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Strategic Corporate Finance: Applications in Valuation and Capital Structure by Justin Pettit

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VALUE-BASED STRATEGIES AND TACTICS

Although countless individual operating actions can create value in any given business, they must all lead to one of four categories measured by an increase in economic profit. Specifically, EP can be increased through strategies that employ the following four means.

Fix

Improve the returns on existing capital through higher prices or margins, more volume, or lower costs. Economic profit margins subsume profit margin and asset utilization:

  • Initiate industry efforts to pool and optimize industry-specific assets or activities. These may be established as independent, or jointly owned and operated networks to improve utilization
  • Employ “virtual” vertical or horizontal integration to enhance value chain transparency. Improved supply and demand visibility can improve efficiency and utilization through broader network optimization.
  • Optimize material flow with dynamic Economic Profit optimization of fulfillment economics. Production economics for companies that move/make things remain largely misunderstood, undermanaged, and suboptimized

Sell

Rationalize, liquidate, or curtail investments in operations that cannot generate returns greater than the cost of capital:

  • Outsource unprofitable activities (in-source capacity that cannot be viably outsourced, sold or closed), restructuring a smaller manufacturing footprint, sale or divestiture, withdrawal from unprofitable markets
  • Creative business sale strategies, such as employee, customer or management ...

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