Reebok 2010 Annual Report Download - page 130

126 Group Management Report – Financial Review Internal Group Management System
Internal Group Management System
The principal financial goal for increasing shareholder value at the adidas Group is maximising operating cash flow. We strive
to achieve this goal by continually improving our top- and bottom-line performance while at the same time optimising the use
of invested capital. Our Group’s planning and controlling system is therefore designed to provide a variety of tools to assess
our current performance and to align future strategic and investment decisions to best utilise commercial and organisational
opportunities.
Operating cash flow as Internal Group
Management focus
We believe operating cash flow to be
the most important driver to increase
shareholder value. Operating cash
flow is comprised of operating profit,
change in operating working capital
and net re-investments (capital
expenditure less depreciation and
amortisation) see 01. To maximise
operating cash flow generation across
our organisation, management of our
operating segments and management
at market level have direct responsibility
for improving operating profit as well
as optimising operating working capital
and capital expenditure. To keep senior
management focused on long-term
performance improvements we have
adopted a modified economic value
added (EVA) model. The asset base of
a market or operating unit within the
Group is subject to a percentage capital
charge to the operating profit of the
respective business unit. The asset base
includes the working capital as well
as other assets needed by a market
or operating unit in its day-to-day
operations. The resulting internal KPI is
called Contribution After Capital Charge
(CACC) and is used as one of the primary
targets for the variable component of
managers’ compensation. This concept
was introduced Group-wide in 2010.
Operating margin as key performance
indicator of operational progress
Operating margin (defined as operating
profit as a percentage of net sales) is
our Group’s most important measure
of operational success. It highlights the
quality of our top line and operational
efficiency.
The primary drivers central to enhancing
operating margin are:
– Sales and gross margin development:
Management focuses on identifying
and exploiting opportunities that not
only provide for future growth, but
also have potential to increase gross
margin (defined as gross profit as a
percentage of net sales). Major levers
for enhancing our Group’s sales and
gross margin include
– optimising our product mix,
– increasing the quality of distribution,
with a particular focus on controlled
space,
– supply chain efficiency initiatives,
– minimisation of clearance activities.
– Operating expense control: We put
high emphasis on tightly controlling
operating expenses to leverage the
Group’s sales growth through to the
bottom line. This requires a particular
focus on ensuring flexibility in the
Group’s cost base. Marketing working
budget is our largest operating
expense. It is one of the most important
mechanisms for driving top-line
growth. Therefore, we are committed
to improving the utilisation of our
marketing expenditure. This includes
concentrating our communication
efforts (including advertising, retail
presentation and public relations)
on key global brand initiatives and
focusing our promotion spend on well-
selected partnerships with top events,
leagues, clubs and athletes. We also
aim to increase operational efficiency
and reduce operating overhead
expenses as a percentage of sales. In
this respect, we constantly review our
operational structure – streamlining
business processes, eliminating
redundancies and leveraging the scale
of our organisation. These measures
may also be supplemented by short-
term initiatives such as temporarily
curtailing operational investments, for
example staff hiring.
Operating cash flow components
1) Capital expenditure less depreciation and amortisation.
01
Operating profit
Operating working capital
Net re-investments 1 )
Operating
cash flow