Table of Contents
“Shareowner Value Creation and the
Management of Intangible Assets”
Poster Presentation Slide Deck
20 International Conference of the System Dynamics Society
Grand Hotel Villa Igiea
Palermo, Italy
July 28 - August 1, 2002
Dr. Roland Burgman
AssetEconomics, Inc.
200 Park Avenue South
New York, NY 10003
A] is a registered trademark of AssetEconomics, Inc.
Seer [| , ConView [] , Pathfinder [| , 4-Column Balance Sheet{] ,
Intangible Value Added{] , IVA[] , Tangible Value Added] and TVA[]
are trademarks of AssetEconomics, Inc.
EVA[] is aregistered trademark of Stern Stewart & Co.
Current Operations Value{] , COV[] , Future Growth Value[] and FGV]]
are trademarks of Stern Stewart & Co.
2 | Q AssetEconomics, Inc.
“Managing for Value”
Managing for value has required that a company grow profitably.
This imperative has in turn required that the following Value
Creation Cycle be understood and managed.
Competitive
— Advantage ™
Quantum
Economic Period Distinctive
Profitability Competence
y t
Capital Strategic
Allocation Assets
Assets Non-Strategic
ce NX Resources _7* + Assets
areholders Capabilities
3 | ( AssetEconomics, Inc.
“Managing for Value” - Today!
The is reliant on a complete
understanding of what constitute strategic assets (and what do
not). In essence,strategic assets are all those resources (things
we own) and capabilities (things we can do) that give rise to
distinctive competence and ultimately to competitive advantage
(which is the basis for achieving positive economic profit).
, this more and more means understanding what the
intangible assets are that are under management as well as their
behavior, both independently and interactively. This fundamental
to the prime responsibility of the managers of (especially publicly
listed) economic entities - to create wealth for the owners of their
companies.
Shareholder Value Added = Market Value
Added, or MVA
.. but, Enterprise Value is not the same as Shareholder
Value Added
Enterprise Value (EV) Market
= Value
Market Value of Added
Shareholder
Value
Equity (MVA) nocd
(ie. the number of shares
on issue x current share
price)
+
Capital
Value of Interest
Bearing Employed
Debt Obligations D
5 | 0 AssetEconomics, Inc. 0 Stern Stewart & Co.
EVA Expectations Drive MVA and
therefore the Value of the Enterprise
MVA represents the expectations of the
present value of a company’s EVAs
_ EVAt EVA t2 EVA #3
= (1+wacc)) + (1+wacc)y + (1 +wacc)z +: =
MVA =Present Value of Future EVAs |
Capital
Employed The value of future returns is brought
back to today’s value of the enterprise
.. and added to the capital
6 | AssetEconomics, Inc. O Stern Stewart & Co.
MVA’s (and Value Creation’s) link to EVA
Shareholder value is created when expectations are met and exceeded
Expected
Improvement
over Current EVA
Current EVA
7 | { AssetEconomics, Inc. 0 Stern Stewart & Co.
The Components of Enterprise Value!
8 | ( AssetEconomics, Inc.
PV of
Future
Growth
Value
PV of
Current EVA
Future
> Growth
Value[]
( )
Current
> Operations
Value[]
( )
0 Stern Stewart & Co.
Share Price Volatility - What Gives!
(ie., the number
issue x current
of shares on »
share price)
(ie., the net value
of Interest
Bearing
Debt Obligations) J
9| ( AssetEconomics, Inc.
What changes »\
are
expectations
about future
growth (Future
Growth Value) -
since
everything else
is constant.
Such changes
in expectations
are reflected in
changes in the
Share Price.
y,
“Managing
for Value”
means
managing
for FGV!
What is the FGV/EV View for the Wealth
Creation Majors?
The Stern Stewart Performance 1,000 and its update (published in Fortune,
December 10*, 2001) shows the following -
Top 20 Top50 Top100 # £Top 150
2001 Median 61.9% 54.9% 51.0% 51.2%
Average 59.9% 52.1% 50.0% 39.7%
2000 Median 79.8% 75.4% 74.2% 72.1%
Average 78.1% 78.9% 75.8% 73.5%
* Using the company share price as at October 30%, 2001 and 2000
10|_ {| AssetEconomics, Inc.
A New View on Asset Management
Share Price components ...
Current Future
Operations Growth
Valuen Valueg
arising from ...
. Traditional Embedded
Tangible Management
rowth
Assets Focus* >
The New
Intangible Effect? NG Management
Assets Imperative !
* The traditional management focus (and basis for firm E nterprise
valuation) is mainly through the Income Statement and Value
Balance Sheet. Thus the emphasis in valuations is on
extrapolating Current Operations Value[] based on the
exploitation of Tangible Assets.
11| { AssetEconomics, Inc.
Findings on
in the United States!
The dynamics of FGV are important!
The better you are doing (EVA), the more is expected of you in
the future (FGV)
The larger you are (EV), the more (proportionally) is expected of
you in the future (FGV)
FGV expectations have increased over time for all companies
and now represents the major component of share price (FGV
vs. EVA/WACC vs. CE)
The largest companies (EV) no longer rely on traditional capital
(CE) - meaning that balance sheets are increasingly
(don’t recognize the intangible assets that are
increasingly relied on by management to create value and are
increasingly valued in share prices) rather than
(don’t capture recognized intangible assets “properly”)
12| {| AssetEconomics, Inc.
What's the Problem?
The problem is one of conceptualizing stocks and flows. The
bath tub metaphor that is often used in System Dynamics is of
limited use here since we also have to worry about what is going
on inside the bath tub! Intangible assets are qualitatively
different from tangible assets.
Tangible assets are more likely to ... Intangible assets are more likely to ...
13| [ AssetEconomics, Inc.
What is Being Valued in Future Growth
Value?
The is that it is the Present Value of all
changes to the current (EVA) performance arising from
current activities, estimated into perpetuity, discounted
to the present.
The is that the FGV Present
Value represents a constellation of the following -
Foreseeable future operations
Unforeseen opportunities and future operations
Ownership claims
Path dependent behavior
all valued and discounted to the present
14 {] AssetEconomics, Inc.
The 4-Column Balance Sheet] -
Reconciling Paradigms
Reconcile 4————__ Value
Enterprise Strategic Assets Strategic Assets Accounting
Value Marked-to-Market Balance Sheet Income Statement
ee ee Balance Sheet
15| { AssetEconomics, Inc.
Strategic Asset Management
Earnings ...
Current Future
Operations Growth
Value Value
based on...
Traditional Embedded
Tangible Asset Value Management Option
Focus* Value
. The New
Intangible Asset Value Management
Imperative !
* The traditional management focus (and basis for firm valuation) is through
the P&L and Balance Sheet - COV. This doesn’t apply for FGV.
16| {] AssetEconomics, Inc.
A New Asset Classification
> arewhatwhatwe have, =—_ are
what we can do!
P Non-renewing
eee
L Self-
renewing
Strategic Assets
L P Replicable
Intangible
& Non-replicable (exclusive)
11|__ ] AssetEconomics, Inc.
What are the Strategic Assets that we Are
Talking About?
“ Brand equity (from Knowledge creating
advertising and capability
promotion) Right of access
C
saris een Ls Ability to utilize Information
Operating procedures and
“ Human capabilities (from
processes
training)
Management capability
Ability to execute strategy
Innovativeness
Real Options
18| {| AssetEconomics, Inc.
A New Methodology - Introduction
This methodology, called Seer™ , has three phases and
ten steps. The phases are -
| Asset identification
Il Asset Quantification
lil Asset Prioritization
The process is a variation of the M’Pherson, Roos and Pike
IC process* which does two things - (i) introduces System
Dynamic modeling to fully capture the value driver causal
relationships and (ii) links current and future period economic
profit outcomes (EVA) with the capital market valuation of the
enterprise (the EV) to establish “best possible” cause and
effect between management actions and share price
outcomes.
Refer, for example,
Philip M’Pherson, Goran Roos and Stephen Pike, “Accounting , Empirical Measurement and Intellectual
Capital”, J ournal of Intellectual Capital, Vol. 2, No. 3, 2001, pp. 246-260
19| ] AssetEconomics, Inc.
Seer{] Methodology - Flow Diagram (A)
Phase | - Identification
So
a
Seer{] Methodology - Flow Diagram (B)
Phase Il - Quantification Phase Ill - Prioritization
ee ES
=<
\
21| ( AssetEconomics, Inc.
The Central Place of System Dynamic
Modelling
Establishing the drivers of performance and share price has
traditionally been approached by financial modeling and its
derivatives (such as DuPont schematics). The hidden
assumption has been that all relevant management information
is captured by a firm’s financial statements or can be
quantitatively linked to them. This historically workable
assumption is no longer useful.
Fortunately, System Dynamics can make a substantial
contribution to identifying and quantifying the drivers of value
through establishing the causal (stock and flow) determinants
of shareholder value creation.
The Benefits of System Dynamic Modeling
To develop a complete causal management model where that
model’s behavior and outputs are linked to shareholder value
outcomes
A complete descriptive business model
What the critical drivers of shareholder value creation are
(stocks and flows)
How to manage the critical value drivers (since cause and
effect are systematically linked)
What management information is required in order to be able
to manage for value (intervene in the system)
What the content and expectations should be for
performance monitoring
23|
Case Study - Sun Microsystems, Inc.
Work in Progress -
Hand Outs to be Provided
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