DSG – Predictable Train Crash? Competitive Strength foresaw this 2 years ago!

From The Times January 4, 2008
DSG hits 12-year low after profit warning sends shivers through the high street
Steve Hawkes and Siobhan Kennedy

John Browett, the new chief executive of DSG International, said yesterday it could take years to revive the Currys-to-PC World business as he issued a stark profit warning that sent a shudder through the high street.
Shares in DSG plummeted 27 per cent to a 12-year low of 78p, wiping £520 million from the embattled retailer’s value, as it became the first major casualty of the Christmas spending slowdown.
DSG said a 10 per cent slide in like-for-like sales at PC World since October meant it could miss full-year profit forecasts by £50 million.

And

Tony Shiret, the Credit Suisse retail analyst, said: “I think it’s a predictable train crash.”

But – the Analysts did not predict it – they could not predict it, at least not more than a few months ahead – they hardly ever do. Why? Because they remain focused on external factors such as Brands, Competition and Markets rather than the internal competencies of the companies upon which they pontificate.

Strong Markets provide an easy ride – that is so obvious it seems hardly worth saying.

What is less obvious and so often overlooked, is that within any such rising market some companies prosper relatively much more than others. How those relatively prosperous companies then make use of their relative financial strength has enormous influence on what happens when, inevitably, the Market weakens. We see three stereotypical behaviour types, Growers, Grabbers and Builders.

Growers are companies that choose to invest their profits on Organic Expansion in the belief that size and market share deliver strength. They do not invest heavily in internal change because “they are doing very well already”. They point to the ever expanding numbers in balance sheet as proof of their success. Financial Analysts regularly applaud such behaviours.

Grabbers are companies that choose to focus their profits plus any funds they can lever into Acquisitions in the belief that variety and/or spread deliver strength. They do not invest heavily in internal change because “they are doing very well already” and they need the P&L leverage for the borrowing that enables purchases. They point to the exploding numbers in balance sheet as proof of their success. Financial Analysts so often become lyrical in their praise of such behaviours.

Builders are companies that choose to invest heavily, as a normal business expense, in internal performance improvement, strengthening their core capabilities and achieving high levels of customer care. In the short term this may result in slower profit growth, but in the medium to long term they significantly outperform the other types of companies. However the short term slower growth (coupled with the tendency of these types of company not to splash money around the city – they don’t need to) often causes the analysts to attack them for lack of enterprise or ambition. It appears that they simply cannot see nor do they understand the connection between the investment in internal performance improvement and the highly positive outcomes this produces for future profit growth.

When the Market weakens the chickens come home to roost.

The Growers find that they very rapidly become unprofitable. They have no latent ability to change. They typically have relied on low pricing to gain sales but find that they can no longer afford these. Their customers’ “loyalty” has only ever been to price, so they go elsewhere.

The Grabbers find that their core business rapidly becomes a heavy drag on the other sectors and then they seek to unload it, or become vulnerable as another sector weakens. They have no internal ability to change rapidly. Often they also may have relied too heavily on pricing to win sales and lose customers fast.

The Builders find that their time won internal efficiencies, cost effectiveness and superior customer retention allow them to trade successfully and to grow market share while others are losing. They adapt rapidly and appropriately to different situations and keep their customers with them.

Which sort of company do you think DSG has been?
What sort of company do you think that John Lewis and Tesco, to name two examples, might be?
And, thinking about Builders, what sorts of companies has Warren Buffett selected over the years?

The Competitive Strength point of view foresaw this – 2 years ago when one of our clients was subjected to one of the worst customer service experience from PC World Business we have ever witnessed. It was clear their internal processes were incapable of delivering their promise to customers. Their response to complaints demonstrated that they neither understood nor cared about this. Financial commentators and analysts finally began to notice in August and September 2007 Links here - 29th August - 19th September.

We pointed out then that John Lewis was showing all the signs of having superior Competitive Strength – and that their competitors were not. John Lewis and Tesco show signs of having the level of Competitive Strength that we call Free. They can afford to make strategic choices even when times are hard – and both can be seen to be doing so as we write.

Stop Press - This morning's Telegraph reports-
John Lewis sales up 8% over the Christmas trading period including Christmas and the early NewYear sales period. Sales rose to £70.2m boosted by electricals and home technology, which had the most consistent growth. (Our emphasis)

DSG has exhibited for some considerable time* all the signs of the Competitive Strength level we call Constrained – just one step away from The Abyss, failure. They have few choices left.
* This information has been available, published customer comments being a critical indicator.
* Did the Financial Analysts attach proper weight to this? Do they have any dimension that enables them to assess this? We do not think so.

A Competitive Strength analysis would show the leadership of any business totally objectively their level of Comparative Competitive Strength and what their future potential might be. For example, for DSG it could show them where their salvation might lie, what their immediate choices are, and identify the key transformational steps they would need to take to achieve first Excellence and then move on to Free.

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.

We say, please look at the Competitive Strength web site. Please see the spectacular difference in both financial strength and business resilience there is between the Constrained and the Excellent. You will also see, as the Analysts so often fail to do, just how deeply temporary and precarious is the position of the Constrained business and how traditional methods of analysis usually fail to spot this until it is too late.

This the time of year when the financial commentators and analysts give their share tips for the New Year.

Here are ours:

If you read the following in a company report: “We received over 2,000 suggestions for improvement from our employees this year and implemented over 65% of them”.
Then BUY!

However if you read: “Our people are of course our most valuable asset”.
Then SELL!

P.S. The Headline says “DSG hits 12-year low after profit warning sends shivers through the high street”
Why should DSG’s profit warning do that?
Do the journalists and the analysts think that all or most other retailers are as inefficient, customer indifferent and operationally incompetent as DSG, or very nearly so?
Is that why they think they should be afraid? We can understand it if they do.
However, we know of several retailers who remain confident in their ability to weather a downturn; their Excellence, (changeability, flexibility, agility, operational competence and exceptional customer care) will ensure they prosper while others writhe in Constrained agonies or the death throes of The Abyss.