Going, Going, Gone? – Auction of the Vanities?

From The Times     May 1, 2009

Need to know: 

Motorola: The US mobile phone maker reported a first-quarter loss of $231 million (£156 million), an improvement on its $194 million loss for the same quarter last year. Sales were down by 28 per cent.

DSG International: The owner of Currys and PC World has raised £310.6 million to shore up its capital base after credit insurance fears contributed to a surprise rise in its net debt.

Chrysler: The American carmaker has gone into Chapter 11 bankruptcy protection, having won $8 billion (£5.4 billion) in US government funding to help it to restructure.

Smith & Nephew: The London-listed medical devices company reported an 18 per cent rise in first-quarter profits to £66.2 million, as the benefit of cost cuts outweighed a 5 per cent slump in revenues, caused by patients deferring non-essential orthopaedic surgery and by hospitals tightening their expenses.

From the Competitive Strength Point of View –

Going – Motorola, a once great technological leader that loudly trumpeted its own excellence that has been struggling for years.  At best this is a company that is exhibiting the Comparative Competitive Strength symptoms of a Constrained condition.  There is much that it needs to do to recover its previous value to shareholders, customers and employees – market leadership, product innovation, quality and delivery are examples.  The fact that none of these are new factors over the last 18 months suggests that the only focus is now survival – that is a Constrained condition.

Going – DSG International, a large business that loudly claims market leadership but has been the subject of our adverse predictions over a number of years.  The list of operational quality failures is massive and widely documented, especially where there is interest in customer service experiences.  This report seems to indicate the next step in the inevitable death throes as this business slides from Constrained towards The Abyss.

Gone? – Chrysler, a motor company that has been so spectacularly uncompetitive for so long that the only wonder is that it has lasted so long.  However, it has never been immodest – the blowhard communication habits of the Motor Industry run through its veins. The various managements of this vast corporation have been ducking and diving over the decades with acquisitions such as Jeep, international misadventures such as the shambles that was Chrysler Talbot, mixed ventures such as the mutually disastrous tie up with Mercedes, and a new vehicles that remain firmly unmatched to market needs (just look at the current range!) – and last but not least, a quality and reliability reputation that almost any Third World vehicle builder can beat hands down.  This is a long Constrained business that has toppled into The Abyss.

The tragedy now is that their extensive  Supply Chain will suffer a massive financial blow that they are also ill equipped to withstand.  It is very probable that much of their Supply Chain is also in a Constrained condition and that The Abyss awaits them too.  And, meanwhile, the worthless Brand Name totters on in the name of job protection, is there any other logical reason?  This time about to be hitched to the paragon of automotive quality leadership that is FIAT – another Constrained organisation that exists only by governmental fiat – what a combination that promises to be..

A Lesson from Chrysler – the LCD Effect

The brutal reality of the Competitive Strength point of view is that, in the majority of cases,  in any interdependent business relationship the Lowest Common Denominator sets the pattern of values, thinking and behaviour for the whole.  So, because Chrysler has been for so long in a Constrained condition, tragically many of their suppliers may also have come to share the condition – and be therefore be doomed in turn.

 The Mercedes/Chrysler tie up illustrates this so well.  Mercedes, strong in the self belief that they were an example of Excellence in  Competitive Strength, entered a joint venture with Chrysler (a Constrained operation desperately seeking yet another silver bullet).  There were two unexpected outcomes – first, Mercedes’ reputation in the USA for quality and reliability with engineering excellence suffered nearly terminal damage from their first locally built vehicles – second, the world wide market spotlight fell across the quality and reliability of all Mercedes’ range and they too were seen to be found wanting.  Mercedes’ self perception of Excellence had been a myth – they were in fact, and had been for some time, merely in a Comfortable condition.  And that is why they slipped downhill with Chrysler without even realising that it was happening. 

However, although it has taken a few years, Mercedes’ leadership realised what was happening, distanced themselves from Chrysler as far as possible, and made a massive investment in restoring their internal culture towards Excellence.  The only question now is whether they have made enough progress to withstand the credit crunch?

However, the News is not all doom and gloom today -

Staying – Smith & Nephew, is a company with a quiet reputation for excellence in everything that they do.  It has demonstrated a high degree of agility in both market shaping and leadership through an adept and innovative mixture of  product leadership and flexibility in distribution channel development.  In fact, it exhibits several symptoms of the Competitive Strength condition beyond Excellence that we call Free.  So it is no surprise to see, as reported, that they have been able to respond rapidly and productively to a sudden shift in market conditions.

So, does your company think it is the greatest? 

Do you shout your superiority from the rooftops?  Are you one of the business leaders fooling your customers, your suppliers, your shareholders and, worst of all, yourself that You Are The Best?  

Times are tough – and in Warren Buffet’s memorable phrase - the tide is going right out.

In terms of Competitive Strength levels -

·       If your business is in the condition of Excellence – you are in for some nasty surprises

·       If your business is in the condition of Comfortable – you are in for a terrible time – you will very probably slide into a Constrained condition without knowing it has happened until it is too late.

·       If your business is in the Constrained condition – you are unlikely to survive

·       If your business is in the Free  condition – you don’t need us to tell you what to do, you will already have done it.

Whether you are a business leader, proprietor, investor, financier, supplier, banker, manager or employee – you would be wise to look hard at the Competitive Strength condition of the companies with which you are closely associated.   If they are going down, they may take you with them without you even realising that it is happening.

If you want to find out more about the Competitive Strength Report, the true financial value of exceeding expectations and the importance of changeability for survival and prosperity, please look at our ChangeWORLD web site here.  If you have the courage to wake up and face reality – contact us before it is too late. 

Exceeding Expectations is brought to you by Steve Goodman and Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. Each blog has a new article each month using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs are "You're having a laugh ... Seriously?", Business Bloop of the Month Award", "Capitalism or ... Common Sense" .

The Fallacy of Market Share

In our last Exceeding Expectations article we demonstrated how being in a high growth market sector and/or having a temporary market advantage are not reliable indicators of long term performance for a business. In this article we explain why “market share” is misunderstood and misused as an indicator of future performance – and so often also as a strategic goal. Given that the ONLY rationale offered to persuade Lloyds TSB shareholders to support the merger with HBOS was the “largest-market-share-in-UK-retail-banking-Gordon-has-given-us-the-nod” argument , this is a highly relevant subject to address.

The argument in favour of achieving high market share is that this creates many advantages that lead to superior financial performance. This fallacy has a corollary– the conclusion that high market share requires a very large organisation. Frequently this prompts boards to “shortcut” their way to increased market share through merger and acquisition. However as the record shows, M&A has a chance of between 50 and 80% of failing to produce value; what does this say about the advantages of high market share?

The research on this subject appears superficially to back the notion that high market share leads to superior financial performance. However one piece of research identified a crucial element needed if this superior performance is to be sustainable. The research, carried out at Harvard and still ongoing is titled Profit Impact of Market Strategies (PIMS). This research involved gathering performance data over many years from many thousands of business units to identify the business strategies most likely to lead to success in a range of contexts. In their book (“The PIMs Principles”) Robert Buzzell and Bradley Gale showed how their PIMS research discovered that only market share growth based on relative perceived superior quality will result in market share growth that delivers sustainable superior financial performance.

For an example of how the lack of relative perceived superior quality results in poor financial performance in spite of high market share we need look no further than DSG, the owners of Currys and PC World. This company built itself into the market leading electricals retailer and showed all the characteristics of a high market share operator, e.g. using its buying power to offer low prices and occupying prime retail sites throughout the UK. Three years ago, after one of our clients suffered one of the worst customer experiences we have witnessed from PC World’s so called Business Division, we looked at DSG from our Competitive Strength perspective and warned that all was not well. Since then other commentators began to voice concerns and in due course DSG’s profits began to slide along with its share price.

Then came the recession and of course this has meant a tough period in retail. In spite of this a few retailers have been able to report results that exceeded expectations whereas DSG announced trading results that were every bit as bad as expected. The media’s financial and business pundits once again cited market conditions, the credit crunch, shifts in demand for one technology or another, and so on. DSG attempted to cushion the bad news by reporting that trials of new store formats had delivered increased sales and margins. On the strength of this news one analyst actually changed his recommendation from sell to hold – obviously he has never heard of the Hawthorne Effect (research that showed the refurbishing of working environments can improve performance – but only for an extremely short time). The thinking (or is it a Prayer?) goes that if the market leader upgrades all their stores, the improved performance seen in the trial will replicate across the business to restore the high market share and once again deliver high profits.

We have to ask - has this analyst or any of the other commentators actually tried to buy anything recently from a DSG store? If they had, they might just understand why even an infinite number of expensive store refits will not stop DSG plunging further and crashing – why there is no sign of a competent pilot and no River Hudson nearby.

Recently, my wife and I popped into our local (large) branch of Currys. She wanted to buy a new electric iron. There was a reasonable choice of items lined up along a display shelf. The chief decision maker examined them and finally decided which one she wanted to buy. We looked at the lower shelves for the boxed item. It was not there – in fact, there were boxed examples of fewer than half the items “on sale”. After a search, I found two assistants busy chatting and asked for help. Visibly irritated at being interrupted, one of them came to the shelf, removed the label, disappeared to a computer terminal and then returned. “We don’t have one, but you can order it”. We asked when, if we were to order, would it be available? He did not know. He asked another lady assistant who said that a delivery would be in 4 days. Would it include that item? “Probably – if you order it”.

My wife asked if we could buy the display item? Could we have the box and instructions? “Oh no, we throw those away. We would be full of cardboard boxes, wouldn’t we?” My wife then asked how much reduction they would offer for the item as incomplete. “Oh no, we can’t reduce it because it is a current stock item. You can order it”. She walked out, fuming. We went straight to Sainsburys – a whole 300 yards. Within 10 minutes she found what she wanted and bought it.

This is why DSG are doomed. Disastrous Customer Service experiences and the inability to deliver the basic function of a “shop” (somewhere that sells things you can buy there and then) demonstrates DSG’s relative perceived inferior quality. Disposing of the packaging and thereby devaluing all their display stock is simply one of many inevitable, stupid consequences of the core problem. This core problem is low Comparative Competitive Strength for which no amount of “bigness”, whether in market share or anything else, can compensate.

Their new chief executive is promising change “but it will take time”. With rapidly diminishing Competitive Strength, my friend, you don’t have the time. This is a business behaving in a way that spells disaster even in good times. What hope does it have in a time of economic crisis? The Abyss looms – and a great deal faster than you may wish to believe. Size matters, a bit – the Titanic took much longer to slide under the waves than a rowing boat, but the only variable was the time, not the sinking. And, as a very large organisation, when DSG crashes, the tsunami will drown many others that do not deserve to die. If, as they have announced, DSG think they need redundancies – it is not in the stores – it is in their leadership.

If you own DSG shares, forget them, write them off. If you are a DSG employee, sorry, look for another job now. If you are a DSG Supplier – get ready for massive contractions at any minute. If you are a DSG Creditor – take protective action now. If you are a Financial Analyst, ask yourself if you are saying the right things but for the wrong reasons and consequently at risk now of giving wrong advice? If you are an Institutional Investor (on behalf of my pension fund perhaps?) and if you still hold a stake, you should be sacked, now.

If you think we are just picking on DSG, what about Lloyds TSB and HBOS? Sorry, Lloyds shareholders, it is probably too late, get ready to sue your Board members and the government.

The only hope the UK has in these troubled times is for every business to raise its game NOW. There is no longer time to pussy foot around. Every enterprise that fails, as DSG seems determined to do, will be an avoidable burden on the few survivors. Don’t expect the Government to help – they haven’t a clue about Comparative Competitive Strength or its importance to saving the British economy – just a few stalwart pursuers of Excellence will, if the banks don’t stop them, provide the only solid base for our future economic survival.

Frankly it makes us want to cry. But if you are of stouter heart, and want to know more about how you can raise your game – NOW – please have look at our website here and at the Comparative Strength Report page here.

Exceeding Expectations is brought to you by Steve Goodman and Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. Each blog has a new article each month using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs are "You're having a laugh ... Seriously?", Business Bloop of the Month Award", "Capitalism or ... Common Sense" .