My Blog List

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.