Value adding manager
Competitive methods exercise
Overview of exercise to be completed
The purpose of this exercise is to identify the key competitive methods that your firm is
currently employing by competing in its industry sector. Additionally, based upon the
environmental analysis completed, it is necessary to identify the new competitive
methods that may be required. Upon completion of the identification, the future cash
flow stream of each CM must be identified taking into special consideration the life of
the CM, the risk associated with the cash flow stream, and the subsequent cost of capital
to provide the necessary return required.
Objectives of exercise
Upon completion of this exercise the learner will have identified the present and future
competitive methods of the organization to be employed in the domain and competitive
environment. Secondly, the learner will have estimated the free cash flows associated
with each competitive method and rank each according to its overall value to the
organization.
Resources to use in completing the assignment
The learner is directed toward chapters five and six in Strategic Management in
Hospitality Industry, 2nd Edition 1998, by Olsen, West and Tse and published by John
Wiley and Sons. Additional required resources include:
Tasks to be performed
The following tasks should be performed in the sequence suggested. The forms are
provided as a guide to assist in this process.
1. Identify the current products and services provided by your organization.
2. Identify the products and services that will be required to compete in the future.
3. Group products and services into unique competitive methods (CM) that will be
sustainable.
4. Estimate the life cycle of the CM.
5. Determine the cash flow stream for the CM over its useful life.
6. Rank the competitive methods according to their cash flow value to the
organization.
7. Conduct a thorough and complete analysis of the investment costs that will be
incurred with each competitive method.
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Value adding manager
Competitive methods exercise
Criteria for the evaluation of competitive methods:
The overall purpose of this exercise is to determine the competitive methods that the firm
will employ in the future. Each competitive method must reflect the forces driving
change in the environment of the firm. There must be clear evidence provided that the
force leads to the competitive method to insure co-alignment is achieved. The products
and services described must be clear and precise and generate value for the firm.
Each competitive method must generate a cash flow stream that adds value. This cash
flow stream must be accurately estimated in order to be sure that risk is limited. With
these assurances, the cost of capital must then be estimated. It is expected that the cost of
capital will vary according to each competitive method. Of importance here also is that
the life of the method must be estimated using the key value drivers as identified in the
remote and task exercises.
In addition to using the forms provided, a narrative justifying the one competitive method
that you have determined provides the greatest value must be provided. This narrative
must clearly and consciously explain why you have chosen it and how it is linked to each
value driver identified in the remote and task environments. It must also clearly indicate
the potential risks associated with this investment and how you plan to minimize these
risks. Each statement made must be well justified. Each assumption must be backed up
by valid and reliable data. You must spend the necessary time to justify this competitive
method in the context of the remote and task environmental analyses you performed in
the prior two assignments.
Criteria that must be addressed:
1. The competitive methods are closely linked to the forces identified as driving
change.
2. Each competitive method is made up of products and services (that are thoroughly
described) that have demonstrated, or are believed to have, the potential to add
value to the firm.
3. The life span of each method has been determined using the key value drivers
identified in the environmental scanning exercises.
4. The cost of capital has been estimated using best practices and reflects the risks
associated with each CM.
5. Competitive methods reflect industry-wide critical success factors and industryleading innovation and creativity.
6. Competitive methods are ranked according to their value-adding capability.
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Value adding manager
Competitive methods exercise
Requirements for analysis of each competitive method
1. A thorough description of the competitive method including in-depth coverage of
each product and service included in the CM.
2. A substantive discussion of how this CM relates to the important forces driving
change in the environment of the firm. This includes a thorough look at the cause and
effect relationships that exist between the firm and its environment. This must reflect
an anticipatory view.
3. A well thought out justification as to the actual life cycle of the CM. This must
include the analysis of your financial position as well as that of your competitors.
4. Cash flow estimates must contain a very well thought out and comprehensive set of
assumptions behind each of the line items on the cash flow worksheet. This means
that revenue projections must contain realistic projections using all the possible data
and information from primary and secondary sources. Key indices for value drivers
must be included in justifying cash flow assumptions. Key metrics on firm
performance must also be included. Since this is the most important junction where
concepts translate to reality, the bulk of the work must be on substantiating
assumptions with quantitative data. This standard applies to each of the following:
 Changes in revenue
 Changes in expenses
 Changes in working capital
 Changes in tax rates
 Changes in depreciation and amortization
5. The probable causes of cash flow variance must be identified and described. The risk
factors must be assessed in terms of their probable influence on timing and cost.
6. The cost of capital associated with each CM must be estimated. This estimate must
reflect the firm’s average cost of capital and must consider the risks associated with
the CM. The adjusted present value concept should be used when possible to
disaggregate the key elements of the cost of capital. This includes assumptions
behind the risk free rate, the average cost of debt of the firm based upon its present
debt structure and the explanation of the equity costs as estimated internally and by
various analyst firms.
7. An estimate must be made as to what percentage of the total market capitalization of
the firm is represented by this CM.
8. A well developed analysis of where your firm is with respect to your competitors on
this CM. Statements as to whether you are the leader, at par with, or behind the
competitor must be supported by solid evidence.
The standards here should be of the highest level. When possible, acknowledged quality
sources of information must be employed and more than one source of information must
be used on key metrics measuring the above-related matters. Each assumption must be
well thought out and researched.
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Value adding manager
Competitive methods exercise
Structure for presenting the analysis of a competitive method
1. Executive summary
2. A justification of the forces driving change – here it is expected that a very solid
case can be made that will identify how and why the force has relevance to your
firm’s future.
a. A thorough overview of all the forces in the remote and task environment
impacting your firm and the subsequent opportunities you see or threats
you need to avoid.
b. A comprehensive identification of the external value drivers related to the
forces identified, including key sources and overall timetable of analysis.
c. A discussion of the cause and effect analysis between the external value
drivers and internal value drivers of the firm.
d. A thorough and complete analysis of the demand curve for the competitive
method(s) chosen. This includes the determinants or value drivers
underpinning the demand in the context of the present and future
competitive environment.
3. A description of the competitive method
a. A thorough explanation of the products and services making up this
competitive method.
b. Your rational estimate of the life of the CM.
c. An assessment of the risk associated with this investment.
d. Your determination of the vulnerability your firm has with regard to this
CM.
e. Where do you stand against the competition and other elements of the task
environment?
4. The investment required
a. Determine the key elements of the initial investment.
b. Determine relevant cost of investment in each element.
c. Discuss any engineering or design costs.
d. Discuss any quality issues that have a bearing on the investment cost.
e. This must take into consideration the financial strength of your primary
competitors in order to estimate how quickly they can compete with you
on the key value-driving competitive methods.
5. Cost of capital
a. Determine relevant cost of capital using appropriate techniques for both
debt and equity. Must reflect reality and not just theory.
b. Determine financing structure.
c. Estimate financing costs.
6. Estimate the cash flows, NPV, IRR, and other financial matters.
a. All assumptions must be linked to value drivers and other determinants
identified earlier in this analysis.
7. Estimate what percentage of the company’s most current market capitalization
this CM makes up.
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Value adding manager
Competitive methods exercise
Current competitive methods
Competitive Method
List and describe products and services
Competitive Method
List and describe products and services
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Value adding manager
Competitive methods exercise
Current competitive methods
Competitive Method
List and describe products and services
Competitive Method
List and describe products and services
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Value adding manager
Competitive methods exercise
Current competitive methods
Competitive Method
List and describe products and services
Competitive Method
List and describe products and services
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Value adding manager
Competitive methods exercise
Future competitive methods
Competitive Method
List and describe products and services
Competitive Method
List and describe products and services
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Value adding manager
Competitive methods exercise
Future competitive methods
Competitive Method
List and describe products and services
Competitive Method
List and describe products and services
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Value adding manager
Competitive methods exercise
Future competitive methods
Competitive Method
List and describe products and services
Competitive Method
List and describe products and services
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Value adding manager
Competitive methods exercise
Competitive method
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Indicate industry value
drivers supporting this life
cycle estimate and their
forecast
Estimate life span of CM
Implementation
Market lead
time
Set up time
Competitor response/capability
—
Be sure to include financial
capability to respond
Number of
periods
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Value adding manager
Competitive methods exercise
Estimating the cost of capital
Firm specific information
1.
Graph the following for your firm for the past five years:
a. The return on invested capital
b. The returns on equity for the market, the industry sector, your firm’s key competitors, and your firm
c. The free cash flow
d. Cash flow from operations
e. Average interest rate paid for all debt
f. The debt and equity amounts in absolute dollars
g. Market capitalization
Industry specific information
1.
Graph the following for the industry sector in which your firm competes for the past five years:
a. The industry sector’s cost of capital
b. The industry risk premium
c. The industry’s average return on invested capital over the past five years
d. The industry’s average return on equity over the past five years
General information for the past five years
1.
Graph the following for the past five years:
a. The prime rate
b. The S&P 500 or comparable index based upon the country in which your firm’s headquarters are located
Commentary and assumptions
Estimate the firm’s cost of capital by utilizing the above information to support your assumptions behind the cost of debt and equity. It is essential that you
reflect the risk associated with the cash flow streams of each of your competitive methods. Your assumptions must be explicit and reflect rational thinking and
best practices. This estimate will be the one you will use for determining the value of all your competitive methods.
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Value adding manager
Competitive methods exercise
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Change in Revenues
less change in operating expenses
equals - change in EBITDA
less change in depreciation and amortization
equals - change in EBIT
less change in interest expenses
equals change in earnings before taxes
less change in taxes
equals change in net income
plus change in depreciation and amortization
equals change in cash flow from operations
less working capital changes
equals changes in operational cash flows to equity
Discount
rate for project
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Present value of cash flows
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Value adding manager
Competitive methods exercise
Summary analysis
Name of competitive method:
Products and services:
Products:
Services:
Changes in remote and task environment regarding:
Forces driving change
Value drivers
Critical success factors
Life cycle
Changes in cash flow estimates and NPV
Original estimate
Current performance
Assessment of the future performance of this competitive method including all key performance
indicators
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Value adding manager
Competitive methods exercise
Competitive method
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Estimated cash flow
vlaue
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Value adding manager
Competitive methods exercise
Scorecard for exercise
Company:
Team members:
Date submitted:
Criteria
The determinants of the demand curve have been
identified and forecasted in the context of the current
and future competitive situation. The target market is
clearly defined and estimated based upon forces
driving change and identified value drivers.
The competitive methods are closely linked to the
forces identified as driving change and the target
market identified.
The competitive methods reflect the task environment
analysis.
The life span of each method has been determined
using the key value drivers identified in the
environmental scanning exercises.
Competitive methods reflect industry-wide critical
success factors, value drivers, and industry-leading
innovation and creativity.
Competitive methods are ranked according to their
value-adding capability.
The cash flow streams estimated for each CM reflect
best practices.
The cost of capital has been estimated using best
practices and reflects the risks associated with each
CM.
Total points
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Comments
Points
/100
/50
/50
/50
/40
/60
/60
/60
/470
Commen
ts:
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Value adding manager
Competitive methods exercise
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