3Shareholder value Warren Buffett, The Focus Investor’s Golden Rules: «I’m 15% Phil Fisher and 85% Benjamin Graham»Benjamin Graham, quantitative: Fixed assets, current earnings, dividends.Corporate filings and annual reports: cheap stocks.Phil Fisher, qualitative: future prospects, management capability.Customers, competitors, managers: intrinsic value, long term.Invest: “Know nothing”: Index funds. “Know something”: 5-10 companies. Diversification overrated. It increases the chances of buying something you don’t know enough about.Volatility happens: thing long term 5 to 10 years.DowJonesEuroStoxx 50AverageEuropeanfund1 Year% Increase50%100%150%200%3 Year5 YearAMEV vs. Drucker, Roadshow cloud vs. Robner (analysts)Warren Buffet (Berkshire Hathaway): Financial vs. Business understandingManagement-by-exceptions, by-walking-around.Jack Weltch, Stock market fluctuations, share splits.Hierarchy: accounting -> Hypertext: zoom in/out: resolution management. Professional, geographic concentration.Arena:FocusAction
4In-Process Research and Development « IPRD » Annual ReportStratus:…manufacturer of fault-tolerant computer systems…$267M Revenues…were estimated to be $84M in 1999 and $345M in 2000…expected to peak in fiscal year 2002 and decline thereafter through the end of the product’s life (2009) as new product technologies were expected to be introduced by us. A risk-adjusted discount rate of 35% was used to discount projected cash flows. The actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisition, except as noted below…Product development relating to the…projects was discontinued due to our reprioritization of product direction…Consequently, we did not realize the forecasted revenues from these projects. During fiscal year 2001, substantially all of the goodwill and acquired intangibles related to the purchase of Stratus were written off as part of our restructuring program…Chromatis Networks: Next generation optical transport solutions that provide telecommunications carriers with improvements in the cost, efficiency, scale and management of multi-service metropolitan networks…integrate data, voice and video services…and combine this traffic onto a wave division multiplexing system.…$428M represented its estimated fair value using the methodology described above…Revenues were estimated to be $375M in fiscal year 2001 and $1 billion in fiscal year Revenue was expected to peak in fiscal year 2005 and decline thereafter…A risk-adjusted discount rate of 25% was used…As part of our restructuring program in fiscal year 2001, the Chromatis product portfolio was discontinued and all of the remaining assets…were written off.Spring Tide Networks: Carrier-class network equipment..that enables service providers to offer new Value-added IP services and VPNs with low cost and complexity…IP service switch carrier class platforms that combine the connectivity of a remote access server, the network intelligence of a remote access server, and the switching capacity and quality of service capabilities of an ATM switch in one integrated switch.In-Process Research and Development « IPRD »In connection with the acquisitions in fiscal years 2000 and 1999 of Chromatis, Spring Tide and Stratus, we allocated non-tax impacting charges of $428 million, $131 million and $267 million, respectively of the total purchase price to IPRD. As part of the process of analyzing each of these acquisitions, we made a decision to buy technology that had not yet been commercialized rather than develop the technology internally. We based this decision on a number of factors including the amount of time it would take to bring the technology to market. We also considered Bell Labs’ resource allocation and its progress on comparable technology, if any. We expect to use the same decision process in the future.We estimated the fair value of IPRD for each of the above acquisitions using an income approach. This involved estimating the fair value of the IPRD using the present value of the estimated after-tax cash flows expected to be generated by the IPRD, using risk-adjusted discount rates and revenue forecasts as appropriate. The selection of the discount rate was based on consideration of our weighted average cost of capital, as well as other factors, including the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances that were known at the time, and the stage of completion of each technology. We believe that the estimated IPRD amounts so determined represented fair value and did not exceed the amount a third party would pay for the projects.Financial highlights: Shareholders’ equity: 2000:$ :$5.73, (81.2%).Annual Meeting to be held on 02/20/02 at 09:00 A.M. Proposals: Evelyn Y. Davis: “Repeal Classified Board.” (Reelection of directors annually vs. recent stagger system).After thoughtful consideration…directors recommend a vote against proposal 2.Purchase Peak TerminationStratus: : Price: $267M, Revenues estimated:Revenue negative for the remainder of the projection periodCosts to complete R&D estimated Discount rate:35%Chromatis: Revenues attributed to the metro optical product: Revenue growth and negative later.Spring tide Revenues attributable to the IP Service switch products:Revenue growth: negative later.
5Schumpeter: Creative destruction Disney corporate portfolio MovieEntertainmentLiveEntertainmentMerchandising,Music,PublishingBroadcastingAmusementParksCruisesCommunitiesHolidays,Resorts,Real estate developmentHolidays, Resorts,Real estate developmentDisneyInstituteAnimal KingdomDisney AmericaAmusementParksResortsHotelsEuro DisneyDisney StudiosMGMDisneylandTokyoLiveEntertainmentEPCOTTheaterHokeyBaseballDisneyworldDisneyChannelKotler’s book: from Rajar Gupta’s lecture (McKinsey)”Starting Kick and growth maintenance?!”, August 4th 1997, Kellogg school of managementKCAL TVABCBroadcastingDisneylandAnimatedFeaturesTVProgrammingTouchstoneHome videosHollywoodPicturesMiramaxAcquisitionMovieEntertainmentFilmsMusicPublishingMerchandising,Music,PublishingBookPublishingDisneyStoresDirectMailHollywoodRecordsSoftwareVisual effectsMerchandisingAnimation‘30‘20‘50‘60‘80‘902000‘40‘70
6Active Portfolio Management -10%-5%0%10%15%A business’s average total return to shareholdersrelative to its industry5%1510152025Business age in yearsComparing 1985 to 1995, the top 150 electronic-systems-companiesworldwide ranked by revenue:75% of the firms in 1985 either slipped or disappeared by 199525% improved / 33% eliminated / 42% newSource: Anderson Consulting (1997) “Exploiting Uncertainty: Hi-Techs High Performers Change the Dynamics of CompetitionCommtouch ’91:Mainframe mail,’99 MS vs. Netscape damage - Outsourcing web mail 2Q M mailboxes. Last chanceLee Dranikoff, Tim Koller and Antoon Schneider, “Divestiture: Strategy’s Missing Link” HBR, May 2002, ppRichard Foster and Sarah Kaplan, “Creative Destruction”, Doubleday, 2001: age, return.
7Distribution of US federal Income-tax revenue by income group ParetoDistribution of US federal Income-tax revenue by income group100%Cum Percent20%40%60%80%100%Share of total revenueIncome Group415%25%50%580%60%40%“Getting personal”, Survey Globalisation and tax, Economist, Jan 29, 00, p.16120%415%25%550%
8Paradigmatic Isomorphism: Deep Structure Porter’s 5 forces:Sustainable competitive advantage; Entry BarriersBrandenburger and Nalebuff ‘95CompanyCustomersSuppliersSubstitutesComplementorsCompetitorsNew entrantssubstitutesSuppliersBuyersA. Grove, ’96: Six forces Diagram x10 forceMarketing:7Cs: Company, competition, channel, customer,The BusinessComplementorsSuppliersExistingCompetitorsA different wayCustomersPotentialMintzberg ’88: Generic StrategiesPrimaryIndustriesExtractionProcessingFabricationAssemblyWholesaleRetailSecondaryTertiaryUpstreamMidstreamDownstreamStrategic ApexOperating CoreSupportStaffTechnostructureMiddleLineIdeologyHamel and Prahalad, ’94: Competing for the Future, Harvard business school press, 1994Andy Grove, “Only the Paranoid Survive”Hamel and Prahalad, ’94Brand &DistributionCreating coalitionsStandards &RegulationCorecompetenciesMarket Learning& Experimentation
12Health-Care Corporate Arena FDAMinistry of HealthGMPDrug ManufacturersEthicalGenericVitamedGSKTevaTevaNovoPharmIMSDistributorsAmericanHospitalSuppliesCTSPharmaLemonGlaxo ILNovologProductSpecialistsEDIDiseaseManagementHealth Management Org.AdvertisingClalitShahalMacabiAdminTelemedicineBoosh: Average Innovative prescription $72 vs. Generic $17Copaxon: 1/day vs. Biogen’s Avanx 1/Week. April 2002 launched (British) Owen Mmford’s Pre-Filled syringe+autoject (hides needle, no need to fill with water, stored 7 days at room temperature(good for travel), can be used by deteriorating patient, can move freely, improves accuracy and consistency of injection: depth adaptor) + more discipline: Patients loose motivation to inject between seizures. Complaints: dull,thicker harder needle, partial injection – left in syringe.Yoram Gabizon, “Given Imaging’s customer base grew to 26 million insured in the US”, Haaretz, July12,2002, p.10גIntercontinental Medical Statistics: IMS health: $8K average pharma firm spends $20M/year. PDS boughtYoram Gabizon, “Shahal”, Haaretz, p.C10, monitor=ניטורShahal: FDA approval for 12/12:patient performs and transmits EKG including electro-cardio activity from 12 angles.Cardio US Response time for short cardiac arrest 215 minutes shorter for Shahal patients (=mental suppression to call or not)->reduced damage to heart muscle and reduced daqnage to quality-of-life. Reduced redundant hospitalization days of 80% of 3.3Million patients complaining of chest pains, hospitalized with no attack. Telemedicine cost per diem=$30 vs. hospital=$1,200. Telemedicine 2000=20% to $2.8B.Yoram Gabizon, “CardGuard”, Haaretz, p.C10, : Heart and lung monitoring systemM&A:1/2001 purchased Life Watch emergency services 70K subscribers, 8/2001: Instrumedics (San Diego) good brand competitor. Q12001: Quality diagnostic Services: 50K subscribers- cardio telemedicine.ListPharmaciesSuperPharmShorTabMacabiPhysiciansWebeMedPrescriptionPublicPrescription DrugsOver the Counter
13Electronic Markets and Electronic Hierarchies Malone et. Al Electronic Markets and Electronic Hierarchies Malone et. Al., Modeling Coordination in Organizations and MarketsDecentralized MarketSupplier1Supplier2Supplier3Customer1Customer2Customer3Centralized MarketSupplier1Supplier2Supplier3BrokerIntermediaryInfoMediaryCustomer1Customer2Customer3
14Rebuilding the value chain: Benchmark Capital Microsoft’s Nathan Meirvold:“Anyone standing between suppliers and customers will become road-kill on the information highway.”Manufacturer/publisherWholesaler/distributorE-retailerReintermediationPortal/aggregatorDisintermediationConsumerThe e-commerce matrixBusinessConsumerB2BGM/FordEDI networksB2CAmazonDellC2BPricelineAccompanyP2PEbayNapsterRebuilding the value chain: Source: Benchmark Capital; The Economist
15E-Hubs: The new B2B Marketplaces. Steve Kaplan. The Forward Aggregator ModelThe Reverse Aggregator ModelIBMCompaqCiscoMicrosoftLarge SuppliersDowDupontAshland3MLarge SuppliersDirectionOfAggregationDirectionOfAggregationE-hub: Fulfillment, call center, Distributorfinancing, configuratorsIngramMicroDistributorsSmall resellersE-hub: Fulfillment, Inspection,Receivables, Financing IntegratorFOB.comBuyersSmall BuyersForward: integrators, Backward: bundling.Steven Kaplan and Mohanbir Sawhney, Harvard Business Review, May-June 2000What Businesses BuyOperatingInputsManufacturingHow BusinessesBuySystematicSourcingMRO HubsAriba, W.W.Grainger, MRO.com, BizBuyer.comCatalog HubsChamdex, SciQuest.com, PlasticsNet.comSpotYield ManagersEmployease, Adauction.com, CapacityWeb.comExcangesE-steel, PaperExchange.com, Altra Energy, IMX Exchange
16Equipment Providers/Integrators Telecom MarketComponent ProvidersOrkitVocaltecECICommatchAptonicsAmdoxRadcomNiceGilatADCSeabridgeMotorolaComverseComtouchEquipment Providers/IntegratorsNortelLucentAlcatelCiscoSiemensService ProviderSmall TelcoBLECILECCLECLarge TelcoDLECAccess TechnologiesFiberCopperSatelliteCableCellularArena streaming: Audiocodes: Supplier, distributor, potential purchaser. Siemens: Supplier, competitor.SeamfreeNew Yorker, September 18, 2000, J. Sorowiecki, “The Most Devastating Retailer in the World”.P.74D. Bovet and J. Martha, “Value Nets”Galicia, Spain, TraditionCustomersMTUSoHoCampusRuralSuburbanBusiness
17Garment Manufacturers Time-To-Market: TTMStandardZaraFocusCostSpeedManufactureO/SVerticalInfo. Tech.Cash RegistersHand Held devicesModels/Yr>11KTTM6 Months Design+3M Manf..4-5W design+1M10-15DaysDelivery1/Season2/WeekBadproducts?Off inWeeksInventory turnover3*GapAdv. Camp.NoneProfits+30%/yearNWH&MGAPZaraMfg. Eur.vs. Asia50%17%80%Design to Delivery6-8Months6Months2-5 WeeksInventory Unsold25%20-30%15-20%Profit margin12.4%10.6%14.9%Sales $Bill$3B$13.7B$2.6BFabricInditex’7923 Robotcut & Die #3>40%TefronHiTexFarEastDeltaGarment Manufacturers400 SmallShops>50%FarEastBenettonSologInnerSecretLabelsSt.MichaelM&SVictoria’sSecretBenettonCKZara ‘75H&M900suppliersGAPStryker McGuire, “Fast Fashion”, Newsweek, September17, 2001, ppCarla Vtzthum, Wall street Journal, “Just in time Fashion”, pp. B1,B4Seamfree Santori? Hennes & Mauritz ABNew Yorker, September 18, 2000, J. Sorowiecki, “The Most Devastating Retailer in the World”.P.74D. Bovet and J. Martha, “Value Nets”Galicia, Spain, TraditionRetailersBenettonZara467StoresWalmart25-35yearsAnti GapOlder&WealthierCollege CrowdTrendy UrbanLate TeensCost ConsciousGirls 12+UpCheap coolZara467StoresMassimo Duti207Pull&Bear238Stradivarius114Bershka127Macy’sCustomers