Middle Market Strategy

This is the second in a series of articles focused on understanding and implementing business transformation.  See the first article in the series here.

Source: Burst

Overview

Strategy, particularly in the middle market, is under attack from many sides.  The pace of disruption in many industries and sub-sectors and the threat of disruption in those corners in which the status quo remains dominant, has consumed the business press, investors and board members.  As a result, executives hear a steady drumbeat suggesting that the future is unknowable and that they must do something.  Such an environment is nothing short of toxic for productive decision-making.

The zeitgeist may be inimical to the measured development and execution of strategy, but the payoff for a well-designed and expertly executed strategy for middle market companies is as robust as ever; and may actually be trending upward.  Leadership teams able to discern, bolster, and exploit areas of competitive advantage while steering away from segments in which a company has no advantage will be able to attract the capital needed to pursue their growth opportunities; while companies that muddle along will find themselves capital constrained.  Executives understand that while we live in an age of abundant capital, that abundance has come with increasingly strict accountability from operationally savvy capital providers who are interested in results, not excuses.  A robust strategy offers leadership, boards of directors, investors, and other stakeholders a framework for filtering out the noise of the moment and remaining focused on the optimal value maximization path for an individual company.

What is Strategy?

Strategy is dying in the middle market due to neglect and underinvestment, which has resulted in a vicious cycle of poor outcomes leading to further neglect and underinvestment, etc.  One of the primary drivers of the current level of underinvestment in strategy across the middle market is a fundamental misunderstanding of what strategy is, can be, and historically has been.  Many of history’s most successful strategists have embraced a view of strategy as a vehicle for offering a clear-eyed path to the realization of a well-defined end goal through the adoption (or development) of a business model that maximizes a company’s idiosyncratic strengths.  Such a strategy must, simultaneously, be developed with an eye toward resource constraints, an embrace of the reality of uncertainty and volatility, and support for the tactical flexibility that will be necessary to address immediate implementation challenges. 

Strategy is dying in the middle market due to neglect and under-investment

Strategy Embodies:

  • A Goal: Plan to achieve an objective outcome or set of outcomes that incorporates resource limitations, known obstacles (competitors, market volatility, etc.) and the likelihood of unknown challenges. 
    • Example: Alfred Sloan organizing General Motors to offer a car for every price point, leading to a century of dominance in the U.S. auto market (“a car for every purse and purpose”).
  • A Business Model: Testable hypothesis of the key drivers of a business and a commitment to foster continued improvement in those drivers. 
    • Example: Jorgen Vig Knudstorp’s turnaround of Lego Group.
  • Self-Awareness: A value creation mindset focused on an understanding of the character of a business. Having the right question while knowing that the answer is likely to change.
    • Example: Satya Nadella repositioning Microsoft for a cloud-centric future.

Today, strategy for too many middle market companies is developed in a time-constrained, under-resourced, closed process featuring too little information pertaining to market factors, competitive strengths and weaknesses, methodology and cadence for testing key assumptions, etc.  This sad state of affairs has come about because strategy has erroneously been reinterpreted into a strategic planning exercise that is invariably poorly understood or entirely unknown outside the c-suite.  Insufficient thought is given to key assumptions (both implicit and explicit) and neither leadership nor investors are well-positioned to properly assess performance as validating or invalidating any element of the plan other than the financial forecast (the review of which is of limited value without reference to key assumptions).  These plans, which often look impressive, quickly fall apart as it becomes apparent that the resulting document is neither strategic, nor a plan. A wish list of objectives followed by a 5-year projection may yield an impressive presentation, but when faced with the challenges of competing and winning in an ever-shifting market landscape, such a plan quickly becomes a millstone around the necks of leadership. 

Strategy is a process, not an endpoint, and embracing that sensibility will consistently yield superior results to those willing to make the necessary investments in time and attention.  A robust strategy will address the ambiguity and volatility inherent in any business endeavor through rigorous and systematic testing.  Variance reporting, standard for the majority of middle market companies, can be repositioned to serve dual roles: reporting on both financial performance while also serving as a running commentary on the soundness of the assumptions underlying organizational strategy.  The process of developing, reporting, testing and refining key assumptions is a pathway to a virtuous cycle of improvement, as leadership gains greater insight into a company’s unique set of capabilities and positional advantages, while also providing insight into how best to address evolving competitive dynamics.  Successful strategy is an iterative process, and today’s flawed assumptions, once tested and refined, offer the prospect of a more robust strategy tomorrow.

While strategy can begin as a shared hypothetical construct, it must ultimately be put in motion.  As a result, the challenges of implementation must be carefully considered in strategy development.  Put simply, strategy is not tactics, and tactics are not strategy.  But either one in the absence of the other will yield disappointing results over the long-term.  Strategy should guide tactics without being overly prescriptive.  When launching a new strategy, leadership should emphasize tactical flexibility as the optimal approach to addressing emerging threats and opportunities within the overall framework of a value maximizing plan.

The key decision makers in a business usually reach their positions through careers marked with far more successes than failures.  This common background can and often does blind leaders to a key facet of strategy: the model is wrong.  Financial forecasts, though robust and always striving for accuracy, are realistically going to be, at best, directionally correct.  Middle market business leaders must keep in mind that a model is simply an analytic framework for thinking about the current and future state of a business.  When viewed through this lens, the key insight can be restated as follows: models are generally wrong, but good models are useful.  Explicit assumptions and regular review of same will help drive an increasingly nuanced view of the business as actual performance is measured and assessed against the forecast (focusing not only on what was wrong, but why). 

Companies seeking to maximize value should impose on themselves the discipline of a rigorous approach to not only developing but iterating their strategy.  The strength and potential advantage to a middle market company inherent in any strategy is that its strategy represents a testable and revisable hypothesis regarding the optimal value maximizing path for that company, and that company alone.  Strategy is a company’s plan to win, and nothing about today’s market dynamics suggests any diminishment in the value of such a plan.

The Challenge of Disruption

There are few phrases more time-worn, and more likely to be proven foolish, than “This Time It’s Different”.  Change is certainly all around us, but in the embrace of change and innovation it is easy to lose sight of the things that endure.  The planes that we fly in and the cars that we drive are based on principles well-known and understood a century ago.  Equity and bond issues to fund new enterprises were familiar in the time of Isaac Newton.  Double-entry bookkeeping is over 500 years old.  Organized research and development efforts are at least as old as Archimedes’ lab, and likely far older.  And the interplay of trade with national ambition surely dates back to a time long before the advent of recorded history.  A disciplined approach to strategy embraces the insight that while we may be surrounded by change, many technological, philosophical, and organizational innovations have endured for a surprisingly long time.  The powerful force of change must be judged against a silent backdrop of an equilibrium consisting of a number of surprisingly enduring innovations. 

Disruption in the popular lexicon is often associated with technology, but more important than new technology, the pairing of technology with business model innovation is the engine that powers industry-shaking disruption.  This pairing is especially challenging to market incumbents as it often forces them to prioritize and accelerate their investment in technological acumen while simultaneously fighting a rearguard action to preserve the viability of their business models.     

Source: London School of Economics

Change is, by its very nature, Janus-faced, with new capabilities and business models on one hand, and dislocation and value destruction on the other.  While the pace is uncertain, change is inevitable; and when change does come, there are warnings.  The tragedy is that few incumbents are able to sift through the noise, overcome their skepticism, and recognize the severity of the threat before significant value destruction becomes inevitable.  An organization with a holistic approach to strategy is far better equipped to identify disruption early, assess risks objectively, and respond appropriately.

Source: Wikimedia

When an organization finds itself in the midst of disruption, it is easy for all stakeholders to lose perspective.  This is due to the fact that disruption represents very different, but equally terrifying, threats to the varying constituencies in a company:

  • Leadership: Challenges ability to achieve performance goals
  • Capital Providers: Threatens to undermine investment thesis, resulting in significantly diminished upside or outright losses
  • Employees: Endangers career prospects as opportunities for advancement shrink
  • Suppliers: Imposes significant opportunity costs through lost growth prospects
Source: McKinsey & Company

Like all boogey-men, disruption is most frightening when it is least examined.  The fear of many executives is that change will fall upon them with no warning, and considerable value will be destroyed before a response is possible.  Upon more careful examination, disruption is revealed to be a serious, though manageable, threat.  Research indicates that attentive and agile incumbents can deliver significant value to investors by identifying and being responsive to disruptive threats early.  Incumbents seeking to initiate preemptive disruption upon themselves may act with urgency, but to be effective, their efforts must be guided by a well-considered strategy.

Source: BCG Henderson Institute

Sound strategy is grounded in an understanding of one’s relative advantages and disadvantages, and as such, any discussion of disruption must be accompanied by an acknowledgment of incumbent advantage.  Technology and business model disruption is threatening to incumbents exactly because it seeks to undercut advantages built and bolstered over time, but those advantages do not give way all at once.  Rather, the example of Walmart illustrates that incumbent advantages, when coupled with prudent preemptive disruption efforts, can extend and expand the market dominance of incumbents. All strategic advantages are temporary, and no business model is perpetually viable.  In a sense, disruption should be regarded as inevitable; but that fact should not give rise to fatalism.  A robust strategy, envisioned by leadership as an evolving understanding of the business that will incorporate new insights while providing a guiding framework to maximize value, is a powerful bulwark against the challenges imposed by disruption.  Though change via disruption is inevitable, it is within the power of a leadership team to determine how an organization will face change, when and in whatever form it comes.

Strategy is a company’s plan to win, and nothing about today’s market dynamics suggests any diminishment in the value of such a plan.

Conclusion

When strategy becomes an item on the agenda for a leadership team, something crucial is lost.  Strategy should be the lifeblood of an organization, a guiding star along an idiosyncratic path of value maximization.  Moreover, strategy is best embodied in a mindset, a view of an organization that embraces the unknowable and the uncontrollable but maintains that what is known is sufficient to divine an optimal path. And while the contours of that path may change, the process by which the path has been chosen, and the tools employed to assess progress and test assumptions, is robust.  When strategy is embraced as a mindset, leaders are empowered to filter out the noise of the moment, capital providers can take comfort that value creation does not rely solely on favorable market conditions, employees understand that their organization has a view of itself and its place in the market, and suppliers and other outside partners understand that they are partnered with an organization focused on being its best self and never a pale imitation of a competitor.  This is a vision of strategy that is enduring, and one that will lead every organization down a bespoke path of optimization and value creation, regardless of the nature of the competition.

Disruption threatens in every market niche, either as a grim reality or as an overdue but fearfully expected visitor.  However, while disruption, i.e. change writ large, may be inevitable, the winners and losers are not.  Disrupters can be right but early, incumbents can accurately discern a disruptive threat and neutralize it, and/or incumbents can reposition themselves in an altered ecosystem.  When viewed through this lens, disruption is not a threat to strategy but a proof of its utility, as only a holistic view of a company’s optimal value maximizing path can permit a reasoned and objective assessment of disruptive threats and inform responses that are appropriate in size and scope.

Strategy is more than strategic planning.  Organizations that invest in a holistic and rigorous approach to strategy are positioning themselves for long-term success and value creation, regardless of threats. 

About the Author:

David Johnson is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career, David has served as financial advisor and interim executive to dozens of middle market companies.  David can be contacted at: david@abraxasgp.com.

The Evanescence of Strategy

Every strategy has a sell-by date, and the costs of ignoring that reality are steep.  Recently General Electric took the radical step of terminating CEO and Chairman John Flannery after 13 months on the job (prior to this action GE had had a total of 11 CEOs and 10 Chairmen in its 126-year history) and replacing him with the company’s first outside CEO, Lawrence Culp.  The break with history was certainly necessary, as General Electric had seen its market capitalization decline by $100 billion in the past year, and $500 billion in the past 18 years.

GE Stock Performance
Value Destruction at GE

GE rose to prominence by constructing a set of self-reinforcing advantages that were largely industry agnostic. Under the leadership of Jack Welch the potential cacophony of multiple lines of business became a sublime orchestra, with GE Capital as the engine that powered the whole.  But the global financial crisis changed the outlook for massive financial businesses, and Welch’s successor, Jeff Immelt, spent much of his tenure untangling the byzantine, and formerly massively profitable, conglomerate.

What happened?

Strategy, a high-level plan to achieve one or more goals under conditions of uncertainty, is the answer to a question.  That question: what set of actions, utilizing what resources, will produce the best outcome.  A company’s strategy is its theory of self, its reason for being.  Unfortunately, few organizations, or the people leading them, can adjust to the cognitive dissonance of an ever-changing answer and all that that implies.

Since at least the Jack Welch era General Electric’s strategy was to compete only in sectors in which it could be a dominant player and rely on what was seen as an advantage in leadership training and internal capital allocation to drive efficiencies that would beat the market.  The strategy worked both long and well (the company first had to attain a market capitalization above $500 billion in order to lose that value), but over time challenges that were long apparent took on increasing importance.

  • Pace of Change.  As the pace of change across industries has ramped up, being a major player in disparate industries became a tax on leadership attention, making it impossible to focus or marshal the resources necessary to make sound strategic adjustments.
  • Leadership Training.  It may have been the case once upon a time that GE had an inherent advantage in leadership training, but with the workforce investing heavily in education and training, this one-time advantage has been negated.
  • Capital Allocation.  Jack Welch took the helm at General Electric after a period of flat equity returns, when many U.S. companies were bloated and inefficient.  In 1981, perhaps a case could have been made that GE could more efficiently allocate capital within the company than the capital markets were able to.  Increased competition, new classes of investor (private equity, activist, etc.), and heightened shareholder expectations have changed that state of affairs.

There is a strong case to be made that complexity killed GE, but the wonder is the extreme longevity that an outmoded strategy enjoyed.  Much like the wooly mammoths (or, for a separate example, the dodo) that lived as recently as four thousand years ago on a small island off the cost of Siberia, General Electric had been a living anachronism for years.  With new leadership, GE is making a break from its past and speeding the dissolution of its current, anachronistic form.

About the Author:

David Johnson is founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. 

David can be contacted at: david@abraxasgp.com.

Implementation: Big Data & Analytics Bottleneck

Implementation

“In five years, inside the enterprise, analytics is just going to be called ‘management.’”

 –        David Wagner, “Five Intuitive Predictions About Analytics”

In recent years the explosion of big data and analytics tools has been truly inspiring.  Companies and academics are now able to mine data sets that are mind bogglingly large.  This wealth of data has proven to be a goldmine as data scientists hunt for previously unrecognized relationships, and seek to optimize everything from the most promising routes of inquiry for drug development, to the pricing of consumer goods, to best practices for maintenance of industrial machinery.  Machine learning algorithms, making use of these large stores of data, are powering rapid advancements in artificial intelligence.  Nevertheless, this multi billion dollar market has, at its heart, a fatal flaw: data by itself is useless, and insights without an action plan are nearly so.  Absent change management expertise and leadership, the promise of big data will never be realized across the broad swath of organizations that might otherwise benefit from it.

As big data and data analytics tools progress through the hype cycle, disillusionment is setting in as company leaders struggle to realize the massive potential of these capabilities across massive organizations.  And it is here that big data runs into a fundamental challenge: analysis may scale, but actionable insights do not seem to, and insights alone do not guarantee successful implementation.

Savvy companies, recognizing this fact, are seeking to embed data scientists into their management teams.  This is a step in the right direction, but it is unlikely to be sufficient for companies with extensive physical operations and well-established business processes.  For these companies, data-driven insights that suggest a compelling benefit to be gained from a reorganization of the business are worse than useless: they are a cruel promise of a gain that cannot be achieved, yet another example of technology’s reach exceeding its grasp.

What is needed is data savvy change management, spearheaded by leadership with the ability to foster a data-driven culture while also building a capability for change and reinvention into the very DNA of established companies.  The promise of big data will, in the end, be realized or not based on the availability of a relatively scarce resource: accomplished change agent leadership.

About the Author

David Johnson Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on change management, strategy, and value maximization.  In his nearly 20 years as a change agent, David has served as an advisor, board member, interim manager, investor and operator at organizations ranging in size from pre-revenue startups to Fortune 500 organizations.  He can be reached at david@abraxasgp.com.

Business Model Expiration Dates

Buddha - Lose what you cling to

For most companies, worries about the transience of advantage can seem hopelessly theoretical.  The goal for the majority of companies and their leadership teams is to achieve market dominance, not worry about the staying power of that dominance.  And for those lucky companies currently enjoying their time in the sun, time spent pondering the end of their hard-won market position can seem morbidly pessimistic.

Recent developments suggest that leadership teams from the scrappiest startup to the Fortune 100 would be better served by stepping back and considering the roots of advantage, how it has been attained in their industry/niche, and how market trends will impact the staying power of that advantage.

  • Media company Gannett (GCI) recently attracted the interest of investor Carl Icahn due to the company’s plan to spin-off its low-growth print operations.
  • Ecommerce startup Fab, which rode to a $1 billion valuation on the strength of its flash sales model, has recently stumbled, with multiple rounds of layoffs, as the company struggles to navigate a path to profitability.
  • Consumer Products giant Procter & Gamble (PG), driven by a tectonic shift in consumer shopping behavior, has announced a plan to divest as many as 100 brands.  There is some evidence from the company’s prior efforts at divesting brands that this approach is flawed, and may in fact only delay a more substantive shift in the company’s business model.
  • Energy company Kinder Morgan, which popularized the use of a tax-advantaged structure known as a Master Limited Partnership, recently announced a $70 billion plan to simplify the company, citing investor concerns around complexity and a high cost of capital.
  • Tech company Microsoft (MSFT), announced that it will cut up to 18,000 jobs in 2014 as it seeks to integrate its recent acquisition of Nokia and implement new CEO Satya Nadella’s revamp of both the company’s culture and market positioning.

Each of these companies are coming to terms with the need to fundamentally reimagine their business models as shifting market dynamics render prior competitive advantages moot.

The lesson, if there is one, is that there is no end in the struggle for market dominance, but only a continuous journey.  It is a lesson that all leadership teams should reflect on from time to time.

About the Author

David Johnson (@TurnaroundDavid) is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services.  He can be reached at 312-505-7238 or at david@acm-partners.com.

Failure to Recognize the Obvious

This article originally appeared in Business Insider

Article Date: 7/3/11

I had a chance to see “Page One” this weekend, the documentary on the troubles facing the New York Times.  Many have opined on the issues facing the New York Times, notably Henry Blodget here at Business Insider, but this documentary illustrated for me how well and truly screwed NYT may be.

A turnaround situation requires, more than anything else, honesty about the nature of the problem and at least a sense of what success looks like.  With revenues down over 24 percent from FY 2008 – LTM, the situation at NYT is clearly a turnaround situation.  And yet, over the course of a very well executed if muddled documentary, I was left with the strong impression that too few of NYT’s own people have a sense of how this ends, other than hoping that each round of layoffs will be the last, or patting themselves on the back for the admittedly impressive breadth and depth of their news coverage.

Death is Not the End

It was interesting in watching “Page One” to hear the vitriolic comments of NYT employees regarding a January 2009 Atlantic article written by Michael Hirschorn.  In the article, Hirschorn outlines the serious financial troubles facing NYT and suggests that the world might soon find the company consigned to the dustbin of history.  Hirschorn’s boldest prediction, that NYT could fail in 2009, has clearly been proven false, but on rereading the piece I am struck by just how much of his analysis remains relevant.

Hirschorn makes a number of fantastic points, notably:

“journalistic outlets will discover that the Web allows (okay, forces) them to concentrate on developing expertise in a narrower set of issues and interests, while helping journalists from other places and publications find new audiences.”

“over the long run, a world in which journalism is no longer weighed down by the need to fold an omnibus news product into a larger lifestyle-tastic package might turn out to be one in which actual reportage could make the case for why it matters, and why it might even be worth paying for. The best journalists will survive, and eventually thrive.”

Facing Up to the Challenge

As a public company valued at not quite 5.4x LTM EBITDA, the markets are telling NYT that something needs to change.  A quick look at the numbers suggests that the low-hanging fruit has already been consumed (see exhibits on key financial ratios, there is just not much left there) and it is time for serious discussion of the types of unpalatable options that make executives nauseous but have a tendency to save struggling companies.

·       Say Goodbye to the Past: Man, the 70s were great for the major papers.  NYT had the Pentagon Papers, Washington Post had Watergate, and journalism was on the march.  A lot has changed and it is time to get over it.

·       You Are Not a Public Trust; You are a Corporate Governance Basket Case: I am not a shareholder in NYT, but to hear Bill Keller, the Executive Editor at the time of Page One’s filming, explain that all options had been considered; including running the company as a nonprofit, made my blood run cold.  This is a publicly traded company, and regardless of the dual-class structure every investor who is not a Sulzberger has a reasonable expectation that management is focusing on turning this ship around, not turning it into a megalithic non-profit dedicated to the idea of its own greatness.

·       Adopt a Bold Strategy and Hunker Down: This is not a call to buy something.  Rather, divest everything that is non-core, put together a clear-eyed view of where this company will be in five years, and then execute.  The people at NYT are an erudite lot: think Fabian strategy, think the Siege of Constantinople in 626, think Stamford Bridge.

Revolution is Not a Tea Party, and Neither is Business

Same Zell got kicked around briefly in “Page One”, and I think somewhat unfairly, when a clip was shown of him at a meeting with Tribube employees exhorting them to change the company.  Yes, Tribune became a fabulous mess, but Zell was right: in the end a company must be able to afford its cost structure, or else reduce it.  This basic law of business does not include a special dispensation for newspapers with foreign offices and numerous Pulitzer Prize winners.

The Change Agents We Need

The leader of men in warfare can show himself to his followers only through a mask, a mask that he must make for himself, but a mask made in such form as will mark him to men of his time and place as the leader they want and need.

― John Keegan

The middle market has seen considerable change in recent years, and these changes have led to an evolving shift in how capital providers view distressed situations among their portfolio companies. Increasingly, capital providers (including banks, commercial finance companies, subordinated debt lenders, private equity firms and fundless sponsors) are seeking out versatile professionals able to serve as Chief Restructuring Officers in order to manage a distress situation from the inside, and steer a troubled company to an optimal outcome.  In many middle market companies a CRO will often find him/herself to be the lone advisor on-site, and as such these professionals must embrace the role of change agent.

The emerging generation of CROs will need to possess the following traits:

1) Focus on Substance over Form.  Too often distressed situations devolve as a result of an overly restrictive view of form success will take.  An experienced CRO will recognize that a sale of the company, refinancing, or balance sheet restructuring are all likely to generate superior value to a liquidation, and as a result will pursue a flexible strategy to position stakeholders for the highest value outcomes while not excluding the possibility of lower-value (but still viable) solutions.

2) Strong Communication Skills.  A distressed situation is always a tenuous balancing act, with multiple constituencies angling for position.  Skilled CROs understand the need for clear and consistent communication to all stakeholders, both within the company and without.  Inevitably certain constituencies will receive more or less information, but the messaging should be clear and the focus should be on executing toward an identified goal.

3) Comfort with both Strategy and Tactics.  In the middle market the day of the armchair CRO is coming to an end.  Small and midsize companies experiencing distress can no longer afford to have turnaround advisors dictate broad strategy while the company internally struggles with execution issues.  Today’s distressed situations call for advisors able and willing to first develop a viable strategy and then take a central tactical role (i.e. leading the charge) in executing that strategy.

The role of Chief Restructuring Officer is becoming increasingly central in driving distressed situations to a successful conclusion.  However, changes in the capital provider universe as well as an increase in the general tempo of distressed situations has given rise to a need for a more versatile, independent type of CRO than those who previously served the market.  Increasingly stakeholders must look not only for a CRO, but for a CRO with the right mix of skills, in order to steer a distressed company to a successful outcome.

Fisker Automotive: A Beautiful Mess

This article originally appeared in Business Insider

How can anybody learn anything from an artwork when the piece of art only reflects the vanity of the artist and not reality?

― Lou Reed

Fisker Automotive recently filed for chapter 11 bankruptcy protection and announced plans to sell itself to recently formed holding company Hybrid Technology, following that company’s purchase of a defaulted Fisker loan from the U.S. Energy Department.  Of the startup automakers granted loans by the Energy Department, Fisker Automotive was approved for the largest amount ($529 million).  Tesla Automotive has repaid the $465 million in loans it received.  Though it received approval for a $529 million loan, Fisker received only $192 million (the company repaid only $53 million of that total).

Co-founded by Ashton Martin designer Henrik Fisker, Fisker Automotive set out to create something beautiful and lucrative.  By all accounts the company was wildly successful at the former, and shockingly unsuccessful at the latter. Fisker Atlantic

The Fisker Atlantic

Privco Chief Executive Sam Hamadeh summed up the challenges of an aesthetically driven company with too much capital and too little discipline when he noted the Fisker was at one point spending $900,000 per vehicle produced, and then selling those vehicles for $70,000.

Hamadeh went on to note:

Fisker Automotive may well go down as the most tragic venture capital-backed debacle in recent history,” Hamadeh said in a statement. “The sheer scale of investment capital and government loan money — over $1.3 billion in all — was squandered so rapidly and with so little to show for it that the wreckage is breathtaking. Bankruptcy will be the end of Fisker, but for the taxpayers, venture capital firms, individual investors, and Fisker’s suppliers, it will all be too little too late.

The writing has been on the wall for some time regarding Fisker.  The company laid off 75% of its staff in April as it sought to preserve its dwindling cash and assess its options.  At the time of its announcement, Fisker, which had raised an estimated $1.3 billion from investors, had cash on hand of less than $30 million.

In the end, the company failed to produce the most beautiful of all outcomes for investors: a return.

Blockbuster Stores’ Stunning Reversal

This post originally appeared in Business Insider

Video rental chain Blockbuster, owned by Dish Network, announced yesterday that it will shutter its 300 remaining U.S. stores.  This closure puts an end to what must rank as one of the most precipitous falls from dominance to irrelevance that has been seen in some time.

In 2004, as it prepared for a spin-off from owner Viacom, Blockbuster was a juggernaut with 9,000 locations.  By 2010 competition from Netflix and others had forced it into bankruptcy (and an ugly, challenging bankruptcy at that).  Now, less than 10 years from the date of its spin-off, the company that defined the U.S. video rental market in the 90s will be gone, with the name living on in a few assorted Dish offerings only.

There are few better illustrations of just how fleeting strategic advantage truly is in a dynamic market.  Blockbuster’s day in the sun was long, but the company was blinded by its success and failed to see the ways in which Netflix and other competitors cut at the very heart of its value proposition.  By the time Blockbuster management recognized their error, it was too late.

And now a brand that rose to prominence by giving consumers more control over their viewing options has been put to rest, killed in part by a failure to see that the video rental store itself was at best an intermediate step toward our current on-demand offerings.  Blockbuster had the resources and the brand to make the leap, but not the vision.  There is a lesson in Blockbuster’s failing for us all.

Challenges Facing Midsize Manufacturing Companies

This article originally appeared in Business Insider

As we review the landscape for small and midsize manufacturing companies, we see considerable challenges.  A review of some items in the February 2013 ISM Report on Business® is instructive (see report here).

Gross Margins

Gross Margins have been an issue that we have focused on extensively at ACM Partners.  The operating expenses of a company are certainly important, but in our experience understanding where gross margins might be headed and why is often a useful exercise in predicting pockets of distress in the broader economy.

The gross margin picture suggests that challenges lay ahead.  In February the index of prices paid by manufacturers increased by 5 percentage points.  As companies lose the ability to protect gross margins, management teams often panic and seek to address the problem by increasing sales.  The pursuit of higher sales at declining margins and with less discipline over the costs of servicing new clients is a long-established recipe for taking a company from mild under-performance to deep distress.

Inventories: Up at Producers, Down Among Customers

Among small and midsize industrial companies we anticipate demand shocks as customers, now comfortable with a historically low level of inventory, respond more quickly to changes in end-market demand.  The disconnect between customer inventories having been below 50 (the point at which they are considered too low) for nearly 4 years and producer inventories increasing suggests that producers are increasingly ill-equipped to address fluctuations in demand, and may be making the implicit choice to tie up cash in increased working capital rather than in capital expenditures.

These diverging trends in inventories present two serious challenges to small and midsize manufacturers:

1.      From a pricing standpoint the existence of slow-moving inventory will provide for some companies a temptation to sell at reduced prices, further eating into gross margins.

2.      From a financing standpoint this approach is a recipe for trouble, as asset based lenders will advance considerably less on inventory than on accounts receivable.  Additionally, for troubled small and midsize industrial companies there are fewer options to get any availability on inventory, further heightening the risk of this approach.  

Changing Power Dynamics

Power flows up and down the supply chain, depending on industry, quality of management, availability of financing and a multiplicity of other factors.  At the moment large national and multi-national customers control the fates of their suppliers, both the small and midsize manufacturers making the products, and the similarly sized distribution companies that store those products and handle order fulfillment.  As these dominant customers seek to maximize profitability and optimize their working capital, they are causing ripple effects throughout their supply chains.  The dominant strategy for the small and midsize industrial companies seeking to adjust is to become indispensable by occupying high value niches or gaining scale.  

Conclusion

Companies will continue to make and ship things, and so manufacturers and distributors will continue to have a role in the economy.  But there is no guarantee that their role will be a profitable one.

Big Data and Organizational Fluidity

This article also appeared in Business Insider

May 12, 2013

The term “Big Data” and the unfortunate hype surrounding it obscures a crucial development in the management of organizations, regardless of size. We have definitively moved into an era of copious data, and the challenge for all stakeholders in an organization is to find ways to analyze that data, discern actionable insights from the analysis, implement changes based on those insights and analyze new data in order to measure actual versus forecast results. The days of analysis being anything other than a core feature of the day-to-day operations of an organization are over; we have entered a period of continuous, iterative change.  Read more