Maximizing Portfolio Profit: An EVA Approach Mark Lundeen & Shane Johnson September 21, 2007. Mark Lundeen. Undergrad: University of Illinois Urbana-Champaign; B.A.—Int’l Trade & Consumer Economics
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Maximizing Portfolio Profit: An EVA ApproachMark Lundeen & Shane Johnson September 21, 2007
Grain Trader/Exporter, Archer Daniels Midland, Brazil & Paraguay
Senior Financial Analyst, Pizza Category Finance
Johnson & Johnson Depuy Orthopaedics
Manager, Technical Sales, Advanced Data Exchange, Palo Alto, CA
Finance Manager, Customer Development Organization—Safeway Sales Team, Livermore, CA
Sr. Financial Analyst, Customer Service & Logistics, Chicago
K-Mart Holding Corp.
What is the role of Finance?
How is Finance involved with new product development?
What are key financial measures to remember when developing a new product?
What is a Business Proposition? Approach
A BP (Business Proposition) identifies the strategic rationale and financial implications for a project. The BP is often used to present the project to senior management, gain cross-functional alignment and once approved, is the record of what was agreed to.
The objectives of the BP process are to ensure that:
When is a BP Required? Approach
The BP process must be followed, with the appropriate levels of authorization received for any change in execution resulting in:
In order to ensure a complete and sound economic analysis of a business proposition, special consideration should be given to the following:
The primary measures used to analyze the financial attractiveness of investments are:
Both are Discounted Cash Flow techniques using the time value money concept
However, we must keep in mind that making a decision on a business proposition always requires careful weighting of many parameters, including strategic/defensive needs, financial attractiveness, risk profile, . . . and cannot be narrowly based on financial return measures alone
The business proposition is the end result of a long iterative process that starts early in the new product development process and requires continuous refinement of assumptions
Business Proposition Process
The EVA framework can be used to analyze a variety of business situations
With over 1,700 product groups, 40 Manufacturing locations and 20 distribution centers, some sort of overall, activity-based system is needed.
Hire a Michigan MBA to figure it out increasingly volatile, Kraft must have correct transfer pricing by product group.Kraft had Two Options to Address this Issue
Invest several hundred thousand dollars in IT resources to track product movement in and between all facilities
Distribution & Transportation increasingly volatile, Kraft must have correct transfer pricing by product group.
By replacing Rate, Volume and Mix with these drivers, we were able to identify and correct inefficient product handling in the Kraft network and find areas of potential cost savings.
Distribution & Transportation--Examples increasingly volatile, Kraft must have correct transfer pricing by product group.
This is an example of how finance can make a meaningful impact on the operations of a large organization
Profitable categories becoming a larger percentage of total segment revenue