Value-based management
The Group is managed and controlled using a value-based management system. Our objective is to systematically and continuously increase the value of the enterprise - through profitable growth and a focus on businesses which offer the best development opportunities in terms of competitiveness and performance. An integrated control concept, value-based performance indicators as well as measures to enhance efficiency and optimize capital employed are key elements of our management system.
Control concept secures Groupwide transparency
Our integrated control concept guides and coordinates the activities of all segments, supports the decentralization of responsibilities and guarantees Groupwide transparency. It aims to increase the value of the Group by bridging operational and strategic gaps between the actual and target situation through the use of concrete measures. For this we have established high-quality systems for the up-to-date reporting of actual and forecast figures of both strategic and operating elements. This focus on value creation pervades all management processes. As measures of business success, the main performance indicators used in value management are also used to calculate the variable components of management compensation.
ThyssenKrupp Value Added as central performance indicator
The central performance indicator for value-based management in the Group is ThyssenKrupp Value Added (TKVA). TKVA measures the value added in a period at all levels of the Group. It is the difference between ROCE (return on capital employed) and WACC (weighted average cost of capital), multiplied by capital employed. Capital employed is defined as invested assets plus net working capital.
In addition to TKVA, cash flow is also taken into consideration to ensure that, especially in growth phases, the Group portfolio comprises a balanced mix of value drivers and cash providers.
The weighted average cost of capital (WACC) is the minimum return demanded by investors and creditors. It is calculated on a pre-tax basis and comprises the weighted average cost of equity and debt as well as the interest rate for pension obligations.
On the basis of the above factors, the weighted average cost of capital for the Group was 9% in fiscal 2006/2007. Specific WACC figures are established for the segments which reflect their respective risk structures.
Since the business environment is constantly changing, the weighted average cost of capital is regularly reviewed and adjusted if necessary. For fiscal year 2007/2008, WACC for the Group and the segments has been lowered by 0.5 percentage points mainly due to the impact of German tax reforms and the resultant lower tax adjustment for the cost of equity. The pre-tax weighted average cost of capital for the Group has thus been reduced to 8.5%.
Application of the value management system
Three levers can be used to increase TKVA: profitable growth, increases in operating efficiency, and optimization of capital employed. Value through profitable growth is created in particular by new investment projects, provided they generate returns higher than their cost of capital. A major contribution to increasing operating efficiency is made by the ThyssenKrupp best value enhancement program. Capital employed as the third lever to increase TKVA can be optimized by withdrawing from business activities in which the cost of capital cannot be earned. Alternatively, targeted programs can be implemented to release capital, i.e. to reduce capital employed without reducing EBIT.
The following tables show how TKVA and its components developed over the last two fiscal years:
The results of the analysis of the performance indicators feed directly into portfolio management at ThyssenKrupp. This involves structural measures with a primarily strategic character. Specifically it involves selecting and growing businesses with which the targeted TKVA improvements are to be realized, and withdrawing in a timely and profitable way from activities which do not achieve adequate TKVA improvements. In addition, it involves developing new businesses by entering into promising new markets on favorable terms. In this way we create the basic requirements for the ability to pay dividends and for sustainable, profitable growth in our core businesses.
Source: Annual Report 2006/2007, pages 54-58