Talking about strategy » analysts

Strategy models help Boeing

Kim Warren — Thu, 18 Aug 2011 08:39:26 +0000

I see strong 2nd quarter profits at Boeing, just after hearing their strategy VP explain their heavy use of strategy models. Their industry model led them not to cut production after a 2009 collapse in orders, in spite of screams from analysts that they should do so to cut costs. Reminds me Airbus used a similar model way back in 96 (also in link above) to spot that a massive jump in orders was fluff, and to be cautious about adding capacity. (Back then, Airbus could only supply part of the market, so they couldn””t have captured Boeing””s 98-9 peak deliveries).

Message here – you can””t do strategy with 2×2 boxes, Vision statements and spreadsheets – you need rigorous and powerful models of your business and its environment. And this is not just for big boys and girls - my friend Warren Farr who runs RSC, a regional distributor of heating, ventilation and air-con equipment, built a strategy model of his market. This told him a market slow-down was not a normal cycle but a fundamental shift to an era of lower demand. Competitors kept expanding, believing growth would return – Warren held back and banked the cash. When competitors failed, he bought up cheap capacity and failed businesses, putting RSC into a strong position – much to the delight of employees who would otherwise have lost their jobs.

www.strategydynamics.com

Another dot-com bubble?

Kim Warren — Wed, 08 Jun 2011 07:25:51 +0000

Back in 1999 I got booed for saying the dot-com boom was mostly hot air, after which the NASDAQ dropped from 1000 to 200. The Economist now warns of a 2nd bubble,with private equity and big corporates falling over each other to throw cash at anything web-ish. Many of the new ventures will be great, but most will fail, due to poor understanding of whether business models are viable – which needs a sound system-model of the business.
As noted before, certified analysts are not required to understand anything about the link from strategy to performance, so we can be sure disasters will follow, as we see the NASDAQ drive up from 300 to 600 …
For a route to sound strategy and business models, see www.strategydynamics.com.

German secret of success

Kim Warren — Sun, 28 Nov 2010 08:28:51 +0000

Fascinating Economist article on two recent studies of Germany’s outstanding long-run success. It’s down to their ‘Mittelstand’ mid-sized companies relentless pursuit of apparently boring but lucrative niches, and similar strategies by their larger, but little-known firms. More detail on their strategies in the article and references. Others tell me this is backed up by very strong involvement from bank-investors, rather than disinterested arms-length investors nagged by foolish analysts chasing every quarterly forecast. Not sexy, but rock-solid.

www.strategydynamics.com

Tyranny of market expectations

Kim Warren — Tue, 24 Aug 2010 13:15:43 +0000

Further to Analysts Getting it Wrong, a set of McKQ articles explain that just meeting investor expectations does nothing to the share price or, therefore, to total shareholder returns. Executives get on a relentless treadmill with every surprise performance requiring still another to boost TSR. It is troubling, then to see one quoted company Strategic Plan start with ‘Our aim is constantly to exceed shareholder expectations‘, which of course is impossible.

Strategy error by Kraft?

Kim Warren — Wed, 03 Feb 2010 09:52:53 +0000

Kraft foods finally won control of Cadbury with a big £11.9 billion ($19.4b) offer. Warren Buffet, owner of 9% of Kraft, says it’s a bad deal – and he’s rarely wrong. Will Kraft do the usual and try to extract ‘synergies’ by slashing costs, or deliver real value by leveraging the combined resources to drive medium- to long-term growth in cash flows? … and will analysts allow them to do it right?

Analysts press for underinvestment

Kim Warren — Fri, 30 Oct 2009 09:06:53 +0000

I have noted before that stock analysts need know little about how strategy affects firm performance, so an academic study on the impact of stock analysts on firms’ investment behaviour is intriguing. The unpublished working paper by Benner and Ranganathan at Wharton finds that negative pressures from analysts to improve cash flow and stock price trigger reductions in strategic investments during periods of technological change. Two examples:

One analyst continually pressured Kodak to cut costs and investment in digital technology: “…we suspect that investors are growing increasingly restless with the gradual pace of cost-cutting … Kodak’s not a player in digital imaging…we consider the opportunities for Kodak to materially alter its growth trajectory with digital imaging technology to be relatively slight over the next three to four years…” (Prudential, February 1995) – and “Shareholders will revolt once the meager (and distant) potential returns from electronic imaging become clear…we are eager to see shareholders’ reactions when they realize how much of their money is squandered on ‘digital nonsense’” (Prudential Securities, 1994:7).
“ …difficult secular issues face the US telecom sector. The troubled state of the US telecom industry is not news to anybody…the most supportive valuation measures continue to be dividends and free cash flow yield…we are recommending a switch from Verizon to BellSouth…there are several arguments favoring BellSouth…cash yield at BellSouth is greater than at Verizon… we like the clear policy of returning cash to shareholders that we see at BellSouth.” (Morgan Stanley report on Verizon, April 3, 2003) – and – “Investors are forcefully questioning the wisdom of inflicting earnings and free cash-flow pain through rebuilding of core consumer businesses. If the competitive environment is to remain subdued, then one should clearly reduce the speed of new product roll-outs, contain investment and maximize short term ROIC.” (Deutsche Bank report on Verizon, January 26, 2006)

These analysts clearly believe that both Kodak and Verizon should abandon ‘wasteful’ efforts to develop knowledge and capabilities to respond to the new technological environment and return cash to investors. The paper’s authors wisely recognise [unusually for an academic strategy paper!] that the key concern should be the present value of likely future cash flows and imply that both companies might have been right to invest in new technology.

But were the analysts wrong? Both companies faced decline of their previous core consumer-based business, so doing nothing probably would have led to declining cash flows for investors, perhaps to the point of shutting down completely. Building capabilities to create new lines of business to exploit that consumer franchise could have led to sustained longer term cash flows.

On the other hand, the investment could have been ill-advised, if there was little chance of developing anything that might have led to sustained long term cash flows. Kodak, for example, made $2.2bn operating profit in 1996, after spending $1.0bn on R&D. By 2001, operating profits were only $1.2bn, and the company still spent $0.8bn on R&D. By 2008, profits were negative, but still R&D absorbed $0.5bn of cash flow. Little evidence here that continued investment in R&D helped sustain long term cash flows.

On the other, other hand, Verizon has raised operating income continually from $5.3bn to $16.9bn between 2003 and 2008, so it is hard to make a case that their efforts to rebuild their consumer franchise were ill-advised. Unfortunately, we can’t tell what BellSouth’s more cash-conserving strategy would have delivered, because they merged with AT&T. However, the merged entity seems to have driven strongly to grow the customer-base with up-to-date products and services – could it be that AT&T saw in BellSouth a resource that had been under-exploited though mean development efforts, offering an opportunity for enhanced future growth in free cash flows from reversing that policy?

Without detailed analysis we can’t know exactly what would have been right in either case – but at least someone is asking about how analysts try to change managers’ strategic decisions.

Good strategy from big listed firms

Kim Warren — Sun, 03 May 2009 09:01:35 +0000

I have been tough on the poor strategy seen over both of the last two boom-bust cycles, so good to see in Sensible Giants from the Economist that the largest listed firms have disproportionately little debt compared with both smaller listed peers and private firms.

It seems that these large firms are both:

more able to fight off the stupid urgings of naive analysts who pushed less powerful companies to take on more debt to pursue unsustainable growth, with the implicit threat that they would otherwise be targeted for acquisition, and
less tempted into the same over-gearing that underpinned the philosophy of the less thoughtful private equity firms.

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The banking crisis – again

Kim Warren — Wed, 17 Sep 2008 12:59:01 +0000

I’ve gone on about this before, but it’s gone way, way worse since I last brought it up, so let’s not forget that this whole mess started with gross strategic incompetence on the part of a few dozen CEOs of ordinary banks over-selling high-cost mortgages to more-and-more people who, more-and-more, couldn’t afford it – and egged on by equally incompetent analysts lauding those same CEOs for their foolishness – and then compounded by further incompetence when those toxic loans were packaged and sold on to top-top banks who should have known far better.

Boy do we need some professional standards of strategic management amongst CXOs !