The last post was a deep dive on how well the Finance Industry was doing and now we need to shift
gears and look at the rest of the real world as it struggles to reset for the "New Normal". Just for the record, and to set the table, the Finboys are not only not doing well on adopting new strategies or adapting to the reset but they still struggling to cope with the last two decades of maneuvering. In fact one could fairly summarize their approach as BAU, Denial and Obfuscation. Our buddy Jake over at Econpic explains it all when he borrows from Chris Whalen of Risk Analytics (via BigPicture) to tell us that Almost 1/3 of Banks Rated F . As usual the chart is well worth looking at. Now the question is how is the rest of the business world coping with things ?
The answer is "middlin fair", as they used to say in the sheep business (that's an obscure hint and pun btw). The Readings after the break are a survey of the state of play and cover several industries (Airlines, Retail, CPG, Autos & Manufacturing, Pharma, Technology and Telecom & Telemediatainment), companies (BA, SBUX, WMT, HD, PG, GM, VW, Brailians, Chinese/BYD,BAC, APPL, MSFT, IBM, Lenovo, CSCO, Huawei, iWorld & Smartphones, NOK and GOOG) and we're going to pick on a selection to make our broader points. To be fair each industry and/or company deserves its own in-depth look of the sort we did for Dell, Citi, HD or WMT but that's be many posts and months away. Can we trust you to take the depth as at least implied and carried ? Please ?
PG as Case-in-Point
The real point is that almost every one of these companies was or is a world leader with a track record that puts it in the top tiers of business performance. As such how they're coping seems to us to be a fair test of how others might be doing. If the best of the best are struggling then how are the followers and strugglers fairing ? We'd guess anything but as well. We're going to single out P&G and the CPG industry as a whole, especially since we took an earlier deep dive on PG as being the poster child of innovation and adaptive resilience (Sailing Into the Storm: From Execution to Innovation).
Diving into the PG/CPG situation the upper l.h. sub-chart shows how various brands are doing in the retail space.There's been a surge in store brands, a major shrinkage in other brands, top brands are under pressure as are expensive brands. In other words consumers and retailers are looking for less feel-good differentiation and more value. Reflecting the deep shift in preferences as the result of a new frugality that's likely to be with us for the next decade of doldrums. The u.r. sub-chart shows yoy% changes in Non-durables spending back to 1950 and, as you can see, the drop was a severe as anything previous. Worse it's hanging around at the bottom of the cliff, battered, bleeding and still being kicked around. The only good news is that, like all other indicators, it's still not accelerating downward.
The lower l.h. sub-chart compares PG to the XLY Consumer Discretionary ETF. Obviously it did better the last downturn but has since tracked the Industry almost exactly. Oddly that tells us that Lafley's re-think and re-do was effective, judged by Red Queen standards. It also tells us that top-down macro conditions can swamp anything. The lower r.h. sub-chart shows PG per se back to 1990 and, in some ways, it's a great story of continuing to create value. Notice we built the l.t. trend by filtering out the last bubble (would that we had at the time) and that we built the Fibchart by taking the low as the point where the bubble rice crossed the trend; interestingly the stock hit the 50% correction limit exactly ! Yet, when you check the readings, PG is going thru another huge re-think to take its entire product line down price around the world. It's adapting to the new normal and using, hopefully we think, the agility and resilience that Laffley built into. That also tells us, IOHO, that understanding the "story" (or the "Theory of the Case") for any individual stock is the single most critical thing you can do in the long-run !
Case-Theory: What's the Real Story Behind the Charts ?
In this next chart we apply that theory to some of the other exemplary companies in the readings and find that it's not all that simple; that is, clear technical trends don't automatically pop up and you've got to do a lot more digging. Here's where long, multi-part and involved assessments of each exemplar are required but this is what you get instead. Consider the rest as a take-home test perhaps ?
The upper l.h. chart shows WMT meandering in the early '90s as it's business model aged, riding the boom with everybody else and then meadering again as its BM went from aging to aged to sclerotic. BUT...notice that the new WMT has held up exceptionally well indeed...all things considered. In the upper r.h. corner is BAC, another great company but in an industry that cycles around the boom-n-bust of new aircraft introductions. Each of which represents a bet-the-company risk but one that's unavoidable. The old Boeing was aging badly and didn't ride up with the last boom but then did well as new strategies and leadership along with new planes drove it skyward. The B787 teething troubles are really hurting it now, as they should, but this is not just a new plane but a new manufacturing technology and a new value chain. It was the B777 where BAC revolutionized design and engineering (btw Mulalley was the project leader and then head of Commercial Aircraft this decade). Once they get it fixed and the demand turns, well....
The lower l.h. sub-chart takes us to Technology by comparing CSCO and IBM. The latter was on death's door in the early '90s until Dr. Lou perfored emergency surgery and introduced e-business, which they rode with the boom. Then they went nowhere as Sam tried to find the Next Big Thing (On-demand and Innovation were the two biggies) until giving up and managing earnings while the Software Group saved them. Now everybody believes the "story" but there are not breakthrus here. CSCO is even more interesting. It rode the rocket during the'90s and then went bust badly but has since stayed in a trading range. Businesswise they completely re-thought and re-did the business, leaving a pure dependence on routers and switches and going after the other big telecom markets. Now we have the recent re-structuring which is the first big, large-scale exercise in organizing for innovation on this scale we've seen or heard about in many decades. Whether it will work or not is TBD but that it's necessary seems beyond question to us.
The next big story is APPL and Jobs. Notice they were at death's door until Jobs was brought back in and caught a following wind but also because he built some new sails by re-vamping the Macs and doing a complete refresh. At least on the business as it was. Then they ended up becalmed again. In 2003 Steve took the time he'd bought and resources he'd created plus his experience with innovation and design from Pixar and took us all to iWorld (iPod (music) to iTouch (video) to iPhone) which has revolutionized the cellphone market, jumpstarted the world of smartphones and created a major new sub-industry. But what have they done for us lately ? The new iTablet will be another big deal if it's done right but that won't be the kind of chasm crossing that iWorld was to the MAC. For APPL to keep on keeping on they'll need that next big breakthru. We didn't graph it but the last story, with a longish excerpt, is on Google and how it's beginning to resemble e-Bay five years ago. Lots of churning but no new NBTs despite all the cute experiments. Think about it - at this point we hope you have the toolkit.
Organosclerosis: the Dangers of Putting Internals Ahead of Value
What drags down a good company ? Jim Collins has just come out with his big new book on that topic but it's something we've been covering for a long time now.Business Hilbert Problems: Fundamental Factors of Performance
The blank graphic at right is Collins' recent interview on Charlier Rose. Unfortunately Charlie is moving servers and all you get is this really ugly black screen as a temporary placeholder until/if/when he's back on the good stuff. Either click on the graphic or the highlighting and it should take you to where you can play the temporary file.
In any case he talks about his new Five Stages of how companies are all too prone to creeping sclerosis when the let conviction of their own innate superiorities cause them to loose sight of continuing to create value in the markeplace and innovate. One of his most telling quote is about how you tell when it's in trouble...."when the CEO is all about me and not about the company". We'd generalize that and say when the company spends more time on turf-fights and personal advantage for the power-holders instead of what they can do for the customer they're in deep dodo. Know anybody like that ? How 'bout the entirety of all the failed Finance companies. What you want is the kind of company that Lafley apparantly built at PG where it's not about the players it's about the game !
Here's our checklist of key performance factors for you to use in determing whether a company is a PG or a LEH.
1) Organosclerosis - all organizations that are successful reach a point where they are insulated from external pressures, internal agendi become the dominant decision-making criteria and self-interested political decisions replace a focus on value. What kind of management system is required to correct these historical and innate tendencies - other than Darwinian sortation ?
2) Integration - no single factor determines the success of an enterprise. It needs to integrate the strategy and business model with the operational execution capabilities and establish a management system that holds the responsible parties accountable against realistic operating plans. How do we migrate from our decades-old set of isolated and conflicted functional silos to a more synergistic enterprise ?
3) Execution - most companies are competent or better on a few core disciplines but often neglect developing the full suite of functional capabilities to where they should really be. A growingly classic example is MSFT who's core discipline is Software Development but after the Code Red fiasco delivered an emasculated Longhorn to market based more on market power and coercion than enhancing customer value. How do we ensure, ala Billy Beane's A's, that we get as good a "player" in each position for the "game" we want to play at an affordable and value-effective price ?
4) Innovation - execution is all well and good but once you detox history and transform current capabilities, like a shark, you need to figure out how to swim into the SEE of the future.(Sailing Into the Storm: From Execution to Innovation) What's the best way to go about designing and implementing continuous innovation as a fundamental core competency of the enterprise ?
5) Leadership and Humanity -at the end of the day business is a team sport. And as Red Auerback taught us and the new Celtic have demonstrated you need great players with superb skills who play for the jersey they're wearing. Which requires Leadership which communicates, management systems that measure and reward real contribution and provides an environment that respects, in all senses, the individual as an adult (Aholes, Shirkers and Performance: a Draft People Principles Policy ). What HR, Communication and Leadership development approaches are best suited to the enterprise we're envisioning here ?
We suggest you apply it to every company you're involved with....or any other organization for that matter.
Continue reading "Welcome to the New Normal: More Frontline Tales of the Reset Economy" »