20120201 - Differentiate or Die!

Relevance FoundRelevant … Reliable … Material Differentiate or Die! Getting ahead and staying ahead in an increasingly competitive marketPresentation to Singapore Polytechnic studentsFebruary 2012

Ok a little bit about meReach me at iryan@deloitte.com (Work)izamryan@gmail.com (Personal) Graduated BA (Hons) Accounting ICAEW Chartered M&A Accountant Pengiran Izam 5 years of post Advisory Ryan Bahrin qualified experience (ACA) Audit Industry Big 42 Differentiate or Die! – Introductions © 2012 izamryan@gmai.com http://relevancefound.com

ContentsWhy is value so important?What are the sources of value?What are the mega-trends that will impact us?How can we profit from it?Conclusion4 Differentiate or Die! © 2012 izamryan@gmai.com http://relevancefound.com

Cash is king, and I’ll show you whyValue Inc. (amounts in $`000) Year 1 Year 2 Year 3 Year 4 Year 5 Revenue 1,000 1,000 1,000 1,000 1,000 Profit 100 100 100 100 100 Investment (25) (25) (25) (25) (25) Cash flow 75 75 75 75 75Volume Inc. (amounts in $`000) Year 1 Year 2 Year 3 Year 4 Year 5 Revenue 1,000 1,000 1,000 1,000 1,000 Profit 100 100 100 100 100 Investment (50) (50) (50) (50) (50) Cash flow 50 50 50 50 50Source: adapted from http://www.mckinsey.com/Client_Service/Corporate_Finance/Latest_thinking/Valuation5 Differentiate or Die! – Why is value so important? © 2012 izamryan@gmai.com http://relevancefound.com

Cash is king, and I’ll show you why Accounting profit is an accruals-based profit • It omits the “opportunity cost” • Illustration: ‒ You invested $100k in buying stocks to sell in a new biz start-up. It earned you $120k in profit (net income) in the 1st year. Accounting profit = $20k. ‒ But for the same year you could have been Cash flow on employed for $50k. The “Opportunity cost” is $50k the other hand ‒ You made an economic loss of $30k. Which is a Is accounting is undistorted. better indicator? Accounting profit or Economic profit a good value? Profitable is metric? not the same as cash Cash flow is the basis for economic value generating. • Which would you rather receive? $100 in cash flow or $100 in accounting profit? • Economic value is more useful a tool If cash flow is more useful than accounting profit • How do we use economic value as the measure to steer the direction of our business?Source: adapted from http://www.mckinsey.com/Client_Service/Corporate_Finance/Latest_thinking/Valuation6 Differentiate or Die! – Why is value so important? © 2012 izamryan@gmai.com http://relevancefound.com

Value comes from two key components – ROIC and Growth Return on • ROIC = operating profit ÷ invested capital invested capital • Revenue growth = annual Cash flow rate of increase of top-line Revenues Revenue • Together these two growth measures gives an idea of Economic future cash flows value • We can then compare future cash flows against the business cost of capital • Value is created when ROIC Cost of Capital > cost of capital. • Value creation is accelerated in high-growth companies or operations in high-growth industries.Source: adapted from http://www.mckinsey.com/Client_Service/Corporate_Finance/Latest_thinking/Valuation8 Differentiate or Die! – What are the sources of value? © 2012 izamryan@gmai.com http://relevancefound.com

The key source of value is ROIC Cost and capital Price premium efficiency • Innovative business • Innovative products method • Quality • Unique resources Return on Invested • Brand Capital (ROIC) • Customer lock-in • Economies of scale • Scalable • Rational price discipline product/processSource: adapted from http://www.mckinsey.com/Client_Service/Corporate_Finance/Latest_thinking/Valuation9 Differentiate or Die! – What are the sources of value? © 2012 izamryan@gmai.com http://relevancefound.com

The Ansoff matrix is a tool that can be used to formulate growth strategies New Market portfolio Existing Existing New Product portfolio10 Differentiate or Die! – What are the sources of value? © 2012 izamryan@gmai.com http://relevancefound.com

“We are shifting from a world where the key source of strategic advantage was in protecting and extracting value from a given set of knowledge stocks – into a world in which the focus of value creation is effective participation in knowledge flows” - NY Times Columnist, Thomas L. Friedman, 19 Jan 201012

The Shift Index is our study of 3 indexes and 25 measures designed to makelong-term performance trends more relevant and actionable Focus on connected individuals. Competitive Digital Talent and Widening gap The “topple” intensity has infra has consumers between rate has more doubled in huge have more “Winners” and the last 40 than doubled adoption power as “Losers” years rate competition intensifies and networks grow in power.13 Differentiate or Die! – What are the mega-trends that will impact us? © 2012 izamryan@gmai.com http://relevancefound.com

The Shift Index is our study of 3 indexes and 25 measures designed to makelong-term performance trends more relevant and actionable Competitive pressures are making it harder to achieve strong results We are lagging behind the potential to tap on this huge potential Focus on connected individuals. Competitive Digital Talent and Widening gap The “topple” intensity has infra has consumers between rate has more doubled in huge have more “Winners” and the last 40 than doubled adoption power as “Losers” years rate competition intensifies and networks grow in power.15 Differentiate or Die! – What are the mega-trends that will impact us? © 2012 izamryan@gmai.com http://relevancefound.com

The biggest mega-trend of our lifetimes is the “Big Shift” Foundation wave Flow wave Impact wave Technology will break Knowledge, capital & A fundamental shift as the world; talent will flow across institutions are created the landscape; not for scalable And re-make it in its efficiency (size) but for image. Transforming it. scalable learning All market segments In the past, talent and (innovation). will feel the force of capital was In order to compete, digitization and the concentrated in companies must learn foundation wave will capitals, but as to create scalable sweep away old norms networks improve, infrastructure where of doing business, innovation will start to performance replacing them with the happen within and increases as more new. without 4 walls. participants join.16 Differentiate or Die! – What are the mega-trends that will impact us? © 2012 izamryan@gmai.com http://relevancefound.com

Value comes from two key components – ROIC and Growth Return on invested capital Cash flow Revenue growth Economic value Cost of CapitalSource: adapted from http://www.mckinsey.com/Client_Service/Corporate_Finance/Latest_thinking/Valuation18 Differentiate or Die! – How can we profit from it? © 2012 izamryan@gmai.com http://relevancefound.com

Business model canvas is a tool to describe business models. Once abusiness model is described, it can be improved upon. Visualizing it thisway can help uncover hidden linkages, opportunities and risks.Key Key Value Customer Customerpartners activities propositions relationships segmentsWho are our “Key What key activities do What value do we What type of For whom are wepartners”, what “Key our “Value deliver to the relationship do our creating value?activities” do they propositions” require? customer? “Customer segments”perform and what “Key expect us to establishresources” do they and maintain?bring to our business? Key Channels resources Through which What key resources do channels do our our “Value “Customer segments” propositions” require? want to be reached?Cost structure Revenue streamsWhat are the most important costs inherent in our business For what value are our customers really willingmodel? Which “Key activities” / “Key resources” are the most to pay? What do they currently pay and how much wouldexpensive? they prefer to pay? What is the contribution of each stream to total revenues?Source: adapted from http://www.businessmodelgeneration.com/19 Differentiate or Die! – How can we profit from it? © 2012 izamryan@gmai.com http://relevancefound.com

Let’s take an example of the “traditional” music record businessKey Key Value Customer Customerpartners activities propositions relationships segmentsDistribution channels Finding talent “We help bring new Mass market unfound talent to the Marketing market with hit records” Super-star artists and hits Key Channels resources Retail outlets Protected content Radio & TVCost structure Revenue streamsTalent “production” Huge revenues from a small portfolio of artistsMarketingSource: adapted from http://www.slideshare.net/Alex.Osterwalder/long-tail-business-models-presentation20 Differentiate or Die! – How can we profit from it? © 2012 izamryan@gmai.com http://relevancefound.com

Now compare that with an innovative business model that harnesses “The Shift” change that is happening21

Take the example of MySpaceKey Key Value Customer Customerpartners activities propositions relationships segmentsContent producers Platform management “We create a platform Communities 100’s of niche where musicians can segments : be heard and fans can discover new music” • electro pop, • dirty disco, Catering to every • hard house, Key musical taste Channels • euro trash, resources • dub step Match-making fans with • vocal trance new music Online • drum and bass Breadth of platform • progressive rock • heavy metal • K-pop • etc)Cost structure Revenue streamsPlatform maintenance Advertising revenues from its huge user baseSource: adapted from http://www.slideshare.net/Alex.Osterwalder/long-tail-business-models-presentation22 Differentiate or Die! – How can we profit from it? © 2012 izamryan@gmai.com http://relevancefound.com

Here are some areas which we can explore once we have a firm businessmodel sketched out New segments New value and partners proposition for for more more ROIC Growth Maximizing Economic value in a Shifted world? Components Unbundling missing from components the pattern from the model Linkages between existing components23 Differentiate or Die! – How can we profit from it? © 2012 izamryan@gmai.com http://relevancefound.com

M&A up-cycle will likely continue in 2012. Global macro factors of lowinterest rates, improving equity markets and the Euro crisis will likelycontribute to increasing M&A activity, particularly in emerging markets. Priority in a Markets punishing M&A focus on M&A affordability “Shifted” world conglomerates emerging marketsM&A will be a key M&A affordability index Large conglomerates Acquirers will be lookingopportunity for growth in is at its historical highest may be inclined to divest for growth, and with thean environment of • Gap between implied non-core businesses Euro crisis, growth willsluggish growth valuation of A rated • Stock markets valuing likely be in emerging• The Shift Index has debts, versus large conglomerates markets. highlighted falling • The implied valuation at a discount • As regulatory ROA across the of broad stock market • And markets seem to frameworks and industries indices be placing greater capital markets• The study also value on pure plays develop in emerging • This means that debt highlighted the markets, so too will financing is affordable • Spinoff transactions widening gap between deal flow and easy to obtain, generally being well the winners and the which can be used to received by the • China outbound losers finance mergers & market. theme, particularly in• Innovation is not acquisitions the natural resources something that comes sector, will likely easily to all continue. corporates, so M&A can be a “quick win”Source: adapted from http://www.db.com/en/media/Deutsche_Bank_--_The_Markets_in_2012_-_Foresight_with_Insight.pdf25 Differentiate or Die! - Conclusion © 2012 izamryan@gmai.com http://relevancefound.com

My challenge to you – take what I’ve given you and make it your own, makeit better! Think holistically about the pieces & how fit together The sources of Maximizing The importance value these maximizes of value our Value (ROIC) (g) Biz models must We are living in be repositioned Differentiate ROA are falling a time of ultra- to take or Die ! competition advantage of the Big Shift M&A will play an Difficult to increasingly Innovate to stay institutionalize important role in ahead an “innovative the search for “culture growth26 Differentiate or Die! - Conclusion © 2012 izamryan@gmai.com http://relevancefound.com

Questions & Answers27 Deloitte PowerPoint timesaver – September 2011

Relevance FoundRelevant … Reliable … MaterialThis publication contains general information only, and the author is not by means of this publication, rendering professional advice or services. Before making any decision or takingany action that may affect your finances or your business, you should consult a qualified professional adviser. The author shall not be responsible for any loss whatsoever sustained byany person who relies on this publication.This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. To view a copy of this license, visithttp://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA.Presentation © 2012 Pengiran Izam Ryan Bahrin izamryan@gmail.comImages remain the property of their respective owners.

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20120201 - Differentiate or Die!

by Izam Ryan Bahrin on Jan 29, 2012

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