Senior excellence charts 2012

Winning BusinessModels

July 2012

by Dr.Hartwig Rüll

Source: H.Rüll

Winning Business Models

The following charts represent examples of our recent

research:

Do you want to understand what is driving the success of firms?

Do you want to identify the key parameters which can improve

- your firm„s profitability

- your firm„s shock resistance

- your cashflow margins

- your firm„s top-line growth

Do you want to understand which parameters are driving the

success/failure of the projects in your business

Do you want to challenge the viability of your business plans

Source: H.Rüll


We are using well proven statistical methods to identify the key drivers of

success of firms competing in their respective sectors

Based on these inputs, we identify the key parameters which need to be

changed in order to improve a firm„s performance to reach a selected target

value (e.g.: profitability … shock resistance)

These parameters are tied to the processes of firms and to their very value

chains

With the help of these critical parameters we can then challenge the soundness

of forecasts in business plans/financial models

Further, we can position/benchmark these companies, within their sectors as

well as cross sectors

Using our approach further, we are able to identify the critical parameters which

are driving projects towards success/failure

Our experience shows, that we are able to significantly reduce the number of

project parameters which need to be monitored in order to ensure that projects

will achieve their respective targets

Source: H.Rüll


Contents:

Defining Winning Business Models; Examples

Process Velocity; Value Chain Velocity and the

Superiority Index

Example: Telco Equipment Sector

Superiority Index and Forecasting/Challenging of

Financial Models

Superiority Index and Valuation of Firms

Reducing Risks in Project Businesses

Source: H.Rüll


Source: H.Ruell

Today, companies are no longer competing on products, services or business-

processes alone, instead, in the end they are competing on business models

Business model innovations are always

strategic and

disruptive

They change the business logic and the competition in a very fundamental

way

R.Scheuss; Handbuch der Strategien

Source: H.Rüll


Source: H.Ruell

Defining “Winning Business Models”

Winning Business Models should yield above average

Shock resistance (meaning: in times of crisis, the profitability should remain

rather robust

Profitability

Liquidity

Revenue growth

These four metrics are captured in the form of the “Target-Diamond” the larger

the diamond, the closer a firm is relative to the “Winning Business Model”-status

Source: H.Rüll

The quest for business models offering:

shock resistance,

profitable growth and

liquidity

The Answer:

high internal velocity

fast value chains

IT is used as a strategic weapon

Growth

Shock Resistance

Profitability

Liquidity


Source: H.Rüll

Doing more with less… "Winning Business Model"

Example: Cisco vs Alcatel-Lucent;

Cisco is clearly outperforming Alcatel-Lucent in all four

metrics

Ebit Margin in sector-crisis in % of

“normal“ Ebit Margin

Average sales growth last three years

*NOTE: All numbers are 3-years averages

Growth

Shock Resistance

Profitability

Liquidity

CiscoAlcatel-

Lucent

92%

28,5%

29%

9%

-111%

0,2%

0,1%-4,4%

Winning Business Models: Communications Equipment Sector

Source: H. Rüll, DB

Source: H.Rüll


Source: H.Ruell

Examples:

The Telco Equipment sector during the collapse of the internet bubble

Cisco, Juniper, Nokia, are exhibiting only a small dip in their profitability,

whereas their competitors are taking a deep dive

Semiconductor sector

The leading firms are showing a high level of shock-resistance, whereas their

competitors are exhibiting losses in 2009

Note:

Similar patterns can be found in sectors like

steel

paper

software

…

automotive

In total we analyzed ca. 600 firms in ca. 20 different sectors

Source: H.Rüll

Winning Business Models: A different look at the equipment sector

Winning Business Models at work

Superior companies are much more robust against sector downturns than

incumbent/trailing companies

Note: Superior

companies are on

their way towards

the “Winning

Business Model”

status

Examples for

superior

companies:

Dell

Wal-Mart

...

12,3

3,3

11,712,7

7,6 7,5

9,5

11,412,6

10,5-

9,7

16,4-

10,4

9,8

-20

-15

-10

-5

0

5

10

15

2000 O1 O2 O3 O4 O5 O6

Op. Profits $ bn

Years

Trailing firms

Lucent

Nortel

Alcatel

Ericsson

Avaya

Tellabs

Superior firms

Cisco

Nokia

Juniper

Source: CBSB, JPM, H. Rüll

Source: H.Rüll

The EBITDA-Margin of trailing firms is taking a deep dive during the crisis 08/09,

whereas the profitability of the leading firms exhibit only a small DIP in 2009.

Leading Firms

Trailing Firms

Shock Resistance

Years 06/07 vs. 08/09

Leading Firms 91%

Trailing Firms -42%

Winning Business Models: Semiconductor Sector

Source: H.Rüll


Source: H.Ruell

We analyzed more than 600 firms in high-tech sectors as well as in low-tech

sectors and in the services segments

Our research led to two key findings:

1. Firms with fast processes outperformed their slower competitors

2. Firms with lean value chains outperformed their “bulkier” competitors

We capture the process speed in the form of the “Cash Velocity” and we

measure the leanness of value chains by the parameter: “Value Chain Velocity”

Both metrics are measured in days … the fewer the number of days, the better a

company‟s performance

To derive Cash Velocity and Value Chain Velocity, we use publicly available data

(P&L-Statement, balance sheet …)

Source: H.Rüll


Source: H.Ruell

These two parameters show very clearly how a given company is

positioned/performing within its sector

Further, this positioning indicates which parameters of a firm need to be improved

by what amount to increase the company‟s performance

In a next step, we combine Cash Velocity and Value Chain Velocity into one single

parameter: the Superiority Index (SI)

The Superiority Index captures the distance of a given firm from the sector average

A positive SI-value shows, that the firm‟s position is above average

SI = 0 means, the firm is performing equal to the sector average

A negative SI-value indicates, the firm is performing below average

The Superiority Index shows a strong correlation with key financial metrics

such as shock resistance, profitability, cash flow … valuation

Source: H.Rüll

Firms in the superiority zone are outperforming their competitors from the

problem zone

- +

Superiority Index

ProblemZone

Superiority

Zone

Neutral Zone

Profitability

Shock Resistance

Liquidity

Growth

103,4%

36,2%

36,5%

19,6%

-1,2%

-1,3%

1,4%

-273%

Superiority

Zone

Problem

Zone

Towards superiority – Example: Telco Equipment Sector

Source: H.Rüll; Data: UBS; Reuters

Source: H.Rüll


Source: H.Ruell

The Superiority Index reflects both the key properties of a firm‟s processes and

the key properties of a firm‟s value chain

Processes and value chains are not changed easily over night. Hence, the

Superiority Index serves as a good indicator of a firm‟s future performance

The following example shows this for the Telco sector:

We took the Value Chain Velocity (≡ SI in this case) of the year 2005 and tested it

against the profitability of the subsequent years.

Findings: The profitability of the years 2006, 2007, 2008 and 2009 (shown here)

correlated very well with the Superiority Index of 2005

This result is encouraging

We can use these findings to gauge the future performance of firms to a certain

extend and to challenge the financial modelling

Source: H.Rüll

We are starting from the value chain velocity (VCV) of the year 2005 and study

the relationship between the VCV in 2005 and the profitability of subsequent

years

As shown in the charts below, the correlation remains astonishingly high even for

the year 2009-profitability measured against the 2005-VCV

Winning business models: Forecasting Example: Telco Sector

Source: H. Rüll; Data: CG, Reuters

Source: H.Rüll


Source: H.Ruell

As our further research showed, the Superiority Index SI is correlating well with

the valuation of firms in a given sector

As an example we show the correlation between the valuation measured in

enterprise value / sales and the superiority index for the semiconductor sector

(linear semiconductors)

Source: H.Rüll

Example:

Linear Semiconductors

Source: H.Rüll; Data: CG, JPM, UBS

Tight relationship between valuation (EV/S) and the

Superiority Index (SI) of firms

Source: H.Rüll

Winning Business Models: Success Factors of

Projects

Source: H.Ruell

We can apply our analytical approach to investigate the relationship between

project parameters and the success rate of projects

The key question here is:

“Which parameters are tightly correlated with the success / failure of projects?”

In all cases we were able to significantly reduce the number of parameters,

management would have to monitor in order to manage projects successfully

Based on these findings, we can build easy to use “Early Warning Systems”

Source: H.Rüll

Key Question:

Which parameters exert the highest impact on the success of projects?

Focus:

Production / Engineering

The Force Field

Targetunit / activity

co

mp

etito

rsco

rpo

rate

influen

ce

Winning Business Models: Identifying key

parameters impacting the success of projects

Source: H.Rüll

Our analysis identified six significant parameters (out of 15 parameters in use)

Combined into the figure of merit, these parameters show a high correlation with the

project results (overtime)



Source: H.Rüll

In another example, we were able

to reduce the number of process

parameters necessary to monitor

the success of projects by a factor

of six!

When combined into the figure of

merit … these parameters yielded

a very good correlation with the

target parameter: “deviation from

target”



Source: H.Rüll

Winning Business Models: Evaluating Business

Plans

Further, we can use our approach to evaluate the consistency of

business plans on the corporate level and/or on the divisional level

We analyze a firm„s past performance and identify the key drivers of

performance/success

We then take these drivers and study how well they are correlating with

the performance of the group for the planning periods ahead

Example: Firm X

© Dr. Hartwig Ruell – Senior Excellence 23

Source: H.Rüll

Observation: whereas the actuals for

2012 are varying widely along the

regression line, the planned values for

the year 2013 are concentrated in the

upper right corner (high profitability)

Winning Business Models: Business Plans of Firm X

Source: H.Rüll

Observation: this chart shows the

profitability of firm X vs. one of the key

drivers of profitability of this firm.

Note the discrapency in the area

between the dotted lines: actuals vs.

planned values: although the key

drivers of profitability remain

unchanged, the planned profitabilities

(2013) exceed the actuals (2012) by a

factor of 5-6!

Winning Business Models: Business Plans of Firm X

Source: H.Rüll


Source: Clayton M. Christensen, H.Ruell

With our approach, we capture two key metrics of the RPV-theory:

Resources and Processes

RPV-Theory: Organisations successfully tackle opportunities when…

They have the resources to succeed

Their processes facilitate what needs to be done

Their values allow to prioritize

How a firm does its work

Resources

ProcessesValues

Value chain

velocity (VCV)

Cash

velocity

(CV)

What a firm has

What a firm wants to do

RPV Theory

Source: H.Rüll

Thank you

Documents

Senior excellence charts 2012