Business Drivers of Industries (Trium)
An Analytical Framework

Overview

As global competition intensifies and technology forces rapid changes, executives and managers need to understand the key strategic business drivers to lead and manage a business. Consultants and investors need to analyze the competitive position and evaluate the quality of strategic execution to suggest improvements and allocate capital. Bankers need to scan the changing business landscape to identify potential synergies and suggest mergers and acquisitions.

The analysis proceeds as follows:

1. We apply the Six-Pack Framework for top-down and comprehensive analysis of financial statements to extract six key valuation inputs – Size, Growth, Margins, Asset intensity, Business risk, and Financial risk.
2. We analyze how these inputs depend upon a company’s strategy by computing the Competitive Advantage Score that ranks competitive drivers and scores strategic strength per those drivers.

The analysis of a wide range of companies will expand your strategic horizons to enable you to foresee challenges and opportunities due to changing competition, technology, and the economy. The framework and the perspective will sharpen your ability to lead value creation as an entrepreneur or executive or to understand value creation as an investor, banker, analyst, or consultant.

Takeaways

Learn a framework to analyze business drivers to understand and lead value creation:

1. Six-pack Analytical Framework (SPF): Identify and extract the six key valuation inputs – Size, Growth, Margins, Asset intensity, Business risk, and Financial risk.
2. Competitive Advantage Score (CAS): Link these six key inputs to the choice and execution of a company’s strategy by identifying, weighing, and scoring competitive drivers.
3. Strategic vision: Expand your strategic horizons by examining how a wide range of companies create shareholder value so that you can grow your business in new dimensions.
4. Question conventional wisdom and raise your Business IQ: Dispel misperceptions about businesses to develop uncommon common sense; understand business models of both parties to a deal to negotiate effectively.

Motivation for the course

Let us take a walk around your neighborhood. Start with a CVS or Walgreens. You notice that the actual prescription drug pharmacy is at the back of the store and occupies a small percentage of the total store space. Would you be surprised to know that around 67% of store sales come from prescription drugs? You may wonder why they do not get rid of the front store and run a small pharmacy to increase profit per square foot? To be “business literate,” you should know the business drivers of a pharmacy store and understand its layout.

You then decide to eat something. You think that fast food businesses are highly competitive and probably have low margins. Here is some data from 2012.

Surprised?! McDonald's margin seems to be more than double that of Starbucks.

“OK,” you say, “I read more about tech companies. I know how they work.” How about the table below for 2012?

Apple did not spend that much on R&D, while Intel outspent Pfizer in R&D as a percent of sales.

I find it fascinating to peek at the basic financial and operational characteristics of a wide range of businesses. It is a step towards making sense of businesses financially. This course is about sharing that fascination with you.

The Six Pack

The course highlights how and why businesses differ along the six key drivers listed below:

1. Size
2. Growth
3. Margins
4. Volume or net asset turnover
5. Business risk
6. Financial risk

1. Size

How do we measure size? Market cap, sales, assets, or the number of employees? What are the merits or demerits of each metric? Is the industry fragmented, or do a few large firms dominate it? What are the reasons for such patterns? For example, how do economies of scale and scope affect the distribution of sizes? What role do network externalities play in industry consolidation? How do the bigger firms differ from smaller firms in the industry? How does size affect risk and return?

2. Growth

What are the drivers of growth? How does growth affect the business model of a company? How does growth affect the financing of a company? What do we know about the rate at which a wider market adopts an innovation?

3. Margins

What are the major components of costs as a percentage of sales? What are the drivers of margins? For example, is the margin driven by pricing power, conversion efficiency, or purchasing power?  Is the success driven by R&D, efficient production, or effective marketing? How do the margins change as a company matures? How do companies offset low margins with high volumes and vice versa? How does that affect its hiring and management practices?

4. Volume or net asset turnover

How asset-intensive is the business model? Does it create barriers to entry? What risks does it create? How does it affect the financing needs of the companies in that industry? Are the revenue-generating assets listed on the balance sheet?

5. Business risk

How does the extent of fixed costs, i.e., operating leverage, affect the company? Does the operating leverage lead to ruinous price competition in a down cycle? Which costs are fixed in the short-run versus the long-run? How does a company mitigate the risks arising from fixed costs?

Is the business cyclical? What do we know about business cycles? What risks do they create? How does fiscal and budgetary policy change in response to business cycles? How does that affect the business we are trying to understand? Is its business model sustainable enough to survive the downturn of a business cycle? Can and how does a company mitigate the risk of down cycles? How does cyclicality affect the financing of a company?

Is the business regulated? Why? What aspects of regulation must it manage to be successful? How does that affect risk?

6. Financial risk

How much financial leverage do companies in the industry have? Is there a wide variation? How have the business risk, industry cycle, corporate performance, and financial policy affected the leverage? What types of debt do the companies have? How does leverage change over the life cycle of a company? Why do industries differ in their borrowing costs? What is the company’s credit rating? How have the business risk and the extent of leverage affected the borrowing costs? How has debt structuring affected the interest rate?

Disclaimers

• You need to be in the following systems before the start of the first class:
  • NYU Brightspace
  • Stern AIS
  • Google groups for the class

Help and Office

• Me: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86
• If you email me, please indicate that you are a Trium student at the top of the email.

Materials

• I use my materials. Therefore, no textbook is required, and you need not purchase anything.

Participation

• I expect you to participate actively in all classes. When we discuss four companies in class, I expect to learn new aspects of these companies from you. Graduate education is a two-way process.

Grading

• TBD

Pre-module Work

• Download the file Trium.zip from http://dgode.stern.nyu.edu/Trium/Trium.zip. This zip file has four folders inside it.
• Read pages 1-7 of Trium-Prework-Packet.pdf from the folder 01-Prework-Handout-and-Supporting-Spreadsheets to familiarize yourself with important data.
• You have been registered online at http://www.almaris.com/assess/ to practice the prework spreadsheets. You should have received the Almaris login on January 29, 2017. Regardless, you can retrieve the password anytime by entering your @triumemba.org email address as the username, leaving the password blank, and clicking Login. Your password will be emailed to you.
• Complete the online tests before the deadline posted on Almaris. Please note that if you find that some of the assignments are too advanced, you can peek at the answers to all of the assignments provided in the zip file (in the folder 02-Prework-answers). However, try to figure out as much of the assignments as possible before looking at the answers. Looking at the answers and discussing them with your teammates is NOT cheating. I just want you to be familiar with these concepts before class. The online system gives you feedback and five attempts to get the answer right. Here is how to prepare for each online assignment: (The pdf file and the spreadsheets are in in the folder 01-Prework-Handout-and-Supporting-Spreadsheets of the zip file.)

• Read the project reports in the folder 03-Prework-projects-to-read. Each company has the following four files:
  • 01: Project report that my MBA students have prepared in the past
  • 02: Supporting spreadsheet for the project report: Make sure you understand where the data for this spreadsheet came from by looking at the next two documents.
  • 03: Annual report
  • 04: CapitalIQ spreadsheet with the financial data used to fill out the analysis spreadsheet
• Optional: You are welcome to read the remaining reports in the folder 04-Additional-projects-for-class if you want to be prepared before class. These are interesting companies to read about!

Grubhub Project

• Download the file from the project folder http://dgode.stern.nyu.edu/Trium/GrubHub.zip.

Class Schedule