Strategy+Business Lessons: Financial Ratios

Financial analysis consists of looking into the financial performance of an organization over time and against its competition. It can be said that the goal purpose of financial analysis is to determine whether and how companies create value for its shareholders. Financial ratios and trends analysis allows us to evaluate and track defined financial features of a firm. Building on all core financial statements, the output allows for trends, ratios, or cost structure analyses. Comparable analysis can be done internally for own company, or externally for competitors. Financial comparable ratios are especially necessary in comparisons with competitors. Financial comparable analysis is used to assess where a company’s problems can lie.

Business strategy includes the topics of growth strategy, marketing and brand strategy, sales strategy, as well other areas of strategic thinking. Sales strategy includes distribution strategy, direct sales strategy, and business development. Within growth strategy, we include normal business growth and acquisitory growth, namely mergers and acquisitions. Business strategies are often conducted during a bi-annual strategic planning environment, usually conducted in a week long day off site location with management and key stakeholders, both inside and outside the business. Marketing strategy includes branding strategy, product launch strategy, in addition to digital strategy. Marketing strategy and sales strategy are many times coupled together, but are completely different in actuality.

There are 3 types of strategy development challenges that can be ascertained from our discussion thus far. In strategy development, framing the type of strategic challenge is the most important activities. You should align execution content, so that strategy can materialize. A noteworthy challenge to strategy development is the existence of ambiguity, in regards to the challenge and approach. One critical strategy development challenge is developing top down intervention fueled by revised strategic intent. Defining strategic intent includes defining objectives, developing business battlefields, and choosing the required core competencies.

Activity Based Costing analysis is a business framework created to improve upon the accuracy of conventional forms of business costing, so that business decisions can be fact based. Activity Based Costing allows for logical profitability to be understood around critical areas of product lines, customer segments, target geographies, and other markets. The reason that Activity Based Costing is better is because it follows a rigorous approach of determining cost objects, cost derivatives, process activities, and resources drivers to understand true cost paths. Whereas, in conventional costing methods, indirect and overhead costs are spread across all products based on a standard, volume-based cost driver, which is quite inaccurate and misleading, thus lends itself to leading to risky business decisions.

Product Lifecycle Analysis provides a framework for predicting industry sales. To exemplify using lifecycle analysis to forecast sales, if your current products are in the late Maturity stage, you should start looking in Introduction or Growth stage products. Similar to the BCG 2×2 Matrix, the product lifecycle framework can be useful in managing a business’s product portfolio. If we presume that every industry and product follows a pre-determined lifecycle, future estimates of sales will be more easily digested if the current stage in the lifecycle for the industry or product is analyzed.

Product lifecycle analysis is closely related to substitution analysis. Since substitution relates to the adoption rate of products, the focus is only on the early phases of the product lifecycle (e.g. Introduction, Growth, Early Maturity). As a product moves through its lifecycle, the likelihood of customers switching to a substitute product goes up. The pattern of consumers switching to emerging substitute products is often called the technology S-curve, reason being the diffusion rate of new technology typically adopts an S-shaped curve.

The way business leaders evaluate and analyze strategy within that of modern business organizations has been built upon a platform of militant strategists since the beginning of organized warfare. Sun Tzu spoke about indirect business strategies when Sun Tzu proclaimed that winning without fighting is the pinnacle of skill on the battlefield. Sun Tzu’s thoughts about the factor of terrain, if we were to take that into the context of companies competing today, translates to markets, industry structures, market positions, and competitive forces. Sun Tzu preached to know and attack the enemy’s strategy. In Sun Tzu’s Art of War, he spoke about several fundamental factors in military strategy and each of these factors relates to a popular concept of business strategy.