bizzXceleration: Performance, Value and Profit

This has been the more than a "Lost Decade" and all the prognostications are that the 10s will be the same. Certainly all the evidence we've presented on the state of the economy, the long-term outlook, the linkages between profits and markets, valuations (which we remind you are over-valued something like 20-25% right now a long-term basis) and the multiple discussions of business performance all point that way. So what do do? Ah, that IS the question. Alas poor Return, we know you well.

Well...this is going to be a stock-picker's paradise as well as needing to rethink investment strategies in light of ongoing major structural shifts. Neither the top-down macroperspective nor the bottom-up value perspective can be entirely neglected but must be integrated. A lot of that machinery has been laid out here. The remaining key question is how do you actually go about linking the headlines to readily available financial data to business performance analysis. But before we dive into our central focus let's revisit the case for active value investing with a hattip to Barry Ritholz. It seems Vanguard, one of the better outfits around period, made it's case for a Buy-N-Hold strategy with an interactive tool that showed the market outperforming an active investor following simple mechanical rules. Unfortunately for them Barry and Paul Kedrowsky proceeded to demonstrate that if you tuned the parameters slightly it went the other way. We spent some more time playing with and got the results collected in this composite graphic. Barry's post and charts are excerpted in the readings while our multiple fiddlings are here, and if you click on the chart you'll go to the Vanguard's tool to play with yourself.

What you see at top is two alternative rules that do better than simple buy-n-hold, in case with less risk and the other with slightly better returns. In some ways case closed.But if there's any economy - markets - investing link we've been pounding on it's that economic turning points are visible a long way away and that economic performance drives markets in the long-run. So in addition to sensible asset allocation plus active value investing plus excellent company performance analysis it seems to us that the first, fundamental key is playing the turning points. Which we sorta mimicked by breaking up the time periods. Within the limits of Vanguard's tool, not designed for this purpose, we're in effective suggesting that you make the big turning point In/Out decision and then adapt/adopt an appropriate rule appropriate to the macro regime. Right now and for the rest of the 10's we think that regime is a rangebound trading market, just to remind you.

Business Performance, ROIC and Investment

Of course some of the other recent investment news is the annual Berkshire meeting which produced a flurry of stories and articles. Some of which are excerpted below along with our selections from Warren's annual letter, as usual a great must-read. One of the more interesting is the Marketwatch story pointing out that BRK beat all mutual funds for the last 45 years. By this time we basically know roughly how he does it (NB: the recent stories on how and why he took a pass on LEH reinforce it - a day with the 10K, some hours interviewing Dick Fuld, a complete lack of confidence in management and voila!) which is to pick good companies with aggressively defensible market positions and value-creating products run by management he trusts. Now we've spent a lot of time digging thru a bunch of different companies here to break that down in much more detail but we want to point to a way to screen and analyze companies for deeper analysis.

One key way to do it, with a number not commonly looked at but rather widely available, is ROIC, or Return On Invested Capital (sometimes ROC).  And the guy who surfaced it and was cited by a bunch of major bloggers was our old buddy Jim Jubak in this column: The one must-have number for successful long-term investing. It strikes a theme and approach he's been using in several by-the-way. But basically ROIC tells you how a company is doing with the resources it has available. We'll note in passing that our recent dive into Home Depot that they link business and operational strategy to key performance metrics to ROIC and capital discipline in a closed-loop management process that is a beauty to behold.

 We put together this sampling of some key bellweather companies, headline names and/or ones we've written about and make good comparisons, using the stats readily available on MSN Money's stock profile pages.One of the things we like is that it shows you ROE, ROA and ROC all side-by-side. ROE is the one most commonly followed but that's dangerous since it's simply ROA leveraged up, and subject as to management folly and accounting whimsies.

The top row is all Tech firms, the middle row exemplars of sorts we've discussed and the bottom row some representative samples. For example MickeyD's (MCD) vs. Burger King (BKC) - both are showing decent ROC, more importantly it's improving compared to the 5 year and tells us there may be a couple of winners. Since we used MCD as our working case for long-term valuation that's good to know. Exxon - the best run by far of the oil major- is interesting since current ROC is so much lower than historical. We know that's not for internal performance reasons but we also know that the world energy ecology is under-going a major structural shift that severely limits the long-term profitability of the Majors. The HD vs. WMT numbers are interesting - HD clearly has a ways to go. Also really interesting are the trends apparent in the Tech row. Dell for example has a decent current ROC but has fallen a long way, Apple seems to be maintaining its exemplary performance and Intel and Cisco are getting good returns with slight drops below historical performance yet, as we've discussed, are going thru major transformations. In other words we may be seeing Red Queen Syndrome in a relatively mature industry where only Apple has found a new value proposition, CSCO/INTC are extremely well run but aren't delivering breakthrus and Dell is struggling. IBM on the other hand is a different story.

ROC, ROA and the DuPont Method

A related number that's often easier to get, understand and analyze is Return on Assets. Especially since breaking it down and linking it to details of company performance has a long...long history having been invented by Pierre du Pont to help run DuPont rationally in the early 1900s but being more fully developed in his takeover, salvation and transformation of GM. (Strategy and Structure: Chapters in the History of the American Industrial Enterprise by Alfred Dupont Chandler). In the readings there are pointers to more educational resources on Dupont Analysis, somewhat related Enterprise Value/FCF and ROC or ROIC. Let's take a look at the relationships in DuPont's framework and what it says about business performance. A couple of notes - ROI here is also ROA, DuPont's critical metric. ROE is related to ROA by ROE = ROA* Equity Multiplier, where  the EM is a measure of leverage and is given by (1+Debt/Equity). You can and should break down ROA into its major components.

Operating Efficiency = Profit Margin = Net Profit/Sales tells us how efficiently a company is running today within existing resources. The trends over time and the value of various tactical and strategic initiatives, when analyzed thru the filter of their impacts on Revenue, Profit and operating costs, tells us where it's been and where it's going.

Capital Asset Effectiveness = Asset Turnover = Sales/Assets tells us how effectively a company has been and is being run. And, again, what the future holds by working the initiatives you read in the press and in the analyst and annual reports thru these filters, how it's likely to do in the future.

Capital Structure = Leverage Multiplier = Assets/Equity tells us whether or not the sources of performance are operational, business or financial engineering. Over the last couple of decades too much attention has been paid to short-term ROE which means too much credence has been given to financial engineering and leverage and not enough to business fundamentals.

Return vs. Performance: the final implicit equation is ROE = ROA X Leverage = Profit Margin X Asset Turnover X Leverage. It's the first two you want to know are improving and are likely to keep improving, or not.

Business Think vs Financial Think

All too often the press and analysts get numbers confused with running the business when actually it's the other way around. The numbers should result from business decisions, not drive them. But in a quarter-to-quarter world where headline earnings are all that matters for compensation plans just the opposite happens. Let us try and illustrate some ways of thinking the way a business person thinks, or tries to, or should (if they're not Dick Fuld and the management of Lehman).

Suppose a medium-sized manufacturer is facing an over-capacity market with lots of competitors and no clear differentiation. And they decide that the way to create a major value engine is to improve total operational service from ordering to delivery and installation to after-market and life-time service. As we know from our whole enterprise investigations that's not just beating up the troops to smile on the phone but involves deep operational changes in order process, fulfillment and distribution, perhaps the creation of a whole new service support organization with its own capabilities plus tight linkages to manufacturing and product development. Over time, say in a phased approach, you're likely to see the impacts on the P&L and the Balance Sheet work themselves out something like we've illustrated.

Beyond that "simple" change that creates a sustainable and appreciating advantage lies a whole host of other possibilities one could envision. Changes in fulfillment and speeding up the order-to-delivery and order-to-cash cycle might lead to and fund major changes in manufacturing operations, say to a leaner operation. With a more cell based operation and less emphasis on long production runs. That kind of flexability means the company could go after smaller markets more profitably, be more responsive to customers and have a broader product line. Which then would support a whole new approach to Product Development and Marketing and so forth...one thing leads to another.

We've covered a lot of ground and tried to do it at some depth, from alternative approaches to Investment Strategy to deep value screening and analysis of companies to deeper methods of business analysis linked to business performance. If there's a final argument to be made here it's that in this market and with this economic outlook the companies doing and demonstrating this kind of thinking are the ones you need to be looking into. Otherwise you'll be lucky to get your 4% return over the next decade.

Continue reading "Investing, Business Performance, Return: Analyzing for Results" »

Posted by dblwyo at 06:49 AM | Permalink | Comments (0)

Now that we've pointed to Pulitzer's wrestling with the impact of major new technologies, that nobody had ever seen before, and finding new value creation goals and delivery mechanisms the next question is, what would Joe do? We're not going to answer that right off the bat but instead build up to it a bit and lay some groundwork by exploring how various old and new media, and the associated members of the ecology, are wrestling with the most fundamental questions. Looking back it's not clear how long it took for Joe to find, develop and implement his innovations but it wasn't over-night either. On the other hand everybody else mimicked him and the models he developed were adopted around the world AND sustained the Industry until the last few years.

In fact while Radio and Television were, in their own rights, major innovations they were only locally disruptive. That is they displaced players and patterns but did NOT cause the entire ecology to be jump-shifted. Perhaps that's the source of the complacency but much of what's going on today was foreshadowed by work done at IBM in 1994-1996 when they came up with the whole e-Business schtick. In fact somewhere in my garage is the file of proposed new businesses that look a lot like everything you see around you! The catches are that IBM was, as usual, way to early and the rest of the world ignored the warning signs until the last 18 months or so. And is now scrambling to play catch up. The graphic is a composite of a vidclip the WaPo did at the WSJ's All Things D conference which has turned into one of the single best places to find out what's going on, what the players are thinking and doing and, especially in this context, how they are or are not adapting to the pressures for change.

Continue reading "What Would Joe Do? Re-thinking Content in the New World" »

Posted by dblwyo at 04:42 PM | Permalink | Comments (0)

We put up the GS review and deconstruction for its own sake - people need to keep paying attention and understand what really went on and is going on. But also because it's such a perfect exemplar of the general behavior and attitudes of the Industry as a whole and, more importantly, representative of the core of the challenges facing most businesses today. Those challenges are a sense of complacency in a return to business as usual, hubris that what they did before the crisis is perfectly suited to the "stormy present" and sclerotic organizations that refuse to recognize those challenges and/or are unable to adapt to them. As for the complacency we start the readings off with some recent updates on the world markets - which are turning out to be as turbulent, fragile and exposed to more structural fault lines as we warned. The biggest surprise we've had is that so many folks are surprised. Well we've spent as much time warning about the deeper structural challenges facing businesses over the next decade so you have to think the same lack of preparation is hiding behind the covers.

Earlier this week we got into a long exchange with a friend on that assessment where he thought we were on to something but wondered what our evidence was. A fair question - partly in answer we've put our online essay collections from the last three years on the subject in the readings as well as specific postings associated with other readings we think are interesting. You might recall though the accompanying graphic which shows the distribution of performance capabilities on a 1-5 scale, before, during and after the crisis. A 1 is a company at risk of collapse, a 2 one which is surviving by mostly emergency short-term measures, a 3 is one which added on some attempts at longer term improvements or investments in new products or markets, a 4 one undertaking serious efforts at major new strategic initiatives and a 5 one which is undertaking major new operational improvements and/or innovation initiatives. Both the headlines, anecdotes and multiple surveys indicate that the distribution is pretty much as we have it.

Continue reading "Complacency, Hubris and Sclerosis: Beyond GS to Real Performance" »

Posted by dblwyo at 03:08 PM | Permalink | Comments (0)

With the refresh on current Economic and Market news in place it's time to dive into applying the ecology to evaluating the outlook for business. We have an interesting choice here - continue topdown by sharing some recent stuff we've found on top-down principles, which would continue our approach. Or take it more bottom-up. We're going to do that because there's so much stuff floating around we'll end up with three separate postings on traditional businesses, technology and Finance. Which'll give us a chance to take a deeper dive on various aspects of each domain. But before we dive in let's add in some more economic and market news update, at last a tad. You'll find some more in the readings but AP just updated its economic stress map (which if you'll click thru will take you to the interactive, online version). You might also want to listen to this morning's PBS interview with David Wessel of the WSJ:Businesses Reluctant To Hire New Workers.

We've sampled the stress map monthly at four points from Dec07 to now(which would be Dec09) and you can read it clockwise. The point AP makes is that the stress is HIGHER than it was, which is a natural cyclic timepath and explains all the sturm und drang in the political arena. We also had multiple conversations with friends and neighbors over the weekend and the general take is that people are worried about jobs, cutting back their spending, thinking about selling their houses and facing major credit/debt problems. The things that are not in the data are a likely next wave of foreclosures, increasing debt problems, major problems with small businesses and worse problems with state and local budgets that are offsetting federal stimulus spending. Not to mention a whole host of international problems giving the markets big time jitters, as detailed in the readings (including a much more detailed YouTube of Jim Chanos assessment of China!).

Continue reading "Stories From the Front: Stories and Cases in Business Performance" »

Posted by dblwyo at 07:51 PM | Permalink | Comments (0)

The primary concern of the last post was defining the "new normal" and adding on the strong suggestion that each and every business needs to be constantly monitoring external events and not keep getting blindsided by them (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance).

As it happens almost everything we've had to say about the nature of the new normal, the pressures on governance and performance, etc. almost ad nauseum were discussed at last week's Davos sessions. Over the weekend we had a chance to sample many of the major presentations and 99% of the readings this time are the links to the ones we think you need to pay attention to. The real reason is that the WEF and the Davos participants have largely done your work for you in terms of assessing the multiplicity of risk factors and outlining the likely paths things will follow over the next several years. So between our work on the economy and business and theirs on the big picture environment most of what you need to populate your own dashboard is readily available. We start with a session that Bill George (Harvard, Medtronics) led on re-thinking global capitalism which gives you a pretty good flavor of the pressures that will be mounting and mounting over the rest of this decade (it's an hour+ but just the first few minutes tell you what you need to get started about trust in Business!).

Continue reading "The Cusp Point is Here: Lessons From Davos" »

Posted by dblwyo at 09:25 PM | Permalink | Comments (0)

A few interesting things happened in this last week that define the things we want to address here. In an exchange with a friend on business performance in the new normal, despite several months of back and forth, most of what we'd been saying about the next decade hadn't really sunk home but we finally managed to get the other shoe to drop. His reaction was somewhere between Wow and OMG! What that exchange makes clear to us is that, in line with our expectations, most businesses haven't a clue as to what's coming at them. So those issues (defining the New Normal benchmark and assessing business preparation and performance outlook) define our endpoints. At the same time we had an amazing, in many senses State of the Union and Davos 2010 kicked off. This environment has moved from Chaos to Turbulence and is still very Fragile - and will remain both Turbulent and Fragile for the decade as deep structural adjustments in the global economy, governance (corporate and public) and geo-politics that will radically alter the deep foundations we've taken for granted for the last three decades are changed in response to the crisis and governance and performance failures. Those changes are a central theme of this year's conference.

Taken all together the economic outlook, the implications for investment and asset performance and business governance define the touchpoints of our highly selected readings section after the break, including several critical vidclips from Davos as some from the FT on emerging markets. There's nothing there that we're putting up just for fun. But the central questions are what will the New Normal look like and how are businesses prepared for it? And how will public authorities deal with restoring a fragile world economy. To set the stage you might want to listen to this brief round table from McKinsey. But we'll let a much wiser man define the situation in words we hope you recognize and take to heart:

"The dogmas of the quiet past, are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall our selves, and then we shall save our country. Fellow-citizens, we cannot escape history. We of this Congress and this administration, will be remembered in spite of ourselves. No personal significance, or insignificance, can spare one or another of us. The fiery trial through which we pass, will light us down, in honor or dishonor, to the latest generation."

Annual Message to Congress (1 December 1862) – A. Lincoln

Continue reading "Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance" »

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

The Markets have been tanking most of this week and have given up most of mini-bubble beyond 1100, which if you recall was our upper resistance limit in previous posts. It's doing so because a bunch of things have come together, though semi-predictably there's a chorus of voices blaming the President's announcements of a major reform to restructure the Finance Industry and change what it's allowed to do and how it functions. Given the poor quality of earnings since last March, recent reports showing how weak the core businesses are and Industry behavior over the year with regard to reform that announcement was, at best, a trigger that crystallized an already saturated solution. What really saturated things and put them on the cusp point of teetering over an edge was a slew of disappointing earnings, an improved grasp on the real economic outlook and China's major changes in policy. ALL of which we've been discussing for months.

Rather than reviewing all that it's collected in the readings but we're going to use it as our fulcrum to focus on the salvo across the bow fired on reform, and ask you to start with investing eight minutes in listening the President's announcement. This is not just political theater, though there's some of that, it's to the point, substantive, grounded and a sensible reaction to being stone-walled by the industry for one year (bear in mind the Administration reached out to the Industry within days of taking office and has been trying to reach out for months).

Continue reading "Comes 'round, Goes 'round: Hastening Forward Slowly to Finance Reform" »

Posted by dblwyo at 10:15 AM | Permalink | Comments (0)

The fundamental messages we've been trying to drive home are that the next decade will be one of the most challenging in at least four, if not since the Great Depression, that the new realities have not sunk into investors, management and stakeholder consciousness and the single biggest challenge will be to improve enterprise performance. Performance improvement will either be led by the enterprises or imposed from the outside, less effectively, by a high level of distrust and justified anger at near-disasters brought on by malfeasance. And this is not just restricted to the Finance Industry. It is in enterprises own best interests to improve their governance, management systems and performance to make sure it's done well, adapted to their needs and, most importantly, they actually improve their performance.

Backing up those assertions you'll find an extensive readings collection on each of the major issues involved after the break; here we want to review the evidence and explore the core concepts of performance improvement and management systems. But start with the BNN clip of Don Coxe both laying out the situation and the level of reality denial currently prevalent in the markets. A reality, judging by the week's reactions to earnings in the markets, that might just be sinking in the general consciousness.

Continue reading "Renewing the Enterprise 2: Governance, Measurement & Performance" »

Posted by dblwyo at 08:18 AM | Permalink | Comments (0)

Well with the second day of FCIC hearings behind us and the agita reactions we could easily pick up on that thread and continue the conversation. Especially because we think almost all commentators are misjudging what they're hearing. Of course to better judge it you'd actually have to a) listen to the whole thing, b) know what you're hearing and c) know some of the background. We still think the three most important things we heard were 1) we really screwed up, 2) it was fundamentally bad management and leadership and we're responsible and 3) we apologize but we're not really sorry (especially Blankfein and GS!). The Street's grasp on the tsunami that will build up over the next two years is abysmal and they don't know how to deal with it, but dealing with public responsibilities is as much a part of an executive's responsibilities as is day-to-day decision making. But, God being just, JPM's lackluster earnings which are bringing down the market as we speak for all the problems we've been warning about for 18 months at least (literally) will do for now (that'll do Donkey, that'll do). Blankfein's major defense for drinking the koolaid was that nobody could have seen it coming - which is just flat not true, and is being repeated. CalculatedRisk was warning about this problems in 2005 and we were warning about a slowing economy in early 2006.

Here's where those all come together - our fundamental question. Are businesses properly preparing for the next decade of slow growth? Just to put up some new charts on that point of forewarnings this one shows monthly retail sales, quarterly back to 1960 compared to Consumption and GDP and the determinants of future demand. The sum of changes in Employment and real Wages continues to weaken. Now if you don't believe things aren't very rosy you're probably done here. If on the other hand you think business performance is a critical factor in how things will go please continue on.

Continue reading "Talking Business: the Outlook vs. the Preparations" »

Posted by dblwyo at 03:24 PM | Permalink | Comments (0)

Since we're about to dive into the first working day of the new year and the new decade we thought we'd provide a bit of review and an outlook on things.Comment - if it's not clear the intent of this post is to make the review and outlook available to you all, for free btw, in downloadable form. In fact we do so with three different alternatives: clicking thru the Summary graphic below, online viewable at Scrib or directly by clicking thru on the highlighted file name. Please do so as we feel that the real value here is in the comprehensive views across the major economic, market and business factors as well as their integration.

Now, let's start with this recent PBS Newshour interview from their show conducted at the recent Am. Economics Assoc. meetings. Several short interviews with some very serious players indeed, including Bob Shiller and George Akerlof.

We hope you take the few minutes (about 8) necessary to watch - or even go to the web site and read the whole story/transcript here. We think it's worth your time.

The central question(s) being raised was "why you didn't you tell us that we were headed for the ditch?". The answers are somewhat various but converge on three key ones:

1) Actually we did, several of us in particular, but nobody paid any attention because everybody wanted to believe this was Dr. Pangloss's world.

2) Everybody got too wrapped up in and by the "animal spirits" of the moment and forgot both that markets go down as well as up, and that they REQUIRE more supervision than we remembered.

3) Everybody got focused on their own little niche and didn't see the big picture of how it all tied together. We knew there were lots of problems scattered around that were serious but nobody put all the pieces together.

Continue reading "Review & Outlook: Economy, Markets and Business in the New Normal (COMMENT!)" »

Posted by dblwyo at 06:21 AM | Permalink | Comments (0)

By this point it should be absolutely clear that we're facing many challenges, collectively and individually, to recover from a brush with near-death. It should be even clearer from out earlier discussions that our present troubles are the accumulated result of the last three decades of not-so-benign neglect, wishful thinking and refusal to face facts. Equally clear should be the notion that this next decade will a challenging one with no financial leverage to bubble us out of our troubles. We're going to have fix this old fashioned way - by earning it. There are two fundamental directions we need to pursue. One is making the enterprise perform as it ought, the subject of the last post (Dealing With the Brave New World: Resilience vs. Sclerosis).

The other is that we need to find, develop, create and deliver new sources of value, also discussed in a previous post (A Bit of Xmas Cheer: Innovation As The Future). On reflection and discussion it occurred to us that we didn't lay down enough detail to get specific and convincing so we're going to re-visit the subject of innovation in some depth. And do so from the perspective of how to make it happen, not why it's such a good thing. The New Year is traditionally when we look ahead with some hope to a better future but what is faith without execution? Let us therefore "Make It So". (Christmas Wishes: Peace, Prosperity and Performance).

 Re-visiting Innovation

So what is Innovation? And how does it work...or should it in our idealized fantasy world? The last Innovation post wrestled with the first - Innovation is NOT invention, nor is it clever people sitting around making incremental improvements in existing products. It is the creation of new value. Two things happen in general regarding I-discussions. First off the more trouble an organization is in the louder the arm-waving about. Followed by a lack of delivery - no resources, no commitments, too much rules-as-usual. NB: Innovation is not measured by the size of the R&D budget. Those are inputs. What we're concerned with it outcomes. The other thing that happens is that everyone stands around and talks about changing the mindset - building a new culture. Well culture is important but again it's not Innovation.

Continue reading "Renewing the Enterprise 1: the Proper Management of Innovation" »

Posted by dblwyo at 01:05 PM | Permalink | Comments (1)

By this time we hope it's crystalline that the "Brave New World" is going to be tough, steep and rocky, that is no more liquidity from which we can all get high fevers and have bubblicious ephorillusions (boy, don't you just love it when word coinage can really get carried away). We won't review either the extensive de-mythologizing we spent so much time on, nor the equally intensive review of the long-term structural outlook for the next decade. Hopefully, it's not necessary, right? Instead we're going to turn our attention to the critical fulcrum - how are businesses preparing for the this upcoming decade? One where there ARE NO mysteries about how tough it's going to be.

We started this series by setting out a marker that summarized our best impression from our network, other contacts, and various readings and used the accompanying graphic to illustrate our main points. Sadly, our friends at BCG have just published another study (not available yet) on how businesses are responding and confirm there own findings from earlier in the year as well as our own (you'll find a link to the WSJ's summary in the readings). Let's repeat it - businesses are NOT prepared, preparing or anticipating. Instead they're all praying for a miracle - we won't retell the old joke about the believer who drowned after being given multiple chances to save himself but it seems to apply.

Continue reading "Dealing With the Brave New World: Resilience vs. Sclerosis" »

Posted by dblwyo at 07:48 PM | Permalink | Comments (0)

Please consider the normal wishes and sentiments of the season extended, sincerely and well, to all my readers. Christmas is the day and season of renewal and hope, and has been for ages, even millenia. It, after all, is the Solstice which all Man's religions have recognized in some form or another for as long as we know.

As is our wont however we would like to put a little more substance and reflection around the surface. It is also a season for reflection on the year and years passed and on what the future may hold. Hope is one thing but hope based on substance something different. Based on previous posts it's clear that this next year, even this next decade, will be challenging.

We exited the last decade and entered this one in a state of euphoria that went aground on many hard realities. While it would be "nice" to suppose that some cosmic scale would see us entering a decade with a distinct lack of euphoria to be one of progress and prosperity. Alas, all the signposts point to continued challenges. Yet there is hope - not least that we recognize these realities and prepare to meet them. And in that, combined with action, lies the true hopes for a good decade.

Hope IS Performance: the Wisdom of Dogen

In a word we hope to see Performance this decade instead of continued coasting along on leverage, failures to execute and strategic maladjustment. At the end of the day, therefore, all our hopes rest on the ability of business to do its job and perform.

For our inspiration we look to the great Japanese Zen sage and founder of the Soto sect, Dogen. One of the greatest thinkers, philosophers and poets who ever lived, and someone capable of putting the most profound truths in the most elegant and simple verse.

In Steve Heine's wonderful translation, "Verses from the Mountain of Eternal Peace", Dogen says:

Attaining the heart

 of the sutra,

Are not even the sounds

Of the bustling marketplace

The preaching of the Dharma?

 As Adam Smith pointed out a long time ago, though almost a 1,000 years more recently than Dogen, man has a natural propensity to truck, barter and trade. Economic relationships are as natural to man as any other and promise more increase in well-being than any.

The Dharma is the natural way of things, the ultimate truth(s), which we must strive to see by seeing and understanding things as they are. Without distortions or delusions. A sutra is a major teaching of the Buddha, a doctrinal bedrock akin to the Bible or the Quaran, in which he set down his lessons for all to read, study and adapt.

Continue reading "Christmas Wishes: Peace, Prosperity and Performance" »

Posted by dblwyo at 11:28 AM | Permalink | Comments (0)

The last several posts might have struck you as a bit depressing. The next in order might have been a year-endish survey and summary of the markets but given performance over the last decade we didn't really want to head into Christmas Day with that on your or our minds. Instead we're going to pick up the thread of business performance and concentrate on the future and what we think are some reasons for optimism. At least guarded optimism. Though we're going to start with a bit of a down note by adding one more chart to the the chain of argument on the long-term economic challenges we're facing. Our optimism rests on the notion of Innovation, which we've covered before. The challenges are indeed daunting and long-standing but we've faced worse, on both the enterprise and total economy levels. So what rays of light are there for this optimistic season?

GDP: Potential vs. Actual

We'll let's start with one semi-final note of a darker hue and compare GDP Potential with Actual over the post-WW2 period. Potential GDP is the level of growth that we could reasonably expect if the economy was efficiently and effectively operating so that all resources were fully employed. The CBO makes continuous estimates of this number and does a pretty good job - it is if nothing else an excellent benchmark to start with.

The top chart shows GDP Potential (dark blue) vs. Actual (light blue) since 1950, as well as the difference between them. First off, in case you had any doubt as to the real depth of this Great Recession, this ought to put them totally to rest. We've never been any farther below potential in six decades than now.

Continue reading "A Bit of Xmas Cheer: Innovation As The Future" »

Posted by dblwyo at 01:32 PM | Permalink | Comments (0)

With the blockbuster financial reform bill moving toward the floor, a Presidential 60 Minutes interview and major discussion with the bankers its time to re-visit the Industry, its status, performance and management. Not least of the triggers is JPM's presentation at last week's GS Financial Services Conference but let's set the stage with Hoofy and Boo giving us their take on the public spiritedness of the Industry, as exemplified by the GS "Goldfellas". It shouldn't take long for you to figure out the movie they're riffing off of, not least because Blankfein does look a bit like Joe Pesci. But the real thing to keep in mind why is a Finance site/service like Minyanville taking this shot at GS and the Industry in general?

While you ponder that question allow us to observe that this post is not just its own thing, i.e. a FinInd update but also ties to the last several on the state of the Markets/Economy and Business Performance. On the former, in case we weren't clear, we'd summarize as: 1) there was a small run toward the dollar as the sovereign debt thing scared folks which drove up the markets confirming everything we've said, 2) some dozen different commentators from Paul Krugman to Rubini to John Mauldin to Mark Thoma have ALL come out to talk, in one form or another, about the "Mother of All Jobless Recoveries". If you'll recall our estimate is that we need 46 million jobs to recover a state of prosperity but are going to be lucky to get 20 million. In other words we're looking at doldrums decade of poor job growth, slow economic growth and constrained profits and earnings. Which then leads to the critical question of what companies are prepared or preparing for a very tough environment thru efficiency improvements, strategic changes in operational effectiveness and creating new value thru real Innovation? Our answer was that most of them are heads-down and hoping just to get by while everything returns to normal. That the banks are still not lending, still have toxic balance sheets and aren't talking about new products and services is critically important.

Continue reading "Paying the Piper: Finance Industry, Performance, Value & Regulation" »

Posted by dblwyo at 05:36 PM | Permalink | Comments (0)

One of our constant themes around here is that it's the age of the "New Normal". The last post reviewed some key arguments that we hope will stick in your mind, talked about some key findings regarding the state of employment and the outlook and linked that into market performance. (BtW - can we rest our case about over-valuation and market fragilities given week-to-date market performance?). We'll re-visit the new normal with regard to both the economy and the markets - and ask that you review the four points - but want to focus some more here on business response. Last time we talked about "deer in the headlights" syndrome among executives. Now we're going to dig into that a little deeper, that is what do we mean by that? In particular we ended up discussing the importance of business job creation and the mental agility and resilience of executives. And make no mistake - it's a lot easier to sit on the sidelines and critique their responses.

On the other hand they've been very handsomely compensated for sitting in the hot seats. The questions become how to judge who's earning those salaries? And what to do about it? The last post worked its way to this chart, which summarizes our impressions of how companies are, on the whole, responding to the crisis and positioning for the future. The answer is, not very well. As Warren says, and is now frequently quoted, we're finding out that there are a lot of folks who floated with the tide and now that it's going out turn out to have been swimming naked. As an investor, employee, business partner or other stakeholder you need some way of judging the clothed from the unclothed.

Continue reading "Adaptation & Resilience: Looking for the Naked Swimmers" »

Posted by dblwyo at 01:59 PM | Permalink | Comments (0)

Well if last week was a surprise downward revision to GDP this week was, ostensibly, a massive surprisingly good number on Employment. Even more interesting the Markets should have shot thru the roof. Instead they barely moved as the Dollar rallied strongly, Gold fell dramatically and Oil did poorly. Now if the Markets were based on fundamentals you'd have expected the opposite. We're not going to dig into the detailed analysis and interpretation of either the Economy or the Markets - almost entirely because everything that's been going on and just happened were things we've been dissecting extensively. We will poke at both chartwise (the Market composite dashboard chart's in the readings) and there are some very good readings you should at least skim. Instead we're going to continue our focus on Business Performance - in fact the intent is to continue the theme of the last post thru the next several because adaptability, resilience, innovation and performance are going to be the sine qua non of returns for the next decade and beyond.

We do our level best to be evidence-driven around here and focus most of our efforts to those ends,as hopefully you've noticed. In filtering all the myriads data points and shibboleths down to key findings we end up with pretty good dashboards on the economy, markets, assets, strategies and businesses but if we were to boil it down to four key things we'd ask (plead?) with you to remember it would be it would be to four major things. First, this time it really is different (the Reinhardt and Rogoff findings that this is a major downturn associated with a financial crisis which take forever to repair). Next, with a jobless recovery likely it's going to be a long, slow and painful process to re-build employment (est. 2019 before Unemployment reaches 2019!). Third, valuations are aberrational and the markets are as divorced from those underlying realities as they have been and there is NO MARGIN of SAFETY. Finally, and the reason for our focus on performance, businesses taken as a whole weren't prepared for the downturn, reacted poorly, aren't prepared for the New Normal and ARE NOT preparing. At the end of the day this is a failure of Leadership, Governance and a willingness to be evidence-driven in decision-making. Implying that the search for the performers is in reality a search for the clear-headed, simple and honest.

Continue reading "Response vs. Performance: Walking Wounded & Mental Attitudes" »

Posted by dblwyo at 07:56 PM | Permalink | Comments (0)

It's just about time to switch back to our bread and butter of looking at business performance but the readings start with some segues into the state of the Economy and Markets. The latter at this point, as we've hopefully made clear a time or thousand, cognitively detached from any linkages to the reality of the former. But not inseparable either, nor for that matter is business performance. Nor are any of the three detached from the huge inventory of policy-driven fluctuations gyrating at day-trading speeds while deeply impacting the underlying structure of all. Or, as we put it, it's a policy-driven economy and, adding to that, a fantasy-driven market. Accordingly the readings have update chunks on the economy and markets plus the business stories we want to point to, and end with a survey of all those policy gyrations. A set of inter-dependent interactions we try and conceptualize with this graphic. If business performance is the sine qua non, that without which there is no other, it depends utterly on the Economy, Politics & Policy and the state of the Markets. While enterprises cannot control most of these factors they MUST deal with them, which means understanding how the winds are blowing is essential.

Framing the Problem

Let's pop way up the conceptualization stack for a minute to explain part of our approach. The world is full of experts in their subject areas, whether it's Finance, Economics, technical analysis, marketing or manufacturing. The problem is that no problem we must address is driven by just one factor but by all of them together. That means that you need to understand each subject area to some extent, their linkages and relationships and how they fit into a bigger context and need some sort of framework for understanding the "ecology". The best illustration we've ever seen of this argument is this graphic.

The problem comes when specialists in one area pontificate on all the others without investing sufficient time to become knowledgeable. Which happens over and over again to the point of predictability. In fact we'd even argue that specialists reaching firm conclusions that are flatly contradicted by the facts and other domain frameworks is the general rule. And have spent considerable time in trying to sidestep that by digging deep enough into each area to be grounded and, at the same time, linked into the bigger picture. There's a second implication here that's potentially profound - a lot of what you hear is going to be wrong when an expert is outside their area and refuses to recognize it.

Continue reading "More Tales From the Frontline: Econ/Mkts to Performance & Policy" »

Posted by dblwyo at 08:31 AM | Permalink | Comments (0)

It's time to return to our knitting, a bit, and focus on business performance. But we're going to come at by combining readings and comments on earnings and key company stories with a composite view on earnings, earnings/PE outlooks and some economic data. Having built up all this machinery digging thru PEs, Profits and the Economy it seems like a perfect opportunity to bump the financial data against the economic information and outlook. So in the readings section you'll find some very interesting stories providing an overview of the earnings story followed by another major section with specific stories on the Banking Industry, Auto Industry (the "Task Force"), WMT, Berkshire & Warren, Merck and MSFT & AAPL. Each selected not just because they a names but because they are deeply representative of key trends and issues in their industries.

Earnings Reporting and Outlook

 About 90% of the SP500 have reported and apparently 4 of 5 have beat estimates on the high side. Which is one of the best numbers in a long time. Of course it helps that YoY comps are against pretty bad numbers and that tailwind will work even more in everybody's favor next quarter. The interesting thing, especially with the energizer market running like crazy, is that heading into this season the headline mantra was something like "we believe the economy's recovering, that they'll beat, but will they grow revenue?". The answer is that they didn't. And that's after managing earnings expectations down again. And playing what's increasingly the unusual game with as-reported earnings vs. unadulterated ones.

This table is worth your time to read, parse and contemplate. It shows the Earnings, % Change and PE Actual/Estimates from several different time periods direct from S&P (Dec08, and Feb/Jun/Aug/Nov09) for two time periods, varying with the time the estimates were issued.

In Dec08 for example the estimate was for $65.73 for 2008 but it came in at $49.51. The 2009 estimate started at $81.52 for a 24% increase, then dropped to $68.88 and 19.2% by Feb09. By Jun09 the estimate was down to $55.61 for only a 12.3% increase, dropped to $54.28 in Aug09 and is now at $56.39. Seems to have converged but does that give you a huge hit of confidence?

Continue reading "Reality vs Delustion Check: Earnings, Performance, Outlook (Updates)" »

Posted by dblwyo at 10:04 PM | Permalink | Comments (0)

The title is a play on words of course, taken from John Donne's Meditation VII, which starts, "No man is an island entire of itself; every man is a piece of the continent, a part of the main" and end with "And therefore never send to know for whom the bell tolls; it tolls for thee.". The message being in a society we are all mutually interdependent. Sadly, this is a message which not only seems to have been lost on the Finance Industry but they would appear, judging from last quarter's earnings and their source in proprietary trading profits, to turned on its head. Ask not for whom the bell rings for it rings for me, but never thee. Having been monitoring and analyzing the business performance of the Industry for two years now we were, and are, nonetheless very surprised. Because the other side of that coin is that society requires that it's major organizations and institutions provide a service that creates value. And, especially, does no harm to society. When the opposite is true, and when it looks likely that the behaviors will continue, society has no choice but to act. Well this week is the anniversary of Lehman's fall and it behooves us to ask what lessons have we learned, what have we done to fix the systemic and systematic problems and what will we do. Washington has been focused on saving us from our own and the industry's follies but the President marked the occasion with a speech to Wall St. putting them on notice that the reckless behaviors of the past will no longer be tolerated; and inviting them to constructively contribute to creating new regulatory regimes. An invitation they've had for months and been fighting in every possible way. The week ended with the Fed's announcement that they will start setting compensation policy. Meanwhile Barney Frank on MSNBC provided pretty clear indications of where he sees things going and Pecora II is about to kick off. Now it's a siren rushing to the crime scene and the results could be very ugly.

Perverse Incentives, Bad Consequences

Let's review some stuff we've gone over before separately and put a new picture together, plus add in some stuff, from this week. Here we look at the overall performance of the Economy vs sector Profits, the Economy vs Markets and Wall St. vs Society. The UL chart we've talked about a lot so moving on the UR chart is updated and shows real SP500 vs real GDP cumulative growth from 1950 to now. The bottom triptych puts charts showing the growth of Debt with Wall St. relative compensation and Bonuses. Taken all together it almost seems to us that a complete story is being told, eh what? But what we have is de-regulation that led to a wave of financial engineering innovation that started by creating value but soon focused almost entirely on internal products, e.g. proprietary trading, that created a tsuanmi of debt leading to completely out-of-balance compensation for the Industry. Not least amusing is that this didn't metastasize until this decade. In other words despite all the tooth-gnashing about systemic problems and accumulated history it wasn't really until the last five years that we all got ebolasized! Anyway that's how we read.

Continued....

Continue reading "Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin" »

Posted by dblwyo at 04:47 PM | Permalink | Comments (0)

Where's the Beef? A fundamental philosophical and religious question when you get right down to which is equivalent for our purposes to where's the money? Or, more granularly, where's the returns - which translates into where's the performance? How are businesses going to grow revenues and profitability in the future? 

The previous economic post (Between Stalingrad and Kursk: Real Economy, Policy and Outlook) provided a long-term assessment that we're facing a decade of doldrums with limited economic growth, slow job creation, no more debt-based spending and severe constraints on corporate profits that call for some major adjustments. The follow-on markets and investment post (Where's the Money: Markets, Outlooks & ReThinks) translated that into the question of where's the Alpha coming from. NB: Beta is the return you get when you traipse along with the market - for about three decades we've been coasting on leveraged Beta with higher than justifiable PE valuations (which are very exposed to the downside). Alpha is the return you get from the execution of good judgment, i.e. what skill and capability get you over and above the market. In the Doldrums it's all about Alpha, alpha will be all about anomalies and anomalies will be all about finding value where others don't see them. In the last business performance post (Welcome to the New Normal: More Frontline Tales of the Reset Economy) we walked thru some cases illustrating how that works. So let's pick up that thread. But you might start with the interesting little vidclip on the Daily Show discussing the MBA integrity and ethics oath - which we feel is unnecessary but justified. High-performance businesses are that way because the deliver value and engage their people. Any time you have to take a formal ethics oath that's a signpost that you're not dealing with a high-performance business.

Finding the Beef: Indicators of Performance

Again, last business post, we walked thru some cases very briefly and don't want to repeat them but do suggest re-reading and THINKING about them is worthwhile. Not that you have to agree - in fact feel to NOT. But then come up with your own story. Because those stories as they play out are the new alpha. Consider this ETF composite chart which compares and contrast the eight major ETFs (industry sectors) YtD and since 2003. You'll notice that every sector road the same train up (call that Beta - and as we know now, it's levered Beta. Not least because of consumer and business debt as well chicanery in the Finance Industry). Now there are distinct differences in how the sectors are responding YtD but they're still all following the same patterns (a statement that's largely true if you compare foreign markets or most other assets classes). Not much differentiated value that seems to be showing up. So where do we look for the anomalies - the differentiating values? And who is, or is not, doing it?

Search for the Elusive Alpha: Judging Performance

Let's go back to basics, which you can judge for yourselves by inspecting a company's good and services, reacting to its advertising and marketing, checking out the actual delivery in stores, at plants or from talking to folks as well as reading the business news, trade press and event briefings.

In an earlier post on Innovation (Sailing Into the Storm: From Execution to Innovation) we pointed to P&G as an exemplar of how to re-make your company for a new world. In the readings you'll find a bunch of stuff on Retail, Pharma and Manufacturing as well as Tech & Media. There's also a large section on the state of play in Finance. One of the key pointers is to recent stories about P&G drastically changing it's strategies, dropping prices, and re-positioning iconic products like Tide. An indictment of Lafley's work, five years of wrenching change and our thesis? We don't think so - for them to respond this well this quickly indicates that the resilience DNA of the company has been completely changed. Another set of stories is about Zara's who not only had an adaptive and innovative business model but has kept continously extending and adapting it. Unfortunately that's not all the stories. The Finance stories are more in line with BAU (business-as-usual) reversion than re-thinkings (BaU vs. NN I: Finance Fumes, Realities and Pecora II) which is beginning to reap its just rewards; e.g. Cerberus is having lots of trouble re-building its new/old funds. Kinda the poster children for that Oath and a perfect example of why it's useless except where it's not needed.

Continue reading "Where's the Money II: Business Performance vs Market Return" »

Posted by dblwyo at 10:58 AM | 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)

The last two posts tried to keep hammering what are the underlying realities behind the headlines - first on the economy and then on corporate earnings. Now it's time to go the dark side and talk about bank earnings, particularly Goldman-Sachs. The central message is that you have to look beneath the surface and make a real effort to understand what's going on - in a phrase, 'where's the beef?' !!! On the economic front, despite all the hoopla and hype, all we've done is stop cliff-diving not begin a recovery. Yesterday's Durable Goods Orders and the reporting are perfect illustrations but we aren't going to reproduce a chart that looks like everything else we've already talked about. (Realities vs Rhetorics: Economy, Policy, Real Data) For the record the latest YoY changes in DG and x-Aircraft, as well as Industrial Production, are here (click to view). Similarly the better than expected earnings were not the result of better performance but continued cost cutting and beating significantly "managed down" expectations. Earnings are terrible and revenue charts look like the economic data. (Earnings vs Growth: Cutting for Growth? Real Business Performance) Now it's time to talk about banks and their even more badly distorted earnings, particularly GS's. The bottomline is that everything we talked about in our previous assessment of the Industry was born out and the banks made money only on trading. The banks, i.e. GS, that traded more made more. The question is how did they make it besides that ? Other than the obvious strategic implications this matters because a market that was headed down all of sudden boomed on the back of those "amazing" bank earnings. You can see how the markets ran up over the last two weeks in this chart of the SPX.

Bank Earnings and Outlook

Another fairly recent post (Beyond the CRE "Bombshell": Real Stress Testing for Finance) tried to anticipate, partly and partially successfully, the reports by looking at the realities of the challenges that still face the Industry. When you look at either the Industry as a whole or any particular company you have to ask how they did in any line of business. We've applied our business performance framework to the functions that each bank needs to perform (click to view chart) and also to evaluating the strategic context, shown in this graphic.

With the economy still in terrible shape, with defaults, foreclosures and bad debt likely to continue to rise the traditional, "normal" lines of business will continue to be seriously challenged. That is consumer lending, business finance and credit cards will continue to see escalating pressures for the next several years. Wealth management will only hold its own as the markets perform and the industry re-thinks its products, services and customer relationship management. What brought down the house in the last 18 months and, literally, almost collapsed Western Civilization, was trading - either for own account or clients. One could argue that in a brilliant recovery banks turned the performance indicator green this time around. And as a result those that, like GS, were all about trading did well while those like C or BAC that are more about tradition did relatively poorly and face increased challenges. Just as a "minor" sidebar one contributing factor to alleged profits was reducing provisions for losses; if we're right that's going to come back to haunt them. So what did work and why ?

GS, the Gov't Put and Dancing with the Music

As you can see in this chart it was trading profits that drove GS's "exemplary" performance. One of the maneuvers that GS performed last fall as it was on the verge of implosion (bet you didn't know that, did you ? See the readings for proof.) was converting itself to a bank-holding company. That meant it had to start reporting and the UL corner tells us that they put more Value at Risk (VAR) than anybody else and even increased their own position. Furthermore GS is far and away the biggest player in derivatives.

Becoming a bank holding company was more than a maneuver - it meant GS had and has access to gov't subsidized low-interest funds. Now the purpose of all the bailouts and Fed special instruments is to get credit flowing again. If you check this chart you'll find out that the credit markets are self-repairing in the sense that interest rates are re-stabilizing and normalizing, which great news. But credit markets are still tight, i.e. that money is NOT flowing into the economy. What did happen is that the "Too Big to Fail" syndrome created the same kind of gov't put (an implicit guarantee) that FNM/FRE used to have, that failures reduced competition, that low interest money created subsidized funding and so on and so forth. All that means that essentially the nimble-feet made some brilliant tactical ploys to take advantage of unique circumstances on the taxpayers nickles without doing anything much to help out the rest of us. Those GS bonuses are being funded by you !

More than any other "bank" GS engages in proprietary trading - they are in effect, front-running their customers. By making markets and trading for so many clients they have more information than anybody on market trends and conditions and have actually been known to trade against the interests of their clients for their own advantage. So not only did GS make all its money on trading, not only did they double down or better using public resources but the can be said, arguably, to be acting against the fiduciary interests of their clients, the public and society. Tactical brilliance ? Surely. Strategic good sense - we don't think so. Just the opposite. Sustainable long-term ? Not in and off itself and l.t. profitability requires the assumption that as things continue to be in turmoil that GS will keep dancing with the new music, successfully every time. Given their track records it's possible but given they almost failed last Fall from getting off beat and missing some steps the question is, is it likely ?

What this pair of charts show us is that Mr. Market is not stupid in the long-run. He has figured out that GS is neither an investment bank or other standard financial firm. It is a giant risk-trading machine, otherwise known as a hedge fund.

Here the People Sing: the Simmering Backlash

The financial crisis made almost everybody from me to you to Bernanke tremendously angry. It was almost pitchforks and torches time; in fact we're sympathetic to the argument that it should have been. Now the firestorm that was is not going away. A few weeks ago we were at a conference for directors and consultants for medium sized business to talk about risk management, corporate governance and managing for performance. This was, in other words, a bunch of seasoned, experienced and mature adults. Nonetheless the second session got sidetracked and almost completely hi-jacked by a question on violations of the public trust which led to the whole audience jumping on the band wagon. Put another way a bunch of mature and responsible adults who are very informed about business and finance was and is so angry they're still stock-piling flammables. That potential firestorm hasn't gone away - it's just been temporarily banked.

A while back we started a whole series on performance, governance and social responsiblity and have since collected the entire set of postings in a single PDF files which we urge you to read (it's downloadable btw). Profit, Performance and Social Responsibility. Meanwhile Barney Frank made a recent major speech announcing that a) he anticipates completing a complete overhaul of the regulatory framework this Fall. At the same time Congress has charted a new "Pecora" commission. The original was the one charted to investigate the causes of the Great Depression and the shennanigans it documented led to the regulatory regimes we have now. We can anticipate something of equal or greater magnitude as the result of the new commission...and GS's malfeasant exploitation of public support for its own advantage just added fuel to the fire. Now be nimble in that guys because they're going to take away the punch bowl AND the party !

Continue reading "More Darkside Earnings Tales: Banks,Goldman und Unsinn" »

Posted by dblwyo at 06:13 AM | Permalink | Comments (0)

From a market that appeared to be running out of steam after the Mar/Apr runup we suddenly shifted to one roaring ahead at a fantastic rate. In fact the last two weeks have seen the SPX roar ahead almost 11%! That relatively huge uptick has been based on the widespread earnings upside surprises. Which then lead to the question of whether or not that reaction is well-based on realities or is simply another example of people not looking below the headlines, much as it was the problem we highlighted in our last post on the state of the economy. That becomes especially acute when you remember that this whole runup began with Meredith Whitney's comments about GS's earnings. What she really said when you listen to it was that GS earnings were based on one-time factors, driven by trading profits and based on taking more risk (essentially with public money !). We hope to show that those caveats apply to all the other companies that reported. Here's the rub - earnings got better but revenue didn't and the upside earnings surprises were a function of continued severe cost cutting combined with strenuous efforts to manage expectations down. You can see the surface symptoms in this graphic. Despite CAT's "surprise" revenue growth was abysmal. Similarly MSFT revenue dropped almost $2B and the damage was across all its divisions. One of the things that fascinates us is the topline revenue curves for the various companies look exactly like all the economic data - the YoY growth has stopped dropping at such painful rates but is also flattening off at terrible levels. Which is NOT what you're hearing reported. Which also means that what we're seeing is a bear market rally continued.

A Little Reality Refresh: Earnings vs Economy

When we try and face up to the realities of earnings we're looking at now, next week and beyond - that is what are earnings going to look like in the future and how are companies setting themselves up to get them. Which naturally leads, or should lead, to what's the economic climate going to be (if you want to consider this bit a continuation of the last post please do). (Realities vs Rhetorics: Economy, Policy, Real Data (Updates))

Business Week had an interesting story about what the changes in consumer behavior are going to mean (excerpted in the readings) captured in the l.h. side of this graphic. An increase of savings rates to 5% will pull $400B/year out of consumption. If, as the chart in the l.r. shows, savings returns to 10%, well... Even at the lower figure that tells us the long-term outlook for GDP growth is 2.4%/yr. That's just about breakeven for creating enough new jobs to keep up with labor force growth. Which in turn means that what we already new was going to be a long, drawn-out and very weak recovery with poor job creation is in fact THE outlook for the next three decades ! You don't have to buy all that bad news to know that companies are not going to be able to cut their way to earnings growth.

Company Performance Outlook

The accompanying graphic is Part 1/2 of a BNN interview the ex-Chief Science Officer at Cisco who joined Nortel in 2005 to try and save the company. He didn't last long because a company trapped in the worst of a 20thC set of business practices refused to change to the ones required for the 21stC. Listening to both parts of the interview dysfunctional and self-inflicted are the kindest words that occur to us. The sad part is that Nortel had both some good technologies as well as some good people; in other words it didn't have to result in a BK filing and the last two weeks of auctioning off the piece parts.

We've been hammering on the fact that for months now many companies were caught flat-footed by the severity of the downturn and reacted like deer in the headlights. (Beyond Specifics to Principles: Business Performance Principles & Outlooks, Cutting to the Heart of It: Capitalism's Death, Values, Performance (Ads)) What the earnings reports tell us is that instead of thinking about what they need to do for what's likely to be a sustained period of crisis they are instead hunkering down and doing what they know how to do. Reacting with thought and discipline in a crisis where the answers are not clear is one of, if not the single most, difficult things that leadership needs to do. Sadly it's also not something they appear to be doing and the damage will get worse, except for those apparently few leadership teams that are adapting intelligently instead of reacting blindly. Both parts of the interview are listed in the readings section, which strongly suggest you listen to 'em, take notes and think about your investments, employment and opportunities with these lessons in mind.

Better yet read the HBR article, excerpted below but available for a fee or subscription, Leadership in a (Permanent) Crisis.

"The immediate crisis—which we will get through, with the help of policy makers’ expert technical adjustments—merely sets the stage for a sustained or even permanent crisis of serious and unfamiliar challenges."

There's a whole slew of other readings on various companies in traditional and technomedia companies about which companies are adapting well and which are not. For many of the major excerpts you'll also find a bunch of related URLs so, for example, the poor adaptation rates that are likely for WIN7 are coupled with a bunch of other Technology earnings reports.

Continue reading "Earnings vs Growth: Cutting for Growth? Real Business Performance" »

Posted by dblwyo at 03:58 AM | Permalink | Comments (0)

Maybe an alternative and less exalted title would be value, focus, clarity, execution and integrity; all the virtues that a business enterprise should possess and few have repeatedly demonstrated during the drunken debaucheries of the last three decades. Case in point of course being GM's BK declaration with the accompany diagnostic litanies of the accumulated consequences of denial, avoidance, missteps and pretending the wolf is NOT at the door. Sadly when business executives fail this miserably the collateral damage for employees, communities, suppliers, lenders, investors and society as a whole are serious. Last post we waltzed thru several key industries so serve as examples of bad and good performance, aside from the current easy target of Finance, to remind us that these issues aren't limited to Wall St. nor Detroit. They are widespread and endemic. The questions, as always, boil down to who's swimming naked and who's a good swimmer. Now we're going to focus on some of the general requirements and principles starting with the classic - know when there's a rip tide and learn to deal with it. Put another way - don't ignore or deny economic realities. With Fri's GDP update verses Mon's startling market rally we'd have to say denial is currently the triumphant sentiment. Just to set the stage the chart shows YoY% changes in real GDP vs annualized QtQ changes. The latter is what the headlines report but the former is what you should be looking at to understand the trends, patterns and turning points. The headlines told us the Q4 GDP change was -6.3% and Q1 was -5.8%. Wow, let's party. The YoY numbers were -0.9 and -2.5%, respectively. Hmmm, let's not and batten down the hatches instead.

Facing Realities: Brave New Worlds

One of the more fascinating surveys that floated around was the readership of the business and financial news over the last couple of years. The "trade" press covered this evolving crisis fairly well yet, by and large, nobody paid any attention. Last week David Brooks the NYT OpEd columnist devoted a column to the kind of CEO's we're going to need in this new environment with David Brooks: In Praise of Dullness.Now as it happens we don't agree with all his points but that he covers it at all is noteworthy and that he's fairly accurate is important. What we need from CEOs is not flash but execution. What we'd add is that that execution cannot be the repeated execution of what's no longer working but has to be what will work in the new world we're facing. Yesterday the BEA also updated it's data on corporate profits and we extended our recent look see at the nature of profits as a result. For decades they rose in lockstep with GDP until the leverage deliriums of this decade. When you break it down it turns out that the real economy companies had a "slight" proft bubble as they curtailed hiring and capital investing but the real "magic", stretching back to the beginnings of de-regulation, was in the Finance Industry. That tells us two major things on the deepest structural level. First, the Finance Industry of the future will look nothing like that of the last three decades. Second, the regular OpCos (operating companies) need to re-think how they run themselves just about as badly. The question is will they ? We'll take up Finance some other time and focus now on "real business" performance challenges.

Key Principles Re-visited

We've spent some time comparing our approach to Buffett's and Drucker's as well as inventorying, from time-to-time, the headline exemplars of good, indifferent and bad performance. From that work we point back to this chart that combines Drucker's Fundamental Principles and the Theory of the Case. The readings section covers stories on the environment, key functions, leadership failures, human resource development and leadership changes for the future. Paul McCulley of PIMCO points out that things aren't going to get much better until 2010 and Jeff Immelt looks ahead to a business environment where performance will be challenged for many years to come; as we've just said and been saying. In the HR section we particularly want to point you a recent HBR article by our friend Bob Sutton on "How to Be a Good Boss in a Bad Economy". Superb article on the attributes in a crisis of excellent leadership - with which we have two major quibbles. Bob's checklist of ToDo's are representative of what these guys should have been doing all along, not just in a crisis they contributed to. But worse, the need to "Cowboy UP" is going to be with us for a long time. In the section on continuing leadership failures you'll find some evidence on how likely that is while in the final section you'll find some countervailing evidence of "green shoots" that may be the first indicators of the revival of management practices as we'd like to know them. You might want to pay attention to the review of Jim Collins' new book wherein he says, "hubris born of success; undisciplined pursuit of more; denial of risk and peril; grasping for salvation with a quick, big solution; and capitulation to irrelevance or death — offer a kind of instant autopsy for an economy on the stretcher. He writes that he’s come to see institutional decline as a “staged disease” The points being that the companies you're looking for are the ones who have answers instead of question marks.

Devil's Details: From Function to Synergy

We'll also point back to a simple chart that provides a conceptual illustration of how all the piece parts of the enterprise need to work together. When Michael Lewis wrote Moneyball: The Art of Winning an Unfair Game he not only documented a revolution in sports management that finally took the BoSox to two World Series titles after a multi-decade drought he started a conversation on performance management in general that's still going on. In discussion and theory, if not in actual practice. The graphic actually speaks to several of those key points: 1) it inventories each of the major functions that are essential for performance then 2) illustrates the linkages between them and their order (first basemen play first base and need those skills after all but also need to have the rest of the infield to work with) and 3) the performance of the whole enterprise is NOT just paying to much for each function, or not enough as the case may be. It IS about making all the pieces work together in the context of the whole.

In the readings you'll find selected stories on:

1) understanding how to think about telling the marketplace and your customers the right story, illustrated here by the lizard-brain messages implicit in various choices, but more broadly illustrative of the need to think about telling a true, accurate, honest story that represents real capabilities and puts the customer's needs and wants at the center of go-to-market strategies.

2) understanding and managing the realities of core operational capabilities, here illustrated with a discussion of the realities of manufacturing but also intended to make the point that core functional excellence is central to long-term business performance. Whether you make software, build cars (ahem), run retail stores or deliver packages real performance for real requirements is at the center of who and what you are. A notion that's been lost and neglected for a long time but one that the prosperers will see return to center stage in the future.

3) making sure the critical operating support functions, logistics and supply chain managment for example, meet and exceed to the requirements of the core, whether it's plants, stores or distribution operations. For almost four decades these functions have been the most sadly neglected of all yet they offer the most strategic promise for improvement. It's as if the Celtics got themselves a great center, two outstanding guards, a decent power forward and then, having spent their available salary budget decided to cut corners and recruit a junoir college player who was competent but not the kind of resource needed for the rest of the team to play up to their full potentials. Like we said and will keep repeating - performance is a team result, not a collection of individual players. There's a reason the US Men's basketball team got it's butts kicked in Athens and did so well in Beijing.

4) and another trip to the cesspit of technology management wherein the perennial lament of a continuing gap between IT and business receives yet more confirmation. Aside from logistics IT is the one major function of the enterprise that touches all others and influences their individual performance and also controls their ability to integrate with the other key functions as well as adapt to the future. Yet for decade after decade this same lament keeps getting repeated with not end in sight. We think there are two fundamental problems - Tech guys are fascinated by bright shiny things and tend to trap themselves in their silos. On the other hand Business guys are even more responsible because they're repeatedly failed to step up and provide the necessary adult supervision. The companies who have figured out how to bridge that gap are the same list of usual suspects from WMT to Fedex to Scwab who keep getting cited as strategic users of IT. Now where's the rest of the world ?

To try and pull this all together we're arguing that times are going to stay challenging for a long time, that effective responses to these challenges still seem to be all to missing in action and there's a checklist, a blueprint, of what to look for in potentially high-performing enterprises.

AND those are the ones you want to be on the lookout for !

Continue reading "Beyond Specifics to Principles: Business Performance Principles & Outlooks" »

Posted by dblwyo at 03:24 PM | 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)

Over the last several months we've been hammering away at various aspects of business performance from individual companies to whole industries to structural trends and disruptive changes in the macro-environment. Before going on to finish some deep dives we figured it was time to pause for an inventory and survey of some key results, findings and concepts. The graphic is our Table of Contents - or more accurately a structured inventory of the topics we repeatedly turn to because we think these are the key elements that MUST always be kept in mind when evaluating a business and it's performance. A downloadable PDF version is available by clicking on the highlight.

When we inventory the actual posts in key topics the major themes are the series on Corporate Governance and Social Responsibility - at which so many have failed so badly, obviously including the Finance Industry which is worsening a bad situation by denial, the Auto Industry going down the Maelstrom it created and taking the livelihoods and lives of so many with it but also many others. Which leads naturally to questions and assessments of Enterprise Performance - which was the focal topic of the last post so we won't repeat our and BCG's indictments. A key strategic issue is the scope and scale of disruption - not just within the firm but at the Industry, Economy and Geo-political levels; and how badly most are prepared or preparing for the multiple cusp points we're all going to be crossing over in the next few years. The downloadable PDF version of this inventory is also available by clicking on the highlight. Sadly we confess that the blue-highlighted titles which should take you to a post don't since we haven't figured out the technique/technology that well. In the inventory though you'll find pointers back at key exemplars of companies who are adapting (WMT, GE) and industries who are struggling or worse. Including Autos and Finance but also, and perhaps surprisingly, Technology.

Guidance From the Master

In the rest of this post we want to spend some time focusing on key concepts and arguments that have accumulated in all those posts, starting with core principles that should guide business performance but don't appear to. For those principles we've looked to our own work and techniques, Warren Buffett and, most especially Peter Drucker. When Prof. Drucker passed a few years ago the WSJ had a nice review of some recent survey work and gifted us with this summary of his key arguments (from which we think at least two key ones are missing but we'll circle back later). Now we've also taken the liberty of creating a collection of this and other principles as well as other key charts from these posts that is also downloadable. In it you'll find major graphics on Principles (Drucker, Buffett, ours), the composite mantra of "situationally aware" business management that monitors and acts on Geo-politics, Structural Changes, Economic Cycles and Enterprise Performance. Consider that a Table of Contents which has some key charts in each area. For example on industry structural change (Autos, Finance, Energy, Technology) and on a blueprint for analyzing business performance, based on our BizzXceleration Framework. That starts with simple questions and heads toward the engineering assessment tools. "Elements of Business Performance" is downloadable - happy reading.

Situational Awareness: Monitoring the Environment

The accompanying graphic is probably pretty terrible by Edward Tufte's standards let alone by Seth Godin's. Sorry about that but our key message is not so much as the specific content as trying to show all the things in one ideographic composite that a business must monitor and act on. The "Elements" download actually has the separate components plus additional ones so if you want to dissect them, again, dload the file. After all if you actually hired a consultant to do the work and customize it for your situation it'd cost a lot of money :) ! These are the major domains in which the world is under-going major structural changes, and only one of them is under the control of management. They are, moving around the clock, the Geo-political Macro-environment, the Economic Crisis, Structural Changes in industries and the nature of business and the key components of the integrated and performing enterprise.

Welcome to the Storm: Scope and Scale of Disruption

Just to put a point on it, flat-footed as most have been caught, you have to wonder how many executives, investors or other stakeholders are really thinking about how many things are changing by how much. We've tried to map out what's going on in this graphic to illustrate those points. Most management teams have grown up with a lot of churn and turmoil inside their firms but it's been a long-time indeed since this many things have been disrupted this much, this fast. We've defined five levels of disruption that are going on simultaneously: 1) within the firm, 2) the need for treating the firm as a whole, not just piece-parts, 3) industry and sector changes, 4) worldwide economic changes and 5) geo-political changes. It's a sad fact that most efforts, such as they are, are confined to #1 and ignore the other, and more important four ! AT least IOHO !!

Business Performance and the Whole Enterprise

Like we said the key between things that can't be controlled but must nonetheless be managed to is the way the firm faces these changes. To wrap-up the introduction let's return to the words of the Master on what the primary tasks of management should be. It doesn't get any clearer than that, does it ? Management is charged with turning the component parts of the enterprise into a whole that's more than the mere sum of the parts. Ask yourself, for example, why the USA Olympic Basketball Team did so well this last Olympics and so poorly in '04 ? It's because the latter was a collection of individual stars who played their own game for their own advantage. The former was a team where every player was focused on the performance of the entire time. The results tell the story. The same is true of the enterprise. But that was just one tournament - a business is much bigger than a sports team and exists for a lot longer. No decision taken today can exclusively focus on today's best advantage, nor on tomorrow's. Each decision must act to maximize the sustainable performance of the enterprise on a balance between the short- and long-runs. The fact that Detroit is now a black hole of subsidies, job losses and collapsing local economies as expedient short-term decisions bring home the consequences of ignoring the long-term impacts would seem to prove the argument.

After the break you'll find some more key exhibits along with discussions on several of these key points, if not all of them. But the bottomline here is that we are crossing over the boundaries into an era of the biggest changes in the macro-environment and performance requirements in many decades. A crossing which will impact us all and one for which we're seeing little concern or preparation.

We hope you find this summary, wrap-up and interpretation helpful. It's the end-result of several months of work here and, taken all together, we hope it provides a useful toolkit for evaluating business performance in turbulent times.

...continued after the break.

Continue reading "Bidding Review: Macro-environment, Disruptions, Business Performance" »

Posted by dblwyo at 06:21 PM | Permalink | Comments (1)

In a way the last three posts have wrestled with the same central structural problem - the deterioration in business performance and the failures of executive leadership to respond to the crisis. In an earlier post we looked heavily at some recent BCG work that found thru worldwide surveys what we've been arguing. That many business were surprised, caught flat-footed and are still non-responsive. That instead of moving beyond reaction and panic to constructive, disciplined action they are failing to develop the right initiatives. And very few indeed are positioning themselves to take advantage of the crisis, despite having the wherewithal to do so. You might want to look back at these posts (Denial's Triumph: From Earnings to Business Performance (NOT) [UPDATES], Leaders, Leadership & Culture: Crisis, Values and Performance (Updates)) for the details. At the same time we want to shift our ground and talk about what can be done and maybe who's doing it. For example Winning in the Reset World: GE and Business Performance (Updates). So what will it take ? We'd like to kick off with this tour of the Emmy Awards (click to watch if/when the graphic won't come up) for several of the actors from West Wing, in which three of them won and many were nominated. Without fail or fault they all start by giving credit to Aaron Sorkin, their fellow actors as a team ensemble and the great production, filming and operations teams that made it happen. Several years ago it dawned on us that the process of making a great movie exactly mirrored that for making a great product - now we'd argue that it's similar to making a great company. First you have to have a great idea and put it together exceptionally well, then you have to get the right people involved, then you have to have the right capabilities and execute, execute, execute. Wash, rinse and repeat. Finally you have to have a great set of management systems (informal or formal) to make all the pieces synch up. If you ever want a textbook lesson in product innovation and team-building watch the extended DVDs special features on Lord of the Rings with Peter Jackson.

 First Principles: Start with the Right Questions

We ended the last post we a summary chart of "simple" questions to ask of any business - questions honored more in theory than apparent practice if BCG's data is right. Now we're going to tunnel down the top-level into some detailed questions (and who knows, maybe set the stage for exploring each of the line item topics at some future date...stand by :) ). Fortunately the WSJ had a special report a few weeks back from which we were able to extract some key readings on companies who are in fact doing it right. As you think about West Wing or skim the readings we suggest you test them all against these questions. First - what's the value, strategy and business model ? Then how do they find, talk to, sell and support their customers ? NB: the biggest area of immediate potential performance improvement that's being deep-sized in this crisis is better marketing, sales and customer service. Two decades after the initial pioneering work on the profit potential of taking care of the customer it continues to astound us how little attention is paid to the opportunities being left on the table. Finally it's one thing to tell a good story or do your best by the customer but then you have to walk the talk. In other words your core operations, be they manufacturing, store operations, making movies, baking cakes or writing code, have to be well done and the various supporting functions like Purchasing, Transportation and Distribution need to be as good as the core, if not better. Sadly these areas are even more neglected as sources of performance improvement than Customer Service.

Second Principles: Finish With the Right Questions

Beyond the direct market-facing operations the next step is to get the key infrastructure functions right, including Technology, Finance and HR. We've banged our chops a bunch of times on the misalignment between business and technology so we'll pass on repeating ourselves. Years ago our first big project was building a decision-support system for flexible budgeting which is, as far as we know still up and running, over 25 years later (or it's successors are) and was used to re-vamp the entire planning and management practices of a major company. What we learned working at and with a whole host of other companies and operations/projects over the years that was the exception that proves the contrary rule. Almost nobody does good budgeting..period, end-of-story. Let alone has more comprehensive management systems. And when you get to HR which should be about work design, management development, incentive systems and on down the Druckerian inventory of best practices you fall into the black hole of benefits administration. Hence the red highlighting. It's when you get to an inclusive definition of management systems that things really get ugly - there's a reason it's all red, and having spent post after post documenting the cases, whys and wherefores we probably don't need to revist the ugly details. But the fundamental question - are the right resources going to the right places with the right commitments is, based on those readings, answered with a resounding, echoing NO !

Final Principles: the Task of Management

We'll let Herr Professor Drucker wrap it up for us, as he does so eloquently on so many topics with his definition of the two fundamental task of management. We challenge you to go back and look at our previous discussions of the Auto or Finance industries for example and find any sustained cases where these responsibilities have been satisfactorily met. Seriously - the bad news is easy to get into the headlines but the good news is not. We suspect businesses and executives that pass these tests with more than minimal results are few and far between indeed.

The readings section starts off with four selections from Warren Buffet's "back-to-basics" to a piece on re-factoring your mindset (which is what we're trying to do here) to the miraculous rescue that Mullaly is pulling off at Ford to the story of how the Allies organized themselves for victory in WW2. Then after the WSJ cases are some more general readings that back up the principles we've been discussing. The Ford case and the Allied victory illustrate our key points however. And if you go back to the cases of exemplary performance improvement we've discussed, like WMT or HD or HPQ, in all cases you find what you find with Ford and the Allies. Focus on your key value and put a management system in place. The stories of companies who are dealing with with this downturn, like F or HP and including P&G, MickeyD's, et.al. are about companies who have gone full force on these principles.

Which suggests that's who you want to do business with yourself, in whatever form, as employee, investor, supplier or customer. And to the extent you can it's how you want to do business yourself.

Continue reading "Adapting to the Reset: Winners, Also-rans, Principles" »

Posted by dblwyo at 08:38 PM | Permalink | Comments (0)

The last post was a review of the market situation and outlook and concluded with a looksee at the long-term relationship between GDP, Profits and the Market. We continue to find that chart fascinating because it shows two bubbles (Tech, Real Estate) in the Markets and a pronounced bubble over trend in corporate profits during this decade that was completely out of line with the growth of the economy. One way or another corporate performance matters. An updated and easier to read version of that chart is here (click to see). In this case our hypothesis was that companies hadn't been hiring nor investing in capital. That's still true but digging down into it there's more going on than met the eye on the first pass. Earlier we'd devoted several posts to the economic outlook and found that we're facing a prolonged period of sub-par growth and business leadership community that's been caught flat-footed, ill-prepared and is not responding well to the crisis. Worse they would appear to not only still be in denial but to anticipating a more robust and faster recovery than might be the case. Our e-friend Tim Walker just did a loverly review of the BCG reports we mentioned some time ago and we highly recommend his summary of the findings. (Readings: “Collateral Damage” ) Finally, on top of all that, there's a lot of questions about the future of capitalism. [Existential Crisis Around the Agora II: New World Stories,Existential Crisis in the Agora I: Economy, Policy and US Strategic Outlook (Addons)]. For Hoofie and Boo's take on the state of play we recommend the Minyanville vidclip (click on the graphic).

The Real Story on Profits: Finance vs Non-Finance Performance

The realities underling that thesis boil down to a question of how well business leadership performs, now and in the extended tough times we're going to be facing. Let's start deconstructing things but taking another look at profits. You might start with review a couple of our earlier posts, including our application of the BCG findings to refresh you memory [Denial's Triumph: From Earnings to Business Performance (NOT) [UPDATES] andWRFest 30Mar08(Business): Days of Reckoning at Hand ! Repent Sinners ?] Take a look at the accompanying chart which breaks down real (inflation-adjusted) corporate profits between the Finance and Non-Finance parts of the economy going back to 1950. In some ways we consider this one of the most important charts we've ever posted for many reasons, starting with the bottom sub-chart. It shows cumulative growth in GDP, Finance and non-Finance profits over that period, which we consider startling. There was indeed a bubble in non-Finance profits but the more important stories are the under-performance for decades of the non-Finance businesses, the HUGE bubble in Finance profits and their relative sizes. There a lot of strategic implications here. Look at the top sub-chart now...between 1950 to 1980 Finance had about 30% of the profits but after de-regulation there was a major structural shift where it grew to 50%. Stop and think about that - the Finance sector between 1990 and now generated 1/2 of all corporate profits ???!!! Say what ? And we got what for our money ? Returning to the 3rd sub-chart you'll notice that the non-finance businesses under-performed GDP ever since. We think the hypothesis is not only did the Financies use leverage and liquidity to maximize their gains at the expense of the rest of us and then to threaten the viability of the economy (of society ?) but they damaged the rest of the real economy in the process. That probably needs some more investigation before we assert it but on the surface a good starting point. We'll come back to these points in future posts but two points: 1) if anybody thinks tomorrow's Finance industries will bear any resemblance to yesterday's we beg to differ and 2) the leadership of the sector appears to be in a complete state of denial, worse than the management of the "real" businesses.

Corporate Performance vs Reputations

The first section of the readings look at some recent results on corporate reputation, which according to 88% of Americans is somewhere around crappy. And should be IOHO. The rest of that section looks at the issue of performance, governance and leadership. The next section looks at performance in general vs. realities and re-iterates and reinforces the points we've been making that recent "not as bad as expected" earnings are an artifact of blind, panicked cost-cutting and not disciplined adjustment processes. The final section provides examples of good and bad responses from Chrysler's terrible ones to Ford and  Toyota's better ones as well as some stories of innovative responses and threats to other sectors (Telecom) that don't normally make the headlines. The chart presents some of the findings and in the UL corner you'll notice that a running reputation for corporate America tat wasn't very good to begin showed a huge surge in bad reputation. If you look at the companies and industries that have decent reputations turn out to be the usual suspects - it's the companies that walk the talk and deliver value to the customers (that would be us btw).

Reputation Matters

If you think reputation doesn't matter and is only a warm and fuzzy sort of thing take a look at this next composite graphic. In fact just the opposite is true as both customers and investors. It turns out that company reputation is reality-based, reflects performance and value-delivered and serves as a useful and easily observable proxy for performance. Let's put that another way - reputation accumulates over time, subject to event-driven fluctuations and the overall climate of opinon. But in general companies with good reputations are ones who deliver and people know it. They're the ones who tell true stories in their marketing and advertising, who's products do real things for real people and are trusted to do so. Notice also that there are two clusters of "dissed" companies - Finance in general and the Big Three auto companies. So for example GM's recent advertising campaign, "put on your rally hats", is likely extremely counter-productive. What they really mean, and people know it, put on our rally hat, buy our cars even when you know it's a bad idea and save our axxes. Let's call that inauthentic advertising. Far better to talk a talk you can actually walk because sooner or later reality catches up with you.

All the sturm und drang of poor performance we've been talking about in post after post is going to show in the next rounds of surveys and be reflected in people's buying and investing decisions. The bottomline here is that reputation matters...and it matters because people are good judges of performance.

Boiling It Down: Principles of Evaluation

If we want to operationalize that finding we can go back to fundamental questions of business performance, on key functions and aspects and timeframes...what we've called the "Theory of the Case". Here we've compressed our business evaluation framework (BizzX) to it's core elements and combined it with the case theory approach, with the issues/questions that are most broken highlighted in read.

1. Business Strategy - businesses exist iff they provide value. Make it don't fake it.

2. Marketing - tell the truth. Period and end of story. And tell it in the right way.

3. Operations - actually be capable of doing what you claim to do. NB: the crisis is highlighting the fact that many of our businesses aren't well run....way too many naked swimmers are showing us more than we wanted to know.

4. Support - make sure critical support functions actually add value to the business instead of just absorb costs. IT for example is the poster child for mis-alignment (Tech Industry Refresh II: From Downturn to Re-structure to Re-engineer ?) but the most broken support function is HR, which is all about paperwork and not about creating a good working environment (Aholes, Shirkers and Performance: a Draft People Principles Policy).

 5. Management - where do we start ? This whole post is, at it's core, about leadership failures. In general (Leaders, Leadership & Culture: Crisis, Values and Perfomance (Updates), Firestorms and Re-Thinkings: Business Performance vs Business-as-Usual) and, unfortunately, specifically with regard to Finance (Predator Prey Symbiosis: Crisis, Leadership and Values). The interesting thing about boiling it down to these apparent simplicities is that many of them are observables - you can walk in the door of any business and quickly judge the culture, which tells you whether it's a good place to work or not. You can walk into any store or watch any ad and reach your own conclusion as to the accuracy and authenticity of the messages and value of the products. With a little more work you can see how Operations is doing. And listen to any business news program and compare what the CEO's are saying verses those conclusions and you get a sense for the leadership. Take Warren and his stockholders letters as your gold standard, at least IOHO.

Good luck to us all - it looks like we're going to need it worse than we should because the guys who get paid the big bucks to cope with crisis thought they were getting paid to coast along in the good times instead.

Updates and Adds:

Literally ads, hence the title edit ! If you thought we were kidding about how angry people and the consequences for corporate performance check out this NYT story and the accompanying vid clips. Which would be hysterical if they weren't so sad...in a way. Come to think of it that makes them hysterical in another sense, doesn't it ?

Angry Ads Seek to Channel Consumer OutrageThe mad men of Madison Avenue are really mad these days, creating a spate of angry advertising campaigns that seek to channel the outrage, frustration and fear felt by consumers hit hard by what some are calling the Great Recession.The campaigns take an outspoken, provocative tone that is unusual for mainstream marketing messages, which typically try to avoid aggrieved attitudes for fear of alienating audiences. The change reflects the significant shift in sentiment as the public reacts to the wrenching and, at times, frightening financial events of the last year.

Jet Blue Ad #1

Jet Blue Ad#2

Harley Davidson

Miller High Life #1

Miller High Life #2

SNL Stress Test

Songs of Angry Men

Continue reading "Cutting to the Heart of It: Capitalism's Death, Values, Performance (Ads)" »

Posted by dblwyo at 03:28 AM | Permalink | Comments (0)

It's been since last August since we've covered the Auto Industry per se with a specific post though we had enough separate posts to generate a dedicated archive walking thru the news and key strategic and functional issues from product strategy, development, manufacturing and marketing and sales as well as governance and management systems. But we have been tracking the news since then and after the break you'll find a roughly chronological/thematic set of selected excerpts that talk about 1) the runup to the disaster last summer and fall, 2) the struggles of Washington to come to some workable rescue plan and 3) key issues for the future. In fact we've been arguing for many years, not least since 2004, that the industry was mal-adoptive, non-resilient and so trapped in it's boxes as not to see a way out. The last major US industry to let denial and willful blindness carry it to the same precipice and then over was the US steel industry. With yesterday's Chrysler bankruptcy filing the poster child of American industrial history and performance malfeasance joins it. Let's hope it also joins it in a gradual, structured, re-thought re-birth. It's certainly long over-due, for the 30 years since the Japanese proved that good quality cars more suited to the modern world were possible in fact ! Something the leadership of the industry has been aware of for decades as well:

•  Stefan Jacoby, Volkswagen of America, Pres. & CEO(CSpan) Volkswagen of America Pres. & CEO Stefan Jacoby joins us to discuss how the economy and public policy impacts the automobile industry.

Looking at the Numbers: the Dinosaur Killer

 The "asteroid" for Detroit has always been a clear and present danger and it arrived last year (actually in late '07). If you look at these two charts you get Auto Sales and YoY% change in sales for Jan07-Jan09 and then back to 1977. Several interesting things pop out. The 16 million vehicles/year being sold recently are clearly an abberation. The announcements that everyone was preparing for a bad downturn by positioning for 13mil/yr were clearly specious and historically ignorant. If Detroit couldn't make money hand over fist at 16, it was in dire straits at 13 and going to face extinction at the 10 level. Yet going forward as consumers become more cautious, as financing no longer subsidizes frequent turnover the fundamental strategic question becomes - what does the industry look like at 8-10 million cars/year ? How does Detroit build cars people want, that are affordable, high-quality and long-lasting ? What does it need to do ?

Re-Thinkings I: Detroit by Segment

Detroit mortgaged it's future to SUVs, Pickups and high-end vehicles on which it thought it could make money and retreated from all other segments of the business. The primary driver for not investing in new development, manufacturing, for not re-engineering the dealer network and the order-to-delivery cycle and the way suppliers were managed or even in the way cars were marketed and sold was not because internal debates didn't discover that these changes were required. It's when they came down to where they had to put the resources to meet these challenges they came face to face with legacy costs in healthcare, retiree benefits, labor contracts and the ways they did business. To meet these challenges required thinking and acting outside the box of existing structures and relationships and for thirty years Detroit has refused to do that. As have, admittedly, everybody involved - from dealers, to suppliers to union members.

Re-thinkings II: Company Specifics

If you apply the same analysis to specific companies as well as the industry as a whole the picture doesn't get much prettier. Here we rank each company on a 1-10 scale and indicate, for the industry, where's it was, where it is and where it needed to be to minimally adapt to the requirements of this crisis. If you look at the evaluations for Ford, GM and Chrysler you'll find the current situation with regard to bankruptcy pretty well anticipated. The really interesting question becomes who can get to Level 5 performance in each of the critical operational and strategic categories in time enough to survive ? Of the three Ford looks to be the only one - and why ? Because Alan Mullaly came in and started insisting on honesty, team leadership, good management controls and facing brutal realities. And he started almost three years ago while the management of GM and Chrysler fought rearguard actions (though to be fair Nardelli and his team took what actions a very bad hand let them to some extent; but they also badly mis-read the future as well. Thinking a plan for a 13mil year was satisfactory !)

Re-thinkings II: Legacy vs Future

We're not the first people to suggest that Detroit build good cars that people actually want instead of what their internal agendii and self-imposed financial constraints forced them to. But the net results are that over 30 years Detroit backed itself into a corner. And by giving up more and more ground lost the business volume that would support their R&D, manufacturing re-engineering and dealer networks. When you let yourself be forced to shrink you've got to give up a lot of things. Hopefully voluntarily and intelligent instead of involuntarily by force-majeure. The Japanese entered the marketspace at the low end and won by providing better value. The profits from that combined with Detroit's unwillingness to face off against them let them grow that entry point into dominance in major parts of the space. When they leveraged their capabilities to create new lower-priced but higher-value luxury brands another self-accelerating virtuous business cycle was created. Detroit meanwhile had trapped itself into a vicious cycle where retreat lowered the profits required for investment in futures and there you have. That was a thirty year process - the current BK's are nothing more than Triage to save what's left.

Fossils or Futures: from Triage to Survival & Recovery ?

One of my favorite military novel characters talks about the privilege or command when he says, "there is nothing more rewarding and nothing more horrifying than having to ask good men to die...once you've done it you'll do anything to do it well again". Unfortunately leadership in Detroit failed all those tests and now are faced with the most horrifying battlefield decision - triaging the wounded created by their decisions. On a battlefield where a medic must decide, right then and there, who's can be saved eventually, who needs urgent help but has a chance and who's beyond hope so as to allocate his limited time and supplies that process is Triage. A beautiful word for an ugly process.

A friend of mind served as a fairly senior auto executive and talked about GM's deliberate decisions to not invest in Saab which has led to the ruination of a once proud, innovative and value-creating brand. Similar things could be said about Saturn. Both companies are, IOHO, potential long-term survivors if they get the necessary life-support and long-term care. In fact we think they could be brought back as highly competitive warriors in this metaphor. But the parents who abused them look to be abandoning them, sadly. Hopefully the LBO/PE guys are paying attention and are prepared to do more than financial engineering (unlike Cerberus).

UPDATES: an Existential Moment for the Industry and America

The news just continues to get better and better. Auto sales continue to tank (btw to pick up the themes of "look at the real data" from a prior post on the GDP numbers we took yesterday's Consumption data and updated the accompanying chart. So much for an uptick ! Dan Gross appeared on Tech Ticker and made a couple of key points. One on the late-coming bondholders who held up a negotiated deal and forced bankruptcy proceedings. The bottomline is what were they thinking ? They got in late, got on their high horses about their rights as senior creditors, invested in the bonds of a company on it's deathbed knowingly and again put the public interest far below private gain - the Finance Industry as a whole seems determined not just to be guilty of malfeasance but po'ing the entire population. Talk about voluntary self-destruction ! Dan had another portion of his interview on Private Equity as well that points out the implications for future LBO buyouts. All of which are worth paying attention to.

• UAW Gets the Goldmine: Did Chrysler Creditors Get the Shaft?
• Chrysler Bankruptcy: End of "Dumb Money" Era for Private Equity
• US auto sales fall 34% in April

Does it get any better ? An existential moment indeed ! Otherwise known as both life-threatening and a fundamental structural change at the deepest levels.

Continue reading "Legacy, Losing, Resets: a Future for the Auto Industry ? (Updates)" »

Posted by dblwyo at 09:15 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)

For a lot of reasons this is a post we'd very much prefer to not write but feel we have to because of the crisis, the deep-seated structural changes that it will require and the major re-thinkings of corporate culture that are mandatory for survivorship. The difference between winners and losers in this maelstrom will not just be logical examinations or disciplined execution but will require executives to adopt new behaviors. The question is will they ? There was a rather bitterly amusing New York magazine story (excerpted below) on the backlash in the Finance Industry recently that details the inability of members of that community to come to grips with those adaptations. The problem seems to be that the last 20-30 years of abberational profits are being taken as the norm and the culture expects to be paid as they have been. Instead of how they will be ! What was particularly striking is that the blog post that drew our attention used the accompanying picture from our favorite cigar and single malt bar, though you have to look at the background...not the eye-candy. We wonder however whether the foreground are professionals in what service industry ?

Re-Considering JR, Values and Performance

Back in the day we used to not watch Dallas as the soap opera never appealed to us and the dissing of business really turned us off. Our experience then, and to a large extent now, is that most people and most executives in business are competent, bright, and want to do well and also do good. The complete antithesis of JR. Unfortunately we then got Enron, WCOM, etc. etc. And now we have the complete dysfunctional breakdown of a major industry....which is also the only industry among them all which is systemically critical to the health of the economy and of society for that matter. The question for us (which in this case means me, you and the rest of America) is does this man speak for the preponderance of business executives or not ? On that answer rests the future of economic health and social development. The stakes couldn't be more serious. Our answer was absolutely not. In 2000 it became there are too many exceptions but the rule was still in favor of the Roman virtues. Now ? Well, unfortunately time will tell. And based on how the Finance Industry's culture is reacting the signs aren't that encouraging. On the other hand there are clear examples of leaders who have stepped up the plate, faced the challenges and positioned their companies for the future. From HPQ to WMT to P&G to MickeyD's. The bottomline here is that the principles of fundamental business performance require good ethics and a sense of social responsibility.

Why You Care: Profits and Economic Futures

 To understand both how important this is and how aberrational the last decade has been take a look at this composite graphic (concatenating several points we've made before). The top sub-chart shows Profits and Wages as shares of GDP (Profits on the left). Except for the Tech Bubble wages were in a long-term secular decline but Profits "bubbled" up enormously  because businesses weren't hiring or investing in this weak recovery. That's going to get worse. The second and third sub-chart shows the shares of profits (% of GDP again) going to "normal" business, Finance and International business. Normal operations didn't get out of line and took a big hit beginning in '06 (Fortune tells us today that profits are the worst in the history of the F500 listing) while int'l, as you'd expect shows an uptick. But Finance...ah Finance ! It went from 1% to 2% to 3% of GDP in three decades. Now tell me what value-add for the economy and society as a whole was created here ? In general Finance is a critical industry but has it been innovative and value-creating that it's profits should have been gone up 100% every decade ? And in particular in this last one ? The evidence would seem to indicate not. Structurally, if for no other reasons, we'd see a future for the Industry were profits return to the more justifiable 1% figure. That'll be a shock to a lot of folks won't it ?

Earnings Performance and Outlooks

The big debate in this bear rally has been on the earnings outlook, which is how long-term trends in the economy are reflected in the quarterly headlines. This graphic pretty well captures a part of the problem. As Fortune points out earnings so far are as dismal as they've ever been and looking to get worse. Even worse the outlook is for a sustained period of continued under-performance and lowered valuations (something we've been harping on a lot and for a long time. Aside from recent postings continuing to dissect this little problem we provide excerpts from two postings from almost a year ago in the readings that illustrate how long these challenges have been clearly visible).

Business Performance

Business performance comes from delivering on five key elements both separately and as a whole. No one can be taken in isolation. The responsibility for making all the moving parts synch up lies with executive leadership at the top and management as a whole. For businesses to do well in this crisis management must step up to these responsibilities on several dimensions and balance them out. Our favorite guru of gurus puts it much better of course. That would be our boy Mr. Drucker:

"A manager's job should be based on a task that has to be done - one that makes a visible and, if possible, measurable contribution to the success of enterprise. A manager's job exists because the task facing the enterprise demands it's existence - and for not other reason."

"A manager has two specific tasks. The first is creation of a true whole that is larger than the sum of the its parts, a productive entity that turns out more than the sum of the resources put into it. The manager must simultaneously ask two double-barreled questions: What better business performance is needed and what does this require of what activities ? And: what better performance are activities capable of and what improvement in the business results will they make possible ?"

"The second major specific task of the manager is to harmonize in every decision and action the requirements of the immediate and long-range future. He cannot sacrifice either without endangering the enterprise".

The Social Consequences

As the recent Tax Tea Parties show there is an enormous amount of public anger at the failures of management leadership to serve either the interests of their companies, of their stakeholders, including employees, business partners and investors, and of society as a whole. A few years ago Jared Diamon published an interesting follow-up book to his earlier "Guns, Germs and Steel" that asked what enabled societies to survive, adapt and prosper or fail...he titled it "Collapse". In this recent PBS interview he boils it down...the biggest cause of failure is the failure of leadership to act for more than their own narrow self-interest. In some circles they call that a failure of fiduciary responsibility.

As Wuzu said to Fojian in "Zen Lessons: the Art of Leadership" :

"As a leader it is essential to be generous with the community while being frugal with oneself. As for the rest, the petty matters, do not be concerned with them.

When you give people tasks, probe them deeply to see if they are sincere. When you choose your words, take the most serious. Leaders are naturally honored when their words are taken seriously; the community is naturally impressed when people are chosen for their sincerity.

When you are honorable, the community obeys even if you are not stern; when the community is impressed, things get done even if no orders are given. The wise and the stupid each naturally convey their minds, small and great each exert their effort.

This is more than ten thousand times better than those who hold on by authoritarian power and those who cannot help following them, oppressed by compulsion"

That was written over 1200 years ago yet still seems more than relevant today. But these measures who would you judge is leading well and how not ? On those answers rest your decisions.

UPDATES: Why It Matters

 We just added a whole slew of other readings excerpts using the Finance Industry, sadly, as our whipping boy. What triggered this recent massive rally in the markets was the belief that the Markets and the Finance Industry were beginning to self-repair and see some daylight. Only it turns out that a) they were engaged in deeply deceptive reporting (we'd use other words but why bother) and b) that really is a giant freight train loaded with explosives, not daylight. All of the banks are experiencing huge increases in defaults and losses in their main lines of business. And doing their best to continue mis-leading the investing public. On every test of leadership, public faith and confidence and good business practice we have to judge the last six weeks an abysmal failure. Both Wuzu and Drucker would be sadly and terribly disapppointed...not least because this is both stupid and unecessary self-inflicted damage. But check out the readings for yourselves. Start with Jim Jubak's vidclip and move on to the slew of stories dissecting the disaster.

Continue reading "Leaders, Leadership & Culture: Crisis, Values and Perfomance (Updates)" »

Posted by dblwyo at 07:06 PM | Permalink | Comments (0)

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)

Back when Yellowstone Park experienced an unprecedented set of fires that threatened to rage out of control I was vacationing there and was allowed to drive into the Park on the theory that things were serious but under control. On trying to return we found the road's had been closed and we had to go many miles and hours around to get back to our start point. At the time there was enormous debate about letting the fires go, management philosophy and how best to manage forests and parks. Now forest fires are a natural part of long-term forest ecology and some species can't even re-produce properly without the fires to spawn their seedlings. Sort of like Schumpeter's "Creative Destruction" ? What made these fires so controversial and dangerous, as we found out, was that for decades all fires had been prevented and a lot of deadwood and downfall had accumulated which made any major fire likely to run out of control. We're in a similar situation now in the economy and  while the fires appear to be being managed, so far, they could still run out of control. But whatever else happens the existing businesses, industries and structures are going to be swept away. Stop and think about that for a minute...every business you know of MUST re-think itself for a new ecological environment that it's not prepared for. Here's another thing to think about, as we've argued before, given the number of businesses who were caught flat-footed and are not reacting very constructively what are the chances that these kind of deep structural re-thinkings are going to happen and be implemented ? The answers to those questions will seperate the sheep from the goats....or the survivors from the road-kills !

And We Care Because: Profits, Earnings & Valuations

Several friends continuously challenge me about translating the rather "abstract and erudite" discussions of big picture trends to specific implications. The last post on the Economy and Markets provided more evidence that the mis-interpretation of reality continues; which means that the level of preparation continues to lag requirements. It was preceeded by a series of posts on the Finance Industry that traced out the consequences of ignoring the big picture, structural breakdowns and error-filled mindsets (here, here, here and here). What we're really saying is that you are going to see similar impacts across all industries and enterprises; albeit more slowly and more disguised for a while. The accompanying graphic is a rather complex composite that tries to translate those hidden decisions into long-term observables. On the left hand side you see the links between Profits (national income accounts), Earnings (S&P) and the SP500 index. We are in the worst decline in profits in, literally, about three or more generations ! The right hand side takes a look at long-term valuations. The top sub-chart shows PE Ratios from 1936 to now with the average for the entire period (yellow) and the average thru 1990 (red). Notice that valuations shot way....weigh....weigh...way over the central average in the late '90s ! Neither bode well for the capex outlook (think Technology !), a return to growth and profitability nor for valuations and prices. In fact PEs tend to over-shoot as they correct as the bottom sub-chart shows. The red line traces out the cumulative difference between the 1936-1990 average and the PE that year. Notice how truly out-of-balance we've got and remain. In other words not only will PEs be structurally lower in all likelihood, not only will they likely over-shoot but we have an unprecedented excess to work off !!! (What does that say about all the non-hiring and deferred capital spending that went into stock buybacks over the last several years ? Not a display of good business judgment at the very least !).

Mindsets and Mis-Perceptions: Re-Thinking the Business Model

In the readings we start with some intersting links on buybacks and a key message from Warren about earning your sales and then segue into a selected set of representative examples of performance from the US Post Office (on the verge of BK) to IBM (laying off people) to Zara's (growing) to set up the two big sections. One is a spate of recent stories on how mindsets influence and control decision-making and why listening to the loudest leads to the largest problems. The final section is a spectrum of readings on how to actually think about the coming firestorm and samples from business model re-thinkings to operations and go-to-market to IT, Human Resources and Innovation. One of the most interesting in the re-mapping the mindset is from a recent oped by Bob Shiller who traces out the mental mindsets that led to this current crisis, their historical precedents and the continuing dangers we face in finding new paths forward. While Bob is talking very big picture re-apply that to the enterprise level as well ! We borrowed the graphic from his piece because it nicely captures how the mental models control decision-making. And how bad ones lead to bad decisions; in this case the financial implosions. The next question then becomes what are the mental models being used by business executives and other leaders to understand the situations they face.

V = Sum(Pi X Gi): Bernoulli's Principles NOT

Back in 2005 Dan Gilbert of Harvard gave a fascinating  TED talk on expectations and judgment (click thru to watch - you'll be startled and rewarded) where he talked about why humans are so bad at making effective decisions in complex situations. He started with a formula from a Dutch genius, Daniel Bernoulli, who in 1738 told us how to make correct decisions in all possible situations. Roughly translated the expected value of a set of decisions is the sum of the products of the odds of an outcome and the payoff, or gain, of a particular outcome. Prof. Gilbert then proceeds to trace thru how mis-judgments, expectations biases and simple rules of thum lead to so many bad results. Going beyond his arguments the situation is made worse because the odds and outcomes are inter-dependent. A decision to loosen capital requirements by the regulators for example leads to greater leverage and risk-taking by bankers which in turn leads to increased risk, lower odds of a favorable outcome and catastrophe when the Black Swans land. Especially when the swans ain't; that is when the actual outcomes were knowable ahead of time but their likelihood was misjudged.

Old Principles and New Conclusions

Businesses are run by folks making decisions based on their own rules of thumb accumulated thru lifetimes of experience. Rules of Thumb work very well when they do and are disasters when they don't. A Business Model is a kind of meta-rule that talks about how the enterprise expects to make money by creating and providing value to it's target customers. The success of that business model critically depends on the key functions being well executed, from Sales, Marketing and Customer Service to Manufacturing, Logistics and Procurement to HR, IT and Finance. Each of those functions is built up over time thru accumulated experience and policies and procedures employed are the rules of thumb that determine how an enterprise performs. Now RofT are great when the model of how things work is accurate. But humans grew up on the savannas of Africa where things remained the same for millenia, you met few new faces and fewer new things that disrupted the old, patterned order. Simple rules of thumb work and worked. Now we're in a world where all the old patterns are disrupted, the old rules of thumb need to be re-thought and re-worked and new ones created. On the fly, under enormous pressure and correctly. When too many changes come to fast most of us freeze up. Which is what's happening to many business and other leaders (Good Boats, Good Captains: Applying the Investment Mantra for Profit).

Here's your bottom-line question: how are business leaders doing on re-thinking...the environment, the business model, the operating functions and the ways they lead and run their companies ?

The ones who successfully answer those questions will be the survivors. The rest will be roadkill. Right now the roadkills would appear to be more common than the resilient adapters and adopters. But the innovators (Disruption vs Innovation: Change, Response, Resilience) who can create new answers and rules of thumb will be the ones you want to work for, invest in and do deals with. And evidence of new rules of thumb being formed is how you want to pick them. Some are in fact making the necessary adjustments and serve as good examples not just for their industry but for how to adopt and adapt in this brave new world. But it's a damm lot of hard, detailed work as well as strategic re-thinking (WMT as Exemplar II: Diving Into the Details of the Retail Enterprise).

Continue reading "Firestorms and Re-Thinkings: Business Performance vs Business-as-Usual" »

Posted by dblwyo at 08:49 AM | Permalink | Comments (1)

Another tumultuous week or more in the markets, the economy, the public policy arenas and the general public (do the words, "kill all the financiers, the devil will know his own" as a paraphrase of several historical quotes ring any bells ? People are very angry and justifiably so. We're going to come back to Technology while we review the markets, economic and business situations and use that as a set up for a follow-on post on the public policy and that anger. Which, however justified, is also very dangerous. The readings reflect the agenda of course but start off with a little history review by sampling and excerpting some previous posts from Jun08 to Feb09. Partly on the "told ya so" but mostly to hold ourselves accountable AND to see how past prognostications held up. It's called back-testing and, on the whole, we under-estimated the depth of the breakdown BUT called the trends, outlooks and structural weaknesses pretty well. In other words we didn't drink our own koolaid as much as we should have. But hopefully that history review strengthens our arguments here !?

Start with the Markets

We've got a lot of ground and want to minimize space so the graphics will be a little shrunken (click to enlarge). The UR sub-chart shows a 5Day intra-day chart and the impact of the Fed's $1T quantitative easing this week....which had disappeared by COB Friday ! The biggest policy move the Fed has undertaken in generations peters out in a trading day !! Now IOHO the markets are/were in a bear market sucker's rally and had reached the end of the upward in any case. The UL corner is a 3Mo daily chart and uses some more technical indicators to map this out. Notice that the Slow Stochastic at top (the sine wave indicator) calls these turning points very well. Super-imposed over the recent down and up cycle is a natural rythm indicator, the Fibbonacci (using naturally occurring patterns in number theory and nature but widely recognized by traders so self-reinforcing) that shows the Fed uptick failing around 800 and the bear rally faded and returning around the magic 775. The question then becomes if this doesn't break back above 800 on re-testing where away from there ?

Look at Economic Realities

A friend reminded us of another famous Warren quote: "in the short-run markets vote but in the long-run they weigh". In other words Mr. Market is more a giddy adolescent going with the popular opinions but in the long-run adult sobrieties return (particularly if the mandantory 12-step programs are working right) and judgments based on best interpretations of fundamentals rules. And by fundamentals, in these circumstances in particular, we mean economic fundamentals at a cyclic, structural and policy-driven timeframe. One such deep reality is Employment, the engine that drives Consumption which in turn drives the Economy. In the RH chart the depth and duration of the Employment downturn is compared across the post-War cycles. Obviously we're exploring dangerous new ground, and extrapolating by curve-matching, are very earlier in what promises to be a steep and long downturn. The LH charts look at long-term trends back to 1980 and a key measure is net new job creation in the aggregate; that is jobs created > 150K/month. This was a weak and jobless recovery because organic growth never took off but as you can see net new jobs is as abysmal as it's been in nearly 30 years !! (NB: this means the Administration is right btw - unless we get thru this downturn AND get back on a sounder strategic foundation the economy will just continue to weaken). We won't dive into but will point you to this chart borrowed from CalculatedRisk for the Strategic Housing Outlook. Don't expect that to repair anytime soon either.

Back to Markets: LT Refresh and Review

The joint answer on Markets, both from a technicals and fundamentals basis, is that seeing a 4-handle on the market should NOT come as a surprise. A point we re-made as recently as March 1rst but have been raising for some time (cf. the history review). We consider that highly likely no matter what happens but containing and repairing the damage and then returning to growth depends on three critical factors: 1) repairing the credit markets and re-factoring the Finance Industry, 2) re-stimulating the Economy and 3) re-factoring the the foundations of the Economy onto new long-term sources of growth.(Disruption vs Innovation: Change, Response, Resilience) If you look back at the first market chart and consider the bottom half what you see is a bear-market process that worked out from Oct07 to Sep08 (not shown) that then imploded as the credit markets broke down. Then a new equilibrium was reached (the "Tradeable Box") that was broken earlier this month when the real economic realities sank in. We're not convinced that it's sunk in very deeply however...hence the 4-handle warning.

Naked Swimgers: Business Principles vs. Performance

We left the Freudian typo in the header because our fingers led us from the intended "naked-swimmers" to "naked-swingers"; as in people who substitute immediate gratification for long-term value-creation based on principle. In the final two readings section we have a few excerpts on basic principles of business management and leadership that have been left in the closet, so-to-speak, for years. Now we're going to find out who the good companies are who've been following them or those who're good enough to self-repair. The two key blog posts are from our e-friends Seth Godin and Bob Sutton. Seth sketches the critical concept of 1) focus on value-creation and 2) the execution plan to make it happen while Bob adds 3) make sure the company is the kind of place people want to work for where people are treated with respect and held accountable for their performance in a fair and just environment. That's how you get high-performance in bad times ! (Aholes, Shirkers and Performance: a Draft People Principles Policy)The sad and really....really dangerous parts of this are that many executives were caught flat-footed and ill-prepared and are now shell-shocked and slow to respond. They're scrambling to catch up to a dangerous situation, still don't get it and the "enemies" decision-curve is faster and tighter than theirs. (Good Boats, Good Captains: Applying the Investment Mantra for Profit, WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize)

The two most critically important readings are the excerpts from Paul Kasriel of Northern Trust in recent Econtrarian essays. The first tells us what really went on with economic growth and public policy in 1929-39 while the latter debunks (destroys) the mythologies of savings, thrift and long-term economic performance. Your take-aways should be 1) stimulative fiscal policy is a survival necessity but 2) if we can lay the foundations of long-term growth properly then, as Consumers shift from Spenders (Swingers) to Savers we'll fund a healthy growth path like we haven't seen since the 1950s !!!

Continue reading "History Review to Look Ahead: Markets, Economy & Business Trifecta" »

Posted by dblwyo at 08:10 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)

This post is something of a bookend for the last one (Good Boats, Good Captains: Applying the Investment Mantra for Profit) which dealt with screening and analyzing companies that are likely to do well. If it wasn't perfectly clear a critical factor is the honesty, integrity and leadership of management, particularly the executive team as a whole. Here we're going to dive a tad deeply into the consequences and causes of bad management. In the readings we use the terrible example of the sturm und drang over Wall Street bonuses as our jumping off point for a deeper exploration of executive leadership. Make no mistake about it - it's a critical factor, Wall St. as a whole with some major exceptions violated both fundamental principles and their own long-term self-interest and broke the rules of social responsibility. A strong, even harsh conclusion ? Perhaps but we think if you'll follow us thru on the arguments the logic is worth considering. And matters as much to you as a tribesman voting on who will be the tribal warchief and take responsibility for his life. The cartoon, drawn from this week's Economist on the implosion of Bear captures the situation without further discussion IOHO.

Predators vs Prey: a Balanced Ecology

We entitle this post Predator vs Prey because the thinking in population biology and ecology that describes the interactions between predators and prey nice represents the inter-actions between aggressive pursuit of profit and a focus on careful, cautious focus on value. Think of the blind pursuit of profit, in the short-term, as being the rough equivalent of a predator species so blinded by kill-lust that it reducess the prey species below a sustainble minimum. These charts are drawn from the Wikpedia discussion of the Volterra-Lotke equations on P-P interactions; one of the first and sustained excusions into mathematical biology and still in use today to some extent. The top chart shows how the cycles in population of the two species interact over time. Whan the prey population gets too large because there predator species is too small there is a population explosion followed by a surge in predators. In other words when the picking's get too easy the predators get more aggressive. The problem of course, say in the second compnent, is that if the population of prety falls below minimal levels the population won't renew itself and the entire system collapses. Hmm...making more sense now.

Looking for the Balance

In any human socionomic ecology most folks would like to have a decent job (fair day's work for a fair wage) but the system as a whole requires people who are willing to be both aggressive and step up and take responsibility for companies and other organizations and institutions. For a healthy institution or a healthy total system the two populations need to be in some sort of balance or excess complacency will collapse it while excess aggression will destroy it. The key driving questions are the tradeoffs between Interests and and Focus (or timeframe). Most folks can get away with most of their efforts directed in the short-term and their own narrow self-interests. I like to think of us as Hobbits. Then there are those who focus on the Big Picture, that is on broad interests but don't inject a strong sense of reality into their thinking. Contrawise there are those who's focus is stricly on their own short-term self-interest and aggressive and responsible behavior seques into excess predation. What's required is a large enough portion of the population who aggressively pursue a broader set of interests. This is the group one would choose executives from - those prepared to act in the institution's broad interests, balance them against their own immediate gains and be prepared to sacrifice for longevity, stability and prosperity.

Leadership is NOT an Accident

Lest you think we're talking out of our hat on this we point you to the feel-good story of the year - the landing of Flight 1549 in the Hudson. We've all come to know, at this point, how much of a miracle that was. But if you click on the graphic you'll be treated to a 2 minute simulation that plays out in real-time to give you an idea of just how little time these guys had to make the right decisions in no time at all. That capability was not created by accident but was the result of years of training, experience, thinking things thru and preparing for that one moment when it was all on the line. In crisis we all react as we're trained, whatever the source of the training. (The graphics didn't turn out as well as we hoped; it if won't "fly" for you try clicking here for the Flight1549 Simulation).

Ecological Stewardship

Several years ago Peter Drucker published what we think is the greatest management book of all time (Management: Tasks, Responsibilities, Practices ). Despite it's being published in 1973 it's diagnosis of what's required of management and executive leadership is a prescient diagnosis of the failures we're all victims of over these last several years. Drucker puts forward a simple list of critical task for Managment.

1. Make the work productive

That is lay it out logically and efficiently and make sure it's effective. How would you rate the Finance Industry given the disaster's we'll be suffering thru for years to come ? Given that the last decade's worth of profits have been destroyed and the viability of many nameplate firms is gone we'd say an ungentlemanly D- would be generous.

2. Make the worker effective

My friend Bob Sutton wrote a great book(The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't ) last year which has resonated with a lot of folks. Given that what Drucker is talking about is the socio-psychological aspects of the workplace environment Bob wouldn't have been able to write that book if many deserved a gentleman's C. Yet the list of firms who create worker-friendly environments also tends to be the list of firms who perform well. Given how notorious the Finance Industry is for terrible workplace environments where it's dog eat dog and devil take the hindmost an F- seems appropriate.

3. Take Social Responsibility

And by this Drucker doesn't mean something namby-pamby like "Save the Whales". Instead he means that Management are also members of the larger society and have a responsibility to see that it prospers, not just the firm. Instead he focuses on those things that an enterprise or other institution can do. If you work in a Hospital or University is the institution taking care of the legitimate interests of all it's constituents and stakeholder ? If you work for a private enterprise that  enterprise still exists within a social matrix - is it acting responsibly ? Better by far to be proactive in solving problems before society as a whole decides to solve them for you because your benefit is grossly exceeded by your damage. One example he uses is Theodore Vail and the definition of ATT's purposes. Vail made absolutely sure that instead of becoming a regulated business that the company was respectful of the general public interest. On this, there being no grade lower than F-, we've probably reached the point where the Finance Industry is expelled from school for bad behavior. And their reward is going to be a new regulatory regime imposed on them over their protests. A sound awareness of the socionomic ecology would have had the Industry stepping forward early and forcefully to develop workable and responsible regulatory behavior and institutions. Instead we've gone thru the Tech Bust, Enron and WCOM and the near-death of Western Civilization in the last two years.

Drucker published this magnum opus in 1973. Sadly almost none of it's concepts and prescriptions have seen the light of day. As Ye Sow, So Shall Ye Reap !

And just in case you think we're making to strong a case or exaggerating it we offer up this refresh of the High-frequency economic data we've used so many times before. Without going into detail we'll just say that a terrible economic situation appears to have crossed over yet another tipping point into really serious problems.

The bottomline point here, to come full-circle, is that responsible, statesmanlike stewardship of the Company or Institution will determine who indeed are the "Good Captains and Good Ships" you want to go storm sailing on !

Continue reading "Predator Prey Symbiosis: Crisis, Leadership and Values" »

Posted by dblwyo at 06:06 PM | Permalink | Comments (1)

The title is a play on the last one and a famous epigram of the greatest of the Greek Stoic philosophers, Epitectus:

We should act as we do in seafaring: “What can I do?”—Choose the master, the crew, the day, the opportunity. Then comes a sudden storm. What matters it to me? my part has been fully done. The matter is in the hands of another—the Master of the ship. The ship is foundering. What then have I to do? I do the only thing that remains to me—to be drowned without fear, without a cry, without upbraiding God, but knowing that what has been born must likewise perish. 

That might be taken as a bit fatalistic or depressing until you parse it out some and realize it says to bear up with fortitude as long as you're able and before you get in trouble do your darndest to make sure all the preparations are in place. And if you pick a bad boat with a terrible captain and then insist on sailing into the teeth of a hurricane at least don't whine about it. If you're a previous reader you've hopefully gotten the correct impression that we have a definite point of view here that's centered on providing the right tools to forecast the weather, build or pick the right boat and captains and sail with style, grace and profit. The prior post laid out our macro mantra with pretty pictures and everything. A key part of that was Industry/Company analysis and we had an opportunity today to run the deep framework by a friend who's a Wall St. analyst. His questions turned a scheduled hour into a really tough but enjoyable three and we ended with a key one: how do you use this approach to make investment decisions ? Can you show a link between stock prices and business analysis ? You can consider this post part of our answer and the graphic below the illustration !

 We think at this point it's absolutely clear that we've shown that the economy drives business, that good businesses generate profits which result in earnings. Then you have to ask are the earnings you read about sustainable, the result of structural capabilities ? Or the artifacts of flukes or financial engineering ? In all our passes at Industries (Auto, Finance, Tech, Retail) and Companies (Dell, HD, WMT, Citi, GE, et.al.) we applied the same approach over and over again. The last post laid out the ginormous graphic of the macro-mantra and dove into the Geo-politics and Economy while the two preceding ones dealt with the Markets - and have sadly all too accurate. We did a little digging around, and perhaps giving ourselves some benefit of the doubt, matched stock prices to prior recommendations and/or assessments. And captured the results in the next graphic.

Proof of the Pudding: Recommendations vs Results

 Back last summer we took a pretty deep dive on Wal-Mart and tried to draw everybody's attention to one of the most far-reaching, fundamental and effective re-engineering transformations we've ever seen or heard about. In some ways at least on a par with what US military forces did in re-thinking their Iraq strategy and doctrines. And in that same Sept. 5th post we also suggested that you Sell ! Now that results of that look almost mystic and we admit the timing was fortuitous but the logic was not. The Street was concocting tall tales that WMT had created some new magic that would let it esape unscathed and we disagreed. Similarly in Aug we published a strong....strong Sell Tech recommendation after warning in the Spring and last Fall (of '07 that is) because our economic analysis suggested that capex spending would tip over in normal cyclic behavior. On the Industry front our first pass on the "Death of Wall St. As You Know It" was last March, preceded by storm warnings and we've been using the Auto Industry as our poster child of organosclerotic suicide for almost 18 months. Perhaps we're being a little overly generous but if you backtrack we'd argue not to much so, even when we didn't scream run for the door as we did with Tech and WMT. You can judge.

The Simple Questions Repeated

In the readings below you'll find yet another collection of business related readings that start with an excerpt from Buffett's latest letter (two actually) using his summary of the economic situation to kick-start and then comparing Immelt, Buffett and a key VC as exemplars of good management (btw IOHO both Immelt and Warren are getting bad press that exagerates their actual failings unreasonably). Let's go back to a previous graphic and put it as clearly and simply as we  can manage:

1. What is the fundamental value of the business ? Is it aligned with the market opportunity ? And carry that down into Divisions, Product Families, etc. for large businesses.

2. Are the Marketing and Sales functions aligned with and reinforce the business strategy and model ? Can they explain themselves to the market and the customers ?

3. Are the Core Operations (Software Development for MSFT, Logistics and Store Ops for WMT, or Design and Manufacturing for GM for example) capable of delivering on the promises ? Are the key support functions what they need to be ?

4. Are clear goals set, resources honestly allocated and people held accountable ?

By and large you can judge most of this from a careful reading of the business and trade press backed up by a review of the annual report, SEC filings and analyst presentations. DELL's troubles for example were predictable when they started cutting corners on customer service - a fundamental part of their value proposition ! Contrawise, as you'll read below, Exxon has been husbanding and hoarding resources for years and now has huge cash reserves to start buying up reserves. Or again Carol Bartz has on-boarded at Yahoo and appears willing to put the kind of adult supervision and good business practice in place that they've lacked for years. And on and on.

You can pick the right boat and the right captain who can sail these storms. There is NO REASON to resign ourselves to our fates ! Or so we think. Try it...you may like it. Or at least please drown quietly without excessive whining.

Continue reading "Good Boats, Good Captains: Applying the Investment Mantra for Profit" »

Posted by dblwyo at 08:40 PM | Permalink | Comments (0)

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)

Let's focus on some of the implications and repercussions of the prior set of posts and pull them together to understand why things are headed into the "facility" with regard to business performance and earnings outlooks. Why in other words we talk about and mean smackdown, unfortunately with two very badly ill-matched opponents. In this corner earnings, which look like your kindergarten teacher, and in the other corner it's "The Rock" ! The readings excerpts after the break go into some specifics from the stimulus package outlook/realities to market and earnings performance to some specific on representative industries and/or geographies.

Market's Lost Decade

But let's begin with a look back at past performance of the market over the last decade (courtesy of Lloyd Norris and the NYT [if you want to see some of previous arm-wavings try Value Analysis & Valuation]). This almost explains itself but what it shows is market returns for the previous ten years for each year, and this year's for the last decade is -5.1% !!! Abysmal and the worst ever, so far. But if you believe our unending litany of Cassandra warnings this is likely to go on longer than the terrible '70s ! So start factoring that into your thinking. (And skim the readings - btw if you click on the highlighted titles they are URL's in disguises and you can read the whole thing in case you missed that notice).

Smacked in the Kisser: Market vs Economy

 We've taken multiple shots at looking at market trends and the relatioinship between the market and the economy but the common meme that markets lead and that there's some disconnects appears to be deeply embedded in analysts DNA, beyond hope of eradication even with genetic surgery. The composite chart shows the YoY changes in GDP vs the Sp500 on top and W+E vs the SP500 on the bottom. The logic is GDP => Profits => Earnings, part of the genetic denial barrier, while W+E => GDP, hence the strong and obvious correlations. So if there's any remaining doubt the if the Economy keeps heading into the crapper earnings will follow right along now would be the time to go onto some other reading.

Lie-ins and TIGRS and Bears: Earnings Prognutifications

Yes, most of the funny wordings are deliberate to make our point, which is that analysts have been too wildly optimistic for years, missed '08 badly and, in continued mis-placed optimism, are likely to miss '09 as badly or worse. The chart at right borrows multiple sets of data, the two charts on the left source from a Mauldin newsletter while the tables on the right are the running S&P operating earnings estimates from S&P's web site at various times (NOTE: Mauldin and S&P are reporting different numbers so you can't directly compare them. Never-the-less....). On the left notice where '08 started and ended up - the only small ray of light is that reported ended up higher, but that may just be the different (apples vs potatoes) data types. Now look at '09, which shows the same appalling drop, and also shows '08 > '09 ! Yet S&P is reporting that the analysts are estimating a significant rise in '09 ! Which is completely contraditory to Mauldin's message and all our analysis. Oh what surprises lurk in the self-decieving minds of men, or in this case business executives, since almost all analysts merely collect, filter and pass on what they're being told. Not what their independent and informed analysis would show. Even with all that S&P is reporting an estimate PE of ~12 to go with that EPS of $68.88. Hmmm....well 12 X $68.88 = 827. Which means that at best the market will be flat in '09. Would that it might be so. On the other hand 12 X $42.26 = 507...ouch, ouch, really ouch. And in line with all our earlier guestimating about L.T. market trends and outlooks.

A real key here is that phrase "business executives tell"....as we've pointed out (Let the Triage Begin: Business Performance vs "Stupid Is",Survivor: Search for the Next "Blue Chips" (UPDATE)) most executives are dealing with a completely unexpected tsunami they didn't anticipate (ignored) and were caught flat-footed and very ill-prepared. Worse, based on the McKinsey and Booz surveys we reported on, they aren't responding well at all, and in fact seem to be shell-shocked and frozen in place. In the readings you'll find excerpts talking about the US and Chinese auto industries, the Mining industry, Retail and the Japanese eletronic manufacturers. To put the shoe on the other foot there are a couple of retail counter-examples where two of the best retailers in the world are being aggressive and taking advantage of the windows of opportunity here.

Bottom line ? There's a huge pile of equine excretory output in train car loads headed for the rotary impellers and it's going to get splatterred all over us all. And NOBODY is prepared or preparing.

Continue reading "Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???" »

Posted by dblwyo at 09:28 PM | Permalink | Comments (1)

Now that the Inaugural is past us it's time to really "look forward" to the New Year, in as much as you can. The reality is that we all will one way or another - that is voluntarily or not. If you haven't gathered our view is more than a tad bleak since our anticipation is for more bad economic news with the downturn continuing into 2010 and future growth rates lower than potential. Further we see the problems spreading and worsening worldwide and none of this being factored into valuations and earnings estimates. The saddest fact is that none of this foreseeable tsunami was factored into business management decisions and performance, with some notable exceptions. Earlier today we had an e-chat with an old colleague about his management not only being caught flat-footed and now in emergency response mode but also making blind and panicked short-term tactical decisions. As it happens noone is immune to the pains we are all experiencing and the risks of more are widespread, but some enterprise are reacting better than others and are better positioned. After the break you'll find some selected readings on those exemplars who are well-positioned, including Wal-Mart, MickeyD's, Cargill and Rolls Royce.

Considering the Exemplars

Before you skim those readings you might want to take a gander at this interview with Lee Scott of WMT on Charlie Rose. And listen carefully please. Among the many pearls of wisdom you'll hear is a key one - although not quite phrased this way. That key is that WMT was locked into it's old business habits and wasn't listening to it's customers. Once they started listening they stopped, thought and re-factored themselves. But that process didn't start last year - it started at least four years ago. And in the process WMT halted excess store growth and reduced it's capital budgets, re-thought product management and store operations and started focusing on value delivery. Whether you know it or not this represents a huge shift from the paradigm that drove them from their founding. The old driving philosophy was growth and efficiency - now it's profitable growth, control, effectiveness and profitability. And last year's results speak for themselves. We try and capture that in this composite graphic summarizing their strategy from their last major annual analyst presentations. The more extended discussion of WMT's whole re-factoring is here ( Time to Sell WMT ? I: Thinking the Unthinkable) and serves IOHO as a good example of somebody talking the right talk and walking the right walk.

Keys to Survival and Prosperity

 WMT's current relative prosperity results from fundamental strategic and operational changes they committed to years ago. The same is true for other major companies we've looked at in prior posts (check the Enterprise Performance and Company archives) like HPQ and HD. They all illustrate the same key challenges being met. Executive management is subject to several conflicting pressures. It must first balance off the short- and long-run requirements for health, sacrificing neither for the sake of the other. At the same time it must establish a balance between strategy and operational capabilities. Strategy without execution is fantasy while execution without strategy is thrashing.

In this environment executive management is faced with many tough choices. But the all too common one is to make the "easy" tough choice and meataxe costs and heads on the basis of immediate cost savings rather than doing the hard work, the hard thinking and the morally difficult work of thinking thru the best balance. Finding places where you want to be and don't and then reinforcing the former even at the expenese of the latter. In terms of the accompanying graphic that means establishing an overall strategy for each of your major functional areas and then translating that into operating plans, resource plan and accountability controls that are continuously monitored against the real-world. Not what we'd like it to be. Our exemplars are the companies that have translated this conceptual framework into real-world actions. Now you need to find them.

Tough work indeed.It will separate the winners from the losers.

So, whether you're an employee, a business partner or an investor find those "Buffetesque" companies who are not reacting with panic, whose management is exhibiting skill, calm and courage and will survive as well as possible in this continuing unpleasantness as well as be better positioned for the future.

UPDATE: Reading this morning's mail just got a Booz & Co. newsletter that eventually led me to a recent survey of their which is sadly syngergistic with our points here and in the prior post on the dismal outlook for all the flat-footed executives. Whereas we're relying on news, our network and anecdotes they did a worldwide survey. The results are startling indeed. A more complete excerpt along with a pointer to a dloadable discussion is now included in the readings. Frankly we don't think the news could be worse. We also would refer you to our prior post on the outlook for enterprise performance: Let the Triage Begin: Business Performance vs "Stupid Is" ; as well as, of course, the complete archives which attempt to beat this topic to death - apparently "meaninglessly" in terms of behaviorial changes.

Continue reading "Survivor: Search for the Next "Blue Chips" (UPDATE)" »

Posted by dblwyo at 02:21 PM | Permalink | Comments (0)

In many ways this is one of my sadder posts with no grain of schadenfreude in it, not matter the justifications. You see we've been warning first about the very visible slowmotion slowdown for well over a year. And well over six months ago we warned that the economy had crossed the Rubicon of tipping over into a severe downturn that was likely to last longer and be deeper than anybody was yet anticipating. In fact deeper than most are still anticipating. The general reaction to those warnings, both to the blog posts and private warnings to my networks, was to poopoo the arguments, tell me that things weren't that bad and all we were really facing was a lack of confidence and things would begin turning around "real soon now". Just wait. Well we've waited and the news continues to worsen at an acclerating rate on a worldwide basis. Here's the real danger though. Like my network and readers most executives were and are being caught flat-footed and ill-prepared. As they scramble to catch up with readily perceptible realities they are again making decisions, likely to be hurried and therefore bad ones, on the fly. As Forrest put it, "stupid is as stupid does" and there are a lot of very ostensibly bright people about to prove him righter than right. In this post we want to review the general business situation and outlook but start by putting a stake in the ground regarding the state of the economy.

State of the Economy

Let's start with one large and overly complicated chart that collapses a lot of the economic arguments we've made recently and been making for all this time into one lump so we can put that topic to bed. As usual these charts are in YoY terms and the first sub-chart shows GDP, GDP ex-trade and Employment. Notice that for the first time in nearly 30 years GDP and GDPxt diverged because of the accounting problems with inflated imports, particularly oil. The more revealing pure domestic indicator (GDPxt) shows a very steady slowdown that peaked in '04 ! Talk about your weak recovery and non-organic growth. It also shows a tipping (recession) beginning in Q407 that accelerated in Q208, and compared historically, looks headed for the basement. The consequences in part two are job growth that was anemic and, measured by jobs net of 150K/month or 450K/quarter, never dug out of the hole. We're now almost six million jobs in the hole. Which in part three is a terrible harbinger of future demand declines, as measured by the sum of the changes in real wages and employment. The best leading indicator we've found. Bottom line - this is likely to get a lot worse before it begins to flatten out. And NOBODY is prepared or anticipating or doing the right things as far as we can tell.

The Wrong Stuff: Flat-footed Executives

 In the readings below, which are extensive, you'll find excerpts on the situation facing businesses in the economy, particularly problems with earnings, warnings and debt loads. That's followed by a section on Industry changes, structure and dynamics with three cases in point from Autos, Retail and Pharma. One of our key mantras is Economy-Industry-Company. In other words the Economy defines the ecology in which which particular species (industries) thrive...or not. And how well an invidual member (company) does is dependent on the general health of it's species niche as well as individual performance. The three chosen industries represent a perfect smorgasbord with Autos being the poster child of denial and sustained malfeasance, Retail sufferring from being over-built and over-hyped/marketed but nonetheless not in denial. Just facing the worst of the stormfront. And Merck, as the representative of Pharama, illustrating after the death of their chemistry-based business model the kind of forward-looking changes in research, development and innovation necessary to put themselves on a new path.

Individual business performance is never just a single item however. It is the confluence of many seperate pieces that have to all work in concert. As we try to illustrate with the graphic. First you need a clear and accurate strategic vision that defines what value you provide to the marketplace. Next you need to be able to deliver on that vision thru Marketing, Sales and Customer Service in the shorter-run. And thru satisfactory operational capabilities in the blocking and tackling in the long-run. As Warren says we're in the process of finding out who's been swimming naked. And it looks like the answers are going to be beyond ugly. The third part of the Enterprise Performance Mantra is accountability - that is you have to set goals, provide resources, measure outcomes, develop the right kinds of infrastructure and ultimately hold people accountable for results. So that's our second major mantra - Strategy+Execution+Accountability=PERFORMANCE.

Where you care is all over the place from your job to your investments to the overall health of the economy. As Carl Icahn observes (again if you backtrack some of our earlier posts on Enterprise Performance) lots of corporate execs have been falling down badly on the job and are about to be found out. Stupid is indeed is !

In addition to the mantra there are two really stupid mistakes we're likely to see a lot of in the coming months. What we're looking for are the ompanies who avoid them. In general we'll see a lot of blind meat-axe cost cutting which'll actually leave them worse off in the long run and is only justified if, in the leveraged euphorias of the last several years, they got themselves into such bad financial positions that no options are left. The hard, courageous and intelligent alternative is to carefully way each of the functions and initiatives of the enterprise, judge it's value and needs in both the short- and long-runs and make judicious cuts while continuing to support high-value, high operational leverage investments. The two typical areas that ware likely to be damaged are people and innovation.

Our final section points to some fundamental longer term changes that are happening at deeper levels in the global geo-economic ecology with both China and India moving up the value-stack while at the same time watching growing deteriorations in their old value propositions. As/when/if we come out of this mess the world will have changed on us yet again.

Continue reading "Let the Triage Begin: Business Performance vs "Stupid Is"" »

Posted by dblwyo at 05:16 AM | Permalink | Comments (0)

Well judging from the readership stats it's not entirely clear that my light-hearted approach to the rather serious subject of major earnings problems got the attention it really deserves. (Using the Palantir: Beyond Fear to Performance and Returns) Or perhaps my approach was too calmly and judiciously phrased and too ponderously charted. No matter, with that superb senseof timing and decorum for which our British cousins are world renowned as John Cleese amply demonstrated in "a Fish Called Wanda" the Economist has come to my rescue with a simple, not very subtle and very pointed dissection of the situation.

Defined as what happens when the economy weakens, the dollar rises, exports drop off and foreign earnings go in the tank ? Their answer is beautifully encapsulated in the cartoon as Atila's hordes raid Wall Street. Well, you can't say you aren't being warned both with my own modest efforts and the authority of the world's best business publication. Let me let them speak for themselves from here - and continue after the break in a longish excerpt:

American corporate profits: A turn for the worse

The outlook is deteriorating even for the best-performing firms, let alone the troubled ones

"…anyone tempted to hope that falling energy costs will mean higher profits for other American firms should think again. To the extent that oil prices are falling because of slowing global growth—the likeliest explanation, despite the flap earlier this year about the role of speculators—then they are likely to be an indicator of falling profits across the board. As oil prices tripled between 2002 and 2007, aggregate corporate profits doubled. Both reflected strong global demand, points out David Rosenberg, an economist at Merrill Lynch. He says the recent decline in energy prices is a “symptom of demand destruction” that has dire implications for overall profitability. Mr Rosenberg has just written a gloomy report identifying “four horsemen” that will do their worst to American corporate profits: thinner profit margins; paying down debt as tighter financial conditions take their toll; lower energy prices; and a combination of slowing growth outside America and a stronger dollar. He predicts 7% falls in profits for firms in the S&P 500 both this year and next."

Continue reading "Palantir Visions: the Economist's Sees Barbarian Hordes" »

Posted by dblwyo at 07:32 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)

Let's wrap up the business news with some specific stories but also consideration of the broader issues that are going to increasingly challenge company performance, thru the rest of the year and likely at least 2010 ! Issues that not many appear to be anticipating nor preparing for but awareness of which will help you as an investor, employee or business partner. The readings after the break are sorted into some interesting articles on how mis-judgments about business performance are getting a lot of people in trouble followed by a section on key operational issues, including retail, manufacturing and the strategic role (& neglect) of good HR strategies. A key chunk is about the rapidly emerging major structural changes in China's manufacturing status and the need to re-think as the result of rapidly rising costs; i.e. the disappearance of the China price ! On the positive side that's followed by some stories on companies who have in fact done what they're supposed to and anticipated problems and pre-positioned themselves; one we find particularly interesting is the huge risks POSCO, the Korean steel company has taken to invest in developing new process technology. The final big section is specific company stories and we'd particularly draw your attention to the Transportation Sector stories because companies like FDX are making some of the biggest changes in their business models since they were founded. Others, like Aviation, Hollywood or Frannie exemplify the consequences of the Ostrich strategy combined with Kubler-Ross denials. They even include those previous poster-children of innovation the Drug companies who have yet to figure out a new development model and continue to suffer greatly for the lack. The final section lists the links to a whole slew of previous posts that should be part of this conversation with deep dives on troubled and/or challenged industries from Autos to Finance to Technology. Consider them part of the package please.

Key Questions

What should be on the top of everyone's mind here is two questions - what's going on and what can we do about it ? Questions we've been shrilling on about for a long time. It now appears that our views are becoming a bit more widespread - at least from a couple of this mornings headlines that perfectly mirror many of the arguments we've been making. What's important here is not that we talked about them in our tiny little corner but that the wider world is noticing:

Hopes Fade for Second-Half Stock Rally A sustained rebound for stocks may not be in the cards until the middle of next year. Even then, expectations are limited as the problems in the markets continue to spread.

World-Beating U.S. Stocks at 25.8 Times Earnings Means Rally Can't Persist The best already may be over for the U.S. stock market this year. The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

 The answer to what's going on here is at least threefold IOHO. First, starting with the initial graphic, too many companies and their executives have lost sight of the bigger currents that always sweep the world. They can't control them but must be prepared to cope with them. A geo-political case in point will be the widespread ripples from Russia's invasion of Georgia and the disruption to the global system we thought we had. The consequences of which change the hidden assumptions of the last twenty years. The second big thing is a sorting into winners and losers depending on who paid attention to the five key factors we list in the second graphic - the need to adopt new strategies and adapt to market, business and environmental changes and then back up those strategies with good execution on an operational level. And the third big challenge that will further separate out the companies you really want to pay attention to is those that not only paid attention to those factors but, as the graphic below illustrates, put together a systematic and systemic approach to integrating strategic innovation with operational excellence and tied it together with a comprehensive management system that makes sure that they are aligned, mutually reinforcing and synergistic. These are the folks to look into...and are we allowed to say that the prior posts offer up a great deal of advice and filtering tools to help pick 'em ? :)

Continue reading "Value at Risk: Business Performance, Issues, News" »

Posted by dblwyo at 10:29 AM | Permalink | Comments (0)

Fascinatingly the markets are up today, led by Financials of all things. Will wonders and delusions never cease ? This despite the fact that, other than WMT earnings, all the economic news was unremittingly bad: foreclosures are up 55%, new house prices dropped -7.3%, continuing jobless claims accelerated and new claims were unexpectedly high and consumer inflation jumped 0.8% MtM, a 17-year high ! None of that sounds like the outlook is sanguine in the sense of good. Anyway, as threatened, we're going to revisit the outlook and consequences for corporate earnings and what it means for the market. Tracking which posts get the most attention, equally strangely if not more so, the diagnosis of a schizoid market attracted more attention then the careful dissection of the profits outlook (Talkin Profits: Economic Outlook, Earnings, Business Performance ?) and what the rapidly deteriorating economic outlook means. To put a point on it if we are indeed crossing a tipping point and starting into a consumer-driven downturn, as is now being widely recognized, ignoring profits and the current market valuations is dangerous to your financial health. On the grounds that perhaps we haven't made it entirely clear why you really care we're going to build a longish post walking thru various aspects of profits, earnings, PE's and the outlook. Just as one example most of the downturn so far in the S&P is due to Financials. If the economy turns over, as we expect, none of that is priced in.

Economy vs Markets

Just to set the stage let's start by considering the long-run relationship between the economy and the Markets. The meme is that markets are forward-looking though the WSJ noted that hasn't been true recently - as in the last decade ! Actually it's never been true. This multi-part chart shows the YoY% changes in GDP and the SP500 on top and the % growth in both since 1951. To our eyes the markets are still far ahead of where the state of the economy would justify their current levels.

Earnings Outlooks

Hopefully the prior post put enough evidence on the table about the structural relationships between the economy and profits that we can take it as given. And the translation between Profits and Earnings will also be taken as understood. That being the case the fundamental valuation equation we like is Graham-Dodd's: PE = (8.5 + 2*Growth)* 4.4/AAA-Yield. We'll dig into that a little later but taking it as a starting point the question becomes what are earnings expectations. And, much more importantly, do they make sense in view of our economic outlook. Take a look at the following chart which reproduces S&P's bottoms-up collection of analysts earnings prognostications and take a careful look at a) the revisions by sector and b) whether or not you believe the outlooks. And to put another point on it the two sectors that are up today and driving the market are Financials and Consumer Discretionary - with the big debate about a bottom in Financials raging onward (Riding the Storm - NOT: Breakdowns, Culture & Malfeasance in Finance).

 Now if you're readers of this blog and these two sets of earnings estimates hang together for you you can probably stop reading. But if thinking that the Financials (in read) and the Discretionary and Technology outlooks (in yellow) have some questions that should be asked below we walk thru some valuable issues of PE and valuation that should be reflected. And aren't IOHO.

Continue reading "Profits, Earnings, PEs and Outlooks: Why You Should Reall....lly Care" »

Posted by dblwyo at 10:54 AM | 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)

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)

David Hilbert was one of the great 19/20C mathematicians and one of the greatest of all time. Back in 1900 he proposed a list of 23 problems, ten of which he presented at a major conference, that id'd major challenges for the field and, aside from his own direct contributions, shaped the agenda of math since then. And much of modern science inasmuch as many of the problems turned out to have major real world application and/or impact. A few years ago I proposed my own list of Hilbertian problems to my colleagues in the SCM/Logistics world as worthy of being on the research agenda because they were critical challenges for business. Hilbert had a lot more success than I however. Well as a capstone to this series of posts on key challenges for Business, which started with the question(s) of dashboards and decisions we're coming full circle to my e-friend Tim Walker's opening the door to the Hilbert problems of business(What are the “Hilbert Problems” of business? ), excerpted below. And don't kid yourselves that this doesn't matter - aside from the minor concern that the central foci of this blog is business performance improvement. In over 45 years GM's stock has a negative gain, Ford's impetus from it's hard-bought transformation in the 1980s has disappeared and the steady, sustainable performer - Toyota - has kicked both their butts. Where to from here ?

Business Hilbert Problems

Fortunately my list is shorter and probably not as intellectually difficult. On the other hand these problems are hard, difficult to solve, involve more than a guy with a pencil in a room, will help define the health of major companies, the well-being of millions and the long-term success of major economies. So they might be worth wrestling with :). Consider the chart at right, repeated from our assessment of the Auto Industry, as a graphic encapsulation and application example of an approach.

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 ?

Now we've taken a shot at some of this before (Performance Assessment Basics: Five Fundamental Factors) as well but after the break you'll find a culled set of readings that address some of these issues from Big Picture approaches to key functions to critical operating infrastructure (HR, IT) to Innovation to Leadership and Team-building. At the end of the day we repeat though - this really matters. About as much as anything in the world does, ceteris paribus :) ! Put another way if the Iranians blowup the ME and our world economy it's likely different principles will become the order of the day. But check out the two Auto industry charts - long-term stock performance and our diagnosis of their challenges and deficiencies and translate those into jobs, economic growth and well-being. 'nuff said ?

Continue reading "Business Hilbert Problems: Fundamental Factors of Performance" »

Posted by dblwyo at 05:25 PM | Permalink | Comments (0)

O.K. we've finally combed back thru all the postings and followed up on the promise/threat to collect the various priors together. It turns out there's enough across a range of topics and domains that the "Business Analysis" tables will get split across three seperate posts. Here we're going to focus on the general approach to Enterprise Performance Analysis, specifically five major clusters - or continuing to beat our control system metaphor to death - consoles/dashboards:

1) Enterprise Performance: why it matters and the impact, including tables categorizing various headline companies into the good, the bad and the ugly as well as some interesting commentary from Carl Icahn.

 2) Financial Engineering: a key component of the last several years has been under-investment in hiring and capex and the largest investment in buybacks in decades. What's the impacts and implications for earnings outlooks ? And most especially - for long-term performance ?

3) Business Environment: businesses control what's inside their walls and must cope with the externals but, as should be very clear by now since it's the whole point of the dashboard argument, understanding how the wind, waves, and currents are setting is essential. 

4) Business Analysis: checklists, blueprints and frameworks along with associted readings and a guide to Warren Buffett's master class on business performance analysis. What are the elements, how do they work together, what should you be looking for and how do you go about looking. Tnink of these as performance blueprints and evaluation templates.

5) Functions and Issues: the enterprise consists of key fucntions like Customer Service, HR or Technology. From time-to-time we'll take a deep dive on a specific function or issue to understand what it is and how it should work vs generally does. Among other things this section includes some interesting work on HR and Innovation as well as Strategy. 

In the table below you can think of the postings detailed below as being the ones behind the left-hand column (sorry if there's some formatting problems - it's better after the break):

Continue reading "Key Postings IV: Business Analysis Foundations" »

Posted by dblwyo at 06:13 AM | Permalink | Comments (0)

Time for a little Su. reflection as well as a rather large collection of readings with regard to business performance. Now over the last few weeks we've put up some posts on analyzing business performance and associted readings to illustrate some key points. Ranging from understanding the necessary balances between strategy and execution (Business Performance III(Readings): Sad Stories, Good Stories & "Fixes") to the critical role of innovation(WRFest 27Apr08(Tech Ind): Innovators, Survivors & Also-rans). These readings extend those arguments and provide in the company stories specific examples of many of these themes, along with several of our prior dissections of particular industries, e.g. Airlines or Technotainatronics [:)]. By this time we hope enough machinery has been provided to enable and encourage you to wrap each story with the big picture of Economy-Industry-Company mantra.

We've divided the excerpts into three sections. Long-term Perspective, Key Issues and Companies. And while the stories weren't deliberately selected to support the themes we've been striking it's nonetheless true that they do in fact align extremely well. Which suggests perhaps that the machinery might be relatively powerful.

If you think back over the last several years the investments that have done well have done so as the result of anomolies. That is as the result of some sort of deep, sometimes, structural change in the economy, industry or company. Think of real estate, commodities or energy all of which went or are going thru major structural shifts. Or think of Emerging Markets which are well beyond their emergence into relatively full, sophisticated and sound participation in the world economy. Albeit with some major risk factors still remaining as the last two posts on the World Economy show.

In the LT Perspestives, with articles on earnings quality, PE valuation and Buffet's accelerating shopping spree you find what we think is a fundamental theme now and for the future. How good are earnings, what are they likely to do and what'll they be worth. After several years of passing by stocks Buffett is putting big money to work because he's finally seeing opportunities in a combination of performance improvement and lowered prices. The section starts with one of the great financial analysts assessment - which boils down to "worst credit crisis since the '30s" and "very low earnings quality". We'd strongly suggest keeping those two signposts in mind.

In the Issues section we see several major strategic concerns from the impacts on morale and performance of the pay gap between worker bees and executives (Aholes, Shirkers and Performance: a Draft People Principles Policy) to major challenges and shifts in the emerging markets - the combination of rising labor costs and skills shortages with an effort/need to move up the value stack. And then two excerpts on the critical role of Innovation which is rapidly becoming a required core competency...only it's not.

In the Company section everything from Retailing to Airlines to Big Oil and Steel to Disney and Kodak are covered. Each story representing more than just the company in question. Many of the best Big Box retailers are hoping to seize the opportunity created by this downturn to continue enterring new markets and expansion. We'll have to see how that holds up if the economy, as we expect, turns down farther and longer than many are anticipating. Nonetheless this is a bold strategic move which suggests these are candidtes to put on your Buffett list. As a retailing counter-example Starbucks got badly scalded but is still looking for int'l expansion. The question is going to be can SBUX do for itself what MickeyD's did several years ago - self-arrest, recover and transform ? On that fundamental question hangs it's future value, as for so many others.

In complete contrast there's AMR, losing $3M/day, as proxy for an industry which is direst need of the most fundamental rexamination of business models, strategies and, most especially, network structure. An initiative which does NOT appear to be even being considered by any players. Instead they're moving ahead to re-arrange the deck chairs as the soles of their shoes are getting soaked.

As examples of another sort consider Oil and Steel (On Being a Boiled Frog: the Strategic Outlook for US Industries). The latter is our poster child for an old-line industry who's been reborn thru long, hard, painful and disciplined effort. Who'd have thought. Yet many of their troubles were self-inflicted by avoiding and delaying necessary changes for decades. Lessons that many other industries are having to learn the hard way. Obviously Airlines but also Autos. Big Oil is facing some similar challenges, strangely enough. Not because they're incompetently run. Just the opposite in fact. The problem is that their environment is changing where new oil discoveries are lagging, they aren't replacing reserves as fast as they're using them, national oil companies and politics are controlling the agenda and are doing so for short-term political goals and their exploration and production costs are escalating rapidly. Whee....talk about changes....and differences from the headlines.

Finally there are two stories of Renewal. One from Disney which we consider a poster child of both the innovative new mediatainment company and a superb example of what self-arrest and transformation should look like. The other is Kodak which continues to change but also to struggle. Disney had to re-discover itself. Kodak has to create a new self - a much...much harder problem. Made harder by, again, denial and willful ignorance. In the last few years they seem to have worked thru that after a decade of avoidance but now it's a race between creating the new Kodak and getting enough speed down the runway to get in the air. Remember V1 - the speed where you're moving fast enough to rotate the nose wheel ? You'd better hope there's enough runway left, especially if you're still too heavy with historical baggage. (Auto Industry: Pressures, Changes & Outlook - Finding V1) 

Continue reading "General Business: Perspectives, Issues & Companies" »

Posted by dblwyo at 12:11 PM | Permalink | Comments (0)

Our normal sequence would call for taking up the market situation but that's not only too depressing, for several reasons, but Sun. seems more suited to reflection on big issues. So we're going to focus on Innovation. Now hopefully some previous posts have established the motivation for that, and they're listed below the break, but in discussing sad, not so sad and good stores about business performance a couple of themes emerged. One of course was good execution and another was balancing strategy with operations. But if you review some of the readings sustainable long-term performance, by which we mean growth in revenue, profits and earnings, also requires adaptability and invention. Innovation in other words. And when you look at the examples from HPQ to P&G you can see where this is all born out. And conversely when you look at the sad stories where the counter-examples also support the argument.

But in case you need more more convincing or, better yet, you'd like to see it explained by somebody with a real track record of both sustained performance and sustained change management we'll point you at the recent appearance of A.G. Lafley on Charlie Rose. IOHO this ought to be required listening in every MBA program and executive suite in the country. As well as by every analyst mistaking this quarter for infinity and beyond. Another interesting exercise is look over the recently published list of the Fortune 1000 and see who ranks where by revenue, profit and return. You'll have to do some eyeball work as the story behind the ranking won't just jump out but a couple of themes emerge. One of course is energy and hot commodities. Another is folks who've been franchises and moats, e.g. WMT and MSFT, who continue to enjoy the fruits of the legacy for now. But you'll also find some of our exemplars moving up those ranks as well. The other thing you'll notice is that ten years it was all about "technology" per se. Now it's about changing the way you do business, bring products to market and is beginning to appear across leaders in all industries.

There's a lot of confusion about innovation, especially as distinct from invention and raw R&D. We define Innovation as the ability to create new products, services and business models that deliver value to the customer profitably. And sustain that over a period of time. Enterprises that can do this are rare but they are the ones who'll do more than merely prosper in the coming storms. And notice some of the subtleties. Innovation is not number of patents, % of revenue spent on R&D or any of those similar metrics. Heck, by those measurements Ford is an innovative company. But what has it to show for it ? Or the Auto Industry in general.

We were happy to hear Mr. Lafley not only has a similar view but is very eloquent both on how hard it is and how important. But also on how becoming an innovative company requires a fundamental change in every aspect of the company. In other words this is NOT about what happens in the lab but the ability to look at the market, develop new products, make them and then delivery them. And then repeat.

After the break we'll share some of the conceptual framework we've developed over the last several years for what's required, what the typical problems are and what an integrated approach to innovation should look like. At the end of the day this matters to investors, stakeholders, employees and any other related party because the closer a company gets to these "Should-Be" ideals the more likely it'll be on the list in another ten years, or 20...or 30 or....well you pick your horizon. One warning note - right now US companies have something of an advantage in this business "software" but our friends in China, India and elsewhere know that and are taking steps to improve their own capabilities. 

Continue reading "Sailing Into the Storm: From Execution to Innovation" »

Posted by dblwyo at 03:56 PM | Permalink | Comments (0)

We're continuing yesterday's thoughts on Business Performance with some sad stories and some happier stories as well as some readings on thinking about performance and how to improve it in both the short and long-terms. The sad fact is that almost all of the companies who are in trouble, much of it life-threatening, got there thru their own internal machinations, by loosing sight of the customer, failing to execute crisply and not planning for the future.

The sadder fact is that, as the first excerpt shows, that this is not just about under-estimated earnings and downturns. Many of the mediocraties will have to deal with that and many good companies will as well. But many of the poor performers who have been able to get by on leveraged funny money are facing a rising tidal wave of bankruptcy. And the much sadder fact is that the world is changing around them and they are not only not prepared to adopt and adapt. They won't have the resources of money, skills or leadership. But that's not the saddest fact. No, the saddest fact, aside from much of this being self-inflicted, is that there are ways to address and fix these fundamental breakdowns. If they have the time, money and guts. And we're not just making that up as some of the good stories prove.

The chart perfectly captures what can and  needs to be done. It shows the evolution of Olympic High Jumping thru four major "industry" innovations in fundamentals along with the on-going improvements along the new innovation paths:Innovation + Strategy + Execution = Performance. BtW if you'd like to see the whole pitch on strategic thinking here's the dloadable file.

Continue reading "Business Performance III(Readings): Sad Stories, Good Stories & "Fixes"" »

Posted by dblwyo at 09:48 AM | Permalink | Comments (0)

We've seen some really interesting gyrations in earnings reports so far but we'll remind you that it's early days yet. Not just for this quarter but if/when the economy continues to weaken earnings will too. A lot more severely than analysts are currently anticipating due to inherent weaknesses in the process that we and others see (Readings (Earnings): The Real Earnings Realities that Ain't...YET). Now our mantra  here is  Economy/Industry/Company/Job  meaning that you need to understand the general economic situation,  the impact on an industry as well as that industry's  innate characteristics and where  a particular company  fits, or not, in that big picture.  By and large  these factors are the climate and weather of doing business. Where a company performs or not in the circumstances  it is given though is  up  to it.  And performance  really....really matters, as the collection of readings excerpts shows.  Earlier we put  up a post (Performance Assessment Basics: Five Fundamental Factors) on a  way of thinking about and analyzing the  key factors that will determine  performance and earnings.  That  was probably  a tad abstract, not to  mention business wonkish,but it nonetheless was and is the things  that tell you how the whole  enterprise will perform. Here  we're  going to flesh out the abstractions with some flesh, bone and, especially, blood.

But first consider the summary performance charts which are slightly updated. We've been tracking various headline performers for some time and watched them evolve from category to category. Some of the stories are encouraging and some are sad and some are much worse than that. If you're a bit of a baseball fan consider the non-business examples of the A's, NYY and Sox as well as the Red Raiders of Texas Tech. Purely as an illustration of course with no implied comments as to the merits of any particular team (please no hatemail or bombs).

Continue reading "Business Performance II (Readings): Performance, Pain and Prospects" »

Posted by dblwyo at 06:56 AM | Permalink | Comments (0)

We'd thought to put up the next readings collections focused on traditional businesses but with INTC's results and GE's from last week, along with the resulting market gyrations, it seemed like a good idea to set that up with a deeper dive into evaluating business performance beyond the headlines. And trying to couple that with some observations on market behavior and investing.

The bottomlines are that GE is actually doing much better than its' hammering, deserved in the short-term but a buying opportunity in the long. INTC is also doing some wonderful things, though not as outstanding as the headlines, and both are long-term investment opportunities. And for largely similar reasons. Both have undergone massive transformations over the last several years, both have broadened and modernized their product portfolios to match the 21st C and both are running very tight, forward-looking but current-controlled enterprises. We'll pick on each one a little more detail in a follow-on post but we need some machinery first. 

We've talked before about our approach and Warren Buffett's to understanding a business, and it might be worthwhile to review that (Masterclass: Buffett on Investing and Business Analysis), but two guidelines Warren came out with that motivate this whole exercise. Understand the business you're investing in - what he doesn't mention is that he spent decades at it, not just sticking to ice cream. And focus - if you're going down this path focus on 7-10 investments but constantly track and monitor a pool of selected targets of 20-30. GE and INTC are perfect examples because, among other reasons, if you get familiar with them you get a baseline for understanding a broad swath of industries. And when Warren says understand a business he means this kind of in-depth investigation.

Understanding the business means digging into five major factors and their relationships with each other and the company as whole, laid out in the graphic and discussed in detail below. If you'd like some more discussion keep on....

Continue reading "Performance Assessment Basics: Five Fundamental Factors" »

Posted by dblwyo at 11:25 AM | Permalink | Comments (0)

Earlier we put up a readfest (WRFest 23FEb08(Business Strategy): What the Future May Hold ?) focused on business strategy, including a view of our strategic concept/context chart. Judging from the performance of the Finance Industry as a whole most of the arguments we made were and will continue to be ignored. But as stakeholders (investor, employees, suppliers, customers) we don't think you. Eveventually and ultimately. Now the WSJ has kindly joined us in our finger-wagging prescience with a fascinating story about strategic awareness really matters. Rather then wait to put up a shorter excerpt we're posting a longer one now. There are many lessons and examples cited here. The question for you becomes - as a stakeholder - do you know where your stake is tonight ?

UPDATE: More credit costs seen weighing on banks, brokers Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.  Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cosall the way up to a whopping $12 billion projected for Citigroup Inc.

The Coming Leveraged Debt Write-Downs

Continue reading "Strategy, Context and Awareness: Sub-prime Lessons" »

Posted by dblwyo at 11:18 AM | Permalink | Comments (0)

Have you ever stopped to really think about what makes a business work ? Obviously it's a central question here but have you really wondered ? Well it's intellectually fascinating - really few things are that complex, with so many moving parts and challenges. A mix of chess, poker and rock climbing because it takes brains, thought, discipline, skills, people judgement and ability to manage stress and risk. More clearly it really...really matters to people where things are going badly or poorly...just ask all those auto workers laid off, the Yhooites about to loose their jobs because of executive short-comings or all those folks in NYC about to suffer even worse. For every millionaire Ibanker laid off there's likely to be hundreds who feel the effects. But it's even more than that - big business has been the engine that's driven our economy and society since the late 19thC. Small businesses create more jobs but the repostitories of big change, for good or ill, or are when innovations are turned into US Steels, the Pennsylvania RR, Ford or GM, GE, Pfeizer, Intel, IBM, Microsoft,..., etc. etc. [If you're interested in exploring this more and understand how much the rise and fall of big business shapes the world around you we HIGHLY recommend two book:Big Business and the Wealth of Nations, Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Science Industries ]. Just as an analyst, investor, employee or other participant you'll learn a lot.

Continue reading "WRFest 23FEb08(Business Strategy): What the Future May Hold ?" »

Posted by dblwyo at 06:03 PM | Permalink | Comments (0)

Following two of our long traditions we're going to a) post several links together rather than sepertately, unlike typical blog practice (a several months tradition now with our Readfests :) ) because these stories are valuable individually but more so IMHO taken all together, as William James puts it. And b) post them en passant during the week (a many (3 ?) weeks old tradition).

As you may have noticed the markets roared ahead today and it was all because of the outstanding Retail Sales numbers, not to mention momentum from yesterday when Buffett's offer to the bond insurers plus GM's earnings surprise got this 2nd Bear Bounce kicked off (and oh yeah, leave us not forget yesterday's look at earnings and the talking heads also: Grading the Takehome: Bottoms, Earnings & Outlooks).Setting the table here was Marketwatch's take on things:U.S. STOCKS RIDE HIGHER ON RETAIL SALES AND STIMULUS; NASDAQ CLOSES UP MORE THAN 2%

Tim Walker over at Hoover's Business started an interesting line of discussion with a post on asking simple questions about apparantly complex problems - btw, the comments are worthwhile, ahem.

Continue reading "Naive Questions: Taking the Next Step" »

Posted by dblwyo at 04:53 PM | Permalink | Comments (0)

A constant them here is having to dig into the actual structural nature of an investment, particularly business. On that topic we've put up some posts on approaches, valuations, and Warren Buffett's thinking (btw - if you haven't follow that post to the YouTube videos we repeat it's well worth your time). The question we haven't addressed as yet is how. Which we propose to make a bit of a start on here. Below the line you'll find a listing of web resources that we've found useful. Now these aren't the resources of course that somebody in the business has access to - in fact we rather hope they have much better and deeper ones. Nonetheless there's more and more information sufficient for you get into investment and business analysis. Along with the links we'll also wrap a short explanation of the stepwise process.

As part of the approach let's repeat our fundamental mantra: Economy, Industry, Company. In other words understand how the overall Economy (& therefore Markets are headed), then understand how particular industries will play in this context. And finally how particular companies will play. Now Warren is found of saying he pays no attention to big picture, macro stuff which is all well and good, especially when you've got his resources and timeframe. But the mantra is not just top-down, as it might appear. One could as readily start on the other end by finding interesting companies, however you do it, and then understanding their bigger picture context. So the mantra works both topdown and bottom-up. 

So below the line please find our suggested links, resources and (implicit) approach to business analysis. We hope you find it useful and productive. 

Continue reading "Earnings, Valuations & Business Analysis (II): Resources and Approaches" »

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