A defense of the total return to shareholders (TRS). Our authors use TRS as the bottom-line performance indicator, and come up with a number of performance insights.
High Performance? Your Strategy Matters
Leadership requires alignment between performance measurement and strategic priorities.
will seek to maximize investment return and cash flow to stakeholders by reinvesting free cash flow in high return projects in the utility’s asset portfolio. They will focus on:
• Capital/resource allocation: strategic management rather than operational;
• An integrated portfolio management model that emphasizes value creation at points of value chain integration, e.g.:
• Supply and Trading;
• Retail and Supply Acquisition; and
• Trading, Pricing and Structuring.
• Active portfolio management
• Targeted asset acquisitions rather than whole company deal; and
• Innovative disaggregation of assets, e.g., distribution versus field services.
• Risk management: focused risk-taking;
• Core operations leveraged for predictable cash flows and lower cost of capital; and
• Aggressive shedding of non-core activities.
Winners Will Align Their Strategies To Their Capabilities
Even though growth companies provide a decidedly superior TRS performance, their risk and range of performance is higher than with value companies. We believe both growth and value companies have strong value propositions for the future and will continue to develop as the competitive and regulated aspects of the deregulated market continue to evolve and mature. Each group faces a set of common and unique challenges—leaders will surpass their peers in aligning their value creation strategies to their asset portfolios, business capabilities, and regulatory/stakeholder strategies.
High performance in the utility industry will be defined by companies that clearly can choose and deliver on their strategic aspirations—value or growth.