Today I was working with a business model alternatives for one specific software company. The business is very international and existing network is truly global consisting of research organizations, content providers and different type of customers. Part of the strategy work has been a task to critically evaluate our business model. All in all this company is very much knowledge driven, which sets the scene in our future coming decision making.
I found this following article in HBR quite useful for my own thinking:
When Facebook acquired the messaging service WhatsApp for $19 billion in the spring of 2014, the question on everyone’s mind was, does the service really merit a valuation of almost 20 times projected revenues?
WhatApp’s valuation may be extreme, but huge gaps between revenues and valuation are increasingly common. Cloud-based sharing service Dropbox received venture capital funding at a valuation of $10 billion, or 40 times revenues. Airbnb.com raised funding at a valuation of $10 billion, which would make it worth nearly 20 times its revenues — and worth more than Hyatt Hotels or Wyndham Worldwide. Taxi-replacement service Uber is currently raising funding and is expected to see a valuation of $30 billion, estimated to be more than 15 times revenues. Most recently, Alibaba’s IPO raised funds at a value approximately 10 times revenues.
These companies represent a new trend in the types of business that investors prefer. Leaders of more traditional companies are left wondering why these upstarts merit such high valuations. Are they more profitable? Do they see faster growth? Do they have higher return on assets and lower marginal costs?
Our answer is yes — to all of the above.
In collaboration with Deloitte, we examined 40 years of financial data for the S&P 500 companies to see how valuations trends have evolved along with business models and emerging technologies. Our research led to three key findings.
1. There are four business models
To begin, we searched for a simple way to characterize the different types of business that were engaging the hearts and minds, and pocket books, of investors. Because today’s highly valued, fast growing businesses can be found in almost every industry, we quickly moved past standard industrial classifications and developed a new framework based on business model, which is the principal way an organization invests its capital to generate and capture value.
The four models are:
- Asset Builders: These companies build, develop and lease physical assets to make, market, distribute, and sell physical things. Examples include Ford, Wal-Mart, and FedEx.
- Service Providers: These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include United Healthcare, Accenture, and JP Morgan.
- Technology Creators: These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include Microsoft, Oracle, and Amgen.
- Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include eBay, Red Hat, and Visa, Uber, Tripadvisor, and Alibaba.
We applied this business model framework to our dataset, the S&P 500 Index companies from 1972 to present, in order to see how the four models performed over time.
Our business model classification and analysis yielded some surprising results. Network Orchestrators outperform companies with other business models on several key dimensions. These advantages include higher valuations relative to their revenue, faster growth, and larger profit margins.