Cracking the value code

In the new economic era, companies are confronted with risks that present both threats and opportunities. Success hinges on understanding and effectively managing these risks. Three main types of risks are prevalent in the new economy: environment risks, process risks, and information risks.

Environment risks are related to external factors beyond a company's control that may impact profitability. These factors include changes in competitor capabilities, government regulations, financial markets, political trends, and shifts in demographics or consumer preferences. These uncertainties arise from the broader operating context and necessitate agile responses. Process risks involve uncertainties in executing and implementing business models. These include potential obsolescence of key processes and the need to adopt new methods to stay competitive. As business models evolve rapidly, failure to update internal systems and ways of working also poses threats.

Information risks pertain to doubts over the accuracy and relevance of data used to inform decisions. With business choices increasingly driven by analytics, bad information can lead to poor choices. As the value of companies depends more on projected future cash flows, mastering information risk is critical.

In today's rapidly changing economy, companies are confronted with unprecedented challenges that necessitate the adoption of innovative business models and the effective management of their asset portfolios. Assets, ranging from tangible ones like buildings and computer equipment to intangible ones such as employees and intellectual property, all go through a lifecycle that includes acquisition, management, and divestiture. The synchronization of these assets with a company's business model is crucial for creating value and fostering growth. For instance, buildings are acquired, used, possibly renovated, and eventually sold or demolished. Computer equipment is purchased, utilized, upgraded, and finally replaced. Customers are won over by marketing, supported throughout their relationship with the company, and in time, succeeded by new consumers. Employees are hired, trained, promoted, and ultimately retire or move on.

However, the internet age has significantly accelerated these lifecycles. The importance of a physical location has diminished with the rise of digital delivery. Telecom companies, which once relied heavily on infrastructure, now face a reduced need for traditional wireline assets due to advancements in satellite and internet communication. Employees find their skills becoming obsolete more quickly due to technological advancements. Customer loyalty is fleeting as consumers readily switch providers for better offers. Business models are evolving rapidly, shortening the lifespan of assets across various industries.

The successful business models of the future will hinge on the ability to create value by utilizing assets that are measured and reported on extensively and in significant detail. A key challenge to prospering in the emerging economic landscape involves understanding how to leverage information to generate value, with the ultimate goal being the capacity to quantify and disclose what truly matters, both internally and externally. Information itself is becoming central to an organization's identity and value creation in this evolving climate. Consequently, firms will need to persistently gauge and document all assets incorporated into their business model in order to flourish. The notion of information transparency prompts numerous pivotal questions, including what specific items companies will monitor, where they will derive related data, and how they will track and communicate the performance of various asset types.

In the past, entities relied exclusively on internal sources for financial information. However, future success will necessitate compiling and analyzing both internal and external data. External benchmarks will enable firms to assess their performance in real time relative to industry peers and broader market conditions. This encompasses trading flows within recently established markets catering to diverse asset categories, which will substantially enhance transparency and efficiency in determining the market value of all assets linked to a company's business model. Legacy financial reporting techniques tend to appraise assets based on historical cost and related metrics, constituting a retrospective approach. In contrast, the emerging era will emphasize the current market price for all assets, which technology now permits evaluating continuously. For intangible resources, key performance indicators will likely play a pivotal measurement role, gauging whichever factors drive value creation for a given asset type. Relevant key performance indicators may encompass inventory levels, cash flows, customer retention rates, employee counts, and related data.