16 - Value creation and growth Flashcards
What is the primary principle behind value creation?
The operating profit generated should exceed the cost of the capital invested in the business to generate that profit.
What was the value created by XYZ Co in the current year?
$51,600
What was the value destroyed by XYZ Co in the prior year?
$37,475
What is NOPAT?
Net Operating Profit After Tax
What was XYZ Co’s operating margin percentage in the current year?
2.6%
What was the cost of capital for XYZ Co in the current year?
12%
True or False: The cost of capital is the same as the general cost of money in the marketplace.
False
What should service providers do if they register low gross and net margins?
Review their whole proposition and consider refocusing or restructuring the entire business model.
What are the two key measures of profitability for service providers?
- Gross margin
- Net margin
What should service providers investigate if gross margins are low but net margins are adequate?
Whether they are charging enough for the value delivered.
What is one strategy for improving profitability related to pricing?
Experiment by increasing prices systematically.
Fill in the blank: The _______ of the billable team should be up to date and fit for market.
skill set
What is an alternative to organic skills development?
Skills acquisition through recruitment or acquisition of a company.
What can service providers do to improve profitability by changing their business mix?
Sell more higher-end ‘solutions’ that deliver greater value.
What does a high gross margin but low net margin suggest?
There isn’t enough volume to cover the unused capacity and overheads.
What is a recommended strategy for increasing sales?
Sell larger projects.
What should service providers do to manage the risks associated with larger projects?
Invest in the right project management skills and disciplines.
Why is increasing the level of repeat business important for service providers?
- Lower sales effort required
- Quicker sales cycles
- Reduced risk of unknowns
- Potential for higher margins
What is one benefit of working within a familiar customer environment?
Reduces the risk of unknowns, scoping errors, and wrong assumptions.
What should management be able to do regarding product and service business models?
Identify and manage them separately.
What is the key constraint on growth in the product model?
Working capital
What usually constricts growth in the service model?
Productive headcount and billable capacity
What is essential for managing growth in a service provider business?
Ability to read the sales pipeline and sense the level of demand ahead.
Fill in the blank: Sensitivity analysis involves modeling a variety of _______.
realistic alternative scenarios
