strategy re-work

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  • 1. & STRATEGY RE-WORK The crisis changed everything a new framework is needed that can survive volatility and drive untapped value through strategic decision-making!

2. & The missing link Again. All gathered together in the meeting room. Various reports and paper scattered on the table and most likely some power point going on in the background with various market assessments and return calculations. It is time again to make another strategic decision about potential investment x or asset y. Very meaningful if it was not for the fact that decision bases keep changing from session to session. One investment a star one year, the next a dog. How can anyone make meaningful strategic decisions in an environment like that? Frustrating at best - root cause of immense shareholder value destruction at worst. But its not for lack of good people on the case or hard work for that matter. No, the solution lies elsewhere. And the good news is that with that solution also comes the potential to substantially improve your return exposure. 3. & The problem Value -drivers Decision -base Decision -making a. Value drivers shift constantly, in particular in terms of the perception of future developments. b. Because we base decision-making on decision bases that estimate one return figure, our decision-base shifts every time the value drivers shift. c. This makes for an unstable base to carry out strategic decision-making. With constantly moving parts it leaves us in a terrible position to make critical calls and worst case make us unconsciously destroy shareholder value. 4. & The solution Market drivers Decision- making Return exposure Model drivers We need a new framework to work effectively with strategic decision-making. A framework where the parts are not all constantly moving. Instead of just working from decision-base we need to work with the full return exposure including the full potential downside and a conceivable upside (this stabilizes our goal post). We split value drivers into market drivers and model drivers. We control the investment, operating and ownership models for any given investment. This gives us another fixture for our strategic decision-making. Which has many other benefits discussed later. Market drivers will continue to be volatile, but isolating them and understanding how we can negate or even benefit from this volatility leaves us much better prepared to deal with it. With this frame we have a solid structure to make strategic decision-making whilst accepting the volatility that is all around us. 5. & What we want to achieve with this The purpose of this framework is helping you put in place an approach that: A. Employs all levers to increase investment returns. B. Aggressively works on reducing downside. C. Creates a robust platform for strategic decision- making. AB C 6. & What comes next 1. Paradigm Shifting the paradigm by moving from one-point forecasting to working with full return exposure. 2. Models Employing models and options by identifying the key components of your business model and associated options and flexibilities. 3. Testing Applying a simple test to understand what your return exposure really looks like and how your strategic decision-making is impacting it. Appendix a. Case illustration b. What Hutchison and others are doing This presentation seeks to introduce the basic components, or missing pieces, we have identified as necessary to work meaningfully towards shareholder value creation in volatile market conditions. It presents the key components to work with the framework presented on the previous slide and will be covered in three simple steps and illustrated at the end by a case. This presentation provides a conceptual framework only. For application we encourage you to reach out to us and initiate dialogue. 7. & PARADIGM Shifting the paradigm by moving from one-point forecasting to working with full return exposure 8. & Step 1. Beyond one-point forecasting When did any projection you ever looked at hold true? If it was a one line projection into the future our guess is never. Just think about investments you or your company have been part of over the last 10 or even just 5 years and how much has changed. But this is not due to prediction failure. It is because of the nature of the markets. Consider the World Bank or IMF, hundreds of economists employed and really a poor poor track record of prediction even just for 1 or 2 year predications. Again it is not because of failure, the world economy is now and increasingly so becoming interdependent a super complex system that is exposed to volatility of all the world markets. Any form of precision prediction leads to failure, we need to change that and work with the volatility that is all around us, and will continue to be there, in a meaningful way. And the best in the sector are going to be benefitting from it. 9. & Step 2. Down and up-side exposure Metrics Estimate Investment size $500mn Net Present Value $241mn Internal Rate of Return 15% -968mn +1,707mn0 +241mn Our downside is known and relevant. We need to acknowledge it and aggressively work to reduce it (in this case mostly made up of investment and concession commitments). Moving beyond a single point view of the world from only working with decision base to full return exposure (in this example illustrated in the form of a wide spectrum of potential NPV outcomes for more information see the case in the appendix). Significant upside is ultimately what justifies putting in substantial commitments. We need to actively work to increase our upside. The more the better. 10. & Step 3. Domain exposure -968mn +1,707mn +1,707mn -968mn Market Model Here we add domain exposure. Our return exposure is not directly dictated by market drivers, they are translated through the models we put in place (we could call it our business model). This distinction serves to provide us with a way to work meaningfully with market volatility and understand how we can work with our business model to alter our return exposure. 11. & Step 3. Domain exposure (2) Market Domain Model Domain Volume Rates Unit costs Tax Interest rates Etc. Concession terms Operating model Expansion, phasing and other options Funding and ownership model Deal structure Etc. Market drivers (or x) Return (or y) Models (or f(x)) Consider your return as the combination of market drivers and the business or investment model you employ to turn those drivers into return. Another way to think of this would be to consider the market drivers as represented by x and your business or investment model as f(x) that together produce y (the returns). Some samples of what goes with which domain have been outlined in the table. 12. & MODELS Employing models and options by identifying the key components of your business model and associated options and flexibilities 13. & Working with models and options In the previous section we set the stage for utilizing the models we employ as a separate lever that deserves more focus and should be a key pillar in our strategic decision-making framework. In this section we provide a brief introduction to identifying and relating to the various models. In general we have seen various ways to analyze and break down the components of the model, but we are seeing some similarities and find the below diagram (see next slide) as a reasonable framework to use. Identifying the key components is important. As important, however, is to understand what flexibilities, entitlements and options you are in possession of (or want to be in possession of). We use one label here to describe them all as real options and they permeate all walks of the different models, from minor flexibilities (in e.g. the adjustment of labor force) to bigger optionalities such as expansion options and similar (see subsequent slide for illustration). In a world that is fully predictable, options have no value, but, as we will see, in volatile circumstances they can be extremely valuable. 14. & Model identification framework We see three key focus areas or models that the best operators and investors focus on. Each with different impact and relevance time horizon wise as well as in terms of project versus shareholder level (see diagram and associated description for explanation). Investment Operating Ownership Concerning everything that relates to the scope, footprint, design, investment, obligations and entitlement that create the frame for the terminal to operate in the market. With the given frame of the investment model the operating model concerns the actual usage and deployment of shorter term resources to operate and provide services. Pertains to the individual shareholders and how they each derive their returns from the shareholding in the project or terminal company through the combination of the investment and operating models. 15. & The importance of real options Investment Model Concession, land and usage terms Investment comm