Jacques Saint-Pierre

Integration of Net Present Value (NPV), Economic Value Added (EVA), and Free Cash Flows (FCF)

To date, ignorance seems to persist about the link between these three concepts. The reason is probably that there is no unequivocal demonstration of the relationship between the concepts of Economic Value Added (EVA), Free Cash Flows (FCF) and the well-known traditional method of the Net Present Value (NPV). The decision makers are still wondering what relationship can truly exist between the EVA and their good old concept of the NPV whose application in the choice of investments or strategies would result in maximizing the value of their company. This article fills this gap by presenting a formal proof and a numerical demonstration. This article is circulating among the MBA students and executives for over ten years and I am always surprised by the need it fills with readers. One need only have a look in the financial literature to be convinced of the depth of ignorance about the interrelationship between these three concepts.

Formal strategic planning, informedness and firm performance: An empirical investigation

Formal strategic planning (hereafter FSP) is the most sophisticated form of planning. It implies that a firm’s strategic planning process involves explicit systematic procedures used to gain the involvement and commitment of the stakeholders most affected by the plan. There is a significant strategic dimension to the planning at both corporate and lower levels. In this context, the corporate plan is a document that takes a corporate perspective and is not just an agglomeration of lower level p1ans.l A recurring theme in management literature is that firms should engage in such systematic or formal strategic planning. Advocates of planning such as Ansoff (1984), Hax and Majluf (1984), and Thompson and Strickland (1978) argue that FSP contributes to managerial effectiveness and, thus, to corporate success. A logical extension of this assertion is that firms engaged in FSP should outperform firms not engaged in such planning and/or that firms’ post-planning performance should be superior to their performance prior to launching formal strategic planning processes. No clear empirical evidence, however, has emerged to support a positive relationship between FSP and organization performance. Studies of the performance-planning relationship for American firms are inconclusive with respect to the benefits of corporate planning, and little direct evidence on this topic is available on Canadian firms.2

The Most Relevant Value Creation Indicator Under Competitive Dynamics of the Firm

This paper shows the most relevant value creation indicator in a competitive economic equilibrium framework. We analyze the relationship between the cost of capital and the competitive dynamics of the firm. Several related propositions on the most relevant value creation indicator under a dynamic competitive setting are developed to establish the theoretical framework of the research hypotheses. A sample of 80 U.S. firms in convergence to equilibrium and cross section data are used in the empirical analysis. Firstly, we compare the costs of capital estimated from the CAPM with those from the Discounted Residual Income Model (DRIM). Using the competitive advantage period “T” as the forecast period in the DRIM, we have considered it as an ex ante model that takes into account the competitive dynamics of the firm. Secondly, we tested the explanatory power of the marginal return to cost of capital ratio from the DRIM compared to that of the CAPM. Finally, we tested the explanatory power of the marginal return to cost of capital ratio compared to the marginal performance spread (the difference between the marginal return on capital and the cost of capital). The results of difference tests, Cox tests, and J tests of Davidson and MacKinnon (1981) show that the marginal return to cost of capital ratio from the DRIM is the most valuable indicator of value creation.

The Competitive Advantage Period (CAP) as a Basis for Portfolio Selection (Sélection De Portefeuilles Et Prédictibilité Des Rendements Via La Durée De L’Avantage Concurrentiel)

La finance et la strategie ont ete, pendant longtemps, developpees en toute independance, de telle sorte qu’on parle d’une dichotomie entre les deux disciplines. L’analyse strategique a essaye de fournir des reponses aux questions suivantes : Quels sont les avantages concurrentiels possedes par l’entreprise ? Combien du temps vont-ils durer ? Comment peut-on, dans un univers competitif, les proteger, les conserver ou les transformer ? Toutefois, elle n’a pas essaye de les quantifier. L’importance accrue de l’approche de la creation de valeur a constitue le point de depart du processus de convergence entre l’analyse financiere et l’analyse strategique, ou de maniere plus large, entre finance et strategie