Ryan Macumber of Best Buy delivered the final presentation at Aurora WDC’s RECONVERGE:G2 conference on Wednesday, and its focus was the use of financial analysis as a device in the CI pro’s toolkit.
Agenda
- Background
- Why finance
- How you can work with finance
- Case study
Why finance?
As medical instruments explain levels of health for individuals, financials help explain a company’s health.
Financial analysis doesn’t work independently of the existing CI toolkit, but makes it better. Finance can serve as an input, and enhances ability to break apart the competition, identify key performance metrics, create early warning systems, connect competitor actions to results, help scenario plan, and bend and stretch existing insights and observations.
How do you approach finance partners? A framework can help.
All companies have the goal to make money, and financial results help determine how well this goal is met. Customers spend money, and stakeholders pay suppliers, employees, banks, pay taxes, and have to make decisions about either reinvestment of dollars back into the business or to pay earnings out as dividends.
Break your competition into parts, and start by working backwards from the ultimate goal of cashflow.
Ask: Is a company generating cash flow? Why, or why not? How is cash flow generated, and what are vulnerabilities that keep this from happening?
Break out the financial path a company takes to achieve cash flow: Revenue and cost buckets, then exploration of how a company generates revenue–transactions, materials, labor, facilities, etc.
Does your competitor rely more on volume and lower costs? If a competitor is struggling, where and why? Financial insights can provide early warning indicators.
“To every action there is an equal and opposite reaction”…strategic decisions involve trade-offs between revenue and cost. The idea is to leverage costs to produce revenue.
How do different retailers view their business? Consider cash flow and the profit tree.
Each company will have different growth strategies and you cannot examine them in the same way. It may show up in SKU assortment, examine revenue per SKU.
Organize your competitors with consideration of their similarities and differences using the “pentagon approach,” look at assortment, price, services, convenience, and experience.
The most valuable part of the framework is not the framework itself, but the discussion it generates.
An Amazon case study
Problem: Amazon taking over, and they wanted to better understand the corporation.
They began with CEO Jeff Bezos. Among his philosophies, Bezos is concerned with price elasticity, he is stubborn on vision, customers are invited guests, they start with the customer and work backward, and brands are like reputations.
Financials revealed their financial goals reflect the company’s psyche. They invest dollars back into the business, and they make money with a “flywheel of growth” model; if initiatives and ideas don’t fit, they are discarded.
Cash flow trends were tracked as a key financial metrics. Capital expenditures signal additional investments in business growth, to include technology infrastructure, and additional capacity to support growth.
As cash flow approached zero, Amazon squeezed vendors to free up capital; Amazon Prime fees jumped, for instance.
During this time, the company grew infrastructure, better managed shipping costs, and better handled cost leveraging. Amazon shifted variable costs to fixed costs with improved infrastructure (more warehouses.)
A few facts on the competition
In comparing Amazon to others, financials reveal Walmart and Costco focus on cost.
Costco’s model has only 4,000 SKUS (things), and the average supermarket stocks 40,000 SKUS. WalMart stocks 125,000 SKUS and Amazon stocks 8,000,000 SKUS.
Costco makes money by membership fees; products are break-even. Key metrics are membership increases and retention of existing members.
Costs are managed very closely.
Another key metric for Costco is store growth; but when store count reaches saturation, productivity drops; thus Costco manages store openings very carefully.
Walmart’s model is similar to Amazon: Grow fast, use scale, acquire international players, “save money live better” mantra for the company equates to saving money and growing the company.
Sales growth triggers strategic changes at WalMart, and changes were consequently made.
As retail sales grew over years, WalMart has traditionally held a disproportionate share of the market; currently Amazon has set the pace.
Macumber’s presentation was data-rich, and the accompanying slide deck presentation will explain in detail other considerations of financial metrics and making competitive comparisons with cash flow analysis; this post covers but a few of many insights regarding the use of financials in assessing viability and strategy of corporate entities.
However, in sum, a takeaway from this very informative session is that CI practitioners need to identify key metrics, solicit help from the finance department, and understand the psyche profiles of the competition’s leadership.
Financial metrics will provide keys to important insights regarding the health and strategies of the competition.