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Spot the pattern . . .Spot the pattern . . .
1.1. Doug IvesterDoug Ivester
2.2. Bob AylingBob Ayling
3.3. Dale MorrisonDale Morrison
4.4. Durk JagerDurk Jager
Don’t let this happen to youDon’t let this happen to you
Strategos Proprietary and Confidential
STRATEGOS
Defying gravity . . .Defying gravity . . .
1.1. The law of large numbersThe law of large numbers
Market cap giants:Market cap giants:
0
100
200
300
400
500
600
GE Cisco Intel M'soft Enron
Market value superstars:Market value superstars:
0
200
400
600
1995 1996 1997 1998 1999 2000
GE Microsoft Intel Cisco
Market value ($ billions)Market value ($ billions)
The P/E escalator:The P/E escalator:
Average P/E for the S&P 500Average P/E for the S&P 500
10
15
20
25
30
3588 89 90 91 92 93 94 95 96 97 98 99
2000
Source: CompustatSource: Compustat
0
1000
2000
3000
4000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
GE Microsoft Intel
Projected market value ($ billions)Projected market value ($ billions)
Market value superstars:Market value superstars:
Do trees grow to the sky?Do trees grow to the sky?
0
3
6
9
12
15
1995 1996 1997 1998 1999 2000 2001 2002 2993 2004 2005
Cisco
Projected market value ($ trillions)Projected market value ($ trillions)Combined value of shares listed on NYSE.Combined value of shares listed on NYSE.
Defying gravity . . .Defying gravity . . .
1.1. The law of large numbersThe law of large numbers
2.2. The law of diminishing returnsThe law of diminishing returns
Diminishing Returns?Diminishing Returns?
150
200
250
300
350
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99
GE
GE’s Revenue/EmployeeGE’s Revenue/Employee
Diminishing Returns?Diminishing Returns?
150
200
250
300
350
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99
GE
GE’s Revenue/EmployeeGE’s Revenue/Employee
Flat-lining?Flat-lining?
GE’s net marginsGE’s net margins
0
2
4
6
8
10
12
1995 1996 1997 1998 1999
UnisysUnisys 383.2383.2 2.02.0 195.7195.7
Amerada HessAmerada Hess 493.7493.7 6.66.6 74.674.6
Adobe SystemsAdobe Systems 3668.43668.4 69.969.9 52.552.5
Eastman KodakEastman Kodak 151.3151.3 3.93.9 38.538.5
Northrop GrummanNorthrop Grumman 1280.01280.0 34.034.0 37.637.6
Marriott InternationalMarriott International 100.0100.0 3.93.9 26.026.0
AMRAMR 187.7187.7 9.99.9 19.019.0
AllstateAllstate 462.2462.2 25.625.6 18.118.1
Hershey FoodsHershey Foods 149.9149.9 10.110.1 14.814.8
Sara LeeSara Lee 409.0409.0 28.828.8 14.214.2
XeroxXerox 79.379.3 7.87.8 10.310.3
New York TimesNew York Times 115.8115.8 7.87.8 14.914.9
Cigna Cigna 40.740.7 2.82.8 14.614.6
Marriott Intl.Marriott Intl. 19.719.7 1.41.4 14.014.0
Source: S&P Compustat; Strategos calculationsSource: S&P Compustat; Strategos calculations
IncomeIncomeGrowth (%)Growth (%)1994-19991994-1999
RevenueRevenueGrowth (%)Growth (%)1994-19991994-1999
Ratio ofRatio ofInc/RevInc/Rev
1994-19991994-1999
HowHowlong?long?
1993-19961993-1996 1996-19991996-1999
Ratio of:Ratio of:CAGR Net IncomeCAGR Net Income
CAGR RevenueCAGR Revenue
Median for theMedian for theS&P 500:S&P 500:
Median for firmsMedian for firmswhere initial ratiowhere initial ratiowas > 5.0:was > 5.0:
1.11.1 1.01.0
10.510.5 0.80.8
Merger maniaMerger mania(Worldwide merger activity, $ billion)*(Worldwide merger activity, $ billion)*
0
500
1000
1500
2000
2500
3000
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Source: Securities Data CorpSource: Securities Data Corp
Merger mania:Merger mania:
0 200 400 600 800
Industrial
Energy
Power
Services
Technology
Health Care
Consumer
Media
Finance
Telecoms
1989 1999Source: Salomon Smith Barney and Thomson Financial Securities DataSource: Salomon Smith Barney and Thomson Financial Securities Data
Average operating marginAverage operating marginfor the S&P 500:for the S&P 500:
0
5
10
15
20
1995 1996 1997 1998 1999
Trends in IT:Trends in IT:
Standard platformsStandard platforms
OutsourcingOutsourcing
IT ConsultingIT Consulting
Web HostingWeb Hosting
ExchangesExchanges
ASPsASPs
Defying gravity . . .Defying gravity . . .
1.1. The law of large numbersThe law of large numbers
2.2. The law of diminishing returnsThe law of diminishing returns
3.3. The law of averagesThe law of averages
How long will this last?How long will this last?
10
20
30
40
50
1995 1996 1997 1998 1999 2000
GE
GE’s P/E Ratio (as of 18.8.00)GE’s P/E Ratio (as of 18.8.00)
0
20
40
60
80
0 1 2 3 4 5 6 7 8 9
The challenge ofThe challenge ofsustaining high shareholder returns:sustaining high shareholder returns:
(1990-1999)(1990-1999)
Number of years in which total shareholder returnsNumber of years in which total shareholder returns exceeded the 75th percentile for the S&P 500exceeded the 75th percentile for the S&P 500
Source: S&P Compustat; Strategos calculationsSource: S&P Compustat; Strategos calculations
Nu
mb
er
of
com
pa
nie
sN
um
be
r o
f co
mp
an
ies
CompaqHome DepotIntelOracle
Defying gravity . . .Defying gravity . . .
• Divide and divide againDivide and divide again
How do you see your How do you see your company?company?
� My company = a business modelMy company = a business model
� My company = an industry leaderMy company = an industry leader
� My company = an earnings factoryMy company = an earnings factory
� My company = an opportunity generating machineMy company = an opportunity generating machine
Defying gravity . . .Defying gravity . . .
• Divide and divide againDivide and divide again
• Find new wealth-creating strategiesFind new wealth-creating strategies
Alchemy: Alchemy: AkamiAkami 7.27.2 4.04.0
AribaAriba 40.040.0 45.445.4
ARMARM 11.811.8 62.162.1
Brocade Comm.Brocade Comm. 24.924.9 68.768.7
Commerce OneCommerce One 11.211.2 33.633.6
InktomiInktomi 15.015.0 71.271.2
Phone.comPhone.com 7.97.9 13.413.4
Redback NetworksRedback Networks 22.522.5 64.364.3
RambusRambus 7.57.5 43.443.4
Sycamore NetworksSycamore Networks 3.33.3 11.311.3
VeriSignVeriSign 35.335.3 84.884.8
MarketMarketValueValue
AnnualAnnualRevenueRevenue
MillionsMillionsBillionsBillions
Innovation pathways:Innovation pathways:CoreCore
RenewalRenewal
White SpaceWhite SpaceBusinessesBusinesses
SpinSpinOutsOuts
Potential for LeveragePotential for Leverage
DifficultyDifficulty
VirginVirgin
EnronEnron
SchwabSchwab
SpinSpinInsIns
CiscoCisco
PortfolioPortfolioShufflesShuffles
C&WC&W
Und
er-u
tiliz
ed
Und
er-u
tiliz
ed
stra
tegi
es fo
r GE
stra
tegi
es fo
r GE
Defying gravity . . .Defying gravity . . .
• Divide and divide againDivide and divide again
• Find new wealth-creating strategiesFind new wealth-creating strategies
• Become less “average”Become less “average”
Sails and anchors at GESails and anchors at GE
Profits ($ millions)Profits ($ millions)
600
800
1000
1200
1400
1600
1800
1995 1996 1997 1998 1999
Appliances
Plastics
NBC
Power
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