Hilliard Consulting Group, Inc.2 Typical Forms of Business – Know your Customer Corporate Form: C Corp. S Corp. LLC Partnership Limited (including LLP) General Proprietorship
Hilliard Consulting Group, Inc.3 Typical Corporate Business Structure Board of DirectorsStaff Executive OfficersLegal Marketing/Finance &FulfillmentRDD&E SalesAdministration SUPPORTED BY PEOPLE, POLICIES, PROCEDURES, SYSTEMS, TECHNOLOGY & NETWORKS (P³STN) High Level PRINCIPAL FUNCTIONS PlanningPlanningPlanningPlanning ExecutingExecutingExecutingExecuting ReportingReportingReportingReporting ForecastingBudgetingForecastingResearch ResearchAccounting/TaxVariance AnalDesign/Dev. AnalysisFin. AnalysisCycle Time Imp.Engineering 4 PsHRSourcingStarts Controls CRMBilling/CollectionsMRP/PurchasingCycle Time Order InputBankingQC/QoS/FPYIRR/RMM Proposal dev.MIS/EDPWarranty/RepairOutsourcing OutsourcingOutsourcingOutsourcing CORPORATECULTURECORPORATECULTURE Greater Environment Stakeholders & Market Influencers Customers Shareholders Competitors Disruptive Technology Suppliers Regulators Financiers Creditors Press/Media Associations Trade Groups Unions Legal community Environmental groups
Hilliard Consulting Group, Inc.4 Converging/Diverging Gross Margins GROSS REVENUE $ CONVERGING GROSS MARGIN AS A % OF GROSS REVENUE - A Good Thing!! DIVERGING GROSS MARGIN AS A % OF GROSS REVENEUE - A Bad Thing!!! TIME $%$% CONVERGING GROSS MARGINS INDICATE OPERATIONAL EFFICIENCY AS EACH SUCCESSIVE SALE IS MORE PROFITABLE THAN THE ONE THAT PRECEDED IT. THE CONVERSE IS TRUE OF DIVERGING GROSS MARGINS.
Hilliard Consulting Group, Inc.6 Third Party Market Studies Typically, you know what 3rd party market studies will show before you buy them - a growth slope for the respective market of between 45° to 60°. The only thing that changes are the time period on the X axis and the metrics on the Y axis.
Hilliard Consulting Group, Inc.7 Environmental Models FIST - Factors, Implications, Strategies & Tactics PEST - Political, Economic, Social and Technological MOST - Mission, Objectives, Strategies & Tactics SWOT - Strengths, Weaknesses, Opportunities & Threats TOWS - SWOT Backwards
Hilliard Consulting Group, Inc.8 TOWS Matrix
Hilliard Consulting Group, Inc.9 Product Curve TIME Dev. Cycle Time Heat Weight Size Power Cost Downward Curve Performance Bundling Interconnectivity Speed Mobility Convergence Scalability Upward Curve
Hilliard Consulting Group, Inc.10 State, Trend and Gap Analysis THE GAP Current State Future State
Hilliard Consulting Group, Inc.17 Average Price/Minute for Mobile Telephone Service $0.53 $0.58 $0.57 $0.56 $0.54 $0.43 $0.35 $0.28 $0.21 $0.45 $0.10 $0.20 $0.30 $0.40 $0.50 $ Average Price Per Minute Source: FCC Annual Report on Wireless Industry, June 2001
Hilliard Consulting Group, Inc.18 Drivers What are They? That element that turns a need, want, or requirement into a purchase How can I use them? To discern the size, direction, growth, and limits of a market thereby gaining competitive insight.
Hilliard Consulting Group, Inc.19 Recent Market Conditions and Their Causes CAGR in % YEARS CAPEX Growth Gross Revenue Growth Rate 26% 12-15% 6-8% The Revenue/Expenditure Gap Causes: Confluence of Forces 1) Y2K - replace versus remediate significant network elements 2) Telecom Act of create many new player with lots of infrastructure needs - CLECs, BLECs, ISPs, etc. 3) Internet growth 4) Wireless Digital One Rate Plans - 30 to 100+ million subscribers 5) Shift from circuit to packet
Hilliard Consulting Group, Inc.21 Life Cycle Analysis - The Gaussian Curve - Where Are You? TIME Main Street The Tornado The Bowling Alley The Chasm Early Market Technology Visionaries Pragmatists Conservatives Enthusiasts Emerging Rising Cash Sunset Hopeful Stars Cows Teen Age Years Mid Life Old Age Infant Mortality Height and width of the curve may vary depending on the number of entrants and time periods involved. Also, the curve will usually be skewed at one or both ends. Consolidation
Hilliard Consulting Group, Inc.24 Dramatic Growth in Mobile Wireless Industry Mobile Subscriber Estimates Approx. 700 million today
Hilliard Consulting Group, Inc.25 Source: Nokia ,400 1,200 1, Projected Cellular Subscribers (Nokia 1999) Projected Web handsets (Nokia 1999) Projected PCs connected to the Internet (Dataquest 1998) Million s Dramatic Growth in Mobile Wireless Data - Data Enabled Terminal Estimates
Hilliard Consulting Group, Inc.26 Porters Market Forces YOU Competitors Suppliers Disruptive Technologies Customers New Entrants Other Stakeholders Governments Unions, Financiers
Hilliard Consulting Group, Inc.27 Developmental Cycle Time Imperatives
Hilliard Consulting Group, Inc.28 Financial Metrics - Important High Level Tools IRR Problem - Calculate the IRR(round-off) - $1,000* Invt. Net Cash10%$20%$ YearFlow $PVIFNCFPVIFNCF PV: (1000*) (1000*) PV= 91 (76) = 15%
Hilliard Consulting Group, Inc.30 Price Volume Sensitivity Analysis - Changing One Variable at a Time: Micro Demand Curves
Hilliard Consulting Group, Inc.31 Inflection Points PHASE ONE PHASE TWO COMPANY A COMPANY B INFLECTION POINT MARKET CAP TIME COMPANY A AND B ARE RELATIVELY CLOSE IN PHASE ONE, BUT SUDDENLY ONE GETS IT, AND THE OTHER DOESNT. AT THE INFLECTION POINT, VALUATIONS DIVERGE.
Hilliard Consulting Group, Inc.32 Microsoft, Apple & Lotus Shareholder Value Microsoft$3 billion$220 billion Apple$4 billion$4 billion Lotus$1 billion$3 billion One Apparently Got it, and two did not.
Hilliard Consulting Group, Inc.33 Inflection Point Analysis - Altmans Z Score Z score above 2.99 represents a company financially strong. Z score 1.81 or less has over a 90% correlation that they will be in bankruptcy in 12 months. Z score in between 1.81 and 2.99 may go either way. Over 90% accurate 12 months out!
Hilliard Consulting Group, Inc.34 Z Score Continued X1 = Working Capital/Total Assets X2 = Retained Earnings/Total Assets X3 = EBIT/Total Assets X4 = Market Value of Equity/Book Value of Total Debt X5 = Net Sales/Total Assets Z = Overall Index of Corporate Health Algorithm Z = (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5)
Hilliard Consulting Group, Inc.35 Modifications to Altman I recommend modifying Altmans Z Score based on changes in gross margin as debt becomes significantly more onerous as gross margins decline See Plan to Win: Analytical and Operational Tools - Gaining Competitive Advantage for a suggested conversion table.
Hilliard Consulting Group, Inc.36 Chanos Discriminant Model
Hilliard Consulting Group, Inc.37 Market Share/Market Growth Matrix Market Growth Market Share Winners Dogs Cash Cows High Potential Fund Winners Grow Winners Fund High Potential Units. Try and move them to Winners quadrant Terminate or sell these units. Of little value. Use proceeds to fund Winners and High Potential units. Milk the cows for cash to fuel growth for Winners and High Potential units. Cows are mature units.
Hilliard Consulting Group, Inc.38 Portfolio Pruning – A Cautionary Note When we decide we must reduce elements, projects, programs, etc. we must pay attention to how costs are being allocated. When we eliminate a project/program, etc. in an entity that allocates costs, the remaining elements/programs/projects must now absorb previously otherwise allocated costs. This may complicate your decision process.
Hilliard Consulting Group, Inc.39 Relative Measure of Merit
Hilliard Consulting Group, Inc.40 Accounting Terms Cost of Goods Sold Direct Costs Above the Line Costs Variable Costs They all mean the same thing Sales, General & Administrative Costs Indirect Costs Below the line Costs Fixed Costs They all mean the same thing
Hilliard Consulting Group, Inc.41 In Financial Form: Gross Revenue - Cost Of Goods Sold CGS Cost of Services Sold Above the Line Costs Direct Expenses (Costs) Variable Costs THE LINE Gross Margin (a/k/a Contribution Margin) - Sales, General & Administrative Costs SG&A Indirect Expenses Below the Line Costs Fixed Costs Net Income Before Tax
Hilliard Consulting Group, Inc.42 Fixed Costs – A Note Fixed Costs are ONLY fixed within a relevant range! Fixed Costs are a Step Function Fixed Components Example: First factory will only produce so many widgets – even going to 3 shifts. When a second factory is required, we reach the step function.
Hilliard Consulting Group, Inc.43 Breakeven Analysis BES = FC + VC BES = Breakeven Sales, always represented as 1.00 BES FC = Fixed Costs, always represented in $s VC = Variable Costs, always represented in decimal form - CGS as a % of sales converted to a decimal To calculate for profit use: (BES =FC + VC + P) Example: FC = $1,000,000, VC (CGS) = 55% or BES -.55 = $1,000,000 BES = $2,222,222
Hilliard Consulting Group, Inc.44 Some Typical Aggregate Valuation Metrics
Hilliard Consulting Group, Inc.45 Key Performance Indicators (KPIs) Must identify, measure and use key performance indicators in managing an enterprise Dont measure unimportant things Pareto is alive an well – 20% of the metrics will yield 80% of the bang for the buck No more than 10 KPIs for each responsible professional Cockpit Chart, Digital Dashboard, Balanced Scorecard, etc.
Hilliard Consulting Group, Inc.46 A Disaggregate Weighting Value Model
Hilliard Consulting Group, Inc.47 Disaggregate Value Worksheet
Hilliard Consulting Group, Inc.48 Pricing Value Pricing Cost Pricing Service Pricing Porters Model
Hilliard Consulting Group, Inc.49 Porters Model Porter proffers that there are two fundamental – but diametrically opposed means of pricing: COST VALUE Following is a model that uses these diametrically opposed models in concert.
Hilliard Consulting Group, Inc.50 Value Pricing Value Price Lead Price Degradation Slope Force Compe- tition to lower prices before NRE Recovery Introduce next Solution at a Value price
Hilliard Consulting Group, Inc.51 Cost Pricing Model Direct Labor + Direct Materials + Other Direct Charges (Consultants, etc.) = Total Direct Charges X + Overhead Rate = Burdened Material, Labor & Overhead (MLO) X + G & A Rate = Total Burdened Costs X + Risk Factor = Total Costs X + Profit Factor = Price
Hilliard Consulting Group, Inc.52 Cost Issues Can not look at only the direct cost of an expense element Must look at burdened impact Example: Give $10,000 to a charity when you have a 5% after tax profit and a 30% tax rate. Real Cost is = $140,000 ($10,000/5% - 30% = $140,000). That is what the entity has to sell to cover this gift – not $10,000.
Hilliard Consulting Group, Inc.53 Service Pricing Typically 2 primary functions: Rate & Time Realization RATE = % of stated rate actually billed and collected Utilization RATE = % of workable hours in a man year (2080) actually billed
Hilliard Consulting Group, Inc.54 Realization Rate Stated Hourly Rate: $300 per hour Through negotiation rate is cut to $200 per hour Realization Rate is 67%.
Hilliard Consulting Group, Inc.55 Utilization Rate 2080 Work hours in the US work year Less than available hours are typically billable because of vacation time, sick time, training time, etc. So if 1500 hours are billed, the utilization rate 75%.
Hilliard Consulting Group, Inc.56 Combined Rate Most consulting firms strike to reach a combined rate of 140 (70% + 70%). It was just reported in Business Week that McKinseys utilization rate dropped to under 50% and that its realization rate was also below plan. What actions do you think McKinsey partners are likely to take?
Hilliard Consulting Group, Inc.57 Sensitivity and Scenario Analysis Sensitivity Analysis is where we change one variable at a time. This permits direct correlation between cause and effect. Scenario Analysis is where we change multiple variables at the same time making it harder to discern cause and effect.
Hilliard Consulting Group, Inc.58 Price Volume Sensitivity Analysis - Changing One Variable at a Time: Micro Demand Curves
Hilliard Consulting Group, Inc.59 Simple Scenario Analysis Pay Metric/ Hour/yr. Rate Per Hour XYX Co. Annual Revenue Estimate/ operator Number Of Operators Est. Annual Revenue Opera-tor Expense $17/hr burdened Supr Expense $19/hr burdened G&A Expense From John $75K/mo Net Income 2080$25$52,00010$520K$354K$40K$900K 2080$25$52,00020$1,040K$707K$80K$900K 2080$25$52,00030$1,560K$1,062K$120K$900K 2080$24$49,92010$499K$354K$40K$900K 2080$24$49,92020$998K$707K$80K$900K 2080$24$49,92030$1,498K$1,062K$120K$900K 2080$23$47,84010$478K$354K$40K$900K 2080$23$47,84020$957K$707K$80K$900K 2080$23$47,84030$1,435K$1,062K$120K$900K
Hilliard Consulting Group, Inc.60 Paretos Rule 4. Paretos Rule = 80/20 split – In any given activity, 20% of the set will be responsible for 80% of the effect. Dr. Jurans repostulation: The Vital few and the Trivial Many!
Hilliard Consulting Group, Inc.61 Typical Corporate Business Structure Board of DirectorsStaff Executive OfficersLegal Marketing/Finance &FulfillmentRDD&E SalesAdministration SUPPORTED BY PEOPLE, POLICIES, PROCEDURES, SYSTEMS, TECHNOLOGY & NETWORKS (P³STN) High Level PRINCIPAL FUNCTIONS PlanningPlanningPlanningPlanning ExecutingExecutingExecutingExecuting ReportingReportingReportingReporting ForecastingBudgetingForecastingResearch ResearchAccounting/TaxVariance AnalDesign/Dev. AnalysisFin. AnalysisCycle Time Imp.Engineering 4 PsHRSourcingStarts Controls CRMBilling/CollectionsMRP/PurchasingCycle Time Order InputBankingQC/QoS/FPYIRR/RMM Proposal dev.MIS/EDPWarranty/RepairOutsourcing OutsourcingOutsourcingOutsourcing CORPORATECULTURECORPORATECULTURE Greater Environment Stakeholders & Market Influencers Customers Shareholders Competitors Disruptive Technology Suppliers Regulators Financiers Creditors Press/Media Associations Trade Groups Unions Legal community Environmental groups
Hilliard Consulting Group, Inc.62 Porters Market Forces YOU Competitors Suppliers Disruptive Technologies Customers New Entrants Other Stakeholders Governments Unions, Financiers
Hilliard Consulting Group, Inc.63 Wireless: Some Definitions Broadband - US FCC defines broadband as 200 KBPS in both directions 5G - Free Air Optics above 300 GHz and delivering over 100 MBPS throughputs - already in the market - Terabeam, AirFiber, etc., packet - Soon Intel with UWB solutions 4G - 2 definitions: US NSF MBPS throughputs, DoCoMo MBPS throughputs - UWB, a WLAN, etc., packet 3G - WCDMA, IMTS, UMTS, CDMA MBPS, packet 2.75G - EDGE, 1XRTTEV(some use 1XRTTDO) - 384KBPS,packet 2.5G - GPRS, 1XRTT and 144 KBPS respectively,packet 2G - TDMA, CDMA, GSM narrowband digital - typically <14.4KBPS, circuit 1G - AMPs, etc., narrowband analog - typically <10KBPS, circuit
Hilliard Consulting Group, Inc.64 Current Wireless Landscape Narrowband/Analog/Circuit Broadband/Digital/Packet GSM TDMA CDMA 1XRTT1XRTTDO1XRTTDV/3G/ CDMA2000 GPRSEDGE WCDMA/3G 1980s 1990s FCC Defines Broadband as 200KBPS in both directions AMPS Analog/Digital Divide Narrowband/Broad- band Divide Circuit/Packet Divide 1G 2G 2.5G 2.75G 3G
Hilliard Consulting Group, Inc.67 Navini NLOS Portable/Nomadic Modem Solutions Partners Careers Press ContactSolutionsPartnersCareersPressContact PCMCIA Version also available
Hilliard Consulting Group, Inc a,b & Wireless LANs b - a/k/a Wi-Fi (Wireless Fidelity), 2.4 Ghz. 5.5, 11 MBPS, DSSS, security issues no roaming interface specified (but see MeshNetworks) a - 5Ghz bands, up to 54 MBPS, OFDM d - Worldwide Mode - SDLans e - QoS g - Standards implementation suspended temporarily- broadband nature of a, & backward compatible with 2.4Ghz i - Authentication and Security Ghz bands, up to 135 MBPS Bluetooth - 30 ft., <1MBPS, 2.4Ghz, FHSS, up to 8 devices
Hilliard Consulting Group, Inc.69 Wireless LANs & Bluetooth
Hilliard Consulting Group, Inc.70 Some Primary Wireless Disruptive Technologies DISRUPTIVE TECHNOLOGIES: HDR (Qualcomm) 1X Plus (Motorola) Ultra Wideband Radio (Time-Domain, Intel) - 4G/5G Spitfire (TRW) - 4G iBurst (ArrayComm) - 4G MeshNetworks, Bell Labs BLAST Free Air Optics - Optical Wireless (Terabeam, AirFiber) - 5G Software Defined Phone (Quicksilver Technologies)
Hilliard Consulting Group, Inc.71 Inflection Point Analysis - Altmans Z Score Z score above 2.99 represents a company financially strong. Z score 1.81 or less has over a 90% correlation that they will be in bankruptcy in 12 months. Z score in between 1.81 and 2.99 may go either way. Over 90% accurate 12 months out!
Hilliard Consulting Group, Inc.72 Z Score Continued X1 = Working Capital/Total Assets X2 = Retained Earnings/Total Assets X3 = EBIT/Total Assets X4 = Market Value of Equity/Book Value of Total Debt X5 = Net Sales/Total Assets Z = Overall Index of Corporate Health Algorithm Z = (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5)
Hilliard Consulting Group, Inc.74 AT&T Z Score Results --
Hilliard Consulting Group, Inc.75 Altmans Z Score Caveats Not a be all, end all metric. Just another data point. Decent leading indicator/predictor. The degree of entity asset wealth can mitigate Altmans time line. Should only be used in conjunction with other tools. Should tailor for different industries.
Hilliard Consulting Group, Inc.76 Modifications to Altman I recommend modifying Altmans Z Score based on changes in gross margin as debt becomes significantly more onerous as gross margins decline See Plan to Win: Analytical and Operational Tools - Gaining Competitive Advantage for a suggested conversion table.
Hilliard Consulting Group, Inc.77 Chanos Discriminant Model
Hilliard Consulting Group, Inc.78 Financial Metrics - Important High Level Tools IRR Problem - Calculate the IRR(round-off) - $1,000* Invt. Net Cash10%$20%$ YearFlow $PVIFNCFPVIFNCF PV: (1000*) (1000*) PV= 91 (76) = 15%
Hilliard Consulting Group, Inc.79 Financial Metrics - Important High Level Tools High level look at time cycle cost & savings Y1Y2Y3(Y1+2)Savings Rev COGS GM NRE+Sus SG&A EBBT(3.5)1.82.0(.3)1.4 By employing cycle time imperatives and shortening development times(some of Y2 into Y1), significant early period costs can be saved.
Hilliard Consulting Group, Inc.80 Cycle Time - IRR Imperatives Based on $1M investment and cash savings from 1/4 Cycle Time - all $ in Ms Year NCF NCF 1 (3.5) (2.1) IRR 30% 49% By shifting forward one quarter to one third of a years development efforts (time to market), the companys IRR is increased almost 20%.