12: Strategic Advantage - The What
The author mentions a middle-school basketball team coached by a man from overseas who didn't understand much of the game - and yet, he coached his team to the national championships. Largely, this is because he was unfamiliar with the game and the conventions - so while other teams followed convention, he took a fresh approach to the game that confounded conventional wisdom and foiled the opponents' strategies, which were based on predictiosn of typical playing styles.
This same individual was founder of a company that was a leader in real-time stock analysis. Rather than relying on quarterly or annual reports, his software adjust predictions as information becomes available in real-time, enabling traders to move quickly on new information while competitors wait for periodic reports (EN: however, the author notes it runs on "most of the trading floors," which would seem to mean it's no longer a strategic advantage because the time advantage is ubiquitous.)
DuPont Analysis
Developed in 1919, the DuPont system is a method of organizing complicated financial data in a way that makes it easier to understand. In a fundamental sense, it illustrates a number of basic financial ratios and schematizes them in a flowchart that follows the path of money through an organization.
By eliminating data that is not pertinent to revenue and expenses, it focuses on those that are germane to the firm's profitability, which clutters many traditional financial documents (balance sheet, income statement, and cash flows)
The DuPont chart can compares two periods in time (last year v. his year), or two firms during the same period, to provide an at-a-glance indication of the differences. The author goes into detail on the value of this, but it seems self-evident.
If Only Someone Had Bothered to Look
A problem with investment analysis is in the subjectivity of the way in which financial data is interpreted. Two analysts can be presented the same figures, and come up with radically different perspectives on what they mean.
It's noted that some firms (such as Goldman Sachs) provide analysis as a service, enabling investors to rely on an objective source that uses consistent methodology across various firms when deciding on investments. (Which is why having "coverage" of a stock is important to a firm: it is visible to more potential investors, requires less time, and is accepted with less hesitation than self-reported analysis.)
However, analysis remains subjective, and the author suggests analysts are "like fiction writers" who are aware that they have a following, and that catering to the desires and interests of their audience can skew the way in which they choose to interpret the numbers.
The author notes a group of students at Cornell University who, for a class project, analyzed the financial statements for Enron and came to the conclusion that the company's business model appeared to be "seriously flawed" and that the figures look suspiciously like the company was manipulating earnings. This was later found to be the case, and after the debacle, it was pointed out the facts that would have given investors a very clear danger sign were there in the financial statements all along - which the students figured out, but which analysts insisted on interpreting in a different way.
Product Differentiation and Co-Branding
The author mentions Intel as a "victim of its own success." The firm would release a better chip, enabling computer users to consume more processor-intensive media (graphics, sound, video, etc.), which would soon require an even better chip, which would encourage users to consume more, and so on.
Meanwhile, its own customers (computer manufacturers) were keeping the pressure on to keep prices as low as possible, because computer chips were largely interchangeable - and because bus speeds were limited, Intel couldn't compete simply by making faster chips than its competitors for long.
The way in which Intel overcame the problem was twofold: first, it developed a new bus system that would take advantage of faster chips - but in a way that would only work with their product. This met internal resistance, from insiders who were insistent that the company was in a very specific line of business (chips, not busses). Second, Intel reached past its immediate customers to the end users, creating the "Intel Inside" campaign that created consumer demand for products that used their chips, which also met with internal resistance, as component manufacturers don't generally market in this manner.
Naturally, it was successful in both counts: it was able to capitalize on consumer demand for devices made with Intel chips (not just the cheapest supplier, whom device manufacturers would have preferred) and was able to offer its customers a platform that would help their devices make the most of the chip technology (and which wouldn't work with other manufacturers chips).
This caught their competition (AMD and Cyrix) utterly flat-footed. They were unwilling or unable to wage an advertising war (as such firms have little experience) and had to rush to develop faster chips and the hardware to use them. This gave Intel sufficient lead time to claim the high ground and establish the Intel "platform" as a virtual industry standard, which would help cement the loyalty of device manufacturers, who could ill afford to re-tool their production lines (and re-engineer their products) to switch to a different supplier.
It's noted that Intel didn't use this power to bully the market - which may have incited a revolt and a move to other brands- but instead worked cooperatively with customers, providing them with engineering data and prototype chips to keep abreast of the latest developments (and continue to remain customers) as well as cooperative advertising dollars to continue to promote the Intel brand.
As an aside, the author mentions that co-branding can be a very powerful strategy - the relatively small amount of dollars invested in getting a company to promote your brand creates greater end-consumer demand for your component in other brands and, if it is successful, cements loyalty to your brand by immediate customers, who will need to change their packaging, explain their decision to a curious public, and risk losing their own customers, if they switch to another brand.
(EN: The author skips the dark side of co-branding, which becomes an effigy for the public to burn and a scapegoat for your partners to blame should anything go wrong. Consider the Ford-Firestone debacle and the impact it had on the brand across all consumer lines when Ford sought to shift the blame for product failures onto the tire manufacturer.)
Evolution
The author returns to the topic of biological metaphors: the need to compete and survive - but more importantly, the need to adapt. However, adaptation can be difficult to sell. Individuals are slow to make changes, and generally are content to continue "business as usual" until a crises arises them and forces them to explore alternatives. Moreover, it's not a common approach taught in business schools, where academic theory is based on stability and continuity of doing business in a fairly static environment.
It's also noted that leadership and decision-making must be regarded as two separate skill sets. The latter is familiar, and should be pushed as far down the corporate hierarchy as possible, so that tactical decisions are made by those closest to the battle. Meanwhile, leadership should be seen as a matter of strategy: envisioning the future, determining how to get there, and selling the vision to the rank and file who will achieve it.
Selling the vision is important: if employees understand a leader's decision, they will act accordingly - and the decisions they make will correspond to the decision the leader, himself, would have made in the same situation, given the same information.
There's a bit about punishing innovation: in an environment when a bad decision results in punishment, employees become reluctant to make any decision at all, and stick to the tried-and-true methods of doing business for fear of making a career-ending mistake. The author stresses that employees at all levels should be given leeway to make mistakes, and helped to learn from them. Risk, the author asserts, is part of life, and inherent in any investment on which one seeks to earn a return.
Game Changing
Even during periods of environmental stability, there is value in making changes and adapting your organization. This book has been replete with examples of companies that have done exactly that: by making a strategic change to their organization, they have effected a change in the competitive field, and forced other firms to respond to the threat.
In effect, the entire game is changed by a player who finds a better strategy and departs from common and traditional practices.