Numbers & Insights
Why look at financials?
Friends,
I hope that all is well with you and yours.
First and foremost, due to a recent surge in demand of my services, I have set up a Calendly for the purposes of easier coordination. Should you or your organization be looking for strategic expertise, e-commerce insights, market analyses, or just a jolly good speaker (there are references) – please feel free to schedule a meeting. I am currently accepting work for Q2 and Q3.
Speaking of speaking, I will be introducing a brand new presentation on complexity in markets and organizations in late Q1/early Q2. The deal is as follows: if you are a Strategy in Praxis subscriber, attendance will be free and prioritized. If you are not, virtual seats will be $50.
Much more information is to follow, but in the meantime, if anyone would be willing to host (on whichever digital platform they prefer), please do reach out. Given my time constraints, it would be greatly appreciated.
Moving on.
In the news
P&G is spending 50% of its $8.1B ad budget on digital, according to its CEO, Jon Moeller. Naturally, commentators were quick to therefore declare the old way officially dead. But most companies already spend more on digital (often wrongly, but that is a different story) and, at any rate, cost per reach is a function of deal-based buying. Recently, negotiation power has shifted from the supply side to the demand side. In other words, the move makes contextual sense, particularly given the company’s overall media strategy and emphasis on net reach.
Coinbase is “setting its sights on positioning the company to generate adjusted EBITDA in all market conditions", abandoning its previous promise to operate “at break even, smoothed out over time”. Not only was the previous goal modest to the extreme, the new vision effectively translates to “we are sinking in shit, hoping to at best swim in it”. Caveat emptor.
Microsoft announced a 10-year deal with Nvidia to put Xbox games and Call of Duty on the GeForce NOW platform. Much like its recent deal with Nintendo, the move has one purpose and one purpose only: to avoid antitrust claims as Microsoft looks to acquire Activision Blizzard.
BrewDog has signed a deal with Budweiser to cash in on the Chinese demand for beer. At this point, if there is anyone still believing in the British company’s supposedly punk positioning, I would suspect they had far too much of its products to drink.
Item of the week
My co-author for the new book, Steve McCrone, is not merely one of the smartest strategists I know, he also has a rare capacity for explaining the advanced in a language that is easy to understand. His guest appearance on Being Human - a highly recommended watch - is a prime example. To illustrate, on companies claiming they need to improve their capacity to innovate:
If you go into a business, there are often small successes happening. But… …as soon as they come above the parapet, they go into a decision-making framework or a bureaucratic process. ‘There is no budget space’, ‘it does not align with our strategy’. So [the ideas] die not because of a lack of innovation, but a lack of oxygen. And then people get frustrated, they don’t try new things, and sticking to the plan becomes more important than success.
Why financial analysis?
A couple of years ago, I was being heavily recruited to become the chief strategy officer of a well-known advertising agency. The CEO is a creative genius of awe, so I was more than interested in joining. That I ultimately decided to decline was not of his doing, but due to two obstacles that I felt were unsurmountable: 1) the board clearly considered my CV ‘too unorthodox’ and I had no desire to work with people endlessly peering over my shoulder, and 2) a philosophical difference about what mattered in strategy.
My view was, and remains, that one of the major issues with agencies is that they often lack commercial understanding; advertising therefore turns into a fine arts project. While understandable - creative types often come from creative schools - it creates a disconnect from the corporate reality in which their clients act and the everyday in which prospective buyers live.
(That is not to say that they would lack employees able to achieve it. For agency specific workshops on how to understand client businesses, contact me by clicking here.)
Failing to take a holistic view is not an issue exclusive to advertising professionals, of course. Marketers in general often make the same mistake; in marketing diagnosis, as important as it is, they focus so entirely on the customer that the underlying business model becomes no more than a blurry background. The work inevitably suffers.
To once more dust off an example that I have used many times before, imagine that you have two companies, creatively dubbed Company A and Company B. Their size is about the same, their revenue about the same, their brands about the same, and they both sell the same kind of aluminium cans. How would you market them?
On the face of it, the answer would more or less identical regardless of which company happened to be the client or employer, plus minus customer insights. Yet, as I am sure you have already surmised, there is a twist.
As it turns out, Company A does long runs to a handful of big clients; shipments are few. Marginal costs are low due to economies of scale, enabling a low price. However, the time to market is long. Company B is its opposite. It does short runs to numerous small clients; shipments are many. Marginal costs are consequently high, forcing a higher price, but justified by a short time to market.
This information ought to change one’s marketing entirely, particularly in the near-term. If one is employed by Company A and goes after the kind of customer that Company B has, it might be that the size of the order is too small; the company cannot employ economies of scale, costs go up, margins go down, and profitability with them. If one is conversely employed by Company B and goes after the kind of customer that Company A has, it might that the size of the order is too large; the company has no capacity to fill it. You would have created a demand for which you had no supply.
Certainly, some will undoubtedly look into these matters during their strategic process, particularly if their main area is business strategy (the point of which is to understand what makes the company tick). But my experience tells me that far from all marketers do.
And so, over the next few weeks, I am going to go through the basics of how to read an annual or quarterly report specifically with the marketer reader in mind. Not so that they may turn into Wall Street employees (for those interested in the advanced, Stern professor Aswath Damodaran puts his lectures on corporate finance, M&A and valuation on Youtube), but in order to improve our ability to diagnose, conclude, and strategically decide.
Next week on Strategy in Praxis… …and beyond
The first week (i.e., seven days from now) will break down the most important financial statements, what they mean, and why they matter for strategy. We will then move on to metrics, both general and marketing-specific. Lastly, three weeks from now, we will conclude with the usual practitioner’s insight interview.
Until then, have the loveliest of weekends.
Onwards and upwards,
JP
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