Posts

Pricing Strategy Post-COVID

Overview

The shifting economic outlook for small and midsized businesses (SMBs) has resulted in a commensurate shift in the optimal focus areas of business transformation initiatives for these companies. In the early days of the coronavirus pandemic, there was concern that as many as 1 million SMBs could fail. Luckily, government intervention softened the blow for many companies, and the public health outlook improved considerably. The end result has been that only 100,000 to 200,000 US SMBs failed as a result of the pandemic. Unfortunately, the economic impact of the coronavirus pandemic has still been extraordinarily severe for SMBs, and their long-term survival is by no means assured (see Exhibit A). Now, those companies that successfully navigated the disruptions of the last 18 months must turn their attention to the challenge of driving a successful business transformation that will allow them to survive and thrive in the recovery. One avenue for strengthening financial performance post-COVID is as simple as it is profound: pricing strategy.

Exhibit A

Source: “2021 Global State of Small Business Report”, Facebook and the Small Business Roundtable, April 2021.

What Pricing Communicates

The price a company charges for the goods or services it provides relays important information to current and prospective customers, and as such a strategy to optimize that value is a powerful lever to drive business transformation. The quality of an offering will speak loudly, but it will only speak to actual customers. Prospective customers will not have the benefit of direct experience with your product or service, and so will tend to draw inferences from the relative pricing of your offering vs. those of your competitors. The danger for companies is that a high-quality offering with a mid-tier price will tend to be viewed as a mid-tier offering absent a concerted messaging strategy. Any successful pricing strategy must strive to avoid a myopic focus on a company’s own offerings and instead seek to be conversant in the trends ongoing in the broader market.

Thinking About Pricing Holistically

The global consulting firm BCG outlines four key gaps in how organizations think about pricing:

  • Strategy. The absence of a well-defined pricing strategy puts organizations at a disadvantage.
  • Execution. Success in pricing requires a commitment from company leadership to the discipline of regularly evaluating prices and making appropriate adjustments.
  • Tools & Insights. Marshalling the appropriate data and applying insights generated through analytics tools can allow companies to develop and test pricing models that will improve over time.
  • Organization. Having the right people, in the right positions, properly incentivized, to drive pricing strategy is key.

A successful business transformation effort premised on optimizing pricing strategy must address the gaps outlined above.

Pricing Traps

Too often, SMBs approach their pricing decisions out of fear. The following are some of the most common pricing traps:

Buying business. By intentionally pricing low some companies seek to establish a sales “floor” for the company. Unfortunately, this approach necessitates a level of financial sophistication and forecasting that exceeds the capabilities of many of the companies who practice it. In the absence of these capabilities, a strategy of buying business becomes a strategy of being a low-cost provider, which often siphons away the profitability that would otherwise allow a company to invest in developing higher quality, and higher priced, offerings.

 

Stagnant pricing. In many ways, this is similar to #1, but more insidious. The pricing was originally fine, comparable to market peers, etc. But over time, and in the interest of staying in the good graces of a major customer, pricing increases are pared back or avoided entirely. As a result, over time good pricing becomes bad, or disadvantageous pricing. And formerly “good” customers come to understand that your fear is a key input in their price.

Loss leaders. Goods/services priced at a loss with the intention of using that low price offering as an opening to sell other, higher priced goods and services. This approach can often fail companies when sales teams, incentivized to maximize revenue and not some measure of profit or cash flow, fail to drive sufficient volume of additional goods or services to make this approach viable.

Actual pricing. Sometimes the list price is fine, even attractive, but a lack of internal controls may allow the sales team to grant or the customer to negotiate, discounts that severely undermine the original unit economics.

Ignorance. Simply being unaware of how your pricing works at the level of each individual customer and offering is a trap, and often, the costliest of them all.

Conclusion

The coronavirus pandemic was massively disruptive to small and midsized businesses, but all indications suggest that the recovery and attendant adjustments to it could be even more so. The companies that thrive in the recovery will be those who embark on business transformation efforts focused on a critical reexamination of business practices, core assumptions, and even long-term goals, all in the interest of initiating a virtuous cycles of value creation. For business leaders seeking such opportunities, pricing strategy is a good place to start.

About the Author

David Johnson (@TurnaroundDavid) 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. He is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation. David can be contacted at: david@abraxasgp.com.

Interim Managers: Value Creation Catalysts

There is a tendency among the leadership ranks of most organizations to espouse the virtues of disruption, but only when that disruption is focused on somebody else.  When incumbent leadership is unable or unwilling to drive necessary change, creditors and other stakeholders are showing an increasing willingness to press for interim managers to supplement the senior management team and drive the change necessary to save what is often a faltering organization.

Recent news regarding two troubled organizations highlights the value interim managers can bring, especially in periods of distress:

  • RadioShack.  The struggling electronics retailer announced recently that CFO John Feray would resign, after only seven months on the job.  Mr. Ferary will be replaced by Holly Etlin of Alixpartners, would will assume the CFO role on an interim basis.  According to Michael Pachter of Wedbush Securities, Ms. Etlin’s appointment is a negative to shareholders, as she will “represent the creditors”.  Mr. Pachter’s comment is actually a strong endorsement: given the fiduciary duty of officers of a company operating in the zone of insolvency, Holly Etlin should be working for the benefit of creditors, not the shareholders who are almost certainly out of the money.
  • Detroit.  In his nearly 18 months as emergency manager of Detroit, Kevyn Orr has presided over the largest municipal bankruptcy in U.S. history ($18 billion) and pushed that contentious process toward what looks to be a remarkably successful resolution.  The Michigan law which allows for emergency managers dictates a term of 18 months, but in light of his successes many in Detroit are arguing for Orr’s continued involvement, if only to provide continuity throughout the bankruptcy and immediate post-bankruptcy period.

Experienced interim managers, such as Ms. Etlin and Mr. Orr, are professional change agents, responsible for both catalyzing and driving the change necessary for organizations to raise their level of performance.  In periods of turmoil, these change agents can be the difference between success or failure for struggling organizations.

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

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.

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

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.

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.

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

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.

Eike Batista

This article originally appeared in Business Insider

How flattering to the pride of man to think that the stars on their courses watch over him, and typify, by their movements and aspects, the joys or the sorrows that await him! He, in less proportion to the universe than the all-but invisible insects that feed in myriads on a summer’s leaf are to this great globe itself, fondly imagines that eternal worlds were chiefly created to prognosticate his fate.

–          Extraordinary Popular Delusions and the Madness of Crowds

Eike Battista is not having a good year.  In fact, it might be fair to say that the Brazilian entrepreneur is having perhaps one of the most horrendous years of wealth destruction on record.  In little more than a year Batista’s fortune has plummeted by over $30 billion, his support among Brazilian politicians has evaporated, and his creditors have gone from enthusiastically backing his endeavors to nervously eyeing their collateral.

For those unfamiliar with the new poster boy for emerging markets euphoria gone horribly wrong, look no further than the recent Bloomberg Businessweek article by authors Juan Pablo Spinetto, Peter Millard, and Ken Wells.  Their reporting details all the usual elements in these situations, with a few interesting wrinkles:

  • The Batista empire benefited from a compelling story that investors desperately wanted to believe.  With a network of companies focused on natural resources and based in Brazil, Batista had a need for capital at exactly the point in time when institutional investors were looking for investment opportunities emerging markets.
  • OGX, an energy exploration and production company founded by Batista in 2007, bid aggressively (in some cases offering bids double that of its competitors) for offshore oil leases.
  • Batitsa had the dangerous combination of being a famously hands-off manager who was nevertheless relentlessly optimistic about his ventures.  Over time his direct reports came to avoid bringing him bad news, which may have only speeded the decline of Batista’s empire.

The focus of Eike Batista these days is on preserving some value, as he struggles to restructure the debt of his various companies.  News that mining company MMX had reached an agreement to sell a controlling stake in a Brazilian iron-ore port sent the stock up 8 percent for the day, though investors have still suffered a 76 percent decline in 2013.  This marks only the latest in a series of transactions aimed at preserving something of the Batista empire, though the heavy debt burden of these companies suggests that preserving any equity value may be a lost cause (see articles here and here).

 

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

 

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 not guarantee that their role will be a profitable one.

 

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Big Data and Organizational Fluidity

This article also appeared in Business Insider

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.

This new world calls for experimentation as a central operating tenet. The organizations that thrive in coming years will be those capable of embracing this new fluidity.

Gold in the Terabytes

For capital providers, there are outsized returns to be generated by seizing the opportunity that our new, data immersed age offers.  The wealth of data offers tantalizing prospects, as savvy management teams and their advisors push those companies willing to make the effort into a virtuous cycle of continuous improvement, identifying compelling growth opportunities, driving margin improvement, eliminating unnecessary expenditures, and overall driving substantial improvements in enterprise value.

We are moving far beyond simple SKU analysis and the development of optimal pricing models.  By understanding high quality data sources both inside and outside and organizations, areas of inefficiency can be relentlessly targeted, and with the continuous stream of data that most organizations generate, small projects that yield results can quickly be scaled up to organization-wide initiatives.

The Certainty of Casualties

Management by rule of thumb is anachronistic; based on what we are seeing in the market we anticipate that those small and mid-sized organizations willing and able to adjust will find a data savvy business model to be a compelling force multiplier for an organization of any size.  Those organizations that fail to adapt will find themselves at a severe and growing disadvantage as their competitors utilize superior insights to grow market share and identify new pockets of opportunity.

Additionally, blind adherence to data will also produce casualties.  Massive data sets are almost by definition “noisy”, and insights derived from such data must take into account both the data’s strengths and limitations.  Ironically, this increasingly analytic field needs more than ever a solid qualitative framework to ensure good “sanity checks” are not forgotten.

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Against Corporate “Hero Ball”

This article also appeared in Business Insider

Your plan should foresee and provide for a next step in case of success or failure, or partial success.  Your dispositions should be such as to allow this exploitation or adaption in the shortest possible time.

– B.H. Liddell Hart, Strategy

My partner and I speak with the owners of dozens of small and mid-sized companies every year, and work very closely with some of them, often during the most challenging periods of their professional lives.

The common theme that we see with those companies struggling with under-performance is the lack of a defined yet versatile strategy to return to success.  Too often we find companies that have burdened themselves with some combination of the following:

  • An incomplete or erroneous assessment of the original causes of distress.  Without an understanding of where a company went wrong, we often see management teams and stakeholders struggle to find an appropriate redemptive course.
  • Lack of consideration of the resources of the company in executing a turnaround.  An understanding of the limitations imposed by cash flow, credit availability, supplier confidence (or lack thereof) and the threat of staff defections, among other factors, is key to developing an actionable turnaround plan.
  • Fixation on easy, “feel good” solutions (land a new customer, sell a building, secure an emergency refinancing or asset sale, etc.).  Solutions to difficult problems are often difficult, and even when the right solutions have been identified, a preconception of simplicity can prove to be toxic as struggling companies and their stakeholders face inevitable complications.

Putting Down the Safety Blanket

Change is frightening, and there is a natural tendency in many groups to defer to stars in order to lead organizations out of trouble.  Sadly, this tendency is as flawed as it is natural.

Relying on a wealth of data that had not previously been available, this fallacy has been exposed and derided in professional basketball with the moniker “Hero Ball”.  Hero Ball, in short, is the unsupported assumption (which inevitably influences strategy and tactics) that the most comforting approach (i.e., putting the ball in the hands of the biggest star) is invariably the approach most likely to ensure success.  It is not.

In basketball, stars are sometimes poorly placed to take a winning shot.  With companies, the same is often true.  The safety blanket of perceived strengths keeps many companies from doing what they need to do as they instead continue to do what is most comfortable.  The corollary to this is that some of the most impressive turnarounds of the past 30 years had their roots in a willingness to address and bolster areas of weakness.

  • In 1979, the moment faltering automaker Chrysler began to turn the corner was the moment that it forced its lenders to consider the dire consequences of the bankruptcy filing it was working so hard to avoid.  Had management failed to acknowledge its precarious situation, the salesmanship of Chairman Lee Iacocca would have been associated with a massive fire sale, rather than one of the preeminent industrial turnarounds in U.S. business history.
  • The successful revitalization of Disney in the 1980s and 1990s came on the back of the financial discipline that Michael Eisner and Frank Wells brought to the listing company, which then allowed it to successfully grow and monetize its library of childhood classics.
  • The turnaround of IBM in the 1990s relied on exiting lines of business deemed no longer strategic (for example the sale of the printing division, in 1991), a forthright assessment of the growth prospects of mature business lines (especially the mainframes business), and layoffs of 75,000 employees before the development of ancillary services that allowed the company to return to a growth footing took off.

Conclusion

Under-performance, and in more advanced cases outright distress, befalls companies in spite of their strengths.  Because of this, it is rarely the case that a sales-oriented company that finds itself struggling will return to health by redoubling efforts in sales, a serial innovator will succeed by bringing to market a transformative product, or that a perpetual acquirer will find a new acquisition to address endemic ills.  Distress is the market’s signal that a company has tilted too far out of balance, and while restoring balance is often painful, it is also the high probability route to long-term success.

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

The Transience of Advantage

This article also appeared in Business Insider

Round the decay of that colossal wreck, boundless and bare, the lone and level sands stretch far away

– Percy Bysshe Shelly, “Ozymandias”

In recent weeks we have seen two developments that, to us, capture the shifting nature of all competitive advantages.

  • Microsoft (MSFT), which rode to tech dominance in the 1980s and 1990s on the back of its wildly successful Windows operating system and Office suite for productivity software, is working on a comprehensive restructuring to streamline the company.
  • Detroit released a restructuring proposal laying out the dire financial condition of the city, and the concessions creditors will be asked to take.

Microsoft: A Tech Giant Beset By Challenges

Microsoft provides a study in the difficulty all wildly successful companies have in searching for a second act.  After leading the PC era with the dominant operating system and the dominant productivity suite, Microsoft began to lose its footing as the locus of innovation moved to the internet.  In the era of prepackaged software, Microsoft became the unquestioned winner.  Now, however, Microsoft is challenged by a set of competitors whose very business models present a set of asymmetric challenges.

  • Amazon (AMZN): When Jeff Bezos first set out to disrupt book retailers, Microsoft was already a giant.  Now, however, Amazon is a massive and proven disruptor that has successfully moved beyond books to become the default ecommerce option for many shoppers.  Perhaps more worrying to Microsoft, the Amazon Web Services offering has taken off, presenting long-term challenges to the entire IT industry.
  • Apple (AAPL): As an integrated hardware and software company with a robust developer network, Apple is now the company Microsoft hopes to be when it grows up.  This reversal presents an object lesson in the shifting nature of any advantage.
  • Google (GOOG): In many ways Google is the competitive threat that Microsoft was best prepared to address.  The challenge may have been as simple as the way the Google chose to optimize itself around selling ads, while Microsoft always believed in getting paid directly for the software it produced.  Nonetheless, Google’s strong market share in search has given it the financial heft to pursue long-term strategies (the most charitable way to describe the acquisition of still-struggling Motorola).

Detroit: Reduced Horizons and the Challenge of Multiple Stakeholders

Detroit rose to prominence as the hub of perhaps the most exciting industry of the first half of the 20th century.  Sadly, the very concentration that allowed the city area to rise became a milestone around its neck as the auto industry faltered, struggling with a succession of external shocks and self-inflicted wounds.  Today, Detroit is a city incapable of providing an acceptable level of service to its citizens, and only a drastic restructuring will allow the city’s restructuring team, led by emergency manager Kevin Orr, to right the ship.

One of the best things about distressed situations is that as the level of distress rises, there is an increasing openness to solutions that would have been taboo in normal times.  Emergency Manager Kevin Orr has been very consistent in expressing the untenable situation Detroit finds itself in.

A review of Detroit’s restructuring proposal indicates that the fundamentals for Detroit have long been moving in the wrong direction:

  • Population, nearly 1,850,000 in 1950, has since declined 63 percent, to 685,000.
  • The unemployment rate has nearly tripled since 2000, rising to 18.3% from 6.3%.
  • Property tax collections have been hit by a withering combination of declining assessed values (down $1.6 billion from 2008 to 2012) and falling collection rates (68.3% in 2011, down from 76.6% in 2008).
  • A growing operating deficit; excluding debt issuance, the accumulated deficit from FY 2007 to FY 2013 is $700 million.
  • The city’s Fitch credit rating has dropped from A in 2003 to CCC as of June 2012.

Conclusion

Percy Shelly may not have understood just how well the lesson of his poem could be applied to the financial matters.  Success is never guaranteed, and dominance is always little more than a temporary market aberration.

About the Author

David Johnson (@TurnaroundDavid) 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 is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.