Applied Analytics in an Organizational Context
Module 5
October 5, 2022
Applied Analytics Program
Agenda
Product marketing
• Financial statements for individual product
• Quantitative and non-quantitative dimensions of
product portfolio (mission, vision, financial)
• Product attributes
Review of Income Statement
1. Measures the company’s achievement (revenue) and
the resources (expenses) that were expended to
produce that achievement
2. Describes the performance of the company over a
period of time, usually a month or a year
Revenue - Expenses = Profit or Net Income
Income Statement for Home Depot
Product
Performance of individual product
Division
Sum of performance of products
Enterprise
Sum of performance of Divisions
Divisional Performance
EBITDA is used to evaluate the performance of those who
manage individual businesses, strategic business units, and
individual divisions and subsidiaries.
• Managers of these entities are not responsible for taxes and
the income and expenses associated with the financing of the
corporation, i.e., interest income and interest expense.
• They are evaluated on those results for which they are
responsible, which leads to a focus on the generation of
operational cash flow
Divisional Performance
Division of Company XYZ had investments at the year end of
$56MM. The operating income of the division for the year was
$7MM.
What was the revenue for the division?
What was the operating margin for the division?
Division of Company XYZ had investments at the year end of $56MM. The
operating income of the division for the year was $7MM.
Profit = Revenue – Cost
Revenue = Profit + Cost = $56MM + $7MM = $63MM
Division of Company XYZ had investments at the year end of $56MM. The
operating income of the division for the year was $7MM.
Revenue −Operating Cost Operating Income 7
Operating Margin = = = = 11%
Revenue Revenue 63
Divisional Performance
Division A of Company XYZ had investments at the year end of $56MM, including $3MM for a
new piece of equipment that was acquired two weeks before the end of the year.
This equipment was paid for by the central treasury department of the company and is
recorded in the accounts as an inter-company loan.
The profit of division A for the year was $7MM before deducting head office recharges of
$800,000.
What is the operating margin for the division?
Revenue −Operating Cost Operating Income 7
Operating Margin = = = = 11%
Revenue Revenue 63
Divisional Performance
The investment was made 2 weeks before the end of the year so it did not
impact profitability
• Annual cost = $56MM – $3MM = $53MM
Chargeback to head office are not controllable expenses so are not
relevant to measuring the performance of the division
Operating Income 7
Operating margin = = = 12%
Revenue 60
Product Performance
Gross margin may be used to compare product performance
However, this would not include the cost of advertising and
promotion and the cost of sales
Measures of profitability
NPV, ROI and IRR
Simple Example
Assume 10% cost of capital. Invest $100 today and get $125 at the end of 1
year, 2 years, 4 years or in equal installments over 4 years.
NPV ROI IRR
1 Year payback $ 14 0.25 25%
2 Year payback $ 3 0.25 12%
4 Year payback $ (15) 0.25 6%
4 Equal installments $ (1) 0.25 10%
Why is ROI constant, while NPV and IRR vary?
What does IRR measure?
Evaluation Example
A company can purchase a product from another company for $500MM. The
product is expected to generate revenue of $200MM in year 1 and grow at
20%/year for the next 5 years. The net margin is estimated to be 35%. The cost
of capital for the company is 8%.
What is the NPV? ROI? IRR?
Create Excel model
Should the company purchase the rights to the product?
Cash flow
Total
Total Cost Income Discount
Year Revenue PV NPV ROI IRR
($MM) ($MM) Rate
($MM)
8%
0 $ - $(500.00) $(500.00) $(500.00) $ 14 39% 9%
1 $ 200 $ 130 $ 70 $ 65
2 $ 240 $ 156 $ 84 $ 72
3 $ 288 $ 187 $ 101 $ 80
4 $ 346 $ 225 $ 121 $ 89
5 $ 415 $ 270 $ 145 $ 99
6 $ 498 $ 323 $ 174 $ 110
NPV
Total
Total Cost Income Discount
𝑁 Year Revenue PV
($MM) ($MM) Rate
𝐶𝐹𝑡 ($MM)
𝑁𝑃𝑉 = 𝐶𝐹0 + 8%
1+𝑟 𝑡
0 $ - $(500.00) $(500.00) $(500.00)
𝑡=1
1 $ 200 $ 130 $ 70 $ 65
2 $ 240 $ 156 $ 84 $ 72
3 $ 288 $ 187 $ 101 $ 80
4 $ 346 $ 225 $ 121 $ 89
5 $ 415 $ 270 $ 145 $ 99
6 $ 498 $ 323 $ 174 $ 110
NPV = -500+65+72+80+89+99+110 = $14M
Invest because NPV is positive?
ROI and IRR
𝑁
Value – Cost 𝐶𝐹𝑡
ROI = X 100 IRR = 𝐶𝐹0 + =0
1+𝑟 𝑡
Cost
𝑡=1
695-500 IRR = 9%
ROI = X 100 = 39%
500
Comparing Investment Opportunities
In the context of a fixed budget, NPV does not provide enough
information to inform investment decisions
• NPV may be positive, but the investment cost may exceed the
budget available
ROI and IRR are better measures for comparing investment
opportunities
Comparing Investment Opportunities
The company has two additional opportunities:
1. Invest $225M in an internal program that will generate revenue of $100M in
year 1 and grow at 20%/year for the next 5 years. The net margin is
expected to be 35%. This investment is risky so the Finance organization has
assigned a 12% discount rate.
2. Invest $60M to comarket a competitor’s product that is being launched. The
product is expected to generate revenue of $100MM in year 1 and grow at
30%/year for the next 5 years. The risk is low. The deal is structured so the
company will get 40% of the revenue and share 50% of the cost of
commercializing the product. The net margin is expected to be 35%
Internal program investment
Total
Total Cost Income Discount
Year Revenue PV
($MM) ($MM) Rate
($MM)
12%
0 $ - $(225.00) $(225.00) $(225.00) NPV = $(1MM)
1 $ 100 $ 65 $ 35 $ 31
2 $ 120 $ 78 $ 42 $ 33
3 $ 144 $ 94 $ 50 $ 36 ROI = 54%
4 $ 173 $ 112 $ 60 $ 38
5 $ 207 $ 135 $ 73 $ 41 IRR = 12%
6 $ 249 $ 162 $ 87 $ 44
Co-marketing investment
Total Company Company Total
Total Cost Company Discount
Year Revenue Share of Share of Income PV
($MM) Income Rate
($MM) Revenue Cost ($MM)
8%
0 $ - $ (60.00) $ (60.00) $ (60.00) $ (60.00) $ (60.00) NPV = $10MM
1 $ 100 $ 40 $ 65 $ 33 $ 35 $ 8 $ 7
2 $ 130 $ 52 $ 85 $ 42 $ 46 $ 10 $ 8
3 $ 169 $ 68 $ 110 $ 55 $ 59 $ 13 $ 10 ROI = 59%
4 $ 220 $ 88 $ 143 $ 71 $ 77 $ 16 $ 12
5 $ 286 $ 114 $ 186 $ 93 $ 100 $ 21 $ 15
6 $ 371 $ 149 $ 241 $ 121 $ 130 $ 28 $ 18 IRR = 12%
Comparison of Investment Options
Investment Cost NPV ROI IRR
Buy $500MM $14MM 39% 9%
Internal investment $225MM $-1MM 54% 12%
Co-marketing $60MM $10MM 59% 12%
How would you rank order the attractiveness of these investment options?
What would you recommend to the CEO?
Additional Considerations
NPV, ROI and IRR might not reflect all of the reasons for making an
investment
Projects must align with the strategic intent and strategic objectives
of the organization
• Financial objectives are one component
• Account for importance of intangible assets and value
Balanced Scorecard
Strategic planning and management system that organizations use
to:
• Communicate what they are trying to accomplish
• Align the day-to-day work with strategy
• Prioritize projects, products, and services
• Measure and monitor progress towards strategic targets
Power of Balanced Scorecard
• Clarify and align around strategy within the company
• Connect strategic objectives with annual budgets and indicators
with forecasts
• Connect goals of organizational units and employees with
realization of strategy
• Monitor and analyze realization of strategic initiatives
• Link attainment of strategic initiatives with compensation
Balanced Scorecard
Translate vision and strategy into KPI’s across 4 dimensions
Customer Satisfaction Financial Performance
e.g. Ratings Financial
e.g. ROI, EBITDA
Vision
Customer & Internal Processes
Strategy
Learning
Organizational Capabilities & Business Efficiency
e.g. Employee retention, Growth e.g. Unit costs, lead times
New ideas
Balanced Scorecard Strategy Map
Apple’s Balance Scorecard
[Link]
Financial
Customer Internal Processes
Learning and Growth
[Link]
Balanced scorecard for Triple Bottom Line
Redefine Financial to Outcomes to
highlight measurable Financial,
Environmental and Societal benefits
Outcomes
No change. These are the
Redefine Customer to
Vision critical activities that must be
Stakeholder because every
Stakeholder & Internal Processes executed to deliver value to all
participant in the ecosystem
Strategy stakeholders and enable the
is treated as a “customer”
triple bottom line.
Enablers
Redefine Learning and Growth
to Enablers to reflect the
diverse capabilities across all
participants in the ecosystem
[Link]
Product Requirements
Kano survey - tool for capturing the voice of the customer (VOC)
• Importance of products and services and the level of satisfaction from the
customer’s perspective.
• Identify requirements of a product or service that bring more than
proportional satisfaction to customers, and identify requirements that do
not bring satisfaction when present, but bring dissatisfaction when they are
not met
Quality function deployment (QFD) - tool in translating VOC into product
specifications.
• Translate customer needs into design attributes.
• Design attributes are deployed in process and quality requirements.
Kano Diagram
Customer perception of importance and satisfaction of product attributes.
Help businesses identify:
• Requirements they must fulfill (basic)
• Requirements they should be competitive with (performance)
• Requirements that bring a differential in the eyes of the customer
(excitement)
Kano Model
Attractive attributes (Delighters): One-dimensional attributes (Performance):
• Characteristics that give customers • Characteristics that directly correlate to
greater satisfaction and for which they customer satisfaction.
are willing to pay a price premium. • Increased functionality or quality of execution
• Satisfaction will not decrease below will result in increased customer satisfaction.
neutral if the product lacks the feature. Conversely, decreased functionality will result
in greater dissatisfaction.
Threshold attributes (Basic):
• Characteristics that must exist in order for the
product to achieve success.
• The customer can remain neutral in attitude
toward the product even with improved
execution of the attributes.
Kano Diagram – Restaurant Example
Offer free parking on site.
The tastier the food, the more satisfied the customer
Restaurant has to be clean and hygienic
What about:
Restaurant’s inventory management system is company A or B
Restaurant is so crowded that it generates huge queues
[Link]
Kano – 5 Star Hotels
Thipwong, P. Wong, W-P, Huang, W-T. (2020) Journal of Management Information and Decision Sciences 23, 1-6.
Kano – Autonomous Vehicles
Ma, M-Y, Chen, C-C and Ming-Chuen, C. (2019) Int. J. Production Economics
69, 142-152.
Quality Function Deployment
QFD - process and set of tools used to convert customer requirements (VOC) into detailed
engineering specifications and plans to produce the products
QFD assumptions:
• Customers have previous experience with the product or service being developed
• Customers are capable of evaluating the importance and their satisfaction with the product’s
requirement
• Relationship between importance and satisfaction are linear and independent.
• For products with innovative requirements, customers may neither be able to rate the
importance of these requirements nor to make a competitive evaluation
House of Quality
QFD transformations are represented by a house of quality matrix that
expresses the relationship between the Customer Requirements (WHATs)
and the Technical Requirements (HOWs)
• WHATs matrix
• Relative importance (weights) of WHATs
• HOWs matrix
• Weights of HOWs
• Interrelationship between HOWs
• Relationship matrix between WHATs and HOWs,
QFD Example - Help Desk
Kano - VOC First level QFD - prioritized Second level QFD- prioritized
1. Response time technical requirements features for implementation
2. Quality of reply 1. Reply quality rating 1. Feedback for the quality of
3. Ease of use of the tool 2. Query turnaround time reply.
4. Relevance of the help desk in 3. Percent repetitive 2. Monthly data processing
projects queries with analysis for repetitive
4. Discussion forum queries
5. Clarity of communication
turnaround time 3. Auto reminder mail to be
6. Usefulness of the help desk- sent from help desk for
FAQ function 5. Hits on FAQs versus the
number of queries queries posted
7. Help desk discussion forum 4. Monthly analysis of the
usage received
metrics: Hits on FAQs versus
8. Usefulness of user manual number of queries
9. Help desk facility value to
software projects
Evaluating projects across multiple criteria
MCDA – Multiple Criteria Decision Analysis
Evaluation of alternatives against multiple criteria based on the “preference” or value
function of the decision maker
• e.g., A decision maker may have a different preference for an investment that
increases revenue from $1.5B to $1.6B compared to an investment that increases
revenue from $50M to $150M, even though the incremental increase is $100M for
both options
• e.g., A decision maker may have different preference for a gain of $100M or a loss of
$100M. Risk aversion may cause the decision maker to care much more about a
potential loss than a potential gain
MCDA Framework
Overall Value
Cost Benefit
Resources Dollars Financial Customer Learning Processes
When might you use Specific Objectives*
MCDA to evaluate
decisions?
*[Link]
MCDA Framework – Triple Bottom Line
Overall Value
Cost Benefit
Resources Dollars People Planet Profits
Specific Objectives
Portfolio Management using MCDA
Efficient Frontier –
Greatest return at each
level of spend
Portfolio that provides the
greatest returns at the
budgeted level of spend
Assignment 2
Due October 21 before 11:59PM
For this assignment, you will demonstrate your developing understanding of
analytics that might be used within a marketing analytics function.
You are an analyst at Fresh Direct and as a result of your terrific work in the
past, the Chief Financial Officer (CFO), the Chief Marketing Officer and Chief
Operating Officer (COO) of the organization need you to help them with
separate, but related projects.
Next Class
Assignment 1 is due on October 7
• Market Research
• Use of research to understand customers, market, competitors
• Primary and secondary sources of data
• Common techniques
Readings:
• Rajagopal, R. (2018). Marketing Research: Fundamentals, Process, and
Implications. Nova. Chapter 1, pp1-28