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Increase Your Company's Value: Use the Value Multiplier

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The Value Multiplier helps leaders understand why investors prefer some business models more than others, the history of different business models, and how to allocate your company's resources in the most valuable 'assets' (tangible and intangible).
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  • 1. Business Model Disrupted The Value Multiplier Four Steps to Creating More Value and Better Performance August 2014
  • 2. Agenda Research   Assessment   Ac-on   Measurement   2   3   4   5   Orienta-on   1   Different  ‘Asset’  Classes,  Value  Mul-pliersm   Business  Model  Index  and  Leadership  Style   Reallocate  Your  Capital  with  CAREsm   GAAP  Versus  Measuring  All  the  Sources  of  Value   Digital,  4  Business  Models,  Leadership  Preferences  
  • 3. Acquired  by  Facebook   for  ~19x  revenue   Raised  funding  at   valua-on  of  ~40x   revenue   Raised  funding  at   valua-on  of  ~50x   revenue   Recent  IPOs  and  investments  highlight  value  of  Digital
  • 4. Q. Which of the following technology enablers and/or disruptors do you believe may threaten your business model?   *Exploring  Strategic  Risk,  DeloiVe  Touche  Tohmatsu,  2013,  www.deloiVe.com/strategicrisksurvey     53%  believe  Digital  threatens  exis?ng  business  models
  • 5. Making  it  the  number  2  strategic  risk Q:  Which  of  the  following  risk  areas  have  the  most  impact  on  your  business  strategy  (three   years  ago,  today,  and  three  years  from  now)?  (Respondents  could  choose  more  than  one  answer.   The  top  three  are  shown  below)   *Exploring  Strategic  Risk,  DeloiVe  Touche  Tohmatsu,  2013,  www.deloiVe.com/strategicrisksurvey    
  • 6. 21%   21%   19%   15%   14%   Our  CEO  sets  a  clear  vision  for  digital  in   our  business   We  have  the  right  people  to  define  our   digital  strategy   We  have  the  necessary  technology  to   execute  our  digital  strategy   We  have  the  necessary  people  and  skill   to  execute  our  digital  strategy   We  have  the  necessary  processes  to   execute  our  digital  strategy   “Assessing  your  organiza-on’s  digital  readiness,  how  much  do  you  agree  with   the  following  statements?”   (8,  9,  or  10  on  a  scale  of  1  [completely  disagree]  to  10  [  completely  agree])   Base: 1,254 executives in companies with 250 or more employees *Forrester/Russell  Reynolds  2014  Digital  Business  Survey   But,  Forrester  Research  says  few  companies  are  ready
  • 7. 1991 2011 Exxon Mobil Corp Exxon Mobil Corp Altria Group Inc. Apple Inc. Wal-Mart Stores Inc. Microsoft Corp General Electric Co Intl Business Machines Corp Merck & Co Chevron Corp Coca-Cola Co Wal-Mart Stores Inc. AT&T Corp Berkshire Hathaway Intl Business Machines Corp General Electric Co Bristol-Myers Squibb Co Procter & Gamble Co Johnson & Johnson AT&T Inc. Same position Higher positionLower positionNew entrant Lost position Source: Compustat data Business  Models  Effect  Even  Most  Valuable  Companies
  • 8. So  how  did  we  get  here?
  • 9. Industrial     revolu-on  —  1800   Services     revolu-on  —  1975   Informa-on   revolu-on  —  1990   Network   revolu-on  —  2010   Technology   Time   Each  Revolu?on  was  built  on  the  last
  • 10. Industrial  Revolu5on     Began  a  new  era:          Away  from  Agriculture   •  Focused  inside  on   manufacturing  and  internal   processes…     •  New  financial  and  opera-ng   measures   •  Physical  output   •  Asset  u-liza-on   •  ROA   Digital  Revolu?on     Beginning  a  new  era:                Away  from  Info. •  Focused  outside  on  social   and  commercial  networks   and  the  big  data   produced… •  New  financial  and   opera?ng  measures •  Network  size   •   Crowdsourcing   •   Value  of  all  intangibles     Informa5on  Revolu5on       Began  a  new  era:                  Away  from  Services   •  Focused  inside  on   intellectual  property,   digi-zing  content  and   insights…   •  New  financial  and  opera-ng   measures   •  Crea-ve  output   •  R&D   •  ROI       Services  Revolu5on     Began  a  new  era:                  Away  from  Industrial   •  Focused  inside  on     hiring  and  training   employees  to  provide   services…   •  New  financial  and  opera-ng   measures   •  Revenue/employee   •  Customer  sa-sfac-on     Industrial Revolution ~1800 Services Revolution ~1975 Information Revolution ~1990 Digital Revolution ~2010 •  Key  Asset:    CapEx   •  Key  Asset:    Human   capital   •  Key  Asset:    IP   •  Key  Asset:    Network  /   rela-onships   New  Eras,  New  Models,  New  Assets
  • 11. Industrial  Revolu5on      Make  one,  sell  one               •  Focus:    High  fixed  costs,   Field  (Ins-tu-onal)  sales;     big  accounts   •   Key  Industries   •  Manufacturing   •  Transporta-on   •  Energy   •   Key  Competencies   •  Finance   •  Manufacturing   •  Distribu-on   Digital  Revolu?on   Many  make,  many  sell         •  Focus:    Even  lower  fixed   costs,  higher  gross   margins;  Inbound   marke?ng  (consumers) •  Key  Industries •   Online  marketplaces   •   Social  sorware   •   Big  data   •  Key  Competencies •  Consumeriza-on   •  Mobility     •  Engagement   Informa5on    Revolu5on   Make  one,  sell  many               •  Focus:    Lower  fixed  costs   and  higher  gross  margins:     Blended  sales;  SMB   •  Key  Industries   •  Enterprise  sorware   •  Biotechnology   •  Publishing   •   Key  Competencies   •  Enterprise  Technology   •  IP  development   •  Content   New  models,  new  economics,  new  assets Services  Revolu5on     Hire  one,  sell  one               •  Focus:    Shir  of  capital  from   CapEx  to  salary;  customer   in-macy   •  Key  Industries   •  Finance   •  Enterprise  Sorware   •  Publishing   •   Key  Competencies   •  Recrui-ng  and  training   •  Customer  service   •  Lifecycle  support   Industrial Revolution ~1800 Services Revolution ~1975 Information Revolution ~1990 Digital Revolution ~2010
  • 12. Network   Orchestrators   Technology   Creators   Service    Providers   Asset    Builders   Key assets Key competencies Key industries •  Relationships •  Network •  Knowledge •  Software •  IP •  Skilled employees •  PPE •  Consumerism •  Mobility •  Engagement •  Research & development •  Communication •  People services •  Manufacturing •  Distribution •  Social software •  Big data •  Software •  Biotech •  Energy •  Transport •  Retail •  Financial •  Healthcare •  Insurance Different  eras  create  different  industries  and  assets
  • 13. Network   Orchestrators   Technology   Creators   Service    Providers   Asset    Builders   Different  eras,  have  different  business  models Many Make, many sell Make one, sell one Hire one, sell one Make one, sell many Build Platform
  • 14. Technologies   Newer  Older   Low   High   Growth  and  Value   The  marginal  cost  for  scaling  goes  down  with  each  model! Result:  Different  models,  different  results Asset   Builders   Service   Providers   Technology     Creators   Network   Facilitators  
  • 15. Exercise:    which  business  model  are  you? ?   How  do  you  make  and  spend  money?
  • 16. As  noted,  there  are  four  business  models… Sorware  and   IP   (IQ)   Networks  and   big  data   (NQ)   Assets  and   products   (PQ)   People  and   services   (EQ)   The  digital  divide  
  • 17. Exercise:  what  is  your  business  model? 1.  Consider  your  revenues   and  ask…   2.  Where  do  most  of  our   revenues  come  from…   3.  Then,  place  a  post-­‐it  note   on  one  of  4  quadrants…   4.  Understand  what  this   means  for  how  your  firm   makes  and  spends  money   Sorware   and  IP   Networks  &   big  data   Assets  &   products   People  &   services  
  • 18. Exercise:  How  do  you  make  and  spend  money?
  • 19. Asset  Builders:  Make,  market,  distribute,  and  operate  physical   assets  and  sell  products.  Invest  in  building/acquiring/managing   PP&E.  Examples:  auto,  real  estate,  advanced  materials,  u@li@es,   airlines,  and  telecom.       Service  Providers:  Hire  people  to  produce  services  for  which   they  charge.  Invest  in  hiring/training,  ren-ng  space.  Examples:   investment  banking,  healthcare,  customer  service,  accoun@ng,   and  management  consul@ng.     Technology  Creators:  Develop  and  sell  IP.  Invest  in  developing/ marke-ng  IP  to  more  users/subscribers  (not  making  more  of  the   same).  Examples:  soAware,  high  tech,  bio  tech,   pharmaceu@cals,  Fin  Tech,  and  data.     Network  Orchestrators:  Create  networks  of  businesses/ consumers  who  interact  to  sell  products,  build  rela-onships,   share  advice,  exchange  financial  instruments,  etc.  Invest  in   technology  plauorms  and  growing  networks.    Examples:  social   networks,  commercial  networks,  and  financial  exchanges.       Other,  please  specify  ________________   100%  100%   Earnings   contribu-on   propor-on   Capital   Investment   propor-on   %   %   %   %   %   %   %   %   %   %   Please  describe  your  earnings  and  investments    u5lizing  the  four  basic   business  models  below.     First  aVempt  to  simplify.    (1)  Cut  out  the  “count”  column,  (2)  re-­‐worded  ques-on,     (3)  eliminated  “scales  by”  sec-on  of  each  descrip-on,  (4)  shortened  remaining  wording.   Make,  market,  distribute  and  operate  physical  assets  and  sell   products:  Examples  include  auto,  real  estate,  advanced   materials,  u@li@es,  airlines  and  telecom.       Design,  market  and  provide  services:  Examples  include   investment  banking,  healthcare,  customer  service,  accoun@ng,   informa@on  services  and  consul@ng.     Develop,  market  and  sell  intellectual  property:    Examples   include  soAware,  high  tech,  bio  tech,  pharmaceu@cals,  Fin   Tech  and  big  data.     Create,  market  and  operate  networks  of  businesses,   consumers,  investors,  etc.:  Examples  include  social/ commercial  networks  and  financial  exchanges.       Other,  please  specify  ________________   100%   100%   Earnings   contribu-on   Capital    alloca-on   %   %   %   %   %   %   %   %   %   %   How  much  do  the  following  business  ac5vi5es  contribute  to  your   earnings  and  consume  of  your  investments?     Shirs  away  from  “business  model  terminology”  and  toward  “ac-vity  terminology.”  Removes  “Invests   in”  descrip-on  but  retains  examples  of  industries   Make,  market,  distribute  and  operate  physical  assets  and  sell   products       Design,  market  and  provide  services     Develop,  market  and  sell  intellectual  property     Create,  market  and  operate  networks  of  businesses,   consumers,  investors,  etc.       Other,  please  specify  ________________   100%   100%   Earnings   contribu-on   Capital    alloca-on   %   %   %   %   %   %   %   %   %   %   How  much  do  the  following  business  ac5vi5es  contribute  to  your   earnings  and  consume  of  your  investments?     Same  as  above  but  removes  examples  of  industries  –  assumes  these   descrip-ons  will  fit  CFOs  percep-ons  of  what  they  do.   Exercise:    How  Do  You  Classify  Yourself  (Placeholder)
  • 20. Agenda Research   Assessment   Ac-on   Measurement   2   3   4   5   Orienta-on   1   Different  ‘Asset’  Classes,  Value  Mul-pliersm   Business  Model  Index  and  Leadership  Style   Reallocate  Your  Capital  with  CAREsm   GAAP  Versus  Measuring  All  the  Sources  of  Value   Digital,  4  Business  Models,  Leadership  Preferences  
  • 21. Industries  are  Ver?cals,  Business  Models  are  Horizontal Network  Orchestrator   Technology  Creators   Service  Provider   Asset  Builders  
  • 22. Size of circle represents number of companies within industry Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM Average Multiplier The  Value  Mul?plier  is  Inversely  Correlated  with  Tangible  Assets
  • 23. Assets 2x Services   3x   Size of circle represents number of companies within industry or multiplier group Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM Average Multiplier Industries  have  some  affilia?on  with  Business  Models Tech 5x NW 8x •  Intercon-nental Exchange  Group   •  Discover   Financial   •  TripAdvisor   •  Visa   •  MasterCard   •  CME  Group   •  Salesforce.com   •  Red  Hat   •  Google   •  eBay   •  American   Express   •  Apple   •  Nike   •  Nasdaq  OMX  
  • 24. Intangible Assets are now 80% of Market Value, Up from 20% Source: Compustat data | Research from Ocean Tomo
  • 25. 0.62   0.40   0.31   0.00   Assets   Svcs   Tech   Network   Average  COGS/Revenue   0.15   0.27   0.28   0.41   Assets   Svcs   Tech   Network   Average  SG&A/Revenue   Note: Based on analysis of the S&P 500 companies Source: Data pulled from Capital IQ database in October 2013; Revenue is prior 12 months Leaders  spend  money  based  on  their  business  model 0.01   0.00   0.15   0.06   Assets   Svcs   Tech   Network   Average  R&D/Revenue  
  • 26. Result:  Network  business  models  grow  faster… 8.4   7.9   12.6   19.4   Assets   Svcs   Tech   Network   Avg.  Revenue  CAGR  ’10-­‐’12   The  digital   divide   Note: Based on analysis of the S&P 500 companies Source: Data pulled from Capital IQ database in October 2013; Revenue is prior 12 months …  with  lowest  marginal  cost  of  expansion
  • 27. …highest  profit  margins… 0.15   0.14   0.24   0.32   Assets   Svcs   Tech   Network   Average  Profit  Margin   0.23   0.21   0.30   0.38   Assets   Svcs   Tech   Network   Average  EBITDA/Revenue   Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013; Revenue is prior 12 months
  • 28. 2.0   2.1   4.6   8.1   Assets   Svcs   Tech   Network   Average  Mul5plier  (Price  to  Revenue  ra5o)   …as  well  as  enterprise  value  premiums! Note: Based on analysis of the S&P 500 companies Source: Data pulled from Capital IQ database in October 2013; Revenue is prior 12 months The  digital   divide  
  • 29. Network  business  models  are  fastest  growing 0%   20%   40%   60%   80%   100%   1972   1982   1992   2002   2012   Types  of  companies*  comprising  the  top  5%  of  the  S&P  500  by  P/R   Assets   Services   Technology   Network   *Each  company  manually  classified  based  on  examina-on  of  business  descrip-on,  spending,  and  MD&A  from   annual  report,  along  with  press  releases  and  other  news;  company  classifica-on  was  changed  if  company  strategy   changed  over  -me   The  network  era  
  • 30. 0.00   2.00   4.00   6.00   8.00   10.00   1975   1980   1985   1990   1995   2000   2005   2010   2013   Average  P/R  Ra5o  by  Business  Model  Historically   Network   Informa-on   Services   Industrial   *Digital CAGR is 1980 – 2013 Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013; Revenue is prior 12 months CAGR   1975  –  2013 8.7%* 2.7% 4.5% 3.4% This  trend  is  accelera?ng  and  premiums  are  widening Assets   Technology  
  • 31. 0   20   40   60   80   100   120   140   160   0   1   2   3   4   5   6   7   8   9   10   11   12   13   14   15   16   17   18+   Distribu5on  of  S&P  500   Investors  pay  more  than  $18  for   each  $1  of  revenue   Investors  pay  less  than  $1  for   each  $1  of  revenue   But:    80%  of  companies  are  s?ll  asset  and  services  firms Number of companies that fall within each range 80% of companies have P/R ratio less than 3
  • 32. Exercise:    which  business  model  are  you? ?   How  do  you  make  and  spend  money?
  • 33. Agenda Research   Assessment   Ac-on   Measurement   2   3   4   5   Orienta-on   1   Mental  Models,  ‘Asset’  Classes,  Value  Mul-pliersm   Business  Model  Index  and  Leadership  Style   Reallocate  Your  Capital  with  CAREsm   GAAP  Versus  Measuring  All  the  Sources  of  Value   Digital,  4  Business  Models,  Leadership  Preferences  
  • 34. Our  research  indicates  that  Business  are  f(Mental  Models) Mental  model   Business  model   •  What  leadership…   •  Believes  is  important   •  Has  developed  their  own  skills   •  Gives  -me  and  aVen-on   •  Measures  and  reports   •  How  a  company…   •  Spends  and  makes  money   •  Hires  people  and  builds  skills   •  Engages  with  customers   •  Generates  long  term  growth  &  performance   Depends  on  leaders  ahtudes,  biases  and  beliefs
  • 35. Exercise:    What’s  Your  Mental  Model ?   What  is  your  leadership  Style?
  • 36. Take  the  Survey:    Find  Your  Mul?plier
  • 37. There  are  Four  Different  Business  Models Technology   Creators   Network   Facilitators   Asset   Builders   Service   Providers   The  digital  divide   Social  networks   Stock  exchanges   Credit  card  companies   Financial  services     Insurance  companies   Consultants  Manufacturers   Retailers   Distributors   Drug  companies   Biotech  companies   SW  developers  
  • 38. Each  Business  Model  Has  its  Own  Mul?plier  Effect The  digital  divide   4   8   1   2   Assets   Services   Technology   Network   Focus   Investment   Inside  Outside   Intangible  Tangible  
  • 39. …as  well  as  business  model  risks IP  &   sorware   Risks   Reputa-on   &  network   Risks   Asset  &   Product   Quality  Risks   Employee  &   Training   Risks   The  digital  divide  
  • 40. Exercise:    What  is  your  Mul?plier  Effect? ?   …Calculate  the  value  of  your  business  model
  • 41. Take  the  Survey:    Find  Your  Mul?plier
  • 42. Alterna?ve:    Es?mate  your  P/R  ra?o   1.  Write  your  company  name   on  post-­‐its   2.  Es-mate  your  P/R  ra-o   3.  Place  post-­‐its  on  the  scale   on  the  white  board   4.  We  will  provide  the  actual  P/ R  ra-o   5.  Discuss  the  difference   Client  4   Network   8   Client  1   Physical   2   Client  3   Info.   5   Client  2   Services   3   High   Low   The  digital  divide  
  • 43. Agenda Research   Assessment   Ac-on   Measurement   2   3   4   5   Orienta-on   1   Mental  Models,  ‘Asset’  Classes,  Value  Mul-pliersm   Business  Model  Index  and  Leadership  Style   Reallocate  your  capital  with  CAREsm   GAAP  Versus  Measuring  All  the  Sources  of  Value   Digital,  4  Business  Models,  Leadership  Preferences  
  • 44. Add Create Eliminate Revise Use  CARE  to  Reallocate  your  capital
  • 45. The  Value  Mul?plier:      4  Step  Process Orienta-on   What:    There  are  4  standard  business  models,  each  with  their  own  archetypes,   assets,  and  Value  Mul-plierssm.       How:    The  Value  Mul@plier  EBook  and  The  Value  Mul@plier  Research  EBook,   Infographic  ,  instruc@onal  videos  (3),  and  ar@cles.   Assessment   What:    Companies  can  ascertain  their  business  model  index,  leadership  style,   and  all  the  sources  of  value.     How:    www.Digitalgrader.com  which  includes  Business  Model  Indexsm  and   Leadership  Stylesm  (Forthcoming)  and  Digital  Inventory  Managersm  apps.   Ac-on   What:    Organiza-ons  can  outperform  their  compe--on  by  crea-ng  network   centric,  P:P  business  models.     How:    By  realloca@ng  capital  to  build  network  centric  business  models  using  our   CAREsm  app  (Forthcoming),  Workbook,  Curriculum,  and  Standard  Presenta@on.   Measurement   What:    Generally  Accepted  Accoun-ng  Procedures  (GAAP)  either  mis-­‐categorize   or  overlook  many  of  today’s  most  valuable  assets.     How:    Use  our  Digital  Inventory  Managersm  to  integrate  big  data  and  financial   data  to  track  all  the  sources  of  value  in  real  @me  (forthcoming).    
  • 46. Remember:    there  are  four  ‘assets’  in  which  to  invest A
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