The application of digital is fundamentally disrupting an industry, requiring a massive revamp of a company’s business model.
FREMONT, CA: The idea of digital transformation is not well defined. There are many digital initiatives, including digital marketing, optimization of trade spending, predictive maintenance, optimization of salesforce coverage, and robotic process automation in the back office. Companies should go back to fundamentals when assessing digital opportunities: evaluate digital projects based on the cash flow they are hoping to create. All investment decisions should be evaluated against an alternative course of action.
To evaluate the potential impact of digital, it is important to evaluate two categories of digital changes. The first is digital to fundamentally change an industry, needing a significant revamp of a company’s business model. The second kind of effect, less dramatic, occurs when firms use digital to simply do the things they already do, only better. Digital disruption upended whole business models and created new businesses because the Internet transformed the way consumers research and purchase airline tickets and hotel rooms, disintermediating several traditional travel agents.
To value these new firms, use the standard discounted cash flow method. These companies are often evolving fast and don’t earn profits early on does not impact the valuation approach. With high-growth firms, they must start in the future to estimate revenues when the market starts to stabilize. Firms also have to estimate ROIC based on an evaluation of the fundamental economics. Consumers have benefited significantly from digital. One key manufacturer of agricultural products generated an easy online ordering, tracking, and query management process. This increases the firm’s customer satisfaction score by 24 percentage and enhanced throughput by 20 percent. As is the case with mitigating costs, it is vital to think through the competitive impacts.
