increase your company's value: use the value multiplier

Business Model Disrupted The Value Multiplier Four Steps to Creating More Value and Better Performance

August 2014

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

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

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

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

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

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 position Lower position New entrant Lost position

Source: Compustat data

Business Models Effect Even Most Valuable Companies

So how did we get here?

Industrial revolu-on — 1800

Services revolu-on — 1975

Informa-on revolu-on — 1990

Network revolu-on — 2010

Techno

logy

Time

Each Revolu?on was built on the last

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

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

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

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

Techno

logies

New

er

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

Exercise: which business model are you?

? How do you make and spend money?

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

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

Exercise: How do you make and spend money?

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)

Agenda

Research

Assessment

Ac-on

Measurement

2 3 4 5

Orienta-on 1 Different ‘Asset’ Classes, Value Mul-pliersm





Industries are Ver?cals, Business Models are Horizontal

Network Orchestrator

Technology Creators

Service Provider

Asset Builders

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

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-nentalExchange Group

•  Discover Financial

•  TripAdvisor •  Visa •  MasterCard •  CME Group •  Salesforce.com •  Red Hat •  Google •  eBay •  American

Express •  Apple •  Nike •  Nasdaq OMX

Intangible Assets are now 80% of Market Value, Up from 20%

Source: Compustat data | Research from Ocean Tomo

0.62

0.40 0.31

0.00

Assets Svcs Tech Network

Average COGS/Revenue

0.15

0.27 0.28

0.41


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


Average R&D/Revenue

Result: Network business models grow faster…

8.4 7.9

12.6

19.4


Avg. Revenue CAGR ’10-‐’12

The digital divide


… with lowest marginal cost of expansion

…highest profit margins…

0.15 0.14

0.24

0.32


Average Profit Margin

0.23 0.21

0.30

0.38


Average EBITDA/Revenue

Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013; Revenue is prior 12 months

2.0 2.1

4.6

8.1


Average Mul5plier (Price to Revenue ra5o)

…as well as enterprise value premiums!


The digital divide

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

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

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

Exercise: which business model are you?

? How do you make and spend money?

Agenda

Research

Assessment

Ac-on

Measurement

2 3 4 5

Orienta-on 1 Mental Models, ‘Asset’ Classes, Value Mul-pliersm





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

Exercise: What’s Your Mental Model

? What is your leadership Style?

Take the Survey: Find Your Mul?plier

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

Each Business Model Has its Own Mul?plier Effect

The digital divide

4 8

1 2 Assets Services

Technology Network

Focus

Investment

Insid

e Outsid

e

Intangible Tangible

…as well as business model risks

IP & sorware Risks

Reputa-on & network

Risks

Asset & Product

Quality Risks

Employee & Training Risks

The digital divide

Exercise: What is your Mul?plier Effect?

? …Calculate the value of your business model

Take the Survey: Find Your Mul?plier

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

Agenda

Research

Assessment

Ac-on

Measurement

2 3 4 5



Reallocate your capital with CAREsm



Add Create

Eliminate Revise

Use CARE to Reallocate your capital

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).

Remember: there are four ‘assets’ in which to invest

Asset Examples

Tangible Financial Stocks, Bonds, Warrants, Op-ons

Physical Plant, Property, Equipment

Intangible

Human Employees, Partners, Contractors

Intellectual Data, Knowledge, Sorware

Network Customers, Partners, Alumni, Prospects

Exercise: Think About How to Reallocate your Capital

? Use CARE to rebalance your pornolio

Take Care Program: 4 Steps to Success

CARE: Reallocate your capital

Por_olio of Tangible and Intangible assets

Create Asset will operate more efficiently if

decreased in scale or scope

Add An opportunity has been iden@fied to

create an en@rely new and valuable product/

asset

Revise Asset ahs poten@al to increase value crea@on

by adding new components (features,

customers, etc.)

Eliminate Asset is no longer

valued or is underperforming with

no path to improvement

Asset 1

Asset 2

Asset 3

Agenda

Research

Assessment

Ac-on

Measurement

2 3 4 5






Reward

Risk

Bio

logi

cal

ass

ets

Fina

ncia

l ass

ets

Inve

ntor

ies

Pro

perty

, pla

nt a

nd e

quip

men

t

Non

-cur

rent

as

sets

Em

ploy

ee

bene

fits

Dep

reci

atio

n

Pay

roll

Inte

rest

ex

pens

es

Term

inat

ion

bene

fits Inte

ract

ions

Con

sum

er

sent

imen

t

Pat

ient

s

Soc

ial n

etw

orks

Cus

tom

ers

Positive bias

Negative bias Non categorized

Positive bias

Assets

Negative bias

Expenses

Neutral Bias

Not categorized

Some Assets have Nega?ve Bias, Some Posi?ve

Outside Managed

Outside unmanaged

Inside managed

Inside unmanaged

To Compensate, Examine All the Sources Of Value

Measurement Capital Sources Examples

Inside Managed Financial Return on Asset, Return on Investment, Assets under management

Inside Managed Physical Rent, SF under management, utilization/occupancy rate

Inside Unmanaged Human Intellectual capital, Employee engagement, networks, alumni

Outside Managed Intellectual Patents, Trademarks, Copyrights, business methods

Outside Managed Customers Loyalty, customer engagement, co-creation, word of mouth marketing,

Outside Unmanaged Network Size of network, number of participants, number of interactions, data size, vitality

Examples of Different Measurements by Quadrant

Exercise: What is our business model worth

? And what is the marginal cost for scaling?

Inventory all your sources of value

Human capital Intellectual capital Network capital Business unit Employees Partners Contractors Data Knowledge Sorware Customers Partners Alumni Prospects

BU1

BU2

BU3

Intangible Asset Inventory Tool

Alterna?ve: Value all your intangible assets

•  Use finance.yahoo.com to find •  Market Value •  It is found under Key Sta-s-cs •  Determine your Non assets

•  In addi-on, write down your key sta-s-cs:

•  Revenues •  Expenses •  Profits

Co. A FYxx Intangibles value $6B

Revenue $40B

Technology COS %

GM% 22%

SGA% 20%

Operating Margin % (.5%)

Market Value $9B

Price To Revenue 0.2

Total Assets $20B

Total Liabilities $15B

Intangible Assets (Market) $4B

Intangible Assets (Acquired) $1B

Physical Assets $15B

Co. B FYxx Intangibles value $106B

Revenue $60B

Technology COS 7%

GM% 14%

SGA% 12%

Operating Margin % 1.0%

Market Value $115B

Price to Revenue 2.0

Total Assets $30B

Total Liabilities $20B

Intangible Assets (Market) $105B

Intangible Assets (Acquired) $3B

Physical Assets $28B

Source: Company 10-‐K

Case Study: Company A versus Company B

•  Market value is considered to be the present value of future discounted cash flows

•  Despite being rela-vely same sized ($40B and $60B), and both delivering opera-ng margins (~1%), the market views company B as 13x more valuable

•  So why does the market believe Company B’s future cash flows will be so much higher than Company A’s? •  The business model, clicks are more scalable than bricks •  The management team, and the employees (human capital) that

understand the newer business model •  The customer, company B uses technology “as the business”, while

Company A uses technology “to support the business”

•  Recognizing that both companies have strong brand and reputa-on, the market gives Company B credit for over $100B in addi-onal intangible assets

Note: The market value of Intangibles

•  Split into four working groups, which will each tackle one of the following topics: 1.  Who at the client do you target? 2.  What does the client-‐facing lab look like? 3.  How do we structure a strategy engagement? 4.  How does this align with exis?ng Deloiqe services

•  You will have 30 minutes to discuss and develop ideas within your working group

•  Each group will then read back out to the lab, ~10 minutes per topic

•  Last topic: which clients do we target (20 min)

Note: For Each Working Session

4 step process for growth and performance

Measuring On Going KPIS

Ac-on 6 Months

Analysis 3 Months

Orienta-on 1 Day

Gather senior leadership in offsite mee-ng to asses current mental model assump-ons and business model investments

Generate detailed business model ac-ons by process and product to include digital networks star-ng with ‘edge based ini-a-ves’

Expand edge based digital networks and new KPI’s to create plauorm for business model transforma-on over -me

Con-nuous Improvement

Conduct high level analysis of capital alloca-ons by SBU and inventory all intangible assets and enabling IT

4 Step Process: Orienta?on

Assess Your Risk Propensity and Business Model: The 1-‐Day Offsite

•  Understand business models and their rela-ve economics •  Assess current mental models of leadership team •  Assess current business model indicated by current assets and technologies

•  Exercises to understand Value Mul-plier and capital alloca-on

•  Management team has complete understanding of business model and economics, plus the gap between current business model/performance and the poten-al

Process

Tool

Outcome

Monitoring On Going

Ac-on 6 Months

Analysis 3 Months

Orienta-on 1 Day

4 Step Process: Analysis

Inventory Tangible and Intangible Assets: The 90-‐Day Assessment

•  Cross-‐func-onal task force formed •  Team inventories current assets and technologies, plus capital alloca-on paVerns •  Team inventories unmeasured and intangible assets not yet mone-zed by firm

•  Mental Model Assessment and Intangible Asset Inventory

•  Management team has complete understanding of the firms assets, both tangible and intangible, plus the related technologies and the historical trends for capital alloca-on among these assets

Process

Tool

Outcome

Measure On Going KPIS

Ac-on 6 Months

Analysis 3 Months

Orienta-on 1 Day

4 Step Process: Ac?on

Create a New Business Model: The 6-‐Month Implementa5on

•  Form project team to mone-ze a currently under u-lized asset (oren a network of customers, employees, shareholders, suppliers, etc.)

•  Develop a technological plauorm to connect this popula-on •  Populate the plauorm with content and product offerings •  Create processes and incen-ves that encourage the network to par-cipate

•  Template for a New Business Model

•  The development of new and highly scalable assets plus a repeatable process for con-nuing to develop underu-lized assets

Process

Tool

Outcome


Ac-on 6 Months

Analysis 3 Months

Orienta-on 1 Day

4 Step Process: Measurement

Monitor and Rebalance: An Ongoing Process for Delivering Value

•  Establish new and tailored KPIs for the developing asset (network) •  Integrate those KPIs with exis-ng financial repor-ng for senior management •  Use KPIs to manage and allocate financial capital across all assets

•  Asset Rebalancing Tool

•  Management team is informed about the progress of network development, using new KPIs tailored to the asset and can effec-vely gauge success and allocate capital

Process

Tool

Outcome


Ac-on 6 Months

Analysis 3 Months

Orienta-on 1 Day