bizzXceleration: Performance, Value and Profit

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)

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)

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)

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)

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

WMT's Turnaround: the Strategic Context

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

Strategic Focus, Execution and Control

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

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

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

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

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

Retail Stocks vs the Economy Outlook

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

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

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

Home Depot's Strategic Reaction

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

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

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

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

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

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

The prior post (LT Business Cycle De-construction: Time to Pay the Piper), which we've left up for your browsing pleasure for a bit to let it really sink in, covered the long-term structural and secular trends in the economy as well as the current cyclic outlook. To re-iterate we think we're crossing a "tipping point" where a normal cyclic downturn is beginning, or has begun as a matter of fact. And that we'll see increasing economic weakness in the months ahead. A good bellweather of this is retail sales and retailers performance, which is what we'll focus on here. And take the opportunity to correct an early data manipulation error we made.

Real Retail Sales Re-visited

If you look at the accompanying chart it contrasts real retail sales in the updated, or revised, version verses the old one. In both cases we tried to estimate real retail sales ex-gasoline, which requires an estimate of real gasoline station sales which is NOT available. We found the "scissors-blade" where real sales dropped and gas sales rose to be extraordinarily surprising. Some of that surprise remains but the new data isn't as anomalous. Nonetheless the fundamental result remains. Originally the overal CPI was used but this time we found a specific, or at least more specific CPI, index to apply. Now Gas sales follow a more rational pattern but are still absorbing a lot of the consumers budget. In any case there's been a severe drop in real gas sales. And overall real sales turned down in the Fall and negative around Jan08. Last month it was down ~ 2% ! And gas is dropping like a rock. That's as good an indicator of "look out below" for Consumer Discretionary and Staples stocks as anything we've seen. As well as an indicator, at least IOHO, that a recession began during the holidays and is accelerating. From the general economic situation to real retail sales takes us from 500K to 100K feet of analytical altitude. Let's drop lower.

Retail Stock Performance

 The next graphic is a Yahoo Finance tracking portfolio of key Retailer stocks which tells us whether or not that outlook is reflected in the market veiws. After the break you'll find a decent-sized collection of stories on earnings and outlooks which would strongly suggest that it does NOT. The other thing we'd suggest looking at is not just the daily changes, which are interesting for very short-term sentiment, but where those stocks sit in relation to their 50-day MA's and highs and lows for the year. TGT for example is above its' 50da and significantly below the year high while WMT, on the strength of its' relative performance (entirely earned IOHO again) is barely below it's high. LOW's is doing well and HD surprisingly so. Yet if our economic analysis is correct there are going to be some unpleasant surprises in store for all of these companies and their investors. The trick will be to sort thru them and find the good performers. Which in many cases means those who have re-thought their operations, strategies and execution. As WMT did and as HD is beginning to do, very well, when you dig into it. On the whole, however, we don't see that a reasonable view of the economic future is reflected in these prices. So if that takes us from 100K to 10K feet of altitude the next step is to get down as close to the ground as we can manage. Which requires examining each retailer in some detail - which is for some other time. Sears on the other hand has seen the penalities of substituting financial engineering for operational acument come full circle. Now that's a stock we'd steer well clear of for a long time to come !

Down on the Ground: Home Depot Example

But we can throw up one example in quick summary form. This next graphic is a composite from HD's last annual analyst presentation in which they outlined how they see the world, what they're doing about it and where they intend to go. Judging the whole (which you can collect from their web site btw) their grasp on the Housing market is enormously more realistic, the realize where they're broke and where they need to fix things and have a very good grasp on some key details, strategic initiatives and operational execution requirements. In other words we're very impressed, though now we all will see whether the charts are translated into store-level realities across the system. 

This chart is a composite drawn from the CEO and CFO's presentations and shows, starting in the UL corner  and moving clockwise, their outlook for Housing, and then their monumental re-think in how they invest their monies. Which represents as good a translation of business strategies and operational changes into financial strategies as we've seen. A major cultural change for HD in particular and American businesses in general. Think of it as a major indicator of sound corporate business practice. Followed then by store-level metrics that derive from their strategic and operational re-thinks but are translated into financial metrics. And finally overall strategic control metrics for major operating areas (and therefore initiatives).

The one metric we'd question is matching capital spending to depreciation. While financially sensible in the short-run, and likely dictated by conditions, this would be a time to invest judiciously in training, hiring, technology, logistics and all the other areas we outlined as strategic requirements. BtW - if you compare to our earlier assessment they hold up very well indeed (Six Steps to Prosperity: HD Initiatives to Consider,Performance Re-visited: Another Trip to HD's Woodshed). And compared to last summer have made a huge turn-around in their worldviews, which is vital.

The jury is of course out. And a huge amount of pain lies ahead because of the next two years of Housing problems as well as the general economic situation. Nonetheless keep your eye on HD ! And also think of this whole process as a way to approach business investment and performance analysis by linking top-down economic to bottom-up business analysis. In other words think of it as a model for the kind of analysis that Warren would be proud to see you do. 

Continue reading "From 500K to 5K Feet: Retail Sales to Retailer Performances" »

Posted by dblwyo at 01:44 PM | Permalink | Comments (0)

Well we seem to be running with a theme, the "BAD", in all its' many guises this time around. So we'll continue it as we shift to discussing our first love business performance. Which, at the end of the day, is all about earnings, which in turn is about growth and profitability. Contrary to the headlines even the companies that reported decent earnings this last time around also reduced their outlooks. And it's not just the Finance Industry either, whom we've been beating up right and left along with everybody else, and deservedly so. Or the Auto Industry, whom we'll get in due course. In this post we'd like to concentrate on Consumer and Industrial companies and after the break you'll find Categories on Earnings plus Consumer (TGT, MickeyD's, CostCo, SHLD, and Sony) and Industrial (UPRR, GE, UTX, Boeing, and CAT). None of whom were particularly sanguine though UPRR was perhaps the most optimistic of the lot, with the major rails having re-discovered pricing power. But even CAT flew a few small warning flags.

Profits and Earnings

Just to put it all in perspective let's borrow a couple of charts from Northern Trust's econ team. You need to take a careful think of this chart and maybe even click on thru to the NT review it comes from. What they have to say though is this, "Are we in a recession or are we not? The debate goes on. Take a look at the year-over-year change in operating profits of the S&P 500 corporations (see Chart 1). Profits have declined for three consecutive quarters through the first quarter of this year". Operating earnings back to '90 are about as bad as they've been and it turns out after-tax profits in the Tech Bust and now are the biggest hits going back to '65. Couple that with the last two econ outlook posts and we'd have to say there are still a bunch of wild-eyed optimists on Wall St. Just domestically we expect the pressures to continue to mount but for everybody looking for the foreign uplift - well if the world slows and currency conversions are no longer as favorable, what then ? The word that comes to mind is OUCH !

Elements of Performance: UTX and GE as Exemplars

Last year was the first in history where buybacks exceeded profits for the year and the pressures from the Street to continue that practice are on-going. In fact one story is about Bill Ackman's continuing investment plus pressure on Target to do just that. Judging from these charts and the outlook there couldn't be a worse time - unless of course you're strategic goal is to effectively liquidate the enterprise. Otherwise buybacks make sense only when the stock is significantly under-valued on a long-term strategic basis, instead of buying it in the face of further likely declines. (Market Drivers 3 (Buybacks):Investment, Hiring, Nah...Bonus, Bonus, Bonus !)

One of the companies who turned in an outstanding performance however is United Technologies (UTX) who also had a pretty positive outlook across their divisions and worldwide. Though clearly they're exposed to all the domestic and international pressures we've discussed and may either not be anticipating them, or downplaying them. Aside from good products, insightful marketing and positioning and a significant int'l presence across several different industries at the heart and soul of their performance is "operational excellence". Something we've harped on over and over again. Several years ago UTX found their performance lagging and instituted a major corporate renewal strategy designed to develop, deploy and implement an integrated "operating system". They've been demonstratively successful and, IOHO, could serve as the poster child for the kind of integrated enterprise management system that couples strategy with execution and functions to the overall enterprise. They call their approach ACE for Achieving Competitive Excellence and this composite tells you, reading clockwise from the upper left, what the strategic components are, shows an example of the kind operational detail involved, charts the current deployment status (telling us how far they've got to go and how much sustained effort is required to do this right) and what the impacts have been on measurable performance. A poster child, we're telling you.

On the other hand let's consider GE which continues to get beat up for lackluster stock performance. Largely on the grounds that it's too big, unwieldy and a conglomerate no one understands. One of the reasons we dug into UTX is that it's also a major multi-industry conglomerate who's managed to do pretty well, which should knock most of that particularly argument on it's head. That the analysts can't figure it out is sad given what they're paid to learn it. And we will admit, and have said, that hanging on to NBCU still doesn't make sense within a corporate framework of industrial + finance focus. We'll further admit that GE's failure to look ahead adequately at the economic trends got 'em into serious trouble quarter before last. Nonetheless their challenges have been a couple of orders more daunting than UTX's, and not just because of the size differences. For one thing Immelt inherited much too high a stock price and PE based on the bubble and Welsh effects. For another Jack left a lot of unraveling for Jeff to do in the first several years. Divisions that should have never been acquired or kept needed to be replaced with those more focused on key strategic trends. And GE has done a great job of completely re-vamping and re-positioning itself for those future trends as well as continuing to run tight ship. If you check out the accompanying chart you'll get a sense for what the strategic trends it sees are, how it's re-positioning and how it goes about executing. IOHO Immelt has positioned GE for the way the world's going to look for the next several decades and done so well with speed, force and style. On top of which people also need to understand that much of their financial activities are synergistic complements to the various vertical businesses. By combining a deep understanding of it's customer's business with it's own industry expertise with deep financing pockets it creates a unique competitive advantage. 

So as you skim over the excerpts and contemplate your own situation and investment plans you might keep all these factors in mind. With reference to these models if you like (Performance Assessment Basics: Five Fundamental Factors,Masterclass: Buffett on Investing and Business Analysis).

Continue reading "Bad Times, Bad Earnings, Bad Outlook: Consumer and Industrial Performance" »

Posted by dblwyo at 01:13 PM | Permalink | Comments (0)

Continue reading "AutoFutures: Re-Thinking the Car Business, or NOT ?" »

Posted by dblwyo at 09:28 AM | Permalink | Comments (0)

Taken a flight recently ? Noticed that over-crowding and under-servicing continue to be the order of the day ? That the staff and crews tend to look a little frazzled ? Where it's no big surprise - or shouldn't be. If there's any industry in worse shape than US Auto Manufacturers it's the US Airline Industry. What they do share is some fundamental breakages in strategies, business models and difficulties in facing realities sufficient to change. We've made the comparison before for both industries to the Steel Industry, which is now in the midst of a worldwide revival. And it's not like any of this couldn't have been seen, and probably was, coming. Warren Buffett kids that he's been a member in good standing of AA - Airline Anonymous - for decades. Any time he's tempted to invest he calls them and they talk him out of it. As Warren repeatedly points out the Airlines haven't made their cost-of-capital in decades, even including the days before regulation. Just to put things in perspective here's a little 2+ year industry index chart - notice the ratio between the SPX and XAL - not pretty is it ?

The airlines face some fundamental structural problems which they're still not facing. We think the primary one is the economics of the Hub-n-Spoke route structure. Now we say that, and have been saying it for a while. In fact it's particularly gratifying that in the last few weeks that particularly meme has been picked up by several MSM reporters. Just to give you a mental picture we've put up an abstract graphic of the typical mainstream US carrier route structure. You can, if you like, impose a mental map of the US around the network structure. And it's certainly not all-inclusive but you get the point. What the airlines set out to do was provide coverage and access from any city in the US to any other city and they priced their tickets from end-to-end on the network. Here's the rub - actually here's the two rubs.

First you end up with a lot of excess or under-utilized capacity on many legs of the network but because you price it end-to-end against what you see as the competition you also end up charging just marginal costs on those last branch connections instead of total fully loaded costs. This works as long as the overall network load factors, that is capacity utilization, is high enough and you charge enough to make money on the network as a whole. Second for any given link in the network Total Cost = Fuel + Labor + Aircraft + Overhead. And strangely enough a lot of fuel gets burned in takeoffs, climbouts, taxi and landings. In other words an airline flying a lot of short hops has trouble making money because it's burning fuel prodigiously. Any airline has trouble making money on those legs where the load factors result in fewer passengers at lower prices than the total cost for that leg. Yet finding yourself in that position is almost required by the operating logic of the network.

Here's the final three challenges. 1) In effect the high usage main routes which are the backbone of the system subsidize the rest of the links. 2) The network is vulnerable to cherry-picking by a smaller airline that doesn't build a network but instead comes in with equipment and flight frequencies tailored to the demand on a particular city pair (stop me when the words People Express, Southwest, TransAir or JetBlue occur to you). 3) The industry operates on the romance of its' version of the greater fool theory. There's always some fool that thinks airlines are neat and is willing to put up the capital to start trying to build a new cherry-picker. Who knows what the exact figures are but for the sake of discussion let's say that the Industry is somewhere, despite all the plane retirements, equipment down-sizing, etc. etc., between 10-30% over-capacity.

The fundamental fix - only fly routes where you can make money with the equipment, strategy and business model you've got. Translation - downsize considerably, give up flying all connection and leave it to local/regionals who can implement that strategy, put direct point-to-point connections in yourself where you can and then, and only then, lay a completely re-designed network on top of it. It's no accident that if you look in your seat pocket the route guides for the majors look like our picture and for LUV look like somebody tossed a set if I-Ching sticks on the map.

On the other side of the House are the world's two dominant aircraft manufacturers where the stories, economics, fundamentals and strategies are very different. We won't go into those in detail here as it's another complex story of Darwinian economics. We will say that if the worldwide slowdown continues their orders books will suffer some. But since they're largely selling outside the US anyway and are over-booked, at least BA is, it almost doesn't matter. Airbus though is in terrible trouble having built a vanity aircraft in the AB380 and gotten caught several steps short by BA with it's Dreamliner. Boeing of course is getting hammered thru typical teething problems for a whole new way of doing business. But the B787 is a major innovation on three fronts: 1) Design (major usage of computer-aided design pioneered and proven on the B777), 2) Construction - emphasis on new engines, composities and modular component assemblage which is working but has some teething troubles. And 3) Supply Chain - where they really pulled out all the stops and are having more troubles than ever anticipated. And slowly working their way thru it. Aircraft manufacturing decisions are 30+ year horizon decisions. BA is going to be around a long....long time. As the world economy continues to globalize, as the US carriers rationalize and demand continues strong they're far better positioned than Airbus. We consider them a major buying opportunity eventually. 

Continue reading "Life and Death in the Air: Carriers, Manufacturers, Realities" »

Posted by dblwyo at 06:11 PM | Permalink | Comments (0)

 Here we continue building, categorizing and summarizing the Business Analysis Toolkit/Dashboards by taking a deeper dive on certain key Industries. In our view to understand how a particular enterprise is going to perform one needs to understand its' context - the environment and ecology in which it lives. On the broadest level that is the geo-political environment - think of it as the equivalent of the climate, weather, terrain and so forth.

Then there are the broad Economic trends and condition which define the ecology within which it must function. A set of challenges which are usually shared by all firms within a particular industry.

And there are always many characteristics common to all firms within an industry. For insiders there will be huge differences in individual companies. Yet, in our experience, firms in a particular industry have more in common than their differences; something they are usually often not willing to admit publicly. Yet something they all recognize and deal with - after all, otherwise there wouldn't be industry conferences would there ? Years ago I got involved with the periphery of IBM's efforts to establish a common reference framework for all its' manufacturing operations. This took years of heavy investment in the large teams. And one of the biggest barriers they faced was the argument of every division and every plant that they were different. Yet, despite stubborn opposition, the central team managed to hammer out a common, shared process model of the general manufacturing enterprise. A model which we then proceeded to test across many other manufacturing industries and sectors. We mirrored and replicated that experience across many other industries as well including Retail, Distribution, Transportation, Finance and Healthcare.

What we found was that there was/is/will be a commonality of approximately 80% in processes across an industry. And that the differences usually lay, or should lay, at the detail level. Yet at the same time those processes were vastly different in name, structure, organization, staffing, etc. So one can't blindly impose the common framework on each firm. Rather the common framework provides a template or blueprint to use as a starting point for analysis, customization and configuration.

It also and most importantly provided a blueprint of things that should be being done even when they weren't. And that was the most telling finding of all. In fact what we found was that there were a lot of innovative ideas that carried, at least potentially, across industries. And offered major new sources of innovation and advantage. Just as one example the Airline industry built its' business models around a process called "Yield Management" - getting the last marginal dollar possible for the last marginal seat. Well a manufacturer couldn't implement Yield Management the same way that an airline could because the products were so different. But the underlying enabling processes required of market analysis, demand forecasting, adaptive pricing and customizing product mix and availability to narrower markets did apply. Ditto for retailers.

So when we analyze industries in our posts this is the underlying approach that's built into our discussions.

1) Industries share a common set of problems and challenges.

2) Industries share a common framework or blueprint that defines the collective best practices and "to-be" vision of the things they should be doing.

3) That common baseline can be used to evaluate the industry as a whole and individual players within the industry. Further elements of that baseline are "sharable" across industries; or can at least be used to analyze opportunities and risks.

4) The industry also shares a common ecology in terms of industry structure and dynamics that defines the shared environment different firms must compete in.

5) The ideal enterprise and the industry ecology are dynamic, constantly evolving and are inter-dependent.

6) By understanding the current and evolving status and characteristics of the enterprise and the industry one can anticipate many of the pressures, opportunities and future paths of both an industry and a particular firm.

We'll have to see how that holds up as time goes on but in the tables after the break we've listed and commented on the prior posts on several key industries. Hopefully this serves a couple of purposes. First, if you're interested in tracking down some ways of analyzing a particular industry this should make it easier. Second it's a catalog of industry analysis tools, approaches, readings and other resources. We hope you find it useful and valuable.

Below you'll find the pointers to the prior posts on Airlines, Autos, Retail, Oil/Energy and Finance Industries. We will point out that the headlines this week and last are strangely congruent with the discussions and guesstimations in these prios however. In other words, not to put to fine a point on it, the analysis seems to be holding up reasonably well so far. Which may argue that there's something to the approach, perhaps ?

Continue reading "Key Postings V: Industry Analysis - Enterprise, Industry Ecology, Evolution" »

Posted by dblwyo at 05:49 AM | Permalink | Comments (0)

Well the timing wasn't entirely intentional but putting up an assessment of the Retail Industry when all of yesterday's headlines were about surprising same-store sales upticks might have had a bit of cognitive dissonance. Maybe with today's terrible employment report the barriers will be lower. But our focus is really on longer term structural and secular trends as well as shorter-term cyclical and quarterly performance. As the headline not quite says "the more things change the more they remain the same". Or in American when things are like this bend over and kiss it goodbye.

What do we mean by that ? Well our mantra is context and performance, otherwise put as Economy-Industry-Company. Like a sailor dealing with the climate and the weather a retailer has about as little control over the externals but the same challenges in not just surviving but getting something constructive done. And right now the weather is worsening, rather badly. The chart shows quarterly YoY changes in real and nominal retail sales going back to '92 on top and monthlies going back to Jan01 on bottom. In either notice the winds picking up and the waves starting to build. And we're just started IOHO...which we've gone over before in our economic assessments.

How it's handled depends on how good a boat you've got and how good a sailor you are. In other words what's your strategy and business model, are you executing on that model, do you have the right people and leadership and are the latter taking care of, appropriately, the former. We can illustrate those questions by abusing an earlier graphic on all the things a retailer needs to do make themselves effective and efficient. Here what we're showing are all the functions/processes required to run daily, plan and schedule tactically and make product, market and related decisions strategically. It's intended as a blueprint or checklist for building and running a good retail "boat". As you go over the reading excerpts consider it a litmus filter and ask yourself what you think each says about the model and real-world issues.

The readings talk about long-running evolution in the Strategic context as economic pressures, et.al. cause customers to change and as the bad performers sort themselves out thru Darwinian processes; i.e. they die, get bought or otherwise change. Then there's a collection of stories about key players which highlight these fundamental points. If there's a theme that occurs to us it's that those retailers who's models and execution are suitable for the times are doing o.k. and conversely. And some folks have changed, some really need to and some are going to be roadkill. A really illustrative contrast is between WMT and TGT - actually two of the best-run businesses anywhere. WMT lost sight of its' own nature but has been going to RA - retailers anonymous - successfully. Target has the misfortune that it's model was brilliant in a different context and will be again. Contrast that though on the other side with Sears (SHLD) which was the supposed poster child of the "new" Warren Buffett and has now shown what substituting financial engineering and a supposed book value salvation based on real estate that nobody's going to want can do for you when you completely ignore these principles. Most of the rest of the stories should be read in similar lights.

Bon Appetit' to you et Bonne Chance to the players, eh ? 

Continue reading "Retail Industry: Plus Ca Change...or Bend Over and Kiss..." »

Posted by dblwyo at 09:36 AM | Permalink | Comments (0)

It's time to pick up the thread of our readings on the future of the Oil Industry and extend it to a structural picture of the future. Within our limits of course. The prior post provided a sampling of readings as well as a strategic summary (). Here we'd like to tunnel into the big picture and little bit and take a look at price trends, energy demand patterns and long-term supply-demand balances. Or as the case is...supply-demand imbalances. Let's start with the following chart on long-term prices and S/D trends.

In some ways no big surprises, at least until you look fairly closely. The top sub-chart shows annual growth rates in world supply, demand and the balance along with trends for the former. The bottom sub-chart shows oil prices, real oil prices and YoY% changes in real prices since '64. A couple of "small" surprises. While we did our own calculations of real prices, so they're at odds with the official ones, our guesstimate is that they are as high as they've ever been and climbing. The surplus of S>D has shrunk abruptly but the rate of growth in Demand has now shrunk below that of Supply ! If that were the long-term trend we'd be pretty happy. That reinforces many of the arguments we made.

After the break we look at the bigger picture strategic issues but here's the bottomline, again. Oil is economically and affordably available but is increasingly controlled by non-market decision-making. And we are increasingly hostage to that decision-making almost entirely thru our own choices. Until we have a major national commitment to a national energy policy that is pragmatic, workable and realistic these trends will continue. And will likely accelerate. And you should note that this is NOT something foisted off on us. Who owns an SUV ? What's the H.P. in your car ? We choose to pay bottom-dollar for gas in the last several decades instead of pursuing alternatives. No the vultures are coming home to roost. 

Continue reading "Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions" »

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

Needless to say oil prices are occupying everybody's mind right now - particularly since you can't go down the street without seeing $4/gal gasoline prices. Congress is holding hearings to chastise the speculative excesses with "inside baseball" players using the correlation is causation argument to prove widespread evil-doing. My favorite bloggers (BigPicture, CalculatedRisk) and financial writers (Jubak, Mauldin) have all put together excellent summaries recently that are worth reviewing. And of course the MSM (WSJ, NYT, et.al.) is covering the issue extensively. So here's our collection which we've been putting together for a couple of weeks now, and for which the time seems ripe.

The basic argument, which we plan in expanding into an analysis in a follow-on Part II, is the fight between fundamentals and speculators. As you skim over the readings below you'll find a wide sampling of sources and informed opinions but here's our take. Of the ~ $150 price/barrel target price the long-term fundamental price is in the $80-100 range. Another big chunk of that target is caught up with geo-political risk factors. And a third with speculative feedback on short-turn prices. Let's say that the proportions are roughly 60% fundamental, 20% risk and 20% speculation.

Except for one thing. The basic structure of the oil industry is that the major cost drivers are exploration and production; then distribution and processing (refining). As oil has gotten more scarce in inexpensive and readily (politically) accessible areas of the world there are non-linear rising costs to the two fundamental drivers. That's lead to a fundamental and long-term supply-demand imbalance as new oil production hasn't been keeping up with new oil demand and consumption. A partial result of that long-term dynamic of skating on the margin is that the system has been and is increasingly vulnerable to shocks as its' fragilities grow.

That's been the basic dynamic for at least three decades only it's gotten much more pronounced in this century. HOWEVER....there is another fundamental shift well underway that is greatly exacerbating all these innate structural characteristics.

Not only are new oil sources in increasingly hard to get to areas but the bulk of the world's known and potential reserves are no longer market priced nor controlled by private companies. Rather they are controlled by national oil companies or other political entities. Who's priorities are NOT long-run profit maximization.

Worse yet for those reserves controlled by political entities they are milking existing reserves to fund socio-political priorities and significantly under-investing in maintaining current flows while not developing new ones.

There are two bottomlines here:

1) oil is likely available but is getting increasingly scarce at prices we're comfortable with; i.e. the $80-100 baseline structural price, which shifted up from $40-50 in the last ten years, is likely go toward $150+. 20% X $150 = $60. 2 X $60 = $120. $150 + $120 ==> ~ $300 oil !

2) because oil is depletable and demand is growing there is a long-term scarcity premium that's being increasingly reflected in the base (cf. Prof. Hamilton's discussions below). In other words there is a rising scarcity rent being built into l.t. prices that's feeding speculation.

So below you'll find readings on the short-term and long-term pricing factors as well as the impacts on gas prices and the survivabilities of the refiners, or refining operations. You'll also find some fundamental re-thinking about the future prospects of Big Oil as we know. Which is pretty good though it generally doesn't reflect these deep structural changes evolving in the fundamentals of the industry....yet....other than by symptom.

The next steps of course are diagnosis and treatment....otherwise known as a National Energy Plan. Yeah, right. 

Continue reading "Oil Industry I (Readings): Prices, Fundamentals, and Big Oil Futures" »

Posted by dblwyo at 10:47 AM | Permalink | Comments (0)

Unless we happen to be involved or know someone we generally take Retail for granted but it's a sector that is at the bleeding edge of the economic pain this cycle, with real retail sales down -2%. Worse there are major structural shifts that have been building for years. In an earlier WReadfest we provided another excerpt collection but also provided our framework for what a high-performance retailer ought to look like. (WRFest 2Mar08(Business): Paper, Auto and Retail News) There are going to be a lot of retailers in serious trouble this downturn even if it's as mild as the optimists think, partly because of those structural changes but also because of major performance problems.

Years ago the Grocery Industry, one of the most challenging retail environments because of the wide mix of products with exacting requirements, was enormously worried about WMT's entry into the business. So they started a massive effort called Efficient Consumer Response (ECR) to re-think how the industry was run. And they delivered one of the biggest multi-company and multi-organization collections of superb advice working the world's best consultants. It's a magnificent encyclopedia of how to run both an individual retailer and a retail value chain covering everything from Product Mangement to Store Operations to Replenishment and Logistics to Sales and Forecasting. [Fair Disclosure: I ran the Replenishment Team].

Well almost none of the reccomendations were put into practice, WMT, Sam's, Costco and Target are now major grocery retailers and the industry saw a huge re-structuring and down-sizing. But if you wonder why the variety, freshness, service and innovation of your local grocery store has gone up a couple of orders of magnitude in the last ten years the survivors did make those changes. At least some of them. Now the entire Retail Sector is facing similar challenges.

Stores have been over-built (Dept. stores in general, HD, WMT, Starbucks), service has deteriorated, supply costs are rising rapidly and general store efficiency and effectiveness leaves a lot to be desired. One chain who did re-think itself from the ground up in the late '90s was Penney's which is now facing a lot of trouble but should be able to deal with, albeit painfully. Another was Target, which was always known as high-service and high-innovation but also re-thought itself to focus on customer value. One of my favorite retailers in the whole world is Tesco's, the British grocery chain, which continues to improve, gain share, go abroad and has introduced a new approach that it's testing in SoCal. For the record I have several favorites but Zara's and Trader Joe's are high on the list. We'll leave it to you to guess why - hint...it has something to do with our model of a well-run enterprise and retailing exemplar. A good really bad example, aside from Circuit City which has blown off both its' own feet at the knee, is Macy's. Which has consolidated a lot of older and famous chains and proceeded to homogenize them into meaninglessness. Now they've suddenly discovered that discombobulated mass ain't the answer and are struggling to create the operational infrastructure to localize their product and services to particular geographies and localities. That kind of operational capability is complex, difficult, requires high skills and good people btw.

That's the same struggle that WMT is facing and not doing well on and Sears, my poster child for how to really screw up a retailer by substituting financial engineering for operational savvy and strategic adaptation. The thing that makes Tesco and Zara's so powerful and profitable is that they've created a flexible operating infrastructure that allows them to have a modular set of processes that are customizable to local conditions. And they run with tight discipline. So as you read over the following stories on Chinese retailing, Penny's, Macy's and Tesco bear all that in mind. And if you're thinking about the industry in any way...well maybe you've got a start on a blueprint for evaluation ? 

UPDATE: Mickey Drexler on retailing, service, corporate culture, accounting over customer focus and other topics. IOHO a must read for anybody interested in what a good retailer ought to be doing. A Charlier Rose interview. 

Continue reading "WRFest 20Apr08(Retail): Shocks, Performance and Localization" »

Posted by dblwyo at 09:18 AM | Permalink | Comments (0)

The alternate title was "Waiting for Armageddon" which happens to be the title of the Economist article looking at what increasing economic pressures will do to corporate performances and bankruptcies. Bear in mind that we're early days yet in the Business Cycle for the downturn and despite all the agita in the credit markets and financials the ripples haven't yet shown up in general business performance. But they will. And given the massive buybacks, re-leveraged balance sheets, and general lack of performance disciplines you can expect, shall we say, some distressed or under-valued buying opportunities. In fact we're not the only ones who see that. The same people who six months ago were sending me invites to new ways to find funny money just sent me their 3rd or 4th on distressed investing:

P.E. Investing in Distressed Companies MasterClass We figure that at any given moment, 5% to 10% of all middle-market companies in North America are either in distress or are significantly underperforming.  Every week we see 5 or 10 of them, and we turn most away.   Over the next 18 months, in this volatile market, we know it’s going to be hard work to make good decisions -- about choosing good companies, recruiting the right management teams, and actually fixing the companies we buy.  Making the right choices will mean the difference between earning just plain decent returns and really great returns.  These observations highlight two thoughts -- first, it’s obvious there are thousands of distressed investment opportunities we do not see.  And even if we saw everything, there just aren’t enough hours in the day, or dollars in our fund, to handle the avalanche of new situations stemming from the current recession and credit crunch. Second, if you have the skills and experience and resources to consider buying distressed private companies, now is the perfect time to jump in. The door is open, but the ride ain’t free (to quote an aging New Jersey rocker). 

Actually they've got a good idea. The trick in sorting the wheat from the chaff is timing, filtering and tools for understanding. So besides the Economist article we added pointers to earlier posts on the subject. In fact we added pointers to relevent posts where we thought they were appropriate. But as you wrestle with the sturn and drang and start looking around check out the readings which cover Materials (Pulp, Coal), Transportation (Trucking, Airlines), Manufacturing (Boeing - a special case we admit, Autos (Ford)) and Retailing (incuding a reprise of our enterprise framework for reference). As you read these don't just read them strictly for the story but also as indicators for their industries and the broader general business climate that's slowly emerging behind the financial rubble.

There will be opportunities here but there's a lot of pain between there and now. 

Continue reading "WRFest 30Mar08(Business): Days of Reckoning at Hand ! Repent Sinners ?" »

Posted by dblwyo at 04:29 PM | Permalink | Comments (0)

Somehow or another all the business news is either finance or technology news these days. I'm sure that's not true but that's the net effect give my readings. The huge wave of finance industry news is, under the circumstances, not a surprise and we covered it yesterday. It's worth bearing in mind that the Industry was a whole appears to a) be as badly broken thru its' own self-inflicted wounds compounding and b) as the credit markets go thru an extensive de-leveraging process that the industry will be badly shaken up and re-structured. And perhaps c) we may have a long way to go.

The first two stories below are on Chrysler and Pfizer - both of which industries have backed themselves into similar corners. The Auto industry by getting stuck in its' own rigidities and denying the need for change for 3+ decades. As we've mentioned the core of the Pharma industry is their R&D activities and, very unfortunately for them, their core business model of chemistry-based drug development is broken by exhaustion. And the nextgen replacement (bio-chemical/biological) is not a near- or intermediate-term potential (though depending your horizon you should be lookin at systems biology and what's going on with "synthetic" life). Whic leaves us a bunch of Tech industry stories. Which in turn are stories about escalating pressures for cost control and change, companies failing to innovate and some succeeding.

In the latter class are Apple and TIVO both of whom have focused on defining and delivering value. Preceeding them is a story about one MS fantasy about Yahoo - that it'll help take them into the on-line software arena by combining Yhoo's on-line DNA and MS's software development DNA. Excuse me - their core strategic value propositions at which they've been failing miserably for years now ? Yahoo obviously but for those of you not enchanted with Longhorn, excuse me Vista the pitiflul remenants of a grand(iose) vision terribly executed and perhaps flawed in conception (btw do a search on Code Red and MS sometime for an understanding of how badly their supposed core competence in programming failed them). The other side of the coin is HPQ which is well on it's way to re-balanced and re-factoring itself, illustrated by a story on Hurd's moving to the next step by starting in on re-directing their R&D labs toward a stronger commercial focus (a step Gerstner took at IBM back around the mid-90s).

The first two tech-related stories are more general interest tech stories which define the ecology of the industry. One counseling IT departments to start putting pricing pressure on their vendors. The other on the topic of business vs technology alignment. We've all heard the stories about businesses able to change an industry thru the strategic use of technology. The problem is that for 20 years it's generally the same small handful of exemplary firms, e.g. WMT, FDX, Schwab, et.al. What you may not be aware of is that there's a huge gap between the MIS department and the operational business which the industry has been struggling with for decades. And despite the bottom of the "stack" becoming a commodity the top part where business solutions live is as much about magic, mis-communication and 70% failure to deliver rates as it ever has been.

As a friend of mine with almost 40 years in the business said:

La plus ca change, la plus ce meme chose.

Continue reading "WRFest 9Mar08(Business):Auto, Pharma & Tech News" »

Posted by dblwyo at 11:54 AM | Permalink | Comments (0)

We're still plowing thru last week's news in digestible chunks having split our weekly reader not only into Economy, Markets and Business but also split Business into this, the 3rd of 4 sections. Given the volume and importance of the various stories it seemed like a good idea and also allows us to wrap a little framing around them as well. A metaphor that captures the approach is that we try to take both an ecological view and a species specific view and look at the interactions. The Economy defines the longer-term geo-climatological context that everybody has to deal with while the markets capture the shorter- and intermediate-term cycles and behaviors. And the Industry/Company studies (Ganesh Filters III: Analyzing Businesses Blueprints) look at the status and outlook for key species. So far this round we've covered the Finance Industry, which at 30% of the market is important in its' own right but also heavily influences the flow of "energy", directly impacts the behavior of the Traditional and Technology businesses. And we specifcally broke out the LBO industry this round because it's on the cusp of what the industry is beginning to view as a major change in its' environment and what it will take to survive. To continue with the biological metaphor/model the LBO industry has contributed perhaps 20% to the rise in stock prices, perhaps more in the '07 over-trend "bubble" but is now facing a huge structural shift where different characteristics will be favored over agility and financial engineering genes. THERE WILL BE A SHIFT in the population as a result. Which will in turn impact all the other players.

Which sort of leads us to the old-line traditional industries in general and the Paper, Auto and Retail industries in particular. In each of these cases we'll return to a constant theme - what does it take to run a good business - in a new perspective. What are the functions, capabilities and processes required to execute a strategy and deliver value. And since several of the most interesting stories are about Retailers we'll frame the discussion using the chart at right (click to enlage) which shows the a complete, architected Retail enterprise. Hopefully you can imagine similar illustrations can be developed for other industries as well. Given a strategy and business model those must be EXECUTED by daily Operating efficiencies, managed by good Tactical planning and, over-time, adopted & adapted by Strategic changes. In the chart what you see is a complete, representative inventory of these capabilites structured to show, to some extent, how these all related to one another. As you evaluate an investment what you're really asking is how are these processes being performed at each of these three timeframes. And unfortunately the answer is all too often not particularly well.

Continue reading "WRFest 2Mar08(Business): Paper, Auto and Retail News" »

Posted by dblwyo at 04:14 PM | Permalink | Comments (0)

The prior post carved out a bunch of interesting international economic stories though linking them to a general US perspective. As part of broadening our perspectives we ought to consider how business in the world is changing. We've been saying for several years that the re-emergence of China and India back onto the stage of the world economy is really the biggest structural change we've seen since the early 19th C. Back around 1820 or so did you know that they were the two largest economies ? And further that various indicators of per capita income and general health and welfare put them ahead, particularly China, who up until ~ 1830 could have made a case for being perhaps the most successful socio-political system for the longest period of time. Or at least had a heck of a good argument.

Well various folks are giving lip service and now more to that. For example both Jim Rogers and James Fallows have moved to China as have a lot of ex-pats but it's not entirely clear to me that people appreciate how we're evovling toward a multi-polar world - their attention is deficient if you will. Not that most don't know and acknowledge that the BRICS are important but they still think of it as a bi-polar link. WRONG ! In a multi-polar world the other nodes can link with each other. So after the break you'll find some fascinating stories about major business news from China and India - some among many we'll point out. For example did you know that a major reason Lucent, Nortel, Ericsson, et.al. are still struggling despite being in the midst of a new internet-driven telcom equipment buildout is that Huawei the Chinese manufacturing has been increasingly competitive with cheaper products with approximate quality. BtW - telecomm tech and gear is rocket science if you don't think these guys are moving up the value-ladder quickly !

But check out the first excerpt which provides a general perspective. 

Continue reading "WRFest 1Mar08(Int' Business): Multi-Polar Problems vs ADD" »

Posted by dblwyo at 10:00 PM | Permalink | Comments (0)

Literally back in the real world. Despite all the on-going storms and thunder there is a real world out there of real companies not involved in financial engineering; though subject to (victimized by ?) it. Again there was a huge amount of relevent news that's going to impact a lot of things. Below you'll find our selected excerpts with stories from the oil, airline, steel, auto, retail and aircraft manufacturing. They're all interesting but a couple or three are harbingers.

Exxon is getting to the point where it's not replacing its' reserves - partly from increased problems with accessing foreign fields but also because of the increased difficulties in finding new, large fields that are economic. Think about that one for a while.

Meanwhile various mearger frenzies continue including the airline industry (which we waxed on at some structural detail) and continued evolution of the worldwide steel industry, Mittal in particular. The Auto industry just moves from one "challenge" to another. A couple/three interesting stories there as well - from Ghosn's naming it recession to an interesting story on Hyundai's Superbowl Ads to Chrysler's increased off-shoring of engineering and R&D. Now those last two we think are particularly important because they not only represent increased globalization but sophistication in both directions. In fact IOHO the Hyundai ads were the best ones on the Superbowl - not for viewer entertainment but from getting bang for the bucks. Everybody laughed or cringed at the others but  Hyundai's a) served notice that they were seriously in the game and were credible and b) got the biggest response that way from viewers. The next time you're in a parking lot test this yourself - see the Mercedes lined up next to a Bimmer next to a Lexus next and so forth down to a Hyundai. That bridges $120K to $20K but we don't see that much difference in fit and finish let alone features and quality. Hmm...indeed. 

Continue reading "WRFest 25Feb08(Old Line Bizz): Back in the Real World" »

Posted by dblwyo at 05:00 AM | Permalink | Comments (0)

We've ended up splitting our regular news summaries into multiple parts because of the number of valuable stories. Not just splitting Econom, Market and Business but in turn we'll end up splitting business itself into four parts, of which this is the the 2nd. The prior post looked at the strategic context and even provided a graphical chart to conceptualize all the multiple factors that any business must face, in general and specifically at these times.

These particular story excerpts focus on the Finance Industry and build on prior posts on the general conditions in the Economy, Market and, most...most especially, the Credit Markets. The bottom line is that a) the credit markets continue to experience a widening crisis whose end is not in sight. In fact whose details and working out are not at all clear. So, b) we think it's fair to consider that the Finance Industry as a whole is in as severe an emerging crisis as the Housing industry. Without the same level of broad understanding or consensus.

One that will, eventually, force serious re-thinking of the strategies, product offerrings, company structures and operating principles. Yet at the same time, given past history, who's corrective measures will be temporary pallative fixes because the Industry, despite it's vaunted "free-market" principles is in fact dominated by near-term and short-sighted thinking. Which tells us that, as investors, we can look forward to continued downtrends in these firms. And recurring cyclic opportunities to ride up and down with these cycles.

None of which is good long-term news. 

UPDATE: for anybody who thinks the bad news is over we suggest listening to this Bloomberg vidclip of Meredith Whitney's outlook for Cit and the Finance Industry. She expects that Citi will have to start selling it's highest quality assets, upto and including Smith-Barney, to raise capital to offset more writedowns. Her slashing of earnings estimates is startling:

Whitney of Oppenheimer Slashes 2008 Citigroup Forecast: Video

If you can't see the video trying searching the Bloomberg site. Meanwhile here is the associated story: Citigroup May Post First-Quarter Loss, Whitney Says

Continue reading "WRFest 24Feb08(Finance Industry): Troubles Continue to Accumulate" »

Posted by dblwyo at 08:23 AM | Permalink | Comments (0)

There have been three interesting (or more) stories on the rapid airline feeding/merger frenzy that's bubbling up before our eyes as the result of intractably higher fuel costs. Like every other strategic initiative since '00 this one too will NOT fix the underlying problems. Which won't stop the mergers nor prevent the financial community from providing the liquidity ammo necessary to bring it about on the theory that it will. Earlier we'd posted a first pass (Airline Merger Frenzies (I): Deep Cost Structure, Restructuring & Outlook) explaining how the hub-n-spoke network route structure was the deepest underlying factor in airline's lack of profitability and failures, since the end of WW2 btw, to earn their cost-of-capital. Excerpts from the three stories are below but here's an excerpt from a strategic assessment we wrote in '04 both predicting the consolidation and its' likely failure.

Continue reading "Airline Merger Frenzies (II): Network Structure, Costs and Strategic Outlook" »

Posted by dblwyo at 08:58 AM | Permalink | Comments (0)

The airlines have managed to occupy a prominant place in the headlines for several years no, starting with the implosion of their traffic demand post-bust, going thru their painful re-structurings, downsizings and cost cutting and now, their merger frenzies. It's not musch discussed but all of these are surface phenomena based on the nature of their deep cost structures. In fact a discussion of that structure has never come to my attention. In the interests of aiding a broader understanding we're reproducing an e-memo we sent out in the Spring of '03, excerpted immediately below and reproduced on the continuation.

"As Warren Buffet pointed out years ago the airlines have never made their cost of capital and always disguised that fact with the next big recovery in a cyclical business (b.t.w. - I recommend Slywotsky's "Art of Profitability" and the chapter on cyclical businesses to understand how cost structures interact with cycles - there's a chapter on that very topic).

Simple reform of the surface of ticketing etc. won't do it. Also b.t.w. - AMR spent at least $150M I know of trying to get to the next level of the end-to-end travel experience but ran a terrible software project trying to clone Sabre in the early to mid-90s. Rumor has it that the real figure was closer to $300M.

Unless the airlines rethink their basic business model in terms of network design, route cost structure, including labor but exclusively, and their pricing and customer service strategies this nonsense will continue until there's major collapses."

 If you'd like to have a framework and toolkit for analyzing the mergers as a traveler, investor or employee this might be quite helpful. It also serves as decent example of a point we emphasize that investing in an industry is, at least to some extent, "Inside Baseball". That is it really helps to understand how it works and what it's capable of. A point the Sage of Omaha makes as well though you have to dig back into his history to see it. (Masterclass: Buffett on Investing and Business Analysis).

A second version of the memor, from a slightly later date, is available as a dloadable PDF. 

Continue reading "Airline Merger Frenzies (I): Deep Cost Structure, Restructuring & Outlook" »

Posted by dblwyo at 06:52 AM | Permalink | Comments (0)

This is the 2nd half our Readfest on Business news. Rather like the B2C/Tech news what we're seeing is major changes on both the secular fronts and deep structural changes. A friend commented on our little exposition of our framework and its' comparison to Buffett's approach by saying you also needed to look at the bigger picture. Exactly - the point our our mantra on Economy-Industry-Business is to combine those factors into an understanding of the context, the particulars and the consequences. Of which there are an enormous lot.

Continue reading "WRFest 10Feb08(Non-Tech Bizz): More Structural Adjustments" »

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

There was so much news last week we not only split up the normal major sections but split the Business readings into three - Finance Industry, B2C & the Yahoo/MS merger and this one with all the rest. Oddly enough there's quite a bit of serious and interesting "other" business news aside from the continuation of the Finance industry's self-inflicted implosion. Or from the emerging re-structuring of the entire Internet for consumers. And make no mistake - win, loose or draw MS's offer for Yahoo will trigger off a lot of changes. Ones that are going to ripple for a long, long time. Think of this the same way that the maturation of the software industry and the resulting acquisition frenzy set back after the Telecom/Internet bust set in. This is a SEE-change. But not the only one.

Below you'll find another bunch of readings that are equally impactful. An excellent WSJ interview with Carlos Ghosn who says what everybody's thinking about the death of Detroit. He's pretty blunt about it too. Not quite on the same level Eddie Lampert has finally admitted that running a hedge fund doesn't qualify him to re-engineer an old-line retailer and so he's going to flail in another direction. Meanwhile the Tech industries are facing, as we warned, slowing spending and continuing momentus changes of their own. Chipmakers for example are having to deal with a major new chip layout changeover which will take years, cost many $Bs and almost bankrupted the major players last time. MOT, the original icon of mobile communications, is talking about spinning off it's cell phone business - rather sad. The Telecomm wars continue with Comcast facing serious challenges as well (and judging by my weekend experience's with HDTV quality and audio bandwidth they're very serious). Finally there's an article about how good Pharma is likely to have it in '08, because the prior years were so bad so relative performance will be good. Without of course fixing their long-term structural problems we've talked about.

Continue reading "WRFest 3Fest(Business): Something Besides Finance !" »

Posted by dblwyo at 12:21 PM | Permalink | Comments (0)

Now let's take a look at the reading and excerpts for business but, because there was so much, we're going to split it up even finer and up seperate posts on the Finance Industry. Oddly enough last week's rally was built on a major Finance sector spurt. Which given the history seems more than a little odd to us. Please note - having had so much of this sort of news we're just being polite. Also - at this point what else can you really say along the lines of "I can't believe they ate the whole thing".

The bad news continues across a reach and range of issues. From the basics - the economic slowdown is showing up in earnings, increases in bad debt and so forth - to structural issues. The top story was probably - pick your own - the continued drama at Societe' Generale' which continues to try and cope with rogue trader who's rapidly turning into a folk hero. Why escapes me at this time but if some explantion occurs we'll share it.

The other big story is the continued dicing with disaster of the monoline bond insurers who appear to have staved off a major downgrade of their credit only at the last minute but are still facing a real risk of corporate death. Unfortunately if they go they take a lot with them. And as expected and usual the extension of other downgrades continues, big banks are shifting assets from "yes we know what it's worth(Level I)" to "we have no idea but we have a model(Level III)" while skipping the intermediate stage of "yeah, we can trade some of this stuff every once in a while (Level II)".

And as a not in-directly related consequence VC's face increasing challenges IPOing their portfolio companies, the buyout guys are having troubles along with it and the beat goes on.

Continue reading "WRFest 3Feb08(Finance Ind): More Troubles Ahead" »

Posted by dblwyo at 12:43 PM | Permalink | Comments (0)

Chant after me: Economy, Industry, Firm. Economy, Industry, Firm. Economy, Industry Firm. That's your new mantra. Understand what the real trends in the Economy are, understand how industries are facing those trends and reacting to them - in particular whether or not their fundamental business models and strategies are able to cope with the trends and then understand how individual firms are behaving. Running with the herd or different model. In Hinduism, at least according to Joseph Campbell, the purpose of chanting AUM is to serve as a mind-body mantra capturing the sounds of the Alpha to the Omega with a final silence indicating that one really can't. Well the chant of the Finance Industry has been Vaule at Risk (VaR) - otherwise known as we can model this. The originator of regression model was the Prince of Mathematicians, Karl Friendrich Gauss. He came up with the technique to correct survey sampling data when he was in charge of surveying for a small German principality (good maps were important for armies, tax collectors and commerce you see, so the 2nd greatest mathematician in known history put his mind to it). The catch is that he was trying to minimize data errors for a well known model - the Earth.

VaR presumes that the estimated parameters can be derived from past historical experience and that the underlying model is known and constant. Both of which presumptions are proving to be very presumptuous. The emerging narrative in the industry is that the sub-prime mess was a Black Swan event - predictable only in hindsight though naturally occurring. Well actually predictable in foresight, and several did though that's now ignored as this new narrative emerges and takes over the standard thinking. And not at all unusual - in fact the same breakdowns that led to LTCC's breakdowns, part of Enron's problems and in fact, going back to Tulip Bulb mania. Fortunately the new narrative is starting to include the idea of actually going back to good old fashioned due diligence instead of taking abstract and artifical models as gospel. 

This is important because a belief in models has been one of the key underpinnings of some major structural shifts in the Finance Industry over the last three decades and associted shifts in the US economy. As we learn to chant our new mantra and mediate on Due Diligence instead of models you might keep the chart in mind. It shows the shares of Profit by source, both in absolute and % terms, in the US Economy. The top sub-chart shows total profits (stacked btw !) and the bottom share %; don't know about you but our view is that the Finance Industry has moved front-n-center as a major driver. The question is was value created or destroyed ?

The weekly readings excerpts below are focused on business, business practices and individual firms. While there are some very interesting stories on Yahoo and MOT that need to be paid attention to the bulk of the stories have to do with problems in the Finance industry and the consequences thereof. Primarily the re-thinking of the business model, which is just barefly started. But also the consequences as bad judgement and poor modeling result in "unintended" consequences for the rest of the economy, e.g. credit is harder to get, the risk of defaults is rising and all those firms who re-leveraged themselves to buyback their stocks at the highest valuations in several years are now going to be struggling to keep themselves together.

This will sort itself out, and painfually. A lot of the buyout firms who helped us into this mess are already building up the stores of dry powder (new funds) to take advantage, i.e. they're going to be looking for buying distressed companies, distressed debt, etc. for $.50 on the $1 ! As this sorting goes on the real winners will be the firms and industries who have an effective business model or who re-invent one. Finding them will be the interesting challenge. 

Continue reading "WRFest 27Jan08(Business): VaR, AUM, & Black Swans" »

Posted by dblwyo at 07:24 AM | Permalink | Comments (0)

This should be the last post for last week's stories and links. The primary focus is on traditional industries and companies. Continuing our theme of digging into enterprise performance are several key readings. Let's kick it off with a great story that, IMHO, encapsulates a lot of our notion of speak softly, run a good business, execute well now and lay the groundwork for the future at the same time.

Green Bay's Quiet Football Mastermind Before this season, fans were calling for Mr. Thompson's head. While the Packers had won just 12 of their last 32 games, he did not seem to care. No matter how loudly the fans complained, Mr. Thompson, who avoids publicity and rarely explains himself, continued sending away popular veterans and replacing them with untested college players, some of whom weren't highly regarded by other NFL teams. This year, led by a core of players that helped make Mr. Thompson a pariah, the Packers won 13 games and made the playoffs. What's more, the players he's brought into the league during his career are having an exceptional year -- as the playoffs resume Saturday, nearly 10% of the active players on the remaining eight teams were signed out of college by Mr. Thompson. While pro football is the nation's most popular sport, the brutal economic structure of the league -- where all 32 teams are effectively given the same resources -- has made winning and losing largely a function of management. Winning not only requires ruthless cost control, but it also seems to reward people who are able to make decisions in a hermetically sealed chamber without worrying about what the fans, the media or their own players will think. "I try to keep my eye on the ball, so to speak," Mr. Thompson says.

In addition there are some general business readings: one of those "smart" companies that moved ahead of the slowdown and are well positioned to ride it out and take advantage of the recovery if/when it comes. How many can say that ? Not many. A good example is what's going on in Retail specifically and the broader function of Customer Service - a major source of competitive differentiation that's little developed, invested in or exploited. The MSN article points to some earlier customer service stories you ought to backtrack, particularly since they point to Comcast, Sprint, ATT, et.al. as being terrible at it. Both for its' own sake but also because it's exemplary is the story further dissecting the mis-steps at Sears which are based on wrong-headed views of how to run a retailer. 

We also point to our own earlier posts on the SEEchanges coming in the Innovation(Tech) and Finance industries. Complemented by more readings on the Auto industry, Energy,  and Airlines.

Continue reading "WRFest 20Jan08(Business): Principles, Paradigms and Potzers" »

Posted by dblwyo at 01:18 PM | Permalink | Comments (0)

A friend and I were discussing the current situation, or "mess" as he calls it and he asked a very pertinent and simple question. Also a very difficult one yet as crucial as it is hard. While I'm not sure an easy answer will roll forward here there are some approaches. Here's the original question:

"Now, I have an interesting and difficult question for you to work around.  Can you propose what kind of scenarios we might see in the resolution of all the mess?  Who will wind up being the biggest losers? the biggest winners?"

Continue reading "Winners & Loosers: Rubble Sorting" »

Posted by dblwyo at 12:17 PM | Permalink | Comments (0)

Well most of the folks in the Finance Industry must be feeling like they're living in "interesting times" (we'll spare you the old saw which my Chinese friends tell me is Thai in origin). If they don't now they will soon and likely all thru next year. In some ways there aren't many surprises here in either the short-term or the long-term. Lots of stories in the last year or so have had lots of executives and others admitting this was a "dance" built on thin, thin ice. Personally my preference would have been to stop dancing and either get off the water or find some way, better yet, to brace it up or stop melting it.

Well like the Chinese peasants of old who wanted nothing more than to run their farms, grow mulberry and make silk so as to build a prosperous life for themselves and their descendents the worker bees are about to reap the harvest sown by the Power and Thrones. Let's make up a new one - "when Princes dance in the Capital the pipers are paid by the peasants".

Time to pay the pipes and it looks to be expensives.

Continue reading ""Interesting Times" for the Finance Industry: Readings & Resources" »

Posted by dblwyo at 09:43 AM | Permalink | Comments (0)

You've probably all heard the metaphor about boiling frogs - how do you boil a frog ? Slowly - it'll just sit there and not notice that the water temperature is rising until it's soup. Well there's a lot of changes going on in the worldwide economy and business pictures that are the same. But our companies, our industries and related decision makers are so trapped into dealing with the day-to-day crisis that the bears and alligators are winning and the swamp is rising higher and higher.

Some time ago I happened to take a general overview of the situation and pulled together some themes. Having just found and re-read it let me share it. Despite being a couple of years old it holds up pretty well. An assertion that I'm happy to have tested and countered by the way. Please feel free as it would make me feel better. Meanwhile here's (hopefully) some food for thought on the strategic prospects for industries in general with some examples from the steel, textile and airline industries.

There are critically important lessons here, that should now be applied to all other industries. To put a point on, as you skim over the rest of this, let me propose that every single industry will be forced to go thru a workout like the steel industry has and the airlines are beginning. As late as last year the residuals of that fight were still being played out but the net structural results are that the American steel industry put itself out of business, the firms have since been bought by new international owners, and different production methods and technologies have been put in place all more aligned with the new world. Unfortunately the failures to adjust and the lack of leadership ended up hurting the workforces worse than anyone else.

Every single domestic industry needs to go thru this re-thinking, and will, one way or another. 

UPDATE: Tim Walker at Hoover's Business Insight has just posted a fascinating comment on enterprise performance, lack of adaptation and adoption and business "disorganization". Extremely useful..

Disorganization Negates Talent.  After yesterday’s entry, I was thinking more about the plight of Alcatel-Lucent and similarly challenged outfits that are trying to restructure their operations. The companies that spring to mind are Kodak (nearly done with its reformation), Ford (slimming down), and Countrywide Financial (no telling whether it will survive the mortgage mess). All of these companies face the challenge of dealing with large infrastructures that may no longer help them to address the needs of their customers. In some cases of restructuring, those customer needs — or even the entire customer base — changes quickly enough or radically enough that the company awakes to find itself in what is essentially a new marketplace.  In each of these cases, changes in the prevailing conditions of business have upended the organizational quality of these large companies. What I mean is that they may have been rightly organized for earlier prevailing conditions in the marketplace — surely they were, considering the huge profits Kodak, Ford, and Countrywide have made at times — but whenever they can’t keep their organization evolving in pace with the evolution of the marketplace, they’re bound to end up looking disorganized. In fact, they are disorganized, as far as making steady, healthy profits is concerned.

A few weeks ago Herb Greenberg had an interesting post on looking beyond same-store sales and what it tells you about retail performance. It struck me as interesting, accurate and a little sad. We've known for years that what you really ought to consider is profit margin on the product, and perhaps category, level. If you've got good enough control of your operations and the technology to monitor that is. Very difficult. Looking at gross margins is a major step - in fact it's a spectrum of sophistication. Below you'll find some interesting pointers to further readings on thinking about retail business models, which have been under great pressures for years (decades) with both no end in sight and no "next big thing" either. The thing is, Tesco has that capability on the product, operations and technology fronts. And judging by what little you can guess at in the stores so does Trader Joe's. So let me quote from Herb.

Continue reading "Thinking About Retail: Product Profitability and Retail Performance" »

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

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

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

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

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

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

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