SMU Classification: Restricted

MBA Program

Linking Financial and

Operational excellence:
Data Analytics

Shantanu Bhattacharya
Aug-Oct 2023

S I N G A P O R E M A N A G E M E N T U N I V E R S I T Y
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What is Strategy?

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What are the different kinds of strategy

possible?
• Growth strategy
• Cost competitiveness strategy
• Differentiation strategy
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Strategy as a function of product/technology

Lifecycle
Prospector Defender
Cumulative sales

⑤Maturity settles in

③Competition shifts to
process features:
cost, quality, speed ④Limits to improvement
appear

② Dominant design emerges

①Probe & learn (ind standard)

Time
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Strategy as a function of performance

• Linkage between financial metrics and actions

• What are the actions you can take to improve your
performance today?
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Margins: Which of These Firms Have Better

Financial Performance?

Which of these firms have better financial

performance?
X Y
Net operating revenues
($ millions)
24509 6999
Cost of goods sold
($ millions)
18978 5206
Gross profit
($ millions)
5531 1793
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AMAZON BARNES AND NOBLE

Year ended December 31 ($ millions) 2009 2011
Net operating revenues 24509 6999
Cost of goods sold 18978 5206
Gross profit 5531 1793
SGA 4402 1858
Operating income 1129 -65
Interest expense 34 57
Other income (loss)-net 66
Income before income taxes 1161 -122
Income taxes 259 0
Net income 902 -122

Assets
Cash and cash equivalents 3444 59
Short-term investments 2922
Net receivables 1260 150
Inventories 2171 1537
Total current assets 9797 1746
Property, plant and equipment 1290 704
Goodwill 1234 524
Other assets 1492 621
Total assets 13813 3595

Liabilities and stockholder equity

Accounts payable 7364 949
Short-term debt 0 786
Total current liability 7364 1735
Long term debt 109 313
Other liabilities 1083 729
Total liabilities 8556 2777
Stockholder equity 5257 818
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Costs Analysis (Income Statement)

Gross margin
• GM= 1 - COGS/ Revenue
• GMAMZ = 1 - ____ / ____ = ______
• GMB&N = 1 - ____ / ____ = ______

Fixed cost footprint

• FC= SGA/ Revenue
• FCAMZ = ____ / ____ = ______
• FCB&N = ____ / ____ = ______
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Costs Analysis

Gross margin
• GM= 1 - COGS/ Revenue
• GMAMZ = 1 - 18978/ 24509 =
22.56%
• GMB&N = 1 - 5206 / 6999 =
25.62%

Fixed cost footprint

• FC= SGA/ Revenue
• FCAMZ = 4402 / 24509 =
17.96%
• FCB&N = 1858/ 6999 = 26.54%
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Financial Measures of Performance

References: Amazon - 2009, Barnes & Noble – 2011

Return on Equity
• ROE= Net income / Average shareholder equity
• ROEAMZ = 902 / 5257 = 0.172
• ROEB&N = -122 / 818 = -0.15

Return on Assets
• ROA= Net income / Average total assets
• ROAAMZ = 902 / 13813 = 0.065
• ROAB&N = -122 / 3595 = -0.034

Return on Financial Leverage

• ROFL= ROE - ROA
• ROFLAMZ = 0.172 - 0.065 = 0.107
• ROFLB&N = -0.15 - -0.034 = -0.116
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Operational Excellence
Supplier relationships Own operations Customer relationships
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Operational Analytics of Performance

Time to Pay Supplier (Supplier Relationships)
• TS= Accounts payable / Costs of goods sold
• TS AMZ= 7364 / 18978 = 20.1 weeks
• TS B&N= 949 / 5206 = 9.48 weeks

Time Customers Take to Pay Firm (Customer Relationships)

• TC= Accounts receivable / Sales revenue
• TC AMZ= 1260 / 24509 = 2.67 weeks
• TC B&N= 150 / 6999 = 1.11 weeks

Time in Inventory (Processor Operations)

• TI = Inventories / Costs of goods sold
• TI AMZ= 2171 / 18978 = 5.95 weeks
• TI B&N= 1537 / 5206 = 15.33 weeks
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Amazon’s stupendous growth story

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Cash Flow Performance

Time at which
Amazon pays publisher
TS
C2 C

Time
TI TC
Time at which Time at which Time at which
Amazon purchases Amazon sells book customer pays Amazon
book from publisher to customer
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Cash Flow Metric

Cash to Cycle Time
• Average amount of time cash enters as cost to when it
returns as collected revenue
• C2C= -TS + TI + TC

• -TS + TI + TC
• - weeks payable + weeks in inventory + weeks receivable

• C2CAMZ= -20.18 + 5.95 + 2.70 = -11.53 weeks

• C2CB&N= -9.47 + 15.33 + 1.11 = 6.98 weeks

How does Amazon make its money?

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What Innovations Should Barnes and Noble

Do?
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What Innovations should Amazon do?

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Financial ßà Operational Performance

Ts ßà ROFL
• Supplier payment time is a good operations excellence metric for return on financial
leverage

Tißà ROA
• Inventory turnaround time is a good operations excellence metric for return on
assets

Tc ßà ROA
• Customer payment time is a good operations excellence metric for return on assets

C2C ßà ROE
• Cash-to-cycle time correlates strongly with investor returns
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Apple vs. Samsung (2021): Forward looking

Apple ($M) Samsung ($M)

Revenues 365817 244389
COGS 212981 145452
SGA 43887 53806
Net income 94680 34881

Assets
Inventories 6580 36172
Receivables 26278 35586
Total Assets 351002 372888

Liabilities
AP 54763 11759
Total liabilities 287912 106390

S Equity 63090 266498

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Costs Analysis

Gross margin
• GM= 1 - COGS/ Revenue
• GMA = 41.78 %
• GMS= 40.48 %

Fixed cost footprint

• FC= SGA/ Revenue
• FCA = 12.00 %
• FCS = 22.01 %
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Apple vs. Samsung (2021): Cash Flow Forward

looking

Apple Samsung
Financials
ROE 1.500713267 0.130886536
ROA 0.269742053 0.093542833
ROFL 1.230971214 0.037343702

Efficiency
TS 13.37056357 4.203916069
TC 3.735354016 7.571830156
TI 1.606528282 12.93171631
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What advice do you give Apple?

Nothing, just continue doing what you do!

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What advice do you give Samsung on

innovation?
• Improve gross margins
– Price versus variable costs
– Outsource to lower cost vendors
• Improve fixed costs
– Shut down some manufacturing units
– Efficiencies in economies of scale of procurement

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What advice do you give Samsung on

innovation?
• Cash Flow:
– Improve Ts
• Outsource more
• Order in staggered amounts to delay payments
– Improve TI
• Rationalize product lines
• More JIT like Apple
• Centralized manufacturing
• Air shipments

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What advice do you give Samsung on

innovation?
• Improve Tc
– Retail presence (store in store concept)
– Digital wallet

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Hochland (GmbH) vs Mulia Boga Raya (2021):

Forward looking

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Hochland (GmbH) vs Mulia Boga Raya (2021)

Hochland (Eur M) Mulia Boga Raya (M INDR)

Revenues 1702.4 900853
COGS 1178.2 610850
SGA 302.9 141794
Net income 41.4 121000

Assets
Inventories 158.8 158855
Receivables 187.2 119275
Total Assets 1136 674807

Liabilities
AP 220.4 128832
Total liabilities 429.5 233906

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S Equity 706.5 440901
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Costs analysis

Gross margin
• GM= 1 - COGS/ Revenue
• GMH = 30.79 %
• GMMBR= 32.19 %

Fixed cost footprint

• FC= SGA/ Revenue
• FCH = 17.79 %
• FCMBR = 15.74 %

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Cash flow analysis

Hochland (Eur M) Mulia Boga Raya (M INDR)

Financials
ROE 0.058598726 0.274438026
ROA 0.036443662 0.179310529
ROFL 0.022155064 0.095127497

Efficiency
TS 9.72738075 10.96711795
TC 5.718045113 6.884919071
TI 7.008657274 13.52289433

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East versus West (Asia vs Europe)

• Where do supply chains in Asia do better?

• Where do supply chains in Europe do better?

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Linking SC to Balanced Scorecard

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Linking SC to Strategy

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Comparison of largest Chinese BE firms

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Example

• Compare the financial and operational performance

for 2018 for Evergrande and Country Garden.
• How do the two firms compare? What operational
excellence measures can you recommend for the two
firms?
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Evergrande vs Country Garden

Evergrande (RMB B) Country Garden (RMB B)
Revenues 466.196 379.079
COGS 297.249 276.603
SGA 32.899 27.739
Net income 37.39 34.618

Assets
Inventories 971.802 635.759
Receivables 123.141 40.597
Total Assets 1880.028 1629.694

Liabilities
AP 423.648 255.053
Total liabilities 1571.402 1456.286

S Equity 308.626 173.408

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Costs Analysis

Gross margin
• GM= 1 - COGS/ Revenue
• GME = 1 - 297.249/ 466.196 =
36.24%
• GMCG = 1 - 276.603/ 379.079 =
27.03%

Fixed cost footprint

• FC= SGA/ Revenue
• FCE = 32.899/ 466.196 = 7.05%
• FCCG = 27.739/ 379.079 = 7.32%
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Cash Flow and Financial Analysis

Evergrande Country Garden

Financials
ROE 0.121149871 0.199633235
ROA 0.019888002 0.021242025
ROFL 0.101261869 0.17839121

Operationals
APT 0.701641457 1.084492243
ART 3.785871481 9.337611154
INVT 0.305874036 0.435075241

Efficiency
TS 74.11192636 47.94870627
TC 13.73527872 5.568876145
TI 170.0046224 119.5195569

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Cash Flow Metric

Cash to Cycle Time
• Average amount of time cash enters as cost to when it returns
as collected revenue
• C2C= -TS + TI + TC

• -TS + TI + TC
• - weeks payable + weeks in inventory + weeks receivable

• C2CE= 109.6 weeks

• C2CCG= 77.1 weeks
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Why Does Country Garden Do Better than

Evergrande in Operational Excellence?
• What can you learn from past best practices?
• What can you do better in future?
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Summary

• Data analytics definition:

– Use data to drive corporate action
• Macro organizational data:
– Financial statements of income statement and balance sheet
• Comparison of closest competitors
– Strategic positioning
• Different business models have different strengths
– E-commerce (low fixed cost footprint, high Tc)
– Brick and mortar (High FCP)
• Profits and……. Cash flow
• Time as a basis of competition

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