Posts Tagged ‘Strategy’

‘That’s not a strategy’

August 31, 2016

Henry_R._Kravis_verticalHenry R. Kravis, co-chair of KKR, in the July/August Bloomberg Markets, on interviewing CEOs of potential investments:

I compare their responses to the dot-com period around 2000. Back then I’d ask, ‘What’s your strategy?’ and people would tell me, ‘Go public.’ I’d say, ‘That’s not a strategy-that’s a way to raise money.’ ‘It’s all eyeballs,’ they’d say. ‘OK, eyeballs,’ I’d say. ‘You’re looking at your screen: How are you going to turn those eyeballs into money?’ And of course all of those people went away.

The arrogance during that time was staggering. I can’t tell you how many people told George [Roberts, Kravis’s cousin and partner in KKR] and me, ‘You don’t get it …’

In explaining our companies’ strategies, investor relations officers – and CEOs – should be wary of two traps: (1) hubris and (2) mistaking a near-term payday for a real strategy to build a profitable business.

© 2016 Johnson Strategic Communications Inc.

 

Advertisements

Can companies think & act long-term?

September 26, 2014

CEO at windowWhen former Merck & Co. CEO Ray Gilmartin sat down with a governance guru to reflect on “The Board’s Role in Strategy” for the National Association of Corporate Directors’ Directorship magazine, the topic turned to the conflict between short-termism and the sustained commitment that executing a strategy demands.

Gilmartin waxed philosophical when asked about encouraging CEOs to act strategically, even under pressure from short-termist investors:

What’s happened is that there is confusion between stock price and creating firm value. I don’t believe investors are short term-oriented, but boards and management can be. Investors will reward investments in R&D, for example, because they recognize it will create long-term value. Therefore, if you’re lowering your earnings growth or you missed a quarter because you don’t want to cut back on R&D, if you have good relationships with your investors and they have confidence in your operating capability and your ability to deliver, then even though you’re falling short on the quarter or you’re going to lower your earnings to invest in research, they will still reward you for that.

Well, OK. This seems a bit theoretical. The ex-CEO is nearly 10 years out from the corner office, having taught at Harvard Business School and served as an outside board member in the intervening time. It’s been awhile since he sweated Merck’s stock price dropping 12% in two days, or its blockbuster drug going off-patent. Maybe it’s more accurate to say investors will eventually reward investments in R&D, but they may deliver a thrashing in the quarter(s) when EPS falls short. So get ready.

For the here-and-now, I would add two things to Gilmartin’s opinion that boards and CEOs can think and act strategically for the long term:

  • Communicating clearly is essential. A big part of the CEO’s job, as well as the CFO and IRO’s, is to explain that the wheels are not falling off the bus – we’re investing in the future. Then we must show concrete evidence of progress, step by step, in R&D or gross margins or whatever.
  • It takes guts to think and act for the long term. When earnings go the wrong way, the whole team needs to toughen up and be bold about interfacing with investors. Hiding doesn’t help, it hurts.

That’s my two-cents’ worth. What do you think?

 © 2014 Johnson Strategic Communications Inc.

What’s your creation story?

February 11, 2014

As investor relations people, we often hear or talk about stocks that have a great “story” – by which we mean a memorable explanation of how the business generates value. Stockbrokers and the buy side like a good story.

So I was intrigued by “How to Tell Your Company’s Story” in Inc. magazine’s February 2014 issue, which highlights entrepreneurial CEOs and their corporate offpsring. Writer Adam Bluestein says:

Before it has investors, customers, profits, press coverage, or even a perfected product, every startup has at least one valuable asset: its story. So you might want to ask yourself: Who are you? Where did you come from? Why are you doing this? … your company’s origin story has more power than you might imagine.

Inc. focuses on the sizzle of young entrepreneurial stories, of course, but the power of how and why your business got started applies to corporate old-timers as well. Even decades into a company’s history – sometimes a century or more – the values, initiative and focus of a founder can influence the culture and brand appeal of a business:

The creation myth is not an asset just for startups. As those businesses grow into established firms and individual founders figure less prominently, the origin story can serve as both a road map and moral compass. Keeping that story alive, keeping it true, and keeping it relevant–these are the challenges more mature businesses must contend with.

What’s the significance for investor relations? Well, investing ultimately is a bet on a company, a group of people trying to accomplish something in the bigger world around us. In IR, we hope to connect with investors whose perspective extends beyond the current quarter.

If we can show that creativity and drive are embedded in a company’s DNA, that business is probably a good bet over the long haul. Think about great companies, and you’ll realize they are also great stocks.

What’s your creation story? Have you researched it, defined the distinguishing characteristics, set out the strategic essentials that fuel your business today and will continue to do so in the future?

© 2014 Johnson Strategic Communications Inc.

Memorable statements

November 16, 2013

Like many who were blessed to work in the robust culture that entrepreneur Ewing Kauffman built in a pharmaceutical company once called Marion Laboratories, I benefited from two core values: First, treat others as you would want to be treated, and, second, share the rewards of performance with those who contribute.

Eighteen years later, these simple rules still roll off my tongue easily. This came to mind recently when talking with a client who recited the mission of one of her former employers, in similar fashion – one, two.

Memorable. Brief. Simple.

These qualities, surely, are what make a great corporate mission, value statement or brand. So ad jingles and rhymes about cereals and sodas echo around in our heads decades later. We remember the guiding principles of our long-past employers. Colors and shapes call to our minds names of companies: Coca-Cola, Dow, BP.

And how about investor relations?

Do we give the market memorable, brief and simple messages?

Or do we describe our companies as a complicated matrix of market segments and product categories? A “portfolio” of services and technologies? A graphic collection of boxes crisscrossed with arrows?

And our business strategies: 18 points? Four categories with multiple strategies for each? Changing formulations quarter by quarter?

We should try to boil our companies down to a corporate brand – a few words that are memorable, brief and simple. A reason to invest. Can we capture the essence in two points, or one? A half-dozen words?

© 2013 Johnson Strategic Communications Inc.

The intangibles investors like

July 1, 2013

Conversations with investors often focus on the numbers, but we also need to give thought to the “soft information” – intangibles. The cover story in this week’s Barron’s, “World’s Most Respected Companies,” provides a pretty good tutorial on which qualitative issues gain the respect of institutional investors. Respect doesn’t always mean a buy decision, but it opens doors.

The direct point of the article is a ranking: Berkshire Hathaway is #1 in a survey comparing institutional investors’ esteem for the world’s 100 largest companies, Walt Disney #2, Apple #3 (down from #1 last year), Google #4 and Coca-Cola #5. No surprises there.

More interesting to me are the comments institutional investors make about intangibles they consider important. The top three qualities that inspire respect, according to the Barron’s investor group, are sound strategy, strong management and ethical practices:

Barrons respect

Those three are followed by other qualities like innovation, competitive edge and growth. In this survey “the numbers” are secondary: Growth in revenue and profit is key for just 5%, strong balance sheet for 1%.

A few of the institutional investors’ comments:

[On Berkshire] “It’s a well-conceived business model, owning good basic businesses, bought at good prices, and managed by great people. A company much to be respected.” …

Does the firm have a defensible long-term business model, and is it built to innovate, compete, and grow? And how good is management, particularly when it comes to capital allocation? …

[On JPMorgan, #45, best of the disrespected megabanks] “How many CEOs would have come out front and center and said, ‘This is my fault?’ … If he weren’t at the helm, you have to think long and hard whether you want to be in this stock …”

“There is value in investing in companies with high integrity. The likelihood is that they won’t do bad things, very bad things, that will affect their stock prices.”

For the investor relations professional, the question is: Are we communicating these intangibles to our investor audiences?

We ought to be thinking about the intangible value-creating qualities as we approach second-quarter earnings (or any season). The message isn’t just this period’s earnings. It is the strategy guiding the company’s business for the coming years, the leadership team’s experience and performance, and whether investors can trust management to deliver on promises.

What’s your opinion?

© 2013 Johnson Strategic Communications Inc.

A pile of dirt and a vision

June 10, 2013

Pile of Dirt2

Sometimes progress looks like a pile of dirt. It’s true of the big construction project starting to take shape. And the biotech company laboring through long years of development to get to market. And the out-of-favor, battered management putting in place a new strategy.

Caught in the snapshot of today’s pervasively short-term thinking, progress often looks like a pile of dirt. When the current financial results aren’t pretty, investors can see an ugly mess – or something entirely different. This brings us to our role in investor relations.

One of our tasks in IR is to communicate the vision to investors – to show the prospective owners the architect’s rendering and give form to what today may seem like a pile of dirt. That vision must begin with the CEO, of course. But the IRO is one of the primary messengers to ensure that others see and understand the picture of the future.

Here are a few thought-starters on how we can do it:

  • Acknowledge the present state. If the past six quarters have been ugly, say so. If the development project has moved more slowly than hoped, admit it. People will give a company credit for recognizing the same pile of dirt they see – and having a plan to get beyond it.
  • Focus on the future state. Any presentation, report or web content should talk more about what is coming than what just happened. I’m referring to  emphasis, not the number of words, because of course we need to give ’em the facts about the company and its performance. Clear accounting results are essential to disclosure and IR – point is, we can’t leave it there. Even past accomplishments are data points for talking about where we are heading, because investing is about the future.
  • Lay out the plan. Executives building a great enterprise – whether developing a medical breakthrough or transforming operations or rolling up an industry through M&A – sometimes don’t clearly explain what they’re doing to those outside. In IR we should be laying out the process so investors know the steps involved in building value. And, of course, then we will tell them each time we complete a step along the way.
  • Give the microphone to the CEO. It’s his or her vision, so challenge the boss to paint the picture of the future. A CEO speaking to investors about nothing but quarterly results seems like a wasted opportunity. Since most CEOs are giving the best part of their lives to a company, they need to share with others the vision that drives their enthusiasm.

What about you – do you have any favorite ways of showing how the company is building value when current results may look like a pile of dirt?

© 2013 Johnson Strategic Communications Inc.

What’s your theory?

June 7, 2013

THEORYThe classic question “What builds value for a company?” often finds its answer in a strategy. But that’s the wrong answer, Todd Zenger, a professor of business strategy at Washington University, argues in the June 2013 Harvard Business Review. The right answer, he says, is the corporate theory. The distinction matters to IR professionals who influence messaging on shareholder value.

In “What Is the Theory of Your Firm?” Zenger says value does not come from strategy, at least not military-style plans for targeting attractive markets and conquering your rivals (“competitive advantage”):

Unfortunately, investors don’t reward senior managers for simply occupying and defending positions. Equity markets are full of companies with powerful positions and sluggish stock prices.

What Zenger calls the theory of your firm is a view of life that runs deeper than any particular strategy:

Essentially, a leaders’ most vexing strategic challenge is not how to obtain or sustain competitive advantage – which has been the field of strategy’s primary focus – but, rather, how to keep finding new, unexpected ways to create value. [The corporate theory] reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position – it is a guide to the selection of strategies.

Three kinds of “sight” go into a corporate theory, Zenger says:

  • Foresight: beliefs and expectations for the future of an industry or its customers
  • Insight: deep understanding of what is rare, distinctive and value in your company’s assets and activities
  • Cross-sight: ability to spot complementary skills or assets that will fit together to create something new

Apple is one example Zenger cites. With PC makers chasing cheaper, faster and bigger computers that basically were interchangeable, Steve Jobs took a different view of how to create value. It was a theory:

… essentially it held that consumers would pay a premium for ease of use, reliability, and elegance in computing and other digital devices, and that the best means for delivering these was relatively closed systems …

This theory guided Apple into a wide range of markets:

Apple was not the first to design a digital music library, manufacture an MP3 player, or market a smartphone. But it was the first to craft and configure those devices and their user environment with elegant, easy-to-use devices and with tight control of complementary products, infrastructure and market image.

So what’s your firm’s theory? One way to find out is to often ask, Why?

Why this, and not that? Is a particular view of the future driving your CEO’s choice of strategy? Does a unique set of assets or skills energize success, across products or markets? Is a novel perspective leading your company to build or acquire new skills and assets to drive growth?

As Zenger suggests, a good theory not only guides a business; it gives power to the value creation story. And if investors buy your theory – well, they buy. We investor relations people should always seek to better understand – and better explain – how our companies are creating value.

© 2013 Johnson Strategic Communications Inc.

3 common mistakes in small-cap IR

December 29, 2012

Small-cap company boards should help CEOs and CFOs face the difficulties of connecting with investors and analysts, governance adviser Adam Epstein argues in a roundtable on investor relations (“Communicating with the Street: Addressing Small-Cap Challenges”) in the Nov-Dec 2012 issue of Directorship magazine.

Here, for example, are three prevalent mistakes that small caps make in IR:

  • “A failure to communicate clearly with an appreciation for the audience [emphasis mine]. … A mix of small, growth-oriented institutional investors and retail investors typically owns shares of smaller public companies, and many lack technical educations and backgrounds. Accordingly, communications with the Street will resonate with only a small portion of investors unless that technology-speak is simplified and more emphasis is given to what most small-cap investors care about—growth and financial performance.” (David Enzer, Roth Capital Partners, small-cap banker)
  • Small-cap habits that “destroy management’s credibility [emphasis mine] and make investors run for the hills and on to the next opportunity: One, a failure to communicate on a consistent, scheduled and timely basis, regardless of whether the news is good or bad. Two, a failure to translate non-GAAP metrics into GAAP metrics, e.g., no one except management knows what ‘orders’ or ‘bookings’ means in terms of revenue. And three, chronically overpromising and underdelivering.” (Timothy Keating, Keating Capital, small-cap investor)
  • “A systemic failure to treat investor relations as a strategic imperative [emphasis mine] … Electing not to put the proper investor relations policies and procedures in place to offer management the opportunity to present a cogent business plan, with proper forward guidance to targeted investors and analysts, will all but guarantee life in the ‘boundary waters’ of Wall Street for small-cap companies.” (John Heilshorn, Lippert/Heilshorn & Associates, IR consultant)

IR is about the basics, in other words. CEOs and CFOs of smaller companies, especially, tend to be so focused on daily demands of running the business that they don’t devote the time or resources needed to communicate well. Where boards can help is by identifying a lack of engagement in IR – and encouraging more. It takes commitment to identify your audience, speak their language and explain who you are. And more commitment to maintain a consistent, proactive outreach.

Although the Directorship piece focused on small caps, commitment to excellence in IR really is the issue with many companies – from micro-cap wannabes to global mega-cap giants.

© 2012 Johnson Strategic Communications Inc.

In 2012, embrace the uncertainty?

January 2, 2012

Happy new year. A chatty column in the Financial Times, “Three cheers for new year trepidation,” touches on a central issue for investor relations in 2012: How should companies communicate with shareholders about what we can’t foresee?

Citing the obvious risks in trying to predict what will happen in a fragile global economy, FT management editor Andrew Hill notes that many companies are simply waiting, hoarding cash, holding off from embracing any particular scenario. But, he adds, mere expressions of caution don’t do much for their investors:

As executives’ reluctance to commit themselves grows, so the appetite of outsiders to know about their future plans increases. Investors are now far more interested in the “outlook” section of the company report than in the backward-looking summary of the historic results. But in their public statements, most chief executives hide behind a “lack of visibility”, adding to the general nervousness.

Hill says CEOs should “embrace uncertainty” in 2012 while at the same time communicating what they can see in the current situation:

Business leaders need to count on their ability to be the one-eyed man in the land of the blind – a proverb recently recast by Richard Rumelt in his book Good Strategy/Bad Strategy: “If you can peer into the fog of change and see 10 per cent more clearly than others see, then you may gain an edge.”

So we should acknowledge to investors our uncertainty but then discuss what we do know: data on changes in our customers’ behavior, qualitative trends in the business, our own strategies for surviving and thriving in what could be difficult times. This may be the biggest messaging challenge for investor relations in 2012.
                                                              –
So how are you communicating in this environment of uncertainty?
                                                              –
© 2012 Johnson Strategic Communications Inc.

Things could be worse

September 27, 2011

In the “things could be worse” category: Unless you work for Hewlett-Packard, Yahoo! or News Corporation, your company isn’t discussed in “The Worst Board in America,” a video by Thomson Reuters tech correspondent Peter Lauria.

“There’s basically a race to the bottom. They’re all dysfunctional in their own way,” Lauria says of the trio of companies that have been generating negative headlines. He reviews the CEO firings, shifting strategies and downward-moving stock graphs and then names “the worst board” – well, I won’t spoil it. You can watch the video.

No doubt H-P, Yahoo! and News Corp. might respond, “Who is Peter Lauria? What qualifies him to judge the merit of our boards of directors?” And they’d be right. He’s just a journalist who covers media, technology and telecom for Reuters.

On the other hand, he’s not alone in his assessment.

The positive side of this: If you’re doing investor relations for a company that does have a long-term, consistent strategy and high-quality board and management, you’ve got some very attractive selling points for long-term investors.

Focus your IR messages on the track record of your strategy and how it’s paying off, the quality and experience of management, and the expertise of your board. The long-term investors will be with you.

© 2011 Johnson Strategic Communications Inc.