Business Strategy Plans Not Working? – Top Down vs Bottom-Up

Business Strategy PlanBusiness Strategy Plans

Business strategy, in my opinion, usually develops over time rather than being a master business strategy plan from the CEO. It is often tempting to think that we can devise a master business strategy plan and then focus on executing that strategy. It is never that simple. There are so many elements to most organizations that I have found it difficult to devise a master strategy plan that incorporates all the various aspects of a business. This is somewhat disconcerting because you must be at peace with the idea that a company is not in your total control. But, the reality is that it is not in your total control.

Intended and Emergent Strategies

Clayton Christensen of the Harvard Business School captured this concept in his class through a concept of “Intended Strategy vs. Emergent Strategy”. To Christensen, many of the best strategies and most common paths toward a strategy were Emergent Strategies. He described this as “the cumulative effect of day-to-day prioritization decisions made by middle managers, engineers, salespeople and financial staff — decisions that are made despite, or in the absence of, intentions.” This is different than an intended business strategy plan that is a very conscious and analytical strategy. Sort of an unexpected concept from a business school that teaches strategy, right?

Business Strategy Plans at Work

But, isn’t a CEO supposed to set the strategy plan of a company? Wouldn’t things drift in the wrong direction if the company is left to its own devices? I have found it is best to set the tone and the direction of the company, but then be open to letting the company find its own specific path in that direction. Of course, this usually assumes that the company is not in start-up mode or a mode of urgent transformation. But if the company is operating effectively, allowing good ideas to emerge over time and implementing tweaks to the strategy is very effective. The cumulative impact of all of those decisions becomes large over time.

Furthermore, I find that many sources of competitive advantage were not dreamed up in a master business strategy planning session. Often, they are discovered as the company moves along, develops relationships, experiments, and makes observations in the marketplace. Thus, very strong competitive advantages usually take time to develop and then solidify. I suggest not forcing a strategy plan, but setting a direction and then being on the vigilant lookout for strategy adjustments and competitive advantages and allowing them to emerge.


Business Purchase and Sale Agreements (a series)

This post begins a series of posts on business Purchase and Sale Agreements.  Even though I have executed a number of  Business Purchase and Sale Agreements in my investing career, this series falls in the category of “teaching what you want to learn” as I want to become even more knowledgeable   It helps to write about something to clarify your thoughts and understanding.  I expect to expand the topics of this series in the future, but here is my initial list of what I hope to cover and please suggest additional topics:

  • Asset Sale versus Stock Sale
  • Section 338(h)(10) and Section 338(g) elections
  • Personal Goodwill
  • Working Capital Adjustments
  • Hold backs, escrow, and recovery by buyers
  • Representations & Warranties
  • Knowledge, Materiality, and Other Important Terms
  • Closing Conditions
  • “cash free / debt free”
  • Form 8494

The goal of this series will be to give you enough information to begin asking questions of your legal counsel.

Real Leadership Lessons of Steve Jobs – Harvard Business Review

In this month’s issue of the Harvard Business Review, there is a nice article by Walter Isaacson titled The Real Leadership Lessons of Steve Jobs that is worth reading.   As you know, Walter Isaacson is the author of the recent biography titled Steve Jobs and he provides his opinion about what he considers the keys to Jobs’ success.

Many of the ideas are ones that we have all seen before about Apple and Steve Jobs, but he does a nice job of summarizing the concepts and ideas.  Some of the ideas that I had not heard before were Isaacson’s mention of “Engage Face-to-Face” and “Know Both the Big Picture and Details”.

Business Ownership – Best Time Ever

Business ownership, even with all the struggles and frustrations, can be a wonderful life experience. On top of that, today may be the best time ever to own a small or medium size business, says Scott Strauss of the USA Today. As part of National Small Business Week this week, Strauss makes the case for why owning a business today is better than all other times in history.

For the business owners I know, business ownership creates constant reflection about how the business is doing, how the business fits into the life of the owners (or not), whether owning the business is worth it, and more. In the daily hustle and bustle of  business ownership, it is easy to focus on the headaches and heartaches.

Every once in a while, it is also helpful to think about your business with a wider perspective. Strauss’ column did that for me and reminded me of the fun, the unprecedented opportunity, and the wide variety of life experiences that business ownership provides.

Business Growth Strategies – Early Revenue and Profits (even small) are Important

Business Growth Strategies

In business growth strategies, two excellent thinkers about business growth suggest driving to revenue, profit, and customers quickly (even if small).  These are ideas from Clayton Christensen of the Harvard Business School and author/consultant Ram Charan.

In Christensen’s class at Harvard, he taught that large companies often wait for large business growth projects with large profit potential and then make large investments that take a while to prove their return.  A better way, he said, is for even large companies to require business growth projects to drive quickly to profits, even if very small.  This kept the focus on creating value and proving the concept before too much money was invested in a losing proposition.

100 Day Business Growth Strategies

Similarly, Ram Charan in his book Profitable Growth is Everyone’s Business suggests that every business growth project have a deadline to have a commitment from a customer within one hundred days.  As he writes, “The one-hundred-day-deadline is vital, because it forces everyone to immediately confront issues that can keep the team from succeeding. . . . . You do the best you can in the time available, you take what you have, a very rough prototype, and test it with customers.”

Small business growth projects with early revenue are valuable for many reasons:

  • it can be early proof of a concept
  • even small projects may be able to be used elsewhere in the organization to increase their impact
  • small revenue projects can become large revenue projects
  • revenue can build upon itself from year-to-year, compounding the impact

What growth projects can your business undertake with a goal of a customer commitment within 100 days?

Investment Strategy – Sell Fixed Income

Pension Funds Buying Fixed Income

As investors and business owners, it is problematic to make decisions for the future with too much of an emphasis on the past. In reading a recent issue of Grant’s Interest Rate Observer, they mentioned an eye-popping statistic from the 2012 Milliman Pension Funding Study: pension funds are now, in a time of record high fixed income prices, allocating more of their portfolio to fixed income (41.4%) than to equities (38.1%). It almost seems that they are buying fixed income because the prices are super high, rather than buying something where the price to value ratio is a bit more favorable.

Sell High, Buy Low

In fact, pension funds and individual investors have a terrible habit of investing in asset classes as the prices are at their highest (think fixed income today or housing in 2007). This reminded me of the 1970’s when Warren Buffett was buying public equities like crazy, but pension fund managers only allocated 21% to equities in 1974 and 1977, and only 9% in 1978. These years were wonderful years to buy public equities.

On the other hand, pension fund managers allocated a record 122% of net funds available in equities in 1971, a time of very high equity prices.

An Opposite Investment Strategy

These numbers suggest doing the opposite from pension fund managers. So today, sell fixed income at these high prices and please do not buy. Whether today is the right time to buy public equities generally, I do not hazard a guess (give me a particular company, however, and I may be willing to offer an opinion). I do believe it continues to be a nice time to own private companies that can adapt to a changing environment as the economy, politics, and global trends change over time.

Competitive Advantage, Company Culture, and Simon Sinek

Competitive Advantage as Company Culture

A powerful competitive advantage, even though it is intangible, can be built through a unique company culture.  I have seen it in action, and it is powerful.  It works particularly well today because many people prefer to work at a company and make purchases from a company where they feel aligned with the purpose of the company.

Simon Sinek “Start With WHY”

Culture can become a competitive advantage because it creates a reason why your company is different — a differentiation in why and how you do something can be more powerful that product features.  An author who has outlined this very well is Simon Sinek in his book Start With WHY.  It is also worth watching his Ted Talk here.

Sinek states that, “By WHY I mean what is your purpose, cause, or belief? WHY does your company exist?”  If your company has a very clear purpose behind its existence, it attracts excellent, well-aligned employees and well-aligned customers.  He says, “People don’t buy what you do, they buy why you do it.”

Particularly in service businesses and with knowledge workers, I believe this is very powerful.  Employees want to work somewhere for more than a paycheck or benefits.  Life is too short to work just for a paycheck.

I also particularly enjoyed Sinek’s writing about the power of company cultures.  He writes: “We’ve succeeded as a species because of our ability to form cultues.  Cultures are groups of people who come together around a common set of values and beliefs. . . . A company is a group of people brought together around a common set of values and beliefs.  It’s not products or services that bind a company together.  It’s not size and might that make a company strong.  It’s the culture — the strong sense of beliefs and values that everyone, from the CEO to the receptionist, all share.”

I have also seen how excellent alignment among employees helps with scaling a company.  When everyone is aligned, it becomes possible for anyone in the organization to make decisions with confidence.  They know which decisions are aligned and they know the organization will back them up.  When that happens, it is much easier for a company to scale.

Also, be sure and check out the Celery Test story on page 166.

Business Moat – Assessing the Width (To Sell or Not To Sell)

Business Moat - Assessing the WidthBusiness Moat

Assessing the strength of the moat around your business is the next post in the series, “To Sell Your Business or Not To Sell Your Business — That is the Question“. Simply put, the wider and stronger the moat around your business, the more my advice is to avoid selling your business. The smaller the business moat, the more you should sell your business. This is because a business with a strong moat is likely going to have a greater financial return (and frankly, less stress or heartache) if you maintain ownership and allow the value to compound over time (unless someone offers you an illogical amount of money today).

What is a business moat? First, a business moat is not assuming that you can execute better than your competition. In every business I have visited, the owners believe they are executing better than the competition. Operational effectiveness is not a competitive advantage or differentiation — you should assume that every competitor will soon match any advantage in operational effectiveness that you have. A business moat is something inherently very difficult (if not impossible) for a competitor to match. Thus, a business moat is an assessment of how predictable the future cash profits are from your business because of some comparative advantage. If your business has some inherent advantages over the competition, then it has a business moat of protection. We can break this idea down further into two assessments that may help:

Business Moat Assessment

  1. How certain is it that the revenue of your business will remain stable and increase beyond inflation? Please also remember that minimal revenue growth may not be enough to outpace inflation, continue to provide opportunities for your employees so that they can progress in their careers and gain financially, or provide the cash flow to invest in the future of the business.
  2. How certain is it that you can maintain your gross margins and profit margins? I recommend that your default assumption is that margins will revert to the mean of your industry. If when you have an advantage, it is usually quite difficult to maintain it as your competitors or customers may see the margins and work to shrink them.

Furthermore, here is a starter list of questions that may help you think about the competitive advantages of your business and how likely it is that you can maintain your revenue and profit margins:

  • How much competition is there in your field?
  • Is the competition rational?
  • Is there overcapacity?
  • Are there close substituties?
  • Can you increase prices?
  • Is your field changing rapidly requiring your business to also change rapidly?
  • Is your field trendy or are the customers fickle?
  • Do your suppliers have leverage over you?
  • Who will capture value creation in your field (you, your employees, the customers)?

As you do your assessment, if you come to believe that you truly have a wide moat around your business, then my advice is to not sell your business. Effective business moats are very difficult to create and very rare.

Business Financial Models – Coca-Cola vs. Wine

Perfect Financial Business - Wine vs. Coca ColaAs the next post in the series on a Perfect Business, Financially Speaking, I think an anecdote told by Donald Keough in his book “The Ten Commandments of Business Failure” conveys the advantages of having a good business financial model versus the alternative.

Mr. Keough relates how they are trying to decide what to do with a wine business owned by Coca-Cola and how the long run president and board member of Coca-Cola, Robert Woodruff, then in his eighties was reporting back on a trip he had made to visit the wine business.
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Thoughts on the Berkshire Hathaway Meeting 2012

The Berkshire Hathaway Annual Meeting

Below are a few words of advice from Warren Buffett and Charlie Munger yesterday at the Berkshire Hathaway annual meeting.  Business owners and investors should make a point to attend a Berkshire annual meeting sometime.  There are not that many opportunities in life where there are six hours of intelligent questions and answers about business that always generates nuggets of wisdom relevant for business owners and investors.

This year at the Berkshire meeting yesterday was no different.  Many of the thoughts and concepts expressed by Warren and Charlie are ones that we have heard from them before, but it never hurts to hear some of them again.  Here are some observations from yesterday’s meeting:

Biggest Surprise

In giving an answer to a question about why he bought the Omaha World-Herald, Buffett said that shareholders should not be surprised if he buys more newspapers.  This is very different from a few years ago when he said on a Charlie Rose interview when the Wall Street Journal was for sale that he would never buy another newspaper.  He must be seeing adaptations in the newspaper business model that makes him comfortable buying newspapers with a strong local competitive advantage despite the negative impact of the Internet.

Reminder Thoughts on the Culture of Berkshire Hathaway

“We cannot put passion into someone, but I can create a structure that takes the passion away from them,” said Buffett on why he creates a culture where his business managers can “paint their own canvas” and “we do not want to do anything that erodes the feeling of the acquired business being their [the manager’s] business.”

On how involved they get in acquired businesses:  “If we thought the success of an investment depended upon the company changing or taking our advice, we would move on to something else,” said Buffett.  At another moment, he expressed how they do not expect management to change post-investment — they want them to continue doing exactly as they have been doing.

At Greybull Stewardship, we also allow the management in our investments to manage their companies as they want to manage them.

Berkshire’s Focus on Being Fair to Shareholders

Berkshire’s stock has been trading at a very low valuation lately, and many questions revolved around what Buffett could do to increase the stock price.  Buffett and Munger seem hyper-cautious about buying back Berkshire stock from shareholders because they do not want to be seen as taking advantage of shareholders and buying them out at a low price.  In answering one question that a shareholder would prefer that Berkshire buy back Berkshire shares at a valuation of 1.15 to book value rather than invest in some of the public companies that Berkshire has done recently (at valuations of much greater than 1.15 to book value).  Buffett responded, “I agree, as a financial person.  As a fiduciary to shareholders, however, I am reluctant to do that.”  While Buffett is probably being more than fair and generous to existing shareholders, he has built his reputation as a not putting his interests ahead of shareholders and I understand why he would make great effort to maintain that reputation even with this decision that would clearly be a good financial decision.

Valuation of Purchase of Burlington Northern & Use of Stock in that Transaction

Prior to the Burlington Northern acquisition, he had expressed a high reluctance to use Berkshire stock in an acquisition, particularly when the Berkshire valuation was not super high.  Therefore, I and many other people wondered why he paid for 30% of Burlington Northern using Berkshire stock.  For the first time that I have heard, Buffett said that he was very reluctant to use Berkshire stock but thought it was worth it in this case.  Yet, the Burlington acquisition price still seemed high, right?  He explained that he was looking at the valuation in relation to the replacement value of all the fixed assets rather than only as a multiple of earnings.  By the way, all indications are that Burlington Northern is performing very well for Berkshire.

Other Reminders

To Buffett, “understanding a business” does not mean understanding what it does, it means “having a fix” on what the earnings and competitive advantage will be in five years.

On risk: “Never risk what we have and need for what we don’t have and don’t need,” said Buffett.

On judging managers: “We are more concerned with how a track record is achieved than the track record,” said Buffett.

“We buy barriers to entry, we don’t build them,” said Charlie Munger.  “One competitor is enough to ruin a business.”

“The business of private equity is selling businesses, not buying them,” said Buffett.