business model wars - a one day program

BusinessModelWarsHowthedigitalrevolutionisimpactinglongtermperformanceandgrowthofallorganizations

AOneDayTrainingProgramforDeloitteProfessionals

2014and2015

Agenda

History10:30- noon

Research1-2:30pm

Application3-4:30pm

Alignment4:30– 5:00pm

2345

Introduction9-10:00am1

Thehistoryofbusinessmodels

Howbusinessmodelleadstoprofit,growth,andvalue

Thefivesteps;Casestudy

Whototalkto,whattosay,whatproductstooffer.

Digitaldisruption;ForbesResearch;ournewPoV

Copyright:OpenMattersLLC

Digitalchangeseverything


OurPoV connectsrisk,performance,&businessmodel

EnterpriseRisks

EnterpriseValue

BusinessModels

MentalModels

Whatleadersknowandvalueaboutdisruptivetechnologies…

…driveshoworganizationsspendandmakemoney…

…whichdriveslongtermperformanceandgrowth…

…andrelatedandattendantrisks

Disruptivetechnologies


Let’sstartbydefiningmentalandbusinessmodels

Mentalmodel

Businessmodel

Whatleadership…• Believesisimportant• Hasdevelopedtheirownskills• Givestimeandattention• Measuresandreports

Howacompany…• Spendscapital• Hirespeople/buildsskills• Engageswithcustomers• Generateslongtermgrowth&performance


Therearefourmentalmodels…

SoftwareandIP(IQ)

Networksandbigdata(SQ)

PPEandproducts(PQ)

Peopleandservices(EQ)

Thedigitaldivide


…driveshoworganizationsspendandmakemoney…

Developingandsellingintellectualproperty

Buildingandmanagingnetworks

Making,marketing,andsellingthings

Hiringandbilling

people’shours

Thedigitaldivide


…whichcreatesfourbusinessmodels…

Knowledge-based

Software,Biotechanddatafirms

Network-based

Socialandcommercialnetworks

Industrial-based

Manufacturers,retailersanddistributors

Services-based

Consultants,financial

servicesfirms

OurValue-RiskMatrix

Thedigitaldivide


Examplesofcompanies

Information Network

Physical Services

Thedigitaldivide


Exercise:whatisyourclientsmentalmodel?

1. Considerclients’mentalmodels

2. Createapost-itwiththeirnameonit

3. Placethepost-itononeofthequadrants

4. Understandwhatthismeansforhowtheyallocatecapital

SoftwareandIP

Networks&bigdata

PPEandproducts

Peopleandservices


Mentalmodels


Agenda

History10:30- noon

Research1-2:30pm

Application3-4:30pm


2345








Technology

Time

Industrial Revolution ~1800

Services Revolution ~1975

Information Revolution ~1990

Digital Network Revolution ~2010

Newbusinesserasaredrivenbydisruptivetechnologiesofthetime


Businesstypeshavedifferentkeyattributes

Industrial

Services

Information

Digital/Network

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


Differentbusinesstypesscaleindifferentways

Industrial

Services

Information

Digital

Make one, sell one

Hire one, sell one

Make one, sell many

Many make, many sell

Business model


IndustrialRevolution

Begananewera:

• AwayfromAgriculture

• Focusedinsideonmanufacturingandinternalprocesses…

• Newfinancialandoperatingmeasures• Physicaloutput

• Assetutilization

• ROA

DigitalRevolution

Beginninganewera:

• AwayfromInformation

• Focusedoutsideonsocialandcommercialnetworksandthebigdataproduced…

• Newfinancialandoperatingmeasures• Networksize

• Crowdsourcing

• Valueofallintangibles

InformationRevolution

Begananewera:

• AwayfromServices

• Focusedinsideonintellectualproperty,digitizingcontentandinsights…

• Newfinancialandoperatingmeasures• Creativeoutput

• R&D

• ROI

Neweras,newbusinessmodels,newassets

ServicesRevolution

Begananewera:

• AwayfromIndustrial

• Focusedinsideonhiringandtrainingemployeestoprovideservices…

• Newfinancialandoperatingmeasures• Revenue/employee

• Customersatisfaction




Digital Revolution ~2010

• KeyAsset:CapEx • KeyAsset:Humancapital

• KeyAsset:IP • KeyAsset:Network/relationships


IndustrialRevolution

Makeone,sellone

• Focus:Highfixedcosts,Field(Institutional)sales;bigaccounts

• KeyIndustries• Manufacturing

• Transportation• Energy

• KeyCompetencies• Finance

• Manufacturing• Distribution

DigitalRevolution

Manymake,manysell

• Focus:Evenlowerfixedcosts,highergrossmargins;Inboundmarketing(consumers)

• KeyIndustries• Onlinemarketplaces

• Socialsoftware• Bigdata

• KeyCompetencies• Consumerization

• Mobility

• Engagement

InformationRevolution

Makeone,sellmany

• Focus:Lowerfixedcostsandhighergrossmargins:Blendedsales;SMB

• KeyIndustries• Enterprisesoftware

• Biotechnology• Publishing

• KeyCompetencies• EnterpriseTechnology

• IPdevelopment• Content

Newbusinessmodels,neweconomics,newassets

ServicesRevolution

Hireone,sellone

• Focus:ShiftofcapitalfromCapEx tosalary;customerintimacy

• KeyIndustries• Finance

• EnterpriseSoftware• Publishing

• KeyCompetencies• Recruitingandtraining

• Customerservice• Lifecyclesupport




Digital Revolution ~2010


Techno

logies

New

erOlder

Low HighGrowthandValue

4BusinessTypesbasedonTechnologyandAssetsUsed

Result:Differentbusinessmodels,differentgrowthandprofits….

IndustrialServices

Information

Network


DigitalDivide

…andEnterpriseValuepremiums…

4 8

1 2

TheoreticalLongTermMultipleofRevenuesBasedonBusinessModel

Thedigitaldivide


…andrelatedandattendantrisks

IntellectualProperty&CodeRisks

Reputation&CyberRisks

PPE&Product

QualityRisks

EmployeeTraining&ClientRisks

Thedigitaldivide


Exercise

Goal

Understandyourclientsbusinessmodeltodeterminehowtheyallocatetheircapital

Goal

Keyquestionsandexercises• Let’slookatAmazonversusBestBuyasexample• Whatisthementalmodelofyourclients?• Whatisthevalueofyourclients’intangibleassets• Whatarethoseintangibleassets?• Whataretherisksofnotknowing?


FY12 Intangibles value $5B

Revenue 45,085

GM% after COGS, Fulfillment 23%

Technology and Content 0

SGA% 21%

Operating Margin % (.3%)

Market Value $8,909

Price To Revenue 0.18

Total Assets 16,787

Total Liabilities 13,072

Intangible Assets (Market) 5,194

Intangible Assets (Acquired) 862

Physical & Financial Assets 15,925

FY12 Intangibles value $106B

Revenue 61,903

GM% after COGS, Fulfillment 15%

Technology and Content 4,560 (7.5%)

SGA% 13%

Operating Margin % 1.1%

Market Value 114,808

Price to Revenue 2.23

Total Assets 32,555

Total Liabilities 24,363

Intangible Assets (Market) 106,616

Intangible Assets (Acquired) 2,552

Physical & Financial Assets 30,003Source:OpenMattersLLC

Themarketvalueindicates$107Bofassetstobepreserved(Amazon)or$5Bthatcouldbeincreased(BestBuy)

Themarketunderstandsthevalueofintangibleassets

• Typically,marketvalueisconsideredtobethepresentvalueoffuturediscountedcashflows

• Despitebeingrelativelysamesized“retailers”($45Band$60B),andbothdeliveringoperatingmargins(~1%),themarketviewsAmazonas7xmorevaluable

• SowhydoesthemarketbelieveAmazon’sfuturecashflowswillbesomuchhigherthanBestBuy’s?Ø TheBusinessModel,clicksaremorescalablethanbricksØ Themanagementteam, andalltheemployees(humancapital)Ø Thecustomer,Amazonusestechnologytobuildintimacy(customercapital),whileBest

Buyhastomaintainphysical/storeproperty

• RecognizingthatbothcompanieshavestrongBrandandReputation,theMarketgivesAmazoncreditforover$100Binotherintangibleassets


Exercise:Thinkaboutyourclients’intangibleassets

• Usefinance.yahoo.com tocomparebookvaluetomarketvalue

• MarketValueisfoundunderKeyStatistics

• Usethecompany’s10Ktocompletetherestoftheinformationontheworksheet

• Writedowntheintangibleassetsthatyouthinkmakeupthedifferencebetweenthetwoandmapthoseassetsbyquadrant


Company name:

Revenue

GM% after COGS, Fulfillment

Technology and Content

SGA%

Operating Margin %

Market Value

Price To Revenue

Total Assets

Total Liabilities

Intangible Assets (Market)

Intangible Assets (Acquired)

Physical & Financial Assets

Exerciseworksheet:Valuingintangibleassets

SoftwareandIP

Networks&bigdata

PPEandproducts

Peopleandservices


Listofintangibleassets,risks,andopportunities


Agenda

History10:30- noon

Research1-2:30pm

Application3-4:30pm


2345








0.62 0.37 0.31 0.00

Physical Svcs Info Network

Average COGS/Revenue

0.01 0.000.16

0.06


Average R&D/Revenue

0.15 0.29 0.28 0.41


Average SG&A/Revenue

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

Leadersallocatecapitaldifferentlybasedontheirmentalmodel



Result:Networkbusinessmodelsgrowfaster…

8.45.8

13.4

17.5


Avg.RevenueCAGR’10-’12

Thedigitaldivide



…producehigherprofitmargins…

0.150.09

0.23 0.24


Average Profit Margin

0.23 0.220.29

0.38


Average EBITDA/Revenue


2.02.7

5.0

8.2


Average Price to Revenue Ratio


…Andgeneratesignificantenterprisevaluepremiums!

Thedigitaldivide


0.00

2.00

4.00

6.00

8.00

10.00

1975 1980 1985 1990 1995 2000 2005 2010 2013

Average P/R Ratio by Business Model Historically

Network

Information

Services

Industrial

Network

Information

Physical

Services

*Digital CAGR is ’80 – ‘13Note: Based on analysis of the S&P 500Source: Capital IQ data pulled October 2013,; Revenue is LTM

CAGR ’75 –‘13

8.7%*

2.7%

4.5%

3.4%

Further,trendisaccelerating…premiumspaidarewidening


Investorspaymorethan$18 foreach$1ofrevenue

Investorspaylessthan$1 foreach$1ofrevenue

80%ofcompaniesarephysicalandservicesbusinesses

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+

Distribution of S&P 500

Number of companies that fall within each range

80% of companieshave P/Rless than 3


Exercise

Goal

Understandyourclientslongtermgrowth,profitsandenterprisepremiumsbyassessingtheirPrice/RevenueMultiples

Goal

Keyquestionsandexercises• EachofyouhavereceivedtheACEspreadsheet• Pickoneofyourclients,ifyouhavenoneonthelistyoumayselectone• EstimatetheP/Rratiofortheclient• Putapost-itnoteonthespectrum


Estimateyourclient’sP/Rratiobasedonbusinessmodel

1. Writeclientnamesonpost-its

2. EstimateP/Rratio

3. Placepost-itsonthescaleonthewhiteboard

4. WewillprovidetheactualP/Rratio

5. Discussthedifference

Client4Network

8

Client1Physical

2

Client3Info.5

Client2Services

3

High

Low

Thedigitaldivide


Agenda

History10:30- noon

Research1-2:30pm

Application3-4:30pm


2345








Thereiscertaintythattechnologyisdrivingchangeandthatclientsmustadapt

EnterpriseRisks

EnterpriseValue

BusinessModels

MentalModels

Billshowedhowdisruptivetechnologiesimpactmentalmodels….

…andhowleadersspendandmakemoney

Meganshowedimpactongrowth,profitsandenterprisevalue…

Thismoduleisgoingtofocusonrisksandcasestudy.

Henrypreviewedhowdisruptivetechnologiesimpactseveryindustry


Doesthisapproachconnectwithyourvieworrisk?

?Copyright:OpenMattersLLC

Commercialization:5stepstoBetterGrowthandPerformance

Strategy Finance Technology Operations Measurement

Fivestepstode-riskabusinessmodel


Exercise

Goal

Understandthatthelargestriskisnotadaptingtothecertaintyofdigitaldisruptionforapotentialclient

Goal

Keyquestionsandexercises• Breakinto4groupstolookatarealclient:Joslin• GroupAssignments:Buildbusinessmodelsforthefollowing

• WorktogethertohelpdefineJoslin’s futurestrategy

• Group1:Finance

• Group2:Technology

• Group3:Operations

• Group4:Measurement


Exercise:DesignthevisionforJoslin

none none

$40Mbuilding

$50Mcash

27Kpatients950employees$80Minrevenue$12Minlosses

Thedigitaldivide

Today:Joslin DiabetesCenter

Vision:Joslin Way


WhatstepsshouldJosslin takeineachareatorealizethisvision?

Strategy

Group 1: Finance

Group 2: Technology

Group 3: Operations

Group 4: Measurement

Gather executive team, do P/R exercise and envision organization as a digital organization

Conduct a complete inventory of unmeasured, intangible assets and risks related to all ‘assets’ (tangible & intangible)

Determine which technologies are necessary to monetize intangible assets and mitigate risks (e.g. reputation)

Identify the right people and processes necessary to deliver a ‘digital first’ business model

Measure and report outcomes of all initiatives and integrate non-traditional reporting KPI’s from digital efforts


RecommendationsforJoslin


Agenda

History10:30- noon

Research1-2:30pm

Application3-4:30pm


2345








Workingsession

• Wewillsplitintofourworkinggroups,whichwilleachtackleoneofthefollowingtopics:

1. Whoattheclientdoyoutarget?2. Whatdoestheclient-facinglablooklike?3. Howdowestructureastrategyengagement?4. HowdoesthisalignwithexistingDeloitteservices?

• Youwillhave30minutestodiscussanddevelopideaswithinyourworkinggroup

• Eachgroupwillthenreadbackouttothelab,~10minutespertopic

• Lasttopic:whichclientsdowetarget(20min)


Listpotentialclients


Whatresourcesdoyouneedtosucceedwiththeseclients?


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BusinessModelWarsHowthedigitalrevolutionisimpactinglongtermperformanceandgrowthofallorganizations

AOneDayTrainingProgramforDeloitteProfessionals

2014and2015