Oct 22, 2020 | Change, Innovation, Strategy
We are all looking for ways to increase the competitive leverage we can bring to bear. It is tough to find the sources of that leverage, and then apply it effectively in aggressive and often homogenised markets. However, there is a thought process that few have ever heard of that delivers such an outcome.
Observe, Orient, Decision, Action, or ‘OODA Loop’ is a competitive thought process articulated by Col. John Boyd, the maverick American fighter pilot, engineer, and scientist, who revolutionised the practise of aerial warfare’, and indeed warfare full stop. His nickname in the Airforce was ‘40 second Boyd,’ reflecting his bet, that he could beat any other pilot in a simulated dogfight in under 40 seconds. It is said, nobody ever collected from him.
Observe: is more than just seeing what is around, it is a process of absorbing all the information available, and synthesising it with the context from which the information emerged. For example, while the 2008 financial meltdown was a surprise to most, the signs of financial fragility were there, for those who were looking for the right messages, hidden in plain sight amongst the hyperbole and emotion of what appeared to be a never ending bubble.
Orient: is a process of applying domain knowledge and experience with the observations made. Continuing the 2008 meltdown example, those few traders who saw the mismatch between the mortgages being written, and the ability of those who were getting them to repay the loans, oriented themselves to take advantage when the bubble did burst. Such a meltdown seemed obvious to the few who were looking, when they observed the mismatch between the assumption of ever increasing prices, employment uncertainty, and the herd mentality that prevails.
Decide: Based on the observe and orient phases, choices need to be made, risks assessed,
and a decision taken.
Act: This is simply executing on the decision, from which point, the cycle starts again.
Boyd’s OODA loop is a framework for creating tactical advantage. As he put it: ‘To enable you to operate inside the oppositions ability to respond’.
The ability to respond is driven by the speed with which you are able to collect and analyse information, to come up with a tactical response, and implement, absorb feedback, reorient and go again. Given that the decision is almost always based on ambiguous and incomplete information, the tendency is to hesitate, seek other information, look for alternatives, seek reassurances and permission, this all takes time.
Boyd saw the winning process as increasing the tempo of the cycle, thereby getting ‘inside’ the oppositions ability to respond effectively, leaving them vulnerable, and beaten. The example he continuously used was the ‘kill ratio’ of US fighter jets ‘dogfighting’ against the Russian MIGs in Korea, which was 12:1, being whittled down to almost 1:1 by the end of the Vietnam war. Partly this was the result of better training of the MIG pilots, but significantly it was because the quicker, lighter MIGS, although less well armed and protected, could get ‘inside’ the manoeuvrable envelope of the US fighters, and shoot them down.
For an SME competing against larger, better resourced competitors, being able to move quickly and decisively, orienting assets and resources towards that opportunity, actively leveraging it, then ensuring that the lessons that emerge are incorporated into a learning loop, delivers victory.
Case Study.
In 1985 the yoghurt market in Australia was in its infancy. Australians did not consume much yoghurt, it was a fringe product, consumed by a small number, with limited retail distribution, manufactured by local state based dairies, largely as a means to give shelf life to raw milk, that promised better margins than butter, cheese, or dried milk powder.
French brand Yoplait was launched from a modern purpose built plant in Victoria, and changed all that almost overnight. The market boomed, as a result of a good product, and better advertising and marketing by Yoplait, which completely dominated the booming market nationally in a very short time.
Ski yoghurt was produced under licence in several states by local dairies, and prior to Yoplait was a significant brand amongst the group of brands available in the then small market.
After the Yoplait launch, Ski was relegated to relative insignificance nationally.
The licensee in NSW, Dairy Farmers Co-Operative Ltd, took the aggressive step of investing in a new dairy foods plant in western Sydney, closing the 100 year old plant located in the inner Sydney suburb of Ultimo. Part of the investment was to produce yoghurt by a continuous process, packaged into form fill and seal cups to compete with Yoplait.
Over the course of the next 6 years, Ski overtook Yoplait, by firstly taking over the licences in every state, to deliver operational scale to the Sydney plant, then embarking on a series of product and packaging innovations, backed by marketing support, that created a tempo of very successful new product launches that Yoplait, being controlled by a French company working through a licensee, and having an inflexible manufacturing plant could not match.
Ski inserted itself well inside the operational speed of the Yoplait licensee, executing product launch after product launch, some minor, some very major, that altered the dynamics of the industry, and was able to dictate the terms on which the marketing battle for consumers minds was played.
The battle was won on the basis of that agility in product development, and ability to bring products to market quickly, and be on to the next thing before Yoplait had time to respond.
Subsequently, both brands lost focus, ceased to invest in the long term health of their brands and innovation, instead, drinking from the sugar hit of tactical price promotion demands by supermarket chains, they shrivelled in size and no doubt profitability.
Sep 18, 2020 | Change, Governance
Gas, it seems is the way forward, according to the Prime Minister.
It seems to me that the conflicted debate about the evolution of our energy sources between fossil fuels and renewables, who wins and who loses, is more about the deployment of capital, and the beneficiaries of that deployment, than anything else. Platitudes about consumer energy prices, offering manufacturing the opportunity to have power at competitive rates is all very fine, and correct, just a few decades slow in coming.
For the whole of the 20th century, the geopolitical landscape around the world was driven by fossil fuels, and perhaps to a lesser extent other extractive industries.
The enterprises, public and private, made their owners and leaders rich by extracting profits, most often rewarding themselves for the largess provided by geography and to a lesser extent, politics and luck. They were, and continue to be an extraordinarily powerful force, often below eye level of the general public. Communities and the individuals in them have benefited from these industries, but not nearly as much as those that control them.
Now, the economic worm has turned, and renewables are becoming rapidly more economically viable, the extractive fossil fuel industries are being squeezed. As the battle for market share has intensified, we see the price of oil has dropped dramatically, and productive assets and their supply chains are being increasingly stranded.
The current oil price is around $40/barrel and under significant downward pressure, while at the same time, extraction is increasingly capital intensive, as the ‘easy oil’ is running out. This combination of downward price pressure, increasing competition from other energy sources, and increasing capital intensity is a harbinger of a wave of bankruptcy as the higher cost wells are closed as uneconomic. I am old enough to recall the very real concern about ‘Peak Oil’ back in the seventies, when the world was supposed to be running out of the stuff. Now the price in dollars is almost the same as it was 30 years ago.
Ref https://tradingeconomics.com/commodity/crude-oil
Listen to the discussion of the modest resurgence of US manufacturing, the low price of fuels comes up, particularly natural gas as the driver. Gas is now at about 2.40/MMBtu, the same price it was back in the early nineties, a sixth of the price 15 years ago, having undergone a roller coaster ride.
This would appear to me to be commercially unsustainable. Gas is (as I understand it) even more capital intensive than oil, as gas wells generally do not have a long life before the resource is exhausted, and therefore need a return in a very short time frame to justify the investment risk.
This is before the environmental risk is considered. I have absolutely no expertise in this area, but have heard a very knowledgeable source describing the fracking process as: ‘being like locking the exit doors in a multi story building , and yelling fire, then watching where the leaks occur as the pressure builds’. In areas of sensitive geology, this is unlikely to have any positive impacts at all, particularly after the gas has been released, and the gas company moved elsewhere to repeat the exercise.
(Gas is measured in BTU’s, or British Thermal Units, which is the quantity of heat content in a fuel. 1 BTU is the quantity of heat required to heat a pound of water by 1 degree Fahrenheit when the water temperature is at 39 degrees Fahrenheit. A MMBtu is 1 million BTU’s)
Then there is coal, a similar roller coaster, and currently below the prices of 20 years ago. There are many grades of coal, some less price sensitive than others, but they all share similar characteristics as being dirty, and now cheap, under the cost of production of all but the most productive mines.
Then you have the cost of renewables, dropping by huge amounts over the last decade, photovoltaic by over 80%, less for wind .
(CSP is concentrated solar power) Graph https://www.irena.org/newsroom/articles/2020/Jun/How-Falling-Costs-Make-Renewables-a-Cost-effective-InvestmEnt
Of course the numbers depend a bit on who you use as a source, and what sort of granularity on the data you are seeking, but the trends are unmistakeable.
At some point, fossil fuels will become completely uneconomic, and we are probably not far from that point. When that happens, investment will cease, the ownership of these entities will pack up, having extracted all the returns that can, and move on. What will be left is the massive clean-up bill.
Who will be paying the clean-up bill?
We will, taxpayers, the public, from whom the fossil fuels industries have already extracted super profits from the jointly ‘owned’ resources.
I am not a green lefty by any means, but am concerned at the legacy being left to my children and more specifically my grandchildren. It is them that will carry the greatest burden of the clean-up.
There are many people with the chops necessary to speak on these topics from a point of expertise, I am little more than a concerned observer. However, the science is unequivocal, and there are paths to improvement.
Barry Jones when Minister for science in the Hawke government keynoted with Al Gore in a 1984 an ‘Ozone layer’ summit in London, sponsored by the darling of conservatives, Maggie Thatcher. This led to the Montreal Protocol, an international agreement to ban the manufacture and distribution of CFC’s. They were replaced by HCFC’s, which did less damage, and have been subsequently replaced again by chemicals with even less impact. Perhaps I am being cynical, but I see the profits of chemical companies driving this change, rather than the need to act for the general long term good. Nevertheless, the science has been undisputed by experts for almost 40 years.
It seems that so far, there are insufficient numbers in the halls of political power listening to scientists, unless it suits them to do so, as in the current Corona crisis.
I cannot believe it is because they are stupid, or blind, rather that they comply with that wry observation made in varying forms by several including Upton Sinclair: ‘It is useless to argue with a man whose opinion is based upon a personal or pecuniary interest’
Somehow, we need to poke a lighted stick up the arses of those who continue to push for the retention of fossil fuels as a core of our energy mix and export income. In the absence of any action to make change, we will be in even deeper trouble than I think we are.
Sep 14, 2020 | Change, Governance, Management
‘5 why’ is a tool often used to understand the real cause of a problem. Finding those real causes is often like peeling an onion: one apparent problem or more often symptom of a problem, leads to another, to another, until the root cause is clear.
Often however, we make changes in the absence of a compelling problem, usually to take advantage of an opportunity, or simplify/optimise some sort of process. In those cases, I have often seen the onion reverse itself.
You end up with unintended consequences.
A pack change that confuses existing customers, a change of supplier for a better price that has consequences for operational efficiency; a product feature added that customers said they wanted that added to unanticipated production complexity, and so on. I have suffered from several of these unintended consequences of seemingly sensible, well considered and pro-active changes.
Before any change, exercise a ‘Reverse 5 why’. Look for the wider consequences that may be caused by the change, and take the impacts into consideration.
Move a few steps back, and ask yourself; are there any impacts from this change? How will other functional responsibilities, customers, supply chain partners, be affected? What unintended consequences may occur?
It is very easy to become close to a project, and proceed to implementation without taking a ‘helicopter’ view of the potential impact beyond the immediate context of the change. Once you start doing it, taking that extra moment, which is usually all it takes, it becomes an integral part of an automatic due diligence process undertaken before making a change.
Building an automatic ‘Reverse 5 why’ into your planning processes will identify risk, and build the confidence of others with a veto in the projections you will have done to support the change.
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Sep 4, 2020 | Change, Innovation
Robust ecosystems have points of balance; change is incremental, competitive, and evolutionary, leading to a revised point of balance.
When a species becomes dominant, that dominance becomes the source of weakness over time, as evolution requires responses to changing circumstances. A dominating player in any system resists change, as that involves increased levels of short term risk, and dominating players are generally risk averse.
Occasionally, an unpredicted catalyst appears, throwing the rules against the wall. Established incumbents fail to evolve quickly enough to accommodate the changes and survive. This is as real a process in commercial life as it is in the natural world.
The introduction of rabbits and the cane toad into Australia’s ecosystems have had the same impact on the pre-existing status quo as has the evolution of the microchip has had on the commercial world. The microchip unleashed a series of innovations for which the pre-2000 economic ecosystem was unable to recover. The now dominating players were little more than single cell commercial organisms, and many did not exist, at the change of the centuries.
Commercial ecosystems are no different. There will be times of consolidation based on the strength of the balance sheet of the dominating players. This becomes the source of weakness as they become locked into the status quo which produced them.
It is pretty clear to me that there are 4 stages in the commercial development of a market:
- Start-up stage. One player emerges, that effectively redefines a market in some way, followed up quickly by a series of fast followers. This is normally generated by some sort of catalyst, unanticipated by market incumbents, and leads to what is seen at the time as unprecedented periods of growth. Think Ford, General Electric, and those around the move from the vacuum valve to the microchip, from Allan Turing during the war to Gordon Moore in 1965.
- Scaling stage. The new players fight for dominance, with most of them going to the wall, while a small number, scale and consolidate to a position of dominance, if not monopoly. Think social media, web browsers, mobile computing.
- Leverage for profit. The new ‘kings’ leverage their dominant position for maximum returns, optimising processes, and minimising risk in pursuit of profitability. Facebook, Google, Microsoft and Amazon are all following this pattern.
- The cycle repeats. A catalyst appears that changes the rules of the game, again. Some may survive in a different form, others will disappear.
This is a Darwinian process applied to our economic and commercial ecosystems. Charles Darwin’s much quoted musing in the header applies as much to commercial systems as it does to natural ones.
The speed of change, enabled by digital technology has concentrated the cycle time from decades to a few years, and now arguably, a few weeks. It took 30 years for the vacuum tube to morph into scalable microchips, a decade for the early versions of the net to enable distributed computing, and a couple of years for that to create a system that might support new communication tools. Then, Facebook created a new model that blitzed the competition and led to absolute domination of a new ecosystem. A similar story led to Amazon, and Google, while Microsoft, the monopoly operating system player of the 80’s and 90’s, threatened with anti-trust breakup, evolved with incredible speed and agility into something new.
In the last few months we have seen examples of businesses and institutions that have evolved at a pace unimaginable a year ago, to face the challenges of Covid.
It may be fanciful, but it seems to me that market dominance contains the seeds of the dominators own destruction. This is a pattern followed not just by companies from Wedgewood, the British East India Co, Ford, GE, Microsoft, but to countries. Rome, China, Britain, and dare I say it, the US, while China is rebounding.
I speculate that this is the result of the crushing of opposition, and resulting lack of ‘genetic’ diversity that occurs as short term risk is minimised while profitability is maximised. Lack of diversity in the commercial DNA leads to commercial vulnerability, just as in the natural world
Ford ‘invented’ the modern version of the production line, (the Venetians had it first in the 1500’s) but could only make one type of car, so GM ran over the top of them with choice. Kodak dominated photos, but they defined themselves in a particular way, and despite being the ones who invented the virus that would kill them, digital photography, they failed to evolve. Same story with Blockbuster. They absolutely dominated global video rental, defining themselves as video rental stores. The then CEO John Antioco put in place a strategy that anticipated the growth of subscription streaming services. Blockbuster even had the opportunity to buy Netfliks at a give-away price at the time. However, the board, dominated as it was by those whose sole interest was short term profitability, got rid of Antioco, and the strategy that may have saved them as a significant if not dominating player. They actively rejected the opportunity to evolve, signing their own death warrant.
On each occasion, in each domain, there has been some sort of catalyst that has led to the demise of the dominating enterprise.
It seems to me that this current Corona crisis is another such Darwinian catalyst?
We have already seen many businesses struggling, and many ‘hitting the wall’ and I suspect there will be many more, while some, mostly smaller and more agile businesses are doing very well. Question is, will a few of the dominating enterprises fail the test of rapid evolution, and disappear?
I am prepared to bet that many will, and be replaced by businesses we have not yet heard of, that are able to deploy digital tools in almost real time. Just look at the manner in which Zoom has been able to harness the opportunity, blowing away incumbents like Microsoft.
Aug 31, 2020 | Change, Management, Marketing
We are in uncertain times, and under those circumstances, perhaps counter intuitively, there are many opportunities for all forms of M&A activity.
For many owners of SME’s, this Covid crisis is the last straw.
You have worked hard for years to build a business, survived and prospered as technology has changed the competitive landscape, avoided the trap of not managing your cash well enough to cover the unanticipated, and survived the various financial meltdowns that have occurred.
Now you are ready to sell, as there is no way the kids want to work as hard, and thanklessly as they have seen you work, and the current uncertainty makes an easier life seem very attractive.
Following are 10 of the traps I have seen over the years, which have resulted in a seller obtaining less than a business may have been worth to a buyer.
Never forget the role that psychology plays in the process.
There are many financial and strategic due diligence boxes that will need to be ticked over the course of a successful transaction. However, the psychological drivers on both sides of the transaction will have a profound and often unrecognised role. From beginning to end, it is an all in negotiation, where skill and experience will play a huge role. This is a double edged sword, and can be made to work for you by judicious planning and execution of the sale process.
Appearing too keen to sell.
Once you appear really keen to sell, that influences the context of negotiations. Nothing is as obvious to a buyer as the desperation of a seller.
Not marketing and managing the selling process.
Marketing plays a decisive role in setting the context for a transaction. How many buyers you can interest, how you go about identifying and generating that interest, how you communicate with interested parties, what information you provide, and when, and how you conduct yourself. It will consume a lot of time and effort when done well, done poorly; you will ‘get done over’. Selling a business is no different to selling a piece of capital equipment, or a tub of yogurt, it is a process to which there is more than one party, with ranges of interests, drivers, motivations and resources available. Pretty obviously, the more keen and genuine buyers the better.
Having unrealistic price expectations.
Few will see the business as you do, and most owners of SME’s consider their emotional commitment over the years has a value. It may do, so long as it is reflected in the financial and strategic value to a buyer, but in itself, it has no value to a buyer. The manner in which the price is structured can vary enormously, from a ‘cash on the barrel’ agreement to swaps of shares, delayed payments, and work-outs dependent on future earnings. Each has their own set of challenges which need to be anticipated and factored into the calculations in a realistic manner. However, going into the process with unrealistic expectations can sour the well.
Poor anticipatory Due Diligence.
Any serious buyer will undertake a DD process, the depth and investment in this will be driven by the size of the transaction more than anything else. Making it simple for the buyer will be appreciated, and add to the trust they have in the forecasts you may make. Anticipating questions that may emerge during the process, and answering them before they are asked defuses them as a potential issue. Removing potential negatives before they become objections is sales 101. Never forget the rules of sales apply, so leverage them.
Ignoring the qualitative elements.
Can you work with these people? Are you prepared to have them take over the business, and its relationships you have nurtured? Do the emerging conditions of purchase cause you to lose sleep?. It may be that none of these apply, so you do not care. However, I have seen transactions turn sour at the last moment after considerable effort, just on the basis of personality, so consider it early and avoid the pain.
Risk assessments.
Every transaction has risks, covering them in an anticipatory DD process so you have the answers before the question is asked, is extraordinarily useful. A buyer will make their own assessments, but the better yours are, the more likely that any difficulties in the negotiation will be papered over. Selling any business is based on the assumptions that a buyer will make of the value that business will add to them. I.e, it is all about revenue and margins over time. The temptation of the seller will always be to beef up the forecasts, which is usually a mistake. Be realistic, but break the revenues down into its components and make assumptions at the more granular level. For example, costumer margins, the trends over time and the influences that adverse events have had. Any comprehensive buyer DD will ask the questions, so have the answers in a robust defensible form.
Understand the strategic value to every potential buyer.
Every buyer will be different, understanding the drivers of each is critical to maximising the price. Make your own assessment of what strategic value your business can add to theirs. This analysis is always way more than just a calculation of future cash flows, although that will always be the starting point. Items such as an assessment of the value of your brand to a buyer, the rate of customer churn, longevity of customer relationships based on barriers to entry and exit, recurring revenue vs ad hoc sales, and many others, will all add to the strategic value to a buyer. Each potential buyer will value these items differently, so developing a nuanced understanding of their business is an essential element of the sale process.
Avoiding the cost of good advice.
Professional advice can be expensive, and for an SME owner keen to maximise the dollars in their pocket, a seemingly avoidable expense. The problem is that selling a business can be a complex exercise, and is always more complex than it first seems. Having good accounting, legal and strategic advice is like any investment, it is made to either make or save money. In the case of the sale of a business, the objective is to maximise the sale price, and minimise the risk to the seller. Experienced buyers will often overwhelm a potential seller with documentation, questions, and promises which conceal the gaps and traps into which the unwary and poorly advised can easily fall.
No plan B.
Selling a business can be a lengthy and difficult process. Many spend time on the process that would be better spent managing the business they are setting out to sell, optimising the value that someone might pay for it. As a flip side of the same coin, many invest themselves in the sale process in the absence of a plan B. When a sale falls through, not only to they have to get back the running the business, they have to deal with the unfulfilled expectations of customers, employees, and yourself.
As a final point, when you get the unsolicited offers, do not invest too much time in considering them in the absence of a real demonstration of the intent of the hopeful buyer. There are many reasons for an unsolicited approach, and none have anything to do with maximising the value for you, as the seller.
Aug 5, 2020 | Change, Strategy
Everyone and his dog is making predictions about the shape of the economy, post corona, a state that is seemingly moving out of our grasp currently with the resurgence of the bug. The reality is that the cards have all been thrown in the air, never has the immediate future looked so uncertain. Therefore, why should I miss out on pontificating?
Friedrich Nietzsche seems to have got it right when he wrote: ‘What does not kill me makes me stronger’. I suspect he will be again proven correct, just bad luck for the dead.
The tone of the predictions made is usually reflective of the mouth from which it came, and the interest they have. However, the almost unanimous view is that we are in for a really tough time. Whether the recovery is ‘V’ shaped, ‘U’ shaped, or more like an ongoing ‘L’ only time will tell.
However, my money is on the ‘L’, with a few upticks in specific areas.
- Demand will be constrained, which will filter through the economy, resulting in sustained unemployment and underemployment, cycling back to lower demand.
- Supply will be constrained, as businesses disappear, their supply chains are disrupted, and manufacturing sovereignty takes front and centre, but is unable to fill the void. Therefore the gap between the rhetoric and the reality might be wider than we think at this point.
- Government policy changes will occur, but will they be the right ones and be sufficiently effective to make a real difference more than the immediate triage. Policies are fairly flexible, subject to quick change; entrenched modes of behaviour and belief are not so flexible. Therefore it may be that the short term measures do not stick after the initial pressure is removed, and policy drifts back to the pre-existing status quo. This would be an opportunity lost.
- The systemic shock to the financial system will be substantial. I am not an economist, but the butchers bill from this response to the virus will have to be paid. That payment will come through a reorientation of financial markets and tax regimes. With very low interest rates, there will be money looking for a home, but the system might be in some sort of semi catatonic state driven by uncertainty, and the chances of further rounds of infections that lead to subsequent close-downs. Household balance sheets will have been severely impacted as people have reached into reserves of all kinds to pay living expenses. The Australian house is the super fund of many older Australians, it is likely that the values will drop substantially in the face of low demand. This is concurrent, with their super balances from super fund investments, which have tanked. Older Australians will simply have to work longer to be able to retire, but there are no jobs for older workers.
- Tax relief except in specific cases such as the usurious payroll tax, will probably not be forthcoming, but fundamental changes in the tax system to reorient it towards greater equity and to plug the gaping holes is essential. The decade old Henry tax review should be dusted off and rethought for a start. Some real political backbone is required, but I suspect will remain missing.
- For a considerable time, it seems likely that the stock market will undervalue performance, reversing the trend of the last 20 years, where markets have overvalued stocks. This feeds into the social problems of how we look after in increasingly large and unhealthy cohort of ageing baby boomers and their parents, as their investment incomes are reduced.
- Business models will be transformed. Working remotely will become far more accepted as we simply do not revert to the commute mentality of pre-corona. This has all sorts of implications for CBD property, infrastructure development, and the way communities are run.
- Supply chains will become more transparent and collaborative, even amongst competitors, as it becomes obvious that agility above all else is necessary to maintain the flow through the whole system.
- Technology will get a shot in the arm, as innovation and tech always does in times of crisis. However, it will be technology emerging from the current pool of scientific knowledge, some of which may have been hiding on the shelf for some time. Original science that will deliver solutions to problems we may not yet have seen, will have to wait longer for the necessary funding. Meanwhile, our stocks of really smart, trained and funded scientists, capable of creating the science that will deliver the future will continue to diminish to close to extinction levels. This is despite government rhetoric, and some current reallocation of funds from humanities to STEM. It is a systemic challenge ignored for at least the last 30 years because it extends well beyond any election cycle.
What have I missed?
