anatomy of Building Economic Profit

With the help of our Building Economic Profit (BEP) approach, a company could unbolt their business units and remodel them together again in a completely different configuration at pace to process orders at high speed, so that the organization can achieve a 50% performance improvement. The approach has an underlining philosophy of simplify, locate, integrate and automate. It makes sure that the new way of working becomes part of the day-to-day running of the business and is communicated across the business so that the cost savings are locked in and that all staff are involved and rewarded for a successful outcome. It also ensures that the business undertakes physical change and organisational change at the same time and with the proper balance to maximise shareholder value in the short as well as the long term.

Radical transformation is seeking 50% business performance improvement instead of an average 10% improvement achieved by Continuous Improvement initiative. Transformation is about challenging the existing assumptions and rules which existing in a business. Business unit is defined as a group of logically related activities when optimised together achieve one or more value-added outcomes for a customer.

However, how to transform is just as important as where to invest as this will shape its growth trajectory over the next five to ten years. A ‘Myopic’ approach focus short-term value creation, whilst destroying value in the long-term by implementing cost-cutting programmes. Let us downsize, chop heads, consolidate work, etc. Low cost manufacturing is the answer. At the opposite side of the spectrum is ‘Technology’ process that captures value in the long-term by pouring billions of dollars into the latest technique without understanding the short-term impact. Companies install publicized techniques as Lean, ERP, TQM, and others without making other changes. A visionary focus process is a balanced approach. It uses strategy to drive the change process, as this ensures that value is added in the present as well as in the future. It is very well having a big vision, but there is a need to win current battles in order to make it a reality.

"Strategic planning is to a business what a map is to a road rally driver. It is a tool that defines the routes that when taken will lead to the most likely probability of getting from where the business is to where the owners or stakeholders want it to go. And like a road rally, strategic plans meet detours and obstacles that call for adapting and adjusting as the plan is implemented." - Dix & Mathews, 2002; P:2.

In our experience, sustainable success can only be achieved by visionary systematic process that links Target, Strategy, Capability and Results into a simple, focus attractive process:

Mission Target - a picture of what the future will be like and goals to aim at that will satisfy investors;
A Strategy – A battleplan about “where to play and how to win” - to hit the target;
Executing To Capability – Using Competitiveness Achievement Plan (CAP) to make your capabilities into formidable competitive weapons, so that the business can compete via the strategy, which will fully supports achievement of overall business targets;
Results – Monitoring the performance in executing plan.

Our BEP framework makes these links. It focuses on long-term value creation as well as short-term value creation. It has been distilled carefully into a single approach from a detailed review of some 500 industrial successful projects, across all sectors, UK and international, carried out by Ingersoll Engineers, Ernst & Young, J P Morgan, McKinsey. BAe System and others.

BEP Review: Aircraft demand risk to Boeing’s outlook

On Boeing’s conference call, CEO Jim McNerney made this statement. “Overall, our long-term outlook remains strong, as we expect the combination of growth and replacement to drive the need for nearly 37,000 aircrafts over the next 20 years.” The Street seems to agree with his statement and his comments on Boeing’s current results, as the company’s share soared almost 11% as result. But a EPB review leads us to believe that Boeing’s long-term outlook needs further clarity.

The Asia Pacific Region is key to Boeing’s long-term outlook. The airplane manufacturer estimates that the region will receive around 12,800 new planes over the next 20 years, constituting 36% of the global commercial deliveries. The company aims to attack this market with 737MAX and 787. It believes that manufacturing sub-assemblies and systems in the region will act as a force multiplier. However, the possibility of Airbus stealing orders due to the lower dollar and Airbus’s manufacturing footprint in Asia Pacific Region are a cause for concern.

When the dollar rises far and fast, it does two things. It hollows out the American aerospace supply base, as suppliers shift production and cut labour at home to compete in the international market. It also allows Airbus to have a price advantage over Boeing. Boeing needs therefore to provide greater clarity about how it will counter these and other headwinds to its long-term outlook.

BEP Review: GE's slow transformation

GE is believed to be not transforming itself fast enough to close the gap between it and its peers. Many investors reckon that GE’s growth has been muted because of GE Capital post the financial crisis. This perception is supported by analysis of the company’s stock price compared to its peers over the last 10 years. However, GE Industrial has underperformed its industrial focused peers and has not overtaken GE capital despite strategic actions such as the winding down of GE capital entity, numerous acquisitions within the industrial segment, and a growing backlog of industrial orders.

A basic yet broad glance at GE current results suggest that, if GE can find a way to execute booked orders faster while increasing margins, the company could be a much better performer. The company is booking more orders than it is executing. At the end of 2013, the total backlog was $244 bn and as Q3 of 2014 its backlog has grown to $250 bn. If we slap a 16.5% profit margin on this impressive $250 bn metric, we get $41.5 bn in future profits.

BEP Review: Customer driven transformation in defence

Defence companies are facing pressures to transformation radically. The reason for this is because of four major challenges:

To deliver affordable products as western governments reduce their defence budgets.
To grow international and commercial revenues as growth in military spending shift from the west to the east.
To return cash back to shareholders as future opportunities becomes more limited.
To develop additional technology, as western governments funnel their limited funds away from products for conventional war to assets for irregular warfare and counter-insurgency operation.

For many, this means the need to reduce costs in the 20% - 30% range and improve cashflow.

BEP Review: Need to transform post a merger and acquisition

As two companies put their forces together to create synergy, the challenge for the integrating team is to reduce the complexity of the combined organization. The aim is to prevent the two organisations from operating in the dreaded silos structure – performing their own task well but unable to come together. This silo structure hampers getting the planned synergies. Therefore to deliver a solid return on investment to the acquiring business, a post merger and acquisition organisation needs to transform radically itself, once the deal has been done.

For example, GE is in the process of acquiring Alstom’s energy assets, which has several projects in the pipeline and is in the process of a turnaround for $16.1 billion. This transaction would add $4 billion annually to GE’s net income for the next three years, which would provide a strong return on investment. Part of this income will come from Alstom’s existing businesses and part of it will come from synergies between the two companies. Therefore, if GE could simplify, locate, integrate and automate its combined existing business and Alstom’s energy business correctly, it will be able to achieve a step change in shareholder value that it is seeking.