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How value is created in a business
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Driving Value in Your Business
3 Vital Components for Staying in the Fast Lane
David [email protected]
Creating Value Over Your Company’s Life Cycle
Sales
Time
OrdinaryWorld
Start-up Ramp-up Mature
ImprovedWorld
Masters at Creating Value
$505 Billion
$120 Billion
$374 Billion
$129 Billion
YOU can become a master at creating value.
Reality Check!!!Obstacles:MarketCompetitionFinancial CapitalHuman capitalCredibilityEtc.
Risks:Strategic
OperationsTechnological
RegulatoryFinancial
Etc.
Business Evolution
Sales
Time
OrdinaryWorld
Start-up
Ramp-up
Mature Decline
ImprovedWorld
OrdinaryWorld
OrdinaryWorld
ImprovedWorld
ImprovedWorld
Transformation
A TALE OF TWO VALUES
Cash 500$
Accounts Receivable + 1,000
Inventory + 2,000
Fixed Assets + 1,500
Total Assets = 5,000
Less: Liabilities - (3,000)
Net book Value (Equity) = 2,000$
Accountant's Tale of Value
Shares outstanding 200
Market price per share x 20$
Total Market Value = 4,000$
Investor's Tale of Value
Shares outstanding 200
Market price per share x 8$
Total Market Value = 1,600$
OR
Cash 500$
Accounts Receivable + 1,000
Inventory + 2,000
Fixed Assets + 1,500
Total Assets = 5,000
Less: Liabilities - (3,000)
Net book Value (Equity) = 2,000$
Accountant's Tale of Value
Shares outstanding 200
Market price per share x 20$
Total Market Value = 4,000$
Investor's Tale of Value
$2,000 Difference Why?
Accountants Expense…• R&D• Quality system• Executive recruit fee• Patent filing• Strategic Relationships• Payments to PAC• President’s leased Ferrari
Net Tangible Assets Intangible Assets
0%
10%
20%
30%
40%
50%
60%
70%
65%
0%
10%
20%
30%
40%
50%
60%
70%
80%
75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
78%
Market Value - Net Book Value = Intangible Assets
Created Value: $367 Billion
Created Value: $90 Billion
Created Value: $84 Billion
Created Value: $391 Billion
0%
10%
20%
30%
40%
50%
60%
70%
80%
75%
75% of These Technology Leaders’ Value Comes from Intangible Assets
Skilled Workforce Know How Trade Secrets Patents Quality Systems Data Distribution Channels Strategic Partnerships Brand Awareness
Strategic
Secr
et Sa
uce
Financial Value Drivers
Increase RevenueGrowth Rate
Improve Earnings
Reduce Risks
Measuring Value: Next year’s earningsLevel of Risk – Growth rate
Financial Value Drivers1. Change trajectory of revenue
1 2 3 4 Years
Sales
1 2 3 4 Years
Sales
Ordinary World Improved World
Financial Value Drivers1. Change trajectory of revenue
2. Increase profit margins & Grow cash flow
1 2 3 4 Years
Sales
1 2 3 4 Years
Sales
$ $$$
Ordinary World Improved World
Financial Value Drivers1. Change trajectory of revenue
2. Increase profit margins & Grow cash flow
3. Manage Risks
1 2 3 4 Years
Sales
1 2 3 4 Years
Sales
$ $$$
Changing Value Drivers Can Grow Company Value Exponentially
Growth rate + Profits + 1 / risk
Value
Scenario AAnnual revenue growth rate 5%Profits or cash flow 750$ Risk 20%
Resulting Value 5,000$
Scenario B
Annual revenue growth rate 6%Profits or cash flow 900$ Risk 16%
Resulting Value 9,000$
Increase in Value 4,000$ % Increase in Value 80%
Improve Scenario A Value Drivers by 20%
GrowthPr
ofits
Risk*
Value Triangle
* 1/risk
Value
Quality Systems
GrowthPr
ofits
Risk
Value
GrowthProfi
ts
Risk
Value
Skilled Workforce
Skilled WorkforceKnow How
Trade Secrets
Patents
Data
Distribution ChannelsStrategic Partnerships
Brand AwarenessCustomer Relationships
Trademarks
Know How
Distribution Channels
Strategic Partnerships
Strategic AssetsFew Many
Ordinary WorldIMPROVED WORLD
Lessons Learned from the Wizard of Oz on Creating Business Value
What Wizard of Oz BusinessUnlikely hero Dorothy Entrepreneur / Intrapreneur
Things are not as they seem
“We’re not in Kansas anymore” Assets – Liabilities= Company’s Value
Secret sauce Magic ruby slippers The thing that will make your company out-shine and out-perform its competitors
Travel with friends Dorothy, Toto and 3 friends Dorothy met along the journey
Develop trust & cohesion among the RIGHT founding/management team
Develop resilience Scare crow putting stuffing back in when it gets knocked out
Taking care of yourself and your team
Persistence Dorothy and friends wanted to turn back but didn’t
Creating value takes time and determined, focused effort
Focus Meeting the Wizard of Oz Creating “Value Culture”
More Lessons Learned from the Wizard of Oz on Creating Business Value
What Wizard of Oz BusinessVision Getting back to Kansas A better world
Values “There’s no place like home” Identify these and be true to them
Transformation Characters became the things they thought they couldn’t possess (Courage, Brains, Heart)
Entrepreneur taking company to next level as company pursues the “vision”
Leverage Friends sticking together to overcome adversity
Strategic assets
Value drivers Dorothy’s passion and courage Changes in: 1) revenue growth rate + 2) profits + 3) 1/risk (cost of capital) MULTIPLIES Company’s Value
Risk House landing on wicked witch shows risks are unexpected outcomes , not good or bad outcomes
Evaluate & manage risks in light of market opportunities instead of trying to eliminate risks
Improving fortunes Good witch sends Dorothy home Rise in company’s value leads to opportunities for improving the world
Driving Value in Your Business
3 Vital Components for Staying in the Fast Lane
David [email protected]
