Mobile Operators Mobile operators are today at a crossroads; caught between a future as a service provider and an access provider.
Japan's Global Engagement CVA has provided this area as a resource for those interested in Japanese business and its relationship to the rest of the world.
Sustainable Growth CVA understands that sustainability is not just a risk management issue, but also a potential source of value creation and strategic advantage.
Value Flow CVA, as our name suggests, has always been focused on 'value' and management's ability to create 'value' for the business.
In a previous article - Strategy Audit: a Critical Boardroom Tool - I argued that a major lesson from the financial bubble was the importance of boards taking ownership of strategy, partly through undertaking independent strategy audits. Most boards do not spend enough quality time assessing, evaluating and challenging current and proposed strategies and whether the business can deliver them.
I concluded that strategy audit should become a basic requirement of good governance, complementing financial audit.
Sir David Walker expressed a similar opinion in his review of governance in UK banks. He wrote: "The chairman needs to be satisfied that the board has the time, opportunity and capability to satisfy itself that all potential risks associated with a new strategy and, in changing market circumstances, in continuing with an existing strategy have
been identified and taken into account."
Business valuation
There are three main measures of a business's valuation: accounting value (AV), market value (MV) and strategic value (SV). It is critical to keep a focus on each.
Some aspects of AV look forward, but it is largely a historic measure of financial performance based on accounting rules and conventions, not a predictor of longer term performance. MV is indeed a forward-looking measure, but it can be influenced by fashion, by near-term results and by AV/MV ratios and so can be unreliable and volatile.
Properly derived, a board's assessment of the SV of a business provides an informed view of its fundamental medium- to long-term valuation having regard to strategy, capacity, context (industrial, economic and market), and relative strengths and weaknesses.
A focus on SV is not just about trying to maximise short term shareholder value. To be sustainable, a business has to have regard to the longer term value provided to all major stakeholders, particularly customers.
In a real sense, the challenge facing boards is to define the value proposition and optimise the value for all stakeholders, ensuring the executive is not devaluing the company through a focus on short term financial results or at the expense of unsatisfied customers. There is no necessary equivalence between the three measures of value but, assuming accurate information is provided to the market, MV and SV should over time track quite closely.
The more uncertain the times, the more the "up periscope" view of a rigorously audited strategy and strategic valuation is needed.
Undertaking a board strategy audit
Strategy audit enables boards to focus on and genuinely take ownership of the strategic or fundamental value of the business.
As with financial audit, the work to support a strategy audit is commissioned by the board, independently of management, and facilitated by strategy specialists. The Walker Report states: "High quality external advice is likely to assist the board in reaching decisions on risk tolerance and strategy. Erring on the side of taking external advice is the course of action most consistent with the board's duty of care."
The audit is undertaken across the business portfolio, evaluating the underlying actual and potential performance of each business and the balance of the portfolio as a whole.
The work generally starts with the application of highly structured quantitative techniques based on analysing customers, costs, competitors, regulation and other relevant factors to look at the competitive position and the risks and opportunities in the years ahead.
Valuations are based on a future vision of the business under different scenarios, using real option-based management techniques - i.e. taking business opportunities as an option with an exercise price - and not a crystal ball. Working back from the future to today it is usual to find that 70% of what needs to be done is scenario independent and 30% are bets on scenarios. The mistake is not to place bets; it is not to manage the risks through buying a stop option which, if necessary, can be exercised before it is too late.
Most of the information for the audit is generally available at the client in the form of strategy documents presented to the board and to investors, complemented with desk research and some internal and external interviews. This is not a task to be facilitated by a large team of junior consultants with low senior input, but by a small number of consultants with significant senior input. Nor, to avoid conflict, is it a task to be facilitated by internal or external specialists who work for the executive
Two practical examples
A French building materials company believed the market was undervaluing its existing strategy by some 50%. The strategy audit first involved taking the company's plan and using internally available data to construct a new valuation model cut by division and geography and challenging the key planning assumptions.
The picture that emerged was of future growth scenarios that were in some cases extremely optimistic and at odds with the market. However, a significant valuation gap remained and the next stage of the audit involved meetings with analysts and institutional investors to discuss their perspective.
This led to the realization that a large part of the financial community had a poor understanding of key aspects of the business and was undervaluing it as a result.
Using the insights gained from the strategy audit, the board agreed three key value-creating changes: to make the strategic planning process more
challenging; to reorganize communications with the market; and to realign the risk/return profile of the business to the type of investor
The second example is a UK government agency, whose board was under pressure as the organisation was not perceived in Whitehall as adding value to the taxpayer.
The strategy audit began with a review and subsequent radical redefinition of the organisation's mission and of the metrics used to evaluate its performance. A significant gap was revealed between the value the organisation actually created for customers and taxpayers and what it could achieve under conditions of value "optimisation".
Each business segment was evaluated in terms of strategic importance an
competitiveness. This then permitted the definition and evaluation of options to close the value gap.
As a result, the board decided to enter into a long term outsourcing partnership for the "production" side of the business, which employed most of the staff.
The outsourcing partnership enabled low risk investment in new systems, a new focus on customer needs and channels, a large reduction in costs and a major improvement in product quality. The resulting sustained high level of value creation for taxpayers and customers has made this a successful case study often referred to in Whitehall.
Conclusion
Depending on the complexity of the business, a board strategy audit can take from six weeks to three months to complete. Good practice is for a full independently facilitated audit to be conducted every two years, with an internally supported refresh following a similar approach in the intervening year.
As the audit progresses and directors have the opportunity to contribute, learn and challenge, typically the understanding and cohesion of the board will grow. As a result, the ensuing strategy and strategic valuation will represent a true act of collective ownership by the whole board. The stronger the chief executive the more value a board will add by analysing and evaluating strategy - a good board is not there just to agree with the chief executive and the analysts.
