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Value Growth How to Profit from Pattern Thinking May 26, 2000--FEI-Chicago. Risk. Disaster Currency Operational Product liability Strategic. Value Collapse: The Fortune 1000 . % of Top 100. Law- suits. Natural Disaster. Competitive. Wrong Products. Customer Losses. R&D Delays.

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Value Growth How to Profit from Pattern Thinking May 26, 2000--FEI-Chicago

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Value growth how to profit from pattern thinking may 26 2000 fei chicago l.jpg

Value Growth How to Profit from Pattern ThinkingMay 26, 2000--FEI-Chicago


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Risk

  • Disaster

  • Currency

  • Operational

  • Product liability

  • Strategic


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Value Collapse: The Fortune 1000

% of Top 100

Law-suits

Natural Disaster

Competitive

Wrong Products

CustomerLosses

R&D Delays

PoorManage-ment

Foreign Economic Issues

High Input Prices

Interest Rates

Cost Overrun

Demand Shortfall

Pricing Pressure

Regulation

Supplier Problems

Merger Problem

Accounting Problems

Supply Chain Issues

Strategic61%

Operational

33%

Financial

6%

Hazard

0%


Slide5 l.jpg

B

Mercer PerspectiveStaying ahead of change requires ongoing opportunity identification and re-invention.

ValueLandscape

  • Value ChainSteps

  • CustomerSegments

A

Time


Slide7 l.jpg

B

Business Design 3

Business Design 1

Business Design 2

Mercer PerspectiveStaying ahead of change requires ongoing opportunity identification and re-invention.

Business Design 4

ValueLandscape

  • Value ChainSteps

  • CustomerSegments

A

Time


Business strategy evolution l.jpg

Business Strategy Evolution

ProductCentric

CustomerCentric

ProfitCentric


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Achieving Sustained Value GrowthIn a world of dynamic strategies, senior executives must answer two deceptively simple questions . . . over and over.

Where will we be allowed to makea profit in this industry?

What Business Design(s) willenable us to capture that profit andcreate shareholder value?


Polarization l.jpg

Polarization

CISCO vs. Bay Networks

ShareholderValue($BB)

CISCO

Bay Networks

Source: Mercer Value Growth Database


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Polarization

CISCO vs. Bay Networks

Shareholder Value

CISCO

$525BB

ShareholderValue($BB)

Bay Networks

$6 BB

Source: Mercer Value Growth Database


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Polarization

Yahoo vs. Others

ShareholderValue($BB)

Yahoo!

Excite

Lycos

Infoseek

Source: Mercer Value Growth Database


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Polarization

Yahoo vs. Others

Yahoo!

ShareholderValue($BB)

Excite

Lycos

Infoseek

Source: Mercer Value Growth Database


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Polarization

Microsoft vs. Apple vs. Lotus

ShareholderValue ($BB)

Microsoft

Apple

Lotus

Source: Mercer Value Growth Database


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Polarization

Microsoft vs. Apple vs. Lotus

Shareholder Value

Microsoft

$498 BB

ShareholderValue ($BB)

$13 BB

Apple

Lotus

$3 BB

Source: Mercer Value Growth Database


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Polarization

Wal-Mart vs. Kmart

ShareholderValue ($BB)

Wal-Mart

Kmart

Source: Mercer Value Growth Database

Note: Fiscal Year Values; Does not include LTD


Polarization17 l.jpg

Polarization

Wal-Mart vs. Kmart

Shareholder Value

Wal-Mart

$206 BB

ShareholderValue ($BB)

Kmart

$6 BB

Source: Mercer Value Growth Database

Note: Fiscal Year Values; Does not include LTD


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Polarization

Intel vs. AMD

ShareholderValue ($BB)

Intel

AMD

Source: Mercer Value Growth Database


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Polarization

Intel vs. AMD

Shareholder Value

Intel

$278 BB

ShareholderValue ($BB)

AMD

$3 BB

Source: Mercer Value Growth Database


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Polarization

GE vs. United Technologies vs. Westinghouse

ShareholderValue ($BB)

GE

Westinghouse

United Technologies

Source: Mercer Value Growth Database


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Polarization

GE vs. United Technologies vs. Westinghouse

Shareholder Value

GE

$370 BB

ShareholderValue ($BB)

United

Technologies

$30 BB

Westinghouse

$30 BB

Source: Mercer Value Growth Database


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The Response: Business Design and Re-invention


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  • Business Design Environment

    • Traditional

    • Emerging

  • CustomerPriorities

    • Stated

    • Silent

    • Future

Business DesignWinning Business Designs create value by being perfectly calibrated to changing customer priorities and working hard to stay that way.

Value Capture/

Profit Model

Customer Selection

and Value Proposition

What high-value customers am I targeting with what unique offer?

What profit model will I harness to capture value from this customer?

Organizational

Systems

How will I “build in”sustainability to myBusiness Design?

What scope of activities and assets are required?

Scope

Strategic Control


The traditional value chain l.jpg

The

Customer

Template

Inputs,

Raw

Material

Assets

Offering

Channels

The Traditional Value Chain


Reversing the value chain l.jpg

The

Customer

Template

Inputs,

Raw

Material

Channels

Offering

Assets

Reversing the Value Chain


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Radar Screen: Financial Services

Banks

Brokers


Schwab s business design reinvention l.jpg

1988

1992

  • DIFM investor

  • Financial planners

  • Mutual funds

  • Investors

  • Fees

  • Referrals

  • Mutual funds and fees

  • Plannerrelationships

  • Technology

  • Owning the switchboard

  • Back-office services

  • “Discount” mutual funds

Services for Financial Planners

Switchboard Business Design

Schwab’s Business Design Reinvention

1980s

  • DIY investor

Customer Selection

  • Commissions

Value Capture

  • Branches

  • Brand

Strategic Control

  • Discount brokerage

Scope

Value-Added Discount

Broker


Switchboard l.jpg

“Switchboard”

Mutual Fund Companies

Investors


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“Switchboard”

Mutual Fund Companies

Investors

The Profit Zone

Schwab


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Radar Screen: Financial Services

Banks

Brokers


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1988

1992

1997

  • DIFM investor

  • Financial planners

  • Mutual funds

  • Investors

  • Mutual funds

  • Investors

  • Fees

  • Referrals

  • Mutual funds and fees

  • Mutual funds and fees

  • Plannerrelationships

  • Technology

  • Owning the switchboard

  • Owning the “choiceboard”

  • Relationships

  • Back-office services

  • “Discount” mutual funds

  • World-class digital infrastructure

Services for Financial Planners

Switchboard Business Design

First Digital Financial Services Firm

Schwab’s Business Design Reinvention

1980s

  • DIY investor

Customer Selection

  • Commissions

Value Capture

  • Branches

  • Brand

Strategic Control

  • Discount brokerage

Scope

Value-Added Discount

Broker


Charles schwab l.jpg

Charles Schwab

Shareholder Value Growth Over Time

Charles Schwab

Merrill Lynch

($BB)

E*Trade


The evolving patterns architecture l.jpg

Mega

Value Chain

Customer

Channel

Product

Knowledge

Organizational

Back to Profit

Emerging

De Facto Standard

Re-inter-mediation

Profit Multiplier

Conven-tional to Digital

TechShift

Reinte-gration

Com-

pression

Block-buster

Know-ledge to Product

Re-definition

Conver-gence

Squeeze

Micro-segment

Solution

Corner-stoning

Product to Customer

Collapse of the

Middle

Weak

Link

Power

Shift

Multipli-cation

Pyramid

Network

Ops to Know-ledge

Traditional

Productto Brand

Skill Shift

No Profit

Deinte-gration

ProfitShift

Concen-tration

The Evolving Patterns Architecture


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Strategic Anticipation Spectrum

“I know forsure”

“Strategic Anticipation®” is about understanding enough to see tomorrow’s opportunities before the competition.

“I see it coming”

“I think it might happen”

“I have a sneaking suspicion”

“I’m totally oblivious”


De integration a 1 3 trillion value chain pattern l.jpg

De-Integration: A $1.3 Trillion Value Chain Pattern

Customer

Customer

* As of Aug. 1999

Source: Mercer Value Growth Database


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De-Integration of the Computing Value ChainComputing Value Migration: 1986-1998

$136BB

$172BB

$193BB

$232BB

$370BB

$782BB

$1550BB

$169BB

$159BB

$202BB

$296BB

$588BB

$1005BB

Service

Networks

Cisco

Software

Microsoft

Percent of Total Shareholder Value

Chips

Intel

Hardware

IBM

SOURCE: Mercer Value Growth Database


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The future has arrived. It’s just not evenly distributed.


The evolving patterns architecture39 l.jpg

Mega

Value Chain

Customer

Channel

Product

Knowledge

Organizational

Back to Profit

Emerging

De Facto Standard

Re-inter-mediation

Profit Multiplier

Conven-tional to Digital

TechShift

Reinte-gration

Com-

pression

Block-buster

Know-ledge to Product

Re-definition

Conver-gence

Squeeze

Micro-segment

Solution

Corner-stoning

Product to Customer

Collapse of the

Middle

Weak

Link

Power

Shift

Multipli-cation

Pyramid

Network

Ops to Know-ledge

Traditional

Productto Brand

Skill Shift

No Profit

Deinte-gration

ProfitShift

Concen-tration

The Evolving Patterns Architecture


Conventional to digital business design l.jpg

Conventional to Digital Business Design

Conventional to Digital Business Design

Mega

Value Chain

Customer

Channel

Product

Knowledge

Organizational

Back to Profit

Emerging

Down-stream

De Facto Standard

Re-inter-mediation

Profit Multiplier

Conven-tional to Digital

TechShift

Reinte-gration

Com-

pression

Block-buster

Know-ledge to Product

Re-definition

Conver-gence

Squeeze

Micro-segment

Solution

Corner-stoning

Product to Customer

Collapse of the

Middle

Weak

Link

Power

Shift

Multipli-cation

Pyramid

Network

Ops to Know-ledge

Traditional

Productto Brand

Skill Shift

No Profit

Deinte-gration

ProfitShift

Concen-tration


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Half-Time@ the Internet Superbowl

Mercer’s Perspectives on Incumbents versus Start-up Dot.coms


Half time at the internet superbowl l.jpg

Half-time at the Internet Superbowl…

0:00

3

200

WWIFX

Incumbents

New.coms

S&P

0


What is the internet all about l.jpg

What is the Internet All About?

MediaView

Dot-coms

Fortune

1000


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The New.coms’ locker room…What’s working? a.k.a. the West Coast Offense.

Re-intermediation

Value-added Intermediary

Supplier

Customer

Brand Rush

Cornerstoning


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While Internet companies have shown the ability to drive substantial revenue growth, profits have become even more elusive

Internet Companies’ Financial Results

Excludes Cisco Systems and AOL/Netscape

$ Billions

Losses as a% of sales:

(36%)

(28%)

(52%)

Source: Mercer Internet Co. Value Flows Database.


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Suspect profit modelsAdvertising revenue is suspect as a widespread source of value for the Internet sector as advertising expenditures rise more rapidly.

Sources: Mercer analysis; Competitive Media Research; Internet Advertising Bureau; Advertising Age; Forrester Research.


New coms coach s concerns l.jpg

New.coms coach’s concerns...

  • Crowding

  • Scaling Fulfillment capabilities

  • Escalating cost of customer acquisition

  • When will we have to demonstrate profit potential?


The incumbents locker room l.jpg

The incumbents locker room

“The picture’s pretty bleak, gentlemen…

the world’s climates are changing,

the mammals are taking over, and

we all have a brain about the size of a walnut.”


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The B2B Internet opportunity is large and growing rapidly

Internet Revenues (US)

B2C

$B

B2B

Infrastructure

Source: IDC/LINK, Forrester Research 1999, Mercer Internet Database.


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What is the Internet all about: Mercer perspective

MediaView

A Different Perspective

B2C NO PROFIT ZONE

Dot-coms

$100B

  • Exiting a No-Profit Zone

  • Strategic move

  • Good business design

Business toBusiness$1,000B

Fortune

1000

e-Commerce


Second half playbook l.jpg

B2B

ValueNets

From Product to Solutions

Choiceboards

Hybrids

Second half playbook


Slide52 l.jpg

Example: Cisco Systems

Cisco’s value net is characterized by extensive outsourcing and use of digital information transfer.

2. Orders are automatically transmitted to suppliers or scheduled for Cisco production

Providers

3. Parts distributors flexiblyorchestrate parts logistics

Cisco

2

1. Customers configure 80 percent oforders on Cisco’s website; 70 percent of technical support calls require no human intervention

3

1

4. Cisco production configures only highly complex orders

4

Customers

6

5

6. Consolidation Centers Cisco operates only 3 centers worldwide

5. Suppliers build and drop-ship 60 percent of all units

Information Flow

Product Flow


Problem solving is a key customer priority for internet l.jpg

Problem-solving is a key customer priority for internet.

Value of Internet Services

% responding important/very important

Source: Mercer Consumer Internet Survey (5/99)


Solutions based on customer systems economics l.jpg

Solutions based on customer systems economics

The Customers’

Total Economic

Equation

“Big Box”

  • Product

  • Service

  • Support

  • Financing

Product

“Little Box”


Converged solutions from machine tools to running a small machine shop l.jpg

Converged solutionsFrom machine tools to running a small machine shop.

Milacron MILPRO.com

Multi-vendor products

marketplace

Help develop

responses to

RFPs

Process

trouble-

shooting

Milacron

e-commerce

(selling)

Find and connect to customers

News and

Info


Choice board l.jpg

Choice board

Customer

Choice Board

System of Accessible, Integrateable Components


Product choice board l.jpg

Product choice board

From: Selection Across Manufacturers . . .

. . . To: Customizable Product

  • Significant advantages:

    • Negates advantages of offering breadth

    • Eliminates easy price comparisons

    • Creates basis for marketing, logistics, and production efficiencies

    • Creates perfect customer demand information and tighter relationships


From generic product to infinite choice l.jpg

From generic product to infinite choice

Monolithic(One size fits all)

Segmentation

(Forced groupings)

Mass Customization(Individual needs)

The Mechanism: Choice Boards


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Rethink the process

Traditional Process

Manufacture

Finance WC

Sell

Digital Business Design Process

Sell

Collect

Make


Charles schwab schwab has built a powerful hybrid business design l.jpg

Charles SchwabSchwab has built a powerful hybrid business design.

Schwab’s Seamless Hybrid Customer Channels

Bricks and Mortar

Telephone

Online/ Internet

  • 291 Branches in 1998

  • 70% of account openings

  • <8% of trade volume*

  • 100MM phone calls in 1998

  • 73% handled without a live rep

  • 15-20% of trade volume*

  • 40MM hits per day in 1998

  • 2.2MM online accounts

  • 75% of trade volume*

Source: Charles Schwab Annual Report.

* % of trades conducted directly with Schwab 25% of total.

Schwab trades conducted through independent financial planners.


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2nd Half Predictions


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Fundamentals still apply

“Let’s be clear on one thing: If you take a business that is a bad business and put it online, it’s still a bad business, it’s just become an online bad business.”

- Michael Dell

Source: Baron's 6/99.


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Why Move Now?

If it’s a good opportunity and you don’t, someone else will.

Internet-related Venture Capital Investments

U.S. - $ Billions

1998

1999

Source: Wall Street Journal (National Venture Capital Association, Venture Economics)


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