The Wharton Program: How Creating Value Gets Security a Seat at the Table
Skills such as leadership, persuasion, and decision making may come naturally to security executives. It's the rare practitioner who intuitively masters financial measures of performance.
In a half-day session at the Wharton/ASIS Program for Security Executives, Wharton Adjunct Associate Professor of Finance David Wessels explained that the essence of business is value creation, and value creation is a combination of organic revenue growth, a healthy return on capital, and sustainable long-term performance.
"You will only be at the table if you can help your CEO with value creation," Wessels emphasized to his security students.
Security Management staff member Michael Gips participated in the Wharton/ASIS program in November 2015. The program seeks to provide the leadership and management skills to communicate the bottom-line impact of security decisions to the C-suite to move security profiles forward.
A few months after completing the program, Gips reached out students from the course—as well as alumni from the earlier iterations of the program—to see how the course benefited them and their companies. Here are some of the key topic areas, takeaways, and real-world applications.
Security can help corporate business executives take a granular view of their markets. That's because most companies do not compete in a single market, but rather in hundreds of small markets, each of which have different dynamics, characteristics, and growth potential.
"Once executives take a granular perspective, research shows that differences in growth across companies is driven more by where a company chooses to play, than the market share it captures," Wessels says.
This requires a change in mindset for executives. "Too much time is spent in strategic discussions? about how and why market share is changing, rather than whether or not the company is in the right markets to begin with," he adds.
The right markets, Wessels explains, could relate to geography (such as U.S. versus emerging markets), line of business (landlines versus cell phones), channel (beer sales at supermarkets versus bars), consumer types (contractors versus end users), or application (selling Tic Tacs as a fun thing to eat when bored, rather than as a breath freshener).
Wessels offers a geographic example involving Clorox and Colgate-Palmolive.
In 2015, Clorox generated 18 percent of its business from international markets; whereas, Colgate generated 80 percent from international markets, of which half came from emerging markets alone. Consensus analyst forecasts predict that Colgate will outgrow Clorox by about 2 percent per year over the next five years.
Because of strong returns on capital, this translates to Colgate being valued at 4.1 times revenues versus only 3.3 times revenue for Clorox.
After learning how to drive revenue and growth, students went through exercises in which they chose among possible product lines to expand with the goals of driving margin (operating profit divided by revenue) and evaluated opportunities by calculating the return on capital and comparing it to the cost of capital.
Students learned to develop a viable business case through a familiar example: loss prevention. Students received background materials explaining the economics of the gift card industry, the rise of gift card fraud, and one chain store's options for preventing gift card loss.
In the scenario, thieves had been copying gift card numbers and waiting for customers to buy the compromised cards. Once a card was activated by the cashier, thieves would immediately make purchases to drain the card's value.
What would be the most cost-effective way to proceed? Students could elect to do nothing, or choose among three options for remediation. Placing the cards behind the could would reduce fraud by two-thirds, but would also make purchases more difficult and decrease revenue by 25 percent. Covering the number with cardboard and placing cards in soft packaging—which thieves would have to open and reseal—would add a fixed cost of $0.25 to each card and reduce fraud by one-third without a reduction in revenue. Finally, encasing cards in hard plastic, at $0.50 per card, would eliminate fraud completely without impairing revenue.
While the final option looks promising on its face, the increased difficulty of opening the package would double the average transaction time, requiring extra cashiers to be hired. In the final analysis, the soft packaging proved to be the most cost-effective approach.
While this module was an eye-opener for students, none of the graduates contacted for this story said they had been involved in driving financial performance in the level of detail Wessels outlined.
For different course highlights, check out "Giving Them the Business" in the July issue of Security Management, available July 1.
To learn more about the 2016 Wharton/ASIS Program on October 23 to 28, visit Wharton University of Pennsylvania's website.
ASIS Chief Global Knowledge & Learning Officer Michael Gips can be reached at [email protected] Follow him on Twitter:@MikeGips.