Ariunjargal Byamba

Munkhjargal Tsedensodnom Chapter 23:International Control

Contents
 History
 Company status
 Value Based Management
 Economic Value Added
 Questions and Answers
 History

• The company was founded in

1876 in Aachen as Henkel & Cie
by Fritz Henkel and two more
partners.

• At the same time, Henkel’s first

brand-name product “Universal-
Waschmittel” (Universal
Detergent) appeared.

(1848-1930)
 History
In 1878, Henkel started In 1907, Persil was In 1995 and 1997, Hans
to produce his new launched as world’s Schwarzkopf GmbH
brandname product first self-acting and Loctite Corp.
“Bleich Soda” . laundry detergent. were obtained.
Employees

● 53,000 employees
● 120 different nationalities
● 78 different countries

Women account for

34.7 percent of the managers in
the company.
Business Units

Henkel

Laundry and Adhesive

Beauty Care
Home Care Technologies
Laundry and Home Care
● Products : laundry detergents, laundry additives,
dishwashing ,hard surface cleaners, toilet care,
air care, insect control products

● Strong competition in this field comes from

huge players like Procter&Gamble, Unilever or
Reckitt Benckiser.

● This business area is characterised by a high

level of internationalisation.

● Large customers include German retail

companies like Edeka, Rewe or Metro as well as
French Carrefour and US Walmart.
 Beauty Care
● The beauty care sector is divided into three sub fields:
hair care, body,care and skin/oral.

● The strongest sector is hair care, which is responsible

for two-thirds of the quoted sales. This is thanks to the
strong brand Schwarzkopf, one of the world’s leading
suppliers of hair salon products thanks to its
professional line.

● Other representative brands are Syoss, Dial and got2b.

● Major competitors in this field include L’Oréal,

Procter&Gamble, Unilever, Beiersdorf and KAO.
Adhesive Technology

● Henkel is the world market leader in adhesives,

sealants and functional coatings.

● The adhesive technologies business unit supplies

different target groups like end-consumers, craftsmen
and industrial business under various brands.

● Key competitors in the three customer groups of

industry, consumers and craftsmen are Bostik, Sika
and BASF.
International Control
at Henkel
● Henkel, especially its
controlling, is influenced by
shareholder value. This is
particularly reflected by its
values, where the pursuit of
sustainable financial
performance is noted.
Value Based Management
The key elements of value-based management are
the
● creation of shareholder value,
● the identification of value drivers,
● the connection of performance measurement,
● target setting and rewards for value creation or
value drivers as well as the connection of
decision making and action planning (strategic
and operational) to value creation or value
drivers
Performance Metrics

● The key part of a value-based management system is a

performance metric which is able to measure a company’s
value.

● Traditionally used metrics like earnings has limitations, so it is

necessary to use value-based metrics which draw on cash
flows or earnings after the cost of equity.
Economic Value Added

● Economic Value Added (EVA) has become an extremely popular

shareholder value method of measuring corporate and divisional
performance and may be on its way to replacing ROI as the standard
performance measure.

● EVA measures the difference between the prestrategy and post-strategy

values for the business. Simply put, EVA is after-tax operating income
minus the total annual cost of capital.
Video
Elements of Economic Value Added
● Net Operating Profit After Taxes (NOPAT)
● Invested Capital
● Weighted Average Cost of Capital (WACC)

● EVA= (NOPAT) - Invested Capital * (WACC)

Return on capital employed
Performance and Financial Key Figures for the Henkel Business Units
Laundry & Home Care Beauty Care Adhesive Technologies

2013 2018 2013 2018 2013 2018

Sales
4580 6419 3510 3950 8117 9403
(in million EUR)
EBIT
682 970 474 589 1271 1669
(in million EUR)
Adjusted Return on Sales
15.6% 18.1% 15% 17.1% 16.9% 18.7%
(EBIT)
Capital Employed
2321 7381 2007 3983 6752 8637
(in million EUR)
Weighted Average Cost of
7.5% 9% 7.5% 9% 10.5% 10.5%
Capital (WACC)
Return of Capital Employed
29.4% 13.1% 23.6% 14.8% 18.8% 19.3%
(ROCE)
Economic Value Added
507 306 323 230 562 762
(EVA; in million EUR)
Question 1
Henkel heavily emphasises the shareholder value
concept. Compare and discuss the shareholder value
approach with the alternative concept known as the
“stakeholder approach”.
Question 2
The shareholder value is established in Henkel’s vision
and values. Which other areas are affected by this
approach?
● Henkel’s corporate governance is dedicated to achieving a
long-term increase in shareholder value. Achieving sustainable
EVA has a huge influence on all operating and strategic
decisions like acquisitions or divestments.
Questions 3
This case study highlights the usage of economic value
added (EVA) as a measure in value-based management.
Explain why traditional accounting measures like
earnings or earnings growth are inappropriate value
based management measures.
Traditionally used measures like earnings do not suit the requirements of value-based
management, because they do not show the shareholder wealth which has been created.
Specifically, the following shortcomings describe why rewarding earnings or earnings
growth may lead to value-reducing decisions inconsistent with shareholder interests:
● Earnings include non-cash items such as depreciation & amortization with no impact
on shareholder value.
● Earnings are not necessarily comparable across firms, since accounting principles
differ across countries and frequently entail some choice and scope.
● Earnings are not adjusted for the time value of money, ignoring anticipated inflation
rates.
● A single year’s earnings level does not indicate volatility over periods due to external
influences and the firm’s management decisions, thus, not reflecting the firm’s
business risk and financial risk appropriately.
● Earnings account for the cost of debt and preferred stock, but omit opportunity costs
for equity capital, thus, overstating value addition.
Question 4

Which other value-oriented approaches except EVA

exist? List their advantages and disadvantages.
● The most common are:

● Residual income (RI) is excess income generated more than the minimum
rate of return. RI is typically used to assess the performance of a capital
investment, team, department, or business unit.
● Economic profit (EP)- type of "what if" analysis. If economic profit comes
out to zero, the company is said to be in a state of "normal profit."
● Cash value added (CVA)- is cash flow that surpasses the Cash flow return
on investment required by investors. The difference between CVA and EVA
is that CVA focuses on the cash flow aspect of the firm.
 Advantage Disadvantage

RI Gives another view on project Difficult to compare across units (not

profitability percentage unit)
Can encourage a short run orientation

EP Helps weigh all opportunities Difficult to estimate

Measures success Does not account for several important
Measures efficiency financial aspects

CVA Not affected by accounting Hard to implement (predicting inflation

depreciation rates)
 Annette Holler, New Metrics for Value-Based Management,
Additional
●
2009

Sources ●
●
Henkel-Annual Report for 2018
https://www.henkel.com
● https://www.investopedia.com
 Thanks!
Does anyone have any questions?