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Wednesday, 28 November 2007

Uncertainty is the Only Sure Thing

Some SCARY Geophysical facts

We live in the thinnest smear of gas on a congealed veneer of minerals, also thin, on the surface of a great big ball of molten rock surrounding a supercritical nuclear mass. This whole, totally improbable, shebang is whizzing around a huge and ongoing nuclear explosion ( a star), called the Sun. All of this is zooming along on some incomprehensible trajectory in the huge collection of other stars we call out galaxy. Other galaxies are also out there speeding about - there is no Highway Code in the Cosmos - they can and do collide.

The thinnest smear of gas we live in? How thin is thinnest? Imagine a large steel ball bearing - say 50 mm diameter. Now spray this with a fine lubricant, such as WD40, wait a while for any drips to go. The surface will look the same - with such a thin layer of oil it is barely visible. That oil will be several times thicker in proportion to the size of the ball bearing than our atmosphere compared to the Earth.

The congealed veneer of minerals? Well, some brave (or lunatic) scientists are busy drilling a hole into it to sample the molten contents. It is that thin.

Our life within this smear of gas is subject to enormous variables - we call the result of these "our Climate". Our thin smear of gas is enormously unstable, affected by its own contents, thermal variations (including "leaks" through the surface veneer) and radiation from the Sun. Sadly, so much of the current debate about Climate Change chooses to ignore the effects of Solar Radiation because it does not serve one or other sectional interest's argument.

The Sun is also enormously unstable - just have a look at this frightening video (Click Arrow twice to make it run)
video

This massive "blip", if it were pointing in our direction, could be good for a typhoon or tornado or two.

So, we are living in conditions of enormous improbability - maybe Douglas Adams was right?

The only certainty we have is that we are surrounded by uncertainty.

Therefore to equip and skill ourselves in any expectation of stability and surety is foolishness. But this is what so much traditional management thinking tries to do - and what so many financial analysts create as expectations for their projections. The Reality is completely the opposite.

The only wise thing we can do is to be ready for change - to have high levels of what we call personal and organisational Changeability. Organisations that do this tend to massively outperform the average - the research shows by up to 44% greater rate of sales growth. And they can withstand bad times infinitely better than their peers. They have much greater Competitive Strength.

Any business can assess its comparative Competitive Strength rapidly and inexpensively with the Competitive Strength Report and then decide what to do about it. They will get an immediate insight into their own organisational Changeability and the opportunity to understand what the potential consequences might be for them.

Please visit the Competitive Strength Report web site to see how you can find out whether the unforeseeable consequences of the next Sun Spot is more likely to threaten your future, or create opportunities to beat your competition.

Times are getting hard and the weak are about to get weaker

From The Times November 28, 2007
Major retailers lose sparkle as figures slump ahead of year’s biggest spree
Steve Hawkes and Miles Costello


Fears over the fallout of the global credit crunch grew yesterday as Signet, the jewellery retailer, and Pendragon, Britain’s biggest car dealer, blamed growing economic uncertainty for stark profit warnings.

John Stevenson, an analyst at Shore Capital, said it was now clear that there would be a marked divergence between winners and losers on the high street over Christmas.
He added that a spate of price cuts and Christmas sales by Debenhams, WH Smith, Gap, Burtons and Dorothy Perkins reflected the fact that stores were already having to use incentives to attract customers. “No doubt Christmas will be late and, with the next weekend representing the ‘payday’ watershed, retailers will be looking for signs of improvement as we move into December,” Mr Stevenson said.

Here we go again – it is the same brutal message of comparative Competitive Strength.
Times are getting hard and the weak are about to get weaker. So what’s new about that?

If we apply a Competitive Strength perspective then we can deduce something different. The key question is not who is or is not cutting prices and bringing forward Sales but whether the stores named were “having to use incentives” or whether they are choosing to do so.

Businesses that enjoy the high Competitive Strength level, better than Excellent, we call Free. For a retailer this means they can choose to discount where and how they want, using this as a tool to create greater competitive advantage. An obvious example of this is Tesco who are regularly and skilfully use the price cut weapon to make life difficult for their competitors.

Companies that are in the low Competitive Strength condition we call Constrained cannot "choose" to discount. They feel compelled to do so in order to chase the sales volumes they cannot otherwise generate, because this is all they can do. A business leadership in a Constrained retailer who states they have “chosen” to have an early sale is attempting either to disguise their weaknesses or, if they believe it, fooling themselves. Hoping it will be "all right in the morning" is not a strategy – it is Denial.

We say, please look at the Competitive Strength web site. Please see the frightening difference in both financial strength and business resilience there is between the Constrained and the Excellent. Please see just how deeply temporary and precarious is the position of the Constrained business.

The Competitive Strength Report is the only independent measure that will enable a business leadership to rapidly and objectively assess how they compare with the Free. Within days they can establish what their business’ position is – and more importantly, decide what to do about it.

Thursday, 1 November 2007

Two Swallows do not a Summer make – more like a Gulp!

From The Times, November 1, 2007
Foundations look just too shaky at Taylor Wimpey
Nick Hasell: Tempus

A writedown on the value of a company’s overseas operations and a gloomy outlook on trading at home would not appear the best formula for one of the biggest rises in the FTSE 100.
But this is housebuilding, or more specifically, Taylor Wimpey, the worst performer this year in what has been one of the stock market’s worst-performing sectors. So with the shares down 55 per cent over the past six months, yesterday’s 6 per cent gain can be read as no more than the covering of short positions and relief that its tidings were not any worse.
Not that all was gloom. Perhaps the biggest surprise was that Taylor Wimpey, now Britain’s largest housebuilder, repeated its confidence that it can achieve operating margins of 14 per cent in the current year. Given that improving Taylor Woodrow’s historically below-par margins was one of the key reasons behind the merger with Wimpey, that affirmation is encouraging.


The Competitive Strength perspective demonstrates why Merger & Acquisition strategies need to take into account the underlying operational cultures and competences of the companies involved. There is an enormous difference between the potential capability of an "Excellent" Competitive Strength organisation to deliver performance improvement compared to that of a "Comfortable" one.

As we have commented before, the ability to deliver an improved outcome will be substantially influenced by the degree of match or mismatch of Competitive Strength level and the Changeability of each outfit. If they do not match, or if they are not vigorously and competently addressed, then nothing will change.

According to this article, the jury is out. Will Taylor Wimpey be greater or less than the sum of its parts? If we disregard the initial share price lift that appears now to be attributable to extensive financial engineering rather than performance, the outlook does not look good. When we apply a Competitive Strength perspective, it looks bad.

Using Competitive Strength criteria, we can reasonably suggest that this may have been a “Comfortable” company merging with a marginally “Constrained” business in the expectation that something stronger would emerge. With no evidence of extremely rapid internal transformation, the most probable outcome is a larger “Constrained” business rather than a “better business”. Even if at the outset Wimpey might have rated a Competitive Strength of “Excellent” and assumed that they could absorb a “Constrained” company and remain “Excellent”, this was unlikely to be the outcome. The lower common denominator tends to prevail, as we have seen in so many previous mergers, which is why their success rate is barely 50%.

We believe therefore that there were questions that were not considered much less answered. What is alarming is that the architects of this merger almost certainly did not know that these questions existed and that they needed to be answered. They applied conventional thinking and got conventional answers and it now looks like this will produce the same disappointing results as at least 50% of mergers. We believe that the Competitive Strength perspective would have highlighted the other questions that needed answers.

You may like to know more about the Competitive Strength Report and Process, the only completely independent organisational self assessment tool that rapidly provides a simple and clear health check, and helps you decide what to do about your results. Please have a look at the Competitive Strength Report web site.

Saturday, 20 October 2007

Knight Vinke vs HSBC - damn nuisance or good point?

Last week Eric Knight, the founder of Knight Vinke renewed his assault on HSBC. He unveiled a 75 page report that he argues provides irrefutable evidence that HSBC has underperformed its peers in the global banking industry. His central argument is that HSBC’s current strategy of diversifying into more and more countries and joining up the pieces would produce only an extra 3 per cent of value for shareholders. By contrast, a strategy of building big positions in a few countries and withdrawing from others would deliver a 50 to 75 per cent gain.

“Some kind of radical restructuring is required,” Mr Knight said. “No matter what HSBC says, there are some real issues here.”

Right now it appears the argument centres on which strategy will deliver the best return to shareholders, the current strategy being pursued by HSBC or that proposed by Knight Vinke. We have applied a Competitive Strength perspective to the situation and find there is really more to it than that.

First we agree with Mr. Knight that there are “some real issues here”. However we also find there is a significant factor that has not been considered that indicates that the strategy Mr Knight proposes may NOT of itself deliver the results he claims.

Applying the Competitive Strength perspective suggests that HSBC is in a condition we describe as Comfortable. At this level the Competitive Strength research base shows that the company could have an improvement potential of more than 50%.

However if Knight Vinke’s analysis actually points to deeper weaknesses, as it might, then HSBC could be classified as in Constrained condition. The overall picture, and the response tactics of HSBC, seems to have many of the characteristics of an organisation that is nearer to Constrained than to Comfortable. In this case HSBC might have an increased shareholder potential growth value of up to 84% greater than its current performance, even higher than Knight Vinke’s assessment of 50% to 75% improvement.

What we can say with certainty is that if HSBC were operating in a Competitive Strength condition above Excellent, then the questions that are being asked would not exist. Excellent rated companies deliver the level of shareholder value that Knight Vinke is calling for from HSBC. What is more in order to keep on doing so they constantly and rapidly review, re-visit and re-adapt their strategies as circumstances and markets change.

Knight Vinke’s alternative strategy proposals for HSBC may appear attractive, even logical. Building strong positions and scale with the emphasis on markets with the greatest growth potential can be a recipe for success. However it is also the product of conventional thinking and does not take account of the Competitive Strength factor, the ability to implement the strategy effectively.

We can say, with confidence, that Knight Vinke’s alternative strategy proposals are unlikely to deliver anywhere near the full potential suggested. This is because a Comfortable organisation like HSBC has a low potential to change itself; it does not know how to do it. Indeed HSBC's current strategy reflects this as it is very much "more of the same". A “better strategy” might deliver a marginally better result for a time but without a complete transformation of the culture of the business from top to bottom the full potential will not be realised. Indeed the organisation may become fatally damaged in the attempt to implement the strategy. To succeed HSBC will have to become better than Excellent. In a leviathan with their scale, complication and history that will be a massive challenge.

In an internationally competitive banking and finance marketplace, being average, or just below average, is a temporary and precarious position. Is that where HSBC stands? Is that what Knight Vinke have spotted? Almost certainly they have a “good point” and appear determined to go on being a “damn nuisance” to get their arguments heard. If their proposals also spark the level of change throughout HSBC that we believe would be needed then they may well deliver. If not you really have to ask - why bother?

To find out more about the Competitive Strength perspective go to the Competitive Strength Report website.

Tuesday, 16 October 2007

Don’t say nobody told you!

The Times
October 16, 2007
Oil price hits record of $86 as commodity rises intensify inflation fears
Carl Mortished and Steve Hawkes
The price of crude oil rose to a record of $86 a barrel yesterday amid fears that a surge in the price of traded commodities is storing up a winter squeeze on consumer wallets and new risks of inflation for the global economy. . . . .
Economists gave warning that soaring energy costs could delay any further reduction in interest rates by the Bank of England. George Buckley, the chief UK economist for Deutsche Bank, suggested that economic growth could be hit if oil continued to rise.

Back in August we wrote

Four years ago Mervyn King issued a warning, “Will the next ten years be as nice? That is unlikely”.

Tough talk by the usually super-diplomatic Governor of the Bank of England. Since then oil prices have doubled, raw material costs soared, interest rates keep climbing and at the end of July this year the “credit crunch” has hit the world’s financial markets. It has definitely not been “nice”.

How is this affecting you and your business? Are you worrying about your pension fund, contracting sales, customer failures, supplier weakness, deferring prized expansion plans, unpredictable cost of finance or the increased risk of opportunities? Nearly everybody we know is.

It could get worse; one authoritative source has predicted a “supply crunch” by 2012 resulting in an oil price of $150 dollars a barrel. What would that do to your business? And there is global warming, globalisation and more economic uncertainty from the European Constitution. It is nasty now, it could become really horrid.

We are all heading into very uncertain territory. The only certainty is that something unwelcome will happen – and then something else. Is there any basis for hope for any of us?

Yes, there is a solid basis for hope. There are a few businesses that seem to be able to ride out these rough seas of uncertainty – they appear to be able to surf the economic breakers and emerge stronger and fitter than before. What do they know that everyone else doesn’t? What do they do that makes such a difference?

A massive research project by Dr Vinod Singhal in the USA has found the answer. He has proved that, providing that you do it effectively, “Excellence” doubles your financial competitiveness.

Using this research base we have developed a powerful web based business diagnostic tool called the Competitive Strength Report. It is the only tool available from anyone, anywhere that provides an objective assessment of a business' Competitive Strength compared to the very best in the world - not just in a particular sector but the best at anything.

The Competitive Strength way of looking at the world delivers exceptional insights - why don't you find out more about it at the Competitive Strength website?

Friday, 5 October 2007

There must be a better way

Which frequently used business strategy is guaranteed to create big rewards for accountants, lawyers and bankers yet at best has only a 50% chance of creating value for the businesses deploying the strategy?

Answer - Mergers and Acquisitions.

Susan Cartwright is Professor of Organisational Psychology at the Manchester Business School and her research interests and publications are in the area of occupational stress and organisational change, particularly in the context of mergers, acquisitions and joint ventures. In an article in the Daily Telegraph Business Summer School she writes:
“US sources place merger failure rates as high as 80%. UK evidence indicates that around half of mergers fail to meet financial expectations. A much cited McKinsey study suggests that most organisations would have received a better return on their investment if they had banked their money instead of buying another company".

So with a failure rate of between 50% and 80% why has the trend for this apparently high risk strategy grown significantly in pace and volume in the last decade?

Undoubtedly the persuasive powers (and the powerful incentives) of the M&A financiers and their associated service providers/advisors are a significant factor – however a key driver of mergers and acquisitions is change. Change is happening so fast, so frequently and on such a large scale that businesses find themselves needing to change shape, focus, size and capability, and often believe that they must do this rapidly and on a large scale. M&A offers an immediate and attractive approach that can be a logical means of achieving this. When it is executed effectively, it can deliver the desired outcomes. But, when it is not done well, the results can be a massive disappointment, as Susan Cartwright and others report. So it looks like we need to use it, but at this rate of failure can we afford to keep on doing it the way we always have? Is there a better way to ensure that M&A’s deliver more predictable outcomes?

Susan Cartwright goes on to say:
“To make mergers and acquisitions work senior managements must focus on integrating the cultures of the companies brought together…One lesson to be learned is that deals work best when the cultures of combining companies are similar … A related lesson is that due diligence in advance of deals should extend to evaluating the degree of the cultural fit between companies. Executives involved in mergers and acquisitions need to understand the cultural values and strengths and weaknesses of their prospective partners”.

This makes sense but why might this be effective and how could you do it anyway? Applying a Competitive Strength perspective to M&A provides some answers.

The Competitive Strength Report enables a business to rapidly and objectively assess its Competitive Strength expressed as one of four Competitive Strength Conditions – ConstrainedComfortableExcellentFree. Each condition, expressed across 15 dimensions of measure, is a product of how an organisation thinks and behaves and so they are also concise assessments of the organisational culture. It is therefore possible to compare the different cultures and assess the potential consequences of combining these, the potential risks of complete failure, and how to ensure you get the result you want from M&A as opposed to just what turns up!

An example of just what “turns up” are when a Comfortable organization acquires a Constrained one, often a temptation because of the apparently low price for which the Constrained business might be acquired for. A Comfortable business has a relatively low potential for change and a Constrained business an even lower one. The chances are the combined businesses will both become Constrained and value will be lost – a donkey and a mule are unlikely to perform like a thoroughbred – a sickly donkey and a mercy call to the Vet is a much more likely result! Is the BAA situation an illustration of this, we wonder?

When a Comfortable business acquires or merges with an Excellent business they will most probably pay a high price for it (it will have strong financial performance) and yet the Excellence can be so quickly lost. We know first hand of one example where it took just 8 months for the acquirer to turn an excellent business from being highly profitable to loss making and for it to disappear completely in under two years.

Even an Excellent business acquiring or merging with a Comfortable or Constrained business can find its Excellence diluted, especially if it is not fully aware of why it has achieved its Excellent Competitive Strength Condition and how to maintain it. A merger situation where it might not be as dominant a partner as it expected is a particular risk. Have recent results at Virgin Media illustrated this type of “what turns up”?

What about Comfortable with Comfortable or Constrained with Constrained? Well they are likely to get on well but the chances of adding value are slim. The “synergy” is likely to be 1 problem + 1 problem = 3 problems.

Explore the Competitive Strength website, apply the ideas to what you know and have experienced of M&A and decide for yourself if this might produce a better way.

Thursday, 27 September 2007

Sainsburys – a missed opportunity?

For some time now Delta Two, the Qatari backed investment vehicle has been circling J. Sainsbury. Yesterday we learned they have entered into formal talks with the company’s pension trustees and its advisors. Is this icon of UK retailing one step nearer to falling into foreign ownership?

The “traditional analyst’s” point of view is that the return on the likely full value of the assets is low, even though Justin King’s recovery plan has improved performance and restored value to the share price. This argument continues that if the value of assets can be unlocked in some way to the benefit of shareholders then it has to be a powerful consideration. Additional persuasion suggests that shareholders, especially the Sainsbury family and trusts, would consider selling out at this time because they had a severe fright previously when market share, profits and shares plunged and there are no Sainsbury family members involved or likely to be involved in the business.

These arguments have been deployed by Delta with their “indicative” offer at 600p per share, against a current price of 574p, a premium of just 4.5% as things stand (though the share price is likely to still include some further potential takeover premium). The precise structure of Delta’s proposition is as yet not clear but it will be based on taking on significant debt with Sainsbury’s assets as the key collateral. In effect the purchaser will use the seller’s assets to finance their bid – in macro-economic terms, arguably, a reduction in the overall wealth of the UK.

All this is based on “traditional” thinking together with the business and financial analysis and the behaviour that results from this. We have looked at the different insights that come from using the Competitive Strength perspective. This gives a radically different and challenging alternative view and asks - Are the Sainsbury’s shareholders going to forego the longer term opportunity to see 800p or more for their shares for the sake of quick cash based on a real value diluting financial manipulation?

The Competitive Strength assessment suggests that, given the real potential value of the business, the Delta valuation is derisory. We must ask whether Sainsbury shareholders should even consider any offer at the current level. Or do they genuinely believe that their management cannot ever deliver the real potential value in the business? Delta appears not to think so (see below).

For some time after it became the market leader Sainsburys remained in a “Comfortable” competitive strength condition. Then market conditions changed, the competition hotted up and Sainsburys quickly fell back into a “Constrained” condition. Under Justin King they have climbed back to “Comfortable” with signs of the potential to move on to “Excellence”. This is why Justin King himself has stated that they are only about halfway through the recovery plan. But does even he appreciate the full potential value that the business could deliver?

We know from the research by Vinod Singhal that “Excellent” businesses can deliver double the profitability and financial returns of those in “Comfortable” competitive strength conditions. Suppose Sainsbury shareholders decided to ignore takeover approaches and instead charged their management with rapidly and effectively moving the business towards Excellence. The research tells us that you could see the share price achieving 800p in the short/medium term and up to £10 thereafter with greater Competitive Strength enabling more and more strategic choice for the business. In addition, they would still have the assets, unencumbered and available to serve the best interests of shareholders, employees and the pension funds.

The research is rock solid, if you don’t know about this then you should read this. The only question is can the management deliver? Delta seems to think so as by all accounts retaining Justin King is central to their plans. Are Sainsbury shareholders about to miss their big opportunity and hand over all their business’s accumulated wealth to Delta and is this what Delta are counting on?

Wednesday, 26 September 2007

How Competitive Strength creates Competitive Advantage

The Royal Crown Derby Porcelain Company manufacturers the highest quality English fine bone china tableware, giftware and collectables. It sells primarily through china and glass retailers in the UK and overseas.

Based in Derby for over 250 years in 2000 became an independent and privately owned business again via an MBO from its parent company Royal Doulton. In spite of its well established reputation it faced formidable challenges. The majority of its competitors have moved their manufacturing offshore, in the UK market there has been a major shift away from formal dining tableware, and the weak US dollar hit profit margins in their most important export markets. Their retail customers are reluctant to hold stocks and have reduced their order lead times significantly.

Crown Derby believes that their history is a key factor in what their customers buy. Royal Crown Derby china still “made in Derby” is a crucial part of this history. They have therefore resisted offshoring any manufacturing even though this put them at a significant cost disadvantage.

What they have done is to focus on Continuous Improvement, in particular the multi-skilling of their workforce. In an industry where traditionally the different “crafts” would never easily interchange their employees now are highly flexible. This has reduced lead times and they can now ship orders in 4/5 days from receipt. In the US, one of their biggest export markets, this enabled them to dispense with their warehousing facility, a significant cost saving coupled with improved customer service. Their competitors still have their warehouses and the costs these entail.

Businesses with high quality upmarket products can often believe that this is enough on its own, but it is not. From a Competitive Strength perspective Royal Crown Derby have moved themselves from a Constrained Condition to the beginnings of Excellence where more dimensions across the business are beginning to match the quality of their products. This has already produced significant competitive advantage.

By contrast their old parent company Royal Doulton in spite of moving all its manufacturing to low cost countries is a still a constrained and struggling business.

Thursday, 20 September 2007

More Competitive Strength Contrast in the Retail Sector

From The Times - September 19, 2007

Gloom deepens in retail sector as Debenhams admits having to slash prices
by Sarah Butler

Debenhams increased the gloom about the prospects for the retail market yesterday when it revealed that it had been forced to discount heavily in the summer to clear stocks.
Shares in the company fell 3.8 per cent to 101½p as the retailer said that gross margins slid 0.9 percentage points in the six months to September 1, worse than expected, after poor summer weather and disappointing ranges forced it to discount heavily to clear stock.

Growing taste for luxury gives Harvey Nichols that expensive look
by Sarah Butler

Harvey Nichols recorded a 47 per cent jump in profits last year as the Knightsbridge department store benefited from strong demand for luxurious fashions and accessories…

Selfridges, Harvey Nichols’s rival, which also filed accounts at Companies House in the past fortnight, announced that it had doubled annual trading profits in the year to February 3.The chain, which has stores in London, Manchester and Birmingham, said that trading profits had risen from £10.1 million to £26.8 million as sales increased 13 per cent to £356 million.
One day, one journalist, three stories – two spectacular contrasts in performance.


Who has high Competitive Strength? Who is Constrained? How do these contenders compare with John Lewis (see other story)

The Retail sector is volatile and changes very rapidly. Competitive Strength can be seen in those that consistently stay in the lead, have freedom to invest, maintain growth.

Wednesday, 19 September 2007

Retail – picking winners from losers

Hardly a day goes by without a warning of tough times for retailers. Just last week Next, in spite of announcing half year profits up 10%, warned that life was getting tougher both on the high street and online. Morgan Stanley downgraded its recommendation on DSG Group, owners of Currys and PC World to "underweight" adding that that they were "much more sickly than most investors realise" and that the dividend "appears unsustainable and could be cut next summer". This week Debenhams report like for like sales down 5%. All cite interest rate rises, fuel and food price rises and now Northern Rock’s problems as factors affecting consumer confidence and their willingness to spend. A distinct nervousness about the prospects for Christmas is creeping in

In August we commented on how John Lewis’ superior Competitive Strength (read it here) had enabled them to buck the trend when it reported substantial increases in sales and a programme of stores openings, new concepts and investment in customer service.

Last week John Lewis announced a 50% increase in first half profits. Their Chairman Charlie Mayfield said that he was “quietly confident” about in the run up to Christmas. He claims that “We are confident our partners will continue to set us apart from the Competition”. A clue as to why his confidence is justified and why John Lewis’ superior competitive strength will continue to set them apart from their competition can be found in a report in September’s Which magazine.

In a guide to buying a computer the clear winner was John Lewis, the only retailer to get a 5 star rating with 61% of customers saying they’d be very likely to return when they needed a new computer. Which was curious about what makes John Lewis so good so they asked some survey participants for some more detail. The overwhelming impression was that “the staff knew what they were talking about”!

When times are tough it is a real advantage if you can hang on the customers you have got. John Lewis can clearly do this and when research shows that it costs 5 times a much to win a new customer than to keep an existing one this creates significant competitive advantage. What’s more they are investing a further £1.5m in staff training and increasing by 200 the number of trained specialist staff in stores.

So we say Charlie Mayfield’s “quiet confidence” is highly likely to be vindicated. As for the others well, PC World came bottom in the Which survey. Looks like Morgan Stanley have got it right with the downgrade. Go to the Competitive Strength Report website and see if you can spot why John Lewis is likely to win and DSG may well lose.

Carphone can…. and it has!

As a postscript to our posting on this company on 10th September (read it here) we read this week that Carphone Warehouse is expected to enter the FTSE 100 shortly. Charles Dunstone started the company in 1989 with just £6,000 of savings. Not many FTSE 100 companies have come from that little that fast!

We believe that this success is an inevitable outcome for a company that has achieved a high Competitive Strength condition, Excellence or above. How can we justify this in the case of Carphone Warehouse?

Well like any other really excellent company they are not immune from making mistakes. Carphone made a big one when it completely underestimated the level of the response it would get to its TalkTalk broadband package. Service levels were catastrophic and the potential damage to their brand was real and significant. Carphone faced up to their mistake, made the investment to rectify it and slowly worked its way out of the corner it had got itself in.

That’s the difference Competitive Strength makes. How do we know? Well do you really think Carphone Warehouse would be knocking on the door of the FTSE 100 less than two years after a disaster like that if it doesn’t?

Thursday, 13 September 2007

Can the Poacher turn Gamekeeper?

Chrysler the US car maker now owned by private equity group Cerberus has announced a string of high profile appointments. First was Robert Nardelli late of Home Depot and famous for extracting a £103m severance package. His appointment is seen as a sign that Cerberus are intent on fast and radical restructuring as Nardelli has a reputation as a tough negotiator (just look at the severance package!) and decision maker.

Then last week Chrysler announce that James Press, President and CEO of Toyota North America and the first non-Japanese to sit on the company’s worldwide management board, is to join them to lead Chrysler’s sales and marketing team. This is the second top executive Chrysler has poached from Toyota. Last month they hired Deborah Wahl Meyer, previously vice-president of marketing for Toyota’s luxury car division Lexus. Then Chrysler announces that Jim Murtaugh, head of GM’s China business is to head up Chrysler’s Asian business.

Commentators see all this as signal of how serious Cerberus are about turning round Chrysler and doing it fast. The appointment of Press in particular who joined Toyota in 1970 and oversaw their dramatic growth in the US is seen as quite a coup. Jim Hall, an analyst at AutoPacific told the Bloomberg news agency “Press understands automotive sales better than 98% of people involved in the business. More significantly, he has real product savvy, something that Chrysler needs”.

Whilst both these recruits from Toyota bring in talent and expertise that Chrysler sorely need note that they are also both “front end” appointments. Toyota’s success is built on the whole organisation from front to back and back again operating to the highest standards of excellence and Chrysler haven’t been near that ever. The research on which our Competitive Strength Report is based demonstrates clearly that being excellent in just one or two dimensions is not enough to achieve more than marginal additional pay off. These ex-Toyota appointees will make a difference but on their own they are unlikely to make “all the difference”.

What is more Press and Wahl Meyer are used to the backing of a business that consistently delivers on the promises they make to customers and will soon grow frustrated with a business that does not. This will happen even quicker if they find they are unable to directly influence and implement change throughout the whole business.

Applying Exceeding Expectations principles our perspective on this is simple. If Nardelli carries out the restructuring and then bows out leaving a good foundation for Press and others to build Excellence as standard throughout Chrysler then this could work. If it does then the people who should really worry are Ford and GM. However if Nardelli hangs around then it won’t get much further than the restructuring.

Cerberus may decide to cash in all or part of their holding in Chrysler around the time the numbers look better following the restructuring (and they will for a while).

Guess which of the above scenarios would suggest to us that the shares would be worth buying and which suggests don’t touch!

Either way we suspect that the one company that won’t lose any sleep is Toyota.

Tuesday, 11 September 2007

The Doorway to The Abyss...

Exceeding Expectations? How to do the Absolute Opposite – and where will it take Virgin Media?

Virgin Media customer loss continues in Q2
Published: Wednesday 8 August 2007 ; TelecomPaper


“UK cable operator Virgin Media reported a continued loss of customers in the second quarter, reducing its total by 70,300 to 4.7 million. The company estimates it lost some 40,000 customers in the period due to Sky removing its channels from the Virgin platform in March. Average revenue per user also fell, to GBP 42.16 from GBP 42.75 in Q1, hurt by lower telephony use and more retention discounts. Growth in broadband subscribers slowed from the previous quarter to 45,800 net additions, while both the mobile and fixed telephony activities showed declines in customer numbers.”

And before that both its predecessors, NTL and NTL Telewest also reported massive customer losses – and even more spectacular financial losses, totalling billions eventually. They have had a lot of practice at losing customers (on one occasion the then Chief Executive reported that they “expected to lose lower value customers”).


“NTL, the cable group that merged with Sir Richard Branson’s Virgin Mobile to form Virgin Media, was twice targeted by private equity players. The merger was supposed to transform the group, which was plagued by a reputation for poor customer service, into a major media and communications player.” May 10, 2007; The Times.

Virgin Media now claim that they are losing customers because of their falling out with Sky. It is just another excuse – they are losing customers because they are treating them with arrogant contempt – because, and their history proves it, it is the only thing that they know how to do.

I have just switched from Virgin Media after 7 months of progressively deteriorating broadband performance and experiencing the same sorts of dispiriting, cynically money grubbing, contemptuous and economical-with-the-reality service transactions that you can find for yourself if you Google “ Virgin Media Service”. As a final inconvenience, I will now lose my personal email address for the last 10 years – “we don’t do that (let you remain on a different deal) anymore”.

What a “perfect result” for Virgin Media – they really have got rid of a “low value” customer - it is difficult to imagine what else in Customer Retention they could have done worse.

Now Sky have gained a high value customer – Virgin Media have scored a total own goal.

What we say from a Competitive Strength point of view is:-

This experience was full of illustrations that typify what happens when a business becomes CONSTRAINED.

  • You make counting pennies more important than Customer Satisfaction.
  • Your performance standards slide, and keep falling.
  • You expect your customers to do your Quality Management for you
    and in this case, even to pay you through the nose to do so!
  • You seek to evade accountability as your basic response.
  • You stop being honest with your customers.
  • You deny initiative and responsibility to your customer facing staff
  • You isolate your Customer Complaints department from customers (of course, why doesn’t everybody else do that?)
  • You “lose” key Directors with a proven track record in Good Customer Service
    and
  • You play repeated claims about your Amazing Customer Service to your customers while they wait more than 20 minutes for you to reply to their call!!!!!!
    You could not make this last item up – it beggars belief – it happened!

Based on this experience, Virgin Media as a business appears to be in the CONSTRAINED condition of Competitive Strength and that means that it is approaching The Abyss – and there will lie failure, again.

  • This means that its shareholders, employees, suppliers and customers all face the possibility of serious disappointment in the foreseeable future - again.
  • This means that Sir Richard Branson’s promise that everything would be to the “Virgin” standard by the time it was in use has proved worthless – and that diminishes both him and the brand.

We say, please look at the Competitive Strength web site. Please see the frightening difference in both financial strength and business resilience there is between the Constrained and the Excellent. Please see just how deeply temporary and precarious is the position of the Constrained business.

Then, if you have any stake in Virgin Media, please do a serious risk assessment of the implications of that for you and your business now, before you have an unpleasant surprise - just like a series of stakeholders in NTL had in the past and sadly it now appears that nothing has changed..

Monday, 10 September 2007

Carphone can…. So Carphone does!

Carphone Warehouse has struck a deal to sell Virgin Media’s broadband, digital TV, home phone and mobile services in its stores. So it is actually offering a broadband fixed line package that is in direct competition with its own TalkTalk service. Does any sane business offer a leg up to its competition?

In fact Charles Dunstone, Carphone Chief Executive, said he hoped to strike more broadband deals and did not rule out offering to resell the services of fierce rival BT! The answer as to why he is doing this can be seen in the Carphone stores where they are setting aside room for The Broadband Shop. This is dedicated area gives a choice of mobile broadband services from T-Mobile, Orange, 3, fixed line through ADSL from TalkTalk and AOL Broadband (also owned by Carphone) and via Cable through Virgin Media.

The more fascinating question is how can they do it, how can they take the risk of offering products from direct competition? We think the answer lies in Carphone’s relative Competitive Strength compared to many of its rivals. To see what you think go to the Competitive Strength website and see how you think Carphone compares to Virgin Media and what conclusions you can draw.

Our only concern would be just how long Virgin Media will remain a viable player in this market (see our article “The Doorway to The Abyss” on this). However if they do not then Charles Dunstone is likely to have others queuing up to take their place. Carphone Warehouse can…. So it does. Many of their rivals can’t …. So they just can’t!

Tuesday, 4 September 2007

No Summer – No Sales

Magners Cider owned by Irish drinks group C&C has been described as a “triumph of marketing” and since its launch in 2003 has grown rapidly in popularity. C&C’s share value grew just as rapidly from €2 to nearly €14 earlier this year. They built their product distinction on the new idea of Cider Over Ice and sales grew strongly during three successive summers and this year’s early Spring heat wave.

Suddenly in July came two profit warnings in rapid succession. C&C said trading "deteriorated at an unexpected rate" and warned that first-half operating profits were likely to fall by 35pc compared with last year's €113.5m. They said there was "a degree of uncertainty" about the outlook for the second half. C&C blamed a collapse in sales on the wet weather and growing competition from rival Scottish & Newcastle's Bulmers who had launched their own over-ice cider brand last year and re-taken 20pc of the market.

The share price dropped to €6 so C&C's market value has more than halved over the past two months amid growing concern that Magners is just a craze. Liam Igoe, an analyst at Goodbody Stockbrokers in Dublin, said: "The question is whether sales are down because of the floods or because people are moving away from the concept." Paul Walsh, chief executive of drinks giant Diageo, said that the "boom" in cider was not a "sustainable proposition".

However Maurice Pratt, chief executive of C&C insists that Magners was not just a fad in the UK."I believe these are exceptional circumstances and don't believe our medium-term model in Britain will be compromised by these difficulties," he says.

These different opinions are not that helpful to anyone wanting to assess where C&C and its share price might go from here. They may not even be truly helpful to the board of C&C. However if we apply a “Competitive Strength Perspective” then further insights can be gained.

It is clear that C&C did a great job on both coming up with the Magners Cider product and in marketing it. However their strategy now is to redirect much of C&C's €40m annual marketing spend towards promoting cider over ice as an all-seasons drink – as a winter favorite no less - to reduce the apparent dependence of their sales on a warm summer. Although this response indicates that the marketing dimension of the business may be strong, the question must be asked whether that is all they really have to try to build a “sustainable proposition”? How often has “Sell It Louder” really changed a lost sales situation? C&C risk looking, and sounding, too much like a “one product, one idea” company.

The Competitive Strength Report, and the research from Vinod Singhal that it is based on, shows clearly why excellence in just one dimension is not sufficient to build a high level of Competitive Strength. In spite of C&C’s excellence in marketing and its importance in the sector in which it competes it still was not enough to overcome adverse weather conditions and a big competitor.

C&C enjoyed a new product “honeymoon” in which the markets, and possibly even they themselves, believed they had “Excellent” Competitive Strength – hence the inflated share price of €14. It was only when the lack of substance underwriting this perceived Competitive Strength became apparent that the markets recognised the reality. Actually C&C look much more as though they are in a “Comfortable” Competitive Strength condition and consequently the €6 share price was almost certainly about right all along. The sales and share price collapse, together or apart, was always going to happen; it was just a question of when and why.

If the markets could have applied the Competitive Strength perspective to an assessment of C&C’s performance perhaps they could have worked this out before the share price got chased up to unsustainable levels. If C&C truly understood their own Competitive Strength position, they may be addressing the competitive situation with a more fundamental shift – or possibly exploited the brief sales and profits bonanza more beneficially for the long term future of the business..

The other question this all raises is, what about Scottish & Newcastle? They appear to have been able to come from behind, bring out a new product and grab 20pc of the market. They were a bit slow off the mark, they let Magners have three years – 3 years! – but now they have hit the nail on the head utilizing their greater depth in distribution and business to business marketing. They have demonstrated a Competitive Strength well above “Comfortable” – possibly even heading towards “Excellence” – does this means that there is more to come? Maybe their shares are worth a look!

Thursday, 30 August 2007

An Example of Extraordinary Competitive Strength

Last week (24 August 2007) the following article appeared in the Times:

Problem of global warming is at heart of currant affairs
by James Harding, Business Editor

It is not only Bangladesh that is threatened by global warming. It is the British blackcurrant: warmer, wetter winters have led to a gradual deterioration in the quality of the blackcurrant crop. Without a heavy frost, blackcurrant buds do not break properly and the result is a decline both in the quantity and quality of the fruit. Climate change could make it impossible to grow two kinds of blackcurrant – Baldwin and Ben Lomond – in many parts of southern England within a decade.

The plight of the blackcurrant is just one example of how rising temperatures promise to transform the face of the English countryside and challenge the business of British horticulture. If by 2050 summer temperatures in the South East of England are 1.5C to 3C warmer than they are on average this decade, the apple orchards and hop gardens of Kent could find themselves eased out by grape vines and apricot trees. It will take only a slight increase in the temperature – and a small leap of imagination – for Maidstone to be encircled by olive groves.

But climate change is not an exercise in futurology. Hotter and more unpredictable weather is already presenting businesses with a disruption to production, an expensive requirement for new R&D and a fresh set of difficult choices.

GlaxoSmithKline, which buys 95 per cent of the British blackcurrant crop to make Ribena, has created a new variety of the berry – the Ben Vane – which is more likely to thrive in warmer, more variable weather conditions. The pharmaceuticals giant, together with the Scottish Crop Research Institute, is in fact developing 40 to 50 new varieties at its farms in Herefordshire and Norfolk. Some of them are designed to be more resistant to new kinds of pests and weeds, which are also expected to be a byproduct of global warming. Others are simply being developed for enhanced flavour. Each new cultivar takes money and time (roughly 16 years) to develop.

Glaxo says it does not do genetically modified crops. So its new blackcurrant breeds are all engineered and propagated using conventional breeding methods. But other producers will, no doubt, seize on GM applications to deal with global warming: conflicts within green farming have only just begun.

In the bleak British summer of 2007, it is, perhaps, hard to believe that sunshine could be a problem. In fact, it is not the only one. In farming as in financial markets, the real headache is uncertainty. Fortunately for the makers of Ribena, it is easier to redesign fruit than reprogramme investors: GSK has developed a new breed of blackcurrant that has greater “hangability” – ie a blackcurrant that is is more able to cling on in stormy weather.

What we Say...
What Glaxo is demonstrating here is not so much the "hangability" of its new variety of blackcurrant but Glaxo's own "Changeability" as a company.

James Harding is right to say that climate change is not an exercise in futurology, neither are any of the other many uncertainties that business and society are faced with. Just trying to be a better guesser is not going to help much.

However when J-P Garnier restructured the whole approach to GSK's R&D he injected massive "Changeability" into the business in order to build extraordinary Competitive Strength. New varieties of blackcurrant aligned with climate change is just one example of the competitive advantage GSK is achieving from this.

For more on "Changeability" and using this perspective together with conventional financial and business analysis can help spot the real long term winners from uncertainty click here for more information.

Wednesday, 29 August 2007

The significance of Competitive Strength compared to other factors

It is no secret that business is tough for retailers and likely to get tougher. In July and again in August, companies including Kingfisher, the B&Q owner, and Sports Direct and JD Sports, the sportswear retailers, warned that slowing consumer spending has hit sales. This followed downbeat statements from retail big hitters Tesco and Marks & Spencer, who earlier in July said that sales growth is moderating.

Analysts at Citigroup have downgraded the valuations of the whole of the non-food retail sector. The bank slashed sales growth targets for 2008 from 1.8 per cent to zero, based on what happened in 2005. “If true, the sector will suffer another severe profits reversal," the bank said. The bank is particularly concerned about retailers with exposure to UK consumers, such as Argos and Homebase owner Home Retail Group. A raft of insolvencies are expected among medium-sized chains between now and February 2008. "It is tough out there and unless you have scale I can't see it getting any easier," said a retail expert last night.

On precisely the same date as the above report came this trading update from John Lewis Partnership.
Sales on the first day of John Lewis's summer clearance sale this month hit £18.8m, up by a third on the previous year and an all-time company record. Overall, sales for John Lewis's first half - which ended last night - were 6.7 per cent higher than last year. Sales on the company's website, John Lewis Direct, are up by 40 per cent year-on-year.

Meanwhile, John Lewis will open its first food hall at its Oxford Street store on October 3. Produce in the hall, which will include a cheese room, delicatessen and fine wine area, will be supplied by Waitrose, John Lewis's sister company. The concept could be rolled out nationally, with the next one opening in Cardiff in 2009.

Andy Street, the recently appointed managing director of John Lewis, said the retailer had extensive expansion plans. The 26-store chain has 22 new stores at various stages of development, including one near the 2012 Olympic site in Stratford, east London. "Only half our target customers have access to a John Lewis," Street said. He said the retailer was putting 25 more staff on tills in every store to improve customer service. "As the markets are getting tougher and people are cutting down on costs, we are investing in our front line."

John Lewis show all the signs of being in an “Excellence” to “Free” Competitive Strength Condition. This gives them greater choice in how they respond to tougher market conditions. They are going on the offensive, opening more stores, rolling out new concepts and improving customer service. Many of their competitors with weaker competitive strength conditions will have no choice but to adopt defensive strategies, cutting costs, lowering prices, reducing stocks and customer service and putting expansion plans on hold and hope to ride out the storm.

John Lewis are bucking the trend in spite of having less “scale” than many of their competitors in most of the product categories they trade in and being entirely exposed to the UK consumer. Unfortunately in order to share in the success of John Lewis you cannot actually buy their shares, but you can apply for a job with them. Oh yes and they still have defined benefits employee pension scheme!