Global report on technology and the economy
Special letter on business models
Across the economy, industries are converging, driven by now-ubiquitous technology that is redrawing; and in some cases, erasing traditional market boundaries. Rapid innovation is creating space for new business models to emerge in almost every industry. And both of these trends are being accelerated by an influx of capital from private equity firms and Wall Street, driving higher company valuations. Written by Deloitte Risk and Financial Advisory partner William Ribaudo, this special letter explores how technology is changing how we view industry, value companies, and develop strategy.
Value is shifting
In business, the traditional sources of value creation have been clear and intuitive for decades: Create a product or service that the market demands, and sell it for a profit. Investors have recognized this approach to business and valued companies based on their ability to make a profit given a certain set of assets.
In today’s economy, however, we’re seeing a new kind of company. One that is valued differently. Companies that have yet to turn a profit have market capitalizations into the billions. Today, investors are measuring—and rewarding—value very differently than they have in the past.
Valuation in the Information Age
It’s clear that, in recent years, investors have been measuring and rewarding differently than they have in the past. Internet, social media, mobile, and cloud computing have removed many traditional barriers to growth, opening up new markets with the click of a mouse. Within this expanded business ecosystem, companies can analyze faster, ship faster, and hire faster.
After examining 40 years of financial reports for the companies in the S&P 500 index and analyzing which received the highest P/R valuations, we found a strong correlation between valuation and business model.
A new framework emerges
Our research identified a new way to view companies through a business-model lens. We identified four foundational business models—the differences among them based largely on companies’ management preferences and investment strategies. As our interest in business models deepened, we asked what the companies with the highest P/R have in common. One thing we noticed was the pervasiveness of digital technologies across industries, sectors—and yes, business models.
Download the full global report on technology and the economy to take a deeper dive into the four business models we identified.
Learn more about Deloitte’s Valuation & Modeling services.