Business Model Wars - A one day program
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One Day Program for Teaching Business Model Wars.
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Business Model Wars - A one day program
- 5. Let’s start by defining mental and business models Mental model Business model What leadership… • Believes is important • Has developed their own skills • Gives time and attention • Measures and reports How a company… • Spends capital • Hires people/builds skills • Engages with customers • Generates long term growth & performance Copyright: OpenMatters LLC
- 10. Exercise: what is your clients mental model? 1. Consider clients’ mental models 2. Create a post-it with their name on it 3. Place the post-it on one of the quadrants 4. Understand what this means for how they allocate capital Software and IP Networks & big data PPE and products People and services Copyright: OpenMatters LLC
- 13. Technology Time Industrial Revolution ~1800 Services Revolution ~1975 Information Revolution ~1990 Digital Network Revolution ~2010 New business eras are driven by disruptive technologies of the time Copyright: OpenMatters LLC
- 14. Business types have different key attributes 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 Copyright: OpenMatters LLC
- 15. Different business types scale in different ways Industrial Services Information Digital Make one, sell one Hire one, sell one Make one, sell many Many make, many sell Business model Copyright: OpenMatters LLC
- 16. Industrial Revolution Began a new era: • Away from Agriculture • Focused inside on manufacturing and internal processes… • New financial and operating measures • Physical output • Asset utilization • ROA Digital Revolution Beginning a new era: • Away from Information • Focused outside on social and commercial networks and the big data produced… • New financial and operating measures • Network size • Crowdsourcing • Value of all intangibles Information Revolution Began a new era: • Away from Services • Focused inside on intellectual property, digitizing content and insights… • New financial and operating measures • Creative output • R&D • ROI New eras, new business models, new assets Services Revolution Began a new era: • Away from Industrial • Focused inside on hiring and training employees to provide services… • New financial and operating measures • Revenue/employee • Customer satisfaction 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 / relationships Copyright: OpenMatters LLC
- 17. Industrial Revolution Make one, sell one • Focus: High fixed costs, Field (Institutional) sales; big accounts • Key Industries • Manufacturing • Transportation • Energy • Key Competencies • Finance • Manufacturing • Distribution Digital Revolution Many make, many sell • Focus: Even lower fixed costs, higher gross margins; Inbound marketing (consumers) • Key Industries • Online marketplaces • Social software • Big data • Key Competencies • Consumerization • Mobility • Engagement Information Revolution Make one, sell many • Focus: Lower fixed costs and higher gross margins: Blended sales; SMB • Key Industries • Enterprise software • Biotechnology • Publishing • Key Competencies • Enterprise Technology • IP development • Content New business models, new economics, new assets Services Revolution Hire one, sell one • Focus: Shift of capital from CapEx to salary; customer intimacy • Key Industries • Finance • Enterprise Software • Publishing • Key Competencies • Recruiting and training • Customer service • Lifecycle support Industrial Revolution ~1800 Services Revolution ~1975 Information Revolution ~1990 Digital Revolution ~2010 Copyright: OpenMatters LLC
- 21. Exercise Goal Understand your clients business model to determine how they allocate their capital Goal Key questions and exercises • Let’s look at Amazon versus Best Buy as example • What is the mental model of your clients? • What is the value of your clients’ intangible assets • What are those intangible assets? • What are the risks of not knowing? Copyright: OpenMatters LLC
- 22. 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 30,003 Source: OpenMatters LLC The market value indicates $107B of assets to be preserved (Amazon) or $5B that could be increased (Best Buy)
- 23. The market understands the value of intangible assets • Typically, market value is considered to be the present value of future discounted cash flows • Despite being relatively same sized “retailers” ($45B and $60B), and both delivering operating margins (~1%), the market views Amazon as 7x more valuable • So why does the market believe Amazon’s future cash flows will be so much higher than Best Buy’s? Ø The Business Model, clicks are more scalable than bricks Ø The management team, and all the employees (human capital) Ø The customer, Amazon uses technology to build intimacy (customer capital), while Best Buy has to maintain physical/store property • Recognizing that both companies have strong Brand and Reputation, the Market gives Amazon credit for over $100B in other intangible assets Copyright: OpenMatters LLC
- 24. Exercise: Think about your clients’ intangible assets • Use finance.yahoo.com to compare book value to market value • Market Value is found under Key Statistics • Use the company’s 10K to complete the rest of the information on the worksheet • Write down the intangible assets that you think make up the difference between the two and map those assets by quadrant Copyright: OpenMatters LLC
- 25. 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 Exercise worksheet: Valuing intangible assets Software and IP Networks & big data PPE and products People and services Copyright: OpenMatters LLC
- 28. 0.62 0.37 0.31 0.00 Physical Svcs Info Network Average COGS/Revenue 0.01 0.00 0.16 0.06 Physical Svcs Info Network Average R&D/Revenue 0.15 0.29 0.28 0.41 Physical Svcs Info Network Average SG&A/Revenue Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM Leaders allocate capital differently based on their mental model Copyright: OpenMatters LLC
- 29. Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM Result: Network business models grow faster… 8.4 5.8 13.4 17.5 Physical Svcs Info Network Avg. Revenue CAGR ’10-’12 The digital divide Copyright: OpenMatters LLC
- 30. Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM …produce higher profit margins… 0.15 0.09 0.23 0.24 Physical Svcs Info Network Average Profit Margin 0.23 0.22 0.29 0.38 Physical Svcs Info Network Average EBITDA/Revenue Copyright: OpenMatters LLC
- 31. 2.0 2.7 5.0 8.2 Physical Svcs Info Network Average Price to Revenue Ratio Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM …And generate significant enterprise value premiums! The digital divide Copyright: OpenMatters LLC
- 32. 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 – ‘13 Note: Based on analysis of the S&P 500 Source: Capital IQ data pulled October 2013,; Revenue is LTM CAGR ’75 –‘13 8.7%* 2.7% 4.5% 3.4% Further, trend is accelerating… premiums paid are widening Copyright: OpenMatters LLC
- 33. Investors pay more than $18 for each $1 of revenue Investors pay less than $1 for each $1 of revenue 80% of companies are physical and services businesses 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 companies have P/R less than 3 Copyright: OpenMatters LLC
- 34. Exercise Goal Understand your clients long term growth, profits and enterprise premiums by assessing their Price/Revenue Multiples Goal Key questions and exercises • Each of you have received the ACE spreadsheet • Pick one of your clients, if you have none on the list you may select one • Estimate the P/R ratio for the client • Put a post-it note on the spectrum Copyright: OpenMatters LLC
- 35. Estimate your client’s P/R ratio based on business model 1. Write client names on post-its 2. Estimate P/R ratio 3. Place post-its on the scale on the white board 4. We will provide the actual P/R ratio 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 Copyright: OpenMatters LLC
- 39. Commercialization: 5 steps to Better Growth and Performance Strategy Finance Technology Operations Measurement Five steps to de-risk a business model Copyright: OpenMatters LLC
- 40. Exercise Goal Understand that the largest risk is not adapting to the certainty of digital disruption for a potential client Goal Key questions and exercises • Break into 4 groups to look at a real client: Joslin • Group Assignments: Build business models for the following • Work together to help define Joslin’s future strategy • Group 1: Finance • Group 2: Technology • Group 3: Operations • Group 4: Measurement Copyright: OpenMatters LLC
- 41. Exercise: Design the vision for Joslin none none $40M building $50M cash 27K patients 950 employees $80M in revenue $12M in losses The digital divide Today: Joslin Diabetes Center Vision: Joslin Way Copyright: OpenMatters LLC
- 42. What steps should Josslin take in each area to realize this vision? 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 Copyright: OpenMatters LLC
- 45. Working session • We will 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 existing Deloitte 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) Copyright: OpenMatters LLC