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Digital Scalability and Growth Options

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The Valuation of Digital Intangibles

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Abstract

Scalability indicates the ability of a process, network, or system to handle a growing amount of work. Scalability fosters economic marginality, especially in intangible-driven businesses where variable costs are typically negligible. Massive volumes may offset low margins, producing economic gains. Digitalization is defined as the concept of “going paperless”, the technical process of transforming analog information or physical products into digital form. Digital scalability operates in a web context, where networked agents interact to generate co-created value. Economic and financial margins that represent a primary parameter for valuation are boosted by cost savings and scalable increases of expected revenues. Digitalized intangibles synergistically interact through networked platforms that reshape traditional supply chains.

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Authors and Affiliations

  1. Catholic University of the Sacred Heart, Milan, Italy

    Roberto Moro Visconti

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  1. Roberto Moro Visconti
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Correspondence to Roberto Moro Visconti .

Appendix: Examples of Operating Leverage Changes

Appendix: Examples of Operating Leverage Changes

 

Company A

Company B

Total revenues

150

150

Total variable costs

(120)

(60)

Contribution margin

30

90

Total fixed costs

(10)

(70)

EBIT

20

20

Degree of operating leverage (DOL)

1.5

4.5

When the incidence of fixed costs grows, the economic and structural capacities of the company worsen, as it needs to sell more to reach the break-even point, since higher operating leverage increases the contribution margin. Let’s consider two alternative scenarios, with the same starting figures:

  1. a.

    Hypothesis 1: revenues decrease to 50

 

Company A

Company B

Total revenues

50

50

Total variable costs

(40)

(20)

Contribution margin

10

30

Total fixed costs

(10)

(70)

EBIT

0

(40)

Degree of operating leverage (DOL)

 

0.75

  1. b.

    Hypothesis 2: revenues grow to 300

 

Company A

Company B

Total revenues

300

300

Total variable costs

(240)

(120)

Contribution margin

60

180

Total fixed costs

(10)

(70)

EBIT

50

110

Degree of operating leverage (DOL)

1.2

1.64

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Moro Visconti, R. (2020). Digital Scalability and Growth Options. In: The Valuation of Digital Intangibles. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-36918-7_3

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  • DOI: https://doi.org/10.1007/978-3-030-36918-7_3

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-030-36917-0

  • Online ISBN: 978-3-030-36918-7

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