Investile Dysfunction

Another Reason Being a Follower Sucks - It Hurts M&A Performance

I read a quote recently in a business book that I wanted to share:  "Life is like a dogsled team / If you ain't the lead dog, the scenery never changes."

Basically, being a follower sucks.  There is no such thing as a world-class follower.  Who remembers the loser in the last 5 Super Bowls?  Exactly.

So with that rant out of the way, I was heartened to see new proof of the lameness of being a follower as it relates to M&A.  For those who have read my blog before, you know my relatively low opinion of M&A.  It is a great vehicle to destroy shareholder value, get bankers rich and feed the ego of some wanting-to-be-visionary management person or team.

The February 26, 2008 New York Times had an interesting article entitled "Mergers in a Time of Bears" which generally affirms my distaste for M&A and fully proves my stance on followership.

Excerpted portions of the article are below:

"Most mergers fail.

If that's not a bona fide fact, plenty of smart people think it is.  McKinsey & Company says it's true.  Harvard, too.  Booz Allen Hamilton, KPMG, A.T. Kearney - the list goes on.  If a deal enriches an acquirers' shareholders, the statistics say, it is probably an accident.

But a new study puts a twist on the conventional wisdom.  It's not that all deals fail.  It's just that timing appears to be everything.  Deals made at the very beginning of a merger cycle regularly succeed.  It's the rest that fall flat.

Deals struck in the first 15% of a consolidation wave tend to do well, at least as measured by the acquirer's share performance against that of the broad market.  The duds come later, when copycats jump on the bandwagon.  Even in the merger game, there is a first-mover advantage."

Do we need more proof that followership is not the way to go.  Yes, being the first requires guts and a certain risk tolerance in any endeavor including M&A, but why would you buy when the best targets are taken and the remaining ones are being valued higher because of a perceived supply-demand imbalance?  If you think M&A is the way to go (I'd advise against this), at least ensure you're not following the lead of others.  Be the best practice - don't follow it.

The Strategic Finance Organization - More Whining and No Results.

The one thing that finance and IT organizations constantly are complaining and moaning about is their inability to focus on strategy or become strategic.  These aspirations are never really well articulated but being strategic or better "a partner to the business" seems to have become the rage so everyone is constantly pursuing this.  It's not a bad thing, but it doesn't seem everyone understands why they're doing this or how to do it.

And in line with this, CFO Magazine ran an article entitled "Are We Strategic Yet?" which describes a study by our friends at McKinsey which found that 72% of new CFOs wanted to spend time on corporate strategy and 45% on M&A/business development but instead spent a lot of time on FP&A/reporting/performance management (56%) and accounting/audit/compliance (42%).  Typically, I'd be skeptical of research like this because a strategy consulting firm, McKinsey, issued it so it would seem a bit self-serving.  But I speak at numerous conferences and "how do we become a more strategic partner?" is invariably a topic

For those who read CFO Magazine, it is customary they run an article describing this issue at least 2 or 3 times a year.  And this is not their fault.  It's just that CFOs and finance organizations continually complain about this but seem to do little to tackle the problem.  They seem to be afflicted with the disease that Rose Macaulay nicely articulated when she stated,

"It is a common delusion that you make things better by talking about them."

So what seems to be the problem?

• What the hell does strategy mean?  It sounds sexy to be strategic, but you were to ask CFOs and their finance organizations what it actually means, I suspect few would be able to articulate what this means.  I suspect many organizations and people across all functions would have problems articulating this.  So let's agree on a simple definition of strategy.  Strategy simply is a plan of action to achieve particular objectives.  Feel free to disagree with me on that definition, but as this is not a post about the definition of strategy so I'm being sufficiently expansive.
• Variance analysis is not strategic - Subtracting two numbers from each other and pointing to the resulting number as good or bad is not strategic.  Creating charts (no matter how pretty) which show a trend ("the bars are getting bigger so that is good") is not strategic.  These are things that can be done by a college kid or an Excel-savvy middle schooler.  If we go back to our definition of strategy, it is about achieving particular objectives.  This means the finance organization is strategic if they can impact decisions that help achieve these objectives by utilizing data and information.  Just parroting back #s in interesting presentation formats is not strategic unless it helps to enlighten on these objectives.  If it's just to look smart and busy, it's a waste of time.
• Let bean counters be bean counters - This may sound terrible at first blush because the term bean counter has gotten such a bad rap.  Basically, not everyone is "strategic".  What this does mean is that getting the numbers right and reconciling them and ensuring proper controls are in place has a lot of value - immense value actually.  And that the people who are good at those things may not be "strategic" nor do they need to be.  They need to make sure that invoices get paid and receivables collected and that people aren't stealing money from the corporations coffers.  These are critical functions but not strategic per se.  They're just required else the company ceases to exist.

If the finance organization wants to be strategic, at least in part, they should focus on utilizing the information they have to impact resource allocation decisions.  To see an article discussing how to do this (and stop whining about it), please click here.

Want Better Performance? Hire Women.

As reported in Entrepreneur Magazine, a 2007 report by Group and Organization Management found that "women have a positive stock effect on a firm's short-term performance, three year stock price growth and growth in earnings per share."

Now you know.

Zara Continues to Innovate. Lesson Learned: Be the Best Practice, Don't Just Follow It.

I'm always amazed and perplexed by companies who somehow believe that they can follow their way to glory.  Basically, they seem content to follow "best practices" instead of becoming the "best practice".  But as everyone has probably realized, there is no such thing as a world class follower, and if everyone is following the same best practice, isn't everyone just in a race to keep up with each other?

And that is why I find clothing retailer Zara so refreshing.  They pioneered "fast fashion" which essentially lets them get the newest, latest fashions to stores more frequently.  To do this, they made changes to how they manufactured, handled their supply chain, marketed their products, etc.  It was a multi-dimensional approach which worked and made Zara the best practice.  They didn't listen to the conventional wisdom and did things their own way.

As a result of their success, others followed their established best practice.  And as the Wall Street Journal reported stated, "Inditex (the parent company of Zara) is responding to a predicament shared by other companies that come up with game-changing formulas: Eventually competitors catch up, forcing the pioneers to do even better to keep their edge. (Please see related story on page B9.) Low-cost carrier Southwest Airlines Co. is making big changes to fend off rivals that have copied its efficient operating model. Inventory-control methods at Wal-Mart Stores Inc. are being mimicked around the world, and Google Inc. is updating its search engine to keep users loyal."

So now that others are catching up, Zara figured it was time to push ahead again (instead of resting).  And there efforts come at a time of economic uncertainty where many organizations are worried about their performance and cutting costs instead of innovating.  Zara continues to forge ahead with efforts as reported in the Journal including:

• "The company is pressing ahead with its expansion plans even as consumers are slowing down. In the U.S., retailers had their worst monthly sales results in nearly five years in January, and some chains are planning to close stores and cut jobs...In the last 12 months Inditex added 560 stores, including entering new markets in Croatia, Colombia, Guatemala and Oman, to reach 3,691 stores in 68 countries. It plans expansion of a similar scope over the next year."
• "Alarm tags are now attached to garments at the factories. In the past, at a big Zara location such as the four-floor store on Madrid's Alberto Aguilera shopping street, 10 people spent an average of 12 hours a week putting on the tags. Now, Inditex estimates, those salespeople spend 3% more time serving customers."
• "Store managers also use new hand-held computers that show how garments rank by sales, so clerks can re-order best-sellers in less than an hour -- a process that previously took about three hours. These orders arrive, together with new pieces, two days later."
• "Also, each of the company's various store brands shipped merchandise separately in the past, concerned that mixing even behind the scenes could dilute their images. Combining the brands into larger volumes has allowed Mr. Isla to launch twice-weekly air shipments with Air France Cargo-KLM Cargo. Planes from Zaragoza, Spain, land in Bahrain with goods for Inditex stores in the Middle East, fly on to Asia, and return to Spain with raw materials and half-finished clothes."

• "In another move to cut costs, Mr. Isla [Inditex CEO] installed software in store computers to schedule staff based on sales volume at different times. As a result, more salespeople work at peak times such as lunchtime or the early evening. Inditex says the more flexible schedules shaved 2% off the hours staff work."

Zara's ability to zig when everyone else zags is commendable and counter to what most organizations do.  And they don't just innovate hoping for one large intervention which will save the day.  Instead, they make small and large innovations to constantly improve their business. 

If you wake up in the morning to work for an organization that aims to be the best follower the world has ever seen, continue to follow the supposed best practices.  For the rest, Zara's efforts to innovate and willingness to take risks, big and small, may be worth closer examination.

GE's Greatometer Reveals a Great New Metric

File this posting in the irreverent file but thought I'd share because this is great.  WSJ's money blog had a great post called "Great Scott! A New GE Metric" which talked about a great 'study' by Morgan Stanley stock analysts where they noted a correlation between CEO Jeff Immelt's use of the word 'great' or 'greater' and company performance.  Dubbed the greatometer, they found that as the "use of 'greatness' rises during the company's conference calls, so does GE stock".  How great is that?  I know - it's too great. 

To give you a sense for just how great the Greatometer is, the blog author provides some great statistics which I'd presume were provided by the great guys at Morgan Stanley.

"In the third-quarter 2002 call, Messrs. Immelt and Sherin said "great" more than 20 times. By the second quarter of 2005, the word appeared about 70 times in an hour-long call. Over that period, GE shares rose 37%, to $36.38, from $26.65.

Then, Messrs. Immelt and Sherin cut back on using "great" for a while. In the call following the third quarter of 2006, the word was uttered only 37 times. GE stock fell 10% over the period.

Following the drop came a great rebound. On Jan. 18, when GE reported its results for the fourth quarter of 2007, there were roughly 80 incidences of greatness, including the "great company," the "great quarter," the "great momentum" and the "great risk management," according to a transcript by Thomson Financial.

Shareholders were feeling great, too: GE shares traded at an average of $40.16 in the fourth quarter.

So how should investors play the greatometer in 2008? The eruption of greatness in the most recent call would seem to be a bullish sign.

"If share prices do really correlate with management optimism, then GE's one-year outlook could be looking up," says Scott Davis, Morgan Stanley's lead GE analyst."

Given the great fascination with GE and its management practices & metrics, I would also suggest that a consultant deem this a great best practice and begin marketing some sort of great offering around this.   

Yahoo's M&A Mishaps - Wisdom After the Fact

If you've read my blog before, you know that I think M&A is generally a collosal waste of organizational resources (money or equity for the purchase + the time wasted to 'integrate' and synergize) and it is driven generally by ego and empire-building visions.  It serves to enrich investment bankers and consultants for the most part. 

And in my view, companies should focus on the more controllable dimensions of growth, e.g, organic growth, innovation, etc. 

But if there is one thing that I am, it is fair (or at least I think so).  And so an article in yesterday's Wall Street Journal entitled "Yahoo Might Long for M&A Do-Overs" was a bit misguided with its Monday Morning quarterback'ing.  The column basically looked at the bad deals that Yahoo has done over time and offered it's 20/20 hindsight wisdom.  Let's take a look.

1. Geocities - Yahoo paid $3B.  Ouch - not ideal.  But then there is a comment that "Had they done things right with GeoCities, there would be no Facebook, YouTube or Myspace."  Really?  I'm not sure the technology was ready back then, nor was the advertising monetization model as prevalent or was social networking all the buzz.  Sure Geocities could have become these, but it seems a bit unfair to expect that Yahoo would have come up with all these innovations.  Facebook and MySpace are possible today because of other advances.  Plus, if you ever used GeoCities, it was pretty terrible as far as I remember. 
2. Facebook - Supposedly Yahoo had made an offer for $850MM which Facebook rejected.  At the time when Zuckerberg rejected a $1B offer, everyone thought he was crazy and the popular media especially.  Now that he has been proven right (given MSFT's investment), Yahoo has become the idiot.  This is just media fickleness.  And honestly, at this point, who knows if the the social network thing has some legs?  They're not converting ads (per Google's last release) and so there is a chance Facebook and MySpace are just other new entrants in the hype cycle.
3. Broadcast.com - So this deal for which Yahoo paid $4.3B gave us colorful Mark Cuban.  Again, this was bubble level prices so a bad deal.  I agree with the WSJ on this one as the biz model of Broadcast.com ("helping conventional radio stations extend their reach by broadcasting their signals over the Internet") was pretty lame.  Wonder who in Yahoo created the deck supporting this one?  Probably some good influencing and PowerPoint skills.
4. YouTube - Google got it for $1.65B which relative to Broadcast looks like a bargain.  But you can't use Broadcast's price as an indicator of any kind.  Sure Yahoo coulda, woulda, shoulda gotten YouTube but what would they have done with it?  Bolting on interesting, high growth products with no business model onto an existing business is not a viable long-term strategy.
5. Google - Yahoo could have bought them for $3B and they didn't.  Idiots?  Not so fast.  Who knows if Google would have become what it is within Yahoo? 

This type of second-guessing is fun perhaps, but not necessarily fair or productive.  Overall, you have to have a real strategy and then these deals could have done somewhat better or maybe they wouldn't have been done.  The problem is that Yahoo hasn't evolved its strategy over time.  Just trying to add eyeballs and buying something because its growing quickly and people think it will be worth something is not a reason to buy. 

At the end of the day, if Yahoo had innovated its search platform, it would need none of these.  Look at Google's profits and revenues.  They're still wildly dominated by search which was Yahoo's biz model.  Again, innovating and growing organically would have served them much better than their past M&A activities.  This holds for most industries. 

Research Spending to Decrease For Next Few Years. Probably Not Good For America's Competitiveness, Right?

I just did a post featuring some commentary by Ram Charan in which he talked about the need to not cut back on investments in product development, marketing, innovation, etc when the economy worsens.  Basically, don't sell your children as they are the future. 

But nevertheless, companies invariably do this.  Spend like crazy during the booms and cut back (somewhat arbitrarily and across the board) during the troughs.  The latest research reports on this seem to validate this phenomenon again. 

Keep an eye on those organizations that think in a contraries manner and actually spend more on R&D now.  They will be positioned for good things down the road. 

More generally, companies should focus on re-engineering non-customer and non-innovation oriented activities all the time so that they can keep investing in those activities which sustain and ultimately grow the franchise - R&D for example.

Can Innovation Be Captured in a Mathemetical Formula? Someone at Bell Labs Thinks So.

The February 2008 issue of Fast Company has an article entitled "Mad Scientist" about Jeong Kim who heads up Bell Labs.  The article begins "Can legendary Bell Labs--and its struggling parent, Alcatel-Lucent--be saved by a "crazy risk taker" who's betting that innovation can be captured in a mathematical formula?"

The article is pretty interesting and Jeong Kim who heads up the group is undoubtedly a great innovator.  He sold one of his companies (Yurie Systems) to Lucent Technologies for $1B and pocketed $500 million.  Some of Kim's interesting insights & actions as the head of Bell Labs include

The use of a venture capital type approach to innovation as "Kim has grouped the Labs' more audacious research efforts under what's now called Alcatel-Lucent Ventures, or ALV. By his estimation, Bell Labs' value is in its critical mass--a lot of researchers in close proximity, sharing insights and expertise. But he also points to two earlier Bell Labs inventions: "Remember, the transistor was invented by three people, not 30,000. The laser was invented by two."

ALV is essentially a venture-capital fund for scientists within the Labs--"intrapreneurs," as business theorists sometimes call them--whose ideas might have previously ended up as stranded assets because they were too far ahead of the curve or not relevant to Alcatel-Lucent's current customers. So far, Kim says he has considered about 150 proposals, routed to him through a semi-annual companywide "call for ideas." He has green-lighted fewer than 10. Each one, in his view, has the potential to recoup six times its initial investment and expand Alcatel-Lucent's reach into entirely new businesses"

This skunk-works for innovation makes a lot of sense.  And several interesting ideas are emerging from these efforts which the article details including a project called Evros which unfortunately has now been labeled "OmniAccess Nonstop Laptop Guardian."

But the article is prone to a few flights of hyperbole including:

First example of hype

The author writes about Kim's theory on innovation as follows:

"He envisioned a cube. One dimension, or one axis, could represent the impact of a particular innovative effort: Would it be incremental or revolutionary? Another axis could represent the process of innovation: Would it be achieved through painstaking analytic work or through artistic inspiration? The third axis was time itself: Was the innovation driven by the market today or in the distant future? None of this would tell his audience what or when to innovate--small inventions could be as lucrative as big ones and ideas for next year as disruptive as products for five years hence. Nor would this offer a foolproof strategy for how to innovate, since hiring an eccentric genius could prove as valuable as an overcaffeinated entrepreneur. But it did suggest to Kim that, for any company, innovation required visualizing the whole future, perhaps within something like this cube, a 3-D box where every idea in your portfolio was judged and plotted in relation to its potential impact, time to market, and creative process."

So although calling it dimensions and visualizing it as a 3-D box sounds impressive, there is nothing particularly amazing about this.  This is a framework that many management consultants have come up with and hawked to their clients or that strategic venture groups have come up with.  It's a simple matter of setting up a x, y, and z axis and putting each dimension down and then plotting points to your heart's content.  It's a slight variation on some long-held views of innovation and not innovative into itself.  The idea that innovation needs to be managed as a portfolio of options is spot on but again, nothing particularly earth-shattering about that.  It seems the author was a bit enamored with this framework, but again, pretty standard stuff.

Second example of hype

Kim is enamored with the idea of developing a formula to quantify innovation in a mathematical formula.  The author comments:

"Lately, Kim has been thinking about the Black-Scholes model, a set of mathematical equations formulated in the 1970s that forever changed how markets operate by providing a way to price options. In simplest terms, Black-Scholes helps financial institutions reach more precise calculations of risk and reward. Kim may have developed his innovation cube as a nifty visual for a speech, but he soon realized that by plotting Bell Labs' innovative endeavors in the three-dimensional box--based, again, on impact, time to market, and process--he could understand whether his bets were sensibly distributed. Perhaps the cube could do for innovation what Black-Scholes did for the financial markets.

There's no proven model, though, for a well-balanced innovation portfolio. Is your company pursuing too many near-term projects? Is it overestimating their impact? How much should you spend on internal research as opposed to buying new technologies? Research dollars are increasingly limited, and prioritizing ideas is crucial. So Kim has asked his best scientists to address what he calls "a really, really tough problem": quantifying innovations in a mathematical formula. "It doesn't have to be perfect. But if we can create a model that is used by a lot of people as a common tool, that would be a great contribution." "

This sounds like a nice luxurious pursuit when you have a bunch of mathematicians on staff, but the portfolio view that a framework would offer is probably enough to help prioritize innovative opportunities.  I see little to no prospect for a generally applicable mathematical formula for innovation coming to light, and I'm not sure this makes much sense to pursue.  For innovation, the old adage that "it is better to be vaguely right than precisely wrong" seems to be pretty spot on.  Management and innovation as science is inherently impossible no matter how interesting/alluring the prospect of this is.  There is no way to say "Add this + this" and you'll have a great company or an innovation.  I'm sure such a formula will result in a book which will sell thousands of copies because this type of mathematical elixir is what some are hoping for.  But its value is dubious. 

The Government and Poor Resource Allocation

I've written numerous times about how the government needs a portfolio management discipline to evaluate all the resource requests it gets and fund those which provide the most compelling value.  I've generally talked about this discipline as it relates to funding, e.g. dollars.  And whenever I write a posting involving the government, I need to make it clear that I'm not taking a political/party viewpoint here.  I'm merely pointing out the inefficiencies apparent and suggesting a solution.

But now it appears, that a resource allocation discipline may also be needed to help our government "leaders" manage their time.  Today, numerous congressmen wasted their time and presumably taxpayer money by questioning Roger Clemens about steroids.  Hmmm...

Let's think for a little bit: Iraq, sub-prime crisis, Al Qaeda, recession, steroids in baseball.  Which one doesn't fit?  I presume this was an opportunity for a bunch of old-timers to get on TV and get pictures with a juiced-up (or maybe not) baseball pitcher.

 

Since most probably know what Roger Clemens looks like, I thought I'd put a picture of the Congress idiots involved in the questioning.  If you recognize any of them as your Congressperson, you know what he/she is spending their time on. 

I still hope portfolio management maybe adopted for project decisions the government undertakes as the only real hope of making better decisions comes from using such a discipline.  Intelligence and the ability to prioritize seems to be in short supply. 

Response to My Posting About IT and the Company's Board

I just posted this note about IT and their role with a company's Board a few hours ago.  Ade McCormack was nice enough to quickly respond to my posting in his IT Value Stack blog.  To see his response, click here.