TiVo Inc. CaseBy Mitch Casselman & John NadeauOctober 29, 2002Carleton University Ph.D. Program - Dr. Tom Koplyay Note: An...
Presentation Outline n   Company Background n   Market Discussion n   Competitive Picture n   Situational Analysis n   Str...
Company Background Product, Technology, Partners,Investors, Government, Lawyers         and Customers                     ...
Company Background -                          Product                n   TiVo Service Subscriptions -         monthly     ...
Company Background:                            Technology/R&D                      n   Pause and instant replay           ...
Company Background -                                        Partners                          n   Manufacturing Partners  ...
Company Background -                                      Partners                           n   Service Partners         ...
Company Background -                          Partners               n    Research Partners                    n   Lieberm...
Company Background -                            Suppliers              n   Single supplier dependency for key             ...
Company Background -              Investorsn   Acqua Wellington North American    Equities Fund    n   $13.8 million purch...
Company Background -                           Customers            n   Consumers                n   464,000 subscribers (...
Company Background:                Sales & Gross Margin Growth                                             Total Sales    ...
Market DiscussionMarket Dynamics, Market Growth,  Government, Legal Situation                                  13         ...
TiVo’s Market is at the point of                            Convergence                                       Broadcasting...
High Segment Growth                          Projected Digital Television Penetration                          350        ...
High Segment Growth                          Projected Interactive Television Penetration                           240   ...
Government Influence            n   Legislative environment is not stable                and could change                n...
Legal Situation                 n   TiVo                        n Intellectual Property                        n Standards...
Competitive Picture                                                                          19What we’ve seen in the mark...
Competition Looms Large                                           Broadcasting & TV                                       ...
Competitors and Size                                        Firm Size of Some Competitors                                 ...
Strategic Analysis                SWOT, Product Life Cycle, Porter,                  SPACE, Value Chain Analysis,         ...
Strengths                                               Weaknesses   • Partnered with many large established players for  ...
TiVo Lifecycle       Tivo has entered the growth phase of the PLCIntroduction           Growth               Maturity     ...
Porter Analysis                                    Pay TV/Set-top Boxes (OpenTV, NNDS)                                    ...
SPACE Analysis                                      Company’s   High                                      Financial       ...
Value Chain Analysis          Traditional Value Chain                                          Research Feedback          ...
TiVo Vulnerability AnalysisHigh                                                                       Financially reliant ...
BCG Product Matrix                                 High                                                  High growth rate ...
Technology Check                                    High     Outsource or                                         Technolo...
Financial Ratio Profile       Profitability                                                   Losing Money                ...
BCG Advantage Matrix                Number of Approaches to Achieving Advantage                                           ...
Analysis Summaryn   Growth Phase of Product Life Cyclen   SPACE Analysis suggests defensive approachn   TiVo’s model is ba...
Strategic Direction                      34                           34
Key Success Factors            n   Market Share            n   Which Standard/Business Model                Survives      ...
Strategic Options for TiVo           1.   Status Quo                   (Vertical Integration via Joint Ventures)          ...
Recommended Strategyn   Focus on one thing and do it well    n   A defensive stance from current approach    n   Focus on ...
NPD Strategies & the Life Cycle                          Introduction            Growth               Maturity            ...
TiVo Inc. Case       Australia TeamMitch Casselman/John Nadeau   Note: Analysis is based entirely on information from publ...
Porter Competitive Analysis       Managerial Capability Industry Rate of InnovationTechnological Sophistication Supplier B...
Company Capability                 Managerial                                                   0%   Weak   Strong   100%M...
Company Capability                  Competitive Factors1. Product Strength, Quality, Uniqueness2. Customer Loyalty and Sat...
Company Capability            Financial Factors1. Access to Capital When Required2. Degree of Capacity Utilization3. Ease ...
Corporate Development                                             MatrixPotential for Leveraging Customer Value   High    ...
Z-Factor             n   Formula developed by Edward Altman                 in 1968 to predict the company survival       ...
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Ti vo

  1. 1. TiVo Inc. CaseBy Mitch Casselman & John NadeauOctober 29, 2002Carleton University Ph.D. Program - Dr. Tom Koplyay Note: Analysis is based entirely on information from public sources 1 1
  2. 2. Presentation Outline n Company Background n Market Discussion n Competitive Picture n Situational Analysis n Strategic Direction 2 2
  3. 3. Company Background Product, Technology, Partners,Investors, Government, Lawyers and Customers 3 3
  4. 4. Company Background - Product n TiVo Service Subscriptions - monthly $4.99 (recently reduced from $9.95) or lifetime $249 n Licensing arrangements for Personal Video Recorders (PVR’s) n Sponsored content n Audience measurement research n Platform for electronic commerce 4The TiVo Service represents what’s been billed as the Personal TelevisionIndustry. Watch what you want, when you want!PVR’s are designed and developed by Tivo, licensed for manufacture and soldin retail channels as a consumer electronic device.Seasonality – anticipate large growth of annual new subscribers during theholiday shopping season.Sponsored content delivers charter advertising and sponsorship revenue.However, revenue by this source has been relatively insignificant.Examples: Short films, Counting Crows Debut of Album 4
  5. 5. Company Background: Technology/R&D n Pause and instant replay n Planned R&D focus n On-staff engineers n Technology Risk 5Pause and instant replay of live TV by storing information on a hard driveContinued investment in the improvement and addition of features and functionality of currentproducts as well as design of new platformsOn-staff engineers in R&D now (previously contract based)Technology Risk – can be devised in home on a PC with a large hard drive and video card or acompetitive technology solution. Overall, many competing solutions 5
  6. 6. Company Background - Partners n Manufacturing Partners n Hughes Network Systems n Sony n Quantum n Phillips n Thomson Multimedia 6MANUFACTURING PARTNERSHughes Network Systems Manufacture, marketing and distribution of personal video recorders that enable TiVo Service in the United StatesSony Manufacture, marketing and distribution of personal video recorders that enable TiVo Service in North America 7 year deal to pay royalties on Sony video recorders incorporating TiVo’s technology (part when shipped and another part when activated) Given the right to sublicense mfg. in JapanQuantum Supply agreement for hard disks Revenue sharing of subscription fees for devices with their hard disksPhilips Manufacture, marketing and distribution of personal video recorders that enable TiVo Service in North America Awarded a subsidy by TiVo for each unit sold (part when shipped and another part when activated) Ceases mfg. TiVo recorders Jan 31, 2002Thomson Multimedia SA Manufacture, marketing and distribution of personal video recorders that enable TiVo Service in the United Kingdom Subsidy on a monthly basis for each unit sold 6
  7. 7. Company Background - Partners n Service Partners n AOL investment ($200 Million) n Discovery Communications and NBC n DirecTV n AT&T Broadband n BSkyB n Best Buy n Creative Arts Agency 7SERVICE PARTNERSAOL investment ($200 Million) 3 year agreement to allow AOL TV subscribers access to TiVo services AOL was issued equity for their investmentDiscovery Communications and NBC $8.1 Million in the form of advertising and promotional services Additional $5 M paid to NBC for promotionsDIRECTV Market, sell, and support the TiVo Service To collaborate on R&D and utilize a portion of DIRECTV’s satellite network Issued 3M shares for marketing services Revenue sharing of DIRECTV/TiVo subscriptions Comprises a “healthy” portion of TiVo subscribersAT&T Broadband Market, sell, and support the TiVo Service in Boston, Denver and Silicon Valley areas Revenue sharing of subscription fees and advertisingBSkyB Market, sell, and support the TiVo Service in the United KingdomBest Buy exclusivity agreement to sell only TiVo branded Series2 digital video recorders (expires February 2003)Creative Artists Agency Marketing and promotional support of the personal video recorder Given 67,122 shares of preferred stock as compensation 7
  8. 8. Company Background - Partners n Research Partners n Lieberman Research Worldwide n Nielson Media Research 8Research Partners Lieberman Research Worldwide Nielson Media Research Develop ways of improving and measuring promotions and viewer behaviour First ever DVR-based panel established in August 2002 with Lieberman 8
  9. 9. Company Background - Suppliers n Single supplier dependency for key components and services n CPU’s n MPEG2 encoder/decoder n secure microcontroller semiconductor device n program guide data 9Risk – should strive to develop a relationship for secondary suppliers in theseareas (possible for 10-20% of demand?) 9
  10. 10. Company Background - Investorsn Acqua Wellington North American Equities Fund n $13.8 million purchase of common stocks n Option to sell up to $19 million more shares to raise cash (Feb 2002)n Crosslink Capital and New Enterprise Associates are buying $25 million of stock (October 2002)n Previous partners also major investors 10 10
  11. 11. Company Background - Customers n Consumers n 464,000 subscribers (October 2002) n TiVo community Forum where customers can engage each other and the company online n Hacker community is utilizing TiVo’s proprietary software code to design a web interface n Advertisers n Relatively small portion of revenues n Experimenting with various ideas for sponsored content (e.g. concerts for CD releases) 11CustomersCommunity development is good for loyalty and insight to help featuredevelopmentHacker community may be beneficial (as de facto imitators) to he lp promoteTiVo as a platform 11
  12. 12. Company Background: Sales & Gross Margin Growth Total Sales 40.0 30.0 $US Millions 20.0 10.0 - Oct Jan Apr Jul 2002 Beginning 2001 2002 2002 exponential Quarter Gross Margin growth? 12What we’ve seen so far:-Multiple products-R&D focus on developing features for the core product-Many partners, many are large players (AOL most significant, some holdequity)-Single source risk for some core components (Risk)-Customer base is growing and showing signs of active involvement-Advertising constitute a small amount of revenue-Sales growth is high and margins are okay 12
  13. 13. Market DiscussionMarket Dynamics, Market Growth, Government, Legal Situation 13 13
  14. 14. TiVo’s Market is at the point of Convergence Broadcasting & TV Software & Programming TiVO Electronic Instruments Communications Equipment 14Personal Television Market is located at the convergence of these 4 establishedindustries.Broadcasting & TV – ContentCommunications Equipment – Pipeline equipmentSoftware – run on equipmentElectronic Instruments – consumer products 14
  15. 15. High Segment Growth Projected Digital Television Penetration 350 300 Households 250 200 150 100 CAGR 29% 50 0 2001 2002 2003 2004 2005 2006 Source: Strategy Analytics 2002 15Digital growth is a proxy to show growth in new TV technology 15
  16. 16. High Segment Growth Projected Interactive Television Penetration 240 220 200 Households 180 160 140 120 100 80 60 40 CAGR 40% 20 0 2001 2002 2003 2004 2005 Source: Strategy Analytics 2001 16Interactive growth is a proxy to show growth in new TV technology 16
  17. 17. Government Influence n Legislative environment is not stable and could change n Copyright laws n FCC could alter regulations that affect TiVo indirectly through partners 17There is a real threat that the gov’t will alter the copyright legislation andcreate a barrier for TiVo. Consortium of broadcasters are lobbying for thesechanges. 17
  18. 18. Legal Situation n TiVo n Intellectual Property n Standards n Consumer Class Action n Competitors n Replay TV 18Intellectual Property Seven patents for pausing live television Five lawsuits (StarSight, Pause Technology, SONICblue - x2, Command Audio)Standards Consortium of broadcast and cable companies threaten to require personal television operators to obtain copyright or other licenses (e.g. Time Warner & Fox TelevisionConsumer Class Action TiVo faces Class Action lawsuits stemming from IPO practices and potentially misleading advertisingReplay TV (Competitor) is being sued for harming the potential market and value of copyrighted material. Replay TV allows users to skip commercials while TiVo only allows fastforward. 18
  19. 19. Competitive Picture 19What we’ve seen in the market:-TiVo sits between 4 large established segments-High projected penetration of new TV technology (Positive)-Legislation risk (copyright)-Legal battle zone – Personal TV is potentially a disruptive technology 19
  20. 20. Competition Looms Large Broadcasting & TV (EchoStar, DirecTV, BSkyB, Cox, Liberty, MDU, Walt Disney, AOL, Communications Newscorp) Equipment Electronic (NDS, Nagra Vision, Instruments Canal+, GIC-Motorola, TiVO (SONICblue, Sony, Scientific -Atlanta, Phillips, Panasonic, Viaccess-France Microsoft) Telecom) Software & Programming (OpenTV, Microsoft, Liberate Technologies, Canal+ Group, NDS) 20lMany big players with vested interest in the traditional business modellIncestuous – for example, OpenTV is owned by Liberty and has EchoStar,DirecTV and BSkyB as customerslDirect – Microsoft (UltimateTV), OpenTV, NDS, EchoStarCommunications, Cache Vision, Keen Personal Media, Sony, Moxi Digital(supported by AOL) and SONICblue (ReplayTV)lIndirect – satellite television, video on demand services, digital video discplayers, laser disc players, cable TV, InternetlAdvertisers – competing against traditional media (print, radio, andtelevision)lEchostar has around 600,000 of its subscribers with DVR capabilities anddoes not charge for the service.lSony PlayStation 2 game console will have TiVo- like features using BroadQsoftware to connect the PS2 to a PC and Snapstream personal video softwarefor the PC 20
  21. 21. Competitors and Size Firm Size of Some Competitors TiVo is a Number of Employess 12,000 10,000 very small 8,000 player, even 6,000 compared to 4,000 SONICblue 2,000 (a recent 0 entrant). S o ND TV TiV lue r sta en Cb ho Op NI Ec SO Competitor 21Glimpse of TiVo’s relative size to competitors 21
  22. 22. Strategic Analysis SWOT, Product Life Cycle, Porter, SPACE, Value Chain Analysis, Vulnerability, Product Matrix, Technology Check, Financial Ratios, Advantage Matrix 22Competition Summary- Incumbents are big and there’s potential for a fierce fight since personal TVstrikes at the core of the incumbents’ business model. 22
  23. 23. Strengths Weaknesses • Partnered with many large established players for • Single suppliers for key product components quick entry and development in the US and UK •Over reliance on partners •High customer growth rates •Separated from customers by partners •Still able to attract fresh capital (I.e. Oct 2002) •Partners squeezing pressure on value chain •Multiple potential revenue streams •Cannot make financial obligations without further injection of cash Opportunities Threats •High market growth •Established players in traditional markets are •Sponsored content entrenched and will implement defensive •Market research data strategies to protect their market share (eroding •Electronic commerce traditional strategic segment barriers) •Replay is drawing most legal attention •Legal challenges •Legislative agenda could restrict opportunities •Low barriers to entry (technology is easy to replicate) •Many competitors – many are heavy weights 23General summary of what we discussed 23
  24. 24. TiVo Lifecycle Tivo has entered the growth phase of the PLCIntroduction Growth Maturity Decline Sales are increasing at high rate, many new entrants, not yet profitable, low barriers to enter, recent price reduction for subscriptions 24 24
  25. 25. Porter Analysis Pay TV/Set-top Boxes (OpenTV, NNDS) Pure PVR Co.’s (SonicBlue) Broadband Internet Multimedia Giants Personal Satellite Traditional Broadcast TV Television Cable Consumer Industry Electronic Manufacturers Microsoft, Western Digital, Seagate, Scientific-Atlanta, Digeo (Paul Allen) 25Although typical for pressure to be coming from vertical areas, the marketdynamic is coming from all sides on the Personal Television Industry.Not only is there pressure from all sides but these players are directly gettinginto the Personal Television market or indirectly through ownership of anotherplayer.This is a market in transition. 25
  26. 26. SPACE Analysis Company’s High Financial Strength Low High Company’s Industry Competitive Defensive Strength Advantage Environmental Stability Low 26Environmental Stability is low-rapid technological change-Price range of competition is relatively high (Echostar free service)-Barriers to entry are low (functionality can be set up on a computer, a number ofdifferent patents to do the same thing)-Many substitute productsIndustry Strength is moderate-High growth potential-Technological know-how-Overall, the industries are quite strong, but the ranking becomes tempered whenlooking specifically at the Personal Television market.Company’s financial picture is weakTivo is currently engaging an aggressive strategy that is not a good fit. The company istrying to aggressively sign on subscribers, generate content, and conduct marketresearch.TiVo is situated in an attractive industry but lacks the financial and competitive strengthto pursue a competitive strategy.The SPACE analysis indicates that TiVo should consider a more defensive strategy thanthe one they currently use. 26
  27. 27. Value Chain Analysis Traditional Value Chain Research Feedback Broadcasting Delivery Software Equipment Customer TiVo Value Chain (vertical Integration) Research Feedback Broadcasting Delivery Software Equipment Customer 27These are the four primary areas of the market where TiVo participates –Broadcasting & TV, Communications Equipment, Software and Programming,and Electronic Instruments.TiVo is striving to influence the whole value chain rather than focus on theircomponent where they excel. They are essentially trying to implement aconvergence model at the intersection of these industries.-Broadcasting with sponsored content-Although not trying to replace the Delivery channel, they are branded theTiVo service to the end consumer-The software to receive signals, record, and adapt to viewer preferences-Equipment by designing and outsourcing the manufacturing of the “box” thathouses the software and large storage device.-They are also getting into the feedback loop by conducting viewer panels andcollecting viewing statistics. 27
  28. 28. TiVo Vulnerability AnalysisHigh Financially reliant on Defenseless Endangered AOL and others.Impact of Threat Rely on others for manufacturing. Vulnerable Prepared Relatively little control over customer base. Major partner has justLow acquired a competitor. Low High Ability to React or Retaliate Source: Rowe et al. 28 28
  29. 29. BCG Product Matrix High High growth rate Question Mark Stars demonstrated in Industry Growth Rate TiVo’s rate of customer acquisition and Dogs Maturity projected technology penetration. Low Low High TiVo is not the Relative Market Share market leader. 29Although products in the growth phase are typically classified as Stars, TiVohas not yet accomplished significant market share. There are other playerswith a larger subscriber base. For instance, EchoStar has grown a larger baseby offering the service for free to subscribers (they just have to buy theequipment). 29
  30. 30. Technology Check High Outsource or Technological Grow/Protect acquire capability Technology Success Potential opportunity is present. The company’s Fair technological ability is differentiated Outsource Maintain by features. Low Low Average High Company Technology Ability Source: Rowe et al. 30Differentiated feature example - adapting to viewer preferences – “TiVo’sSuggestions” option 30
  31. 31. Financial Ratio Profile Profitability Losing Money Very Low Average Very High Liquidity On the brink Very Tight About Right Too Much Slack Leverage Negative Equity Too much debt Balanced Too Much Equity Activity High Sales Growth Too slow About Right Too Fast 31Current Ratio = 0.80Quick Ratio = 0.75They are not able to meet current obligations$27M in cashShareholders Equity = -51MMarket Capitalization = $199.6MLiquidity – w/o new investment in October of $25 Million, they wereessentially bankrupt. This injection represents their “burn rate” for a quarter.Leverage – they have used up investors money and then some!Activity is good since sales are ramping up. This is good. 31
  32. 32. BCG Advantage Matrix Number of Approaches to Achieving Advantage Many Fragmented Specialized Business Business Stalemated Volume Business Business Few Small Large Potential Size of Advantage 32# of Approaches to Achieving AdvantageThere are many ways that a firm could deliver Personal Television to theiradvantage-traditional TV with pay-per- view-PVR-PC’s (connect to TV or stand alone)-Video Game console (X-Box and Sony Playstation)It can be pursued from any of the four established industries, but eachadvantage is relatively small. It is difficult to see at this point. Eventually, ifPersonal Television is adopted, the position should migrate to another spot onthe matrix (volume business). 32
  33. 33. Analysis Summaryn Growth Phase of Product Life Cyclen SPACE Analysis suggests defensive approachn TiVo’s model is based on industry convergence but the market’s not ready yetn TiVo is currently vulnerable financiallyn Proprietary technology represents a key opportunity 33 33
  34. 34. Strategic Direction 34 34
  35. 35. Key Success Factors n Market Share n Which Standard/Business Model Survives n Ability to Survive n Avoid Entrenched Players Wrath 35Market Share – must create a presence in the market to ultimately cross thechasmWhich Standard/Business Model Survives – the technology to win the battleover competing solutions will contribute to survivalAbility to Survive – financial resources and cash flowAvoid Entrenched Players Wrath – big players already here that can fight hard 35
  36. 36. Strategic Options for TiVo 1. Status Quo (Vertical Integration via Joint Ventures) 2. Horizontal Integration 3. Concentration 4. Divestiture 36Status Quo (Vertical Integration) Continue to grow the convergence business model Work on developing advertisement and sponsored content revenue to evolve differently than direct competitors (essentially becoming a broadcaster) Trying to capture value from across the value chain with such big players could come back to bite TiVo - TiVo really doesn’t have the financial resources for this course of action.Horizontal Integration Purchase competitors to gain market leadership - Again, finances restrict this course of actionConcentration - Focus on Technology Core Expansion with product differentiation Strive for platform leadershipDivestiture – Leave the market, dissolve the company or sell. 36
  37. 37. Recommended Strategyn Focus on one thing and do it well n A defensive stance from current approach n Focus on technology development and licensing revenue business model n Aggressive on promoting this position to establish platform leadershipn Anticipate a Merger n Once made attractive to an established player n TiVo will need help to Cross the Chasm at the end of the growth phase 37 37
  38. 38. NPD Strategies & the Life Cycle Introduction Growth Maturity Decline Pioneer Strategy First Mover N/A N/A N/A Advantage Imitator Strategy Strong Benefit Decreasing Benefit Only Useful if Cost Only Useful if Cost Advantages Advantages Rapid Innovation First Mover Steal Competitors Extend Life Cycle Limited Benefit Advantage Growth Disruptive Create New Market Strong Benefit Terminate N/A Technology – First Mover Incumbents Introduction Advantage Pre-Announcement Financing Strategy Standard Setting Strategic Strategic Strategies Perceptual Barriers Switching Costs Communication Communication Competitive Games Competitive Games Partnering Strong Benefit – Strong Benefit – Limited Benefit – Limited Benefit – Absorptive Capacity Growth & Learning Cost Only Cost Only Standard Setting Cooperate until Standard Set;Market Competitive Phase - Competitive Phase technology Segmentation & Erect Entry Barriers legitimation Cost Use of Platforms Limited Strong Aid to Critical Component Weakens but some Applicability Growth Of Survival Lasting Benefits38Relatedness to TiVoImitator Strategy – TiVo was a fast second to the Personal Television marketafter ReplayTVRapid Innovation – Competitors are coming into the market from all sides totry and steal away growthDisruptive Tech – Personal Television may be disruptive, however, theincumbents have identified this potential threat and are positioning themselvesaccordingly. Therefore, tough to terminate them!Pre-announcement – TiVo actually pre-announced their product when ReplayTV came out firstPartnering – key aspect of the TiVo strategy since they are too small to carryout the convergence strategy on their own.Standard Setting – A Consortium of broadcasters (incumbents) are trying toforce a standard on the new technology (re: copyright) to reduce disruption totheir existing business modelUse of Platforms – Becomes important in the growth phase. This is where 38TiVo should be focused on becoming the platform leader.
  39. 39. TiVo Inc. Case Australia TeamMitch Casselman/John Nadeau Note: Analysis is based entirely on information from public sources 39 39
  40. 40. Porter Competitive Analysis Managerial Capability Industry Rate of InnovationTechnological Sophistication Supplier Bargaining Power Buyer Bargaining Power Dependency on Inputs Product Substitutability Intensity of Competition Ease of Entry Industry Rate of Growth 0 2 4 6 8 40 40
  41. 41. Company Capability Managerial 0% Weak Strong 100%Managerial Factors1. Corporate Image, Social Responsibility2. Use of Strategic Plans and Strategic Analysis3. Environmental Assessment and Forecasting4. Speed of Response to Changing Conditions5. Flexibility of Organizational Structure6. Management Communication and Control7. Entrepreneurial Orientation8. Ability to Attract Highly Creative People9. Ability to Meet Changing Technology10. Ability to Handle Inflation11. Aggressiveness in meeting competition12. Other 41 41
  42. 42. Company Capability Competitive Factors1. Product Strength, Quality, Uniqueness2. Customer Loyalty and Satisfaction3. Market Share4. Low Selling and Distribution Costs5. Use of Experience Curve for Pricing6. Use of Life Cycle of Products and Replacement Cycle7. Investment in New-Product Development by R&D8. High Barriers to Entry into Company’s markets9. Advantage Taken of Market Growth Potential10. Supplier Strength and material availability11. Customer Concentration12. Other 42 42
  43. 43. Company Capability Financial Factors1. Access to Capital When Required2. Degree of Capacity Utilization3. Ease of Exit from the market4. Profitability, Return on Investment5. Liquidity, Available Internal Funds6. Degree of Leverage, Financial Stability7. Ability to compete on prices8. Capital Investment, Capacity to Meet Demand9. Stability of Costs10. Ability to Sustain Effort in Cyclic Demand11. Price Elasticity of Demand12. Other 43 43
  44. 44. Corporate Development MatrixPotential for Leveraging Customer Value High 1. Watch and Wait 2. Winners 4. Losers 3. Unstable Cash Bonanza Low Low High Achievable Competitive Cost Advantage 44 44
  45. 45. Z-Factor n Formula developed by Edward Altman in 1968 to predict the company survival for manufacturing companies n Z = .012 A + .014 B + .033 C + .006 D + .999 E n Z = .765 n Less than 1.81 therefore significant risk of bankruptcy 45Z = .012 A + .014 B + .033 C + .006 D + .999 E, whereA = working capital/total assets (%)B = Total retained earnings/total assets (%)C = Earnings before interest and taxes/total assets (%)D = Market value of equity/book value of total debt (%)E = Sales/Total AssetsIn some cases the z-factor can be approximated with the equation sales/totalassets.Companies with a z- factor less than 1.81 have a significant risk of bankruptcyCompanies with a z- factor of 1.81 to 2.99 are in a zone of ignoranceCompanies with a z- factor greater than 2.99 have minimal chance ofbankruptcy. 45

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