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Value creation across the corporate and M&A lifecycle

This is the first article of our fifth blog series. It generalises the principles for value creation and leadership with key focus on innovation and special situations that were introduced by the book “Transforming Financial Institutions”. EES offers a comprehensive programme on Entrepreneurial Leadership in the Digital Age.

Value creation is a management philosophy with the goal to drive an institution’s growth and performance through aligning processes, governance and culture. Its objective is to increase the worth of an entire business driven by intrinsic value drivers that can be measured by a tangible set of performance metrics. This terminology became a widely used term since its introduction of the shareholder-value approach and value-based management in the 1990s. Under the shareholder-value paradigm, value creation becomes the key strategic and operational priority that drives all company decisions.


As a managerial concept, value creation focuses on the financial impact of defined strategic and operational initiatives measured by key performance indicators (KPIs). Those KPIs can be return metrics such as return on investment (ROI), operating profitability and cash-flow generation such as earnings before interest, taxes, depreciation, and amortisation (EBITDA). The individual steps can be illustrated and visualised by value bridges as a central pillar of the value-creation plan and toolkit. Business operators with focus on creating shareholder value and financial performance such as private equity firms and activist investors use value creation initiatives as a key toolset of their investment strategy.


The value-creation toolkit

Value creation starts with setting strategy but follows through with its execution. Its toolkit consists of strategy methodologies, the target operating model (TOM) and data-driven decision-making. The strategic and operational initiatives can be illustrated by a value-creation plan with a value bridge. This toolkit finds its applications across the corporate and M&A lifecycle.


Strategy through execution

A strategic and end-to-end solution framework is required for the execution of a comprehensive value-creation and business-transformation framework across the commercial, operational, and financial dimensions of a business. Strategic decision-making aims to follow a scientific approach but often is more art than science. It aims to clarify the uncertainty in decision making with an applied set of problem-solving principles. It is applied to complex, unstructured, and multi-dimensional issues, driven by the uncertainty of human behaviour and decision making.


As a methodology, strategy combines a rigorous planning approach with adaptability to the circumstances given the uncertainty of the situation. Corporate and business strategy follows a vision for a business in accordance with an executable mission of a specific commercial and operational plan. This involves determining and implementing long-term goals and objectives, with the considerations of an organisation’s market positioning and available capabilities. These considerations include competitive analysis, macroeconomic and industry conditions, regulatory constraints, and other dimensions of the internal organisation and external environment. The ability of an institution to convert strategy into a successful business is directly related to the continuous testing of the logic and the assumptions when making structured decisions about how to win in a competitive marketplace.


Scientific approach

Strategic analysis is by nature solution-oriented and hypothesis-driven while being fact-based at the same time. The process of coming up with a good strategy has the same logical structure as the problem of coming up with a good scientific hypothesis. As strategy deals with the edge between the known and the unknown. It is an educated guess about what will work in a specific situation. As a decision and problem-solving process, it applies a structured framework to generate fact-based hypotheses followed by data and information gathering with the objective to prove or disprove the hypotheses.


This process is known as a hypothesis-driven approach, a cornerstone in strategic analysis. The methods starts with understanding the situation, framing the problem, analysing through gathering information as well as data and finally concluding the analysis by guiding policies and coherent action plans. In its analytical approach, it simplifies the complexity and reality by identifying certain aspects of the situation as critical.


Strategic and risk intelligence

Through a systematic, scientific-driven approach, specific insights are gained for strategic planning and the decision-making process. The combination of the insights with a specific modelling approach leads to the development of advanced analytics that provides decision makers with actionable descriptive, predictive, and prescriptive decision intelligence augmentation. Mathematical and quantitative methods provide objectivity but are crucially dependent on data. In combination with artificial intelligence, including big-data and machine learning techniques, these methods fundamentally augment the available intelligence for decision making.


Complexity science is the systematic investigation of emergent phenomena, following a multidisciplinary approach from mathematics to economic, political, and social sciences. As part of it, complex adaptive systems (CAS) theory integrates holistically different theories, data and evidence with their individual premises and dynamic behaviours. Its goal is to discover dynamics, conditions, and constraints that can be generalised to overarching principles for the modelling and analysis of emerging events in an integrated systemic approach. CAS attempts to integrate disparate perspectives, theories, and science together for fuller, more sound explanations and predictions. It focuses on connectivity and interdependencies across several scales and nested subsystems.


Understanding the macro environment in the context of individual, micro company performance and managers all interconnected in business-to-business and business-to-consumer meso networks of sectoral performance is crucial for decision making. Often such complex connectivity results in new, emergent behaviours. This behaviour arises from multifaceted relationships, interactions and connectivity of elements within a system and between a system and its environment. Connectivity and interdependence mean that a decision and action by any individual, group or entity may impact related individuals and/or systems. Effects are often nonlinear and contingent, as we saw with meme stocks, which might vary with the state of each related individual and system at any particular time. The generalisation of history for instance may lead to predictive power. The understanding of the history of civilisation with its philosophical, political, and economic exchange and the impact for historical development is key under this objective. What are the underlying drivers of these historical trends and developments? Can they be generalised and mathematically modelled, supported using the capability and capacity of modern computer science. Historians disagree if world history is essentially the biography of great men (the great-men theory) or if there are broader forces at play that can be modelled.


Operational design

Operational design facilitates the realisation of an organisation’s strategic ambitions. It is an expression of its strategic identity in coherence and alignment with its market position, capability set, and product and services fit. The method links back to vision, culture, and specific management processes. It is organised in accordance with the paradigm of operational efficiency in transparent alignment with its KPIs. It most importantly clarifies if resources and costs are correctly allocated, and its cost base and drivers in line with benchmarking peers and best-practice. The information flow must be guaranteed and controlled back-to-front.


The operating model can be distinguished in an as-is and target operating model (TOM). The as-is operating model is a description of today’s processes, systems, and services. It delivers a functional front-to-back view of today’s cost base which is the starting point for the performance analysis. The TOM on the other hand implies a target state that is to be attained on a going-forward basis. For any value-creation plan, the TOM is fundamental and any business performance improvement initiative such as cost reduction, restructuring or commercial as well as operational transformation. They all start with the design of the targeted state of the operation and its functions that are defined by the TOM. There are several design principles that must be incorporated.


The TOM outlines where operations and people are going to be located. It defines the organisational structure with its major business units, sets roles and responsibilities and allocated resources respectively. Tasks are defined and divided, and authorities are distributed to ensure efficient delivery. It is an expression of an institution’s day-to-day activities, organised front-to-back across functions, representing the value chain of a business. It starts with the front office which includes all revenue-based activities such as product and sales related ones. It defines the market position and how the organisation faces off to customers and competitors. It is followed by operations and technology and outlines the services that are provided. It can be divided into a middle office which includes product control and compliance functions as well as client services support. There the back-office which settles products, issues documentation, and drives standardised operational services. The shared functions support the different business units, operations, and technology across the organisation. These are finance, risk, HR as well as legal and compliance.


The TOM design should be inspired by the quality and range of possibilities that are open for the business. It is usually defined across six key dimensions or building blocks such as organisational structure, governance, authority matrix, decision rights, processes, policies, and procedures as well as staffing requirements. This incorporates which customers and markets to serve, the range and type of products and services to offer. In accordance with its coherent strategy, it is a well-defined system for planning, setting goals, delegating authority, budgeting, and measuring performance. The hierarchical structure is shaped by spans of control. Decision rights are at the same time a critical determinant of organisational performance. They describe the decision-making authority and accountability across the organisation.


Value-creation plan

The value creation plan captures and measures opportunities across a defined method. It is a blueprint of quantifiable and measurable value creation initiatives. In a first step, the value creation plan defines the sources and drivers of value creation within an institution, business, industry, and marketplace. The second step is driven by the performance metrics that quantify the performance impact of the value-creation initiative. It is defined by the valuation methodology and the applied KPIs.


Vale drivers are activities that create value measured financially through a metric across the engagement lifecycle. They may improve the commercial positioning, reduce costs through operational improvement, reduce risk and promote growth in accordance with an overarching objective of the business. This objective may include increasing shareholder value or establishing a differentiating competitive edge. There are different categories of value drivers such as commercial drivers, operational drivers and financial drivers that can be applied generically across an organisation or specifically on a product. Depending on an institution’s understanding of value, different metrics or KPI are applied to measure the value impact. Value drivers must be defined at an explicit and measurable level where specific action can be taken towards its realisation.


The most fundamental driver across all value-creation methodologies is focused on cash generation. Cash generation is measured by cash flow or a cash flow proxy such EBITDA. Operating income measured as earnings before interest and taxes (EBIT) which measures as a pre-interest earning metric the profitability of a business’s operations is the base of return of investment (ROI) assessment. The value drivers and metrics are combined to a value creation plan that describes and outlines each individual step across categories. On a combined basis, the value creation plan provides the base for value optimisation across commercial, operational, and financial initiatives. It outlines each opportunity and hence initiatives on how to increase value across categories and hence becomes an important input and decision factor.


The corporate and M&A lifecycle

Value creation and protection are natural stages of corporate development during the life cycle of a business. It can be applied broadly across incubation and build-up, growth and scalability, turnaround and transformation as well as principal investments and merger & acquisition (M&A).


Incubation and greenfield build-up

The incubation and greenfield build-up of a business from scratch requires establishing the proposition and business plan, defining the roadmap and operational blueprint, selecting technology platforms, hiring core team members, and navigating the funding process.


Growth and scale-up

Growth is a central part of the corporate lifecycle and is based on the successful scale-up and acceleration of a business. This can be achieved organically through scaling available internal resources or inorganically through purchasing other businesses. Core focus in a growth environment is on scalability and acceleration of a business’ value proposition with its product portfolio and its operational set-up represented by the institution’s capabilities, technology, and products.


Growth initiatives must be clearly articulated which may include internal build-up or the external acquisition of specific capabilities. A growth plan is to be established that follows the logic of a business plan and can further be specified through an investment memorandum that outlines the investment requirements. It starts with the product perspective with the roadmap, the marketing plan with its campaigns, evaluating the product and market fit, eventually leading to the go-to-market approach and sales model. The growth plan evaluates business’ core value drivers. Value is realised through our disciplined management approach and consistent communication with key stakeholders.


Turnaround & transformation

In special situations due to underperformance, financial distress, or corporate crises an immediate response schedule to stabilise the business needs to be defined before establishing a comprehensive turnaround plan. The turnaround plan is based on a transparent assessment of the company’s liquidity and financial situation. The plan initiates the financial, operational, and legal restructuring. It builds the fundamentals of a long-term entrepreneurial solution.


At the end of a successful turnaround, an institution often moves back on a path of value creation with the objective to lead the recovery and growth of the business. It involves the continuing improvement of an institution’s performance while the situation starts to normalise. The focus moves to profitable growth through focused marketing initiatives and enhanced efficiencies throughout the business. Scalability and growth get at the core of the value-creation agenda as soon as an organisation emerges from situations of turnaround and transformation.


Principal investments and bolt-on acquisitions

Value can be created and defended during M&A situations by becoming involved early in the process, typically during the idea generation, target identification and due diligence phase. In a buy-to-fix, a turnaround plan is established and executed across the deal lifecycle. In a buy-to-build situation, the value creation plan shapes the execution and post-deal value realisation, which is supported by a disciplined integration and/or separation approach. For an exit, it is crucial to have a clear communication framework in place to position the business to external interested parties.


Initiating and driving transforming

Initiating and driving the change and growth agenda is an important part of the leadership skill set for value creation in innovation and special situations. The last blog of this fifth series is focussing exclusively on this topic.


Notes and further reading:

  • ANSOFF, IGOR H.: Corporate Strategy, 1988

  • BAR-YAM, YANEER: Dynamics Of Complex Systems, 2019

  • BESANKO, DAVID ET AL.: Economics of Strategy, 2000

  • COUTO, VINAY, PLANSKY, JOHN AND CAGLAR, DENIZ:. Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring and Renewal, 2016

  • BRANDS, HAL (Editor): The New Makers of Modern Strategy: From the Ancient World to the Digital Age, 2023

  • BRAUDEL, FERNAND: A History of Civilizations, Penguin, 1995

  • CARLISLE, TOBIAS E.: Deep Value; Wiley, 2014

  • COLLINS, JIM: How the Mighty Fall, 2009

  • DEIBEL, WALKER: Buy then Build, 2018

  • DEPAMPHILIS, DONALD M.: Mergers, Acquisitions and Other Restructuring Activities, 2005

  • FERGUSON, NIALL: Civilization: The West and the Rest, 2018

  • FREEDMAN, LAWRENCE: Strategy – A History, 2013

  • GRAHAM, BENJAMIN: The Intelligent Investor, Revised Edition, 2003.

  • GRAHAM, BENJAMIN. Security Analysis; Sixth Edition, 2009

  • HARNISH, VERNE: Scaling Up, 2004.

  • HUNTINGTON, SAMUEL P.: The Clash Of Civilizations: And The Remaking Of World Order, 2002

  • JOHNSON, LUKE: Start It Up, 2012.

  • JENSEN HENRIK JELDTOFT: Complexity Science: The Study of Emergence, 2022

  • KIECHEL III, WALTER. The Lords of Strategy, 2010

  • KISSINGER, HENRY: Leadership: Six Studies in World Strategy, 2022

  • KOLLER, TIM ET AL.: Valuation, 2020

  • LEINWAND, PAUL AND MAINARDI, CESARE: The Essential Advantage: How to win with a capabilities-driven strategy, 2010

  • LEINWAND, PAUL AND MAINARDI, CESARE: Strategy that works, 2016

  • MEADOWS, DONELLA: Thinking in Systems: A Primer, 2008

  • MCKEOWN, M: The Strategy Book, 2019

  • MINTZBERG, HENRY: Rise and Fall of Strategic Planning, 1993

  • MURRIN, DAVID: Breaking the Code of History, 2011

  • QUIGLEY, CAROLL: The Evolution of Civilizations: An Introduction to Historical Analysis, 1961

  • RUETSCHI, JOERG: Transforming Financial Institutions: Value Creation through Technology Innovation and Operational Change, 2022

  • RUTHERFORD, ALBERT: The Systems Thinker, 2018

  • RASIEL, ETHAN M. AND FRIGA, PAUL N.: The McKinsey Mind, 2010

  • RUMELT, RICHARD: Good Strategy, Bad Strategy, 2011

  • SHAPIRO, ALAN C. AND SHELDON D. BALBIER: Modern Corporate Finance: A Multidisciplinary Approach to Value Creation, 2000

  • THAKOR, ANJAN V.: Becoming a Better Value Creator: How to Improve the Company’s Bottom Line – and Your Own, 2000


  • ZEISBERGER, CLAUDIA, MICHAEL PRAHL AND BOWEN WHITE: Mastering Private Equity: Transformation via Venture Capital, Minority Investments and Buyouts, 2017


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