Strategic capability is quite simply the capacity of a business to survive, prosper and deliver future value. It comprises a number of distinct components. Clarity of thinking and action in objectives and strategy; evidence of strategy in action and strategic progress in operational achievement; sensitivity to the future and to the impact of controllable and uncontrollable trends and factors upon future performance; investment in resources, strengths and less tangible drivers of value; and, an approach to social ethical and environmental matters that is integral to the strategy of the business.
The aim of strategic value analysis is to assess the relative capacity of a company to drive value, sustain profits and achieve growth. It achieves this through the interpretation of strategy and strategic capability content disclosed in a listed company's annual reporting narrative. Best practice guidance and statutory regulation both provide a framework for annual reporting that enables consistent evaluation and comparability of strategic value added between companies.
Strategic value analysis is the process of evaluating and scoring the individual components of strategic capability - as itemised above - to arrive at a score for strategic value added that is directly comparable with other companies.
A Strategic Value Profile encapsulates the rigorous and detailed analysis of each listed company's reporting narrative. Covering seven separate factors the Profile addresses the components of strategic capability disclosed by a company. FutureValue scores each company for the comparable and evident quality of the strategic capability disclosed to estimate the relative strategic value added. A Profile is in effect an 8-page Report covering some fifty or more questions and three or more different analysis models.
The Strategic Value Profile uses a template that contains more than fifty questions, the answers to which FutureValue scores on a scale of 1 to 10. Our research methodology also uses analytical models such as the Resources Grid and KPI Effectiveness Grid to add breadth and depth to this analysis. So, the output from our analysis is as rigorous and consistent as can be, even though we are evaluating subjective, non-numerical data.
These Reports are intended for anyone for whom the future performance of a quoted company is of importance. These therefore have relevance to a wide range of stakeholders as well as to investors and to the senior executives of the companies in review.
It will provide you with fresh insights that are not readily apparent to those who are not as expert in strategy as the FutureValue research team. Experience, both our own and that of our clients, indicates that a Strategic Value Profile will highlight points to explore in the process of positive engagement with a company that would not otherwise be apparent. There is also particular merit in comparing companies within sector using this technique. Strategic value analysis seems to uncover the DNA of a company.
A Strategic Value Profile will help you to formulate a judgment about the leadership and management of a company, how well that company is run and its capacity to improve its performance, sustain growth and so optimise its future value. Our work over the last five years in reviewing and evaluating forward-looking disclosure, and correlating this with share price performance, has helped to demonstrate the value of narrative non-financial report content.
It is fundamental to current and future performance. How you articulate your Company's strategic thinking, planning and underlying action has become an important indicator to analysts, investors as well as to stakeholders more generally of your company's capacity to generate future value. What appears in the annual report narrative as evidence of strategic capability is as important to future value as the accounts are evidence of past performance.
Academic research has identified the role of investor confidence in the correlation between narrative disclosure and share price performance. This is why communication and coherence are two of the seven evaluation factors. This increasingly requires evaluation of different media such as online interactive annual reporting as well as annual reviews and super-summaries.
Comparability is pivotal to effective strategic value analysis. So, just as annual accounts provide historical comparability, annual report narrative provides forward-looking comparability, encouraged by best practice guidance and enforced by statutory requirement.
The OFR is a narrative explanation, provided in the annual report, of the main trends and factors underlying the development, performance and position of an entity during the financial year covered by the financial statements, and those which are likely to affect the entity's future development, performance and position. Its objectives are: to improve transparency; and, to improve the quality, usefulness and relevance of information provided by quoted companies, thus improving the understanding of the business and its prospects and encouraging shareholder to exercise effective and responsible control.
Introduced to incorporate the EU Accounts Modernisation Directive into UK law in 2005, Business Review legislation requires that the Directors' Report [the core of the annual report narrative] must contain a fair review of the business of the company, and a description of the principal risks and uncertainties facing the company. The Review should comprise a balanced and comprehensive analysis of the development and performance of the business of the company during the financial year, and the position of the company at the end of that year.
The Companies Act 2006 has sought to increase the value of the Business Review', making it largely similar to the OFR. The EBR also requires information about the main trends and factors likely to affect the future development, performance and position of the company, as well as information about social, ethical and environmental matters. It applies to companies' year-ends starting on 1 October 2007 or thereafter.
There are clear similarities between the Business Review legislation and the Operating and Financial Review (OFR). Both require companies to report on their key performance indicators and principal risks, on the trends and factors likely to influence future performance, as well as on social, ethical and environmental issues. Unlike the OFR best practice guidance, the Business Review legislation omits two important elements - the requirement to explain the market context and the strategy of the company. So, companies complying with the minimum statutory requirement will get a low score from FutureValue. They will also leave investors and other stakeholders with limited knowledge about a company's strategic capability.