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And we are going to get that value from the product or service that is delivered at the project’s completion. It’s important to remember that, all else (risk, cashflow, community relations, ethical or legal constraints) being equal, NO project sponsor has ever said they want LESS value from a project for their investment!
It took more than 30 years for electricity to diffuse and enable industrial plant design that could generate significant productivity growth. In comparison, absorption of AI might reach today’s level of digital absorption by 2027—in roughly ten years. Our simulation suggests that it may reach 70% by 2035.
The observation that many “unicorn” companies with no profits — and sometimes no revenues or even fully developed products — get valued so highly makes me skeptical of the idea that the capital market is systematically myopic. McKinsey tries to address this issue by doing comparisons within industries.
Recent analysis by Bain and SAP found that only 7% of bank credit products could be handled digitally from end to end. By comparison, online lenders face capital costs that can be higher than 10%, sourced from potentially fickle institutional investors like hedge funds. Other sectors of retail lending have not fared much better.
With the best of intentions, many proxy advisors and long-term investors have widely blessed three years as appropriate, adopting three-year pay for performance as their standard comparison. Another company, in the agricultural technology sector, chose free cashflow as the primary long-term incentive measure.
Instead of formulating detailed, long-term financial plans, executives at Dell now align around a common performance ambition—a cashflow vector consistent with growing the company’s intrinsic value faster than competitors. Think of strategy as a portfolio of options, not bonds.
First, five points from the article I found interesting and then some comparisons to other areas of business. A 1932 research paper showed firms had loaded up with cash and post-crash, “companies were flush with cash and investors beleaguered,” which they wouldn’t pay out. Adjusted Ebitda or adjusted earnings are the norm.
That challenge, however, pales in comparison with the difficulty of measuring incremental financial value. If you spend $1 today, it might take three years for the marketing to “work” and for the consumer to make a purchase, especially with products, like cars, that are purchased less frequently.
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