Mike
Greetings from the road via a borrowed pc. My geriatric laptop finally gave up the ghost.
Some thoughts on the networks project. (I don't have access to my files, so the following is more general than I would like and probably hazy--or wrong--in places.)
Companies: I would like to suggest that we use JDSU, SIEBEL, I2, and NTAP as our guinea pigs. Besides being closely followed on the thread, these four have the benefit of being in different sectors (fiber-optics, enterprise apps, supply chain, and NAS storage). They also fit the Fool's rulemaker balance sheet/income statement qualifications (with the caveat that JDSU's acquisitions cut into its cash king margin). And in the case of NTAP, we would have the added benefit of Down South and Eric Jhonsa's understanding of the technology.
Framework:
Basic facts: Besides the RM metrics (revenue growth, gross margin, net margin, cash minus debt, flow ratio, and cash king margin), we would want to set out the revenue growth for a longer period--YOY and QOQ for, say, three years when possible.
Intangible assets:
Baruch Lev convincingly argues that knowledge assets are the engines fueling value growth. If, for example, he says, a company is selling at 6X book, then 1 part is tangible assets (financial or physical), and 5 are knowledge assets. It is the knowledge assets that create barriers to entry and raise switching costs, and, I suspect, are the reason behind the debate over JDSU's status as gorilla or king.
Knowledge assets scale geometrically. Though they will be difficult to define or quantify precisely, they can be loosely categorized.
1. discovery--creation of new ideas (both continuous and discontinuous, but not restricted to technology)
2. human resources (compensation, training, acquisitions)
3. customers--brands, trademarks
4. organizational designs--process-based advantages
Follow the money: If we look for where a company is spending its money, we will get a good idea of the network effects it wants to set in motion. ORCL, for example, unlike SEBL, seems to be increasing efficiency (margins) by cost cutting (specifically the sales force) as opposed to SEBL, which has been spending more to increase revenues even more.
Knowledge assets are also difficult to manage. They are more risky, have less liquidity, and as QCOM shows the property rights may be less enforceable (or less easily
enforced). But investment in knowledge assets shows up in network effects--increased alliances, higher switching costs, greater barriers to entry. Part of CSCO's success has come from its best of breed sales force. I2's sector specific implementations were only possible after considerable investment in developing industry templates. HR investment may appear as an income statement expense, but its real effect may be in the company's retention rate. NTAP's solutions may be cheaper than EMC's (following the Innovator's Dilemma of attack from below); they are also (to my mind, at least), discontinuous by virtue of WAFL and DAFS with anything EMC has to offer (basically a front-ending of Celerra NAS on Symmatrix SAN). JDSU's acquisitions speak not just to technology needs--missing pieces--but an investment in integration and in ramp-up of manufacturing output that is designed to produce process-based and scale advantages.
If we can follow the money trail on knowledge assets, we might then be able to see when the various kinds of investments began to be felt in network effects and to what degree. It might also provide good clues as to how successful management is in managing the discovery, implementation, and commercialization of knowledge assets and the network effects they set in motion.
Threats to network effects:
These could be divided into internal sources and external ones. Some we cannot gauge. It is clear that, whatever the election outcome, antitrust regulators will be giving cases involving the licensing of intellectual property greater and greater scrutiny. Others, like competition or obsolescence, are obvious. JDSU's advantages would suffer a real setback were production processes to witness some discontinuous innovation (robotization). Taking up Stockhawk's suggestion, we might pair each of our focus companies with its chief competitor. How, for example will the I2/IBM/Ariba partnership fare against Oracle/Commerce 1/SAP and how is this different from I2's competition in its SCM position? But competition also arises internally, when a customer of one division or product becomes a competitor of another, throwing alliances in the value chain out of joint.
Judith |
