bizzXceleration: Performance, Value and Profit

Better yet consider the truly sad migrations of, for example, Dell or Citi. Dell for example started out in the Sustainers column of high-performers who have found a way to maintain that performance. Alas not as it turns out they were unable to see the changes in their environment, succumbed to internal scelrosis that then led to bigger and more public failures. Consider Citi which started in one of the worst places - in court due to the breakdown of internal controls and the management system. While they struggled with those terrible self-inflicted wounds they still hadn't managed to figure out to make themselves work [Citi(2)] but finally seemed to be getting some semblance of clean-up and control back together [Citi(3)]. Having reached a certain level of mediocrity they then proceeded to loose their minds, insofar as business judgement and acumen was concerned and turned in a disastrous performance [Citi(4)].

How many other companies are on similar journey's ? Or the opposite ones ? Because the answer really matters whether you're worried about the economy, your investments, are a customer or supplier or perhaps an employee. Let's repeat that:

Business Performance really matters and is critical to surving the downturn and establishing long-term returns.

Just to put a point on it the reading start with Goldman's take that "earnings are awful", one of thee first summary judgements and then walks thru excerpts from three Ram Charan columns on things business should do. Some of it will read pretty basically but the fact of the matter is that the poor performers lost sight of what they needed to do now, environmental changes and required adaptations. Which leads us to the GE example - which despite the headlines based on an earnings surprise is just the opposite of a bad example. We cite the GE story instead as an example where headline reporting that fails to dig into the massive changes and strengths of a company misses its' long-term performance capabilities. An argument exposed to considerable dispute we admit but one we're prepared to defend and will follow-up on.

There are more readings on long-term values and valuations and how they split between current and future prospects as well as on the habits of thought that cause good executives to turn good companies into performance disasters. The long-term valuation excerpts are particularly interesting. One about Shiller's study of PE ratios shows that valuations are still much too high compared to both historical norms and looking at real earnings instead of future fantasies. But the second reading makes a key point - companies operate in the now but invest and develop for the future. And what they find is that, over time, better than half the value of a company is based on future performance. In other words all that chasing after short-term quarterly earnings is fundamentally dangerous to the long-term health of the company. 

What we hope is that you'll walk away from this with the idea that performance is critical, that it's about long-term resilience, that it's possible to achieve sustained high-performance and possible to find the companies that are likely candidates. Or at least get a start on it.

Performance, Earnings & Returns

Goldman Strategist Says U.S. Earnings Are `Awful,' Will Pull Down S&P 500 will drop as companies slash forecasts for the rest of 2008. ``Early signs are awful,'' a team led by David Kostin, Goldman's New York-based U.S. investment strategist, wrote in a report today. ``We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks.'' Kostin, 44, said last month that the S&P 500 may fall to 1,160 in the ``near term'' before rebounding to 1,380 by December, making Kostin among the most bearish Wall Street strategists tracked by Bloomberg. His year-end forecast implies a 6 percent annual decline, the biggest drop predicted by Goldman, which outmaneuvered competitors last year by profiting from the mortgage-backed securities market's slump, since Bloomberg began tracking the data in 2000. Goldman said worst-than-expected earnings from General Electric Co. and Alcoa Inc. are a harbinger of more to come. Analysts have reduced expectations for S&P 500 earnings growth during the second half of 2008 ``only slightly'' even after cutting first-quarter projections by 17 percent, Kostin wrote. Forecasts for a ``speedy recovery'' in profits are too optimistic, and stocks will drop when investors start viewing estimates with ``appropriate skepticism,'' he wrote. Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008. Analysts are currently estimating 2008 profit growth of 11 percent for S&P 500 companies, down from 15 percent at the start of the year, according to Bloomberg data. The index has declined 15 percent since reaching a record in October.

The Basics of Moneymaking Here's a question to test your prospects as a business leader: How does your company make money? If you can't answer it, you're hardly alone. Many MBAs can't answer it. Many CFOs and vice presidents can't answer it. Experienced CEOs sometimes struggle to answer it. What I'm testing with this question is your business acumen. At the core of every successful business, from a global giant to a corner store, are the same fundamentals of moneymaking: cash, margin, velocity, return, and growth. And at the core of every successful business leader is an intuitive understanding of the relationships among them. It's easy to think the basics of business are for beginners. Everyone knows what cash is, and that companies must make a profit. But business acumen isn't about knowing definitions. It's about keeping the basics of moneymaking in sharp focus and balancing them in a way that's healthy for the business. When you have business acumen, you realize the importance of every job at every stage of your career. A mailroom clerk with business acumen knows that getting checks to the accounts receivable department more quickly will ease the company's cash flow. And a sales rep with business acumen knows that higher-margin products will increase the company's return. As the complexity of your job increases, it's easy to lose sight of the fundamentals. If your business acumen doesn't develop, you can stumble -- focus too much on revenue growth and overlook cash, or focus too much on cash and overlook growth. That's why you should never consider it beneath you to revisit the moneymaking basics. They should be front and center in your diagnosis and decision making in every job you have.

See Your Business from the Outside In One of the great truisms of leadership success is that a leader must constantly keep an eye on "the big picture." But there's a serious flaw in this bit of time-honored advice -- the big picture keeps changing. In its wake lie the best-made business plans and strategies of organizations that had planned for one future, only to see another emerge. New consumer buying habits produce fast-rising opportunities. A newly forged political coalition drives up the price of raw materials. Markets don't grow as planned. A dormant competitor gets reinvigorated. Promising product innovations don't translate into more sales. Population shifts redraw markets. Given the dizzying array of possible developments, how can you keep your organization ahead of the game, knowing that tomorrow's reality is likely to end up looking a lot different than today's projections? No one can predict the future. But you can improve your chances of keeping your business ahead of the curve by developing the critical know-how of detecting the patterns of external change. If you learn to look at your business from the outside in and practice connecting the dots of seemingly unrelated trends and events, you'll be able to spot opportunities and threats before they become obvious to everyone else. You can put your business on the offensive and avoid unpleasant surprises.

When -- and How -- to Reposition Your Business From mom-and-pop shops to regional manufacturers to vast Fortune 500 corporations, the range of disparate businesses that make up the global economy is almost mind-boggling.Yet for all of their diversity, businesses of every size, shape, and location have one vital thing in common: the need to make money. If you're not generating cash, covering your expenses, and providing a financial return to banks or investors, you're not likely to be in business for long. When your business can't achieve those simple things, you may be failing to execute. But equally likely today, your business may need to be repositioned. Positioning means creating an unmistakably clear central idea for your business that does two things: meets customers' needs better than other options, and makes money. Positioning and repositioning a business is the most difficult know-how to master. Maybe that's why it's in such short supply at a time when it's so desperately needed. Positioning methods that worked for decades are crumbling with increasing regularity. Think of the U.S. auto industry or of the troubled newspaper industry. Think, too, of Wal-Mart, which is wrestling with slowing comp sales growth (sales at stores open for at least one year) largely because consumers' lifestyles are changing. Meanwhile, Target appears to be in the mainstream of changing lifestyles and its comp sales are growing faster. Given this external context, should Wal-Mart think hard about repositioning its business? Some leaders try to stem declining profits, revenues, or market share with a one-time, one-dimensional fix, such as cutting prices or dumping more money into advertising to enlarge the company's "slice of the pie." They think, or hope, that the downturn is temporary.  Too often, more profound action is needed. In today's environment, leaders can expect to have to reposition their companies four or five times over the course of their careers.

GE Retreat From `In the Bag' 2008 Profit Growth Puts Immelt Under Pressure General Electric Co. Chief Executive Officer Jeffrey Immelt told shareholders in December that 10 percent growth in earnings to $2.42 a share this year was ``in the bag.'' What a difference four months make. GE reduced the forecast Immelt had repeated as recently as March 13, citing turmoil in financial markets that slashed the value of investments and thwarted end-of-quarter dealmaking. Fairfield, Connecticut-based GE three days ago predicted 2008 profit will increase no more than 5 percent, calling Immelt's forecasting and strategy into question with investors. ``Immelt now has to be put in the penalty box,'' James Hardesty, president of Hardesty Capital Management in Baltimore, said in an interview with Bloomberg Television. Hardesty Capital manages $700 million including GE shares. Immelt, 52, took over GE from Jack Welch just four days before the September 11, 2001 terror attacks and has spent his tenure fine-tuning GE to limit risks. He sold units with annual revenue of about $50 billion, such as plastics sensitive to oil prices, and protected GE's AAA credit rating while building higher-return areas such as power generation and commercial finance. Now he must rebuild faith with investors who had stuck with him during the 19 percent stock-price decline under his tenure because of GE's dividend yield of about 3.9 percent and consistent earnings.

Business Performance and Valuation

Remembering a Classic Investing Theory More than 70 years ago, two Columbia professors named Benjamin Graham and David L. Dodd came up with a simple investing idea that remains more influential than perhaps any other. In the wake of the stock market crash in 1929, they urged investors to focus on hard facts — like a company’s past earnings and the value of its assets — rather than trying to guess what the future would bring. A company with strong profits and a relatively low stock price was probably undervalued, they said. Their classic 1934 textbook, “Security Analysis,” became the bible for what is now known as value investing. Warren E. Buffett took Mr. Graham’s course at Columbia Business School in the 1950s and, after working briefly for Mr. Graham’s investment firm, set out on his own to put the theories into practice. Mr. Buffett’s billions are just one part of the professors’ giant legacy. Yet somehow, one of their big ideas about how to analyze stock prices has been almost entirely forgotten. The idea essentially reminds investors to focus on long-term trends and not to get caught up in the moment. Unfortunately, when you apply it to today’s stock market, you get even more nervous about what’s going on. To Mr. Graham and Mr. Dodd, the P/E ratio was indeed a crucial measure, but they would have had a problem with the way that the number is calculated today. Besides advising investors to focus on the past, the two men also cautioned against putting too much emphasis on the recent past. They realized that a few months, or even a year, of financial information could be deeply misleading. It could say more about what the economy happened to be doing at any one moment than about a company’s long-term prospects. So they argued that P/E ratios should not be based on only one year’s worth of earnings. It is much better, they wrote in “Security Analysis,” to look at profits for “not less than five years, preferably seven or ten years.” This advice has been largely lost to history. For one thing, collecting a decade’s worth of earnings data can be time consuming. It also seems a little strange to look so far into the past when your goal is to predict future returns. Today, the Graham-Dodd approach produces a very different picture from the one that Wall Street has been offering. Based on average profits over the last 10 years, the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off. Shiller’s Long-term PE Charts and on Investor Confidence/Outlook

The Future Is Now Executives have become increasingly sophisticated at analyzing the value of current operations to help them manage the goal of increasing shareholder value. But they still need to supplement the tools used for value-based management with one that can analyze their company's future value. By the early 1990s, companies were increasingly zeroing in on whether business operations were adding value. Value-based management tools remain popular today, among them EVA, or economic value added, which takes after-tax operating profit and subtracts from it a charge for the capital employed to generate that profit. However, a variety of academics and consultants have pointed out the limited usefulness of EVA and other value-based performance measures, particularly given a propensity toward current-period and short-term, backward-looking performance evaluation. For example, EVA fails to quantify the increased value a company might realize in the future through, say, higher levels of investment in programs aimed at increasing brand loyalty, developing talent, generating patents or bolstering research-and-development capabilities. True value-based management requires executives to look both backward and forward. How important is future value to share prices in concrete terms? As an example, an analysis by AssetEconomics Inc. of the companies in the Russell 3000 Index as of May 2003 found that future-value expectations represented 59% of their overall enterprise value -- the market value of a company's equity plus the net value of its interest-bearing debt obligations. In 12 of 22 industry groups analyzed, future value made up more than half of enterprise value. In our research on a select set of major retailers, we saw a downward trend for future value in the industry as a whole. From 1998 to 2006, most of the retailers continued to invest heavily in new-store openings, fueling an increase in the companies' current value. Future value, however, didn't keep pace with the growth in current value.

Attitudes, Habits & Performance

Blind to Change, Even as It Stares Us in the Face Our visual system’s inability to detect alterations to something staring us straight in the face is known as change blindness. The phenomenon that Dr. Wolfe’s Pop Art quiz exemplified is known as change blindness: the frequent inability of our visual system to detect alterations to something staring us straight in the face. The changes needn’t be as modest as a switching of paint chips. At the same meeting, held at the Italian Academy for Advanced Studies in America at Columbia University, the audience failed to notice entire stories disappearing from buildings, or the fact that one poor chicken in a field of dancing cartoon hens had suddenly exploded. Beyond its entertainment value, symposium participants made clear, change blindness is a salient piece in the larger puzzle of visual attentiveness. What is the difference between seeing a scene casually and automatically… In both cases the same sensory information, the same photonic stream from the external world, is falling on the retinal tissue of your eyes, but the information is processed very differently from one eyeful to the next. What is that difference? At what stage in the complex circuitry of sight do attentiveness and awareness arise, and what happens to other objects in the visual field once a particular object has been designated worthy of a further despairing stare? Visual attentiveness is born of limited resources. “The basic problem is that far more information lands on your eyes than you can possibly analyze and still end up with a reasonable sized brain,” Dr. Wolfe said. Hence, the brain has evolved mechanisms for combating data overload, allowing large rivers of data to pass along optical and cortical corridors almost entirely unassimilated, and peeling off selected data for a close, careful view. In deciding what to focus on, the brain essentially shines a spotlight from place to place, a rapid, sweeping search that takes in maybe 30 or 40 objects per second, the survey accompanied by a multitude of body movements of which we are barely aware: the darting of the eyes, the constant tiny twists of the torso and neck.

Pitching With Purpose It’s easiest to change the mind by changing behavior, and that’s probably as true in the office as on the pitching mound. Others are eloquent about courage and creativity, but Dorfman is fervent about discipline. In the book’s only lyrical passage, he writes: “Self-discipline is a form of freedom. Freedom from laziness and lethargy, freedom from expectations and demands of others, freedom from weakness and fear — and doubt.” His assumption seems to be that you can’t just urge someone to be disciplined; you have to build a structure of behavior and attitude. Behavior shapes thought. If a player disciplines his behavior, then he will also discipline his mind. Dorfman builds that structure on the repetitiousness of baseball. It’s commonly said that it takes 10,000 hours of practice to master any craft — three hours of practice every day for 10 years. Dorfman once approached Greg Maddux after a game and asked him how it went. Maddux said simply: “Fifty out of 73.” He’d thrown 73 pitches and executed 50. Nothing else was relevant. A baseball game is a spectacle, with a thousand points of interest. But Dorfman reduces it all to a series of simple tasks. The pitcher’s personality isn’t at the center. His talent isn’t at the center. The task is at the center. By putting the task at the center, Dorfman illuminates the way the body and the mind communicate with each other. Once there were intellectuals who thought the mind existed above the body, but that’s been blown away by evidence. In fact, it’s easiest to change the mind by changing behavior, and that’s probably as true in the office as on the mound. And by putting the task at the center, Dorfman helps the pitcher quiet the self. He pushes the pitcher’s thoughts away from his own qualities — his expectations, his nerve, his ego — and helps the pitcher lose himself in the job. Not long ago, Americans saw the rise of a therapeutic culture that placed great emphasis on self-discovery, self-awareness and self-expression. But somehow the tide seems to have turned from the worship of self, and today’s message is: transcend yourself in your job — or get shelled.

Previous Posts on Business Performance Analysis

Earnings, Valuations & Business Analysis(I): Readings

Winners & Loosers: Rubble Sorting

Ganesh Filters III: Analyzing Businesses Blueprints

Performance Assessment Basics: Five Fundamental Factors