Operating Radar


Definition

The Operating Radar is a graphic display of the Operating Ranks of several financial metrics of a company or investment for a certain time period. It illustrates either the Operating Ranks of the financial metric itself or the Operating Ranks of the changes in the financial metrics.

It is possible to show average Operating Ranks either a) across several time periods or b) across several enterprises. The Operating Radar is also known as the "Stern Radar" in German-speaking countries.

Description

The Operating Radar facilitates the assessment of the value contribution of each financial metric, independent of subjective assumptions or economic impacts (see also Operating Contribution). the Operating Radar is not only able to show true operating performance independent of external economic factors but is also to express dissimilar metrics in like terms for comparison: growth rates, margins, and turns are all displayed as percentile ranks within the index.

The Operating Radar exhibits for each financial metric, not the actual value but rather the Operating Rank among the Peer Universe. This has the following advantages:

  1. Each metric is directly comparable with any other metric. With this, one can assess which metric contributes positively to value generation and which metric contributes negatively to value generation.
  2. The analysis is independent of economic cycles since the metric rank is taken against peers that are subject to the same economic conditions.
  3. The analyses of the Operating Radar are directly comparable between different business areas, thus facilitating the cross-divisional identification of value gaps.
  4. The Operating Radar is impartial and thus a performance assessment without target setting, budgets, or other assumptions.

Value sources or value gaps can be illustrated with the Operating Radar as follows:

  1. The Operating Rank of the key metric shows the actual (historically formed) position within the market.
  2. The Operating Rank shows the change in the key metric and thus illustrates the actual period performance within the market.

For recurring performance assessment, the research company Obermatt recommends the Operating Radar of the changes in key metrics (measuring the period performance). This analysis is comparable universally (i.e. to be performed analogously for all business divisions) and independent of economic cycles. It enables interpretations of performance since the Operating Ranks illustrate performance assessments.




Application

The Operating Radar is particularly useful in strategic planning and capital budgeting. Financial metrics in the Radar are grouped by value driver, with growth at the top of the star, profit margins to the right, and capital efficiency measures to the left. The sample Radar above, for example, shows a company with relative strength for its industry in profit margins and net working capital management, but lagging in sales growth and operating leverage.

In the Operating Radar graph above, the Operating Ranks for the metrics sales growth, gross margin, EBITDA margin, EBIT margin, NWC turns (net working capital turns), FA turns (fixed assets turns) and ROI (return on investments) are shown. Typically, the value drivers are listed clockwise in the sequence of the Value Driver Tree. But this is not imperative. Other financial metrics or other sequences can be defined.

The Operating Radar in the above diagram shows strong characteristics (value opportunities or strengths) in margins (gross margin, EBITDA margin, and EBIT margin) and in net working capital efficiency (NWC turns). Against this, the Operating Radar reveals weaknesses or value gaps in sales growth and invested capital efficiency. The total Operating Radar graph illustrates the position of a company in its respective market, thus a market position.

Such market positions could have evolved historically or could be the result of a different business model compared to peers. For this reason, they are not simply good or bad but merely a fact. If the period performance is to be assessed, the Operating Ranks of the changes for the same metrics are to be considered. These can be growth rates or deltas depending on what is appropriate on the basis of the financial data available.

The Operating Radar of the period performance (the metric's delta) does not necessarily have to be large or small. However, it has to reflect the strategy. A company targeting to increase cost efficiency should not deliver an Operating Rank in margins below the median. A company targeting growth should outperform the average or at least half of all peers.

The Operating Radar is first and foremost a measure of strategy implementation and thus also an early warning system of undesirable developments, a system that is independent of external factors.

Examples

To exemplify the development of a typical Operating Index, we cite the Swiss luxury goods company Richemont (PDF download). Hermann J. Stern's article in the German Corporate Governance magazine comments on the application of the Operating Index for Executive Management and the Board (German: PDF download). On the Social Science Research Network, there is a paper on Cycle-Proof Performance Measurement and Executive Bonus Plans (PDF download) In "Finanz und Wirtschaft" Raiffeisen Bank Group is quoted as an example for the Operating indexed bonus targets based on the Operating Index for Swiss Banks (PDF download).

The financial research company Obermatt AG (about) provides indexing performance analysis such as the Operating Radar to clients. Request a quote for your company by contacting Obermatt AG (contact).

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