bizzXceleration: Performance, Value and Profit

We're in an environment where the critical factor will be finding sustainable sources of value, value that can be differentiated and turned into profitable business models, and where the keys are strategy, execution and management. And we will be in that environment for at least the next decade. A change from the last three decades where a rising economy plus financial engineering floated all boats. Among the many changes that are disrupting the old world and creating new normals is the rise of technology-enabled new media, what we've called the Technomediatainment Industry, the evolution of which we chronicled in this white paper:Technomediatainment Futures: Evolution, Barriers, Structure and Opportunities of a New Industry . A few posts ago we started another pass by taking a very deep dive on Cisco (Mobility, the 4As, and Cisco: an Anti-sclerotic Exemplar?) and how their entire business strategy is dependent on that evolution, the rise of the 4A Anywhere, Anytime, Anyplace, Any Device ecology.

Yet we can look back well over a 100 years to Joseph Pulitzer and his creation of a new media empire as the benchmark for how technology and media companies will have to adopt and adapt to this ecology. The fulcrum of his efforts was the widespread emergence of two disruptive technologies that changed the fundamental structure of the world's economy, more than at any time in human history, and more (relatively speaking) than now. Those technologies? The railroad and the telegraph. But the lever that created the world's first media empire was value - he focused on delivering news the way the new audiences wanted to see it, written in ways that were appealing and that gave value for money. Pulitzer's innovations defined and shaped how we view media ever since and offer us lessons for resilience that are still relevant today. This recent Newshour interview of a recent biographer is a clear summary of the man's ideas and impacts and is, IOHO, well worth the time of anybody concerned about the outlook for these industries.

Continue reading "Pulitzer's Legacy: Value, Disruption & Delivery in Technomedia" »

Posted by dblwyo at 08:16 AM | Permalink | Comments (0)

Once more into the breech dear friends and shorted be he who ignores to much stuff. Terrible poetry but perfectly in line with the realities of this morning, the week, the month and the last several. My perfect example is this headline from CNBC,Housing Recovery Is Looking a Lot Shakier These Days, which my friend Bill over at CalcRisk responded ROFLOL! Why - because he's been analyzing this for something like nine months. But as the stimulus fades it would appear the underlying weakness in Housing, which ain't all that underlying, is becoming visible enough to the commentariat and analtocracy to notice. The problem is that it's only one among several major data sets which have been visible for months, equally widely ignored, from which the lessons everybody should have learned haven't been because they were never taken, and which are increasingly likely to bite everybody in the arse tout suite'. Others include the Fed beginning to end QE and their purchase of MBS(the source of 80% of the housing demand), a surge in delinquencies in housing and credit cards, a previously mentioned cliff-dive in bank credit, a good GDP number entirely based on Inventory effects and the outlook for fiscal stimulus to start fading long before we reach self-sustaining takeoff velocity (the real point in Bernanke's recent testimony that was almost completely ignored). We ignore all those at our mutual peril but ignore them everybody is. Another blogging buddy (Prieur du Pleiss) was kind enough to call attention to Montier: Was it all just a bad dream? Or, ten lessons not learnt from which we take the following two quote:

"At its simplest, value investing tells us to buy when assets are cheap and to avoid purchasing expensive assets. This simple statement seems so self-evident that it is hardly worth saying. Yet repeatedly I’ve come across investors willing to undergo mental contortions to avoid the valuation reality."

"In his book on value investing, Marty Whitman says, “Graham and Dodd view macrofactors … as crucial to the analysis of a corporate security. Value investors, however, believe that such macrofactors are irrelevant.” If this is the case, then I am very happy to say that I am a Graham and Dodd investor. Ignoring the top-down can be extraordinarily expensive. The credit bust has been a perfect example of why understanding the top-down can benefit and inform the bottom-up. "

The chart is taken from that same white paper which is well worth your time along with a discussion of Shiller's CAPE without the cycle (What is the Cyclically Adjusted S&P500 P/E Ratio ? ), which finds that stocks have been tremendously over-valued for a long-time. Which is, as are the other points, entirely consistent with things we've been saying for years. The basic points we want to focus on is that you need to understand the macro-environment AND business performance, along with the notion that at current valuation levels the chances of a decent return for the next ten years are nil. The critical questions are what do you do about that?

Continue reading "Walkin the Talk: Lessons Lost, Value Creation - HD as Example" »

Posted by dblwyo at 02:54 PM | Permalink | Comments (0)

Well we've been working our way down yet another track on business performance in the "New Normal" from general environmental conditions (here, here and here) to & toward general assessments (here and last post), and interweaving it with specifics, this time on the Tech Industry and Finance (general, GS as bad example).(BtW - Matt Taibbi has a follow-up takedown on GS where he channels Barry Ritholz of Big Picture using his own very unique voice that lines up with our assessment almost exactly in terms of substance, if not tone:Taibbi: “The Best 18 Months of Grifting This Country Has Ever Seen”). Over the last few years it's fair to say that almost all businesses failed to monitor the environment, walked into the downturn blind, got sideswiped by the crisis, reacted rather poorly and are still frozen. We've just had several conversations off and on over the last few weeks with other folks who're seeing the same things on a widespread basis. But there are exceptions and it seemed like a good idea to address while also creating a Tech pair to match our Finance Industry/Firm examples. Plus it's been a while since we took a really deep dive on a particular firm so we're going to address all that by looking at Cisco.

Mobility, the 4A's and Cisco's Strategic Environment

With all that in mind it may seem a little strange to start (above) with a clip pointing to NBC's Olympics coverage home page but there's a method to our madness triggered by a recent TechTicker on how upset everyone was with their coverage (NBC's Olympics Coverage Infuriates Sports Fans From Coast To Coast). Now we gave up TV years ago and see everything online and the one thing we still missed was some sports but especially the Olympics and it turns out if you actually navigate your way over there there's plenty of stories, photos and slideshows. And, lo and behold, an immense inventory of online video clips, full event coverage and live streaming broadcasts. And it's all pretty well done. Which made someone who's resurrected their career by hoping on the new media outlet using that venue to harshly criticize NBC for tape-delays disingenuous at best and appallingly ignorant at worst. We'll admit NBC has a long ways to go to better market and integrate their new stuff, cross-leverage with the old and make money but they've done a find job. In fact we've lost way too much time, including being able to watch the entirety of the complete opening ceremonies online. Which makes NBC on the bleeding edge of the 4A's - Anywhere, Anytime, Anything, Any Device. It is this brave new world that Cisco sees as being a major driver of the Tech world going forward (as does IBM, HPQ, Dell, Intal, TI, etc. etc.). The real question is who's got it right, who can develop the right capabilities and who can deliver? Now those are really interesting indeed. And to attack them and understand what making the 4A's real you need to know a bit about how all the pieces play, or not as the case more often is.

Continue reading "Mobility, the 4As, and Cisco: an Anti-sclerotic Exemplar?" »

Posted by dblwyo at 01:38 PM | Permalink | Comments (0)

At this point we're generally tired of talking about the general performance of the Finance Industry, Wall St. in particular and especially continue the apparently futile flaying/flailing at Goldman Sachs. Forgive the headline btw - we were savoring our own cleverness. Nonetheless let's take one more pass at least for several reasons. First, because as the recent Davos conference shows everybody else is tired too but the Industry still is pretty smug in its attitudes and fails to acknowledge fundamental breakdowns in its business models or lack of value creation. Second, though the pressures have picked up, the Industry is still fighting as hard as possible to avoid fixing the problems or adapting to re-regulation. And third, but most importantly, because PBS's Newshour just did two short segments on GS that take apart the sources of its profits and the sources of its liquidity and funding. Guess what - all the angry pitchfork bearing populists have it exactly right if you believe PBS. A position and attitude summarized, from the inside remember, in Hoofy and Boo's takedown of Goldfellas from Minyanaville (which is about inside as it gets).

Where the Vampire Squid Makes Its Money

The first segment is interesting and asks the fundamental question of where does GS makes its money. Ostensibly they are an Investment Bank who makes it advice, fees for M&A, Deals, capital raising, e.g. floating bonds or IPO's, etc. or all those other similar activities that go on in the mysterious bowls of the financial engineers. In actual fact now that GS is a bank holding company it's required to report its profits. It turns out that traditional IB activities - the things that arguably are their reason for being and what is supposed to be their value-add to society - are about 10% of revenues last year. The other 90% comes from vampire squid activities, speaking loosely. In fact 75% of their profits appear to come from proprietary trading! Which includes front-running their own clients. When the President proposed before Xmas that banks be forbidden from having prop trading, private equity or hedge funds in essence he was talking about GS.

As several people have put it, including a Republican investment banker who served in the previous administration, "Goldman is a hedge fund disguised as an Investment Bank".

Continue reading "Goldmine Sacking Vampire Squid: PBS Takes Down the Goldfellas" »

Posted by dblwyo at 04:51 PM | Permalink | Comments (0)

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" »

Posted by dblwyo at 10:42 AM | Permalink | Comments (0)

All of this week's economic news should serve to confirm our earlier discussions, that is the bottom's stopped falling out, we're still in a bad place and it'll be a weak and drawn out recovery. As well as the parallel confirmation that the market is pricing in a stronger recovery, is starting to get a little queasy and completely ignoring the drawn-out and week parts of all that. In our normal cycle of major components the next thing to consider beyond the Economy and Markets is Business so we're going to turn our attention to some specific examples. Since we so recently reviewed our approach to top-down analysis (Bidding Review: Macro-environment, Disruptions, Business Performance) and followed that with a specific deep dive on the problems of the news industry (Technomedia Content Wars II: News Industry Futures (Updated 2)) we're going to focus on a few company situations and use them as examples of industry challenges.

Energy Industry

In the readings section you'll find stories on BP, Shell and OPEC all of which are wrestling with some of the fundamental conundrums of the industry. Which boil down to how to deploy their cash flows, affordably, to replace existing reserves with future production. Unfortunately many of these companies end up with several major quandaries. First off those cash flows, with the drop in oil prices, aren't sufficient to fund exploration and new field development while continuing to pay dividends. In fact the only major that's really in good shape balance-sheet wise would appear to be Exxon, which was cautious and protective during the recent bubble and is now able to buy properties and invest in new development affordably. Related to that quandry is the related one of the world wants/needs to shift to alternative forms of energy and the Oil companies should be leading the charge, instead of continuing to oppose the shift. Some of them get that and doing a lot, BP for example which now gets something like half it's output in the form of liquified natural gas we understand. The third major barrier is that the crisis has curtailed new field development and exploration which combines with the fact that most reserves are trapped behind political barriers and controlled by state oil companies and/or governments. So you get Mexico, Russia and even Saudia Arabia under-funding old field maintenance investments and not developing new resources while the majors with the money, skills and other capabilities are locked out. That whole dynamic explains China's investment in Petrobras, which is a win-win-win for Brazil, China and the future world oil markets. Overall the rest of us have some major problems which are going to come back big time if/when we get a serious long-term recovery, especially in the BRICs. The graphic represents the inter-play of all these factors. You should also ask yourself what the structural constraints are on any industry you're concerned with because they all have analogous challenges.

Auto Industry

Not least of which is the Auto Industry, which if you haven't been paying attention, is likely to see GM's filing for bankruptcy Mon. morning. Shall we all stop for a moment or more of silence - stunned silence ? In the readings you'll find URL pointers and some excerpts from stories on Ford, Chrysler, GM and on China, which has surpassed the US this year as the world's largest auto market !!! When you look at the rapidly improving quality of the Chinese cars, the growth of their home base plus the structural changes in US and European demand this perfect storm is going to be a local squall compared to the one coming along behind it. Which the US industry is no more prepared for than it was willing to face the structural shifts they've been in denial about for four decades. The top chart shows Auto Sales YoY vs Total from '76 to now and the bottom compares Sales to GDP YoY%. In both case we think we see a similar message - the Industry artificially drove up sales over innate historical growth and GDP trends largely thru financing. Which means as consumers change their behaviors that the old "norm" of ~14 million cars/year is likely to be quite a bit less, say 10-12 million ? Couple that with the changes in the worldwide industry structure AND the pressures from the Energy industry and it's not a pretty picture.

Retail Industry

The Auto industry isn't the only one going thru hard times right now nor the one facing serious structural changes for a long-time to come. The Retail Industry is, in some ways, facing equally serious conditions but hasn't yet begun the kinds of adjustments being forced on Autos. In fact while Autos were in denial for decades Retail seems to be unaware. In the readings you'll find pointers to stories on Home Depot, WMT, Target and some electronics chains. Now we've covered HD and WMT in real depth and both are, IOHO, exemplars of profound re-thinkings and re-structurings that the rest of the industry will need to go thru. Target on the other hand has a much longer and more successful history of re-factoring itself which streches back almost a decade and looks to be sustainable. The current damages to it are more due to external factors over which it has no control and to which it's adapted well. It's challenges are going to be twofold: first, will consumer spending habits in the new thrifty world allow it to grow as it has and second with WMT's US structural shifts it'll be facing more value-delivery capable competition. In other words WMT as created more capability to come onto it's home turf. HD as admitted that the Housing market is much worse than anticipated and will go on longer than it planned. Instead they are continuing to restrain capital expenditures on new building, being very cautious with their balance sheet but continuing the operational and strategic re-structurings that we think will position them well for the future. The charts give you an idea of the consequences with TGT compared to to Penney's, WMT, Sears, Kohl's and Consumer Discretionary. Notice that the latter has been flat for essentially the last ten years while the stocks have out-performed in some ways. But you have to pick 'em carefully. In Sears for example Slick Eddie Lampert sold the "new Buffett" store long enough to energize the stock but failed to re-vitalize the company. In contrast JCP went thru a huge re-structuring in the late '90s which the market started to figure out  and led to a comparable rise, except it was reality based. When you drop down to look at TGT specifically Ackman's recent challenges look beyond mis-placed and his investors are disappointed (to say the least). They've performed very well indeed. BUT...the next most important thing to notice about their stock is huge earnings increases coupled with serious PE compression. Admittedly that's down from late '90s fantasies to more realistic and grounded levels but the question is, given our economic scenarios, what's appropriate in the future ? Keeping 15 will be a challenge - returning to 20 we'd judge to be impossible short of a miracle re-thinking of their business model.

Technology Industry

In the final section you'll find readings on Sony, the Tech Industry in general, HP, Dell, Time-Warner/AOL, Google and SAP. The industry as a whole was caught more flat-footed and blind-sided than almost any other because it's numbers held up longer until they suddenly fell off a cliff in Q4 and Q1 (items we discussed in prior posts). Briefly Investment in general and Capex spending in particular lag the general economy. As GDP tanked eventually so would Tech Spending (something we fired a major warning shot here and around our network on in Jun/Jul of last year and which was almost entirely ignored). With that in mind we'll go ahead and suggest that recovery is still a ways off so tech spending is likely to keep dragging if not not dropping, a weak recovery means a poor outlook and a below long-term potential coupled with maturity, excess capacity and lowered l.t. demand means continuing problems for a long time to come. Challenges which some tech companies are prepared for but most are not. Sony for example has only just come to grips with the kind of organizational and structural changes it needs to make. HPQ on the other hand did a lot of it's re-factoring when Hurd took over but is still pessimistic; it's problem will be future new sources of revenue growth about which it's had nothing to say. Dell on the other hand is well on the way to re-thinking itself but hasn't gotten there yet and is coping with a terrible PC market in the meantime. We consider the AOL spinoff, approximately 10 years after the original merger, to be greatly ironic. It turns out that it wasn't so much a bad idea - though there are some legitimate debates - as terribly executed. And the ideas that Steve Case put on the table for re-thinking the media industry were lost in the feudal internecine warfare of the TWX organization. Sad to say Google is beginning to look to us rather like MSFT circa '95. Great core product, a ways to run, no major new breakthrus, just a lot of extensions and a business management system and model that was blindsided by it's growing maturity into serious layoffs with no prep and no warning. The chart walks thru the components of Investment from Residential (which is important here because it drives and leads GDP and will be weak for years to come), Capex and Tech specifically. Now we don't happen to see anything in the worst downturn in capital spending in 30 years that suggests that there'll be a pickup in Tech Spending any time soon - do you ? We do some evidence that some major players are prepared to survive. But look as we might - and we're open to correction - we haven't found any evidences that any Tech company is positioning for the future. In general, let alone as we see it !

Continue reading "From Leaders to Roadkill: Energy, Autos, Retail, Manf. & Tech" »

Posted by dblwyo at 09:40 AM | Permalink | Comments (0)

The last post (Leaders, Leadership & Culture: Crisis, Values and Performance (Updates)) focused on leadership, values and the consequences and, hopefully, it sits in the context of the widespread denial, lack of resilience and danger that recent surveys had id'd for a lot of major businesses. (Denial's Triumph: From Earnings to Business Performance (NOT) [UPDATES]) What a performing business needs is a good grasp on things, a sound value prop, business model and strategy, superb execution across all the key functions and the operating infrastructure (including HR, IT and Mgt Systems) to tie it all together into one cohesive whole. Yesterday we added a bunch of excerpts from the Finance Industry showing where each of those has been and is being violated, almost across the board by the major names. The thing needed above all others however, the sine qua non or "that without which there is not OTHER", is honest, competent leadership with integrity. In the readings below - and you can judge for yourself - what we find is that the recent spate of good earnings reports were mis-representations, fabrications and maneuverings. Worse yet the material impacts of a continuing and accelerating credit crisis were disguised. Now our public leadership is doing all the right things, in fact overall and on a worldwide basis public leadership is actually performing better than private leadership (Re-building On A Rock: Policy, Economy & Values). It's time for private leadership to step up to the plate and do their jobs as well. Some of the companies we've pointed as exemplars of resilient adaptiveness (WMT, HPQ, Tesco, Zara's, MickeyD's) began their re-thinkings years ago by confronting harsh realities and beginning the major changes that are positioning them well. Another such exemplar, and one that is sadly under-rated is GE which just had it's annual shareholders meeting yesterday. We've taken the trouble to listen to the executive presentation, the slides are available for download by clicking here and now, instead of using our own constructs, we're going to use GE's materials to investigate how companies should be responding. Just to put a couple of points on it the markets have been on a tear recently, largely driven by hopes based on the Finance earnings which we now know are grossly mis-represented and mis-interpreted. To put another point on it because of GE's scope it has to deal with the major dimensions of the current crisis and points toward the major themes for the next decades. The accompanying graphic presents a four-quad composite of how they see things and have been performing so far. No denial there !

Performance in the Re-setting World

And no lack of relative out-performance either ! A central theme, IOHO, of Immelt's portion of the speech is that we're under-going a major structural change in the world socionomic environment. A re-setting as he terms it. The question should be for every company what do they see, how are they positioned and what are they doing to re-position themselves. And then how to they plan on delivering against the plans that result from those insights. Frankly, when you look at this next chart, we're not aware of anybody who's doing better, or even close. Their views of the state of world changes is the same we've been hammering on for a while, the five major focal points they're driving against as strategic objective across their businesses are the right ones over several time frames, the business portfolio is well-positioned, individually strong and largely complementary as well as being individually reasonably well-run (with some caveats).  Finally the set of "themes" they have id'd and positioned themselves for are an astute assessment of what's going to be driving the world economy and business performance for years to come. Whether or not GE delivers against them almost every business needs to be responding to them.

Delivering on the Promise

Which is a matter of execution: good management system, reasonable and resource objectives, right product mix and good functional capability. And the promise of delivery, based on this chart, would seem to be pretty good. GE is downsizing GE Capital but more closely linking it to it's core businesses - which is where a real competitive advantage lies. NB: Jack Welch did some good work at GE in his early days but left a real mess for Immelt to clean-up - a lot of the wrong businesses, 50% or better of the profits coming from Finance and Finance being run as independent fiefdom that fell to far in love with financial engineering and not enough with leveraging finance and key industry expertise. Immelt has been major surgery on the divisions thru sales and acquisitions and is using this crisis to do the same on Finance. Long over-due in over opinion.

Theory of the Case: Business X Function X Timeframe

We introduced a framework for analyzing business performance by talking about what we called the "Theory of the Cases" which asks what's the fundamental organizing principle that drives your argument ? Applied to a business and it's performance evaluation that translates into asking for each line of business what are you doing for each component of the blueprint for each timeframe. The previous two sections spoke to immediate and short-term. The question then becomes what is GE, or any business, doing for the long-term ? The general principle is you should be re-investing in the business and focusing on innovation that create new value. This next graphic samples some of the things that GE is doing, though not all. It would appear that in each of it's major lines of business and at the divisional level GE is turning itself into a real forward-looking innovator, whether it's Healthcare, Entertainment, Energy, the Environment or Infrastructure. It's also doing something else almost as important - it's wrapping core product development and innovation with value-adding services while at the same time re-emphasizing manufacturing excellence. Product Development, Manufacturing and Services are three essential competencies that will be at the heart of the new GE and they, unlike many others, appear to be doing the right things.

Two Major Caveats

We will add two/three major caveats however.

1) Key to all of this is actual boots-on-the-ground delivery. After $millions of investment and a three year delay GE Healthcare recently delivered it's new Physicians Practice software to market. And had it described privately to us as the "buggiest software" an expert had seen in nearly 30 years of working in the field. NOT GOOD.

2) Every consultant, vendor, partner or employee we know of has chuckled bitterly in discussing working with GE's over-controlled and numbers-driven corporate culture. They aren't just tough to do business with, they are counter-productive.

3) Despite the demonstratable out-performance relative valuations remain poor because Mr. Market doesn't know how to evaluate GE. Part of that may be a conglomerate discount but IOHO GE is right when it says it's divisions are complementary in fundamental ways. One of course is differences in cycles which help to stabilize the whole enterprise. Another is the cross-leverage between finance and industry expertise. Finally - and this seems to be growing - there are real operational level synergies between some of the divisions. Particularly when economies of scope and scale can be shared.

Because we think we're far from out of the woods with the global economy and the market has major downturns in store GE isn't a buy right now but it's certainly an "Out-perform". Even if valuations stay poor, once the markets turn up for real, then would be the time to buy in. In the meantime GE definitely goes on the watch list. How it does in the long-turn will depend on valuations - which in turn depend on explanations - which in turn relate to corporate culture. If GE can figure out to tell a better story and translate that into cultural change it'll become a real strategic out-performer. In the meantime it's darn well doing much...much better than most in both the crisis, in intermediate positioning and in long-term positioning.

In the readings you'll find excerpts not just on GE but on the Finance mal-reporting and several other businesses. Along with the URL for Immelt's annual meeting presentation audio clip. Which was very much NOT reported on well, if at all, in the business press. We strongly urge you to listen, download the presentation and use it as a blueprint for evaluating any business you're interested in !

UPDATES:

In case we didn't make it entirely clear there's a bunch of readings that illustrate the points we making using GE as our example. The first tranche focused on the Finance Industry who appear to have violated ALL the principles and guidelines of what we think is good business practice on the whole, though with some clear exceptions. The second tranches are selections are readings across a wide swath of industry and business to give you some other examples, to which we've just added excerpts on Ford and the Pharma Industry. Ford's earnings surprised to the upside and they did it by doing it right. The Pharma guys are facing some stiff headwinds partially due to the economy but mostly by ignoring their broken development model for a decade.

The real point here is that this is all easy to say and hard to do but some people are really doing it right - finding value, establishing a clear strategy and executing under good leadership. That'll make the difference between the winner and loosers. And the good news is that it's now clear that fundamental values are seperating the two.

Last Word:

Let me give the last word herein to Seth Godin and a recent post that puts the notion of "walk the talk" in a nutshell:

What you say, what you do and who you are

Continue reading "Winning in the Reset World: GE and Business Performance (Updates)" »

Posted by dblwyo at 11:56 AM | Permalink | Comments (1)

The last post surveyed the economic and market outlook with a view toward separating the signal from the noise and distortions, of which there is a surplus, and finished up by summarizing the business performance outlook and the implications for earnings. Earnings will make or break this sucker's rally but the real question shouldn't be this last quarter but what's the long-term outlook ? Which in turn boils down to how are businesses responding to the economic crisis ? The basic answer is terribly - an argument we've been making repeatedly and strongly for many months now and were sketching over the last year. Unfortunately the news turns out to be even worse than we anticipated. In the readings section we start with a deeper dive on the strategic and structural outlook for earnings, where John Mauldin's argument that a recovery could take 20 years is well worth considering. Yes, you read that right....20 years ! That's followed by another set of readings on the strategic business outlook where the findings are discouraging to say the least; in particular Boston Consulting Group has been publishing some of the best, to the point and well researched and analyzed reports on business responses we've seen. Three of which are excerpted slightly (due to password protection you need to go dload the reports for which the URLs are provided. AND SHOULD. Really outstanding work that every investor, employee, business partner or other interested stakeholder really needs to grasp). The final section surveys the landscape with Industry/Company examples that sample the spectrum from Finance to Retail to Manufacturing to Drugs to Tech. We are in the midst of fundamental structural changes in every industry and companies aren't reacting with sufficient scope, speed, force or depth. To be honest every one of these excerpts deserves the same kind of extended dissection we did on WMT (WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize) but that would require many...many posts so not right now. Nonetheless the WMT example proves it can be done it just isn't ! A negative lesson in leadership (another reading talks about Dimon and how his discipline is helping JPM cope). Now we covered this ground just recently (Firestorms and Re-Thinkings: Business Performance vs Business-as-Usual) so this is reinforcement of those themes and findings but it's more - it's stunning confirmation of how flat-footed and ill-prepared most businesses have been caught. Worse it also confirms how shell-shocked and non-responsive they have been and are - which has very adverse implications for the macro-outlook as well. Again pointing to WMT as an exemplar (WMT as Exemplar II: Diving Into the Details of the Retail Enterprise) companies need to be re-thinking every aspect of their business - instead they're standing there in shock. BtW the sketch is from Bill Mauldin and shows soldiers standing around Anzio after surviving a very heavy shelling - point taken ?

Earnings and Valuations

Earnings are going to be challenged for a long time as are valuations and stock prices for several reasons. First off the implications of a U-shaped recovery at best, or an L-shaped one as is the risk, mean that profits will not recover. Plus many companies will face a need to re-build their balance sheets, mature, saturated and over-capacity industries which will put downward pressures on margins and prices, deleveraging by consumers and customers which will further lower demand, slow growth, reduced or eliminated buybacks plus a need to re-invest. Profits in this decade have been at historically abnormal and aberrational levels as well because of constrained hiring and capital investment. Now the future is also likely to see continued constraint but structural re-engineering ala WMT will be expensive. That also means btw that there will be a bad feedback to demand as hiring and equipment investment remains low for a long time. We also have just come thru a period when valuations were at abnormally high and aberrational levels as well. Which will also not continue. Consider the accompanying graphic, part of the earlier post on business performance. The bigger composite chart is here if you'd care to refresh the link to GDP and corporate profits. The top sub-chart shows PE Ratios from 36-08 and two averages - we think the more realistic one to which we'll revert at best is the average before the abberations, i.e. 36-90, which is 12.9 ! We'd argue that recent rumors that PEs are returning to reasonable fair values are wrong and that's before one allows for the over-correction factor. Which we try and gauge in the second sub-chart by looking at the cumulative difference between PEs and the average. Notice that the PEs balanced out until the Tech Boom completely discombobulated things. Now we're living in a huge valuation bubble. Given a very poor economic, profit and earnings outlook for years to come (the Mauldin 20 ?) how do you think it'll perform in the future ? Our guess would be pretty poorly indeed.

Company Responses

We've borrowed two of BCG's charts to create this composite though we've put up plenty of others and our own to make the same points. Here a key though is that they literally just completed the survey work within the last month or so and published the results in the last couple of weeks. Their findings are nearly identical to what our network, readings and anecdote collections have been telling us and we've been sharing with you. In the top sub-chart you see a conceptual representation of a good reaction compared to a typical reaction. A company paying attention to macro-environment and external issues would have started positioning, say at least back in July when we published our tipping point warnings on the Tech Industry ? Instead what you're seeing is reactions delayed to far, sudden responses and meat-axing without discipline, systematic approach or systemic (informed and detailed on the operational levels, i.e. looking at each part for each business and deciding what the best mix of tactics and strategies are) and a failure to even begin thinking about future positioning. The latter is particularly scary since this is such a different business cycle and the associated structural changes will force huge changes in business models and operations. The news gets worse when you realize the the leading-edge companies who are responding are only about 20% of the sample. And it gets really bad when you look at the bottom sub-chart which inventories the responses. Notice that the actions of even the best companies are focused on short-term changes at the margin and don't begin to undertake the kind of deep re-thinkings we consider necessary and advantageous. In it's own perverse way the re-shapings of the landscape that will be driven by the crisis creates tremendous once in several lifetime opportunities for seizing and creating strategic competitive advantage. The number able and willing to seize that opportunity however is pretty limited; i.e. the WMTs of the world are few and far between.

Quarterly vs Long-term: Investor Attitude Changes

For the better part of three decades companies and investors have let themselves be driven by the quarterly numbers, which has always been a major mistake since, as we keep hammering, real stockholder value is created by a proper balance between short-term and long-term and between strategic and operational concerns. But it is what it was. BCG however has picked up the early signs of a shift so fundamental and far-reaching that it's startling and very encouraging, it it pans out of course. Apparently some major institutional investors are beginning to undergo a SEE-change and re-think the way they evaluate and value company performance. They appear, in fact, to be beginning to pay more attention to long-term performance than quarterly ! Would that it 'twer so !! As several of them said, no matter what their past approach they're all becoming value investors now. They also said they see this as that proverbial once ever opportunity for companies to re-position themselves and for their own investments. To do that though they're looking for executives to tell them truth, to have a good and credible story and to be convincing and compelling. The companies that can do that will be the ones who have a provable "Theory of the Case" about how each line of business will perform now, in the short- and long-terms and ultimately. In other words investors want to hear the same things we're asking for. Their chances of getting it must be judged to be small right now. BUT...the companies to pay attention to or be looking for are the ones who can in fact develop that story and ground it in fact.

Hopefully you enjoy living in interesting times because you're going to whether you want to or not; and for a long time to come. Easy to say, harder to grasp and hardest of all to become convinced and act on. But that's what'll seperate out the sheep, the sheepdogs and the wolves. I don't know about you but it strikes me wolves are more likely to do better in this environment than the others.

UPDATES:

We've added two new readings (admittedly on another blog they'd be seperate posts but c'est la vie). One a recent McKinsey discussion of strategic planning in a crisis which is a bit of conceptual candy and the other a recent post by Bob Sutton on a Boston Globe story (how ironic) surveying the accelerating debunking of the standard strategic planning gurus. It turns out there is no substitute for knowing the whole business, balancing short- and long-term and strategy with execution (our fundamental mantras) and executing, executing and executing. Unfortunately these proven truths continue to escape and evade while the world seperates into the shocked and the easy answer crowds. We recommend you not be among them !

Continue reading "Denial's Triumph: From Earnings to Business Performance (NOT) [UPDATES]" »

Posted by dblwyo at 04:58 AM | Permalink | Comments (0)

Earlier we took a pretty deep dive on WMT(WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize), at least from a top-down, strategic perspective that was somewhat well received (judging by readership and feedback). Here we propose to "de-construct" that top-down view with a more bottom-up view of key details including the virtual enterprises made up by the different business units, Marketing & Branding, Product Management, Store Operations, International Operations and Support Functions (Logistics, IT). At the same time this exploration serves two other purposes. We ended the last post on innovation(Disruption vs Innovation: Change, Response, Resilience) by pointing to the need for understanding industry dynamics and used the Oil Industry as one of several possible examples. [Other Industry Examples:Auto Market Structure, IT Industry Stack Evolution,Finance Credit Environment, Technomediatainment Stack,Air Industry Network] The processes and functions of the enterprise are as critically important where processes are how you run the enterprise while functions are the things you do. The great re-engineering revolution failed because the consultants doing the analysis created greenfield process architectures that lacked a grasp of the functional details that business experts needed to supply. Those changes still lie in front of us as vital necessities. The accompanying graphic lays out an idealized Retail Enterprise Architecture that is a blueprint for what an ideal Retailer needs to do. And let us re-assure you is that it wasn't invented and composited in a vacuum - it's the result of well over a decade of accumulated work with many retailers of all sizes and across all geographies. [The equivalent graphic for Manufacturer's]. So with all that said let's take our dive into WMT for it's own sake and as exemplar; and keep the enterprise architecture in mind as a checklist.

Business Unit Performance

The accompanying graphic speaks to key business units as enterprises within an enterprise. In fact given WMT's size, scale and scope each of these units is in fact a major industry leader in it's line of business. At the same time each of these business units is embodied in each store in one form or another. Here four key BU's are shown.. Home Furnishings and Apparel are somewhat old hat so let's consider Grocery. Back in the early '90s WMT wasn't in the industry but was thinking about. They went from no presence to, 10 years later, both WMT and Sam's separately were each in the top 10. The industry mounted a massive effort to re-think itself with ALL the industry groups, major retailers and CPG manufacturers and every one of the major consulting groups involved. As it happens I led one of the task forces responsible for re-thinking distribution and store replenishment and we came up with a breakthru in how those operations should work. Like every other major component of this massive initiative (Efficient Consumer Response[ECR]) almost none of them were adopted (on this one, Flow-thru Replenishment - THE critical enabler for complex store level stocking) almost the only adopters were Wakefern (parent of Stop-N-Shop) and (sorta) Target. The real point is that WMT is well along in the process of simlar disruptions in other major industries with it's entry into Electronics and Health. Watch out CC and the pharmacy chains !

Marketing and Store Operations

This next graphic conjoins a complete re-thinking and re-map of WMT's Marketing strategy with Store Operations. For literally decades their motto was EDLP, Every Day Low Price, but they've since evolved that into a major new theme that still builds on that history. That theme is "Save Money and Live Better" which should resonate at any time but is perfectly suited for these times. At the same time they're also carrying it down to the store level. We'll talk more about how that message and strategy is, and must be, carried down to Product Management and discussed Marketing Strategy re-factorings in the prior post. But on the store level, which is vital for making this credible, they're basically taking their blueprint for an ideal store enterprise in, rather like applying the sort of business blueprint we talk about with our BizzXeleration framework, to each and every store. And notice the synergies between changing the store rollout plans, more efficient and controlled capital management and operational level performance improvements. That's what we'd call a virtuous cycle indeed !

Product Management & Logistics

This next graphic links the re-vamped Marketing Strategy to specific product categories. EDLP meant that the sole previous strategy was Price Leadership; now they've expanded that tremendously to create new value-creating dimensions and directions. As shown in the UR corner that means getting the world's best brands into WMT store. It also means, on the store level and in the core enabling operations, other major changes. In fact the LR corner is in some ways the most stunning change. For almost the last two decades WMT has been on the "usual suspects" list for best use of logistics and technology but their highly effective logistics operation was designed to put a standard unit into a standard store and NOT adapt to local sociographics and variable demand patterns. In fact a few years ago when they tried to move up-scale in Target's part of the value-equation by putting more fashionable apparel in their stores the effort failed miserably because the logistics operation couldn't support it (at least as best we could judge). For the LR corner to be feasible, workable and profitable implies a huge re-factoring of those operational capabilities. In other words WMT must have developed a complex and adaptive flow-thru distribution and replenishment operation. Logistics is both the most under-appreciated operatioinal capability, and like none other but IT touches all other aspects of the enterprise, and represents the largest un-tapped source of performance improvement in almost every company in America ! The synergistic links between better links between logistics and the rest of WMT's operations creates yet another reinforcing virtuous feedback loop. Without these changes the entire new Marketing, Product Management and Store Operations strategies would be likel to fail as well. Yet judging from their performance all the piece parts are clicking along in a highly synchronized fashion. Talk about orchestrating a revolution !

 International Operations and IT continued below

Continue reading "WMT as Exemplar II: Diving Into the Details of the Retail Enterprise" »

Posted by dblwyo at 08:30 PM | Permalink | Comments (0)

On the "oh what an interesting, small world" topic a friend's post led me to an HBR post which in turn led me to a series by John Hagel, John Seeley Brown and Lang Davison on the coming "singularity" - a major, discontinuous disruption in the business and geonomic environment. As it happens their diagnosis of the reason has to do with Technology - not a surprise given their backgrounds but a tad narrow. We happen to disagree with them on the trigger, agree with them on the singularity, think it'll be even bigger than they say and involve more factors. The nature of the singularity - the appearance of continuous disruptions that will prevent a return to some sort of punctuated equilibrium for a long-time. Having spent the last six straight posts diving deeply into the dimensions of the Singularity and documenting it with big inventories of readings we won't review it but you may recall this "kitchen-sink graphic" that was our Mantra Mandela...the mantra being Geo-politics/Economy/Industry/Company of course :). The accompanying graphic tries to represent the scope and scale of these disruptions we've been documenting on a firm, industry, economic and geo-political level as well as relate it to our on-going concern with enterprise and organizational performance. One of the interesting excerpts is a post by Irving Wladawsky-Berger on re-architecting the enterprise from a holistic perspective. Couldn't have put it better ourselves - in fact that's such a central concern of ours it shows up in most posts directly or in-directly and has it's own archive. One of our key findings is that with occasional  exceptions very few concerns are prepared for the changes they're failing to meet now, let alone the singularity. Which, btw, is a matter of leadership among other things, which is why the readings start off with Cramer's recent startling Mea Culpa on the John Stewart Show. On the other hand there are the WMT's and MickeyD's of the world who have started and made serious progress on "whole enterprise" re-factorings(WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize); also a matter of leadership ! The readings contain excerpts from a bunch of the key posts on disruption and response and then another slew of carefully selected examples from just starting to profoundly well along. We'd also point to P&G as another exemplar for resilience and innovation (Sailing Into the Storm: From Execution to Innovation) as well as a host of the Tech Industry archives that dove deeper into various models of change and innovation. For the rest of this post, having discussed "big picture" and enterprise disruptions we'd like to focus on the lower R.H. component of the Mandela and talk about industry innovation and the Next Big Thing (NBT), which is a primary driver of all the rest and/or an enabler.

Innovation and Disruption

The History of the NBT: This little graphic illustrates the socionomic history of the US, and to some extent all developed economies depending on when and where they got on-board the train. As note quite a sidebar notice when you match these changes and their disruptions you get an amazingly good match to the 18 year cycles that the market mavens keep talking about. A correlation, and we think a causal linkage, that as far as we can tell hasn't been explicitly made elsewhere. But one that explains an enormous amount about company, industry and economic performance as well as the associated socionomic changes.

Post-WW2 Business Changes: if the previous chart tell us how technology, business and social change led to Industrialization and the emergence of Mass Markets this one breaks down some of the more recent history for how that evolved. Consider that post-WW2 we had four major new industries (Plastics, Pharma, Electronics, Transportation) that were based on pre-war invention, wartime investment and innovation and post-war implementation. The entire "golden" age of the '50s which saw the rise of a prosperous middle class for the first time in human history was built on these foundations. At the same time all these disruptions matured and at minimum leveled off or began to decay. For example the Pharma industry has been pursuing mega-blockbuster hit derived from it's chemistry-based R&D strategy and associated business models and strategies. Yet we've known and noticed that that model is beyond exhausted and there's no more major value being created. The industry is struggling with a disruptive shift to a biology-based model and clearly hasn't found the way forward as yet. They're not alone either, as the top bar shows - between maturity, value saturation, a globalizing economy, et.al. you can sort and categorize the headlines and business book titles and consulting gurus of the last four decades. So what happens next ?

The Next Wave of Innovation:  well here's where we think things are going. This isn't an entirely ill-informed prognostication but it's not cast in concrete either. That said it's held up pretty well over the last few years while we've developed and used it. Basically we see three phases which are probably more over-lapped and inter-dependent than shown but still representative. The current phase where enterprises need to re-invent themselves as WMT, et.al. have done, but few others; and which'll exponentiate in the next decade as the foot-dragging and systemic disruptions accelerate. The emergence and evolution of new firms, worldwide competition and new industries and the morphing of old ones. For example this last two weeks has seen newspaper bankruptcy announcements galore but nobody has come up with a viable New Media business model yet. TBD and watch this space. (Key Postings Vb (Technomediatainment): Maturities, Barriers and Disruptions).

Putting It All Together

 If you put all the pieces together into one chart here's what we end up with. Disruption will indeed continue. Whether the Singularity will be continuous small- to medium-scale on-going disruptions or drumbeats (Taiko anyone ?) of major structural changes we'll find out. But if you think there's some merit and evidence so far for the historical accuracy and current assessment consider the last phase. Right now we're trapped in an environment where there is no NBT because it takes years to go from idea to invention to innovation to investment to market/industry development. On the other hand that means that you can see a lot of it coming if you know where to look. The other huge disruptive force will be the need to face up to the narrow window of bringing all the world's people into a prosperous middle class in a stable and effective geo-political environment. In other words this weekend's G-20 crisis conclave might just be a good rehearsal for the bigger changes coming down the pike. And it's by no means guaranteed that we'll work our way thru with style and grace. But considering the alternatives let's hope so. On that assumption though think about the world we face from an opportunity point of view - P&G circa the '50s except for billions of people and whole new sets of consumer products and all that implies for all the associated industries. Not to mention new biologics, energy and materials solutions and on and on. Future generations may look back on it as a great age of romance, discovery and innovation. After all they'll have to won't they ? Or not care at all ! But when you dig back into the last great age of exploration you find out that things weren't so easy and romantic at all !

Readings and Observations

The last part of the readings brings us full-circle back to the questions of enterprise response to these crisis (Risks + Opportunities, right ?). Stories cover the range from manufacturer's struggles with lean to Chrysler's desperate gyrations to get itself out of a terrible box to the Pharma industry's metastasizing shakeouts that's crossing a cusp point this last week or so. Talk about punctuated equilibriums ! Or punctured as the case may be. On the other hand there's a great story on MickeyD's continuing renewal and adaptation efforts as well as the beginnings of Yahoo's long postponed ones. And then two of our favorites. One on how that big old stick-in-the-mud Exxon has suddenly woken up - or was it carefully positioning itself ? :) And then a really interesting new initiative from WMT in medical records that's startling and stunning in some ways but leverages existing capabilities in others. In this era of needing to holistically re-think business management we'll close with two final observations.

One is that the ultimate arch-guru of management Peter Drucker provided the single best bible for re-thinking the firm we've ever seen (Management: Tasks, Responsibilities, Practices by Peter F. Drucker). Sadly though he wrote it at the time and found that the pre-war innovations and post-war adoptions had reached saturation and we needed to move to a whole new level. Sadly ? Well he published that book in 1973 and as far as we can tell none of his breakthru ideas and approaches has been tried. The second is that, among all the other factors, you need to understand industry dynamics and structure (Key Postings V: Industry Analysis - Enterprise, Industry Ecology, Evolution). For example one reason that XOM is so brilliantly positioned is that it's built up huge cash reserves, vast technological and management capablities and timed it just right. (Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions) You see when you look at the accompanying chart we're still in a world where, if growth resumes, demand will be greater than supply and then's not the time to invest in exploration, reserves or acquisitions. NOW is !

Continue reading "Disruption vs Innovation: Change, Response, Resilience" »

Posted by dblwyo at 03:42 PM | Permalink | Comments (0)

Having put five posts up in a sequence that started with a strategic market analysis and ended with survey of the Econ/Mkt/Business factors at play we want to dive into what we love to do and focus on the outlook and performance of a single company. We last looked at WMT for such a dive in Sept.. In fact around Sep. 5th we asked the then unthinkable question of Time to Sell WMT ? I: Thinking the Unthinkable  and found ourselves the fortunate recipient of a truly prescient prediction since it's stock "collapsed" the next week. Now that's timing but much as we'd like to claim credit we didn't anticipate the full impacts of the worldwide collapse of the credit markets a couple of weeks later. And all things are relative of course. Only MickeyD's and WMT came out of '08 with rises in their stock prices among major companies ! In fact if you'll take a careful look at the accompanying chart it looks like our timing couldn't have been better. Yet our recommendation wasn't based on magic chart reading or luck but on the application of the Economy/Markets/Industry/Company Mantra. In this case the economy was weakening faster than most thought into a more severe downturn, that wasn't being reflected in valuations and earnings estimates (the continuation of realities denials by analysts IOHO) and WMT had, as we analyzed, done a superb job of re-thinking and re-factoring itself as well as positioning brilliantly for a down-scaling customer base. Nonetheless it wasn't going to escape the consequences of a receding tide. It was, is and will be revealed however as having been swimming clothed but in SEAL assault gear with a full combat load and in really buff condition. Really, really,..., really buff. In fact we think WMT has re-thought and re-built itself as profoundly and smartly as about any other example we can think of and serves as a poster-child of the kind of executive leadership and resilient company we think you ought to be looking for. Which is really odd, strange and exciting because as recently as Oct07 the WSJ headline was "Wal-Mart Era Wanes Amid Big Shifts in Retail". Look again at the chart and carefully... '04 saw the continued drop in the stock as the failures of the old WMT became clearer, was flat for three years as they "struggled" and, just about the exact time the story hit began a year long surge. What you're looking at is a vast divergence between the analysts and press's grasp on WMT's business and the realities. As we now know from Lee Scott's wonderful Rose interview (A conversation with Lee Scott, CEO of Wal-Mart) they began, and he led, the beginnings of a re-thinking in '04 that began to take shape and get traction in '05, '06 and '07. Those are the anomolies one wants to search out !

Divergences, Anomalies and Case Theory

What we'd like to do now is take the deeper dive into the details of WMT's re-factoring and see if there's real substance that maintains our "Out Perform" rating. And comparing and contrasting that with the market's evaluations. By way of illustration take a careful lookat this composite graphic which shows Scwab's quantitative rating system on WMT, the Yahoo Finance summary of recent analysts opinions and the P&L, Balance Sheet and Cash Flow financials drawn from their. All information that you can get to readily yourselves. (sorry 'bout the print..you should probably go look for yourselves !) But Schwab rates them a D because of poor fundamentals and a terrible recent down momentum. Well, duh ! On the other hand the P&L tells us they're growing revenue like mad and profit as well while the Balance Sheet is fairly strong and tells us that they're using Payables to finance Inventory, their life's blood and they have a lot of PPE, i.e. stores. The Cash Flow tells us they generate $18-20B per year of cash flow and are maintaing a VERY strong investment strategy, even at the expense of drawing down the balance sheet. Overall we'd have to say the Schwab ratings are short-term (sighted ?) and overlay quantitative. On the other hand the balance of the analysts seem to share our opinions though upgrades/downgrades recently are balanced on both sides.

WMT's Views of the World

The questions then become how are they really doing, how do they see the world and what do they think will happen ? More deeply and importantly, the devil being in the details, what are they doing under the covers. To answer those questions we're going to go deeper into excerpts from their Oct07 annual analysts presentations which tell a really in-depth story, if you are prepared to dig thru it and understand what they're telling you.

Performance

 The composite graphic shows the % of growth in US total retail sales captured by WMT in the UL corner. Amazing, but are they efficiently run and making money ? The UR corner talks about the growing awareness of and adoption of a disciplined capital management strategy instead of just cookie cuttering one darn store after the other - their strategy for decades. That's an enormous mindset change in the corporate DNA. The LR corner shows their corporate performance compared to five of their biggest competitors in Retailing and, on the whole, they're more efficiently and profitably run than any of them. And they manage to create tremendous growth profitably while sustaining investment for the future by, as the LL corner illustrates, by developing a set of strategic metrics and objectives that prepresent the translations of analysis and re-thinking into simple rules of thumb that can be used to to run the business straight-forwardedly, simply and comprehensibly. Bravo Zulu indeed.

Outlook

So how does WMT management see things (or more accurately how did they see things and how well is it holding up) ? Here the UL corner lays out there views on key strategic objectives from sales growth to stores to key capital measures the operating metrics we discussed above. A little sanguine but much more forethoughtful than most, by far. Reflected in the UR corner where they clearly didn't anticipate they downturn's depths but were setting up for it nonetheless. Considering where most folks were in Fall07 truly prescient. The LR corner though is the payoff... it shows the fundamental re-thinkings where EDLP is being supplemented by major new strategic focii while being kept as the fundamental base of the company. Price Leadership + Brands + Store Experience + Integrated (thematic) Marketing = a whole new Integrated Go-to-Market strategy based on a deep and profound re-thinking of operational requirements and investments in capabilities.

What they Really Did: the Re-Factored WMT

Here's one way to think about what they did do. The graphic at right is the analyst presentations translated, abstracted and mapped to our BizzXceleration framework. To understand why this is sto startling you have to cast your mind back to the WMT that was that kept cookie-cuttering one store after the other. And then tried to clone (impose) they same model (product mix, culture, etc.) abroad and came a big cropper in Japan and Germany. In this framework old WMT would be a monolithic block where each of the key strategic and operational and control elements was the same as it was 5, 10 or 20 years ago. Now they've re-factored each of these elements enormously but instead of pure cloning used them as a starter to create distinct platforms for the US, including new formats, International (Developed, Emerged and Emerging) and major product categories. And adopted and adapted them to local circumstances on a store level while integrating the pieces into a cohesive whole.

Lessons and Implications

If that's a lot to swallow let's wade thru the details on each of these areas and see what they look like. Then you can reach your own conclusions as to whether or not our assessment is accurate and what it means. There are several bottomlines here including and beyond WMT.

1. If WMT's turn-around is well-grounded and sustainable on all these dimensions they have positioned themselves incredibly well for the future in the US and across the world. They will be able to move from strength to strength and are a definite Outperform. Whether that translates as a Buy depends on your reading of the Economies and Markets. We'd say hold off for now.

2. The Retail industry as a whole is very over-built and under-managed with many chains in jeopardy. What WMT has done is a model for thinking about retailers in general. If they can't show where they're creating their own equivalents for a WMTlike makeover pass on by. That extrapolates back up the chain to their suppliers as well from CPG manufacturers to consumer electronics to home furnishings and apparel.

3. Even more broadly what WMT appears to have done applies to almost any company or industry, suitably adapted and re-formulated. Look for the re-thinkers who are executing well...those will be the good companies to put on your watch list.

...to be continued.

Posted by dblwyo at 10:50 AM | Permalink | Comments (1)

You ever feel lie you're shouting at the wind, or screaming at the tide to go out when it clearly wants to come in ? Over the last year or so we've often felt like the oceanographer vacationing in Thailand who saw the tides suddenly surge out, and knowing that was the immediate indicator of a tsunami, screamed at the vacationing beachcombers to run. Only to be ignored. In the last several posts (State of the World: Crisis Metastasis, Strains and Fault Line,Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???)we've tried to focus on the "Big Picture" economically and take it down to issues of business performance. Judging from what we're still seeing and hearing though the wave is a 100' crest, racing for the shore and everybody's still standing around going OMG, will you look at that ! Our new mantra is Policy-Economy-Industry-Company, from the old E-I-C which took a predictable policy environment for granted. In case you didn't notice the biggest post-WW2 economic package was put together in three weeks and a major new set of regulatory principles for salvaging the Finance Industry was announced. We'll dive into the details some other time but both are enormously better than the punditocracy would have you think, or the political opposition for that matter. Later we can talk about self-interested expediency at the expense of the public good. But this not just a top-down macro-driven environment, it is a meta-topdown environment utterly dependent for the next several years on the efficacy, efficiency and timliness of worldwide public policy. You'd better hope "they" get it somewhat right or be prepared to kiss it goodbye.

Economic Situation

 The readings after the break provide more interesting excerpts on the US and World Economies; as we mentioned in our last integrated post it's not just the US facing the worst post-war downturn. In actual point of fact the rest of the world is in much worse shape, getting worser faster and the threat of socio-political breakage is exponentiating. Just as a reminder here's the US economic situation composite chart we put up in our previous post on the subject, and rather than re-review it in detail we simply suggest you compare the current situation to equivalent periods in prior downturns. Then ask how much farther the downturn will have to proceed to be proportionately equivalent. A lot, right ? Well also just for "fun" here's the latest world economic outlook from the IMF chart and the key chart from Davos on major geo-political risk factors. Just refresh yourselves a little bit or go re-read the earlier post. A drink or three might be in order. Are there any questions - go back to the Four Factor chart and ask yourself how you'd grade the situation in each quadrant ? How 'bout and D- for the things we've just talked about ?

Which leads to the question of business performance. If you're headed in stormy weather and rough seas you'd best be prepared to sail in tough conditions, swim or drown. As we mentioned (Survivor: Search for the Next "Blue Chips" (UPDATE)) the general reaction seems to be to default to the D-position. Hard to breath water, don't you know !

Business Outlook: Performance vs Malfeasances

 Our central theme on this blog is business performance and what it takes to develop and deliver it. You can see that worked out in individual company posts, in industry analysis - most recently with the easiest whipping boy the FinInd (Rescue, Recover, Re-Design, Re-Build: Finance Industry Futures) and in multiple deep dives on analyzing performance factors. Running thruout every single one of those posts is our BizzXceleration Blueprint for how to play Bizzball, in one form or another. From the simple to the more complex to the company specific. We even went and mapped ( Masterclass: Buffett on Investing and Business Analysis)our approach the best post-war value investor of our lifetimes. So as you skim the excerpts in the business section bear in mind that the tsunami's headed in and the survivors are not going to be random.

Readings

 Specifically we start the business section off we a column from Jim Jubak proposing his own, consistent, approach to screening for performers and follow that with several readings on the general business situation. One is about the extension of Moneyball to Basketball and how it's impacted the Houston Rockets that serves as a good template, followed by a great Seth Godin post on the self-inflicted suicide of the Music Industry for failing to re-think itself. That's complemented by two "financial readings" that tell you what the flotsam and jetsam will be; one on a wave of bad debt and bankruptcies which are just beginning and another on the dawning realization that profits will stay in the crapper for a long time (Wow, Deja Vu', All Over Again ! Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???). That's followed by a pair of complementary stories about improving the focus on Customer Service as an immediate way to get some air. Finally there are some specific stories about Tesco (adapting well), the Pharma Industry (a badly broken R&D model that's destroyed their business model and they're scrambling just not well) and the trials and tribulations of Dow Chemical who was "blindsided" by the credit crunch and downturn which destroyed two major transformative deals. Frankly we think in the context we and others have been talking about both were built on the proverbial House of Cards and "they should have seen it coming".

Well if we can only throw back one Starfish at a time it's still a saved starfish.

UPDATES:

1) Japan's leadership is in political crisis and apparently completely unable to pull together the requisite policy actions and strategies to address their problems.

2) Eastern Europe's excessive external debts and mounting economic crisis is threatening Western Europe's financial system with systemic risks; think of it as sovereign sub-prime.

3) The Investment Community continues to look for the best of it and refuses to face the brutal realities of the situation. This is, in it's implications for lack of grasp, valuations, flat-footedness and shell-shock both exemplar of all that's bad about executive reaction AND a major warning sign for market and business outlooks !

Continue reading "Time, and Past to Play Bizzball: Economy to Business Performance (UPDATEs)" »

Posted by dblwyo at 04:07 PM | Permalink | Comments (0)

We've left the longish post on the Economic outlook up and undisturbed for a while since it seemed to be drawing a lot of attention but it's time to move beyond the unpleasant outlook and ask so what ? In Lord of the Rings the Palantir where the great seeing stones crafted to allow someone with the skills to see beyond the local, if they had the will, power and the discipline to not let their vision be distorted. We're going to take our best shot at that and ask what does this all mean for current and future business performance - and the short answer is that anybody can be a hero in good times but now we're going to find which companies are being well-run and which were drifting on the tide or worse.

And we're going to do that in two ways - first by laying out the arguments for what to look for and the linkages between the economy and business outlook and second by putting another collection of readings up split into General Business information, Retailing and Retailers, the Auto Industry and Other Industries/Companies. As this week's market actions show we're crossing several perceptual tipping points where the normal Fed intervention being followed by yet another bear market rally has been replaced with a cold dose of realities. Today for example, while the main indexes were up they faded rapidly at the end of the day after having fallen the prior two. And the Financials who've been the mainstay of hallucinogenic behavior actually fell today. Given that the nationalization of Frannie was succeeded by the near collapse of Lehman and WaMa and others are tanking the only surprise is why it's taken so long. Our answer is that many of the Palantir gazers were seeing what the Dark Lords wanted them to see and not reality. That reality is composed of the links between the economy and profits, the links between good business practices and profits, the split of valuations between current and future value and the nature of good practices that maximize opportunities.

Profits and the Economy 

Given a weakening economy that's about to get weaker and the growing awareness of that fact along with continued denial what is the link ? The links between GDP, Corporate Profits and the Markets should be clear from these charts showing the YoY changes back to 1980. With the most recent GDP release we got Q208 data and Profits are down -7% ! What's more this is the sixth quarter in a row that they've been dropping and the rate of decrease is accelerating. Worse this isn't just a Finance problem. Non-financial profits dropped -17% in Q2 after having dropped -8% and -11% in the prior two quarters. If anybody thinks earnings, valuations and PEs aren't in trouble you can probably stop reading now as the Dark Lord will completely distort your vision.

Profits, Performance and Business Practices

Obviously the Frannie, LEH, BSC, WaMA, etc. etc. stories are poster children for why one should run a prudent and disciplined business with good control and management practices. But did you know that the Auto Industry is asking for $50B in government loans under the guise of transitioning their product mix to more energy efficient models ? Or that with cliff-diving sales the risks of Bankruptcy are rising daily ? Probably but pay attention anyway. What you may not have heard is that the Retail Industry as a whole is so over-stored and under-executed that a huge shakeout and consolidation will emerge that will change much of the landscape. And create enormous opportunities for turn-around specialists and the Private Equity investors. Now we've been flapping our gums forever about poor corporate performance and the lack of disciplined and systematic approaches but McKinsey, Stamford and the London School of Economics just releases the results of a worldwide study of 4,000 firms that finds almost exactly what we've been saying by anecdote and onesie/twosies. Since they make all our main points let's just let them: 

"The spread of management performance between firms, even those of similar size operating in the same industry sectors in the same regions, is very broad, sug­gesting that management excellence is a matter of internal policy and not just the business environment. The techniques of good management are well known and in the public domain so the fact that they are so poorly disseminated suggests either that successful implementation is elusive or that it is not a priority for many firms. We also found the managers interviewed had little idea of the overall management performance of their own organizations. …Overall, regional differences accounted for only 9 percent of the difference in management practice. Performance differences between companies in the same country were far larger than any regional variations and there is substantial overlap between regions (Exhibit 5). The best 20 percent of firms in India, for example, performed better than the average US firm and 75 percent of US firms are worse managed than the top 10 percent of Indian firms…. We found this lack of self-awareness striking. It suggests to us that the majority of firms are making no attempt to compare their own management behavior with accepted practices or even with that of other firms in their sector. As a consequence, many organizations are probably missing out on an opportu­nity for significant improvement because they simply do not recognize that their own management practices are so poor. Multinational companies have been forced to take a systematic approach to management. Only by having strong, effective management practices in place have they been able to replicate the same standards of performance across different regions, cultures and markets. Today, they are reaping the benefits of this effort in terms of higher productivity, better returns on capital and more robust growth. The same benefits are easily accessible to other organiza­tions, wherever they operate. Yet surprisingly few firms have made any attempt to gain an insight into the quality of their management behaviors. Those that do so give themselves the opportunity to access rapid, cost-effective and sustainable competitive advantage."

Long-term Value

Jim Jubak comes thru for us again with yet another superb column on how to sort the winners from the losers in this macro-mess. The first filter is figure out who's making money and will continue to do so in the downturn. BUT the second filter is to find the real jewels who have either a major sustainable advantage or, even better, an opportunity re-invest in the business because those advantages combine with the downturn and the competitive environment to ensure that these folks can get higher ROIs by investing their resources in their own future growth. Sometime ago another study was done that separated Enterprise Value into current and future value. It's summarized in the graphic but the gist of it is this. Current value is the portion of EV due to current operationaly profitability while FV is the portion due to these future investment opportunities. Withe downturn valuations and PEs will be dropping, and from our analysis potentially dropping like a rock. That means that current EVs will appear to drop as well. Which in fact is a huge, perhaps unique and certainly scarce long-term Buffett-like investment opportunity. The trick of course is to find those companies with such prospects. 

Building a Palantir

The original Palantir was apparently pretty hard to make and there was a limited supply. Now we're not going to tell you it's not a lot of hard work but we think we can offer a leg up. For one thing in various posts on Industries and Companies, e.g. Dell, WMT, HD, we've suggested some candidates with some fairly deep backup detail. And Mr. Jubak is in the business of providing candidates as he does in the excerpt below and the prior column; as well as others. We'd suggest tracking him as much as anyone; in fact a great place to start is with his target portfolios of Jubaks 50 Best and Future 50 and walk thru your own P-analysis. The details of which we've gone thru a time or three as well. But just as reinforcment and to try and bring some of the details, as well as get some use out of a graphic we built which a "friend" immediately labeled the "seeing-eye" we offer up the accompanying picture. Since our framework is called BizzXcleration we prefer to call the "seeing eye stone" the Bizzball. And while we're not sure it's magic we are convinced that over time learning to look into creates a lot of magic opportunities for future return. What we've tried to do is list, categorized and relate structurally all the major elements of the effective business in a new way we haven't offered up before.

So as you wade thru, or skim over, the readings after the break take your Palantir Bizzball with you. And if you don't dig into many of them right now we think you ought to pay very careful attention to Jubak's columna and the BNN interview the head of A.T. Kearney's Retail Practice who lays out the strategic future of the industry as clearly and quickly as anyone we know of. 

Continue reading "Using the Palantir: Beyond Fear to Performance and Returns" »

Posted by dblwyo at 04:19 PM | Permalink | Comments (0)

Speaking of retail enterprise performance and exemplars it seemed like a good time to take a look at WMT who have turned themselves from stodgy, mature, also-running to poster child and stock market exemplar over the last several months. Largely by engineering a major re-think of their business which amounts to getting back to what they were but at the same time coming up with major new innovations and translating that into operational practice. After several years of denial and mis-steps. Nonetheless we think it's time to consider selling, or at least certainly not buying WMT, for a variety of reasons. Consider this a practical application of our earlier discussions on the economy, profit outlook, earnings and valuations (Talkin Profits: Economic Outlook, Earnings, Business Performance ?,Profits, Earnings, PEs and Outlooks: Why You Should Reall....lly Care). In particular there's the question of valutions. WMT is running at a PE around 18 which using the Graham-Dodd method implies 5% money and a sustained forever 6% earnings growth rate. Well money is running at 6% and EPS averaged 14% since FY99, YoY, but is sliding so that the average for the last three years is 8.7% and over the last four quarters is 7.0%. Not a bad number but indicating at best that WMT is fully valued indeed. And that's before one factors in a looming US downturn or worldwide slowdown. When you look at the stock charts you can see that WMT went nowhere despite rising earnings for eight years due to PE compression and only recently has seen a surge in price on the backs of a decade-long reversal of deferred strategic and operational changes. In fact the recent rise is on the back of those improvements plus right time, right place syndrome - given the state of the economy and shift in consumer purchasing patterns. All of which takes nothing away from what they've accomplished but simply illustrates the same points we made regarding HD or Dell - both of whom it's also time to sell if we didn't make that crystal clear. And both of whom we consider outstanding long-term investments.

WMT's Turnaround: the Strategic Context

Wal-Mart has really gone thru several phase shifts. Up until a couple of years ago they were basically continuing the model they inherited from Sam and continuing to pump out new stores. Unfortunately their emphasis on every-day low price (EDLP), cost controls and general stinginess saw that accompanied by dirtier stores, worse service, deteriorating product quality and a lot of other symptoms of organo-sclerosis. Problems that they recognized and tried to fix with forays into up-scale fashion and similar efforts. None of which were compatible operationally with their legacy operational capabilities which were built around mass, scale and military-like repeatability when their new strategies required the operational capabilities of a Target for flexibility, service, changing product mixes and new product development and management (another sidenote - Target is also IOHO a great long-term buy for different reasons). Then WMT abandoned those half-hearted efforts, looked deep into it's own heart and started making fundamental changes across the board. And they started by halting the mindless store expanasions and starting to run what they had better and combining that with judicious investment in new stores based on investment returns. All of which we've tried to capture conceptually in this WMT Enterprise Architecture which shows how they've re-vamped strategy, key functional capabilities, especially including product development and management and store operations while building on their outstanding legacies of operational excellence. Remember for decades WMT was the example of value, logistics and technology. Now in essence they've returned to their roots by re-inventing them. And, as we've also tried to show, they're doing so by focusing on key vertical lines of business in the US, continuing to pursue their opportunities in mature international economies and going full-bore after key countries in the developing ones.

Strategic Focus, Execution and Control

How'd they do it ? Aside from a serious change of heart - which we're here to tell you is not easy. Well borrowing from their last major annual analyst strategy presentation they have a good story to tell. As we hope you can see from another interesting composite chart which brings together four key slides. This chart compares results for WMT against their top five worldwide competitors on key metrics and also discusses the key strategic drivers and controls they're now focused on. The UL shows captured shares of US retail growth by WMT and its' top three competitors. The UR shows the evolution of their strategic focus which traces out, really, the emergence of a disciplined approach to growth and investment. The LR compares WMT to the aforementioned five competitors on some key strategic metrics. And the LL lists out some key measurements and the controls that WMT is offering up as their guidance for how they're going to run the company in the future. We won't discuss them in detail but those are some incredibly stringent, though sensible and achievable, metrics. If they do manage to deliver sustained performance they will indeed be the old new WMT.

The question of sustainability gets to the next level of detail - how are they going to run the company ? In other words looking at the WMT enterprise framework what are the details for the key functions. We're going to take that up in a future post but hopefully we've made our case that a) WMT's current success is not a fluke but the result of a deep and serious re-think of who and what they are combined b) with a huge shift in their favor because of the economic downturn. But c) if we're right about the US just now beginning to cross over into a more severe downturn, which as late as two hours ago Barton Biggs was on Bloomberg arguing with, then WMT sales will slow and so will earnings. And, as a result, a stock that's already fully, fairly valued will likely come under pressure. If for no other reason than it's sector and industry will as well.

In the meantime, pending Part II of this WMT as examplar dissection, here's a dloadable powerpoint presentation which has all the charts and extracts in it. You'll be able to dive into those next level details yourself. :) ! Bon Appeitit'. 

Posted by dblwyo at 02:14 PM | Permalink | Comments (0)

The last post (Value at Risk: Business Performance, Issues, News) laid out the high level concerns with understanding and improving general business performance. Here we're going to both build on that and take it down to a specific enterprise by re-visiting our prior posts on Home Depot. (Performance Re-visited: Another Trip to HD's Woodshed) As well as try to kill several birds with one boulder, so bear with us. And there are several things that thread thru here perfectly illustrated by the past posts on Citigroup and Dell Computer. In all three cases careful attention to the details of what the companies are doing indicates that they are all well along with putting in place the kind of re-engineering transformation required to turn poor performers into good ones. And in each case there are macro-considerations that also need to be weighed, as Dell's recent results and the resultant analyst outcry about non-delivery indicate. The bottomline here is that HD is putting in place all the right kinds of carefully crafted strategic initiatives that promise to turn it into a high performer once we all come out the other side of the worsening economic downturn and the Housing crisis. Now is the time to learn about, follow and monitor that performance. Not, if you believe our economic analysis and earnings/valuations outlooks put money into a bet on an immediate return.So before we dive deeply into the thing we've been looking forward to for months, a analysis of HD's turn-around, let's set the stage.

Retail Stocks vs the Economy Outlook

 At the right are the daily and longer-term results of our monitoring portfolio of retail stocks which went up, often dramatically, yesterday and today as well, in the face of severe market downturns. The new dangerous meme making its' way thruout Wall St. is that the US is going to do much better than a weakening world. Otherwise one couldn't explain the rise of Consumer Staple and Discretionary stocks, Homebuilders, Retailers or the Finance industry. Short of drug-induced hallucinations that is. We'd hope by this time that any reader of this blog has a deeper understanding of the mis-reading of headlines and statistics and, as a result, the real state of the economy. (Markets vs Economy: Dangerous Memes vs Realities)

But just as a brief review plus introducing a new composite chart that compares the most recent Real Consumption and Real Retail Sales data so you can see the headwinds that are facing these folks, and hopefully buy into the argument that all that green is enormously unjustified, consider this chart. 

The top shows monthlies back to Jan99 on two different scales. Notice that both Consumption and Sales are now lower than the '01 recession or getting there, did it gradually and are NOW TIPPING OVER into a more rapid decline. Something that becomes even clearer on the quarterly chart going back to Jan93, which puts both indicators on the same scale. Notice Sales accelerating downward away from Consumption and lower than it's been in 15 years !!!

Home Depot's Strategic Reaction

So how has HD reacted ? Well in our last detailed dissection we were damming with faint praise and rather held them as being still in denial but beginning to move on the right initiatives on the right time, if not at least being upfront in their earnings calls and quarterly reports. As Jim Collins points out, rather like a 12-step program, the first step is moving beyond denial and accepting reality. Which takes courage and moral leadership. The next big step is having the additional courage to develop a recovery program that's clever, workable, innovative and practical. And the final steps are to work that program which takes sustained, hard, disciplined effort. Frankly, judging by this composite extract from the annual report, HD couldn't be moving on this path any better. In the UL corner you find a reasonable, though somewhat optimistic strategic assessment of their principle marketspace combined with workable goals for growth. In the UR corner that's translated into time- and event-phased, staged intiatives that win big by focusing on the now and layering on bigger changes for the future. The MiddleRight lays out the kind of "run a better business" set of strategic initiatives combined with the details required to make it workable and credible. The LR then adds on the next layer, the major strategic change initiatives combined with an honest dashboard assessing the current capabilities that makes you believe they not only know what they're talking about but are being honest and realistic about what needs to happen. And the final component, in the LL corner, links these business model, strategic and operational initiatives with specific controls and guidelines on the finance and controls side to encourage one to think they do indeed get it !

If you compare my structured shopping list of suggestions, critiques and assessments from last year to what HD is telling us it's doing they're pretty close. Now either we're both nuts or they're starting to put into place the kind of immediate improvements in a bigger context that should have been put in place when Nardelli came into office. Instead of...well never mind. My opinion and assessments of a matter of very blunt public record (oddly and sadly what he's doing at Chrysler appears to be closer to what's now happening at HD. What a strange world we live in). This chart was put together early last summer and it makes an interesting comparison. (Six Steps to Prosperity: HD Initiatives to Consider)

At the end of the day though it's the next levels of detail down from here that'll be the make or break differences. And finally whether you can tell the differences in each and every store. After the break we go into more specifics on the Marketing and Product Development, Operations and Logistics and Finance & Management System details that further add to the story. We urge you to read them and think about them for their own sakes as well as what we consider an outstanding template and exemplar of what any really good retailed should be doing. Or in fact, in general, any high performance business. Just in case you're interesting here's a complete Powerpoint slideshow that pulls all these charts on HD together into a nifty little package which you're welcome to dload or look at online: Home Depot as Retail Examplar. In fact we hope you do as HD's examples are really worth thinking about for any retailer specifically and businessess in general.

The real bottomline is that HD is doing all the right things, leadership-wise, strategically and operationally - as you'll be able to see in some detail below - and tying it all together with the right kind of management system. And they have the financial resources to weather the storms of the next three years and come out of it a stronger, better competitor delivering more value to their customers. And therefore, likely, more profitability, reasonable growth and stockholder returns. If we were Warren we'd be looking at this as a candidate investment for sure ! 

Continue reading "Value Delivered: Revisting HD as Retail Exemplar" »

Posted by dblwyo at 06:23 PM | Permalink | Comments (0)

Now we're going to shift the focus back onto business performance but come at it top-down by starting with the macro-issues of profitability and asking what the economic outlook means for business performance and earnings outlooks. After the page-break you'll find some readings on those topics, general business conditions and some specific players (WMT, SBUX, Kraft, Whole Foods) that illustrate many of the points. Before we get into the meat however we'd like to share some of the morning's headlines which reinforce the arguments about a slowing economy and the deteriorating earnings outlooks. MUCH more importantly however these are the headlines from places like the WSJ and Bloomberg. Here's the first central question: what happens when it dawns on businesses and investors that the V-shaped recovery is history ? And that '09 is not looking much better ?

1.       Economists Expect 2008's Second Half To Be Worse Than First The U.S. economy is poised for an unpleasant finish to 2008, amid a consumer-spending slowdown and a weakening global economy. The emerging pattern is the reverse of what most forecasts showed at the beginning of the year.

2.       OECD Forecasts Sharper Slowdown for G-7 The world's leading developed economies are set to slow more sharply in the months ahead, according to the OECD's indicators of future activity.

3.       Predicting What's Next Gets Harder Investors often expect the stock market to behave like a crystal ball. Lately it has made a better rearview mirror. For decades, turns in the stock market typically led earnings by roughly six months. But during the past decade or so, stocks have moved roughly in tandem with, and occasionally lagged, the trajectory of profits…

4.       Is the Market Still a Future Indicator? At this point, you would have thought the Efficient Market Hypothesis would have died a quite death. The most fascinating aspect of this is the opportunity for anyone in the market to identify inefficiencies. Discover where the market has a non random error -- we've called it Variant Perception over the years -- and you have a potentially enormous money making opportunity.

 Those headlines pretty well capture the arguments we've been making for some time, are based on similar analysis and point to a lot of other folks seeing the tipping point being crossed. And as Barry Ritholz points out in his post on the Deficient Market Hypothesis "you have an ....opportunity" ....if you make the right choices of course :) ! Speaking of which the next central question is what happens when the analysts figure out that their earnings outlooks need to go in the trash ? And the markets absorb those revisions ? How long will all that take to percolate ? Somewhere in there may lie some of Barry's opportunities.

We'll leave you to skim thru the readings which beef up these arguments but will note that the blue-highlighted titles are URL's - in other words you can click thru to get to the underlying story or post if you like. Now let's jump into parsing out the profit analysis

 Corporate Profits: First Pass

Let's start with a fairly simple look by using the St. Louis Fed's FREDII data graphing tool to look back at YoY changes in corporate profits to 1980. Part of the point here is that you aren't reliant on the MSM but courtesy of the Fed can take some pretty deep dives yourself.  It may take a bit to learn the tool and data sources, and maybe a bit more to learn what the data's telling you, but generating current analysis eventually takes a few minutes. Also btw just clicking on any graphic or chart will bring up an enlarged version for closer examination.

Take a careful look here and there are several things to notice. First off the timing, patterns and business cycle relationships are exactly what one would expect. The economy drives profits, no if, ands or buts. With some aberrations  that are important.  The blue line is  "real company"  after-tax profits on the right scale and it's volatile. But that scale wouldn't be so distorted except for the huge jump since '00. Before that those profits were cycling around a trend, which turned down in the '90s. Notice also that the drop in this decade is steep, now near-zero and below and appears headed lower.

Corporate Profits: Pass II

Let's take another pass at the data courtesy of Northern Trust's econ department and zoom in a bit, albeit with slightly different data on profits coupled with some inflation data.

 First off notice that QtQ profits have been negative and dropping since Q406. Wonder where those buybacks and earnings reports are coming from ? You should. We do know it certainly didn't go into hiring or capex. And therefore won't either !

What about margins ? Well when the ratio between the good CPI and the finished consumer goods PPI is dropping like a rock that tells us there's no pricing power whatsoever. It also tells us that profits have been under enormous and growing pressures for some time. And when it accelerates those pressures worsen. Now what do you think about future profit prospects ? Worse and worse we hope ! :)

Corporate Profits: Pass III 

Now let's take final pass at the big picture so you can get the full "slowly-boiling-frog" environment. The rather busy chart below shows corporate profits from 1979 from the national accounts. The UL shows the absolute number stacked up and if it looks like the Finance industry has been wallowing at the trough you'd be right. The UR shows profits as a % of GDP. We see three major structural trends that will govern things in the future. First off profits for non-financial companies were steady until this decade when they started liquidating their futures. Second, it looks like Financial companies went thru a major structural jump-shift and grabbed off more of GDP and, in the LR chart which shows % share of total profits, that's confirmed. And we now know what that was based on and how solid it was. Hm.....not promising. Remember the broken business models and wonder how that'll play out. And third, it looks like foreign profits (Rest-of-World or ROW) showed a steady rise until later in this decade when they took a big jump. That's born out in the LL chart which shows YoY% chanages, which btw, are both steady and pretty much mirror the business cycle. Note that very recently ROW profits are showing a non-cyclic jump. Brave new world indeed.

Continue reading "Talkin Profits: Economic Outlook, Earnings, Business Performance ?" »

Posted by dblwyo at 08:02 AM | Permalink | Comments (0)

The Road to Perdition is paved often by good intentions and traveled by opportunists and in the near collapse of Fannie and Freddie we have both working over time over years, even decades. But in the last several days and weeks the shibbolethic ideologists have certainly been getting their licks in to. Not to long ago, despite the fundamental structural flaws being well-known, we were fantasizing about propping up the Housing freefall with GSE debt and loans. Unbelievable - das ist unsinn as my old German teacher used to say. And on the other side we have well-informed people ranting about rampant socialism and throwing their usual careful focus on the facts and the nature of things to the wind. We won't mention names but you know who y'all are. After the break there's a bunch of carefully selected readings which we hope you skim. If you haven't the time to go read them all then the last couple - the Economists dissection of the situation and the structural flaws and Larry Summer's short, pithy and brilliantly insightful summary are essential.

Essential, why ? Well first off let's put it in context. Combined they hold over $5 Trillion in mortgages and guarantees and are counter-parties to another $2.3T in credit swaps. We're talking here about numbers so unbelievably huge that the sovereign credit and wealth of major worldwide economies are the only basis of comparison. Right now we're in the worst financial structural breakdown we've seen since the Great Depression but it has barely scratched the performance of the economy unlike that earlier episode. Why ? Because policy-makers have a much deeper and more profound understanding of how to manage markets. It was policy error that turned the Great Crash into the Depression. And from Aug07 to Mar08 we were headed that way because non of the traditional instruments were working as they should in normal cyclic patterns. This was a structural problem. When BSC went down that, IOHO, seriously threatened the stability of the entire system. To understand the difference between what happens if/when BSC was allowed to go under in capitalist purity and what would happen if FNM/FRE went you need to wrap your head aroung the Richter Scale. A reading of 2.0 vs 4.0 is not twicet - each number up is 10X the prior number. But that's not the real rub - the energy release scales by a power law so that a difference in magnitude of 2 represents a 1000X more energy. BSC was a 3, maybe a 4.0. A collapse of the GSEs would be an 8.0, maybe a 9.0. The difference between a kiloton explosion and a gigaton in the financial system.

All of this ideological prattling about socialist intervention is utter nonsense, it's also extremely disingenuous as well. On at least two strategic fronts and sustained over years. The most recent one being that it was spending on Housing and the Housing ATM that allowed us to sail past the Tech Bust without a major downturn. Now if the GSEs were/are half, at least, of the mortgage markets, and as the giant players, define the cost structure where do you think we'd have been without their implicit subsidies of lower than market mortgage rates ? Where would the economy have been ? And where would the so-called rally from '02-'07 have been ? All of which the critics benefited from without objecting to how the sausage factory was working.

But our turning a blind eye to the sausage factory health standards has gone on for decades. The GSE's managed to run with minimal supervision, grow into a serious threat to the Western world (literally), maniuplate their books and bribe Congress widely and deeply for years with our implicit cooperation. Greenspan, and to his great credit Bush, started trying to tackle all this back in '04 when accounting shennigans finally caught up with the Pashas and Mandarins of the GSEs. But again we've benefited for years ourselves. As the Economist points out the GSE are/were leveraged  up about 65X - a level no private company would ever be allowed to run at and one possible only with wink-wink, nod-nod government backing.

Which gets to the second bottom line and then the third. Since everybody saw thru the veil of independence to the implicit guarantee what's really at stake here is the faith and credence of US government debt. If we let Fannie and Freddie go what won't we not stand behind next ? And how good is the dollar - who'd want to keep their reserves in the currency of the banana republics ? Those are literally and legitimately the kinds of questions lurking in the backs of the minds of Finance Ministries all over the world. If a direct collapse could have been an R-scale event of 8.0 then the impact on our ability to borrow, on interest rates and on the dollar would be a 10.0 !

Which is not to say this can be allowed to continue either - as Summers points out. The last time we backed ourselves into these corners where the government guaranteed the S&L mess without forcing changes in business models, operations, policies, risk management and controls was a disaster with a huge bill. We need to get thru this and then re-engineer the GSEs. Which is exactly what Paulsen and Bernanke are proposing. And have apparently been working on for months if not years.

So it's time to throw out the ideological, man the pumps, repair the ship and get her to port. And then re-build her from the ground up. Or else. Oh btw that R10.0, let me quote:

10.0+ Epic Never recorded; see below for equivalent seismic energy yield. Extremely rare (Unknown). 1 teraton equivalent. Estimate for a 2 km (~1.2 mi) rocky meteorite impacting at 25 km/s (~55,000 mph)

Continue reading "Bad Times, Really Bad Behavior, Bad Trouble: Fannie/Freddie and Perdition Road" »

Posted by dblwyo at 07:27 PM | Permalink | Comments (0)

Sometimes you work to a plan and sometimes you get interrupted by events. If you can put the events into the context of the plan we call that interrupt-driven event-managed, the sine qua non of aglity and resilience :). In this case the plan was to take forward the prior economic discussions and apply the implications to various business sectors. The last two days of market gyrations, Merrill's stunning announcements and some serendipitous inside scoop from Big Picture cause us to change course...a little. Consider the following excerpt from a recent post:

 Merrill's $5.7B Write-Down, $8.5B Share Issuance My (naive) question: "Wait a second -- didn't Merrill just report last week? How did they not disclose a $5.7 billion dollar whackage?"Merrill guy's by-the-book-answer: "Earnings were the 17th; The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week." I think:  "yeah, sure it was."  Frickin weasels. 

Other Merrill guy says: "Geez, the stock is gonna get hit tomorrow" (ya think?) The stock closed Monday at $24.33, down 55% year-to-date. Merrill woman: "When do we buy this?" CDO guy: "When it hits $15" Me: Ouch!

Only that wasn't quite how it played out. The markets nose-dived yesterday and got another nosebleed today from re-climbing back to their previous altitudes. As Barry occasionally puts it ...WTF !!! Take a look at the accompany 10-Day composite chart of the SPX and NDX and tell me it all makes sense you. Particularly in light of the last two posts on the domestic and international economic situation (Note: trade talks have collapse - NOW that's really bad news as we discussed). No way that all makes sense. The commentary yesterday was that the IMF report on Housing troubles was the trigger and the running unsinn today that better confidence was the re-trigger. BS ! But let's put those arguments to bed.

WTF 1: Real Data on Confidence and Housing Prices 

The first composite chart shows U of Mich. consumer sentiment on a YoY% and absolute basis. Notice that YoY changes are as bad or worse as the Volcker-Reagan surprise short-stop of the economy that broke inflation. But on an absolute basis they're as bad as we've seen in nearly 30 years. Headlines may talk about MtM improvements but in actual fact these haven't been worse in a long...long time.

Now, courtesy of Calculated Risk consider the composite of Housing prices based on this morning's SP Case-Shiller reports. Ditto...they also are about as bad on both an absolute and YoY basis as we've seen in a very long time. Much worse if you think thru the absolute numbers we'd think that there's a long way to go before a semblance of normalcy returns to the housing markets....years of future pain. Now everybody may be getting jaded.

WTF 2: What Really Happened ?

On the basis of those charts plus Merrill's stunning anouncement, which follows right on the heels (that's deliberate - heels as in slimebxxx not heals as in fixes or even heels as in bringing up the rear) of MER's recent earnings announcements which said "we're under control, don't need more capital and no more write-offs. Sheesh.... Several reactions.

1. If they didn't know this was coming a few days ago their grasp of their own situation is sadly deficient and the company is completely out of control (which should also make you wonder about the rest of the industry).

2. If they did know it was coming and weren't ready or refused to couple the two together that's borderline malfeasance. If the deception was deliberate it's beyond borderline and on a murderous cattle raid that should start a war.

But wait, there's more.

3. Yesterday's news should have been insufficient to trigger the major drops we saw, especially since it was triggered and driven by financials. If it was/is true then today's more credible news on the economy PLUS MER's announcements should have seen an even bigger drop.

4. It looks like the details of the announcement got leaked out all over the place without being formally and publicly announced yesterday. That, I believe, satisfies the technical definition of criminal. Now we're beyond bad companies and into bad judgement and bad behavior - can you spell integrity.

5. Oh BtW, as long as we're having several WTF moments - the recent fantasy rally was based on the Financials having seen reality, admitted it and cleaned it up. So much for that notion.

Who do you think can trust to tell anything resembling the truth at this point ? Now there's a question you should never have to ask. It's one thing - not a good one IOHO - to spin-doctor to keep the patrons from stampeding in the fire. It's entirely another to tell them there was no fire, there is no fire and anyway it's out. And leave the building while leaving them there watching the movie.

After the break are some readings you might want to consider on this business picture designed to survey the depth and breadth of the breakage as well as provide some guidances for finding candidate truth-tellers. 

Update: BNN comes thru again with the best, substantive and human discussions that'll actually do you some good instead of being more tainment than info

 Scott Peterson reports on Merrill Lynch & Co.'s plans to raise $8.5B by selling stock.

 BNN speaks to Janet Tavakoli, president, Tavakoli Structured Finance Inc.

Continue reading "Bad Times, Bad Behavior: Merrill, Malfeasance, Markdowns, Markets" »

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

My what a funny market - clearly the worst is over...again. All the writeoffs have been taken, banks are repairing their balance sheets and the "recession" isn't really here. Or so one would believe from the last few days of market action. The sudden uptick - which we plan on discussing in more depth this coming weekend - has been driven by surges in Finance and Consumer Discretionary, including huge jumps in GM and F. Of all people. Just to wrap a little perspective on it check out the graphic which is a 10-day snapshot of the SP500 major sectors. Who's read and who's green - all the folks who've done well are now reddish to glaring crimson while the converse is true of the ones who've been taking it in the kister. We won't wax on too much about whether or not this all makes sense per se.

But you likely recognize the Buffett quote about finding out who's been swimming naked when things get tough and the rising tide starts receding. As you no doubt know by now we think the tide is really just starting to ebb and there are going to be a lot of stranded players. Many of whom have been swimming more naked than they've admitted and, sadly, than they may know themselves. Interestingly despite the "good" earnings news from financials and others in fact this is more a case of severely lowered expectations being satisfied. Not the delivery of good news. From ORCL's poor outlook a couple of weeks ago to Apple and MSFT's not-so-good outlook we come to today's news where, for example, Costco's poor but honest outlook has tanked the stock. Now we ask you if one of the better run retailers in the world is getting nailed by rising costs, falling demand and tighter spending who else is going to catch it ? The markets have shrugged off AmEx's warnings and increased negative outlook as well but it's even more of a harbinger. Which leads us to the topic and readings we do want to get to.

Finding a Wet Suit

 Just as refresher we've found that five major factors determine whether one is naked, wearing a swimsuit or is even better equipped. IOHO there are two things you should be thinking about right now. First, while this bounce may run for a while it's certainly been wishy-washy and seems to be largely on the back of the demand drops for oil. Not a positive sign. That would say this is more an opportunity to sell into the market rise and build up some dry powder. Second you ought to be looking for those companies that will be worthy of that powder...at some point in the future. And they may already be telling you who they are.

Virtuous Circle of Enterprise Performance

After the break you'll find another readings excerpt collection that walks nicely thru the five factors and then some. The immediately adjacent graphic is another way of thinking about things btw....no one factor by itself will make sure a company has a deluxe wetsuit. It takes all of them working together in a synergistic feedback loop. But those that've got it are going to really hammer those that don't. The readings include some good and bad stories... including those companies still squandering scarce capital on buybacks. In a time which we believe couldn't be worse, except for what's to come. A perfect contrast of strategies is the unraveling of Cold Stone Creamery's not-so-sound business model as compared to some very strong outfits that are using this downturn to turn up the pressure on their competitors - the usual suspects, e.g. HPQ, LUV, FDX. All of whom are companies with operational capabilities as excellent as it gets in their respective industries. Yet who's example is sadly neglected as the stories on Manufacturing and Logistics neglect illustrate. Just as a sidebar we've been talking about the need for manufacturing excellence since the Japanese started kicking our butts almost three decades ago - after having learned the howto from an American. Makes you wonder.

Largely it's a question of leadership, management and discipline. JNJ's discussion of how they run themselves is superb and contrasts with the bad stories from Dow and American Axle. It's also a story of good, strategic human resource development - in other words of making work worth an extra effort. And finally it's a story of tying it all together with the right kinds of measurements and controls - an integrated management system. Highlighted here by another discussion of the Moneyball approach to doing it right.

These are the folks you want to be hunting down - the experts at BizzBall ! Who aren't swimming naked but are going to stake out those who have on the beech for the crabs. 

Continue reading "Bad Times, Good Companies: Who's Swimming Naked" »

Posted by dblwyo at 08:04 AM | Permalink | Comments (0)

Having reviewed Markets and the Domestic Economy that led us to the on-going disruptions in the Finance Industry. Notice despite decent JPM performance and not bad from Wells Fargo that a lot more results aren't as encouraging. Not to mention in other industries. Nor the collapse of Indy-Mac, the "bankruptcy" of FNM and FRE and the on-going threats in the Auto Industry. Most of which is "dashboarded" by this composite chart of some key companies and industries (GM, F, Airlines, Hombuilders, Retail and the Con. Disc. sector). Again what's continuosly surprising from these charts is that folks are surprised. At the same time they illustrate several key themes we've hammered more than a few times. Key ones of which are a) business performance matters, incredibly much.(Business Hilbert Problems: Fundamental Factors of Performance) And b) the Economy-Industry-Company mantra is alive and well. We've previously dissected some of these industries in particular, for their own sake and as representative exemplars of key strategic issues (Retail Industry: Plus Ca Change...or Bend Over and Kiss...,Once More Into the Breech: 3 Decades of Auto (Industry) Delusions, Life and Death in the Air: Carriers, Manufacturers, Realities). After the break you'll find these stories, trends and arguments carried over into the Industrial Sector (Dow, GE, aircraft manufacturing), the Auto Industry (Honda, GM, BMW), Retail (Saks, Starbucks, Tesco, office-supply) and logistics services (FDX/TNT).

GDP Components and Outlook

As you skim over these excerpts we'd ask you to keep the accompanying chart on YoY changes in GDP components in mind. It offers, IOHO, some deep insights into the pressures that are slowly emerging and evolving on each of the major sectors. Just as a reminder the top sub-chart shows the YoY changes in each component while the middle one shows the % contribution (impact) on the YoY change in GDP. And the bottom shows the running total. Look at Consumer Spending for example which has been shrinking rapidly and who's contribution likewise. The two most important things to think about are the decrease in Capex as businesses tighten up - what one would expect as capital spending begins to follow the normal cyclical pattern - and Net Exports. Which have really been the sole source of relatively good news. Which raises the interesting question of whether the accelerating downturns in foreign economies will allow that to continue. Which we don't think it will - bad news for GDP in general but specifically for the Tech Industries who've shifted so much of their business offshore. And one then has to ask what're the implications for the Tech stocks, eh ? As well as any realistic grasp of these trends is priced into the markets !

Continue reading "Readfest (Business): Back to the Future, Revisiting Old Themes" »

Posted by dblwyo at 01:33 PM | Permalink | Comments (0)

Let's pick up the thread of our listings of key postings with the finale - specific company analysis. At the end of the day the central focus of this blog, even if/when the weight of postings seems to indicate otherwise, is on improving enterprise performance. Hence our repeated mantra of Economy - Market - Industry - Company. Now you might be asking yourself why does that matter ? Other than that's how we all make our livings directly or in-directly (public organizations may make society more effective but it's still companies who make the squirrel cages go round - puns and images intended).Just to put a point on it consider this recent chart of GE's market performance as well as some recent headlines and excerpt:

"GE at 4 1/2-Yr Low as Broker Wants More Unit Sales General Electric Co (NYSE:GE - News) shares fell for a fourth straight day on Monday after J.P. Morgan cut its rating on them to "neutral" from "overweight." The shares fell 2 percent to $28.55, after touching a 4-1/2 year low early in the session on the New York Stock Exchange. J.P. Morgan said the second-largest U.S. company by market capitalization needed to sell off wide swaths of its operations to restore investor confidence."

 Frankly we think that whole line of argument is absolute unsinn based on not understanding the business - and if we don't pay analysts for that then what justifies their compensation (and GE's investor presentations are very clear and to the point so no excuses). Nonetheless Immelt and crew screwed up badly by not being better at economic analysis and in planning ahead for its' impact on their company. And the headline/story certainly captures the enormous pressures they're under, justified or accurate or not.

If GE is one of the better and more well-run enterprises with an enviable track record measured at least in decades what does that say about understanding performance for the non-GE's of the world ?  As usual we have some graphics for you to consider where we've been categorizing at least the "headline" companies, so everybody can dig into and verify the background if you choose, over the last several years using our enterprise performance criteria. The first graphic is, shall we say, the mal-performing companies. Now sometimes they migrate...sometimes even to the well-performing list....and back ...or visa versa as well. That is they start out as good and then a failure to adopt turns a Dell from exemplar to trashcan.

Consider this second graphic which shows the relative better performing companies in appropriate categories. You might also want to notice that to balance out the tables we moved "Strugglers and Stragglers" to the good chart. Now these charts aren't absolutely up-to-the-minute but you'll notice that GE is one of the few, IOHO, who's in the sustainable column of demonstrated excellent performance - no matter what the market's short-term impressions might be. And darn few others. On the other judging from a recent post (Dell Computer: It Ain't Your Grandfather's Beige Box) Dell might be in the process of re-inventing itself. They're certainly doing a lot of the right things, or so we've judged. On the other hand Starbucks probably deserves a significantly revised entry indeed.

After the break you'll find the table of company specific postings, including the long series on Home Depot that kick-started the whole effort and a prior analysis on Citi. And just as a reminder the analysis uses the "framework" and relies on a lot of industry analysis as well. For example our analysis of the state of play in the Finance Industry leveraged and adapted the model developed to analyze Citi. Partly because their investor relations reports were so good and gave us all a great picture of the major components of the whole industry. Comes full circle. Which is another way, btw, of saying that the key postings on business and industry analysis are be used here to do specific companies. Need the framework to do the analysis - a blueprint and checklist. Need to the analysis to validate and verify the framework.

Over time we hope to add more companies to the inventory but meanwhile here's Home Depot, Citi and Dell. Which are also a retailer, a bank and a manufacturer which links back to the and provides insights on any other Retailer, Bank/Finance, Manufacturing or Tech company. Consider that as well. 

Continue reading "Key Postings VI: Company Level Business Analysis" »

Posted by dblwyo at 05:29 PM | Permalink | Comments (0)

Since Dell not only announced it's results this morning and surprised everybody, perhaps itself also, with pretty good numbers we thought a deeper dive on what's going on might be appropriate. And a test of our various toolkits for enterprise and industry analysis. Here we're going to dive into Dell's strategy, commenting along the way, as they see it themselves. And base it on their most recently available analyst presentations. We've argued before that Dell's downturn was visible at least three years before the fecal matter hit the impeller for two reasons. First off their core business - selling cheap beige boxes to large enterprises - was maturing and headed down. Now we also admit that we though their basic business model of low-cycle-time, customized order fulfillment would adapt nicely to a lot of other opportunities. Second we argued that they were cutting way too many corners since their whole business model was based on trust, reliability and outstanding, responsive customer service. When they started off-shoring and that service became non-responsive what had been a competitive weapon devolved into a cost to be shrunk. We won't mention the disingenuous accounting that went along with all this. Well let's not get to excited but things may in fact be turning around...and not because of the numbers. We still have to see how sustainable those are and how the economies hold up. Nonetheless DELL goes on our watch list as a strategic buying potential. Let's talk about why.

The two major challenges Dell had was they needed to re-think their business model for a new world. AND they needed to completely re-think, transform and re-build their operational capabilities to support whatever they finally came up with. Dell had three key initial challenges: 1) face reality, 2) re-think, re-craft and adapt their historic business model and 3) translate that re-thinking into new execution capabilities. We'll take a deeper dive on major aspects of these after the break but here's a composite picture of two key charts from their Apr08 analyst meeting.

The top half lists out the key challenges, where they want to go and where, according to their dashboard they think they're at. Refreshing and honest on many levels take a careful look. The bottom chart focuses on the two key strategic elements of profits and costs. Re-thinking product design and development, both as a cost control and a strategic marketing initiative. And reducing on-going operating expenses. Again both appear well-thought thru and accurate. The proof of course will be in the pudding. 

That is are the new ideas and business models being translated into the key strategic initiatives required to implement them. Well take a look at another composite chart which certainly indicates somebody has done some serious thinking indeed. The top sub-chart shows key strategies combined with the major, DIFFERENT, markets they are going after. Each of which requires different capabilities, business model adaptations and NEW operational capabilities. From marketing to customer service to go-to-market channels, logistics, manufacturing and product design and development.

So the next critical questions are they being put in place - which is preceded of course by recognition, acknolwedgment and commitment. And are they working as planned - likely in the face of economic turbulence and worldwide competition as well as the inherent challenges of doing business in unfamiliar markets. But it is the right, componentized, modular and adaptive Chinese menu of re-structurings that suits the markets they propose to tackle. 

Continue reading "Dell Computer: It Ain't Your Grandfather's Beige Box" »

Posted by dblwyo at 10:49 AM | Permalink | Comments (0)

Hopefully you've had the chance to take a look at yesterday's post on Citigroup. By this point most of the MSM, et.al. commentary is in. Now I'll admit that an in-depth post on Citi and it's deep-seated structural deficiencies has been on my to-do list for a very long time. And interestingly commentators like Jim Jubak and Meredith Whitney have been less than positive (their vidclips are at the bottom of the intro btw...worth watching). However after reviewing the Analyst presentation from last Fri. IOHO they may in fact be dead wrong. Note - we're saying may. If you think back to our template of business business performance (Performance Assessment Basics: Five Fundamental Factors) we argued that a business had to have a strategic vision/business model, execution capabilities that supported it and the ability to manage the outcomes. All of which Citi has lacked for years. Instead it's operated as a discombobulated set of isolated, conflicting and self-serving silos. Even if you believe the breakup thesis each of these silos needs to be turned into an efficient and effective business in its' own right. Then you get to the synergy question.

What we saw in Pandit's presentation starts to answer the mail in each of these areas. Just by way of compare and contrast here's two dloadable files from the old regime and the new. The first is so confusing it's scary. The second is so well-structured, thoughtful and straightforward it's scary in a whole other way. If you dload nothing else take it because of what it tells you first off about Citi. Secondly because of what it shows us about how to think thru a complex business looking to turn itself around. And third because it's as a good an overview of the worldwide finance industry and key strategic trends as you're likely to find. In the same way that looking at IBM's pitches gives you a broader insight so does this. What we show at right is our template of the Fundamental Performance Factors used to create a foward-looking map of what Citi should look like. And which we think Pandit's presentation goes a long way toward speaking to.

Below we have two analysis sections you might find worth looking at. One is a review of real historical performance vs. the common wisdom using long-term stock prices. The second are excerpts from the presentation of key and critical charts with a little discussion wrapped around them. The bottomline here is that major challenges remain - primarily putting in a good management system and changing the culture from one of self-interested aggrandizement to measured collaboration. As Lou Gerstner admitted in his book changing the culture is the hardest part and he left it too late to have much impact. We'll have to see. And as Pandit admits this is NOT an overnight effort nor should it be. Furthermore there's a lot more short-term pain to come from the economy and markets as well as company specific. Nonetheless we think what we see is the beginnings of a Buffet-like long-term value investment opportunity. 

• Whitney Says Pandit Faces `Impossible Feat' at Citigroup May 12 (Bloomberg) -- Meredith Whitney, an analyst at Oppenheimer & Co., talks with Bloomberg's Margaret Popper and Carol Massar in New York about Citigroup Inc.'s business strategy, capital position and earnings outlook, and the performance of Chief Executive Officer Vikram Pandit. David Darst, chief investment strategist at Morgan Stanley Global Wealth Management, also speaks. (Source: Bloomberg)
•  Jubak’s Journal: Citigroup’s real problem Citigroup says the financial supermarket created in the 1998 merger was never fully integrated. Citigroup now has the tough task of selling $400 billion in “hobby” businesses.

Citigroup has been a poster child for many things in the last few months...actually over the last decade. As such they make a good example of digging into a company to examine it's current situation, performance and outllook. Now they've faced a myriad of problems and bad news, much of it self-inflicted, as it turns out. And the bad news keeps on coming with recent writeoffs, more layoffs and more and more MSM media coverage of the sort "can anybody run Citi ?".

The standard story that's been built up is that Sandy Weill put together a giant financial super-market thru astute deal-making but his successors have failed to translate that vision into executable reality. There's a lot of truth to that story but even for a standard mythology it tells us only about 1/2 and reinforces the storyline that Weill himself has been selling.

As a start for digging into it we've collected a bunch of readings from fairly recent reports on the writedowns and earnings, key analysts take on capital and dividends and headline stories on the workability of Citi. Where this all comes together is that this year is the 10th anniversary of Weill's legerdemain and the newest CEO, Vikrim Pandit, just gave his first major presentation to the investment community telling us what he's found, what's being done to fix things and where they're going. Not surprisingly much of the reaction to his pitch is..."oh no, not that same old leaner, meaner story again". Actually we happen to think that the presentation, which we have reviewed is superb, simple, both broad and deep and, if properly executed, indicates the beginnings of the same kind of turnaround that Alan Mullaly is orchestrating at Ford. And by the same approach.

Consider the chart of Citi's stock at right as being the initial starting point and main evidence for the Weillology of "my successors" screwed it up. On the surface it would seem to support his argument. At least until you take a closer look. Notice that the giant runup in price began in the early 1990s, not with Weill's magic touch. Which means a great deal of it had to do with the overall runup in the markets in the '90s. The other thing one would want to ask when looking at a chart of this length is what would inflation-adjusting it tell us ? A third small detail to notice is that once the economy slowed and the bubble in mainstream stocks starting deflating Citi, on Sandy's watch, didn't do particularly well. At minimum he wouldn't appear therefore to have created a vast differential in performance.

What we think happened is that he put a lot of stuff together, ran off the key operating/strategic exec (Jaime Dimon) who was required to turn that mess into an integrated whole and left a whole bunch of organic problems to his hand-picked successor. When Prince took over he ended up having to jettison a lot of businesses. clean-up $Bs of legal and operational problems and try to repair the lack of controls and management system as well as the culture. Unfortunately while he did pretty well on the first part the second wasn't his forte. And worse he let himself be seduced by the performance Sirens into making some really dangerous decisions. Summarized in the "while the music's playing you've got to keep dancing" quote. Well actually not. What they pay the senior executives for is to dance with style, grace and skill, to know which dances they're good at and which not, to sit out the bad ones and to leave before the party's over. Looking back it looks like Prince got it all wrong.

So what's Pandit going to do ? If you'll recall we've suggested two major mantras, dashboards or filters for thinking about things. The first is the Economy-Industry-Company mantra. In other words  the continuing downturn in the Economy will continue to impact Citi's performance while the fundamental re-thinking of the Finance Industry that needs to go will, or should, trigger major changes in strategy, operations and business models.

The other major dashboard/evaluation mantra we've suggested is that a high-performing company  needs to: 1) Have a fundamental value proposition and a Business Model/Strategy that translates that into specifics. And 2) it needs to be able to execute against the strategy in an aligned way at the most fundamental level. And finally, 3) it requires a management system that makes sure everybody is marching to the same drumbeat and rhythm where people are held accountable for delivering on their responsibilities. And conversely that the things they are held accountable for are the things they are responsible for, i.e. have control over.

Citi as an entity failed all those tests thruout the last decade. Now the question is can Pandit fix them. We'll take that question up in our next post. 

Continue reading "Poster-child of Mal-Performance: Citi, Wow Deja Vu' ?" »

Posted by dblwyo at 10:41 AM | Permalink | Comments (0)

With all that's going on and our predilection for big picture stuff it's still fascinating and educational to look at the "small" (relatively speaking of course). Here's a great narrative of 10 days that shook the world and destroyed 87 years of Bear Stearns hisotry thru a combination of chutzpah, arrogance and mis-calculation. This is worth reading for its' own sake...BUT consider this...please. What would have happened to the Credit Markets if this same "run on the bank" had happened more broadly. We really did face the danger despite everybody passing it by..

Continue reading "Anatomy of Collapse: BSC...and the Markets ?" »

Posted by dblwyo at 07:12 PM | Permalink | Comments (0)

Among the other big news, and there was sure a lot of it last week, was Fri's announcement of MSFT's semi-hostile offer for Yahoo. An offer which apparantly is the last item in almost two years of on-going discussions and failure to reach agreement. In our humble opinions this is a disaster in the making and they only possible beneficiary is Google. That conclusion is reached by a combination of familiarity with the Industry, with companies and technologies involved and applying our model of enterprise assessment (Masterclass: Buffett on Investing and Business Analysis). It's also a lesson in business history among other things. In any case how this plays out is important for Internet users, for investors and for employees as well as customers and suppliers of the companies involved. As a start on pulling the pieces together we used our framework to put together a preliminary analysis skeleton of the merger and wrapped it in a bit of industry analysis as well. Below the line you'll find some very interesting reading excerpts and linkages as well. In particular we highly recomment following thru the link on Nicholas Carr's article and using his discussion as a template for understanding what's going on here. To put another point on it btw - this is an excellent example to illustrate how one might begin to do deeper analysis on companies. Let's start with the skeleton in the table below:

 The emphasis here is on preliminary - a considerable amount of additional work would be needed to flesh out the details,especially at a company level. Nonetheless several key points stand out when one uses the template to think things thru a bit.

Continue reading "B2C Wars:Yhoo/MS Merger - Disaster in the Making ?" »

Posted by dblwyo at 08:33 AM | Permalink | Comments (0)

For some time now it's been the intention to revisit prior dissections of HD - where we ran a nice little series but also with the intent of using HD as an example of we outsiders taking a look at company performance. It seems like it might be time to re-visit that and for several very good reasons. As the set of postings on profits and earnings show company performance is a critical factor in many things. And, the point in yesterday's post on the Weekly Reader, there's a lot of examples of folks who deserve poking at.

Just to review the bidding the last HD posting id'd six major factors in digging into HD's performance and then worked thru them in some detail. The six are: 1) Economic environment and whether or not it was going to be worse, 2) Employee Morale and it's linkages to HD performance (an anlysis thread we dug into in several postings, and here), 3) Customer Service - a major area of old competitive advantage, current major breakage and bad image and one requiring major investments but not too major, 4) Operations - major changes in procurement, logistics and store operations to improve service and lower long-term operating costs, 5) Product Development - continue and expand the development of new products with higher value propositions and new services to support them ala Target and 6) revisions and extensions of the historical Business Model because the US market is pretty well saturated and new market niches will need to be developed to restore growth.

So the key questions are how're they doing, what's likely to happen and what can we do about it ? Below we present a summary table of the six factors along with some discussion and some implications. But before doing that let's review the last few months of headlines:

• May/Jun - Q108 same store sales down approx. -8%, buying back $25B of stock (a 1/4 of capitalization at the time) using $10B in proceeds from the sale of Hughes Supply plus $12B of borrowings. [Earlier on MSN Money over 10K e-mails were recieved with detailed stories of customer woes and complaints]. BigPicture rants about poor service.
• Jul/Aug - EPS for FY07 -15-18%, down from expectations of -9% with a 1-2% reduction in shares btw. Buyback set at $39-44/share. (7/26) Moody's downgrades all ratings, buyback reset (8/9) at $37-42/share, (8/26) Hughes prices drops to $8.5B with a guarntee of $1B in debt plus retaining equity.
• Sep/Oct (9/5) Buyback 290Mil shares at $37/share for approx which would be 1/2 way uisng $8B in proceeds plus $2.7B in cash, about 12.5% of the stock. Seperately outlook was revised and pessimism increased for revenue, profits and earnings. (10/10) HD Design Center concept announced - warm & fuzzy hardware stores targeted at women (?). (10/16) Same store sales down -16% and (10/30) Buffett rumored to be interested.
  

While those are the sorts of headlines you'd expect in the financial press, especially in these times, notice that after a couple of quarters of "how-to-fixup-HD" articles the summer to date is primarily about buybacks, finacings and deteriorating sales with a little buyout thrown in to flavor the buyback. On the surface you'd have to ask yourself is this HD just being coy, preserving competitive information while it explores those options or is the lack of information a lack of action ?

Given a downtrending economy, increased financial pressures, and an imploding primary market then using scarce & expensive capital resources to buyback shares, especially when you're having to borrow and increase leverage to do it, doesn't make much sense. Even if you're a PE guy this outfit is going to spend the next couple of years fighting down pressures on EPS. Pressuring management to buyback shares makes sense if they're under-valued. Using scarce capital to hold back the tide and worsen performance is in nobody's interest. Or so it seems to me. 

And judging by the stock chart so it would seem to Mr. Market. Now if you're buying back stock at $37 that then is worth $32 you better hope Warren buys it for $35 or more and reduces your loss. It seems to me that now would be a good time to hunker down, explain what's going on, make some judicious investments and get set for an upturn that would/will hopefully follow what's likely to be another two tough years. And for gosh sakes - tell your people that too. Not use borrowed money to prop up your stock and paper over the deep challenges. 

Continue reading "Performance Re-visited: Another Trip to HD's Woodshed" »

Posted by dblwyo at 02:58 PM | Permalink | Comments (0)

Tesco, the largest UK retailer, is coming to the US with a new format that primarily focuses on ready-to-go meals of high quality and will start in the US market. Knowing them they've thought this thru thoroughly, tested and will execute with style, discipline and customer-focus.

Where this is both interesting and a harbinger of things to come is twofold. First, just in their sector, making something like this work takes a complex blend of skills in store operations, replenishment, logistics & transportation, product development, procurement and technology. Having worked some with Tesco in years past they are as good and balanced as anybody in the world at the reach and range of these skills. In fact their logistics operations are THE critical enabler of their responsive, high-service store operations and are built with more capabilities than any other; and closely coupled to very sophisticated IT.

Second, it's a harbinger for the retail market as a whole. Which is largely split between high-end retailers where price isn't much of an object and the EDLP (every-day-low-price) cost-control mantra low-end with some examples but no major players in the middle. With a sorta of exception in Target and more so in Trader Joe's. Yet it's where the largest opportunities lie when you add up the number of people with disposable income who are ill-served.

So that makes the US entry of Tesco a great, dramatic and exciting event for some of us who find the world of business (as it is not as Dallas would have it) intriguing. 

Continue reading "The Unpopulated Middle: Tesco in the US" »

Posted by dblwyo at 07:41 AM | Permalink | Comments (0)

With all the turbulence in the Economic and Market environments the next question is what do we do about it ? That's a question of particular and peculiar fascination for me and I hope for my readers. At the end of the day the externals define the context while it is what business does that makes them successful or not. Earlier we spent a great deal of time on examing how well Home Depot was coping and found that major internal errors led to major strategic breakdowns in performance. Yet, in looking around at the headlines, we also found that this bizzskul exemplar was hardly alone. In surveying the headlines the number of companies that have been experiencing significant performance challenges seems to be more in the majority than not (thought admittedly that may be in my sampling :) ).

 Two major areas of under (UN ??) development are strategic HR and IT. In the special section below we find a fascinating case study of a firm that puts major emphasis on nurturing human talent at the lowest levels and sees it as a strategic advantage. IT is one of the great mysteries - the gap between the business and technology sides of the enterprise not only continues as wide as ever but seems to be increasing. Yet it's widely admitted how strategically important and how much the leading players from WMT to FDX to AmEx benefit from their systems innovations. And the problem is growing apace, as shown by an article below.

But continuing the 'companies in trouble' theme there are updates on Dell, MSFT, and AMD which dive deeper into their struggles while also pointing out some of the things Lenovo is doing. There's also a set of interesting postings on the state of the Telecom industry and key players. Finally some interesting reading on GM and the Auto Industry as well as MickeyD's ability to continue to innovate and find new value - in this case by moving up from below to challenge SBUX's value prop.

Life is interesting. Perhaps we need a great Greek Dramatist to chronicle the tragedies and comedies, no to mention the occaisional pure farce :), of the trials and tribulations. Wasn't it Aeschylus in the Oedipus series that gave us our best take on how pride, hubris and ignoring the environment led to disaster ? Though perhaps Shakespear's King Lear is a better model for how power struggles lead to performance catastrophes ?

Continue reading "Weekly Reader: 16Sep07 Business" »

Posted by dblwyo at 08:04 PM | Permalink | Comments (0)

So here's our preliminary shopping list - things to focus on now and things to do to set the table for the future. In other words while emergency repair and recovery needs to be pusued with all due haste and effort those short-term focused efforts need to seque into longer-term and deeper changes or they will be unsupportable.

Continue reading "Six Steps to Prosperity: HD Initiatives to Consider" »

Posted by dblwyo at 12:32 PM | Permalink | Comments (0)

After some sidetrips to explore performance vs. valuation and the impacts of sacrificing employee morale on long-term performance it's time to revist our friends at Home Depot. Not that we're above just plain old picking on HD, probably the sign of jilted expectations for us as well as the many folks who innundated message boards around the Net and the Blogosphere expressing their deepest disappointments with value and customer service at HD. But it's also more than that - and we hope - much...much more. HD was, perhaps is and certainly can be a great company again but it faces many challenges.

Continue reading "Picking on HD Some More" »

Posted by dblwyo at 09:55 AM | Permalink | Comments (0)

Well let me try and get back to discussing Home Depot and the lessons therein for corporate performance. While my primary purpose and focus here is on enterprise performance I keep letting economic and market events seduce my attention away - largely because it's hard to sail the boat well if you don't know where the wind and the currents will take you. That said I'm liable to succumb in the future somewhat often to build up my collection of tools and observations.

In the prior HD post we talked about Nardelli's short-term focus doing tremendous damage to the soft-assets of customer value and employee morale; and that enormous asset depreciation being reflected in a long-term decline of PE Ratios and the associated drop in enterprise value. With a couple of toolkit posts on PE trends and valuations in the market we can turn around and dig a little deeper now into HD's history. Unfortunately the Nardelli experiment in excessive cost control for apparent short-term earnings not only spent soft-assets but squandered a major market opportunity. Now that housing is slowing dramatically the new management must not only re-build the company that was but face severe down-pressures in demand. It won't be easy but perhaps a look back may help.

Continue reading "Home Depot: a Little History" »

Posted by dblwyo at 11:01 AM | Permalink | Comments (0)

Despite the outrage let me suggest that his departure was cheap at the price. And that the real question was why it took the Board so long to reach the necessary conclusions. Perhaps the short-term lesson is that dissing the Board, as he did by not inviting them to last year's annual meeting, is not in any CEO's interest. On the other hand after six years he walks away with at least $20M in cash and the rest of the package.

Continue reading "Cheap at the Price: Nardelli, Home Depot and Performance" »

Posted by dblwyo at 10:17 AM | Permalink | Comments (1)