Dec 7, 2012|
The rule is that there are no rules
There is hardly a management graduate that passes out of the management institute without a peek into the world of Michael Porter. It would not be wrong to say that Porter is to the field of business strategy what Socrates was to philosophy. Thus we read with surprise that a firm called Monitor Group, co-founded by the iconic Michael Porter himself, filed for bankruptcy protection recently.
It turns out that post the 2008 crisis, Monitor Group, which has business consulting as its specialty, really started finding the going tough. It was all downhill from there leading to the recent filing for bankruptcy protection.
It is ironic that the very management guru that advised businesses and Governments world over on how to create a competitive edge could not save its own business from going down under.
This thus goes to show that there aren't really any golden rules for a company to sustain its excess profitability for a long period of time and fend off competitors. For long it was being believed that Mr Porter's famous strategy models came pretty close to the real answer. But Monitor's failure has put a big question mark before any such assumption.
It could also be the case that the framework that Porter created was out of sync with the current globalised and internet dominated world and that such an environment called for an entirely new set of rules.
Whatever be the case, one thing is sure that there is nothing that can be considered sacred in the cut throat world of business competition. Each day presents new set of challenges and models that have been successful in the past, may not be that handy any more.
Does this have implications for the way we go about investing? They certainly do we believe. No matter how successful a business model or how big a moat, there is no guarantee that it could lead to sustainable long term value creation. Thus, it is always a better idea to invest with a particular margin of safety so that losses, if any, are minimized.
Besides, rather than going overboard with just one stock, it pays to have investments spread across a few companies. This ensures that there are other investments to fall back on in case one or two of our investments get killed by the competition onslaught or a sudden change in business dynamics.
It is not that these points are not known to us. But we will have to be even more vigilant about them in view of the events like the Monitor bankruptcy.
||Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.
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