Overview

We illustrate a streamlined and structured framework to analyze business drivers of companies from a wide range of industries, excluding financial services. This helps us understand their business model, drill into their financial statements, and assess competitive advantage.

The analysis proceeds as follows:

  1. We apply the Six-Pack Framework for a 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 weighs competitive drivers and scores strategic strength along 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 environment. 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 for an analysis of 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.

The Six Pack

1. Size

How do we measure size? Market cap, or sales, assets, or 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 the 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 an innovation is adopted by a wider market?

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 company primarily driven by the success of its R&D, the efficiency of its production, or the successful marketing of its products to customers? 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 business model of a company? Does it lead to ruinous price competition in a down cycle? Which costs are fixed in the short-run vs. 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 in order 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 the 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?

The course will not cover financial institutions such as banks and insurance companies.

Disclaimers

Help and Office

Materials

Participation

Grading

Pre-module Work

Assignment Pages to read from Trium-Prework-Packet.pdf Supporting spreadsheet
1. v02-02-leverage Pages 8-19 v02-01-leverage.xlsx
2. v05-02-financing-needs Pages 20-26  
3. v05-04-cash-conversion-cycle Pages 20-26  
4. v05-07-basic-funding Pages 20-26  
5. v06-09-ecf-comprehensive Pages 27-29  
6. v07-03-dcf Pages 30-40 v07-02-dcf.xlsx
7. v15-01-company-analysis You should be familiar with this from Module 2.  

Grubhub Project

Class Schedule

Session # Industry Materials
1. Tuesday, March 7: 8:30 AM to 12:30 PM
  • Size
  • Growth
  • Margins
  • Net operating asset intensity
  • Business risk
  • Financial risk
  • Tiffany

Trium-Prework-Packet.pdf in the folder 01-Prework-Handout-and-Supporting-Spreadsheets. Read the supporting spreadsheets with the pdf.

Tiffany: In the folder 03-Prework-projects-to-read

2. Thursday, March 9: 1:45 PM to 5:45 PM
  • Amazon
  • Starbucks
  • Simon Property Group

In the folder 03-Prework-projects-to-read

In the folder 03-Prework-projects-to-read

04-Additional-projects-for-class

3. Friday, March 10: 8:30 AM to 12:30 PM
  • Continental Resources
  • Vestas
  • First Solar

In the folder 04-Additional-projects-for-class

In the folder 04-Additional-projects-for-class

In the folder 04-Additional-projects-for-class

4. Saturday, March 11: 8:30 AM to 12:30 PM
  • Pfizer
  • Illumina
  • Google

In the folder 04-Additional-projects-for-class

In the folder 04-Additional-projects-for-class

In the folder 03-Prework-projects-to-read