How to Use Financial Early Warning Indicators to Understand Competitor KPIs

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How to Use Financial Early
Warning Indicators to Understand
Competitor KPIs
A Complimentary Webinar from Aurora WDC
12:00 Noon Eastern /// Wednesday 17 August 2016
~ featuring ~
Ryan Macumber Derek Johnson

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Ryan Macumber
Ryan Macumber is Sr. Manager, Competitive & Market Insights, at Best Buy Company. He has
worked for Best Buy for 10 years and in the Competitive Intelligence and Market Insights
groups since 2011.
Ryan is a subject matter experts on competitive, macro-economic, and consumer trends that
impact the retail industry in addition to providing marketplace research and analysis for
strategic projects throughout the enterprise.
Email: rpm587@gmail.com
The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and
other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems.
Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC
at http://AuroraWDC.com.

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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 Wisconsin Dells.
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
Flow!!!
=
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.

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Cash
Flow!!! 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
Remainder
Shareholder
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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Cash
Flow!!!
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
Remainder
Shareholder
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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Cash
Flow!!!
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
Remainder
Shareholder
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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Cash
Flow!!!
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
Remainder
Shareholder
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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Cash
Flow!!!
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
Remainder
Shareholder
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
Cash
Flow!!! 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
Remainder
Shareholder
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 DOESTHIS 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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Cash
Flow!!!
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
Remainder
Shareholder
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 SamWalton:
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.

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Thank you!
Now how about a little Q&A?
Email: rpm587@gmail.com
Phone: (612) 291-5860
LinkedIn: linkedin.com/in/ryan-macumber-
172a122
The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and
other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems.
Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC
at http://AuroraWDC.com. See you next time!

How to Use Financial Early Warning Indicators to Understand Competitor KPIs

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