This course requires that you can and want to analyze financial statements. If your accounting and analysis skills are rusty, refresh them before taking this course.


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.

We illustrate a streamlined and structured framework to analyze business drivers of companies from a wide range of industries, excluding financial services. This framework 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 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.


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 the 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.

Company name Operating margin
Red Robin Gourmet Burgers 4.20%
Jack in the Box 7.00%
The Wendy's Company 7.30%
Darden Restaurants 9.00%
Starbucks Corporation 13.70%
Domino's Pizza 16.50%
Yum! Brands 16.50%
Chipotle Mexican Grill 16.90%
Burger King Worldwide 23.10%
McDonald's Corp 30.30%

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?

Company name R&D costs R&D costs/Sales
Apple 3,381 2.2%
IBM 6,258 5.9%
Intel 8,350 15.5%
Dell 856 1.4%
Pfizer 9,112 13.5%
Google 6,793 13.5%

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.



Attendance and participation

Help and Office

Prerequisites and expectations

Prerequisite: Any student who has taken the Core financial accounting course can take this course.

Please do take this course if you expect the following:

Pleaes do NOT take this course if you expect the following:

System requirements

How this course differs from existing courses


We will illustrate the application of frameworks you have learned in your strategy courses to a wide array of companies and industries.

Financial statement analysis (FSA)

The focus of my course is on a broad financial overview of industries, not on a detailed analysis of financial statements. The latter is reserved for the FSA course.


We will not build any financial statement models in the course. However, you will use excel for certain assignments — basic knowledge of excel is sufficient. This course will help you understand how to extract inputs for valuation models by reading financial statements.


We will discuss value drivers, but we will not discuss valuation theory or build valuation models.

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?


The schedule depends on the number of teams, which depends on the number of students in class. The following list should give you an idea of what will be covered. The exact details will be provided via a spreadsheet on OneDrive.

Session # Industry Subsectors
1 and 2 Overview The analytical framework and tools
3 and 4 Retail and real estate
  • Kroger [KR]
  • Dominos [DPZ]
  • Wal-Mart [WMT]
  • Lululemon [LULU]
  • Limited Brands [LB]
  • Amazon [AMZN]
  • Simon Property Group [SPG]
  • Equity Residential [EQR]
5 and 6 Healthcare, Auto, and Transportation
  • Community Health [CYH]
  • United Healthcare [UNH]
  • Pfizer [PFE]
  • Illumina [ILMN]
  • Tesla [TSLA]
  • United Airlines [UAL]
  • Union Pacific [UNP]
  • UPS [UPS]
7 and 8 Energy, Education, and Technology
  • Continental Resources [CLR]
  • Exxon Mobil [XOM]
  • First Solar [FSLR]
  • Stanford
  • Google [GOOG]
  • Apple [AAPL]
  • Intel [INTC]
  • Microsoft [MSFT]