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Introduction
How we cope with the economy of the New Normal will depend on how well businesses adjust
to the slow growth, over-capacity and strong worldwide competition. In other words all our well-
being depends on how well businesses do in re-thinking and re-engineering themselves.
Sadly, the prospects in general aren’t very good, when you survey the landscape. Here we
examine how businesses adapted during the crisis from December, 2008 thru the end of 2009.
Because most businesses ignored the warning signs that had been visible since 2006, clear
since 2007 and undeniable in early 2008 they were largely caught flat-footed by the crisis in
the Fall of 2008. Having been blindsided they reacted slowly like deer startled by the
headlights on a dark country road. And, like the deer, with the excuse that nobody could have
seen this coming.
Here we survey those reactions across the broad spectrum of general business responses, lay
out and examine the principles that should have governed their responses and should be the
principles that guide them going forward and consider the implications for performance, profit
and earnings. We also investigate particular companies that did well heading into the crisis by
already having major re-construction projects underway. In particular we take a deep dive in
examining the complete overhaul of Wal-Mart which began major restructuring in 2004,
established new strategies and controls and completely re-thought all aspects of its operations.
Those include product development, market branding and merchandising, store operations
and logistics and technology as well as its international operations. In other words we take
WMT as an exemplar of the kind of deep-seated re-thinking that every business will need to do
but few are.
We also offer up major explorations of how disruptive this decade is going to be and the crisis
in leadership that contributed to so many of these problems.
Table of Contents
3. Economy vs. Earnings Cage Match: Outlook, Business Performance & Realities??? 7
5. Good Boats, Good Captains: Applying the Investment Mantra for Profit 11
9. WMT as Exemplar II: Diving Into the Details of the Retail Enterprise 23
READINGS
Page 2 of 34
http://llinlithgow.com/bizzX/2008/12/let_the_triage_begin_business.html
In many ways this is one of my sadder posts with no grain of schadenfreude in it, not matter the justifications. You
see we' ve been warning first about the very visible slowmotion slowdown for well over a year. And well over six
months ago we warned that the economy had crossed the Rubicon of tipping over into a severe downturn that
was likely to last longer and be deeper than anybody was yet anticipating. In fact deeper than most are still
anticipating. The general reaction to those warnings, both to the blog posts and private warnings to my networks,
was to poopoo the arguments, tell me that things weren' t that bad and all we were really facing was a lack of
confidence and things would begin turning around "real soon now". Just wait. Well we' ve waited and the news
continues to worsen at an accelerating rate on a worldwide basis. Here' s the real danger though. Like my network
and readers most executives were and are being caught flat-footed and ill-prepared. As they scramble to catch up
with readily perceptible realities they are again making decisions, likely to be hurried and therefore bad ones, on
the fly. As Forrest put it, "stupid is as stupid does" and there are a lot of very ostensibly bright people about to
prove him righter than right. In this post we want to review the general business situation and outlook but start by
putting a stake in the ground regarding the state of the economy.
Page 3 of 34
In the readings below, which are extensive, you' ll find excerpts on the situation facing businesses in the
economy, particularly problems with earnings, warnings and debt loads. That' s followed by a section on Industry
changes, structure and dynamics with three cases in point from Autos, Retail and Pharma. One of our key
mantras is Economy-Industry-Company. In other words the Economy defines the ecology in which particular
species (industries) thrive...or not. And how well an individual member (company) does is dependent on the
general health of it'
s species niche as well as individual performance. The three chosen industries represent a
perfect smorgasbord with Autos being the poster child of denial and sustained malfeasance, Retail suffering from
being over-built and over-hyped/marketed but nonetheless not in denial. Just facing the worst of the stormfront.
And Merck, as the representative of Pharma, illustrating after the death of their chemistry-based business model
the kind of forward-looking changes in research, development and innovation necessary to put themselves on a
new path.
So that'
s our second major mantra – Strategy + Execution + Accountability = PERFORMANCE.
Where you care is all over the place from your job to your investments to the overall health of the economy. As
Carl Icahn observes (again if you backtrack some of our earlier posts on Enterprise Performance) lots of
corporate execs have been falling down badly on the job and are about to be found out. Stupid is indeed is!
In addition to the mantra there are two really stupid mistakes we' re likely to see a lot of in the coming months.
What we' re looking for are the companies who avoid them. In general we' ll see a lot of blind meat-axe cost cutting
which'll actually leave them worse off in the long run and is only justified if, in the leveraged euphorias of the last
several years, they got themselves into such bad financial positions that no options are left. The hard, courageous
and intelligent alternative is to carefully way each of the functions and initiatives of the enterprise, judge it's value
and needs in both the short- and long-runs and make judicious cuts while continuing to support high-value, high
operational leverage investments. The two typical areas that ware likely to be damaged are people and
innovation.
Our final section points to some fundamental longer term changes that are happening at deeper levels in the
global geo-economic ecology with both China and India moving up the value-stack while at the same time
Page 4 of 34
Earlier today we had an e-chat with an old colleague about his management not only being caught flat-footed and
now in emergency response mode but also making blind and panicked short-term tactical decisions. As it
happens noone is immune to the pains we are all experiencing and the risks of more are widespread, but some
enterprise are reacting better than others and are better positioned. After the break you'll find some selected
readings on those exemplars who are well-positioned, including Wal-Mart, MickeyD' s, Cargill and Rolls Royce.
Page 5 of 34
In this environment executive management is faced with many tough choices. But the all too common one is to
make the "easy" tough choice and meataxe costs and heads on the basis of immediate cost savings rather than
doing the hard work, the hard thinking and the morally difficult work of thinking thru the best balance. Finding
places where you want to be and don' t and then reinforcing the former even at the expenses of the latter. In terms
of the accompanying graphic that means establishing an overall strategy for each of your major functional areas
and then translating that into operating plans, resource plan and accountability controls that are continuously
monitored against the real-world. Not what we' d like it to be. Our exemplars are the companies that have
translated this conceptual framework into real-world actions. Now you need to find them.
Tough work indeed. It will separate the winners from the losers.
So, whether you' re an employee, a business partner or an investor find those "Buffetesque" companies who are
not reacting with panic, whose management is exhibiting skill, calm and courage and will survive as well as
possible in this continuing unpleasantness as well as be better positioned for the future.
UPDATE: Reading this morning' s mail just got a Booz & Co. newsletter that eventually led me to a recent survey
of their which is sadly synergistic with our points here and in the prior post on the dismal outlook for all the flat-
footed executives. Whereas we' re relying on news, our network and anecdotes they did a worldwide survey. The
results are startling indeed. A more complete excerpt along with a pointer to a dloadable discussion is now
included in the readings. Frankly we don't think the news could be worse. We also would refer you to our prior
post on the outlook for enterprise performance: Let the Triage Begin: Business Performance vs "Stupid Is" ; as well
as, of course, the complete archives which attempt to beat this topic to death - apparently "meaninglessly" in
terms of behavioral changes.
Page 6 of 34
Economy vs. Earnings Cage Match: Outlook, Business Performance & Realities???
http://llinlithgow.com/bizzX/2009/02/economy_vs_earnings_cage_match.html
Let's focus on some of the implications and repercussions of the prior set of posts and pull them together to
understand why things are headed into the "facility" with regard to business performance and earnings outlooks.
Why in other words we talk about and mean smackdown, unfortunately with two very badly ill-matched
opponents. In this corner earnings, which look like your kindergarten teacher, and in the other corner it'
s "The
Rock" ! The readings excerpts after the break go into some specifics from the stimulus package outlook/realities
to market and earnings performance to some specific on representative industries and/or geographies.
Page 7 of 34
A real key here is that phrase "business executives tell"....as we' ve pointed out (Let the Triage Begin: Business
Performance vs. "Stupid Is", Survivor: Search for the Next "Blue Chips" ) most executives are dealing with a
completely unexpected tsunami they didn' t anticipate (ignored) and were caught flat-footed and very ill-prepared.
Worse, based on the McKinsey and Booz surveys we reported on, they aren' t responding well at all, and in fact
seem to be shell-shocked and frozen in place. In the readings you' ll find excerpts talking about the US and
Chinese auto industries, the Mining industry, Retail and the Japanese electronic manufacturers. To put the shoe
on the other foot there are a couple of retail counter-examples where two of the best retailers in the world are
being aggressive and taking advantage of the windows of opportunity here.
Bottom line? There' s a huge pile of equine excretory output in train car loads headed for the rotary impellers and
it'
s going to get splatterred all over us all. And NOBODY is prepared or preparing.
Page 8 of 34
http://llinlithgow.com/bizzX/2009/02/post_5.html
Our new mantra is Policy-Economy-Industry-Company, from the old E-I-C which took a predictable policy
environment for granted. In case you didn' t notice the biggest post-WW2 economic package was put together in
three weeks and a major new set of regulatory principles for salvaging the Finance Industry was announced. We' ll
dive into the details some other time but both are enormously better than the punditocracy would have you think,
or the political opposition for that matter. Later we can talk about self-interested expediency at the expense of the
public good. But this not just a top-down macro-driven environment, it is a meta-topdown environment utterly
dependent for the next several years on the efficacy, efficiency and timliness of worldwide public policy. You' d
better hope "they" get it somewhat right or be prepared to
kiss it goodbye.
Economic Situation
Well also just for "fun" here's the latest world economic
outlook from the IMF chart and the key chart from Davos on
major geo-political risk factors. Just refresh yourselves a little
Page 9 of 34
Which leads to the question of business performance. If you' re headed in stormy weather and rough seas you' d
best be prepared to sail in tough conditions, swim or drown. As we mentioned (Survivor: Search for the Next "Blue
Chips" (UPDATE)) the general reaction seems to be to default to the D-position. Hard to breath water, don'
t you
know!
Readings
Specifically we start the business section off we a column from Jim Jubak proposing his own, consistent,
approach to screening for performers and follow that with several readings on the general business situation. One
is about the extension of Moneyball to Basketball and how it' s impacted the Houston Rockets that serves as a
good template, followed by a great Seth Godin post on the self-inflicted suicide of the Music Industry for failing to
re-think itself. That' s complemented by two "financial readings" that tell you what the flotsam and jetsam will be;
one on a wave of bad debt and bankruptcies which are just beginning and another on the dawning realization that
profits will stay in the crapper for a long time (Wow, Deja Vu', All Over Again ! Economy vs Earnings Cage Match:
Outlook, Business Performance & Realities ???).
That's followed by a pair of complementary stories about improving the focus on Customer Service as an
immediate way to get some air. Finally there are some specific stories about Tesco (adapting well), the Pharma
Industry (a badly broken R&D model that' s destroyed their business model and they' re scrambling just not well)
and the trials and tribulations of Dow Chemical who was "blindsided" by the credit crunch and downturn which
destroyed two major transformative deals. Frankly we think in the context we and others have been talking about
both were built on the proverbial House of Cards and "they should have seen it coming".
UPDATES:
1) Japan's leadership is in political crisis and apparently completely unable to pull together the requisite policy
actions and strategies to address their problems.
Page 10 of 34
3) The Investment Community continues to look for the best of it and refuses to face the brutal realities of the
situation. This is, in it'
s implications for lack of grasp, valuations, flat-footedness and shell-shock both exemplar of
all that'
s bad about executive reaction AND a major warning sign for market and business outlooks!
Good Boats, Good Captains: Applying the Investment Mantra for Profit
http://llinlithgow.com/bizzX/2009/03/good_boats_good_captains_apply.html
The title is a play on the last one and a famous epigram of the greatest of the Greek Stoic philosophers,
Epitectus:
We should act as we do in seafaring: “What can I do?”—Choose the master, the crew, the
day, the opportunity. Then comes a sudden storm. What matters it to me? my part has been
fully done. The matter is in the hands of another—the Master of the ship. The ship is
foundering. What then have I to do? I do the only thing that remains to me—to be drowned
without fear, without a cry, without upbraiding God, but knowing that what has been born
must likewise perish.
That might be taken as a bit fatalistic or depressing until you parse it out some and realize it says to bear up with
fortitude as long as you' re able and before you get in trouble do your darndest to make sure all the preparations
are in place. And if you pick a bad boat with a terrible captain and then insist on sailing into the teeth of a
hurricane at least don' t whine about it. If you'
re a previous reader you' ve hopefully gotten the correct impression
that we have a definite point of view here that' s centered on providing the right tools to forecast the weather, build
or pick the right boat and captains and sail with style, grace and profit.
The prior post laid out our macro mantra with pretty pictures and everything. A key part of that was
Industry/Company analysis and we had an opportunity today to run the deep framework by a friend who' s a Wall
St. analyst. His questions turned a scheduled hour into a really tough but enjoyable three and we ended with a
key one: how do you use this approach to make investment decisions? Can you show a link between stock prices
and business analysis? You can consider this post part of our answer and the graphic below the illustration!
Page 11 of 34
On the Industry front our first pass on the "Death of Wall St. As You Know It" was last March, preceded by storm
warnings and we' ve been using the Auto Industry as our poster child of organosclerotic suicide for almost 18
months. Perhaps we' re being a little overly generous but if you backtrack we'
d argue not to much so, even when
we didn't scream run for the door as we did with Tech and WMT. You can judge.
Page 12 of 34
3. Are the Core Operations (Software Development for MSFT, Logistics and Store Ops for WMT, or Design and
Manufacturing for GM for example) capable of delivering on the promises ? Are the key support functions what
they need to be?
4. Are clear goals set, resources honestly allocated and people held accountable ?
By and large you can judge most of this from a careful reading of the business and trade press backed up by a
review of the annual report, SEC filings and analyst presentations. DELL' s troubles for example were predictable
when they started cutting corners on customer service - a fundamental part of their value proposition !
Contrawise, as you' ll read below, Exxon has been husbanding and hoarding resources for years and now has
huge cash reserves to start buying up reserves. Or again Carol Bartz has on-boarded at Yahoo and appears
willing to put the kind of adult supervision and good business practice in place that they've lacked for years. And
on and on.
You can pick the right boat and the right captain who can sail these storms. There is NO REASON to resign
ourselves to our fates! Or so we think. Try it...you may like it. Or at least please drown quietly without excessive
whining.
Page 13 of 34
The questions then become how are they really doing, how do they see the world and what do they think will
happen ? More deeply and importantly, the devil being in the details, what are they doing under the covers. To
Page 14 of 34
Performance
Outlook
Page 15 of 34
If that'
s a lot to swallow let'
s wade thru the details on each of these areas and see what they look like. Then you
can reach your own conclusions as to whether or not our assessment is accurate and what it means. There are
several bottomlines here including and beyond WMT.
1. If WMT's turn-around is well-grounded and sustainable on all these dimensions they have
positioned themselves incredibly well for the future in the US and across the world. They will be
able to move from strength to strength and are a definite Outperform. Whether that translates as a
Buy depends on your reading of the Economies and Markets. We'd say hold off for now.
2. The Retail industry as a whole is very over-built and under-managed with many chains in
jeopardy. What WMT has done is a model for thinking about retailers in general. If they can't show
where they're creating their own equivalents for a WMT-like makeover pass on by. That
extrapolates back up the chain to their suppliers as well from CPG manufacturers to consumer
electronics to home furnishings and apparel.
3. Even more broadly what WMT appears to have done applies to almost any company or industry,
suitably adapted and re-formulated. Look for the re-thinkers who are executing well...those will be
the good companies to put on your watch list.
...to be continued.
Page 16 of 34
http://llinlithgow.com/bizzX/2009/03/crisis_leadership_leaders_and.
html
The top chart shows how the cycles in population of the two
species interact over time. When the prey population gets too
large because there predator species is too small there is a
population explosion followed by a surge in predators. In other
words when the picking' s get too easy the predators get more
aggressive. The problem of course, say in the second
component, is that if the population of prey falls below minimal levels the population won'
t renew itself and the
entire system collapses. Hmm...making more sense now.
Page 17 of 34
Contrawise there are those who' s focus is strictly on their own short-term self-interest and aggressive and
responsible behavior segues into excess predation. What' s required is a large enough portion of the population
who aggressively pursue a broader set of interests. This is the group one would choose executives from - those
prepared to act in the institution'
s broad interests, balance them against their own immediate gains and be
prepared to sacrifice for longevity, stability and prosperity.
Lest you think we' re talking out of our hat on this we point you to the
feel-good story of the year - the landing of Flight 1549 in the Hudson.
We' ve all come to know, at this point, how much of a miracle that
was. But if you click on the graphic you' ll be treated to a 2 minute
simulation that plays out in real-time to give you an idea of just how
little time these guys had to make the right decisions in no time at all.
That capability was not created by accident but was the result of
years of training, experience, thinking things thru and preparing for
that one moment when it was all on the line. In crisis we all react as we' re trained, whatever the source of the
training. (The graphics didn' t turn out as well as we hoped; it if won'
t "fly" for you try clicking here for the Flight1549
Simulation or http://llinlithgow.com/bizzX/DloadFiles/Flight1549Landing.wmv .
Page 18 of 34
Several years ago Peter Drucker published what we think is the greatest management book of all time
(Management: Tasks, Responsibilities, Practices ). Despite it'
s being published in 1973 it's diagnosis of what' s
required of management and executive leadership is a prescient diagnosis of the failures we' re all victims of over
these last several years. Drucker puts forward a simple list of critical task for Management.
That is lay it out logically and efficiently and make sure it' s effective. How would you rate the Finance Industry
given the disaster' s we' ll be suffering thru for years to come ? Given that the last decade's worth of profits have
been destroyed and the viability of many nameplate firms is gone we' d say an ungentlemanly D- would be
generous.
My friend Bob Sutton wrote a great book(The No Asshole Rule: Building a Civilized Workplace and Surviving One
That Isn't ) last year which has resonated with a lot of folks. Given that what Drucker is talking about is the socio-
psychological aspects of the workplace environment Bob wouldn' t have been able to write that book if many
deserved a gentleman' s C. Yet the list of firms who create worker-friendly environments also tends to be the list of
firms who perform well. Given how notorious the Finance Industry is for terrible workplace environments where it' s
dog eat dog and devil take the hindmost an F- seems appropriate.
And by this Drucker doesn' t mean something namby-pamby like "Save the Whales". Instead he means that
Management are also members of the larger society and have a responsibility to see that it prospers, not just the
firm. Instead he focuses on those things that an enterprise or other institution can do. If you work in a Hospital or
University is the institution taking care of the legitimate interests of all it'
s constituents and stakeholder? If you
work for a private enterprise that enterprise still exists within a social matrix - is it acting responsibly? Better by far
to be proactive in solving problems before society as a whole decides to solve them for you because your benefit
is grossly exceeded by your damage.
Page 19 of 34
And just in case you think we' re making to strong a case or exaggerating it we offer up this refresh of the High-
frequency economic data we' ve used so many times before. Without going into detail we' ll just say that a terrible
economic situation appears to have crossed over yet another tipping point into really serious problems. The
bottomline point here, to come full-circle, is that responsible, statesmanlike stewardship of the Company or
Institution will determine who indeed are the "Good Captains and Good Ships" you want to go storm sailing on!
http://llinlithgow.com/bizzX/2009/03/disruption_vs_innovation_chang.html
The accompanying graphic tries to represent the scope and scale of these disruptions we' ve been documenting
on a firm, industry, economic and geo-political level as well as relate it to our on-going concern with enterprise
and organizational performance. One of the interesting excerpts is a post by Irving Wladawsky-Berger on re-
architecting the enterprise from a holistic perspective. Couldn't have put it better ourselves - in fact that'
s such a
central concern of ours it shows up in most posts directly or in-directly and has it's own archive.
One of our key findings is that with occasional exceptions very few concerns are prepared for the changes they' re
failing to meet now, let alone the singularity. Which, btw, is a matter of leadership among other things, which is
why the readings start off with Cramer' s recent startling Mea Culpa on the John Stewart Show.
On the other hand there are the WMT' s and MickeyD' s of the world who have started and made serious progress
on "whole enterprise" re-factorings(WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize); also a
matter of leadership ! The readings contain excerpts from a bunch of the key posts on disruption and response
Page 20 of 34
The entire "golden" age of the ' 50s which saw the rise of a prosperous middle class for the first time in human
history was built on these foundations. At the same time all these disruptions matured and at minimum leveled off
or began to decay. For example the Pharma industry has been pursuing mega-blockbuster hit derived from it' s
chemistry-based R&D strategy and associated business models and strategies. Yet we' ve known and noticed that
that model is beyond exhausted and there' s no more major value being created. The industry is struggling with a
disruptive shift to a biology-based model and clearly hasn' t found the way forward as yet. They' re not alone either,
as the top bar shows - between maturity, value saturation, a globalizing economy, et.al. you can sort and
categorize the headlines and business book titles and consulting gurus of the last four decades. So what happens
next?
Page 21 of 34
On that assumption though think about the world we face from an opportunity point of view - P&G circa the ' 50s
except for billions of people and whole new sets of consumer products and all that implies for all the associated
industries. Not to mention new biologics, energy and materials solutions and on and on. Future generations may
look back on it as a great age of romance, discovery and innovation. After all they' ll have to won' t they ? Or not
care at all ! But when you dig back into the last great age of exploration you find out that things weren' t so easy
and romantic at all !
And then two of our favorites. One on how that big old
stick-in-the-mud Exxon has suddenly woken up - or
Page 22 of 34
One is that the ultimate arch-guru of management Peter Drucker provided the single best bible for re-thinking the
firm we' ve ever seen (Management: Tasks, Responsibilities, Practices by Peter F. Drucker). Sadly though he wrote
it at the time and found that the pre-war innovations and post-war adoptions had reached saturation and we
needed to move to a whole new level. Sadly?
Well he published that book in 1973 and as far as we can tell none of his breakthru ideas and approaches has
been tried. The second is that, among all the other factors, you need to understand industry dynamics and
structure (Key Postings V: Industry Analysis - Enterprise, Industry Ecology, Evolution). For example one reason
that XOM is so brilliantly positioned is that it's built up huge cash reserves, vast technological and management
capablities and timed it just right. (Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions) You see
when you look at the accompanying chart we' re still in a world where, if growth resumes, demand will be greater
than supply and then' s not the time to invest in exploration, reserves or acquisitions. NOW is!
WMT as Exemplar II: Diving Into the Details of the Retail Enterprise
http://llinlithgow.com/bizzX/2009/03/wmt_as_exemplar_ii_diving_into.html
The processes and functions of the enterprise are as critically important where processes are how you run the
enterprise while functions are the things you do. The great re-engineering revolution failed because the
consultants doing the analysis created greenfield process architectures that lacked a grasp of the functional
details that business experts needed to supply. Those changes still lie in front of us as vital necessities. The
accompanying graphic lays out an idealized Retail Enterprise Architecture that is a blueprint for what an ideal
Retailer needs to do. And let us re-assure you is that it wasn' t invented and composited in a vacuum - it' s the
result of well over a decade of accumulated work with many retailers of all sizes and across all geographies. [The
equivalent graphic for Manufacturer's]. So with all that said let's take our dive into WMT for it'
s own sake and as
exemplar; and keep the enterprise architecture in mind as a checklist.
Page 23 of 34
As it happens I led one of the task forces responsible for re-thinking distribution and store replenishment and we
came up with a breakthru in how those operations should work. Like every other major component of this massive
initiative (Efficient Consumer Response[ECR]) almost none of them were adopted (on this one, Flow-thru
Replenishment - THE critical enabler for complex store level stocking) almost the only adopters were Wakefern
(parent of Stop-N-Shop) and (sorta) Target. The real point is that WMT is well along in the process of simlar
disruptions in other major industries with it'
s entry into Electronics and Health. Watch out CC and the pharmacy
chains!
Page 24 of 34
For the LR corner to be feasible, workable and profitable implies a huge re-factoring of those operational
capabilities. In other words WMT must have developed a complex and adaptive flow-thru distribution and
replenishment operation. Logistics is both the most under-appreciated operational capability, and like none other
but IT touches all other aspects of the enterprise, and represents the largest un-tapped source of performance
improvement in almost every company in America ! The synergistic links between better links between logistics
and the rest of WMT' s operations creates yet another reinforcing virtuous feedback loop. Without these changes
the entire new Marketing, Product Management and Store Operations strategies would be likel to fail as well. Yet
judging from their performance all the piece parts are clicking along in a highly synchronized fashion. Talk about
orchestrating a revolution!
International Operations
Page 25 of 34
Adaptive Flexibilities
Technology
Page 26 of 34
It'
s time to return to our knitting, a bit, and focus on business performance. But we' re going to come at by
combining readings and comments on earnings and key company stories with a composite view on earnings,
earnings/PE outlooks and some economic data. Having built up all this machinery digging thru PEs, Profits and
the Economy it seems like a perfect opportunity to bump the financial data against the economic information and
outlook. So in the readings section you' ll find some very interesting stories providing an overview of the earnings
story followed by another major section with specific stories on the Banking Industry, Auto Industry (the "Task
Force"), WMT, Berkshire & Warren, Merck and MSFT & AAPL. Each selected not just because they a names but
because they are deeply representative of key trends and issues in their industries.
Page 27 of 34
Meanwhile the Nov09 estimates for 2010 are for earnings of $75.03 for a 33% growth rate with a PE of 14.57.
Now that's not an outrageous PE estimate though from our earlier (many times) assessment it's pretty optimistic.
But a 33% growth rate seems more than a tad optimistic based on the last thirty economic posts and the data
we're seeing. In any case $75.03 X 14.57 = 1093 on the SPX! Hmmm....to say the least.
Page 28 of 34
Page 29 of 34
Finally there'
s the historic PE data. We won' t repeat ourselves but judging by the historical averages the PE' s in
S&P' s outlook are, shall we say, a tad aggressive. Which leads to the question that sets up the whole last section
of the readings selection. We' ll let you take yourselves thru those, even if it'
s only to skim our excerpts. But you
have to ask yourself where' s the performance going to come from?
The reading set we found extraordinarily fascinating was Steve Ratner' s article and interview after he finished up
with the Auto Task Force. You know what their major finding was? That management and execution was beyond
abysmal. Think about that - allegedly bad enough for the government to have to take over two major corporations
(one of which - Chrysler - they thought not worth saving). But for them to find appalling bad management ... well
what more can we say?
If all of our economic analysis is anywhere close to target the entire next decade is going to call for extraordinarly
competent management on the part of business. Based on all this how likely are we to see the necessary
performance in the new normal of the reset economy?
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We start by looking at the basic core value proposition and it’s translation into the Business Model and Strategy. Typically we
next examine Marketing and Sales operations, where it is possible to reduce operating costs by 30%, shorten the sales cycle
by 30% and increase the closure rate by 30%. This is primarily the result of establishing good processes and discipline.
BizzXceleration is comprehensive but integrated across the total reach and range of business activities and issues. And
emphasizes a pragmatic, workable approach that results in a stepwise path to performance improvement. We believe that our
approach mitigates business risks, improves operational performance and can lay the groundwork for 10-30% EBITDA
improvements in post-deal execution.
If you would be interested in further discussions, more detailed descriptions or the review and testing of specific opportunities
we would enjoy hearing from you. We can be reached at contact@llinlithgow.com .
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Swinging the axe THE headlines screamed that January 26th was “Black Monday” for jobs, after firms such as Caterpillar,
Corus, Home Depot, ING, Pfizer and Sprint Nextel announced cuts of several thousand jobs each, due mostly to the rapidly
deteriorating global economy. Alas, the consensus among the corporate bigwigs gathered this week at the World Economic
Forum in Davos was that this marked only the beginning of the axe-swinging, and that there are blacker days to come.This
proved to be one of the big points of difference between the company bosses and the politicians brainstorming in the
mountains. The politicians are primarily concerned with restoring demand enough to reverse the rising trend in unemployment;
for many of the corporate leaders, ensuring the survival of their firms takes precedence over saving jobs. The difficult decision
they face is not whether to cut, but how to do so in a way that strengthens their competitive position in the medium term rather
than seriously damaging it. The gloomy mood among bosses in Davos makes the worst-case scenario outlined in a new
forecast from the International Labour Organisation (ILO) seem the most plausible of its possible outcomes. Equally candidly,
many bosses admit that the crisis is giving them a chance to restructure their firms in ways that they should have done before,
but found a hard sell when things were going well. As a rule of thumb, a careful cull of the 10% of lowest performers can make
a firm leaner by removing fat without damaging muscle. It is going beyond the 10%, as many firms are now starting to do, that
poses the real risks to a firm’s competitiveness. During the relatively modest downturn at the start of this decade, for example,
many professional-services firms cut too deeply, especially in their lower ranks, and found they were poorly positioned when
strong growth resumed sooner than expected, says Heidi Gardner of Harvard Business School. This crisis is revealing how
few firms have really thought through their talent strategies, says Mark Spelman of Accenture. Claims that “our workers are
our most valuable assets” are too often platitudes, the emptiness of which is now being revealed. But those firms that have
thought seriously about their talent needs have the opportunity to get ahead of those that haven’t, says Mr Spelman, not just
by shedding poor performers but also hiring scarce talent from outside, in what is now a buyer’s market.
Searching for More Tools to Trim Costs Prompted by slackening demand for consumer electronics and automobiles, chip
maker ON Semiconductor Corp. will cut 1,850 jobs -- nearly 13% of its work force -- and close four fabrication plants by early
next year. But that' s not all. ON is also suspending bonuses and raises, cutting discretionary spending, idling factories for as
many as 12 weeks and requiring managers to take as much as six weeks off without pay. Employees at ON and elsewhere
are learning that in this recession layoffs are only part of the pain. Many companies are also cutting the pay, hours and
benefits of those who survive. On Thursday, Hewlett-Packard Co., which was already cutting 24,000 jobs following a big
acquisition, cut salaries by 2.5% to 20% and reduced contributions to employee 401(k) plans. Last year, HP asked employees
to take unpaid vacation days and extended a planned holiday shutdown to two weeks. On average, employers cutting costs
have implemented five belt-tightening measures and are considering four others, according to a January survey of 513 U.S.-
based companies by consultant Towers Perrin. There are no comparable data from earlier recessions. But Laura Sejen,
director of the strategic-rewards practice at consultant Watson Wyatt Worldwide Inc., says companies are trimming costs in
more ways than in previous downturns, when they relied more heavily on layoffs. She and other experts cite two principal
reasons for the shift: The speed and depth of this recession is forcing employers to cut costs steeply, and many also worry
about retaining enough talented workers. When the economy recovers, "those may be heads you wish you hadn' t cut," Ms.
Sejen says.
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For GE' s Immelt, Blue-Chip Blues A sliding stock market is turning up the heat on executives at blue-chip companies. Just ask
General Electric Co.' s chairman and chief executive, Jeffrey Immelt. "There' s a real drumbeat of negative sentiment out there,"
said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which owns GE shares. "I' m not sure it
is legitimate." He said Mr. Immelt and other GE executives have been making strides in shrinking the company' s riskier
financial units and being transparent about company strategy. Beyond the broader market decline that dragged GE down
Friday, some speculated that GE was also hurt by a report from Sanford C. Bernstein & Co. analyst Steven Winoker that
predicted lower profits at GE because of "declines never seen before at GE Capital." Others speculated that short-sellers also
weighed GE' s shares down. In past years, half the company' s profit came from financial services, which have been hit hard by
losses and delinquencies during the credit crisis and economic downturn in the past 18 months. GE, one of the largest
corporate-bond issuers, saw liquidity seize up last fall and had to use a government bond-guarantee program to issue bonds in
recent months. It also had to sell commercial paper to the government last fall when such short-term funding markets dried up.
"This is not a great scenario to have government as debt investor," said Mr. Immelt earlier this month, in an interview with The
Wall Street Journal. "But you don' t have a lot of options." In recent weeks, many institutional investors believed the company
was out of the woods as its stock price hovered between $10 and $15 and the company made moves to reduce its debt, shrink
its financial business and cut costs through layoffs. At the same time, it has been focusing on its more profitable industrial
businesses. "You can' t fault them," said Deane Dray, an analyst with FBR Capital Markets in New York. "If they had been
asleep at the switch during this process, you can criticize them. But they have been pretty proactive." Mr. Immelt and other
executives have indicated the company shifted into survival mode last fall as major banks began failing and stress on GE' s
finance unit intensified. It stepped up the business-unit reviews the company is known for. "Everything we used to do weekly,
we are doing daily. Everything we used to do monthly, we are doing weekly," he said. But, in the past year, GE has been
unable to sell underperforming businesses such as its $30 billion private-label credit-card operations and its appliances and
light-bulb units. GE now must hold and operate those businesses.
GE’s Immelt Accepts Blame Amid ‘Opportunity of a Lifetime’ General Electric Co. Chief Executive Officer Jeffrey
Immelt, two weeks after turning down $11.7 million in bonus pay, took responsibility for eroded investor trust and
said he will work to restore faith in GE. “Our company’s reputation was tarnished because we weren’t the ‘safe
and reliable’ growth company that is our aspiration,” Immelt, 53, said in his yearly letter to shareholders dated
Feb. 6 and released yesterday with the annual report. “I accept responsibility for this. But, I think the environment
presents an opportunity of a lifetime.” A “brutal” global economy means GE and capitalism itself will have to be
“reset,” Immelt said. He’s shrinking GE Capital to provide just 30 percent of total profit this year, down from about
half in 2007, to ease investors’ concerns and try to stem the freefall. “We intend to reset this business to be
smaller, less volatile and more connected to the GE core,” Immelt wrote of GE Capital. As for the economy, “we
are going through more than a cycle. The global economy, and capitalism, will be ‘reset’ in several important
ways. The interaction between government and business will change forever. In a reset economy, the
government will be a regulator; and also an industry policy champion, a financier, and a key partner.” The CEO
made it clear he intends to see GE through the crisis. “The current crisis offers the challenge of our lifetime,”
Immelt said. “I’ve told our leaders at GE that if they are frightened by this concept, they shouldn’t be here. But if
they’re energized, and desire to play a part in transforming the company for the future, then this is going to be a
thrilling time to be a part of GE.”
Warren Buffett' s Letters to Berkshire Shareholders Most of the Berkshire businesses whose results are significantly affected
by the economy earned below their potential last year, and that will be true in 2009 as well. Our retailers were hit particularly
hard, as were our operations tied to residential construction. In aggregate, however, our manufacturing, service and retail
businesses earned substantial sums and most of them – particularly the larger ones – continue to strengthen their competitive
positions. Moreover, we are fortunate that Berkshire’s two most important businesses – our insurance and utility groups –
produce earnings that are not correlated to those of the general economy. Both businesses delivered outstanding results in
2008 and have excellent prospects. As predicted in last year’s report, the exceptional underwriting profits that our insurance
businesses realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for
the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we
hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008.
Charlie and I find this enjoyable. Over time, most insurers experience a substantial underwriting loss, which makes their
economics far different from ours. Of course, we too will experience underwriting losses in some years. But we have the best
group of managers in the insurance business, and in most cases they oversee entrenched and valuable
franchises.Considering these strengths, I believe that we will earn an underwriting profit over the years and that our float will
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• Buffett'
s Berkshire cuts jobs broadly, more coming
Michael Moritz: Lessons from a Long-Ball Hitter Can great companies be built in bad times? Some of that is true. In bitter and
cold times only the brave are going to venture out into the cold and the lily-livered posers are going to stay tucked into their
bed clothes. It makes life easier for us. The people we are meeting are the genuine article as opposed to the pretenders. The
only people who venture out are on a mission, which is what you need. What about Cisco ? (Sequoia invested in Cisco two
months after the 1987 stock market crash.) For us, Cisco is always the company we think of when we think about bad times. I
had been here a couple of years. I was the guy who sat around the table and said nothing. The one thing I remember was the
vociferousness with which they talked about the business. They had a mantra: "We network the networks." Many investors
had already passed on the opportunity. What people forget is that many companies were doing something similar: DEC, IBM
(3Com, and many startups. There were 20 companies. So why did it succeed? They had a very good understanding of what
the customer wanted. They didn' t have to run any advertisements until Year Five. They had a very aggressive sales machine.
John Morgridge, the CEO, had lived through some tough experiences. He had this wonderful mixture of experience and an
avuncular calming presence and a taste for frugality. They didn' t do anything extraneous. They outsourced manufacturing. It
allowed them to ramp up quickly. So what has changed? What has changed is that there are more smart people elsewhere.
Good ideas spread more quickly. Are there any benefits to building a business in a downturn? There' s less frenzied money.
There' s more time to think. The hiring environment is a lot easier and the money goes a lot further.
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