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Second, value impresarios have a clear understanding of the precise role that each business unit needs to play in the company’s overall value-creation strategy. One com- pany we have worked with, for example, assigns each of its more than 45 lines of business to one of three roles in the company’s overall portfolio: growth businesses, with strong prospects for long-term expansion and sustainable profitability based on clear competitive advantages; fi- nancing businesses, with solid competitive positions and the aspiration to be important sources of net cash flow; and turnaround businesses, which require major restruc- turing or possible exit in order to create value. In addition to defining the aspirations and key performance indica- tors for each business, these roles also determine the spe- cific metrics used to evaluate executive performance.

Third, value impresarios use TSR as the central metric for value creation. Because it incorporates the value of divi- dends and other cash payouts, TSR is a far more compre- hensive measure than share-price appreciation. It is also a better metric than commonly used operational proxies for value creation such as growth in EPS or economic

profit, or even cash-based metrics such as cash flow re- turn on investment (CFROI) or cash value added (CVA).

Fourth, value impresarios manage the drivers of TSR di- rectly at the business unit level. In effect, they treat busi- ness units as independent companies competing for cap- ital in a kind of internal stock market. Units are responsible for delivering a required contribution to TSR through some combination of sales growth, margin im- provement, and increased asset productivity. The internal TSR system uses metrics equivalent to a company’s capi- tal gain—that is, it incorporates the increase in the intrin- sic value of the unit, typically measured by growth in sales and margins. It also tracks a unit’s “dividend” con- tribution by measuring the cash flow that the unit returns to corporate aer reinvestment. Internal TSR metrics are a comprehensive way to ensure that a company’s internal targets are tightly linked to what actually creates value for shareholders. Instituting such a system, for example, was a key factor in Procter & Gamble’s (24) turnaround aer a major decline in its share price in 2000. (See the sidebar “Procter & Gamble: Managing for TSR.”)

Procter & Gamble Managing for TSR

When A.G. Lafley was appointed CEO of Procter & Gamble in June 2000, the company was at a low point. On March 7, 2000, the company had announced that it would miss its quarterly earnings estimate for the first time in 15 years, causing its share price to plummet. Since January 2000, the company’s market capitalization had dropped roughly $85 billion. “P&G Investor Confidence Shot,” read one headline in the financial press.1

Among the many steps Lafley took to transform P&G’s per- formance, one of the most important was to start manag- ing the company explicitly for TSR. The process began with setting an ambitious TSR goal. Lafley and his team defined a peer group that included not only traditional consumer- goods rivals such as Unilever and L’Oréal but also large cor- porations in other industries that were competing with P&G for investors’ dollars. The company’s TSR target was for P&G to be in the top third of this group over rolling peri- ods of 3, 7, and 10 years—something that none of the com- panies in the group had achieved over the previous 20 years.

Defining this ambitious goal put the company’s current problems in stark focus. The company’s current growth

rates were nowhere near enough to meet the new TSR tar- get. Executives estimated that in order to achieve top-third status within its peer group, P&G would need to nearly dou- ble its current revenue growth rate.Even worse,what growth the company was delivering was increasingly coming at the expense of margins. Although, on the whole, the company’s top line had been growing slightly, too much spending chas- ing questionable growth initiatives was causing its overall EBITDA margin to decline. This decline contributed to the company’s missing its earnings estimates in March 2000 and was causing investors to question the company’s growth plan. So the challenge wasn’t just generating more growth; it was doing so at lower cost and higher profitability.

The company’s new focus on TSR was a key factor in push- ing the organization to strike the right balance between these sometimes conflicting goals. P&G created an internal system of metrics known as “operational TSR” to measure the performance of its brands and business units in terms

1. See A.G. Lafley, speech delivered at the eighteenth session of the Integrative Thinking Seminar, Rotman School of Business, Uni- versity of Toronto, April 21, 2003, available at http://www.rotman. utoronto.ca/integrativethinking/Lafley.pdf.

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