Automated method of and system for identifying, measuring and enhancing categories of value for a value chain

Abstract

An automated method and system (100) for identifying, measuring and enhancing categories of value for the different levels of a value chain on a continual basis. The categories of value are analyzed at each level in the value chain using predictive models and vector creation algorithms to define the enterprise and element vectors before valuing the organization, each enterprise in the organization and the elements of value in each enterprise. The relative strengths of the intangible elements of value are used in evaluating the real options of each enterprise and in determining the allocation of industry real options to the enterprise and the organization before summary reports are prepared, displayed and optionally printed. The system then generates potential value improvements which the user (20) optionally accepts, rejects or modifies before simulations are completed to analyze the value impact of the enhancements.

Description

CROSS REFERENCE TO RELATED PATENTS[0001]This application is a continuation of application Ser. No. 09 / 940,450 filed Aug. 29, 2001. Application Ser. No. 09 / 940,450 is a continuation of Ser. No. 09 / 421,553, filed Oct. 20, 1999 which is incorporated herein by reference. Application Ser. No. 09 / 421,553 was a continuation-in-part of application Ser. No. 09 / 358,969, filed Jul. 22, 1999, of application Ser. No. 09 / 295,337, filed Apr. 21, 1999, application Ser. No. 09 / 293,336, filed Apr. 16, 1999, application Ser. No. 09 / 135,983 filed Aug. 17, 1998, application Ser. No. 08 / 999,245, filed Dec. 10, 1997 and application Ser. No. 08 / 779,109, filed Jan. 6, 1997 which are incorporated herein by reference. The subject matter of this application is also related to the subject matter of U.S. Pat. No. 5,615,109 for “Method of and System for Generating Feasible, Profit Maximizing Requisition Sets”, by Jeff S. Eder, the disclosure of which is also incorporated herein by reference.BACKGROUND OF THE INVE...

AI Technical Summary

Benefits of technology

[0025]It is a general object of the present invention to provide a novel and useful system that continuously calculates and displays a comprehensive and accurate valuation for all the categories of value for a virtual organization that overcomes the limitations and drawbacks of the existing art that were described previously.

[0028]The present invention eliminates a great deal of time-consuming and expensive effort by automating the extraction of data from the databases, tables, and files of existing computer-based corporate finance, operations, human resource and “soft” asset management system databases as required to operate the system. In accordance with the invention, the automated extraction, aggregation and analysis of data from a variety of existing computer-based systems significantly increases the scale and scope of the analysis that can be completed. The system of the present invention further enhances the efficiency and effectiveness of the business valuation by automating the retrieval, storage and analysis of information useful for valuing categories of value from external databases and publications and the internet. Uncertainty over which method is being used for completing the valuation and the resulting inability to compare different valuations is eliminated by the present invention by consistently utilizing the same set of valuation methodologies for valuing the different categories of organization value as shown in Table 2.TABLE 2Organization Categories of ValueValuation methodologyTotal current-operation value (COPTOT):Income ValuationCurrent OperationCash & Marketable SecuritiesGAAP for portion of assets / liabilitiesAssets / Liabilities:(CASH), Inventory (IN),from each enterprise that are devotedAccounts Receivable (AR),to the organizationPrepaid Expenses (PE),Other Assets (OA); AccountsPayable (AP), Notes Payable(NP), Other Liabilities (OL)Current OperationProduction EquipmentReplacement Value for portion ofAssets / Liabilities:(PEQ), Other Physical Assetsassets from each enterprise that are(OPA)devoted to the organizationCurrent OperationEnterprise contribution toSystem calculated valueEnterprisevirtual value chain (VVCC)Contribution:Current OperationGeneral going concernGGCV = COPTOT − CASH − AR −Enterpriseelement of value (GGCV)IN − PE − PEQ − OPA − OA − VVCCContribution:Real options / Contingent LiabilitiesReal option algorithms + allocation ofindustry real options based on relativeindustry position*The user also has the option of specifying the total value

[0031]The utility of the valuations produced by the system of the present invention are further enhanced by explicitly calculating the lives of the different elements of value as required to remove the inaccuracy and distortion inherent in the use of a large residual.

[0032]As shown in Tables 2 and 3, growth opportunities and contingent liabilities are valued using real option algorithms. Because real option algorithms explicitly recognize whether or not an investment is reversible and / or if it can be delayed, the values calculated using these algorithms are more realistic than valuations created using more traditional approaches like Net Present Value. The use of real option analysis for valuing growth opportunities and contingent liabilities (hereinafter, real options) gives the present invention a distinct advantage over traditional approaches to business valuation.

[0034]The system also gives the user the ability to track the changes in categories of value by comparing the current valuations to previously calculated valuations. As such, the system provides the user with an alternative to general ledger accounting systems for tracking financial performance. To facilitate its use as a tool for improving the value of a commercial enterprise, the system of the present invention produces reports in formats that are similar to the reports provided by traditional accounting systems. The method for tracking the categories of value for a business enterprise provided by the present invention eliminates many of the limitations associated with current accounting systems that were described previously.

Problems solved by technology

Despite the widespread acceptance and use of “virtual value chains” as a mechanism for efficiently and effectively responding to customer demands, there is no known method or system for systematically evaluating the value of these new types of organizations.

The most popular traditional approaches to valuation are all based on some multiple of accounting earnings (a price to earnings ratio or P / E ratio)—with no corporate earnings in the past or the foreseeable future—these methods are of course useless in evaluating the new companies.

The inability of traditional methods to provide a framework for analyzing “virtual value chains” and internet firms are just two glaring examples of the weakness of traditional financial systems.

Numerous academic studies have demonstrated that accounting earnings don't fully explain changes in company valuations and the movement of stock prices.

Many feel that because of this traditional accounting systems are driving information-age managers to make the wrong decisions and the wrong investments.

All three companies were showing large profits using current accounting systems while their businesses were deteriorating.

These deficiencies of traditional accounting systems are particularly noticeable in high technology companies that are highly valued for their intangible assets and their options to enter growing markets rather than their tangible assets.

While these systems enhance the day to day management of the individual “soft” assets, there is currently no mechanism for integrating the input from each of these different systems in to an overall organization or enterprise asset management system.

As a result, the organization or enterprise can be (and often is) faced with conflicting recommendations as each system tries to optimize the asset it is focused on without considering the overall financial performance of the organization or enterprise.

Unfortunately, using current methods, the valuation of a business is a complex and time-consuming undertaking.

One difficulty with this method is determining the length of time the company is expected to generate the expected returns that drive the valuation.

One of the problems inherent in a steady state “residual” forecast is that returns don't continue forever.

Because the CAP is hard to calculate, it is generally ignored in income valuations however, the simplification of ignoring the CAP greatly reduces the utility of the valuations that are created with large residuals.

The usefulness of these valuations is limited because there is no correct answer, there is only the best possible informed guess for any given business valuation.

The usefulness of business valuations to business owners and managers is restricted for another reason—valuations typically determine only the value of the business as a whole.

Even when intangible assets have been considered, the limitations in the existing methodology have severely restricted the utility of the valuations that have been produced.

Problems associated with existing methods for valuing intangible assets include:1. interactions between the different intangible assets are ignored,2. the actual impact of the asset on the enterprise isn't measured,3. the relative strength of the intangible asset within the industry is just as important (and in some cases more important) than any absolute measure of its strength, and4. there is no systematic way for determining the life of the assets.

This, in turn affects the allocation of industry options to the market price for equity in the enterprise.

The lack of a consistent, well accepted, realistic method for measuring all the categories of business value also prevents some firms from receiving the financing they need to grow.

As a result, these businesses generally aren't eligible to receive capital from traditional lending sources, even though their financial prospects are generally far superior to those of companies with much higher tangible book values.

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