Winners & Loosers: Rubble Sorting
A friend and I were discussing the current situation, or "mess" as he calls it and he asked a very
pertinent and simple question. Also a very difficult one yet as crucial as it is hard. While I'm not sure an easy answer will roll forward here there are some approaches. Here's the original question:
"Now, I have an interesting and difficult question for you to work around. Can you propose what kind of scenarios we might see in the resolution of all the mess? Who will wind up being the biggest losers? the biggest winners?"
First, let's change the scale and take a couple of different looks at enterprise performance and then ask some questions. Now all of a sudden an entirely different picture emerges where BA is far and away the best performer, on both sub-charts. Despite it's recent dip due to B787 Dreamliner delays. At the same time, if you look at the top sub-chart, the only one of these bellweathers that has come even close to matching the performance of the SP500 is GE. As noted C has dropped big time, ~ 60% so far. And neither PFE nor WMT has done well with declines since '04 of -30% and -15% respectively. So what's going on here ?
Well we have several mantras we like to apply and hope to persuade you to, if not adopt, at least think-thru and be aware of. And which we'll use as our template for further discussions. The three (& there are likely more but let's stick with three for now) are:
1. Economy to Industry to Firm analysis: no firm is entirely immune from general trends and the more it's one of the pack the more that's true. Conversely a true innovator, e.g. Fedex in its' heyday, can defy the overall trends if it's establishing a new business model, industry or solution.
2.Timeframe: back in my days in corporate planning one of the great puzzlements was how major initiatives that had huge payoffs failed to move the market. And conversely how irrelevent short-term data caused it to jump all over. Businesses move in three timeframes.
- Short-term where the run what they have with who they are, say over 12-18 months.
- Intermediate-term where major shifts, investments and adaptations take place, say over 18-36+ months. So, for example, a decision by Frito-Lay to go to Europe is a major strategic effort. Whether it pays off or not depends on how well suited the fundamental DNA of the company aligns with the new market. As WMT found out to its' great chagrin its' model wasn't well-adapted to Europe or Japan but seems to be working better in China and Latin America.
- Long-term where major innovations in product, markets, business model and/or strategy take place. Apple's recent "firing on all cylinders" success is based on executing well on all fronts but becoming the champion at sustained product innovation that adds value. BA is another good example because its' great success if based on major innovations in design, manufacturing, go-to-market and operations that date back years, if not decades.
3. Enterprise Characteristics: when you get to looking at an individual firm then you have to ask three fundamental questions. First, what's the Business Model and Strategy. Next, what are the operational capabilities, in all timeframes, and are they aligned with the BM etc. And third, what's the Management System - that is can they ensure that we they think they want to do is what they actually do do. GE seems to be as good as anybody in the world at this while Citi appears to give new meaning to the words miserable failure. For each of these example firms we lay out a partially filled in table of the major question areas to investigate.
Here's a couple of things to think about. How much of this sort of thing do the Street analysts do ? Or do they just extrapolate this quarter off into infinity ? And, since we start with the BM and Strategy - for each of these companies how well is it working now ? We'd argue that BA's model has shown superlative returns and will do so again in the future while Citi, as many have argued, has never managed to convert it's story (it only gets to be called a business model when it's working at least partially) into operational delivery. Yet GE which is in most ways much more complicated seems to have mastered the art of making a huge, multi-group, many-division conglomerate enterprise function. And the distance between medical equipment and aircraft engines is a lot farther than that between investment banking and consumer banking, vast as those differences might be to "inside baseball" cognoscenti.
So there's the first two+ questions you can ask for any company - how well is their model working ? And can they make it work ? And where's the information ? On that latter question look around you. MickeyD's recovery based on changing its' model was headline news several years back and any casual skim would tell you something is going on. In the same industry when Howard Shulz broad-sided Starback back last winter it told you that their BM was on the verge of breaking. Lo and behold here we are. And you could have made money going both ways on both companies but a relatively quick investigating of these questions.