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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!