bizzXceleration: Performance, Value and Profit

Environment

Bad times for good companies Even household names such as Coca-Cola are getting drubbed in this ugly market. Many careful savers and investors are vulnerable, and the trouble isn't close to being over. The collapse of market value since autumn has actually wiped out years of progress, putting all but a few big companies' returns for the decade below zero -- an extraordinary development that has jeopardized thousands of families' financial plans and possibly soured an entire generation on the stock market. Indeed, it's fair to conclude now that the bear market of 2000-02 never really ended and that the 2003-07 period of modestly higher returns will look from a historical perspective like a twitch of life in a moribund carcass. Although the story of what's gone wrong in this Lost Decade has been well documented, by myself and others, fresh evidence suggests the last pages of this sad history have not yet been penned -- not even close. For after months of denial that anything was seriously wrong, a few leading government, banking and industrial executives have decided in recent weeks that it's time to come clean and acknowledge that the collapse of the greatest credit bubble of all time will leave profits and price-to-earnings multiples impaired for years.

• Profits & Profit Margins, That Was The Week That Was, Profits drop by record amount
• Barron's: The Bear's Back, Back in the Pool, Bearish battalions  , Lost Decade

Profits Plunge, Buybacks Don’t The corporate love of buying back stock — which Wall Street encourages as much as it can — reached new heights late last year. Standard & Poor’s, which has been tracking buyback data for the S.&P. 500 since 1998, reports that in the fourth quarter of last year, companies in the index had net reported profits of $68 billion — and spent $141 billion buying back stock. That was the first quarter in which the companies managed to spend double their net income in buybacks. The third quarter of 2007 had been the first time that buybacks exceeded profits for the companies. With that surge, 2007 goes down as the first year in which buybacks exceeded profits for an entire year. The major companies of America, as a group, are acting as if they are in liquidation and have few good investment opportunities. In the fourth quarter, profits were down 62 percent from a year earlier, and share buybacks were up 35 percent. Howard Silverblatt, S.&P.’s keeper of the numbers reports that over the last 13 quarters, since the buyback boom started in the fourth quarter of 2004, the companies in the index reported net earnings of $2.1 trillion. They paid out $721 billion in dividends and spent $1.4 trillion in buybacks. Their total capital spending came to $1.6 trillion. Companies — the non-financial ones, that is — still have plenty of cash, so Mr. Silverblatt thinks buybacks will continue at a high level, although not as high as in 2007. One reason for buybacks is to avoid dilution of earnings from the exercising of stock options. Another is to boost reported earnings per share. Shareholders — the ones that don’t cash out, that is — benefit if the stock price the company pays turns out to be cheap. But all too often the opposite is true. Companies spend freely on shares when the price is high, then cannot afford to buy any more — or even have to issue new shares if buyers can be found — when times are bad and the share price is much lower.

Strategies

The Inside Scoop Earlier in this decade, Cold Stone Creamery was one of the hottest franchises around. The super-premium ice-cream stores attracted scores of franchisees hungry for a piece of the "Ultimate Ice Cream Experience." Now many franchisees are selling their stores, overwhelmed by soaring bills and shrinking profits. Some have lost their homes, broken their retirement nest eggs or filed for bankruptcy. What happened? Even as they rave about the quality of the ice cream, numerous franchisees say the numbers in Cold Stone's business model didn't add up. The cost of running one of the shops was so steep that making a profit was daunting, especially in an economy where a $4 scoop was a pricey indulgence, they argue. They also contend the company cut their margins even further by offering two-for-one coupons and making them buy costly ingredients from a single supplier. Some argue that the company's rapid expansion crowded stores too close together -- and brought in too many inexperienced franchisees.

In Hard Times, Some 'Go for the Jugular' Hewlett-Packard, Southwest Airlines and FedEx all have been sharpening their claws lately. Tactics include hiring extra salespeople, storming into new markets or holding down prices in a bid to pry business away from the competition. There's a risky side to these measures, because they can put extra pressure on short-term profits. But executives believe the long-term results will justify their audacity. As they see it, market share is most likely to be up for grabs in a downturn -- when some competitors are too hard-pressed to defend their position vigorously. New customers won today may become profitable accounts for years to come. H-P's chief executive, Mark Hurd, laid out the case for well-aimed expansion in a visit with Wall Street Journal editors a few weeks ago. His computer and printer company has been expanding its sales force lately, particularly to target small and medium-size businesses. That market has been "underserved" by H-P for some time, Mr. Hurd contended. H-P isn't just looking to sell machines to such customers, Mr. Hurd added. It wants to bring them on board as service customers, too, helping them run their information-technology departments more effectively. Such add-on business isn't just extra revenue for H-P; it also creates a tighter link with those customers, making them less likely to bolt to other vendors later on.

Operations

Manufacturing Myopia Instead of drifting into decline and irrelevance, producers of goods have a chance to seize the future. During the past few decades, many industrial companies have attempted to achieve manufacturing excellence. They have had at their disposal any number of methodologies and theories, quality initiatives, and cost-reducing concepts. But few companies have made much headway. Manufacturing strategies — decisions related to siting, designing, and running factories — are often the same as they were 10 or 20 years ago. Plants often look and feel as they did then. Programs intended to improve performance, such as “total quality management,” “lean production,” and “Six Sigma,” seem to ebb away, without producing the desired results. Sometimes it seems as though the harder manufacturers try to improve, the worse they perform. Today, myopia is even more prevalent and dangerous in manufacturing than it was in marketing four decades ago. Like marketing myopia, manufacturing myopia is caused by isolation; it is the inevitable outcome of keeping manufacturing strategies contained to the functional or even plant level, with little or no connection to enterprise-wide strategies. As the factories and supply chain oversight functions are cut off from the rest of the executive decision makers, the manufacturing focus grows narrower, and overall competence can atrophy. This compels companies to cut costs even more blindly and irresponsibly, often by setting company-wide targets determined by financial fiat rather than by competitive or customer insights.

• Manufacturing Realities (short Booz Allen intro to strategic issues in manufacturing and corporate performance…superb).

Weak Links in the Food (Supply) Chain Companies throughout the food business are responding to increased prices by trying to squeeze more costs from their supply chain, including using new software that can help plan manufacturing cycles and optimize delivery routes. Facing consumer resistance to higher menu and supermarket prices, Papa John's and companies throughout the food-manufacturing, distribution and retail world are responding to increased prices for their commodities by trying to squeeze more costs from their supply chain -- the collection of relationships that moves goods to stores from factories and warehouses. That means grappling with excess inventory, inefficient truck routes, poorly planned production schedules and the computer systems managing the process. Few businesses have managed to get new technology in place in order to deal with the current commodity-price crisis. So they are taking the same systems they have bought and enhanced since the late 1990s and early 2000s, and rethinking how they operate with them.

Management: Leadership, People, Systems

J & J: Leadership in a Decentralized Company The way that we look at our organization is that we have three business segments we work in. So when you look at J&J, most people think of it as the consumer side, but it's actually our smallest portion of the business. And, we have about $61 billion in revenue and anywhere from $180 billion to $200 billion in market capital. I think J&J is probably the reference company for being decentralized. There are challenges to it, and that is you may not have as much control as you may have in a centralized company. But the good part of it is that you have wonderful leaders, you have great people that you have a lot of confidence and faith in and they run the businesses. This is because the problem with centralization is if one person makes one mistake, it can cripple the whole organization. This way, you've got wonderful people running businesses. You have to have confidence in them, but you let them run it -- and you don't have to worry about making that one big mistake. If you look at straight innovation, as you would in any pharmaceutical group, or medical device, or consumer group, we have all of those working in our R&D organizations. It's the ability to work across the boundaries that really brings true innovation, and is going to take some real breakthroughs and will bring real breakthroughs in the future. But, it also does take some coordination and some sacrifice from the individual. That is the toughest thing, getting people to get outside of the silos that they work in and work across the groups.

• Inside job The extraordinary story of two Dow Chemical officials who plotted an LBO of their company - and forgot to tell the CEO or board.
  
• Narcissism, nepotism and greed at American Axle

Book Review: Why Work Sucks and How to Fix It Too many companies — too many of us — have put up with these varieties of nonsense for reasons that have a lot to do with habit and tradition and not much to do with actual productivity. This devotion to the status quo has cost us untold amounts, in terms of both foregone productivity and thwarted human fulfillment. Ressler and Thompson want us to discard these old ways of being for a new paradigm, the Results-Only Work Environment (ROWE), which promotes results as the be-all and end-all of business, and demotes appearances, trappings, rituals, and everything else to the point that they are no more than optional add-ons to our work experience. Crucially, in a ROWE the option for adding on these trappings lies with workers, not with management. Management sets the stage by making it very, very clear what sort of results are expected and in what timeframe, but then it frees up workers, both individually and in teams, to achieve results by whatever legal methods work for them. If your graphic designer can work up a logo for a new promotion while sitting in her jammies at her grandma’s house in Manila, who cares? The work got done — the result was achieved — and the business need was met. Even better, the designer is likely to be far more loyal to your company because you let her go visit her old grandma without making a big deal about it, and because you trusted her to get the work done remotely.

Unboxed: If You’re Open to Growth, You Tend to Grow WHY do some people reach their creative potential in business while other equally talented peers don’t? After three decades of painstaking research, the Stanford psychologist Carol Dweck believes that the answer to the puzzle lies in how people think about intelligence and talent. Those who believe they were born with all the smarts and gifts they’re ever going to have approach life with what she calls a “fixed mind-set.” Those who believe that their own abilities can expand over time, however, live with a “growth mind-set.” Guess which ones prove to be most innovative over time. “Society is obsessed with the idea of talent and genius and people who are ‘naturals’ with innate ability,” says Ms. Dweck, who is known for research that crosses the boundaries of personal, social and developmental psychology. “People who believe in the power of talent tend not to fulfill their potential because they’re so concerned with looking smart and not making mistakes. But people who believe that talent can be developed are the ones who really push, stretch, confront their own mistakes and learn from them.” In this case, nurture wins out over nature just about every time. While some managers apply these principles every day, too many others instead believe that hiring the best and the brightest from top-flight schools guarantees corporate success.

Meaningful? Or Just measurable?  Michael Lewis’s terrific book Moneyball is as much about management and innovation as it is about baseball. So whether you’re a baseball fan or not, please stick with me for a second as I talk about one of Moneyball’s lessons. In the book, Lewis describes how Billy Beane, the general manager of the Oakland Athletics, identified on-base percentage (OBP) as the key underpriced asset for major-league hitters. If you wanted a hitter with a high batting average or lots of home runs or lots of runs batted in (RBIs), you paid a premium for that hitter. But you could get players who lacked those things — yet who had high OBPs — on the cheap. (For the non-baseball fans in the crowd, the crudest definition of OBP is this: it’s the percentage of the time that a batter doesn’t make an out, regardless of whether he walks, gets hit by a pitch, drives a ball into the centerfield seats, or whatever.) Now, here comes the business application: What do you measure in your organization? How do you evaluate your people, especially in roles outside of sales that often lack clear yardsticks? Do your measures have real meaning? Or are you just continuing to measure what you’ve always measured? Many companies, in my experience, have their own version of “batting average” that they like to point to, even though there’s some more-meaningful “OBP” metric that they should be using. What about you?