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Investing: How focused are you - Views on News from Equitymaster
 
 
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  • Dec 17, 2008

    Investing: How focused are you

    In order to pick up the right stock, investors need to look at not only valuations and numbers of company but they need to look at the strategic planning focus, function and orientation of company. It is of utmost importance that a company adopts the right strategic plan to survive in a competitive world. A company can cope up with certain internal deficiencies, but firms cannot survive competitive inadequacy. Allowing the company to deteriorate against its competitors means putting the company’s fate in the hands of the competition.

    In today's business environment we cannot define perfect strategy or the perfect competitive situation. But we can certainly analyse company on the basis of how the company has gained an advantage over the competition at a reasonable cost. The long range-planning horizon adopted by companies can give us visibility of the future prospect of the company.

    A famous Japanese author Kenichi Ohmae explained Strategic Paths that companies take to survive in the market. We can analyse companies on the basis of these paths to determine its growth prospects. Following are the paths, which he has explained in his book ‘Mind of strategist.'

    • Re-allocation of resources.

    • Being free

    • Relative strength.

    • Bold stroke.

    Re-allocation of resources
    There are only one or two most important factors that determine success in any industry. These factors are known as critical factors. The critical factors in an industry can be identified in several ways. It can be ascertained by analyzing the industry, looking at each segment, defining how competitors in each area behave and drawing some overall conclusions about the success factors. Another way to ascertain this factor is by examining the conduct of winners and losers to define the behavior, advantages or resources that made the difference. Once the key factor for success (KFS) in industry is identified, we need to analyze that whether the company is re-deploying its resources to focus on building strength in that key factor. For instance, if it is in service industry, then it should focus its resources on developing outstanding service. And if product design is a key factor, focus on that.

    Being free
    Having identified the key factors for success (KFS), precisely identify what courses of action may be open. In the case of an auto company, perhaps safety is a KFS. An automaker can do many things to improve safety, but can't do all of them at once. Meanwhile, there are some things that might improve safety but that the company simply cannot do. Thus we need to watch whether strategic planning and strategic action of company would proceed in the areas where the company is indeed free to move.

    Relative strength
    In order to ascertain relative strength of company, we need to examine product or services of the company and identify areas where they are focusing to achieving a relative advantage. This may mean literally taking each product apart, taking its competitor's product apart and comparing the two. For example, Hindustan Unilever Limited (HLL) and Procter & Gamble Hygiene (P&G) competed in the market for detergent. Their quality was comparable, but HLL had an advantage in its established brand which was present in market for long time in Indian market. P&G analyzed the market and found that consumers were becoming more concerned about cost and often tried to squeeze more out of one pack. P&G decided to introduce its product at lower price. Strategically, this made sense. P&G develop relative strength on the basis of cost and gained market share in the detergent segment. Investors should keenly watch the relative strength of a company and should think through competitors' likely reactions to each move, and should also watch whether the concerned company is prepared to defend itself against those reactions.

    Bold stroke
    Investor need to analyze whether the company is taking any bold steps to break the barriers of conventional wisdom. One of the best examples of this path is the strategic planning of Toyota. The management went against the convention wisdom of industry wherein auto companies used to keep costly-to-finance inventory on hand. Toyota wound up inventing and introduced "just-in-time" material management practices.

     

     

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