Friends,
I hope that all is well with you and yours.
A quick update on a couple of things on my end before we get started.
Firstly, ever since Elon Musk purchased Twitter, the platform has gone from bad to worse. Consequently, I will be shifting most of my social brain farts to LinkedIn. If you have yet to follow me there, please do.
Secondly, keynotes are now starting to roll in for Q2 and Q3. If you want to bring me in to present or run workshops on strategy, e-commerce, marketing, or leadership, now is very much the time to let me know.
In the news
Elon Musk confirmed he is building an “anti-woke AI” with fewer restrictions than that of, for example, Microsoft. While I am sure that Joe Rogan fans are frothing at the mouth, the move augurs a future most of us saw coming. If users can, as Musk implies, set the sources from which their AI chatbot can draw information – effectively ensuring they only hear what they want to hear – the already massive echo chamber problem may increase by orders of magnitude.
AMV BBDO has stolen Martin Weigel from Wieden & Kennedy, naming him their new CSO. Martin is, for my money anyway, one of the sharpest strategic minds anywhere on the planet and a hell of a nice person to boot. Managing to lure him away is the biggest coup in adland that I can remember.
Digital DTC companies are facing a new fulfillment problem: VC backed 3PL partners that hold their inventory hostage. The story illustrates two issues that James and I have covered at length, viz., that fulfillment is the name of the game for e-commerce, and that the VC growth demands of old (which here apparently remain present) create all sorts of perverse incentives.
Item of the week
Russell L. Ackoff was an American organizational theorist who, unlike many of his peers, took a systems approach to management. In a seminal piece titled On the Use of Models in Corporate Planning, published well ahead of most anything else, he introduced three ways of managing problems: resolving (to select a course of action that yields an outcome that is good enough, i.e., one satisfices), solving (to select a course of action that is believed to yield the best possible outcome, i.e., one optimizes), and dissolving (to so change the system or its environment as to bring the system closer to an ultimately desirable state, one in which the problem cannot or does not arise, i.e., one idealizes). With plenty of examples, it is a paper in which the practical implications are very easy to spot.
Much is made these days of planning models, which I take to mean models from which plans could be extracted. It seems odd to me to think there is, or can be, such a model, as odd as it would be to think there is, or can be, a set of medical instruments from which health can be extracted. Obviously, medical instruments can sometimes be used in providing health care, and models can sometimes be used in planning; but, to switch metaphors, when English is used in planning it does not thereby become planning English. The same is true for models: when they are used in planning they do not become planning models.
Moving on.
Annual reports and you
The parts that inform the whole
As promised, we are today going to begin our introduction to financial analysis for strategic purposes. While some may consider it a dull topic, it is inescapably important; even basic number crunching can hold immense value. To illustrate, the as-far-as-I-know-anyway universally lauded white paper that I wrote with James relies very heavily on annual and quarterly reports – for good reason. Following the money is the quickest way to unearth a company’s strategic intentions.
The reason is partly, of course, that while companies can publicly say all kinds of things for all kinds of reasons, money does not lie. But the other reason is that they are, at least to a degree, legally required to be open about their intentions.
You see, there are two main kinds of accounts: management accounts and statutory accounts. The former will delve into all kinds of financial details that are of particular importance to strategic decision-makers, but they are not mandatory nor, if they are created, is it to release them to the public. Obtaining one is therefore nigh impossible unless you are working for the firm in question. But the latter, which is mandated by law, can also hold immense value; its purpose is to establish financial actions taken and their results.
Statutory accounts include an income statement as well as a balance sheet and cash flow statement, all formatted in such a way as to make reading simple, and are found in annual reports.
The income statement is also called the profit and loss statement (or P&L), and most client side marketers will be aware of what it entails; it establishes whether the company is profitable.
The basic formula is revenue – expenses = profit.
Expenses can in turn can be broken down into costs of goods sold (a.k.a. COGS; costs related to revenue) and overhead expenses (costs related to running the overall business).
The balance sheet tells you about the company’s fiscal health at a snapshot in time; it establishes the present value of a company’s assets (what it owns) and how they have been funded (what it owes).
The basic formula is assets = liabilities + equity.
Assets are usually classified in order of most to least liquid (easy to sell without loss of value). Liabilities can be broken down into short-term, or “current”, liabilities that are owed in less than a year, and long-term liabilities that are owed in more than a year. Equity is effectively what the company is worth based on its books (attributable to owners).
The cash flow statement, lastly, provides information about how the company has spent cash over the relevant time period.
The basic formula is cash flow from operations + cash flow from investing + cash flow from financing = net cash flow.
Cash flow from operations can be defined as cash from sales – cash paid to get sales; it is net income in cash form. Cash flow from investing refers to investment gains and losses. Cash flow from financing is the flow between the company and its creditors (usually debt or equity).
Remember that cash flow can be negative.
Each of these may provide crucial insights to strategies of all sorts and varieties. Among other things, it may help you understand whether current strategy is actually working, if cost structures constrain execution, or how a company drives sales.
Similarly, annual reports can shatter false beliefs in an instant. A very common question for management to ask upon being introduced to a new strategy is “has it worked for anyone else?”. The fundamental mistake made about strategy therein notwithstanding, falling into the popular trap of referencing companies that recently made big headlines may turn out fatal; a look at the relevant net earnings can squash hope in an instant.
Next week on Strategy in Praxis
Given that even this short introduction may be a lot to digest, I am going to let you take a week to do so. Next time, we will go one level deeper and discuss how we can obtain a few more insights through what is called ratio analysis.
Until then, have the loveliest of weekends.
Onwards and upwards,
JP
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