Author: Mark Streich

What is it worth to YOU?

Going into a negotiation, the management team of a mid-sized company discussed a potential deal:

Business Development: If we can buy it for $68mm or less, it clears our hurdle rate.
Chief Strategy Officer: What’s our BATNA? [Best Alternative To a Negotiated Agreement]
Senior FP&A Analyst: If we pay $68mm, it reduces our enterprise value. We have to get it below $54mm to be a net positive.
Chief Strategy Officer: Why is that?
Senior FP&A Analyst: Paying any more than $54mm and using other resources on this project keeps us from doing a few other projects that are collectively worth more to us than this one.

This conversation happens all the time at companies that actively use portfolio management to aid their decision making.

Two or more companies could use the exact same forecasts and assumptions about an acquisition, but may still decide it is worth different amounts. That’s because the companies all have different alternatives. If they complete the acquisition, it will likely mean they cannot do other projects under consideration. And that’s because few companies have infinite resources, and doing Project A means you may not be able to move forward with Projects B and C.

The value of the npv10 solution is to very quickly evaluate your alternatives, recalculate all of the pertinent key performance indicators, all while achieving corporate goals within the given constraints.

Beyond the quick analysis, executive discussions can focus on relaxing constraints (perhaps by raising additional capital, or finding other necessary resources) to enable the firm to take on additional valuable projects. The software will show which KPIs are “bumping against the ceiling” and you can decide if they are “hard ceilings” or have some flexibility.

If you are frequently considering acquisitions or divestitures, and want to quickly determine how they impact your company, let us help model your business and its opportunities, and show you how to maximize your company’s value.

Strategic vs. Opportunistic

“What’s the difference between being strategic versus opportunistic?” a friend recently asked.

After thinking about it, I answered, “Suppose you want to make $1,000. Being strategic means you come up with a strategy or plan that you reasonably expect to make that amount, perhaps investing in a stock or bond, or take a job that pays that much. Being opportunistic means you wander the streets looking for loose change.”

It is usually straightforward to know how a company operates by looking at its portfolio of business lines. Strategic companies have fairly similar-looking opportunities, almost cookie-cutter in their appearance. By knowing what they do well, they develop plans to replicate their successful endeavors. Having this tight focus enables them to have better insights into how these ventures work, and hopefully work together for greater efficiencies.

Opportunistic companies are always on the lookout for “a good deal.” Their portfolio is a collection of seemingly unrelated ventures, with little or no cross-venture benefits. They may still make a good deal of money, but they are dependent upon a sufficient number of acceptable deals to come their way. In essence, they wait for opportunities to come to them, instead of making the opportunities happen.

If we look at the world’s largest companies, we see 14 banks in the top 50, 6 oil companies, 6 automotive companies, 6 insurance companies, 5 utility-like companies, 3 drug companies, 3 tech companies, 2 consumer electronics companies, and 2 consumer packaged goods (CPG) companies. There is only one potentially opportunistic company among the 50, Berkshire Hathaway, although they may actually be an insurance company that also invests opportunistically in a wide variety of industries.

These are the most valuable companies in the world, and they show the value of a focused strategy. They didn’t become that valuable waiting for opportunities to come along. They made the opportunities happen.

Using a disciplined portfolio strategy will enable you to set audacious goals and develop a plan to achieve them. Contact us to start you on the path to becoming one of the LARGEST COMPANIES in your industry.

You Can’t Get There From Here

Whether you are in Maine trying to get to Millinocket, or are in your FP&A group figuring out how to achieve the latest corporate goals, “You can’t get there from here” may be the only possible answer.  Your company may have goals that are simply unattainable given where you are, and the paths available to you.

Some companies simply reduce the goals to what is achievable, and claim victory when the lowered target is surpassed.  This would be like wanting to get to California from New York, with only enough fuel to get to Ohio.  You then decide that Ohio is your goal.  And sometimes, frankly, that is your only option to creating a plan that is achievable.  But this should not be the only option considered.

Other companies simply add up the plans from their various divisions, and call that their plan.  There may be some back and forth negotiation on the details, but executives at least know what the divisions are signing up to deliver.  But this is like taking a trip and making random turns until at some point you stop and proclaim, “We’re here!”  Yes, you technically make it to your destination, but it may not be where you really wanted to end up.  And it fails to take into account the many interactions or dependencies among your divisions.

With goal-based planning, you start with your overall goals in mind, and then determine what it takes to achieve them, selecting and sequencing the many options available to you. This approach changes the discussion your management team has, focusing on goals instead of arguing over getting more budget for this or that opportunity.

On that NY to CA trip, you would realize that you could take one of many routes, with different total miles or total time required.  You may still only have enough fuel to get to Ohio on that trip, but you would know that you’re getting closer to your goal, and you would know what it takes to achieve it.  You can then work on getting the necessary resources to achieve the overall goal.

Contact us to discuss how your company or business unit can use goal-based planning to achieve your goals, consider alternatives much more quickly, and ultimately how it improves the value of your company.