7/09/2010 |
(en una verdadera perspectiva global)
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Let’s start from the end... of the previous paper
Beyond
the value life cycle there is hope. We have a new dream: how to become younger.
Being
more concrete beyond the life cycle there are:
·
an entirely new methodology to forecast the capability to produce value of an
enterprise. The novelty lies in the fact that through the value life cycle it is
possible to forecast the future cash flow taking into account the stage of
competition an enterprise is involved in.
·
the first methodology ever
developed to support an entrepreneur or a managerial team to redesign the
identity of an enterprise not to compete; but to eliminate competition. In other
words: the first methodology to rebuild (instead of defending) the capability to
produce value of an enterprise.
Qualitative
forecast of the capability to produce value in the future
The
Value Life Cycle is a general law of evolution at industry level.
In
every industry, the “zero sum games” among competitors give rise to
progressively loosing meaning (for the customer-observer) for the enterprise.
Decrease
of meaning means decrease of the capability to produce value at industry level.
By
“value” we basically mean three “things”:
- Sales
(at industry level)
- EBITDA
(at industry level)
- Cash-Flow
from sales (at industry level)
By
“decrease of the capability to produce value” we mean the progressive
decrease in sales, EBITDA ed Cash-Flow from sales.
The
basic issue is that a continuous decrease in sales, EBITDA a Cash flow is
different from one another.
The
fastest decrease is the one in Cash-Flow. EBIDTA stands aside. Sales continue to
grow “for a while” in spite of the decrease in both cash-flow and EBITDA.
In
the next figure we “qualitatively” represent the different trends in the
decrease in sales, EBITDA and cash-flow from sales (at industry level).
(click here to view figure).
Looking
at these different trends we can point out a dramatic pitfall and try to avoid
it.
Managers,
consultants, scholars and bankers share a static vision of competition. More
precisely, they believe that only one type of competition exists. It is a mix of
quality and efficiency competitions.
Taking
this vision seriously means to position, in the above picture, industries at the
borderline between quality competition and efficiency competition.
Well,
in this position there is a contemporary increase in sales and decrease in cash
flow generated by sales.
The
result of these two opposite trends is an increase in the circulating capital.
Were
is the pitfall? It is in the fact that the direct proportionality between sales
and circulating capital is seen as a general law of making business while it is
just the first signal of degeneration of the capability to produce value.
If
you look at the previous entrepreneurial phase, the increase in sales
corresponds to an increase in cash flow generated by sales. So, more sales means
less circulating capital down to negative circulating capital.
Let’s
consider the implications of this pitfall for bankers. Well, as they believe
that an increase in sales implies an increase in the need for circulating
capital, they finance, without concern, the increase in circulating capital. It
is a dramatic error because an increase of the need for circulating capital
means degeneration in the competitive battle. And as the competition becomes
fiercer the probability of liquidating circulating capital decreases.
The
use of this law at firm level
We
developed a methodology to use the value life cycle to forecast
the capability to produce value
of an enterprise at business unit level.
The
methodology works in this way.
I
Phase
Interview
with the entrepreneur
The
aim of the interview is to have the entrepreneur describe his “view” of
industry in terms of:
- Boundaries:
- Types
of Clients
- Clients
needs
- Geographic
scope
- Product
and process technologies
- Value
chain
- Competitors
- Description
- Market
shares
- Main strategies in the industries. We mean the definition of a weighted mix of fundamental strategies (entrepreneurial creation, quality competition, efficiency competition, representation competition, surviving competition.
The
interview is an ethnographic one! We
do not need an objective description. We need the entrepreneur description.
Apart from the fact that the expression “objective description” is
epistemologically meaningless, the entrepreneur, in any case, will make
decisions, choose strategies and so on, taking into account the description of
the industry in his mind. And not an objective description or a description
which is in someone else’s mind.
II
Phase
Strategic
metaphor of the present
Using
“the interview results, we can (through a specific algorithm we have developed)
position the firm over a matrix which we have called “destiny matrix”.
The
dimensions of this matrix (click here to
view matrix) are:
- Potential
profitability
of the industry where the considered business unit competes. Potential
profitability is calculated using the weighted mix of fundamental strategies.
Roughly speaking the potential profitability measures the value that can be
produced operating in that industry.
In
other words,
potential profitability measures the level of entrepreneurial innovation.
In
spite of the fact that we live (and we declare to live) in a very fast changing
world, firms have a lot of difficulties to look over the present.
In
other words, firms prefer to compete inside present boundaries of the business
than design new boundaries.
The
result is that:
·
Competition becomes fiercer and fiercer.
·
The innovation comes from "garage competitors" (for example
competitors like Apple when almost destroyed IBM) who generate "catastrophic"
change in the business.
The
combined effect of increasing competition and the risk of revolutionary new
comers make probability of making money decreasing.
Starting
from main strategies of the firm, 2SC algorithm determines at which level the
process of decreasing of the probability of making money has arrived.
Level
of entrepreneurial innovation can be expressed on a scale of 1 to 10.
- Competitiveness
of the business unit. Whatever
the level of entrepreneurial innovation might be, it is important to
determine which is the strength of the firm against competitors.
Competitiveness
is calculated using market shares of competitors in the industry
Level
of competitive advantage can be expressed on a scale of 1 to 10.
Different
positions in the matrix are characterized by different capability
to produce value:
sales, EBITDA, cash-flow form sales.
We
divided the destiny matrix in five main zones. Each of theme is described
through a metaphor.
First
area
"The sky in a room" (the origin
of the metaphor is a very poetic and popular Italian song from the sixties).
This
area is characterized by a high value
of both entrepreneurial innovation and competitive advantage.
Second
area "The
earthen pot".(The metaphor comes from a novel of one of the most
outstanding Italian writers: Alessandro Manzoni. He writes about a very unlucky
pot which has been forced to make an enjoyable trip, but together with iron
vases.)
This
area is characterized by a high value
of entrepreneurial innovation and a low value of competitive advantage.
Third
area
"The Old lions"
This
area is characterized by a medium to low value of entrepreneurial innovation and
a high value of competitive advantage
Fourth
area "Aurea mediocritas"
This
area is characterized by a medium value of both entrepreneurial innovation and
competitive advantage.
Fifth
area "The
Pain of living"
This
area is characterized by a low value of both entrepreneurial innovation and
competitive advantage.
III
Phase
Strategic
evolution
From
the position in the matrix we can calculate the path of evolution of
strategic position of the business units over time.
And
due to the fact that different points of the matrix are characterized
by different values
of sales, EBITDA,
cash-flow form sales, we can also calculate the evolution
paths for sales, EBITDA, cash-flow form sales.
Some
other possible uses of our methodology
The
previous described methodology can also be used for:
- A quantitative forecast of the capability to produce value in the future;
- Supporting
the entrepreneur in redesigning firm identity.
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