Strategic Thought Transformation - The IIPM Think Tank
Strategic Thought Transformation - The IIPM Think Tank
Strategic Thought Transformation - The IIPM Think Tank
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transactions (including capital inflows<br />
and outflows), while OCWF<br />
only includes operational wealth<br />
flows. <strong>The</strong> most analytical aspect<br />
of this part is that the aggregate of<br />
the past period’s OCWF is increased<br />
with a pre-decided rate of return<br />
and is called the Past Augmented<br />
Wealth Status (PAWS). PAWS is thus<br />
the past period’s operational wealth<br />
gain or loss, whose value has been<br />
increased (that is, augmented) by<br />
the Augment Interest Rate (AIR) to<br />
represent its true value as in the<br />
current period. Thus if Rs.100 was<br />
earned in operational wealth in the<br />
last period, its true current value<br />
for correct comparison with current<br />
figures would be Rs.120 in case AIR<br />
is 20% (100 + 20%). AIR has been<br />
explained later on in the discourse<br />
on DWACC.<br />
Part B (CLAWS: CLuster<br />
Augmented Wealth Status):<br />
This part displays the actual operational<br />
wealth gain or loss in the<br />
current period after analyzing the<br />
performances of the current period.<br />
CLAWS thus displays the summation<br />
of actual current Operational<br />
Cluster Wealth Flows during the<br />
current period. Interestingly, due<br />
to the premise of dividends being<br />
an operational expense, payment<br />
of dividends would reduce CLAWS,<br />
but have to be necessarily made according<br />
to the promised schedules in<br />
the Wealth Time Frontier annexures.<br />
Positive CLAWS most often add to<br />
the WTF Tally of the MetaSBU and<br />
negative CLAWS generally reduce<br />
the WTF Tally.<br />
Part C (FEET: Future Endeavours<br />
Expected Target):<br />
<strong>The</strong> third part is the most important<br />
part of the Wealth Digress Body<br />
and displays the present value of<br />
expected future operational flows<br />
of wealth that would be achieved<br />
in a definite number of future periods,<br />
after considering environmental<br />
changes and forecasting using advanced<br />
tools. It should be realized<br />
very clearly that FEET displays the<br />
Time value of money (Paws, Claws, Feet)<br />
In Wealth Digress Body<br />
A wealth infl ow of Rs.100 today is not equal to a wealth infl ow of Rs.100 say<br />
in the next year. <strong>The</strong> amount of Rs.100 that we might receive after one year is<br />
actually equal to a lesser amount today; ‘how much lesser’ is found out by discounting<br />
the next year’s amount of Rs.100 with an interest rate that is equal to the<br />
required rate of return. If we use 10% as the discounting rate, then the amount<br />
of Rs.100 that we receive after one year is today actually equal only to Rs.100<br />
divided by 110%. That is, equal to Rs.90.90 of today. In other words, if we had<br />
Rs.90.90 today and if we were to invest this amount in an activity (or say, bank<br />
deposits) that could get us 10% returns, then this amount of Rs.90.90 would have<br />
become Rs.100 after one year. If we discount tomorrow’s Rs.100 with a lesser<br />
interest rate (say 5%), then the same amount is equivalent today to an amount of<br />
Rs.100 divided by 105%; that is, Rs.95.23. In other words, lower the discounting<br />
rate, higher the present value of future wealth fl ows; higher the discounting rate,<br />
lower the present value of future wealth fl ows. This is the concept of time value<br />
of money with respect to the Wealth Digress Body<br />
expected (most probable) and most<br />
realistic future target that can be<br />
Standard periods of<br />
forecasting range<br />
from 4 to 6 years;<br />
beyond which<br />
interest rates ensure<br />
that present values<br />
fall<br />
achieved by the management, given<br />
the strategies, competencies & environment<br />
that the MetaSBU is endowed<br />
with. FEET is not the vision, rather<br />
the target that should be achieved for<br />
giving profitable returns. <strong>The</strong> figure<br />
of future operational wealth flows is<br />
forecast utilizing technically efficient<br />
methodologies mentioned throughout<br />
(dynamic game theories, quantitative<br />
algorithm building measures, factor<br />
analysis models, market research exercises<br />
etc). This is not a figure that<br />
should be just management’s perception<br />
of business competitiveness and<br />
expected future sales. <strong>The</strong> question<br />
of how many periods in the future to<br />
consider totally depends on the industry<br />
dynamics. Shareholders would<br />
not be ready to wait for 15 years to<br />
see their present value dreams come<br />
true. Standard periods of forecasting<br />
for modern corporations actually range<br />
from four to six years; beyond which<br />
the discounting interest rates anyway<br />
ensure that present values fall down<br />
dramatically. <strong>The</strong> forecasting aspect is<br />
further described in one of the paragraphs<br />
below. However, this takes care<br />
that calculations are attempted not<br />
just based on handful of factors, but<br />
in some cases hundreds of importance<br />
units of data (including industry life<br />
50 STRATEGIC INNOVATORS<br />
An <strong>IIPM</strong> Intelligence Unit Publication