The Nature of Value

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Graphics from the Book, The Nature of Value. The Nature of Value combines evolution, economics and value investing best practices into a single simple theory of economy. Investors, economists and financial specialists will learn fresh perspective from The Nature of Value. Research includes insights from information theory, psychology, thermodynamics, economics, finance, ecology and many other disciplines.

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  • The Nature of Value

    1. 1. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com. All items in this PowerPoint are made available under a Creative Commons License of Sharing with rights of attribution. So copy/ paste but give credit to The Nature of Value / Nick Gogerty. www.thenatureofvalue.com
    2. 2. Chapter Goals Focus : Contrast : Context Introduction: Problem: Solution: Call for action State question: formalize: propose solution: suggest actions The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    3. 3. Chapter 4. Narrative story with historical examples 3. Simple Graphic showing behavior & relationships 2. Easy to remember name tied to behavior 1. System links (ecological & value) thinking 5. Application Sanity check for each Chapter The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    4. 4. The Nature of Value is The Economy of Life The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    5. 5. $0 $25 $50 $75 $100 $125 $150 $175 Today 50% inflation Excess customer value Corporate profit Cost of production Moat cost A. B. C. Perceived value Price Cost (total) A. B. C. Inflation resistant moat working for 10 years The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    6. 6. Inflation resistant moat Today +10 yrs Customer Perceived value $110.00 $165.00 Price $100.00 $150.00 Excess value to customer $10.00 $15.00 Cost of production $45.00 $67.50 Moat cost $45.00 $45.00 Total cost of production $90.00 $112.50 income $10.00 $37.50 Corporate value @ 10x profit $100.00 $375.00 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    7. 7. http://www.ggdc.net/Maddison/ARTICLES/Causal_influences.pdf Annual average compound growth rates Source data: Angus Maddison The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    8. 8. Ino for distribution strategy Increased inventory turnover Lower cost shelf prices Genes & Inos are survival knowledge enabling their own replication capabilities Gene for muscle protein structure Increased leg muscle mass Faster Antelope The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    9. 9. Early cluster adopters value shrinks as competitors adopt ino Value($’s) Adoption cycles Early opportunistic Entrepreneurial Mature competitor Endemic Customers Ino Vendor(s) Cluster The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    10. 10. Expressed Ino capabilities create & discover economic possibility spaces Successful value creation Value destroying ino Vector length/magnitude represents reproductive success The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    11. 11. 10 Types of innovation capability Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience Unique capabilities help competitive outcomes The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    12. 12. Innovation iceberg Product offering Business model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    13. 13. Categories of life capabilities Homeostasis Organization Metabolism Growth Adaptation Response to stimuli Reproduction The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    14. 14. Taxonomy of chairs The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    15. 15. Aircraft taxonomy: adaptive radiation of value capturing knowledge The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    16. 16. Walmart’s unique innovation led capability footprint 1970-80’s Business model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience Unique Value creating capability The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    17. 17. Life’s iterative organizing cycles Adaptive Information Expression & form Selection in Competitive Context The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    18. 18. Moore’s law capability over time & technologies semi-logarithmic plot 1010 108 106 104 102 1 10-2 10-4 10-6 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Electrochemical Relay Vacuum Transistor Integrated Circuit Tube Calculationspersecondper$1,000 YearSource: Based on Ray Kurzweil’s Fifth paradigm chart The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    19. 19. Value’s iterative growth cycles Ino: Adaptive Information Capabilities: Expression & Form Selection in Competitive Context Business plan Employee list Recipes Supplier list Lemonade $1.00 $ $$ $ $ $$ $ $ $$ $ The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    20. 20. Value flows through the economy’s network growing & spreading evolution’s knowledge 1. Ino 2. Organization 3. Cluster Value: growth decay Business model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience Business plan Employee list Recipes Supplier lists Designs Tacit skills Strategies 4. Economy The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    21. 21. Growth in value flow vs. Value capture 0 + Growth(revenueflow) + 0 _ 1. Lottery ticket 4. Cigar butt Value capture (ROIC) 3. Death spiral 2. Lollapalooza The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    22. 22. Compounding virtuous positive feedback cycles grow flows Increasing capability & advantage Increasing value creation & flow Increasing capability & advantage Increasing metabolizing biomass Increasing species’ flow capability Increasing organization value flow capacity Ecology Economy The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    23. 23. Virtuous cycle of selective feedback Antelope Cheetah Life’s capabilities improve 1. Input (Knowledge & expressed form) 2. Computation (knowledge transformation by selection) 3. Output (selected & replicated knowledge) Macro-processing generates knowledge across domains The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    24. 24. Inos expressed as an organization Lemonade $1.00 Recipe •1 gallon water •1 cup sugar •5 lemons B-Plan •Build stand •Buy Ingredients •Mix lemonade •….. Resources •Bobby & Susie •$5 start capital •Cups & pitcher •Wood & sign The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    25. 25. Traders consume predictable low entropy patterns arbitraging them away leaving increased price entropy Low Entropy = Predictable path straight line market High entropy = Unpredictable random white noise market 4% 0% -4% Time The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    26. 26. 12% 10% 8% 4% 0% Index Nature of Value Long-termreturns Portfolio concentration Missed hits Too hot to hold rebalanced away Tax & transaction costs Know nothing hold all the shares Know something hold a few shares Typical portfolio Know nothing index returns beat concentrated ignorance The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    27. 27. 20 years of compounding effects The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    28. 28. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    29. 29. A “hits” index returns 8% per year when 1 out of 100 firms returns 800% $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    30. 30. Year 1 Year 2 Year 3 +800% +0% Predicting the location of next years+800% hit company is nearly impossible* *The 3 Fama-French factors are an exception to the random distribution of returns The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    31. 31. 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Australia Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands NewZealand Norway SouthAfrica Spain Sweden Switzerland UnitedKingdom UnitedStates 1900-2011 Real Equity Index Returns Source: Credit Suisse Global Investment Returns Yearbook 2012, Elroy Dimson, Paul Marsh and Mike Staunton The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    32. 32. Inos expressed in an organization Knowledge Capabilities Lemonade stand business Product performance (refreshing drink) ice-cooled Fresh squeezed Marketing (perceived as local business) Hand made signs Business model (retail) Store front cash business Channel(direct distribution) Sold from the front lawn The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    33. 33. Iron law of economic survival Cost Price Value Raw materials & production Goods sold Perception of consumer The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    34. 34. Complex Adaptive System Elements 10102020203 Oiu-riewer- ljksfd 32290-afoufd- oiuqoiurqeou The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    35. 35. Unique competitive capabilities define organizational morphology (shape & behavior) Busines s model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    36. 36. 2003-2012 Apple’s unique capability footprint Business model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    37. 37. GM 2012 unique capability footprint Business model Networking Enabling process Core Process Product Performance Product System Service Channel Brand Customer Experience The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    38. 38. Basic Avalanche model The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    39. 39. Innovation constantly trickles in The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    40. 40. High Tension (instability) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    41. 41. Vulnerable component The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    42. 42. Innovation diffusion cascades through economic network links Ino adopting Organization Supply Chain or cluster The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    43. 43. Innovation cascades The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    44. 44. Power law: innovation cascade System & component behavior1,000 100 10 1 1 10 100 1,000 Cycles between events Magnitudeofchange The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    45. 45. Input Process Output System Inputs • Capital • Management • Team & resources Process • Moat • Competitive cluster Output • Return on capital The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    46. 46. Increasing knowledge bifurcates into new forms increasing value flow Over time material & energy flows grow Product&service Variation/Adaptation Replicating system Dead system The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    47. 47. Adaptation rates TimeTime Steady Linear increase in variety Log normal shifts in variety Gradualism Punctuated Equilibrium Process Efficiency & System complexity increase over time The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    48. 48. Ontology of CA probabilities & selective forces • Bit information probability • Gene phenotipic probability • Ino value probability The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    49. 49. Trial/Error Variation/Selection Bifurcation/Convergence Radiation/Consolidation Innovation/Consumption Complex Adaptation & System Feedback Variety Time The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    50. 50. Ino: a unit of economic probability −∞ +∞ Net Economic Impact (efficiency/throughput) #ofInos(Logscale) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    51. 51. All Some None Competitors using & expressing an ino #ofInos(Logscale) Ino trait survivorship among economic participants The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    52. 52. Experience curve: unit cost declines at each production doubling $0 $25 $50 $75 $100 1 2x 4x 8x 16x UnitPrice Total cluster/organization unit/cycles production The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    53. 53. Evolution explores possibility spaces inside network clusters & edges Humans Human Guts New Bacterium possibility space Cars Headlights New type of light possibility space The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    54. 54. Clusters adapt & emerge externally or internally from existing clusters Cell-phone Cell phone games House Mortgage insurance Mortgage External cluster birth Internal cluster birth Cellphone Operating System The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    55. 55. Purchase cycles/key Capability (value) cycles P/C=Adaptive factor Key Innovation cycles/T Purchasecycles/T Difficult Difficult Deadly <0.5 Desired >5.0 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    56. 56. Cluster traits stable v. unstable Trait Stable Unstable Key innovation cycle Long/ minimal change Short/large change Customer cycle Recurring/long Volatile/short Strategies displayed Stable Volatile Market share Stable Volatile Cluster competitors Known familiar Volatile new entrants Operating margins Stable Volatile Cash flow Stable Volatile Value creating process Stable Volatile Capital or Value at Risk Normal Extremely high The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    57. 57. The Cluster impacts of inos None Some All Competitors expressing an ino EconomicImpact (efficiency/throughput) +∞ −∞ Growth Red Queen Cluster collapse Competitor consolidation Ino occurrence: Rare Common The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    58. 58. 1. Cluster Shock • First Innovator receives margin or share benefits 2. Cluster adoption wave • Follow on firms adopt innovation 3. Innovation normalized • Margins revert & stabilize Innovation flows through clusters Value passing to cluster customers Excess margins to cluster participants The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    59. 59. Read more: http://www.businessinsider.com/the-collapse- of-best-buy-in-two-simple-charts-2011- 12?utm_source=feedburner&utm_medium=fe ed&utm_campaign=Feed%3A+clusterstock+%2 8ClusterStock%29#ixzz1giGD7LWB The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    60. 60. Clusters: defined by customer choice set Customer Viable Product offering Product offering Product offering Product offering Viable Product offering Product offering Viable Product offering The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    61. 61. Schelling beach & flavor solution spaces Vendor/offering Customers/cost or preference Fred-Sue Sweeter More Sour Physical location preference space Taste preference space Fred-Sue The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    62. 62. Long-term combined inter and intra cluster growth is more powerful +7.5% SSS growth (intra - cluster) +7.5% # of stores growth (inter cluster) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    63. 63. $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 1 3 5 7 9 11 13 15 15.0% v. 7.5% growth compounded for 15 years 15.0% 7.50% The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    64. 64. Competitive Cluster (Economic Niche) • Carrying capacity: measured in $s • Stability: measures competitor flux • Maturity: carrying capacity fullness The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    65. 65. Customer’s & competitor’s pressure squeeze cluster profit margins cost unique capability (value add) excess value capture (profit) price to consumer (revenue) high margins low margins The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    66. 66. Cluster growth & maturation empty early growth mature The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    67. 67. Early stage cluster: close & distant strategies open field fast followers Wal-mart in 1970’s Search engines 1999 (pre-Google) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    68. 68. Selection forces dominant design & capability convergence Evolution discovers a radical new dominant design Surviving organizations converge on the dominant design Most organizations fail to adapt & express the dominant design Productandservice Phenotypicvariance Time (ino & product cycles) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    69. 69. Organizations are defined by valued goods and services they deliver Busines s model Networking Enablin g process Core Process Product Performanc e Product System Service Channe l Brand Customer Experience Value delivery enabling capability categories The structure of unique value creation capabilities determines firm survival The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    70. 70. Elements, capabilities & impacts found in value delivering organizations Cost of goods Revenue from sales Unique value delivery capability The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    71. 71. Unique value adding capabilities improve margins and ROIC No unique value adding capabilities leads to lower margins Many unique value adding capabilities create higher margins Cost of goods Revenue from sales Unique value adding capability The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    72. 72. Moats shrink margin pressure from cost, competitors & customers Unique value creation capability expands margins Competitor moats reduce customer choice sets Efficiency moats shrink cost of goods Boundary of addressable revenues Pricing power expands grey margins space Cost of goods 1. 2. 3. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    73. 73. Moats reduce cost, competitor & customer pressures allowing margins to expand The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike Consumer choice pressure defines maximum price and viable market size Competitor pressure determines marginal value delivered to the customer
    74. 74. Efficiency moats deliver value cheaply Consumer pressure limits maximum unit price & total viable market size Competitor boundary pressure forces value delivery to the customer Cost factor • Network effects • Scale effects • Experience curves The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    75. 75. Consumer pressure limits maximum unit price & viable market size Competitor boundary pressure forces value delivery to the customer Cost factor • Physical & geographic factors • Patents, licenses & regulations The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com. Moats reduce customer choice & competitive margin pressure
    76. 76. Consumer behavior moats Consumer pressure limits maximum unit price & viable market size Competitor boundary pressure forces value delivery to the customer Cost factor • Brands, behaviors & social perceptions • Sunk switching cost • Mental switching costs The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    77. 77. Moat forces alter consumers & competitors 1. 2. 3. 4. Consumeralteringforce BeliefCost Behavior/capability Cost Competitor altering force The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    78. 78. MV=P environmental stability fosters economic growth -30% 0% 30% Money (flow/growth) Value(flow/growth) Optimal GDP Growth Zone Depression Failing monetary stimulus Price stability High Low Price (CPI) +15 % 0% -30% Price Hyper inflation spiral Boom The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    79. 79. Moat to own based on MV=P location relative to attractor basin -30% 0% 30% Money (flow/growth) Value(flow/growth) Optimal GDP Growth Zone 4. Equities based 1. Real assets Price stability high low Price (CPI) +15 % 0% -30% Price 3. Debt based 2. Cash based The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    80. 80. Berkshire Hathaway’s business categories & the moat to own -30% 0% 30% Money (flow/growth) Value(flow/growth) Optimal GDP Growth Zone 4. Equities based: Manufacturing, servic es & retailing 1. Real assets: Utilities & regulated capital intensive businesses +15 % 0% -30% Price 3. Debt based: Banking & finance 2. Cash based: Insurance/cash Price stability high low Price (CPI) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    81. 81. Inflation strains profits as costs exceed consumer value demand Input cost Inflation Demand for delivered Value Profit Loss $0 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    82. 82. Extreme environment pendulum shifts lead to tension or system failure Long-term resilient operating capacity Brittleness leading to susceptibility of minor shock failure Competitive softness leading to failure Valuedeliveryefficiency 0% 25% 50% 75% 100 % Operating network flow efficiency: energy, material, money Minimal Low Normal High Extreme Functional vitality Dead High Sloth risk Greed risk The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    83. 83. Average organizational lifecycle on the S&P 500 is accelerating 70 60 50 40 30 20 10 0 1960 1970 1980 1990 2000 2010 7 year rolling average of the average lifespan Data: Innosight/Richard N. Foster/Standard & Poor’s The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    84. 84. Viable value creating firm Selection & adaptation process in economic & ecological network domains Failed maladapted economic firm Viable biological form Failed life form Economic dominant design & required capability set Evolutionary bifurcation into multiple clusters/niches Economic forms using inos adapt faster than life forms using genes The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    85. 85. Herman Daly insert into chapter 8 from ecological economics Herman E. Daly & Joshua Farley, 2004 Cycling from ends to means (value) creates, relics, information and embedded information and entropy. Ultimate end (final cause, God, ??) Intermediate ends (health, safety, comfort) Intermediate Means (artifacts) Ultimate means (material cause, low- entropy, matter-energy) Religion, Philosoph y Ethics Economics, politics Technics Physics The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    86. 86. for chapter 8 Erwin Schrodinger • Life is a system in steady-state thermodynamic disequilibrium that maintains its constant distance from equilibrium (death) by feeding on low-entropy inputs. E. Shrodinger, What is Life? Cambridge, England: Cambridge University Press 1944. Economics is system in steady-state value disequilibrium that maintains its constant distance from equilibrium (death/stasis) by feeding on low- entropy inputs and innovations. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    87. 87. Chapter 7 on Hyperinflation • Hyperinflation occurs when money fails in 2 of its 3 functions. (store of value, and medium of exchange) It is often measured as 50%/month inflation. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    88. 88. Evolution’s energy dissipation structures evolve into increasing Φ(m) capacity structures ascending across the panarchy. Wasp wing F-16 wing Algorithmic fluid mechanical model Airflow related dissipative structures as expressed across network domains Volcanic smoke Geology Ecology Economy Symbology The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    89. 89. Firms in U.S. television industry 1950 55 60 65 70 75 80 85 Numberoffirms 100 75 50 25 Stylized from source data: James M. Utterback, “Innovation and Industrial Evolution in Manufacturing Industries,” in Bruce Guile and Harvey Brooks, eds., reprinted with permission from Technology and global Industry (Washington, D.C.:National Academy Press, Copyright 1987), based on data from R. Fabris, “Product Innovation in the Automobile Industry,” Ph.D. Diss., University of Michigan, 1966. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    90. 90. Birth & death of competing U.S. auto manufacturers 1900 1920 1940 1960 Numberoffirms 75 65 55 45 35 25 15 5 Stylized from source data: James M. Utterback, “Innovation and Industrial Evolution in Manufacturing Industries,” in Bruce Guile and Harvey Brooks, eds., reprinted with permission from Technology and global Industry (Washington, D.C.:National Academy Press, Copyright 1987), based on data from R. Fabris, “Product Innovation in the Automobile Industry,” Ph.D. Diss., University of Michigan, 1966. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    91. 91. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    92. 92. Cluster stability v. lifecycle stage StableUn-stable Growing Maturing 1. Lollapalooza 3. Lottery 2. Cash Cow 4. Red Queen no / low barriers to competitive entry high barriers to competitive entry Strategy&capabilitystability Cluster life cycle stage The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    93. 93. Number of competitors during dominant design convergence Product/capability cycles over time Competitors 1. 2. 3. 100 75 50 25 0 1 2 3 4 5 Innovation radiation explosion of variety in offerings Dominant design emergence Expressed economic capability and design convergence 1. 2. 3. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    94. 94. Cluster supply chain outcomes: Competition v. corruption’s impact $ cost/unit of value=7.6x $100 Corruption extracts value as each clusters throughput Competition delivers value as each clusters throughput $125 $156 $195 $244 25% corruption impact/cluster $100 $75 $56 $42 $32 25% competition impact/cluster The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    95. 95. Ino Organization Cluster Economy Complexity EffectiveStability The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    96. 96. Ino the unit of Innovation • Innovation is a physical unit of uncertainty • Works similar to an avalanche model • Power law impacts • Can be positive or negative for individual firm • Sustained innovation delivers benefit to consumer The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    97. 97. Socio- cultural Political/lega l InnovationCompetitive cluster Environment (physical) SPICE environmental factors determine limits to economic value flows Economy (network of competing clusters & value flows) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    98. 98. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    99. 99. Cluster Value at Risk Ease of competitor entry RateofInnovation 10X Risk The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    100. 100. Data sources: Bureau of Economic Analysis & Bureau of Labor Statistics The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    101. 101. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    102. 102. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    103. 103. A century of railroad convergence http://nicolasrapp.com/wp-content/uploads/2011/09/RAIL_MAP.gif The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    104. 104. Cluster Categories Growth: Convergence: Maturity StableUn-stable Snowball Cash Cow Lottery Red Queen Risk: low high The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    105. 105. Firms with many unique capabilities in slow cycle clusters may live to create value longer Offering & capability cycles Coke / IBM Blockbuster 1 5 20 50 ? Growthrate 60% 50% 40% 30% 20% 10% 0% The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    106. 106. Stable v Unstable Cluster Market Share with multiple competitors over time ClusterShare Years (Product cycles) A B C Mature stable cluster ClusterShare A B C Unstable cluster D Years (Product cycles) 0% 100% 0% 100% The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    107. 107. Evolution’s maturation path Organism,Ecosystem,and EvolutionaryCharacteristics Stage Early successional Late successional (climax) Unbounded expansive bounded - constrained "stressed” "unstressed" Juvenile Adult Selection Rapid Growth, R selection Slow Growth, K selection Growth Development High fecundity Low fecundity Short Life span Long Life span Broad niche Narrow niche Cycles Simple Complex Rapid Slow Open cycles (leaky cycles) Closed cycles (recycling) Few cycles Many cycles Network with loose network articulation Networks with highly articulated networks Thermodynamics& energetics Closer to Thermodynamic Equilibrium Farther from Thermodynamic Equilibrium Lower free energy and exergy Higher free energy and exergy Shorter energy residence time Longer energy residence time Small size Large size Skewed negative size distribution Unimodal size distribution Simple structures w/ few hierarchical levels Complex structures w/ many hierarchical levels (more parts) Less complex, less diversity More complex, higher diversity Lower average mutual information Higher average mutual information Lower systems efficiency Higher System Efficiency The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    108. 108. 60% 40% 20% 0% 60% 40% 20% 0% Fad business v. stable moat Depth ROC&RevenueGrowth Duration (Years) 1 5 10 20 30 40 Technology / fad business Duration (Years) 1 5 10 20 30 40 Moated business (cash cow) Moat effectiveness ROC over time Revenue growth Depth ROC&RevenueGrowth The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    109. 109. Lollapaloozas combine unit growth & high margin moat Moat effectiveness ROIC over time Revenue growth Duration (Years) 1 5 10 15 20 30% 20% 10% 0% ROIC&RevenueGrowth The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    110. 110. Shrinking unit selling price over adaptive capability cycles shrinks competitor numbers $0 $25 $50 $75 $100 16 8 4 2 1 Unitprice(survivalfactor) Cluster firm carrying capacity over time/cycles* *assumes a simple fixed unit cluster demand The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    111. 111. Depth(%margin) Duration (estimated years) AddressableROC Participants & Strategy mix Measuring cluster & moat quality Stability 60% 40% 20% 0% 45% 30% 15% 0% 0 10 20 30 40 50 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    112. 112. Unique inos & capabilities create excess margin for a finite time Time in years or product cycles Extra%ROC Extra margin capture trajectory Extra value captured over time The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    113. 113. Price reflects future margin & earning’s expectations Time in years or product cycles Extra%ROC Price reflecting predicted excess margin capture (yield) 1. 2. 3. 1. Overly optimistic early stage lottery ticket pricing 2. Accurate pricing for future yield 3. Underpriced asset The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    114. 114. Automobile dominant design selected & adapted more functionality & complexity Steam engine Combustion engine Doors & Fenders Glass window enclosure Seat belts and airbags Superfluous luxury capability zone Substandard product capability zone Structural&functionalcomplexity Evolution’s adaptive selective cycles over time The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    115. 115. Lemonade stand $150 Assets $50 Liabilities $100 Equity (Book value) Produces $40 FCF Balance Sheet The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    116. 116. $100 Book value $150 Assets $50 Liabilities $100 Equity (Book value) $200 Intrinsic value $100 Moat value $100 Moat value $40 ongoing Free Cash Flow The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    117. 117. $0 $100 Price Price is created by opinions of value Value BearBull The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    118. 118. Most people confuse me with price because I am invisible and uncertain. $0 $∞ Moat factors* Cluster dynamics* Forces pushing the invisible intrinsic value Goose Management capital allocation* *explained in the The Nature of Value: How to invest in the adaptive economy Intrinsic Value The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    119. 119. $0 $100 Traders and opinions News & noise Quarterly earnings Price Forces pushing price & value Cluster Competition Customer demand & moat The Nature of Value by Nick Gogerty The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    120. 120. $0 $100 Old Price Your brother in-law’s “money maker” Current Price “Is it really a winner?” Intrinsic Value The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    121. 121. $0 $10,000 Bubbles Price Intrinsic Value The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    122. 122. $0 $100 3. Price now Be greedy when others are fearful. 1. Old Price 2. Negative price shock Intrinsic Value The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    123. 123. $200 20% Price and free cash flow Yield for an asset with $40 in free cash flow The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    124. 124. $0 $100 Price InvestmentHorizonTime horizons & decision factors for various types of investor Value Seconds Days Quarters Years Price based traders Fundamentals based fund managers Evolving competitive process Nature of Value investor The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    125. 125. 0% 20% 40% 60% 80% 100% 120% 1% 5% 10% 12% 15% 18% 21% 26% 31% 38% 46% Valueneededforbreakevenrecovery Value lost Siegel's slippery slope The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    126. 126. $0 $100 Price Short term price balloon movements approximate heat diffusion. Black-Scholes can’t see the goose. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    127. 127. Risk house elements: 1. Moat as shield against innovation 2. Asset based “margin of safety” foundation as book value Ino’s Constant erosive forces FirmValue$’s The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    128. 128. Organism: management resource allocation layer moats resourcesOperations Attributes: •Metabolism / cash flow cycle •Birth / growth / death •Adaptation (potentials) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    129. 129. Innovation’s shifting focus Ino-cycles / maturity Competitors Revenue growth focus Market share & operating margin focus The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    130. 130. $0 $100 Price As the price balloon wiggles backward & forward faster, modern portfolio risk models get nervous* *the fast wiggling balloon model of volatility won a Nobel prize in economics and underpins many financial risk models. Whether my balloon is ahead or behind me doesn’t matter in modern financial theory. If price wiggles faster, modern portfolio theory says I am riskier and thus worth less. Quants say I look positively Gaussian, but complain I have fat tails. I blame the goose for the fat tail thing Value The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    131. 131. $0 $100 Volatility News/noise Quarterly earnings Long term earnings Moat factors Cluster dynamics Price Intrinsic Value Forces pushing price & value The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    132. 132. Source: National Renewable Energy Labs The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    133. 133. http://www.macsolarindex.com/index_breakdown.php Index is spread around 3 global regions $- $50 $100 $150 $200 $250 $300 2004 2005 2006 2007 2008 Global Solar Energy Index ETF (TAN)
    134. 134. Source: National Renewable Energy Labs 0 5 10 15 20 25 30 35 2007 2008 2009 2010 2011 2012 Installed global solar PV market (GigaWatts) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    135. 135. Individual lottery psychology leading to lost value Final cluster capacity Individual market share expectations Innovative individual competitors The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    136. 136. Cat herding chasing the “next bowl of milk” price/earnings jump Include examples of no milk bowl and “percieved smart cats” beta herding. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    137. 137. Perceiving Panarachy’s Perspective cycles & flows Buddhist temples which reflects multiple levels and cycles of heaven and hell are abstractly represented as 2-D mandalas The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    138. 138. SVE-0406-3DC-5N Ino Organization Cluster Economy Gene Organism Niche Ecology The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    139. 139. Organization Cluster Economy Ino Energy cascades through a value maximizing economic panarchy producing dissipated heat & increased complexity in the form of information embedded structures The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    140. 140. Organism Niche Ecology Gene Energy cascades through a life maximizing ecological panarchy producing dissipated heat & complexity The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    141. 141. Value Life & value adapt by macro-processing selected flow through Ecological & Economic panarchy networks Ino Organization Cluster Economy Eachlayermacro-processestoselect survivors LifeGene Organism Niche Ecology The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    142. 142. Economy Cluster Organization Ino Panarchy of Ecology vs Economy Ecology Niche Organism Gene Change occurs in an upward direction and is accepted & amplified or rejected with feedback at the boundary layer above it. Each boundary between layers selects creating feedback which is likely stable with punctuated radical shifts, similar to Gould’s punctuated equilibrium model. Nature of Value focus areas Slow variables Faster cycles The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    143. 143. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    144. 144. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    145. 145. Increased personal energy harnessing capability: Hours of labor required to capture a unit of power 1860 1880 1900 1920 1940 1960 1980 2000 10 KW Otto cycle gas engine 100 KW reciprocating steam 10 KW reciprocating steam 100 HP diesel 10 HP Otto cycle Diesel 1,000 HP Diesel 1,000 HP gas turbine Envelope mobile prime movers 10,000 HP aero gas turbine Diesel Aero derivative gas turbine (stationary) Envelop; stationary prime movers (electric power) 1,000 KW steam turbine 10 MW steam turbine Data: The Economic Growth Engine, Robert Ayres 0.0 0.1 1.0 10.0 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    146. 146. Adaptive systems filter survivors creating life/value feedback at each system level Example: The ecosystem ends up with optimal genes/inos by selective pressure at each layer. Organization pursues the best innovation by selective feedback. 1,000,000,000 10,000,000 10,000 1 Components Median cycle (days) 1 10^3 10^4 10^5 Gene Organism Niche Ecology Ino Organization Cluster Economy Adaptation Filter/feedback The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    147. 147. Evolution’s economic panarchy of network links and elements Mediansurvivaltime(logscale) $/element value (log scale) Centuries Decades Years Weeks Thousand s Millions Billions Trillions The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    148. 148. Ecology’s panarchy networkTime(logscale) Space meters / resource Millennia Centuries Years Days Thousands Millions Billions Trillions The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    149. 149. Flowing energy adapts more complex dissipative structures across domains Timeyears(logscale) Now 5,000 2 billion 14 Billion Φ(m) Energy dissipation rate Ergs/gram/second 1-4 1,000 10,000 ? The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    150. 150. Gradient pressures drive evolution to higher Φ(m) dissipative structures People’s perception/ (Maslow hierarchy drives the process) Economy competitively amplifies selected inos Inos form organizational value creating capabilities Concept/idea Increasingly structured information as formally embodied and amplified The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    151. 151. Evolution’s knowledge creating cycle across: Ecological, Cultural & Economic domains Knowledge/info storage • DNA • Meme • Ino Form for expressing capability • Organism • Idea/Culture • Organization Selection /competition • Ecological Niche • Attention/History • Cluster/Consumer sale Reproduction/dissemination* • Sex • Tradition culture • Manufacture *Information successfully selected to replicate as knowledge increases its propensity to spread. Selection & reproduction distinguish knowledge from inert statistical information. Instantiation/ Expression Feedback/ Information by macro-processing Amplification Propensity Expression The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    152. 152. Evolution’s adaptive knowledge domains: Ecological, Economic & Symbolic Knowledge stored in: • DNA • Meme/Ino • Symbolic Capabilities embodied in: • Organism • Idea/Culture/Organization •Logical Instantiation (deep structure) Fitness measured in a: • Ecological Niche • Competitive Cluster • Algorithmic Computer Reproduced /amplified by:* • Sex • Manufacture/production • Duplication Instantiation/ Expression Selective Feedback/ Macro-processing Amplification: Expression Propensity Existing in a networked panarchy *Information selected to replicate is knowledge with a propensity to flow & cycle. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    153. 153. WWI WWII Great Depression Base year 1900 Total Exergy 15.6 eJ GDP 1900 G-K$ $312.5 billion The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    154. 154. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    155. 155. Maslow’s hierarchy of needs & value Self Actualization: morality, creativity, spontaneity, problem solving, lack of prejudice, acceptance of facts Esteem Needs: confidence, achievement, respect of others, respect by others Love/Belongingness needs: affiliation, acceptance, affection, sexual intimacy Safety needs/security of: body, employment, resource, morality, the family, health property, psychological safety Physiological needs: breathing, food, water, sex, sleep, homeosta sis, excretion The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    156. 156. Allocator’s Instrument Panarchy MapTime(logscale) $/resource (log scale) Ino / Venture Capital Organization / shares Cluster / sector ETF Economy / Indexes Centuries Decades Years Weeks Thousands Millions Billions TrillionsThe Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    157. 157. Timing cycle mismatch 10% v. 60% Buy Wait Buy Wait Returns +35% +0% +65% -30% 100% 75% 50% 25% The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    158. 158. Additive inclusive v. extractive value chain raw input conversion Inclusive chain delivers $244 equivalent to 760% more economic value than $32 from the extractive value chain +25% value per Additive inclusive cluster -25% value per Extractive cluster $100 $125 $156 $195 $244 $100 $75 $56 $42 $32 Value processed Low High The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    159. 159. Returns 500% 0% -100% Ranked organizations 0 25 50 75 100 Median return Average return Value creation among orgs The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    160. 160. ROIC 500% 0% -100% Years 0 2 10 +20 Median return Average return Moat duration and depth The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    161. 161. Economies grow as organizations expand value flows in existing clusters & successfully explore new possibility spaces New clusters grow value rapidly with profit margins typically following the cluster maturity curve lifecycle and innovation diffusion rate. TFP productivity growth quantitatively and qualitatively grows the economy. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    162. 162. New possibility spaces create rapid profit expansions before innovations diffuse among competitors as value is transferred to consumers leading to higher GDP. Innovation radiation explosion in new possibility space Diffusion process as innovation matures Full diffusion as margins return to normal but GDP increases 1. 2. 3. Product/capability cycles over time 1. 2. 3.100 75 50 25 0 1 2 3 4 Margin captured cluster competitors Change in value flow (GDP) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    163. 163. Inflation / deflation money & available credit Prices of value available for purchase Inflation Deflation The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    164. 164. Money & Values creative/destructive flows tip the price balance Inflation Price Deflation Money (Near & Far) Value (near & far[wealth]) Issued currency Available credit Debt Equity Goods & services Investible projects income streams Assets The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    165. 165. Money market instr./weeks Money risk & inflation premiums FaithinMoneyfunction* Highest High Medium Low Lowest Typical required yield/expectation Currency=B ills, Coins/N A Checks & demand deposits/days Short-term debt/months Long-term govt. debt/years Equity/ years Long-term corporate debt/years Money form/ Duration until decay into currency *Faith in money’s social information utility as a unit of account, store of value, means of exchange. Central bank’s definition of money (M0,M1,M2&M3) Near money Far money The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    166. 166. $0.00 $1.00 $2.00 $3.00 $4.00 Money paid back over time reflects demand for capital, inflation expecations and payback risk Non-credit related risk yield reflect loss of belief in monies three functions The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    167. 167. (In/De)flationeffect 100x 10x 1x 0 1/10 1/100 Diffused magnitude of value impact Organization Cluster Economy (In/De)flation distortion magnitude vs. Scale of initial impact Opec 1970’s oil shock Weimar Germany Great depression Central bank inflation targeting Money shocks A single commodity shortage The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    168. 168. (In/De)flationeffect 100x 10x 1x 0 1/10 1/100 Fully diffused scale of value impact Organization Cluster Economy (In/De)flation MV=P shocks vs. scale of initial impact Early Internet Opec 1970’s oil shock Weimar Germany Great depression Average ino Central bank inflation targeting Money shocks Value shocks The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    169. 169. Investor confidence & knowledge drive portfolio outcomesAssetConcentration/ AllocatorConfidence Nature of value knowledge 3. Below index returns 1. Significant losses likely 4. Index plus returns 2. Berkshire type returns Few managers Most managers The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    170. 170. Protecting the moat and balance sheet prior to price changes Anticipatedpriceinflation Moat Balance Sheet 3. Below index returns 1. Increase turnover by accelerating payment terms 4. Pay down debt and slow capex spending 2. Accelerate capex spend with current cheap debt DecreasingIncreasing 3. Grow relationships and sales cycles The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    171. 171. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    172. 172. Mode, median & mean -10% 0% 10% 20% 30% 40% 50% 20% 15% 10% 5% 0% Mode Medi an Mean Shares annual rates of return Frequencyofoccurrence The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    173. 173. Lottery tickets Source data: Longboard asset management The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    174. 174. An economy is a flow of energy and structures perceived as having value Upstream: Downstream: •Innovation’s impacts travel at each cluster’s innovation adoption cycle and diffusion rate •Each moat is potentially eroded at the rate of the innovation cycle speed •Value Chain throughput cycle speed is determined by slowest cluster’s capacity •Each cluster passes innovation as information embedded in structure towards consumers Raw materials Finished goods & services The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    175. 175. As value & information flows through network links, Economies macro-process Cluster Top View Raw upstream supply chain Finished goods & services Value chain flow = GPP (gross produced product) Low value raw inputs Cluster Side View Higher value goods & services The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    176. 176. Inclusive vs. Extractive economies Raw material inputs Finished goods & services outputs Inclusive economy: all may compete to add value Extractive economy: a few use power/violence to extract value at each stage in the value chain The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    177. 177. Inflation shocks compress margins as they pass through linked value chains Upstream: Downstream: Inputcostshock 45% 30% 15% 0% Average historical COG (cost of goods) margin Low value raw inputs Higher value goods & services Time The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    178. 178. $Cost/Unit System Capacity Utilization Profit price System throughput efficiency curve (profit smile) $100 $75 $50 $25 $0 Low Normal Extreme The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    179. 179. $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 0 25,000 50,000 75,000 100,000 1… 1… 1… 1… 2… 2… 2… US Business bankruptcies GDP ($billions USD) Unpredictable corporate death & GDP resilience The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    180. 180. Energy gradient driven process Evolution: Energy flows through an adapted structure selected to grow or die death Growth & amplification Selection filter “competitive process” Organized structure holding knowledge (DNA/INOs/Bits etc.) The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    181. 181. High quality energy Evolution’s cycle: Energy flows through organized forms selected to replicate or die Knowledge death Knowledge growth Selection process Organized structure The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    182. 182. GDP/capita Government control of economic actors v. long term GDP flows per capita Rigid governance & control of a state extractive economy, limited adaptive learning capacity Extreme libertarian no governance chaotic random power based mafia extractive economy Well regulated, free agent additive inclusive learning economy yields knowledge growth Economic controls & governance The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    183. 183. Energy/resource flow rate (temperature) Φ(m)capability Environmental conditions required to support knowledge & growth Frozen knowledge = no macro- processing Boiling random structures unable to store knowledge Viable range for knowledge to adapt higher Φ(m) capable structures over cycles Low High The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    184. 184. Burundi USA y = 0.1275ln(x) - 0.4634 R² = 0.88171 0.20 0.40 0.60 0.80 1.00 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 HDI(HumanDevelopmentIndex) UNDESA GDPPPPper capita 2005 constant dollars(World Bank) GDP(PPP) v. HDI 2011 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    185. 185. Burundi USA y = 5486.1x - 9804.3 R² = 0.64899 $100 $1,000 $10,000 $100,000 0 2 4 6 8 10 GDPpercapita(Semi-log) Transparency International Corruption index higher = lesscorrupt GDP(PPP) per capita vs. Corruption index Source: World Bank & Transparency International 2011 The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    186. 186. y = 903.48x - 42348 R² = 0.41233 $ 100 $ 1,000 $ 10,000 $ 100,000 30 40 50 60 70 80 90 100 GDP(PPP)percapitaWorldBank constant2005$'s Economic Freedom Index (HeritageFoundation 2012) Economic Freedom v. GDP(PPP)
    187. 187. Inflation increases working capital costs shrinking real value flow capacity •Inflation increases working capital costs across the chain •Inflation shrinks capacity and viable chain lengths & flow paths Working capital cycles & requirements Upstream Downstream Low value raw inputs High value added goods & services The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    188. 188. Ino value flows through the cluster Cluster Top View Required ino capability Customer value derived from ino Cluster Side View ClusterROC margins Cluster margins revert to mean 1. 2. 3. 4. 1. Normal returns on capital 2. Innovator reaps higher returns due to cost saving ino 3. Others adopt cost saving ino 4. Normal returns on capital The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    189. 189. ClusterROCmargins Ino margin shock & mean reverting cluster margins 1. original normal returns on capital 2. hype spike: initial adopter has high margins due to exclusive capability 3. diffusion phase: competitors adapt by adopting the ino 4. normal returns on capital as competitive pressures erodes margins 1. 2. 3. 4. Innovation diffusion over time forces value flow to consumers 20% 10% 0% The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    190. 190. Pig 05049’s value spread across the network to 185 clusters by knowledge & capabilities Pig 05049 Value Flow Bullets Medicine Chewing gum Bone china Automobile paint Train brakes Aluminum mold coating Cigarette filters Cosmetics Yoghurt Rubber bands The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    191. 191. Meta-panarchy of nested networked dissipative domains evolving over timeOrigin/Singularity(logscale) Energy dissipation rate Phi(m) Ergs/gram/second Particle based (cosmo & geo logical) Gene based (ecology/life) Ino based (economy/human) Algorithm based Symbology Now 5000 yrs 2 billion yr Billions 1-4 1,000 10,000 ? The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    192. 192. The Sun’s energy dissipating capacity Φ(m) adapts for flow over time Φ(m)(erg/gm/s) Billions of Years Ago 10^2 10^1 1 5 0 - 5 Newborn star Current sun Subgiant star Red giant Source data: Eric J. Chaisson, Cosmic Evolution The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    193. 193. Evolution’s increasing Φ(m) structures create singularities as network domains emerge Adapted from Eric J. Chaisson’s, A Singular Universe of Many Singularities: Cultural Evolution in a cosmic context, The Singularity Hypothesis: A scientific assessment, The Frontiers Collection, Springer, Berlin 2012. Symbology is the author’s addition. EnergydissipationΦ(m) Billions of years ago 10^6 10^4 10^2 1 10^-2 15 12 9 6 3 0 Sun Animals Plants Earth Milky Way Economy Symbology? Physical Biological Economic Symbology The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    194. 194. Plant dissipating capabilities Φ(m) adapted quickly Φ(m)(erg/gm/s) Millions of Years Ago 10^4 10^3 10^2 500 250 0 protists gymnosperms angiosperms C4 plants Source data: Eric J. Chaisson, Cosmic Evolution The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    195. 195. Evolution adapted Animal’s Φ(m) capabilities to be 10X greater than plants Φ(m)(erg/gm/s) Millions of Years Ago 10^5 10^4 10^3 500 250 0 fish amphibians reptiles mammals Source data: Eric J. Chaisson, Cosmic Evolution birds The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    196. 196. Evolution adapted Φ(m) 10X greater than animals using memes & symbols Φ(m)(erg/gm/s) Hundreds of thousands of years ago 10^6 10^5 10^4 300 150 0 hunter-gatherers agriculturalists industrialists technologists Source data: Eric J. Chaisson, Cosmic Evolution First recorded symbols: bone tally stick 44,000 years ago, Border Cave, South Africa The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    197. 197. Evolution used information stored in ino form to create structure’s with rapidly increasing Φ(m) capacitiesΦ(m)(erg/gm/s) Years ago 10^7 10^6 10^5 100 0 Early machines Automobiles Airplanes Jet Aircraft Source data: Eric J. Chaisson, Cosmic Evolution The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    198. 198. Energy flows adapt, creating greater phi(m) capacity panarchy relics Domain Primary Energy source Age informational unit Gradient resolved to increase Local network scale Unit of relic Phi(m) Cosmology & Astrophysics Nuclear, fundamental particles gravitational 13.7 billion yrs spatio & physical mass flow efficiency Cosmology astronomy Emerging Astronomical features 0-100 Geology Physical, Gravitational, chemical Billions of yrs physical constructal substrate, lattice mass flow efficiency Geography Geologic features 100-1,000 Ecology light / bio- chemical 2 billion yrs Gene reproductive efficiency Ecology / life Fossil 1,000-10,000 Economy bio-chemical fossil fuels nuclear/electri cal 300k yrs meme/ino value creating efficiency Human symbolic/Cultur e/ economy History/ Archaelogy 10,000- 1,000,000 Symbology Electrical / quantum? 35k yrs alg Algorithmic Parsimony? Technium/symb olic singularity? Archive? 1,000,000-?? The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    199. 199. beta • Given enough time all beta’s go to zero. The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    200. 200. Exponential results from reinforcing moats and cash-flow feedback cycles X ZY ! XxYxZ=Snowball!The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    201. 201. Lalapaloozas are intrinsic value exponential growth spirals Each square area is a cash flow cycle with volume representing moat capacity. Distance travelled reflects earnings or value captured. Free cash flow Expands innovation capabilities & moat depth Growing moats create free cash flow which flows back into creating better moats The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.
    202. 202. ?’s • What is the nature of the Cluster? Stable? Mature? • Where is the offering in terms of design cycle? • How efficient is the firm operationally? ROE? • How is the company capital allocation function? • How is the price? • Could I purchase this for 3-7 yrs with no exit? The Nature of Value website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Based on a work at http://thenatureofvalue.com.

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