Reebok 2013 Annual Report Download - page 122

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adidas Group
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2013 Annual Report
Group Management Report – Financial Review
118
2013
Internal Group Management System
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03.1
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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 is the most important driver to increase
shareholder value. Operating cash flow is comprised of operating
profit, change in operating working capital and net investments
(capital expenditure less depreciation and amortisation)
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DIAGRAM 01.
To maximise operating cash flow generation across our organisation,
management of our operating segments together with management at
market level have 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
net 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 operating 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 has been in place
Group-wide since 2010.
Operating margin as important KPI of operational
progress
Operating margin (defined as operating profit as a percentage of
net sales) is our Group’s key focus measure to drive and improve
our operational performance. It highlights the quality of our top line
and operational efficiency. The primary drivers central to enhancing
operating margin are as follows:
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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:
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Optimising our product mix.
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Minimising clearance activities.
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Increasing the quality of distribution, with a particular focus on
controlled space.
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Over-proportionate growth in emerging markets.
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Realising supply chain efficiency initiatives.
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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 one
of our largest operating expenses and also one of the most important
mechanisms for driving top-line growth sustainably. Therefore, we are
committed to improving the utilisation of our marketing expenditure. This
includes concentrating our communication efforts (including advertising,
public relations and digital media) 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 regularly
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.
Furthermore, we carefully analyse the different mix effects which
impact the Group’s profit ratios, as our business performance differs
significantly across geographical markets, business models and
channels. The strategic implications and decisions taken in this respect
are a key element of our strategic planning efforts, ensuring clarity and
focus of the organisation to maximise the Group’s operating margin.
01
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Operating cash flow components
Operating profit
Operating
cash flow
Change in operating working capital
Net investments 1)
1) Capital expenditure less depreciation and amortisation.