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Stock Re-Purchase? A Lack of Imagination?

Posted by Ted Sehl on February 11, 2011 at 10:28 AM Comments comments (1)

Here is the scenario: you are a public company with a sizeable cash balance and it is proposed to the Board that you re-purchase some of your shares, thereby giving the stock price a nice nudge forward.  After all, your view is that you are there to maximize the shareholders wealth.  A no brainer, right?  I agree – you have not thought this through.  I would suggest that you look at the following alternatives first:

 

1.      Re-invest in your business.  If your business is making good returns, why not re-invest and create more wealth for your shareholders and strengthen your position in the industry.

2.      Accelerate your strategic plan.  Even in businesses that are generating large cash flows, there are tough allocation decisions to be made.  Ask yourself, if we could spend some money now to accelerate our strategic plan, would that give us an even greater market advantage?

3.      Payoff debt.  The companies that survived the recession were generally the one’s that had conservative balance sheets –is this the time to prepare for the next recession?  Could you weather a double dip recession?  As a former colleague often said, “I have never seen a company go bankrupt that had no debt”.

4.      Leverage the supply chain.  Do you have suppliers that have poor cash conversion cycles? If so, negotiate more flexible payment terms that allow you to pay early– you will be surprised at the size of discounts you are offered. And those discounts fall directly to the bottom line.

5.      Look at acquisitions.  Can this accelerate your expansion into a new market?  Can you solidify your market position?

 

Your stock is valued by earnings multiples.  Your choice is to either accelerate your earnings or reduce the amount of shares outstanding.  If you choose the latter, what is it saying about your organizations’ view of the future? It would appear to me that a re-purchase may signal a lack of imagination and a management team that does not have an idea of how to expand their business.

 

 


Why Do Strategies Fail?

Posted by Ted Sehl on February 1, 2011 at 12:26 PM Comments comments (0)

Why do most strategies fail? Many of us assume it is because the wrong strategy was chosen and that the secret is picking the “winning formula” for the industry.  My experience is that this is seldom the case.  Lou Gerstner said fixing IBM “was all about execution”.  His claim was that at the end of the day their might be four to seven strategies that could be chosen for a specific industry, so it all came down to execution.  So strategy success or failure is not often determined from the corner office but rather on the plant floor or elsewhere in the front lines.

 

If we chose the correct strategy why do we fail?

 

The two most common reasons are the inability of the corporation to execute and the timeliness of the implementation.

 

Companies often fail to execute because they have overestimated their capabilities and resources. This is the hard part of strategy – knowing whether or not your organization can pull it off. Unfortunately, entrepreneurs are by their nature optimists and tend to thinkt heir organizations are world class and can accomplish anything.

 

Care must be taken when planning the execution of a strategy to insure that all members of the team are realistic about their capabilitiesand resources. Strategies should always be over resourced.  When I was working in the restaurant industry, you deliberately overstaffed for the first three months of operation of a new location.  You wanted to give your customers exceptional service right from the start, otherwise they may never return.  Only after you developed that exceptional service did you consider optimizing your staffing levels.  This resource loading is part of the cost of implementing a strategy – do not assume that everyone will be able to fit thenew strategy within their current workday

 

Because entrepreneurs are often overly optimistic about their organizations ability, the resources are often not adequate to carry out the strategy.  As a result, the strategy gets implemented unevenly and not as quickly as expected.  This leads to the second type of failure which is the timeliness of the implementation. Long implementations can lead to organizational fatigue, brand confusion and missed windows of opportunity.  If your strategy is to move part of your manufacturing to a low wage country, you may not have time to do in-depth site analysis and build your own site.  Rather, it may be prudent to lease a site and get the benefits of the low cost wages now and then optimize the site selection at a later date.

 

If you have done your strategy right, you will have picked the correct strategy, you will have carefully planned the resources and timelines and you will have insured that your organization is prepared for the challenge.  Taking the time up front to plan and having milestones for strategy checkups will help your organization out execute its’ competition.

 

 


Saving Your Way to Recovery

Posted by Ted Sehl on January 10, 2011 at 12:50 PM Comments comments (1)

Throughout the life of an enterprise, there will come times when a cost reduction strategy must be adopted. This is usually a result of a string of poor financial results – either unsatisfactory returns on investment or more commonly a string of losses.  Unfortunately, it is nearly impossible to cost reduce a company back to health. This is not to say that the cost reduction is not important but rather that something else is going on here.

What is that something else? It is a failure of the company’s basic strategy – where they have chosen to compete, with what product offerings and with what key advantages over the competition?  The fact that the returns are not acceptable means that the enterprise has failed the first test of a healthy strategy – can it consistently beat the market.

Research has shown that 80% of revenue growth is explained by choices about where to compete; leaving only 20% about explained by choices of how to compete (Baghai, Smit, Vigueirie, The Granularity of Growth, 2008 )  So, the first step is that a review should be taken of what market segments have attributed to growth and which have not.  Resource allocations should be reviewed with an aim to supporting the growth areas. 

The next step is to review the product offerings.  Do they tap the key sources of advantage that the enterprise has over its’ competition? What about over substitutes that have entered the market?  What has happened to erode this advantage?  What can be done to regain it?

These are all tough questions that must be addressed.  Cost reduction may stem the tide of losses for now, but the real turn around will come from the review of the enterprises’strategy.

Choose Where You Compete

Posted by Ted Sehl on January 6, 2011 at 10:22 AM Comments comments (1)

I am always surprised by the entrepreneur who does not think about his or her competition.  I have been involved with projects that seem great in the boardroom but do not meet up to the test of the market place.  One of the most common reasons for this lack of success is a poor choice of where to compete.

If you are offering a new product or service, the guiding questions have to be 1) is it within our competencies and aligned with the way we compete today? and 2) who else is in the market with the same offering?  As Warren Buffett is attributed with saying: "I don't look to jump over 7-foot bars: I look around for 1-foot  bars that I can step over."  Many companies fail because they are swinging for the fences rather than just trying to get a man on base.  If you are a small player and the market is saturated with large players and lots of competition, then you need to find profitable niches rather than compete in the mainstream of the offerings.

I have a friend who once stated that he looked around for markets where the competition was small and that he knew that he could easily beat the products and services that were currently offered.  A reporter who listened to his speech creating the tagline that he "enjoyed beating up on little guys".  It sounds harsh, but let me ask you this and remember, it is your money that is on the line - would you rather beat up on the little guys or do you have a David complex and want to take on Goliath?

The successful companies I have seen take a portfolio approach to expansion.  I recommend that you plan to fail often, fail cheaply and fail quickly.  You will be surprised how often that your failures lead you to creating the winning combination down the road.