Working With Your Finance Partners to Better …ci.sla.org/wp-content/uploads/2016/08/Working-With-Finance...WORKING WITH YOUR FINANCE PARTNERS TO BETTER UNDERSTAND YOUR COMPETITION

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ENTERPRISE RESEARCH

JULY 2016

WORKING WITH YOUR FINANCE PARTNERS TO BETTER UNDERSTAND YOUR COMPETITION

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AGENDA

1. BACKGROUND

2. WHY FINANCE?

3. HOW YOU CAN WORK WITH FINANCE

4. CASE STUDY

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BACKGROUND

CEO

CMO

Personalization and Strategy

Enterprise Research

Primary Research

Competitive and Industry

Insights

A bunch of other

stuff

Best Buy Where We Reside

• Consumer Electronics and

Appliances

• Founded in 1966 (50 years, yay!)

• Formerly called Sound of Music

• $40 Billion Annual Revenue

• 1,600 Stores

• 125,000 Employees

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WHY FINANCE?

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1. You tried to trade 50 basis points for a prize at Chuck E Cheese

2. You think Alan Greenspan is a 24/7 news channel.

3. You can’t spell 10K or 10Q.

4. You wonder why some profit is gross.

5. You think Paul Volcker is a bad guy in Star Trek.

6. You think an abacus is the first name of a character in To Kill A

Mockingbird.

7. You think Net Present Value is the amount Santa spent on your kids.

8. You think a balance sheet goes in the linens drawer.

9. You tried to look for the Cash Flow ride at the amusement park.

10. You think COGS is a style of wooden shoe.

TOP 10 SIGNS THAT YOU MIGHT NEED HELP

FROM YOUR FINANCE PARTNERS…

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Your finance

partner can help

‘decode’ financial

results to help

understand the

health of a

competitor…

… for a fraction of

the cost of a

doctor.

Doctors are

required to

‘decode’ output

from medical

instruments to

understand the

health of a person.

MUCH LIKE MEDICAL INSTRUMENTS HELP EXPLAIN HOW HEALTHY A PERSON IS, FINANCIALS HELP EXPLAIN THE HEALTH OF A COMPANY…

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FINANCIAL ANALYSIS DOESN’T WORK

INDEPENDENT OF THE EXISTING

COMPETITIVE INSIGHTS TOOLKIT.

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Competitor Profiles, CI

Frameworks, CI Process,

etc

Leadership

Financial

Background Information

MarketingStrategy

Products

Etc

Enhances ability to…

• Break apart your competition into

digestible portions

FINANCE AS AN INPUT AMONG MANY

• Identify key performance metrics

and vulnerabilities

• Connect competitor actions to

results

• Create early warning systems by

identifying KPI trends & deviations

• Scenario plan (do they have money

for this strategy?)

• ‘Bend and stretch’ existing insights

and observations

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HOW DO YOU ACTUALLY WORK WITH YOUR

FINANCE PARTNERS?

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A FRAMEWORK CAN HELP…

Customers Stakeholders Shareholders

Customers

Revenue

Suppliers

COGS

Employees /

Landlords / etc

SGA

Banks

Loan Interest

Expense

Government

Taxes

Business

Reinvestment

CapEx

Pay Outs

Dividends / Stock

Buybacks

Cash

Flo

w!!!

=

Financial results help you understand how well (or not well) a company is doing at

making money.

All companies have the same basic goal – make money.

To make money…

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Ca

sh

Flo

w!!

!

Revenue

Transactions

Traffic / Sales Leads

Close Rate

Revenue Per Transaction

Units per Transaction

Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc

Management Headcount

RemainderShareholder

Returns

Re-Invest

Pay Shareholders

BREAK YOUR COMPETITION IN TO COMPONENTS. START BY WORKING

BACKWARDS FROM A COMPANY’S ULTIMATE GOAL…

• Awareness Initiatives (Advertising)

• Promotions

• Employee Training

• Product Availability

• Upsell / Add-on Tactics

• Assortment Strategy

• Vendors

• Logistics Model

• Labor Model, Labor Strategy

• Store Strategy, Types of Stores

• Management Structure

• Company Stage: Growth, Stable, etc

Goal Drivers / KPIs Company Psyche Tied to Financial OutcomesFinancial Path

Is the company generating cash flow?

-Why or Why Not?

What are key vulnerabilities keeping it from

generating cash flow?

How does it typically generate cash flow?

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Ca

sh

Flo

w!!

!

Revenue

Transactions


Close Rate



Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc



Return

Re-Invest

Pay Shareholders

… BREAK OUT THE FINANCIAL PATH A COMPANY FOLLOWS TO ACHIEVE

ITS GOAL


• Promotions





• Vendors

• Logistics Model






Does your competitor rely more on

volume and lower costs?

Are they struggling in a particular

financial area?

Does your competitor operate in

a lean manner?

Or higher prices/premium

products?

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Ca

sh

Flo

w!!

!

Revenue

Transactions


Close Rate



Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc



Returns

Re-Invest

Pay Shareholders

WHAT ARE KPIs (KEY PERFORMANCE INDICATORS) THAT DRIVE THE

COMPANY’S FINANCIALS? NOW YOU HAVE A PROFIT TREE!


• Promotions





• Vendors

• Logistics Model






If your competitor is

struggling, where and

why are they

struggling?

Do they have too much

management, too

many stores, etc?

Are they not drawing

enough customers?

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Ca

sh

Flo

w!!

!

Revenue

Transactions


Close Rate



Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc



Returns

Re-Invest

Pay Shareholders

FINALLY, ADD COMPETITOR BEHAVIORS AND STRATEGIES


• Promotions





• Vendors

• Logistics Model





Goal Drivers / KPIs Company Behaviors Tied to KPIsFinancial Path

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Ca

sh

Flo

w!!

!

Revenue

Transactions


Close Rate



Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc



Returns

Re-Invest

Pay Shareholders

GREAT. WHO DOES WHAT?


• Promotions





• Vendors

• Logistics Model





Goal Drivers / KPIs Company Psyche Tied to KPIsFinancial Path

Finance Partners CI Team

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Revenue Metrics

Costs

Newton: “To every action there is always an equal and opposite reaction.”

Business: “To every action there is hopefully an unequal and opposite reaction”

Most strategic decisions involve an

inherent trade-off between revenue

and cost / profit rate metrics

The idea is to ‘leverage’ costs to produce

disproportionate revenue

Examples

Increasing advertising spend (lowers

income) in hopes of increasing

revenue (increases income)

Sacrificing gross margin by cutting prices

(lowers income) in hopes of driving

close rate and/or traffic (increases

income“Cost Leverage”

ANOTHER WAY TO THINK ABOUT THE METRICS…

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LET’S APPLY THIS TO FOUR OF

THE LARGEST RETAILERS ON THE

PLANET

WHY RETAIL?

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HOW DO DIFFERENT RETAILERS VIEW THEIR

BUSINESS? THINK BACK TO THE PROFIT TREE

Ca

sh

Flo

w!!

!

Revenue

Transactions


Close Rate



Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc



Returns

Re-Invest

Pay Shareholders

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Each company…• Has different growth strategies

• Has different merchandising/assortment strategies

• Pays attention to different financial indicators

In short, each of these companies defines “winning”

differently, which means you cannot treat them the

same when analyzing their business models.

THESE COMPANIES ARE ALL DIFFERENT

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Total SKUs Assorted vs. Revenue per SKU

THIS SHOWS UP IN THEIR SKU ASSORTMENT

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• Amazon’s goal is to offer as many products as possible

(ideally all of them)

• SKU and vendor setup is highly automated; it does not need to scale

headcount to scale assortment

• This is the opposite strategy of a Costco, which offers a

tightly curated, carefully selected sku assortment and sells

those fewer items in tremendous quantity

• Walmart splits the difference

• Target is sort of like Walmart with a bigger focus on

experience, but with fewer skus and less revenue

WHAT DOES THIS MEAN?

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NOW, YOU CAN ORGANIZE AND UNDERSTAND

COMPETITORS BY SIMILARITIES AND DIFFERENCES

The {Insert Industry} Pentagon is an

effective way to do this…

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Target’s focus on experience is

more costly and therefore

requires the company to drive

higher margins

CONVENIENCE

Costco’s focus on low prices

results in low margins, but is

made up for in volume and a lean

cost structure

TARGET VS COSTCO

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THE MOST VALUABLE PART OF

THE FRAMEWORK ISN’T ACTUALLY

THE FRAMEWORK.

RATHER, THE TRUE VALUE COMES

FROM THE EFFORT AND PROCESS

OF COMPLETING THE

FRAMEWORK.

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CASE STUDY TIME

ISSUE:

AMAZON WAS TAKING OVER THE WORLD

GOAL:

WE WANTED TO BUILD A DEEPER

UNDERSTANDING OF AMAZON’S PSYCHE

AND FINANCIAL MODEL VS OTHER

RETAILERS, FOR PURPOSES OF

EDUCATING KEY DECISIONS MAKERS.

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• "We've done price elasticity studies, and the answer is always that we should

raise prices… by keeping our prices very, very low, we earn trust with

customers over time, and that actually does maximize free cash flow over

the long term."

• “We are stubborn on vision. We are flexible on details….”

• “We see our customers as invited guests to a party, and we are the hosts. ”

• “Start With the Customer and Work Backward”

• “A brand for a company is like a reputation for a person. You earn reputation

by trying to do hard things well.”

• “We can't be in survival mode. We have to be in growth mode.”

• "There are two kinds of companies: Those that work to try to charge more

and those that work to charge less. We will be the second.”

• “If we can keep our competitors focused on us while we stay focused on the

customer, ultimately we'll turn out all right.”

Source: Fool.com, goodreads.com

FIRST, WHAT IS AMAZON’S PSYCHE?

To understand Amazon, understand Jeff Bezos…

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RELENTLESS.COM

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AMAZON’S FINANCIAL GOALS REFLECT THE

COMPANY’S PSYCHE

Sources: Amazon.com

“Do a bunch of stuff to make money.

Invest all of that money back in to

the business to improve the

customer experience. “

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Amazon’s Growth Formula

• Consumers come to Amazon for three things: — Selection

— Price/Value

— Customer Experience

• Amazon’s strategic focus: — Driving Traffic

— Enhancing Selection

— Providing Value

— Personalized Experience

This formula results in a lower cost structure that

Amazon passes to consumers in the form of

lower prices, which further accelerates the wheel.

“Every time the math tells you that you shouldn’t lower prices because you’re going to make

less money. That’s undoubtedly true in the current quarter, in the current year. But it’s

probably not true over a 10-year period….

– Jeff Bezos, Amazon CEO

Sources: Amazon.com, Forester Research

HOW DOES AMAZON MAKE MONEY?

THE FLYWHEEL

Amazon’s Flywheel of Growth

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SO, WE STARTED TRACKING AMAZON’S FREE

CASH FLOW AS A KEY FINANCIAL METRIC

From Amazon’s Q4 2012 Earnings Call:

“Trailing 12 month free cash flow

decreased 81%“

“The increase in capital expenditures

reflects additional investments in

support of continued business growth

consisting of investing in technology

infrastructure including Amazon Web

Services and additional capacity to

support our fulfillment operations.”

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AS AMAZON’S FREE CASH FLOW APPROACHED ZERO,

THE COMPANY HAD SOME DECISIONS TO MAKE… THIS

WAS AN EARLY WARNING INDICATOR

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TURNS OUT AMAZON’S PRICE HIKE FOR PRIME

WORKED AS INTENDED…

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… AND IT GOT A HANDLE ON SHIPPING COSTS

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Ca

sh

Flo

w!!

!

Revenue

Transactions


Close Rate



Avg Price

Variable Costs

Materials or COGS

Average Cost

Shipping

Hourly Labor

# of Employees

Avg Wage

Fixed Costs

Facilities Cost

# of Locations

Avg Size, etc



Returns

Re-Invest

Pay Shareholders

Observed Scott Devitt of Morgan

Stanley during Amazon’s Q4 2012

earnings call:

“…it looks that you have successfully

begun the transition of your logistics

costs in the direction of being more of

a fixed fulfillment cost with lower unit

based shipping costs..”

SPEAKING OF COSTS, RECALL THE

FRAMEWORK AND CONCEPT OF COST

LEVERAGE

from

to

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Net Income Percent of Revenue (Past 10 Years)

Companies like

Walmart and Costco

focus on costs while

maintaining fairly

predictable business

models and results

…

… Amazon clearly

doesn’t, which is

what makes them

dangerous.

WHEN COMPARING AMAZON’S FINANCIALS AND PSYCHE TO

OTHER RETAILERS, THE DIFFERENCES BECAME

APPARENT…

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Costco CEO Jim Sinegal:

MUCH LIKE AMAZON, COSTCO’S RAZOR THIN FINANCIAL

STRATEGY REFLECTS THE MENTALITY OF ITS

LEADERSHIP

• “We’re low-cost operators, and it would be a little phony if we

tried to pretend that we’re not and had all the trappings.”

• “We want to turn our inventory faster than our people.”

• “We pay much better than Wal-Mart. That's not altruism. It's

good business.”

• “Paying good wages is not in opposition to good

productivity.”

• “Competition makes you stronger. If our top competitor didn’t

exist, we would have to make them up.”

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• Product Mix: Treasures (1/4) and Triggers (3/4)

• Costco stocks only 4,000 Stock Keeping Units

(SKUs)… also know as ‘things’

• The average supermarket stocks 40,000 SKUS

• Wal-Mart stocks 125,000 SKUs

• Amazon stocks 8,000,000 SKUs

COSTCO’S MODEL

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HOW COSTCO ACTUAL MAKES MONEY

Source: Fool.com

• Costco just about breaks even on product…

• And makes most of its money on membership fees

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COSTCO’S SGA RATE STAYS AT ROUGHLY 9.9% TO 10.1%

It took a recession to budge Costco’s line

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COSTCO’ STORE GROWTH

Despite pressure to scale

more quickly, Costco’s

model is to open stores in

a measured fashion.

Store growth drives total

sales…

Is store count

reaching saturation?

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• A change in SG&A

• A change in the number of new stores

• A change in same store sales

• A change in its inventory model

COSTCO’S EARLY WARNING INDICATORS

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• Similar to Amazon’s – Grow quickly, use scale to

muscle suppliers to the lowest possible cost

• Acquire international players

• “Save Money, Live Better”

• It’s not just WMT’s tagline, it is a mantra within the

company as well

• Reduce SG&A (save money), grow the company

(live better)

WALMART’S MODEL

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Walmart Found Sam Walton:

WALMART’S PSYCHE

• “You can make a lot of mistakes and still recover if you

run an efficient operation. Or you can be brilliant and

still go out of business if you're too inefficient.”

• “Give ordinary folk the chance to buy the same things

as rich people.”

• “Control your expenses better than your competition.

This is where you can always find the competitive

advantage.”

• “Capital isn't scarce; vision is.”

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• Topline Sales Growth

• Cost of Goods Sold (COGS) Rate

WALMART’S EARLY WARNING INDICATORS

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SLOW GROWTH TRIGGERS STRATEGIC

CHANGES

“Wal-Mart is spending $1.5 billion in

higher wages and training next year.”

“Wal-Mart also said it was adding

curbside pickup for groceries”

Source: Google, Walmart.com, AdAge, Reuters

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WHAT DOES IT ALL MEAN?

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THIS MEANS WE’RE SEEING A PASSING OF THE RETAIL TORCH

Here’s Porter’s 5-Forces in Action in Real-Time!

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WRAPPING UP…

EVERY COMPANY, EVEN ONES THAT

APPEAR VERY SIMILAR HAVE A

DIFFERENT DEFINITION OF

“WINNING”

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WRAPPING UP…

FIND THE KEY METRICS THAT YOUR

COMPETITORS MONITOR AND MANAGE

ABOVE ALL OTHERS

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WRAPPING UP…

GET HELP FROM YOUR FINANCE

DEPARTMENT IF YOU CAN’T SPELL 10-Q

OR WONDER WHY SOMEONE PUTS THE WORD GROSS IN FRONT OF PROFIT

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WRAPPING UP…

BY UNDERSTANDING THE FINANCIAL

PERFORMANCE OF A COMPANY,

LISTENING TO PUBLIC COMMENTS, AND

BUILDING THE “PSYCH PROFILES” ON

COMPANY LEADERS, YOU’LL BE WELL ON

OUR WAY TO DEVELOPING AN EARLY

WARNING SYSTEM AND HAVING

INFORMATION TO POPULATE CI FRAMEWORKS.

Documents

Working With Your Finance Partners to Better …ci.sla.org/wp-content/uploads/2016/08/Working-With-Finance...WORKING WITH YOUR FINANCE PARTNERS TO BETTER UNDERSTAND YOUR COMPETITION