Business Drivers of Industries
An Analytical Framework (EMBA)

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.

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 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.

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.

Grading

• There are no quizzes, midterm, final exams, or presentations.
• Please read about the penalty for missing classes below.
• Almaris assignments: Required. -15% if you fail to complete them. All of these HW assignments have a detailed video and PDF explaining how to complete the HW. Therefore, there is no credit for finishing them, but there is a penalty for skipping them. These assignments provide the critical foundation for analyzing companies.
• Weekly team projects: 50%
  • I will provide a spreadsheet template and document/report template.
  • Your team fills out the spreadsheet with the company data and the document template with your analysis.
  • Your team sends the spreadsheet and the document to the TA, who checks it for accuracy and provides pointers for improvement.
  • Your team makes final changes and upload them to the OneDrive class submissions folder.
  • I discuss your spreadsheet and document in class.
• Final team project (OPTIONAL): 50%
  • It is a group project.
  • The write-up and analysis are like the class submissions. However, a more detailed competitive analysis is expected.
  • The team chooses the company. I do not assign it. However, you have to get the company approved by me. I reject companies that have been picked too many times in the past.

Penalty for missing classes and unapproved use of devices in class

Paper and pencil

Please bring paper and pen/pencil to take notes in class.

Unapproved device usage

Most of us are now addicted to devices, which impedes learning. You are allowed to use devices only when I ask you to use your computer in class. Otherwise, ALL device use is strictly prohibited, unless you have a qualified disability which allows you to use devices in class. Students using devices when not approved will be asked to leave the classroom. Each time you are asked to leave the class, you will be marked absent. This is very painful, awkward, and disruptive, and I hope I never have to do this, but I will not hesitate to enforce this policy.

Reasons for requiring attendance

Attendance is required for several reasons. First, you incorrectly assume you can catch up on a missed class by watching a recording (if available). Videos do not engage your brain as much as a live class. Second, less than 20% of you watch the recording (if available). You are then lost in class, which provides the wrong signals to me as an instructor. Third, your absence hurts class discussions. Fourth, you miss out on feedback if you do not work through the questions I pose in class. Fifth, I lose the feedback since there are fewer questions.

Attendance policy enforced after the add/drop period

The attendance policy below will be in effect only after the add/drop period.

Attendance sheet

After entering the class, please mark yourself present on the OneDrive sheet within the first 20 minutes (link posted on Brightspace after the add/drop period). You will be marked absent if you are more than 20 minutes late, unless it is due to factors beyond your control (traffic, subway delays, or interviews running late). You will also be marked absent if you leave the class early unless you have my permission or get it afterward. You will get an F in the course if you are caught cheating on the attendance sheet.

Mark yourself excused on the attendance sheet for excused absences

Without mandatory attendance, attendance is often below 50%. Therefore, though I dislike doing this, I penalize absences. If you anticipate being absent for good reasons, please email me well in advance. Please enter Excused on the attendance sheet described below to avoid the penalty if approved. You must update it; I will not mark you excused. If you miss a class due to emergencies and cannot tell me in advance, do not panic. Take care of the emergency first, and then email me. I will permit you to change the Absent to Excused. But if you miss a class without a valid reason, there is a penalty, as stated below.

Penalty for missing classes

For sections meeting in 150-190 minute sessions, you will lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY missed session unless you were explicitly excused via email. Thus, if you miss two class sessions, you will lose two grades, and so on.

For sections meeting in 75-80 minute sessions, you will lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY TWO missed sessions unless you were explicitly excused via email. Thus, if you miss four class sessions, you will lose two grades, and so on.

Seating and name tags

Please sit in the same seat in every class and display your name tags. For Zoom classes, you must keep your video on AT ALL TIMES. You must also have a good working headset or mic, as it is extremely rude to be inaudible and force me to ask you to repeat yourself.

Almaris Assignments

• When and how to access the tests: After the first week of class, you can view the online assignments at https://www.almaris.com/assess/ using your official NYU email (no aliases) and the most recent password emailed to you by Almaris. The Almaris password is different from NYU or Stern passwords.
• Support: Almaris staff will reply to your emails only if they pertain to technical issues with the Almaris system, not deadline extensions. Please contact Stern IT for technical issues with your network.
• Password retrieval: To retrieve the password, use your full email with the domain name as it appears in Brightspace. The domain name could be @nyu.edu for some of you, while it could be @stern.nyu.edu for others. I do not control this mess.
• Length: Some assignments are short; others are long. Please manage your time.
• Deadlines: Almaris tests list the deadlines. I may update the deadlines as the course progresses.
• NO EXTENSIONS will be granted for any reason except medical or family emergencies. If you have religious or personal conflicts, please submit the assignments early. The related materials are covered well in advance of the assignments. Please do not email me to request extensions unless you have a medical or family emergency.
• Late: Assignments are marked LATE if you do not meet or exceed the passing score described below before the deadline. There is no additional penalty for lateness other than a low score.
• Passing score: Assignments have a passing score of 100% or less.
  • Passing score 100%: I set the passing score to 100% on an assignment if I want you to ace it. In reality, there is no passing score. Whatever score you get on your last attempt is your final score. You are graded on accuracy but not the number of attempts. There is a difference between passing a test and getting full credit. If you get 80/100 on your final attempt, you pass, but you do not score 100.
  • Passing score less than 100%: I set the passing score to less than 100% on an assignment if I do not require you to ace it. Any score above that score is rounded up to 100%. For example, if the passing score is 90%, and you get 93%, your score is rounded up to 100%. I do the rounding up in a separate spreadsheet. You will see only the raw score online.
• Free to you and NYU: Almaris is not affiliated with Stern in any way. It is offering these tests to Stern at no charge.
• Data privacy and no marketing: Your data is not shared with any third party. It is not used for any promotion or marketing.
• No data retention: Your data is not retained. It is deleted in approximately two weeks after the end of the course.

NYU Stern Policies

Please read the NYU Stern Policies for this course.

Help and Office

• Me: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86.
• Teaching assistant: Please check NYU Brightspace.

Administrative and System Requirements

Videotaping

Classes are normally not videotaped, except for EMBA classes. If the class is videotaped, the link is posted to Brightspace by NYU Stern IT within a day.

Registered Students Only

Only registered students can attend classes. I cannot override this NYU Stern rule. We do not allow unregistered students to "audit" a class.

Albert and NYU Brightspace

You must be in Albert and NYU Brightspace before starting the first class. If you register late, there might be a delay of a day before you appear in these systems. If you cannot access these systems after a day, please contact the relevant REGISTRAR. I cannot add you to these systems regardless of what someone in IT tells you.

Computer Requirements

You need to bring a computer to every class. If you have any technical questions, please contact Stern IT at (212-998-0180) or servicedesk@stern.nyu.edu, or NYU IT at +1 (212) 998-3333 or askit@nyu.edu. I cannot help you with your computer issues.

Excel 365 Desktop Version Required

The desktop version of Excel 365 is required. Excel Online and Google Sheets are NOT OK. Read this page regarding Excel 365 Desktop access for NYU students.

Materials

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

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:

• You enjoy class discussions (sometimes unstructured) that bring together insights from business economics, strategy, and analysis of financial statements.
• You are prepared to put in the time to analyze companies assigned to your team during the course and do a final project.
• You work well in a team.
• You value constructive criticism of your work in front of your peers.
• You understand that the class is about guiding you towards discovering the challenging process of business analysis. Mastering this process requires extensive practice. The class starts you on that journey. However, it takes time to develop the skills to identify business drivers.

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

• You think there is a quick process or a magic formula to comprehensively identify an industry’s business drivers.
• You expect a structured class with PowerPoint presentations highlighting the business drivers of each industry.
• You dislike reading company financial statements.
• You are unable to navigate OneDrive. Brightspace does not have the features the course needs. Therefore, it must use OneDrive. The course materials will not be on Brightspace. Do not take the course if you love Brightspace and are unable to use OneDrive.

How this course differs from existing courses

Strategy

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.

Modeling

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.

Valuation

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?

Companies

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.