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A Case Study of KPMG Consulting’s
Enterprise Value Creation Framework
By: Marcy Jill Strauss
High Tech Lead, Enterprise Value Creation
KPMG Consulting
ContentsContentsContents
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Executive Summary……………………………………3
Introduction…………………………………………4
Methodology and Analysis…..……………………5
Findings..……..………………………………….…7
Results…..…………………………………….……10
E x e c u t i v e S u m m a r y
Yichang, a subsidiary of the $8 billion Chinese steel behemoth BaoSteel Group, came to
KPMG Consulting to understand the changes required to be globally competitive, now that
China has been admitted into the World Trade Organization (WTO).
The client selected KPMG Consulting’s Enterprise Value Creation framework that has been
known to create value for companies, and has earned favorable acclaim from external analysts
at Goldman Sachs, Aberdeen Group and AMR, among others.
Through the Enterprise Value Creation (EVC) framework, the team was able to understand
Yichang’s primary problems, and to develop solutions to address these issues. From the
beginning, a high level of executive participation helped the team to hone in on the process
areas of focus. They included:
1. New Product Development
2. Marketing, Market Analysis, Product Pricing
3. Sales, Customer Service, Channel Management, Customer Solution Development
4. Financial and Managerial Accounting, Cost Controls
5. Performance Management
The team relied on interviews, management reports, quantitative analysis, benchmarking,
competitive intelligence and best practice information to ascertain and document the current
state of Yichang’s processes and operational efficiency. A Scorecard and Value Impact
Analysis were used to create medium and long-term target metrics.
After two client offsite meetings to gather feedback and to develop consensus within the
management team, a roadmap was developed that prioritized and laid out future initiatives.
The scorecard metrics were directly linked to the fulfillment of the roadmap projects so
ongoing measurement could be applied to gauge progress. The impact of process changes
were also linked to BaoSteel’s financial statements.
In ten weeks KPMG Consulting’s work positioned the client to:
Achieve consensus on the current state issues
Distinguish the areas of greatest opportunity
Agree on remedies to current problems
Mobilize efforts to become more efficient and competitive
Systematically measure and achieve the desired results
KPMG Consulting’s primary sponsor, the CFO, believes the EVC project was pivotal in the
company’s ability to be successful as the implications of China’s acceptance into the World
Trade Organization are realized.
I n t r o d u c t i o n
China’s economy has been expanding at an annual rate of seven percent over the past three
years. The GDP growth of Shanghai has approached ten percent during that same period. This
has been fueled by China’s entry into the World Trade Organization, as well as the increased
globalization of trade and the development of an educated, tech-savvy workforce.
While China’s steel market has become the world’s largest, with annual demand estimated to
grow by 50 million tons to more than 182 million tons by 2005, industry expansion plans fall
far short of these numbers. Only 27 million additional tons of capacity are forecast to be built,
forcing the existing plants to either become more efficient quickly, or to leave a lot of demand
on the table.
Demand for steel in the US, Europe and Japan has been sluggish while China has seen growth
of over 400% since 1980. Consuming over 130 million toms in 2000, China is now the
biggest steel market in the world. China consumed more than 130 million tons1 of steel in
2000, surpassing the United States to become the biggest steel market in the world. Three
percent of the nation’s $1Trillion gross domestic product comes from steel and over three
million people are employed in the industry.
Jonathan Woetzel, a director in McKinsey & Co’s Shanghai office believes that the
“country’s steel producers are in poor shape to take advantage of their homeland’s boom.
Fragmented, uncompetitive, unprofitable, heavily in debt, and geared to the wrong products,
they are losing out to imports.”
BaoSteel Yichang, like most of China’s steel industry, has focused primarily on producing
steel rather than on satisfying customers. The company tries to keep the mill running at
optimal capacity to maximize their Return On Assets instead of focusing on increasing profit
and customer satisfaction. Many operational improvements and mind-set changes, such as
managing processes instead of managing siloed functions, are required for real efficiency
gains to be felt.
Yichang, a subsidiary of the $8 billion steel behemoth BaoSteel Group, came to KPMG
Consulting to understand the many changes it would have to make to compete in the global
market effectively.
The client wanted an actionable roadmap they could embed in their immediate operating
plans. They viewed the roadmap as the initiating step of an evolutionary process to sustain
their profitability as they enter the global steel market. Many management practices that are
established in faster moving industries and in more aggressive markets had not yet been
introduced into BaoSteel, given the protected markets and significant government
involvement in China’s steel industry. The Chief Financial Officer considers KPMG
Consulting a strategic partner in educating the team in proven business practices.
Methodology and Analysis
Specifically, BaoSteel Yichang sought to:
1. Diagnose inefficiencies in its operational and infrastructure processes
2. Identify improvement opportunities
3. Develop specific recommendations and solutions for future execution
4. Add metrics and quantitative measurement around it’s key process areas
5. Instill more rigorous performance management practices to aid in accomplishing
goals
The client selected KPMG’s Enterprise Value Creation framework that has been known to
create value for companies, and has earned favorable acclaim from external analysts at
Goldman Sachs, Aberdeen Group and AMR, among others.
Through the Enterprise Value Creation (EVC) framework, the team was able to understand
Yichang’s primary problems, and to develop solutions to address these issues. From the
beginning a high level of executive participation helped the team to hone in on the process
areas of focus. They included:
New Product Development
Marketing, Market Analysis, Product Pricing
Sales, Customer Service, Channel Management, Customer Solution Development
Financial and Managerial Accounting, Cost Controls
Performance Management
Starting with detailed in
person interviews with
each of the functional
area heads, the team
stepped through the five
stage EVC process.
The interviews focused on understanding the current processes used in each area. These
meetings, paired with reviewing management reports and other materials, comprised the
primary method used to develop the Operational Blueprint (EVC Phase 2). Pointed
questions
laid the foundation for the teams’ exploration of the As-Is state. Each interview was
augmented by further discussions with individuals responsible for key tasks within each
process.
Interview questions included:
1. What are the key processes in your area?
2. Diagram the key processes.
3. What is the estimated cost of each process?
a. How long does it take?
b. How many people are involved?
4. What metrics are used today to manage the processes?
5. What are the problems associated with the current processes?
6. What do you think should be done instead?
7. What metrics should be used to manage the new process?
8. What changes are needed to transition to the new processes?
9. What organizational structure would optimize process efficiency? (Draw it)
Process maps were developed that highlight the key steps in each focus area.
The team
distilled the
metrics
currently
applied to as-
is processes
to understand
how efficient
and effective
they are.
These
process
maps,
together with
conclusions
regarding
how the
processes are
managed and
monitored,
were
integrated
into a current
state
blueprint.
Findings
Based on this information, the team identified trends throughout the organization suggesting
that an inconsistent level of integration among the functional groups was hindering efficient
management of fundamental cross-functional processes. In some cases the team had to create
the as-is process maps during the interview and to ferret out the implicit metrics around the
vital activities within that process. Together the team came to an understanding that functional
walls and the siloed orientation of the enterprise were significant factors in creating
inefficiencies and driving up costs. Information useful to many teams was frequently the
domain of one function, and was not necessarily communicated to other groups. Decision
making relied on limited understanding of the impact on processes further up and down the
value chain. This impeded accountability for the decisions, and disincented a broad,
contextually informed approach to tasks.
Additionally, performance incentives were function specific and put the Manufacturing, Sales
and Marketing teams at loggerheads. The former is incented to keep asset utilization levels
high, while the later two are measured on customer satisfaction and sales levels. A number of
the groups had a difficult time diagramming the key processes under investigation.
Individuals’ thinking had been caught within functional walls. Linking tasks that spanned
different departments, such as new product development, required puzzeling together pieces
of disparate functional responsibilities.
This meant that communication addressed specific tasks instead of overall processes. It also
meant that there were few or no metrics used to manage efficiency and effectiveness from end
to end. Metrics such as New Product Introduction Cycle Time, keenly regulated by many
High Tech companies where product iterations are introduced every 3-6 months, were not in
place at BaoSteel Yichang. While the manufacturing team could tell us the value of scrap
produced in tuning a new width of cold rolled steel sheets, the cost or time of the development
process itself was not readily known or managed.
Once the current state processes and conclusions had been validated, the team set out to
aggregate best practice processes to create a gap analysis. Methodologies, metrics, benchmark
values, process maps, and example case studies were developed for each of the four areas.
The research came from analyst groups such as Gartner Group, IDC, Meta Group, as well as
Harvard Business Review, and steel industry related publications. Non-industry specific
information was customized to address Yichang’s needs by the Client / KPMG Consulting
process teams.
Using this information, the team located gaps between best practices and the current state as-
is processes. Three to five recommended projects were scoped in each of the four process
areas that would help BaoSteel Yichang fill the gap. Each new process, organizational and
infrastructural change was supplemented with corresponding metrics. These metrics and
benchmark values are considered indispensable to manage the process effectively.
A two day offsite meeting was held an hour outside of Shanghai to communicate the details of
the recommendations. The team and executive sponsors focused on making sure that each
internal stakeholder felt his/her needs were well represented and met by the current
assessment and recommendations. Best practice information was presented in support of all
recommendations, so the client could understand the sources of the ideas and how they can be
put into practice at BaoSteel.
Project scoping and validation was accomplished the second day leaving the team to prioritize
the recommended projects. A decision model called the Business Value Matrix was employed
to help prioritize projects by ranking them based Operational Importance and Ease of
Execution.
Each project was reviewed and ranked by the team along these criteria. An indication of
the ranking was then
placed on the matrix so the
overall portfolio of
recommendations could be
understood. It is important
to note how the
recommendations for each
process area are prioritized.
An aggregation of projects in
one area, suggesting
similar roll-out priorities, can
require lofty demands on
management and staff time. This makes them difficult to roll-out effectively without
staggering the timing. This occurred with the Finance recommendations. The team re-
scoped the projects to include the greatest benefit up front while still laying the necessary
foundation for future requirements.
The placement was then re-evaluated based on sequencing requirements, corporate goals,
and the expected impact of earlier projects on later stage initiatives. Once this “second-
round” prioritization step was taken, those initiatives falling in the top right quadrant –
those of high importance that are easy to execute – are generally pursued first. A Value
Realization Roadmap (EVC Stage 3) was then crafted. The roadmap phased the projects
into three month increments.
A Scorecard (EVC Phase 5) was then built to enable management to keep the team focused on
what needs to be accomplished. It is also a tool to drive performance. Current and target
values were calculated for 40 operational and financial metrics. The metrics follow the four
high priority process areas. Example metrics are:
1. New Product Development
NPD Cycle Time
Percent of Revenue from Products Less than Two Years Old
2. Marketing, Market Analysis, Product Pricing
Market Share
Forecast Accuracy
3. Sales, Customer Service, Channel Management, Customer Solution Development
Average Contract Size
On Time Delivery
Dispute Resolution Cycle Time
4. Financial and Managerial Accounting, Cost Controls
Inventory Turns
Cash to Cash Cycle Time
COGS Percent of Revenue
The Scorecard was supplemented by target values that were based on benchmarks. The
benchmarks came from a mixture of competitive data collected through a Value Impact
Analysis (EVC Phase 1) as well as best practice and competitive research. Industry reports
such as the Steel Industry Survey provided aggregate Financial and Operational benchmarks
for the most competitive companies. Working with the client, decisions were made regarding
target values that could be reached as a result of implementing the recommendations.
Results
In ten weeks KPMG Consulting’s work positioned the client to:
Achieve consensus on the current state issues
Distinguish the areas of greatest opportunity
Agree on remedies to current problems
Mobilize efforts to become more efficient and competitive
Systematically measure and achieve the desired results
The team identified three areas of greatest client challenge:
Inconsistent integration among functional groups
Inability to share data with company-wide value beyond functional boundaries
Lack of metrics and no emphasis on enterprise level efficiency or value creation
The client is pleased with the team’s conclusions and is currently moving forward with the
recommendations to become more process-driven and to link decisions to corporate value.
Specific actions being taken include the launch of a full ERP initiative.
The CFO believes the EVC project was pivotal in the company’s ability to be successful as
the implications of China’s acceptance into the World Trade Organization are realized.
