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Thursday, 22 January 2009

The Fallacy of the "Market"

As we move into the early part of 2009 one of the business names shortly to be added to the casualty list is Foxtons estate agents.

Foxtons grew rapidly on the back of the London property boom and became famous for the Minis in Foxtons livery darting around the streets of London. Jon Hunt, the founder, sold the business to BC Partners for £360m just before the credit crunch. Now comes the news that Foxtons have breached their banking covenants and BC Partners have conceded that its decision to buy the business was a mistake. “As housing markets fall, so do estate agents, so we got that wrong. In hindsight, we made the wrong assessment of the market,” said a spokesman.

Well yes you did, but the really wrong assessment was not “of the market” – it was of the company itself. Jon Hunt had done a great marketing job, the company Minis were just one example. He rode the boom astutely, opening more offices, taking on more staff, positioning the business as THE estate agent in London and timing his exit impeccably – good luck to him! Yet many who had attempted to buy or sell a house with Foxtons had perceived the company as inefficient, its staff incompetent and unprofessional (remember the Put-A-Sign-on-Anybody’s scandal?) and putting its own interests before those of its clients. A bit of research amongst Foxtons’ clients and London house owners who had had anything to do with them would have revealed a business that was likely to be unsustainable other than in a booming market.

There is a mindset amongst many investment analysts and managers that leads them to believe that investing in businesses in so called “high growth” market sectors and/or with apparently unassailable market advantage in their products/services is the Holy Grail that will produce the stellar returns they seek. This leads them all too often in to over-valuing the “biggest” – because, “obviously it must have grown more”. The same immature logic has driven company directors to pursue Top Line growth regardless of expense, because it will impress these analysts who will then recommend their shares.

This is just rubbish thinking because all “high growth” sectors and any market advantage are at best temporary and frequently illusory as BC Partners experience with Foxtons illustrates. There is no substitute for being a good, well run business that has developed a high level of Competitive Strength that ensures it stays that way.

In 2003 Irish Drinks Group C&C, launched Magners Cider. Described as “a triumph of marketing” the new concept of “Cider Over Ice” swept all before it. Sales grew strongly during three successive summers and into 2007’s early Spring heat wave. Over the same period C&C’s share price grew strongly too, from €2 to €14. However in reality this was based on just two assumptions – that no competitor would enter the market and that it wouldn’t rain.

Well, S&N launched Bulmers Over Ice in 2006 and recaptured 20% of the market - and it started to rain. In two months C&C shares dropped to €6 as sales and profits collapsed. The business simply did not have the Competitive Strength to maintain and build on the advantage it had gained with its new product. Their share price is now around €1.45, their Chief Exec has gone to be replaced by John Dunsmore former Chief Exec at, guess where, S&N!
For the most spectacular example of a booming market masking fundamental weaknesses in the business, look no further than the banks!

However an example of how this works in reverse is Sainsbury’s. For some time their market share, sales and profits wilted as competition from Tesco, Asda and Morrison’s hotted up. Financial and investment analysts were forever claiming that Sainsbury’s must reposition up market, down market, sideways, anywhere where there was less competition if they were to have a future. Successive managements arrived, tried, failed and went.

Then along came Justin King, with the novel strategy of making Sainsbury’s a “better business”. The result has been growing market share, sales, profits and the resilience that will see it through the downturn, all of which had nothing to do with the market. Can you imagine the previous state of the company enabling it to introduce its expanded non-food offer and its new value lines as effectively as they have done now? As a “better business” Sainsbury’s are not only spotting changes in the needs of their customers but are actually now capable of responding.

We are not saying that the market and/or market advantage from a break through product or process will not have an effect on the performance of a business, it is just that on its own it is not as crucial as many think it is and certainly not as significant as Competitive Strength. Businesses with high Competitive Strength conditions, what we call Excellent or Free, can not only respond faster to market changes but are frequently the instigators of those changes. They can profit from high growth and continuously create and renew their market advantage.

Experience and rock solid research has proven that how an organisation thinks and behaves, the deep seated managerial and behavioural values and competences of a business, are the main differentiator of whether over time they will substantially outperform their competitors and successfully withstand unpleasant surprises.

This manifests itself in the form of Competitive Strength, a new measure of business performance.

Yes, you can actually measure Competitive Strength, either in your own business or in any businesses you are considering investing in. The Competitive Strength Report Process is the only tool available from anyone, anywhere that provides an objective measure of Competitive Strength compared to the very best in the world. The Competitive Strength Report enables a business leadership to understand where they are positioned, in comparison to the very best, where their main threats lie, what the implications are and helps them decide very clearly, collectively and speedily what they need to do. There is nothing else as fast, as accessible or as affordable.

Find out more about it on our Competitive Strength web site page – or at the Competitive Strength Report website.

Exceeding Expectations is brought to you by Steve Goodman & Tony Ericson of ChangeWORLD. For more lighthearted comment with a serious point on current business related topics go to our You’re having a laugh … seriously? and Business Bloop of the Month Award