Operating Trend
Definition
The Operating Trend displays the development of the median or other location parameters of a financial metric of a Peer Universe across several time periods.
Description
The Operating Trend analysis shows the development of markets (Peer Universes) with regard to selected value drivers. Typically two or several trends are displayed against one another. If the median is used for the Operating Trend, then it corresponds to the Operating Index. The graph below shows a typical Operating Trend diagram.
The Operating Trend is also used in the strategy process for identifying market developments from a value-oriented perspective. Positive and negative market developments can be spotted directly, and projects can be better justified by analyzing markets with the Operating Trend view.
Application
By comparing several Operating Trends, conclusions about key figure developments in different markets (Peer Universes) can be drawn. Peer Universes can, for example, be verified for their feasibility. Typically, this is the first step in a Peer Universe Definition done by the research company Obermatt. During these clarifications, Obermatt is personally at the client's disposal for correct interpretation and assessment of the Operating Trends.
If the Operating Trends are running in parallel, Peer Universes could also be consolidated, provided this can be justified rationally. In the graph above, the Operating Trends of markets A, C, and D are largely similar. Thus, these Peer Universes could be consolidated for Indexed Operating Performance assessment. Against this, market E is running counter-cyclically, which could indicate that different cycles and thus different risks are prevalent in this market. The companies of market E are definitely not peers for markets A, C, and D. Such decisions on behalf of the client are initiated and moderated by the responsible Obermatt account manager.
The Operating Trend is also used in the strategy process for identifying market developments from a value-oriented perspective. Positive and negative market developments can be spotted directly, and financial projections (financial plans) can be better justified. Such insights are provided by Obermatt account managers while monitoring strategy processes. The cooperation in strategy is often formulated such that Obermatt ensures data quality and correct interpretation of the analyses so that the client can conduct the strategy process in-house.
Changes in strategy can also be derived from Operating Trends. In the above graph, market D is developing largely similar to markets A, C, and D up until 2006. Starting in 2007, this market suddenly changes course, which could indicate that it has become more attractive as of 2007. This could be used in the strategy process to justify or intensify growth strategies into market D. Against this, market E runs counter-cyclical to market A, C, and D. This information could be used in the strategy process to intensify activities in market E in order to reduce business cyclicality.
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 white paper on how the Operating Index is used in bonus systems (Download PDF). 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).
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