Intangible Assets-Based Enterprise Management - A Practical Approach -

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1 Intangible Assets-Based Enterprise Management - A Practical Approach - Juergen H. Daum Chief Solution Architect, Business Solutions Architects Group (BSAG), SAP EMEA Presentation at the 2005 PMA IC Symposium, 15 December 2005, Stern School of Business - New York University

2 Juergen H. Daum Function in the BSAG at SAP EMEA CFO Relationships, advisory role in Finance Transformation and Enterprise Performance Management projects Finance and management background was a CFO in a mid-sized German company before joining SAP in 1992 Spent five years in SAP s field organization in Germany and Europe sales, consulting, product management with the focus on financials and enterprise mgmt. Six years in development global product manager for SAP R/3 EC and Strategic Enterprise Management (SEM), then as global program manager for mysap Financials Since 2002: advising senior executives, CFOs, and controllers of European companies current focus on finance transformation & enterprise performance management Frequently publishing and speaking on enterprise performance management, finance and management topics; author of the book "Intangible Assets and Value Creation (2003) and Beyond Budgeting (2005). juergen.daum@sap.com, Personal Website 15 December 2005, New York University - Stern School of Business Page 2

3 The main message of my presentation and my paper is: We have to solve practical day-to-day problems of managers otherwise the IC/IA-movement will fail to be regarded as something relevant. The good news is: Managers are increasingly aware that it is impossible to manage the value creation process without integrating intangible assets in the managerial analysis and the management system. The traditional shareholder value management concept (the management mantra of the 1990s) is increasingly criticized, because it doesn t provide the tools to really manage for value and sustainability i.e. the need exists for something new and more advanced. 15 December 2005, New York University - Stern School of Business Page 3

4 Agenda Intangible Assets: A Challenge for Enterprise Management (Examples) A Change of Perspectives: Towards a New Concept for Enterprise Management Understanding and Optimizing Enterprise Performance Conclusion 15 December 2005, New York University - Stern School of Business Page 4

5 Example of a Pharma-Multinational How financial analysts value the company: Confidence Factor (or Future Value ) Can account for up to 50% of total enterprise value Value of the R&D Pipeline Net Assets / Book Value Analysts recognize with the confidence factor the company s (as-yet unknown) options for future growth (i.e. its ability to actively shape an unknown future by exploiting unmet demand and/or new technologies to make a difference and to generate additional revenues / create new businesses) How can management manage the confidence factor in the reality of the day-to-day business? 15 December 2005, New York University - Stern School of Business Page 5

6 Example of a Consumer Products-Multinational internally created Intangibles (e.g. brands) + realized acquisition synergies Goodwill + acquired Intangibles (e.g. brands) Tangible Assets + Working Capital The Black Hole from an internal management control perspective bn 8.8 bn = 19% reach of balance sheet Start of acquisition strategy mid 1990s mid 1980s 2.0 bn reach of traditional management accounting Enterprise value: 1.2 bn 3.5 bn 13.3 bn What is driving ROI (of all assets)? How to maximize value from investments in advertising? 15 December 2005, New York University - Stern School of Business Page 6

7 Example of the European Finance Shared Services Center of another Consumer Products-Multinational After 4 years in operation the general manager is asking himself the following questions: How can we move up the value chain and compete with low-cost service providers from India or China? Which (low value adding) tasks and processes are possible candidates to be outsourced? Which are the tasks and processes we should never outsource, because the related resources and assets (business know-how, human capital etc.) represent our family silver? How can we identify our family silver and strengthen and leverage it to create value-added in the future? How do we really create value? Which are the assets that create competitive advantage? 15 December 2005, New York University - Stern School of Business Page 7

8 Business 2010 Embracing the Challenge of Change Business 2010 is an intensive research program, conducted by the Economist Intelligence Unit and sponsored by SAP involving a survey of 4,018 executives and business leaders around the globe The results of the analysis suggest that, to compete successfully in 2010, executives will do well to heed the following messages: Revisit your business model - regularly Respondents identify new business models as a greater source of competitive advantage than new products and services Be nimble, be quick Adaptability to change and achieving the requisite speed of innovation are regarded as the greatest management challenges that organizations face Know thy customer, and invite him in The way organizations interact with customers will be the area of greatest change in their operations between now and 2010 (requiring e.g. better customer insight) Do what you do best Consolidation of existing market players and new entrants from emerging markets are seen as major competitive threats forcing organizations to focus on what they do best 15 December 2005, New York University - Stern School of Business Page 8

9 Example: Innovation Management Innovation means increasingly not only product innovation but also business model innovation. This requires a kind of creative destruction concerning the old business model and its processes and assets. The following questions arise for managers: How can we innovate and destroy (get rid of) old processes and ways of working and preserve at the same time our most valuable intangible assets that we have created through the old operations? What are our valuable intangible assets that we should never give up? December 2005, New York University - Stern School of Business Page 9

10 Dr. Werner Brandt CFO of SAP AG Intangible Assets: Is this something that we have to address in the performance management process and if yes, how? Dr. Werner Brandt, Chief Financial Officer of SAP AG Dr. Werner Brandt: For us it is a serious topic, since we as SAP have total assets of 7.6 billion and a market capitalization of more than 40 billion Euros [as of December 2004] - and that is a huge gap. I fully agree, you cannot solve it with accounting and it does not help much if you try to close this gap via the capitalization of specific intangibles. Instead you need to develop a concept that helps you to explain and to manage the gap between total assets and market capitalization and with all the consequences. And I don t think that this is limited to our brand value. We have other very important assets such as our employees, the customer base, and we should really try [ ] to define some measurements that help us to manage this gap and to create value added from it. [ ] My view is: Do not limit it to only one aspect or type of intangibles. In order to close the accounting gap, you have to look on all intangible assets a company has. Source: Panel discussion at the 2nd European SAP CFO Roundtable, 2-3 Dec. 2004, Venice/Italy (the panel discussion has been published in: Controlling Zeitschrift für Erfolgsorientierte Unternehmenssteuerung, Nov. 2005, p.51-56) 15 December 2005, New York University - Stern School of Business Page 10

11 Some important questions for which we need answers / analytical concepts What are the potential, values and production factors including intangible assets a company can dispose of? How are intangible assets created in operations? How can intangible assets be exploited efficiently in the value creation processes? Which effects can be achieved with them for customers, shareholders, and other stakeholders? Which gaps exist between available intangible assets and intangible assets needed to support the successful implementation of corporate strategy and to secure the company s future? Which available intangible assets are under-utilized and represent an option to create additional value? 15 December 2005, New York University - Stern School of Business Page 11

12 Agenda Intangible Assets: A Challenge for Enterprise Management (Examples) A Change of Perspectives: Towards a New Concept for Enterprise Management Understanding and Optimizing Enterprise Performance Conclusion 15 December 2005, New York University - Stern School of Business Page 12

13 Traditional Enterprise Performance Management Capital Investments Raw Material Direct Labor + Overhead Input The Enterprise Revenues (Cash Flow) Output Financial Accounting Management Accounting 15 December 2005, New York University - Stern School of Business Page 13 _ Economic Model production Financial Control = (Profit / ROI) ) sales financial + tangible asets Sophisticated Product Costing Sales statistics, P&L, Margin Analysis Financial metrics (such as WC, ROCE ) This model does not explain anymore, how value is created in today s enterprises!

14 Traditional Enterprise Management Concepts our Outdated From Industrial to Global Service Economy Focus on Internal Efficiency Seller s Market (until the 1970s) Focus on External Effectiveness Buyers s Market (since the 1970s) industrial economy (car production in the 1920s) knowledge economy (media production in the 2000s) Customer focus: availability (absolute) price Customer focus: variety (subjective) customer value Managerial focus: production capacity cost Managerial focus: innovation customer relations Source: Juergen H. Daum Customer- and market-oriented innovation has become the driver of economic value-added and growth 15 December 2005, New York University - Stern School of Business Page 14

15 The result: a growing Value Black Hole 15% 25% Book Value Market Value 80% 55% 85% 75% Intangible Assets? 45% 20% Peak (3/2000) Post Crash (8/2002) Source: John Ballow/Roland Burgman/Göran Roos/Michael Molnar (Accenture Institure for High Performance Business): A New Paradigm for Managing Shareholder Value, July 2004, p December 2005, New York University - Stern School of Business Page 15

16 Different Value Creation Models Require A Different Control Models Seller s Market / Industrial Economy (until the 1970s) Buyer s Market / Service Economy (since the 1970s) Focus on Internal Efficiency Focus on External Effectiveness Industrial Operation Model production Financial Control sales customers investors employees prod. dev. Today s Operation Model financial + tangible assets Sophisticated Product Costing e.g. Grenzplankstrg. Financial metrics (such as Working Capital, ROCE, EVA) Sales statistics, P&L, Margin Analysis Success factors (in a seller s market): Cost-efficient production Margin Efficient utilization of assets Partners 15 December 2005, New York University - Stern School of Business Page 16 fullfillment production Start with today s success factors (in a buyer s market): Customer value orientation Innovation power Ability to partner Adaptability sales fin. + tangible assets Intangible Assets How to design the control model? CRM NGOs

17 We Need a New Economic Model of the Enterprise Resource View Process View Results View Financial Assets Physical Assets Operative Process Areas Sales/ Marketing Customer Value Created Relationship Assets Structural / Org. Assets Human Assets R&D Production/ Fullfillment Support-Processes Financial Return Other Intangible Results Organisations need today performance measurement systems that: are based on a comprehensive ressource model (incl. intangibles) are integrating the process perspective (value creating processes) are presenting results in a multidimensional way (subjective, qualitative & objective, quantitative/financial) 15 December 2005, New York University - Stern School of Business Page 17

18 Agenda Intangible Assets: A Challenge for Enterprise Management (Examples) A Change of Perspectives: Towards a New Concept for Enterprise Management Understanding and Optimizing Enterprise Performance Conclusion 15 December 2005, New York University - Stern School of Business Page 18

19 Fokus of the 1 st Generation of IC/IA-based EM concepts: To provide information of the status of all resources Resource View Process View Results View Financial Assets Physical Assets Operative Process Areas Sales/ Marketing Customer Value Created Relationship Assets Structural / Org. Assets Human Assets R&D Production/ Fullfillment Support-Processes Financial Return Other Intangible Results Intangible Assets Monitor (Sveiby) Examples: Economic Value Added / EVA (Stern/Stewart) NOPAT 15 Net Operating Profit After Tax EVA 5 Cost of Business Assets Capital charge December 2005, New York University - Stern School of Business Page 19

20 Next Practice: controlling and optimizing operations based on an enhanced enterprise model and value concept Resource View Process View Results View Financial Assets Physical Assets Operative Process Areas Sales/ Marketing Customer Value Created Relationship Assets Structural / Org. Assets Human Assets R&D Production/ Fullfillment Support-Processes Financial Return Other Intangible Results How is value and value-added created? Which are the major value-creating processes? How effectively and efficiently are resources used by business processes to create value? What are the success factors and risks that have to be managed? 15 December 2005, New York University - Stern School of Business Page 20

21 Marketing economics: example of a consumer products company trying to optimize value creation from marketing investments Inflation Demand Customer Model (Influence segments: Diagram) They do not know the brand They do not like the brand Non- Buyers GDP Unknown Advertisement Refusers New product launches No. of potential buyers They are aware of the brand They perceive its value proposition They are fully convinced and committed Brand aware Quality perceivers perceived Convinced Product not available at shelf Buyers The levers of marketing Discounts Adv. Sales Force Trade Promotions Demand Sales volume Economic Results Market share Margin 15 December 2005, New York University - Stern School of Business Page 21 Profit before overhead % Shelf Space

22 Innovation value chain economics Discovery Research Technology Acquisition Implementation Patenting Product Development Knowledge Management Commercialization Marketing Alliances Product Marketing Licensing Risk Value of investment Source: Prof. Baruch Lev, New York University / Stern School of Business The key to success: sound project management and focus on financials and customer value in managing R&D Investments: Input R&D expenditures R&D Project Management Outcome in form of profit and shareholder value depends on the capability of the firm to create a positive effect from a subjective customer perspective (thus: to create subjective customer value with new products and to achieve enough market share) 15 December 2005, New York University - Stern School of Business Page 22 Output: Cust. Value Market Share Fin. Outcome: Revenues, Profits, SHV

23 To identify the real drivers of (financial) performance requires an enhanced concept of value-added Customer Value Added Profitability Why is the customer buying at all? Why is he or she willing to pay a price premium? What are from the customer perspective the most important value components? How do we create them? Subjective customer value Brand / Image Design Quality Price Value Added Functionality Revenue Costs Sales & Marketing Service Costs Product Costs Others Profit What are the costs and their cause? What are the activities that do not create customer value added? How can we reduce costs without destroying customer value? Target Results Target Which activities and competencies are the critical success factors? subjective customer value Body / Design Engine Brand / Image Chassis R&D R&D costs / input resources Functionality + subjective customer value Body / Design Engine Chassis Brand / Image sales price achieved Functionality Marketing/ Sales R&D Process-KPIs Sales / Marketing Process-KPIs Source: Juergen H. Daum & Peter Bretscher more information about the concept at 15 December 2005, New York University - Stern School of Business Page 23

24 We have to look on companies organically, rather than as the sum of their financial ratios Strategy How do we strengthen / create the capabilities that we need to initiate growth and to secure the survival of the enterprise? customers Today s Operation Model fullfillment production investors prod. dev. sales fin. + tangible assets Intangible Assets CRM employees Perf. Mngmt. How to better exploit available capabilities (including intangibles) to improve (short term) financial performance? Partners NGOs Key questions: How do we define value added? (start with the stakeholders) How do we create value? (Which are the value creating processes and resources? requiring a thorough operation & resource analysis) Which are the (operational) success factors? 15 December 2005, New York University - Stern School of Business Page 24

25 Analysis from a IC-/IA-perspective in three steps 1. Analysis of Value Creation System / Operation Analysis: Analysis of operative, value-creating process areas: Customer Relationship Management Fulfillment / Production Research and Product Development Analysis of Support Functions / Support Infrastructure 2. Resource analysis: identification of the value creating resources and resource transformations 3. Analyzing the profit generation capability, i.e. identification of the drivers of financial performance Strategy Management Performance Management 15 December 2005, New York University - Stern School of Business Page 25

26 Operation Analysis and Ressource Analysis 1. Operation Analysis How do we create customer relations? Which are the most important (customer-) value components of our product/service offering? How do we communicate this to customers and how to we organize the customer s experience with us? Sales/ Marketing How do we create value and attraction for the customer through our products? How do we organize product innovation so that we are able to generate customer value and profits? R&D Value Shop? Value Chain? Value Network? Production/ Fulfillment How do we make sure that customers receive products and services as ordered (in time and with the right quality)? How do we produce this at lowest cost? Which are the most important support processes and infrastructure components? Support Processes Support Infrastructure How do we ensure their effectiveness, efficiency and their capability for sustaining success? 2. Ressource Analysis Financial Capital Phys. Assets Cust.Rel/ Image Structural Capital Human Capital Which are the core value creating resources and which major resource transformation take place? 15 December 2005, New York University - Stern School of Business Page 26

27 Enhanced Enterprise Performance Management Framework Strategy Management: configuration of value creation system and development of capabilities necessary to achieve long-term strategic goals Performance Management: Controlling the value creation system in order to achieve (financial) performance targets/optimally exploit available potential Resource View Process View Results View Financial Assets Physical Assets Relationship Assets Structural / Org. Assets Human Assets Operative Process Areas R&D Sales/ Marketing Production/ Fullfillment Support-Processes Customer Value Created Financial Return Other Intangible Results Business Model Innovation (Strategic Excellence) Process Innovation (Operational Excellence) 15 December 2005, New York University - Stern School of Business Page 27

28 Today s management mission: Develop new performance management and leadership concepts Leadership model (managing people) Enterprise Management Steering System (managing results) Organization (focus: human behavior and social dynamics; people & organizational productivity) Controlling System (focus: economics & processes; achieving targets by rational management ) What is our mission? What are the values we share? What is our vision as an organization / ecosystem? How do we create valueadded for employees and from employees? How do we manage team & organizational performance What is (economic) value? What is our objective and target ( output for customers and shareholders)? What is our strategy? How do we measure results? How do we manage business & financial performance? 15 December 2005, New York University - Stern School of Business Page 28

29 Agenda Intangible Assets: A Challenge for Enterprise Management (Examples) A Change of Perspectives: Towards a New Concept for Enterprise Management Understanding and Optimizing Enterprise Performance Conclusion 15 December 2005, New York University - Stern School of Business Page 29

30 Conclusion A lot of unsolved practical day-to-day problems of managers exist that we can help to solve. This will demonstrate that an IC/IA-perspective is something, which is relevant. To become practical, that has - first, to start with a thorough analysis of the existing value creation system of a company, i.e. it has to start with the context in which managers act in their day-to-day work and which they want to better understand, and - second, we have to use the gained insights to better support managers in dealing with strategic and operational decision challenges they face everyday. Both steps require cross-departmental collaboration and skills development: success is based on the intelligent combination of different domain knowledge (e.g. marketing and finance or HR and finance) with the objective to create shareholder and customer value. And if that has been accomplished, also the foundations are created for better communicating the capabilities and the potential of an enterprise to the general public and to financial analysts. 15 December 2005, New York University - Stern School of Business Page 30

31 Gary Hamel: Innovations in management Companies and researchers have focused so far mainly on technological innovations. However, most breakthroughs have been achieved by those companies that came up with innovations in management. (Gary Hamel, in an interview in Frankfurter Allgemeine Zeitung, 7 November 2005) How can we contribute to innovations in management from an IC/IA-perspective? 15 December 2005, New York University - Stern School of Business Page 31

32 Peter F. Drucker: The Management Challenge for the 21st Century* The most important, and indeed the truly unique, contribution of management in the 20th century was the fifty-fold increase in the productivity of the MANUAL WORKER in manufacturing. The most important contribution management needs to make in the 21st century is to increase the productivity of KNOWLEDGE WORK and of the KNOWLEDGE WORKER. The most valuable assets of the 20th-century company are its production equipment. The most valuable asset of a 21st-century institution, whether business or nonbusiness, will be its knowledge workers and their productivity. [ But] work on the productivity of the knowledge worker has barely begun. In terms of actual work on knowledge worker productivity we are, in the year 2000, roughly where we were in the year 1900, a century ago, in terms of productivity of the manual worker. *Peter F. Drucker: Management Challenges for the 21st Century, New York 1999, p December 2005, New York University - Stern School of Business Page 32

33 Thank You! Juergen H. Daum Chief Solutions Architect Business Solutions Architect Group, SAP or Website: 15 December 2005, New York University - Stern School of Business Page 33

34 The content of this presentation is intellectual property of Juergen H. Daum ( the author ). Quotes from this presentation (i.e. text used on the slides) can be used only with reference to the author and his website ( and to this presentation (title, date, event, location). Charts are not allowed to be copied or used in presentation, in publications or in any other form without individual authorization by the author. 15 December 2005, New York University - Stern School of Business Page 34