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This page intentionally left blank This page intentionally left blank This page intentionally left blank This page intentionally left blank This page intentionally left blank Strategies andStrategies andTTactics of theactics of theMaster CyclistMaster CyclistExecutiveExecutive1 11 The brightest people in the world didnt see [the recession]We saw this recession coming three years ago. It wasobvious the booming economic cycle couldnt continue. Wetightened our belts. We focused on cash flow.ŽTiming is everything. In love and war, most certainly. But certainlyalso in managing the business cycle.Consider, for example, a Master CyclistŽ CEO such as Johnson &THE WELL-TIMED STRATEGY timely layoffs„even as rivals continue to add workers at premiumwages. Nor, as Larsens quotation suggests, will such an executivecompany saw double-digit growth in both revenues and earnings.These positive indicators coupled with asector rotationŽ byturn over the CEO reins in 2002 with his head held high.of oil prices and a flattening yield curve in 1999 to a collapsingorganizational design, lacked many macroeconomic variables input it, The economy is too complex to get anything meaningfulrecession and was eventually forced to write off more than $2in excess inventory„even as the company had to lay offSTRATEGIES AND TACTICS OF THE MASTER CYCLIST EXECUTIVE You will see that while Master Cyclist companies like J&J routinelyachieve superior performance using these well-timed strategieshemorrhage cash The essence of strategy is to achieve a long-term advantageover the firms competitors.Ž „Professor Arnoldo Hax, Sloan School of Managementhave been shown to be the most effective by some of the verytarget the all-important areas of risk management, the strategicactivity of the modern corporation, and a solid understanding andTHE WELL-TIMED STRATEGY improve company performance.STRATEGIES AND TACTICS OF THE MASTER CYCLIST EXECUTIVE Well-timed strategies and tactics of the Master Cyclist executive.Countercycling Your Capital Expendituresflow at a most opportune time. However, the most proactive of Master Cyclist executive teamsoffensiveweapon. This is done by increasingsurging demand. us, they do this with an abundance of new production capacity,Strategically Timing Your Acquisitions why one company acquires another. The acquisition might opencomplementary new technology. It might be a crucial link in theacquisition target might simply be a key rival that needs to beto be raised.to impulsively make an acquisition if the stock price is too high„chipmaker Micron, telecom calling card King IDT, and the credit-THE WELL-TIMED STRATEGY The Art of Cherry Picking and Other HRM TacticsMoreover, any wage pressures will have totally subsided. That iswhy to the Master Cyclist, a recession is a great time to cherrypickŽ the labor market.force with lower labor costs than its rivals. That is a strategy thatyou will see played to absolute perfection by companies such asAvon, Isis, and Progressive in industry sectors as disparate asProduction and Inventorya recession approaches inevitably suffer in myriad ways. MostCisco painfully learned. There is, however, a far more subtle cost to mismanaging onesinventoriesas a recession approaches. As the examples ofGateway and Hewlett-Packard will stunningly illustrate, a largeinventory overhang can also leave a company with obsolete orSTRATEGIES AND TACTICS OF THE MASTER CYCLIST EXECUTIVE Bloating the inventory as a recession approaches is not, however,the only„or perhaps even the worst„sin of the Reactive Cyclist.economy kicks once again into high gear. you will see played out in a marathon boxing match between twoheavyweight truck manufacturers. In one corner will be theconsummate Master Cyclist Paccar, with its incredible accordion-sign of recession or recovery. In the other corner will be thehistorically pitiful and pathetic Navistar, which has always beenCycle Seasonsand pricing offer some of the richest insights into buildingduring a recession can be a highly effective way of building thecompetition and noiseŽ in the marketplace. advertising is a highly effective strategy, you will nonetheless seeTHE WELL-TIMED STRATEGY cost-cutting targets in the companys beleaguered recessionarybudget. However, as Kmarts myopic Mac the KnifeŽ CEO willstraight into Chapter 11 bankruptcy.The simple truth behind such tactical cycling of the product mixmeat gambitŽ in the darkest days of recession turned out to beTactically Hedging Business Cycle RiskHumor-Breyers always hedges the costs of its most importantSTRATEGIES AND TACTICS OF THE MASTER CYCLIST EXECUTIVE premium-quality New Zealand butterfat for its heart-stopping iceHumor-Breyers are able to focus on their core competenciesŽ„whetherit be providing high-quality cruise experiences or therisk. This is a lesson to be learned from the likes of the utterlymasterful Master Cyclists at Southwest Airlines who, unlikeown internal and highly sophisticated models.Strategically Diversifying Business Cycle Riskthe Master Cyclist deploys two other important risk managementstrategies, thereare many good strategic and synergistic reasonsdiversifies into producing SUVs may be able to build largerTHE WELL-TIMED STRATEGY That said, there are equally obvious benefits to various forms ofbusiness unit diversification that effectively do hedge businesscycle risk. You will see, for example, how a highly astuteStill, these strategic benefits notwithstanding, it is equally true thatvarious countries are not, as they say in academia, perfectlycorrelatedŽ statistically. In lay terms, this means that while EuropeStates might be in the midst of a robust expansion. This is a point driven home in one of the most sophisticated andbargain-hunting foray into Indonesia and the Philippines duringSTRATEGIES AND TACTICS OF THE MASTER CYCLIST EXECUTIVE hawk their ceramic body armor. Terrorism spawns huge newand biometric identification. Companies such as InVision andViisage swoop in with new products to grab a lions share. Birdflu sweeps across Asia and sets off a vaccine-developmentsweepstakes to the benefit of large companies such asdangers and opportunities. Unfortunately, in the chaos that oftencaught flat-footed. Master Cyclists are, however, immediately able to parse both thelonger-term strategic opportunities. You will see these themeshow to develop new products or retarget old markets in response„Lakshman Achuthan, Managing Director, Economic Cycle Research Institute THE WELL-TIMED STRATEGY To end this chapter, I want to leave you with a highly compellingwhen to actŽ is strategically just as important as knowing what toRetailer Montgomery Ward is the classic example of whatcan happen when an enterprise miscalculates the direction ofthe macroeconomy for too long and by too much. Believingthat depression always followed a major war, chairman SewellAvery did not open a new store between World War II and themid-1950s. Sears took the oppositetack, opening new storesrelentlessly, particularly in the fast-growing suburbs. Sears was betting onstrong, post-war growth driven by pent-up demand. Sears took off; Montgomery Ward never reallyrecovered and eventually filed for bankruptcy. Many factorswere involved in the dramatically different post-war paths ofthese legendary Chicago retailing rivals. The crucial factremains that one was right about the macroeconomicdirection. The other was wrong.In the chapters that follow, you will see this same kind of battlebe for you both a very interesting and highly entertaining journey,one abiding fact will stand out. In an increasingly global and fiercely competitive economy,the line between corporate success and failure is now beingdrawn by the ability„or lack thereof„of the modernexecutive team to first understand the business cycle in allof its strategic and tactical richness and then proactivelymanage that cycle for competitive advantage.STRATEGIES AND TACTICS OF THE MASTER CYCLIST EXECUTIVE This page intentionally left blank CounterCountercyclingcyclingYour Capitalour CapitalExpendituresExpenditures2 ƒ though a countercyclical investment strategy wasobserved to enhance profitability, few firms practiced this„Professors David Aaker and Briance MascarenhasMascarenhas and Aaker, many executive teams pursue just theopposite course. However, capital expansion creates large cash flow needs to service an ever-larger debt at a perilous time when revenues can fall dramatically. Calpine encounter„in large part because of the hubris of theirTHE WELL-TIMED STRATEGY COUNTERCYCLING YOUR CAPITAL EXPENDITURES Labor Readys CEO confuses brains with a bull market,Žand (almost) his company.kari byopting for an ill-advised, and exceedingly ill-timed, retail outlet strategy. Calpines Pinocchio CEO succumbs to a classic build theto try to repowerNorth AmericaŽ„and learns how toA recession attacks the life blood of a company„its cash„Professor Richard Nolan, Harvard Business School Dont confuse brains with a bull marketŽ is a wise old Wall StreetDuringprolonged economic booms, far too many top executivescome to think of themselves as brilliant captains of industry ratherthemselves very much in the right industry with the right product When top executives confuse their own management skills withto a classic build the empire syndrome.Ž They continue to forgeahead with ever-larger expansion plans„oblivious to thebearish for a heavily margined investor, it can all come crashingLabor Ready Misses Its Own Recessionary SignalsExploding from 200 branch offices in 1996 to more than800 in 2001, the company overreached. As chief executive,Mr. Welstad became intoxicated with the echo from WallStreet of his rhetoricƒŽ Labor Ready is the McDonaldsŽ of the day-labor world. Its armyoffices both in the United States and Puerto Rico as well asCanada and Great Britain to perform some of the mostfalling on its own capital-expansion sword. Thats because LaborThe demand for temporary labor is,in and of itself, a very goodincrease. In light of the real-time labor-demand data quite literallyTHE WELL-TIMED STRATEGY badly CEO Welstad and his executive team„with their thumbs soThis unforgivable stumble would leave Labor Ready operatingfalling out of its business. Predictably, as year-over-year salesthe company was forced to close about 150 of its offices„manysuffered mightily as Labor Readys stock fell from around $15 peras the March 2001 recession began. Welstad, himself, wound uplosing his job in the most ironic of ways: He took an unauthorizedloan from the company to meet a margin call on the crumblingbad„bet it would keep going up.When the stock plummeted, Welstad found himself with amassive loss he could not cover. This is stark testimony to the factthat Welstad managed to confuse brains with a bull marketŽ notonce but twice„once with his company and again with his ownSure, we might have started out as a direct, built-to-orderderthan that.Ž„Jeff Weitzen, CEO, Gateway, 1999 Annual ReportLets face it. 2002 wasnt a very good year.Ž„Ted Waitt, CEO, Gateway, 2002 Annual ReportCOUNTERCYCLING YOUR CAPITAL EXPENDITURES assumption that the good economic timesŽ would never end. The Gateway example is, however, more than just a cautionaryteeth of an expansionary bubble. It is an equally compelling storyto the leadership of a young, ethically challenged, hotshot MBA1985. In a small farmhouse, college dropout Ted Waitt started adirect distributionmade it so famous! With this lean and efficient business model,the dropout Waitt fortuitously hit the exact sweet spot of whatwas then the unfolding computer boom. And Gateway did indeedbillion mark by 1996. Note, however, that by 1999, Waitt had become a moreturned the CEO responsibilities over to Jeffrey Weitzen. Weitzenimportant, wanted to put his own visionary stamp on Gateway.You can see Weitzens hubristic vision clearly in Gateways 1999Annual Report. In his chairmans statement, Weitzen delights inhad, in fact, originally been built on. Instead, Weitzen favored aTHE WELL-TIMED STRATEGY much bigger vision of an international retail outletmake no mistake about it, much likethe Weitzens vision was big.From a base of 280 retail stores in 1999, Weitzen would growin little more than a year. At the same time, Weitzen would addinvestment in the office supply company OfficeMax. Business Weekof exactly how that OfficeMaxWeitzens one-manŽ executive band:Tanned, trim, and soft-spoken, Weitzen seems like a laid-back, southern-California sort of guy. Dont believe it. Hes soGateway outlets within OfficeMax Inc. stores during a familyUnited States, Weitzens Gateway also continued to aggressivelyexpansionary moves added significant overhead costs to aindustry good timesŽ were about to be very over.by a performance yardstick called the SG&A ratio. It comparesend of Weitzens ill-timed expansion, that ratio had ballooned toand Compaq but soaring high above the 9 percent of Dell„thecompany that Weitzens had so arrogantly needled in his 1999COUNTERCYCLING YOUR CAPITAL EXPENDITURES channels and falling gross margins unable to support its higheroverhead model. As even Weitzen himself was forced to admit asGateway began to badly miss its earnings estimates, there is a lotoutlet meltdown. With its own distribution channels as uncloggedas a teenage heart, Dell smelled Gateways blood in the water. Intrue Master Cyclist fashion, Dell began lowering its prices to spurdemand and to tear off large chunks of Gateways now fallingAt this point, Weitzen summarily got the ax when Gatewaysfounder Ted Waitt came back to try to rescue the company.the MBA„at least in the near term. Perhaps the final lesson to be learned from Gateways roll of thecan also get you into big trouble with the law.In November 2003, the whiz kid Weitzen, along with Gatewaysformer CFO and controller, were charged by the Securities andExchange Commission for engaging in a fraudulent earnings-manipulation scheme to meet Wall Street analysts expectationsŽWeitzen and his croniesWaitt stepped in quickly to settle theTHE WELL-TIMED STRATEGY cook its books again. As for Weitzen„and the perversity of justicewith a $5.6 millionseverance payment.ever faced. In spite of this, it was a great year for Calpine„Peter Cartwright, CEO, 2001 Annual ReportIn this allegedly great year,Ž Calpines stock mimicked a meteornear-blue-chip status to outright junk. It is difficult to understandhow such an abominable performance could lead any rationalIn fact, the story of the San Jose, California-based Calpine isemphasize how individual patterns of so-called sector rotationForecasting ToolsŽ) in the stock market can prove useful inTo understand more clearly the predictive power of sectorrotation,lets look more closely at what Calpine does. This is acompany that builds large, natural-gas-fired electricity generatorsCOUNTERCYCLING YOUR CAPITAL EXPENDITURES From a sector-rotation point of view, the electricity-generationsector sits in the broader energy category, and energy prices tendexpansionary stage when energy supplies are tight and energydemand is high. However, higher energy prices coupled withdestined to soon bring the economy crashing back down to Earth. possible time for an energy or electricity company to undertakecycle turns down, energy prices will typically soften very swiftlyliquidity concerns.Chapter 11) and just 1 month before therecession would begin,CEO Cartwright announced that he was upping Calpines capital-expansion target to an astonishing 70,000 megawatts of electricity-and would make Calpine the largest power producer in thebegan to suffer what would become a severe reduction in cashBusiness WeekTHE WELL-TIMED STRATEGY Today, Calpine is powering down fast. ƒ Its reeling fromfalling electricity demand caused by the recession and from theuncertainty about its liquidity and expansion strategy. Wereeconomic recovery comesƒŽPerhaps the most amazing thing is that after this boneheadCalpine stock fell deep into penny-stock territory.Countercyclical RetrenchmentCOUNTERCYCLING YOUR CAPITAL EXPENDITURES Taking a page right out of J&Js playbook, DuPontsWe saw this recession coming three years ago. It wasobvious the booming economic cycle couldnt continue. Wetightened our belts. We focused on cash flow.ŽYou might recall Larsens quotation from the first chapter in thisretrenchment in the face of a looming recession. This turned out lead J&J to superior performance over the course of the recession.pull off a similar feat.DuPonts Sophisticated Forecasting TeamBecause of the nature of our business, DuPont was one ofthe first to see the economic troubles on the horizon. Wemade immediate adjustments to deal with recession even as„ChadHolliday, CEO, 2001The Master Cyclist DuPont is one of the few major corporationsin America to still have a staff of its own economists. It also hasPerhaps not surprisingly given these resources, DuPontsWith a possible recession looming, DuPonts executive team swiftlyother fronts, DuPont was able to build a large cash reserve. AsTHE WELL-TIMED STRATEGY Business Week explore much more fully in the next chapter, DuPont used itscash hoard to make fully highly strategic acquisitions. Theseacquisitions„mostly at bargain prices in the midst of theThe All-Important Well-TimedCountercyclical Expansion COUNTERCYCLING YOUR CAPITAL EXPENDITURES Intels counter(cyclical) culture leads it to dramaticallyprosperously into the new economic recovery with newLowes CEO obeys one of the most important Master I see an unparalleled opportunity to gain market share andexpand business. The downturn has left some of our verytheir businesses. By investing, were a leg up and in betterfrom somebody else.Ž „King Harris, president and CEO, Pittway Corporation We have seen that countercyclically cutting capital expenditures intoist goes on the offensive isthrough the implementation of a well-The Intel story illustrates how such proactive thinking is part ofbusiness cycle. To finish this chapter with a bit of internationalflair, the real estate developer SOHO China illustrates howstrategic Master Cycling is as much a universalglobalphenomenon as it is a tool for both large and small businesses.Intels Counter(cyclical) Culturecompanies to emerge from them stronger than before.Ž„Gordon Moore, co-founder, Intel The industry has shrunk more in the last two years than inmarkets inevitably recover.Ž„Paul Otellini, COO, IntelTHE WELL-TIMED STRATEGY of recessions and downturns in the semiconductor cycle toAs many of its competitors were retrenching during the downturn,Intel continued to expand both its product line and its productionpay off handsomely when the recovery began.doing so, shaves 30 percent off the costs of cut-die manufacturing.technology allows Intel to make high-performance chips that aresmaller and faster. These chips also cost less to manufacture andeven less to operate because they use less power. CEO CraigBarrett and Chairman Andy Grove described Intels[W]e know that a downturn is no time to shy away fromstrategic spending. Though the high-tech industry was mired inovercapacity in 2001, we know from experience that capacitywilts like lettuce. Theres always too much of yesterdaystechnology and never enough of tomorrows. ƒ Consequently,during this downturn, we did what may seem counterintuitive:We accelerated our capital investments, spending $7.3 billion in2001, compared with approximately $10 billion in capitalspending over the previous two years combined. We also invested$3.8 billion in research and development 2001ƒ. COUNTERCYCLING YOUR CAPITAL EXPENDITURES The payoff from Intels counterintuitiveŽ strategy was ahighly touted Mobile Pentium IV-M processor. As it did so, Inteltrumpeted loudly the great gains in performance, great savings inby 81 percent. Moreover, in the third quarter of 2003, as its newproducts swarmed into the market, Intel reported its highest rateLowes Obeys the Know Thy SectorŽretailers look for opportunity. The marked economic shift thatoccurred during the latter part of 2000 was one such time, andsharpen our vision for the future. ƒ Looking to the future, wesee a fast-growing and highly fragmented $400 billion home-improvement industry only getting better.Ž„Robert Tillman, CEO, Lowes, 2000 Annual Report retailing sector. Exhibit A: the strong challenge of the Loweshighlights the importance of understanding how the cycle of onesTHE WELL-TIMED STRATEGY Tillman firmly believed that the time was ripe to make Lowes aHome Depot didnt? Well, Tillman clearly believed that therates would then spur a new housing boom for the next growththere, however. Lowes also was counting on playing an importantThe home-improvement market is expected to grow over 4percent annually for the next four years, as Baby Boomerstrade up, remodel, and generally improve their homes, andove their homes, andprepare for the family to follow.COUNTERCYCLING YOUR CAPITAL EXPENDITURES taken by the likes of Calpine and Peter Cartwright. However, thisthey operate in and how that sector is affected not just by indeed all go into the toilet. However, in such times, as notedthe home-improvement market can actually grow andprospershort-term interest rates, and the 30-year fixed mortgage ratesAt that point, Lowes business began to boom. By the first quarterquarter, 2002 net income increased to almost $500 million„evenTHE WELL-TIMED STRATEGY as Lowes began to grab an ever-bigger slice of market fromHome Depot. By 2003, the news was even better, as evidencedLowes Cos. reported improved fiscal fourth-quarter resultsMonday that beat the most optimistic forecasts from Wall Street.Shares of Lowes jumped more than 4 percent in early tradingon the New York Stock Exchange. The company ƒ has beenpicking up market share from Home Depot, and the fourthforecasts.former General Electric top executive Robert Nardelli, HomeDepot focused its efforts not on an aggressive capital expansionthe companys inventory turnover rate, improving its broaderdiscounts during the soft economic times. earnings news broke:Home Depot, the No. 1 U.S. home improvement retailer,lowered its sales and earnings growth targets for the comingfiscal year Friday, citing a challenging economic environment.ƒ Home Depot ƒ also said it is increasing capital spending by21 percent to $4 billion to enhance the customer shoppingWe have embarked on a transformation of The Home Depotfrom a young, decentralized business toward a more matureand balanced company with predictable and sustainablegrowth potential,Ž said Bob Nardelli, chairman, president andCOUNTERCYCLING YOUR CAPITAL EXPENDITURES Forgive me, but what a Reactive Cyclist crock. Here we have anThat, however, is precisely the kind of calamity that can strikereally doesnt understand. To put this problem another way,well suited to his old company, he was out of his depth as soonhire top talent from outside your sector.SOHO Chinas Master Cyclist EntrepreneurAs a developer, we need to be a smart thinker, analyze themarket trend wisely.Ž„Pan Shiyi, CEO, SOHO ChinaChina. But laid back like Hawaii, Hainan distinctly is not. In fact, Hainan is an economic juggernaut, in large part becausein 1990, the Chinese government designated Hainan a specialownership of financial institutions. THE WELL-TIMED STRATEGY construction-to-sales spread„start to widen. To Pan, this stronglysuggested that the real estate market was beginning to overheat„a concern soon confirmed by a rapid rise in the price index.signs, he, unlike most other developers in Hainan, pulled out ofthe market. As Pan put it, The hot economy and beneficial localHowever, in 1992, I found the real estate market was out of theeconomic patternƒŽ small office, home office.Ž In promoting this futuristic concept,estate market was suffering both from the beginning throes of themonetary policies of the Chinese government. In this environmentCOUNTERCYCLING YOUR CAPITAL EXPENDITURES movement of a customized indicator he liked to follow known assignificant amounts of cash„and purchasing power! 1998, the central government required all state-owned enterprisesto stop self-buildingŽ houses for employees and instead establisha housing financing system to facilitate private purchasing. inventory. A few years later, the company brought its SOHOanother, Pan Shiyi became one of the top 10 real estateTHE WELL-TIMED STRATEGY COUNTERCYCLING YOUR CAPITAL EXPENDITURES € Top executives whose companies prosper duringdramatically. € Countercyclically cutting capital expenditures inanticipation of a possible recession is a veryMaster Cyclist. It preserves cash flow at a mostThe All-Important Well-Timed Counter-€ A true Master Cyclist also goes on the market-shareattack by countercyclically increasing capitalexpenditures during a recession. In this way, theinnovative products when the recovery takes hold. This page intentionally left blank The AcquisitiveThe AcquisitiveMaster CyclistMaster CyclistBuys Low andBuys Low andSells HighSells High33 The age-old maxim buy low, sell high!Ž isas true for a smalllarge corporation shelling out $5 billion for a strategic acquisition.one company to seek to acquire another. The acquisitiontargetTHE WELL-TIMED STRATEGY company is broaden the franchise at the bottom of thepositive. I think we really strengthened the companyduring this [recessionary] period.Ž„Ronald DeFeo, CEO, Terex We sold plants at the top when prices were at their peak.Now that everybodys selling, were anxious to buy assets.„Richard Priory, CEO, Duke Power technology. The target might be a crucial link in the supply chainor possess a key patent. Most Machiavellian of all, the target mightto impulsively make an acquisition if the stock price is too high„ squeezed, bankrupt rabbit to the recessionary python. In the euphoric white-hot heat of the late stages of an economicexpansion, Reactive Cyclists turn the buy low, sell highŽ ruleperhaps spurred on by equally foolish rivals in a bidding war„they take the acquisition plunge at the worst possible time. Thisis a time when the irrationally exuberant bulls on Wall Street have with a long-term competitive cost disadvantage. Moreover, if yourand Exodus did„it might face a major cash flow or bankruptcyproblem as soon as arecession and new bear market hit. Nortel Vaporizes $75 Billion in Market Cap We are moving at the speed of light to maintain our first„John Roth, CEO, Nortelnot destructive„to earnings. In the late 1990s, Nortel faced a difficult strategic challenge. In theold daysŽ prior to the Internet revolution, all that Nortels staidThe Internet revolution changed everything. As the number ofWeb users grew from a few million in 1995 to more than 200million by 1999, both stodgy old phone companies such as AT&Global Crossing and WorldCom all began demanding highlysophisticated gear. Such gear was needed to move not just With this astonishing technological revolution, a multi-blending fiber optics, switchers, routers, Internet Protocolnetworking, wireless, and other rapidly emerging technologiesTHE WELL-TIMED STRATEGY fastest and most cost-efficient manner possible.many other big gear makers, including Nortels archrival Lucent.expand its product line and fill in all the technological blanks thecompany needed to fully service the Internet. lightŽ pace. It executed no less than 12 major acquisitions in theXros all turned out to be mostly busts that led to huge write-downs. Rather, in what had become the telecom industrysequivalent of an astonishingly expensive arms race,Ž the costs ofand, like a compulsive Las Vegas gambler, Nortels executive teamsimply did not know when to quit. Indeed, rather than looking forward like Master Cyclists at all theplus Nortel employees who lost their jobs wildly amused. For few companies have ever driven over such a big cliff at suchdownturn. In classic Reactive Cyclist fashion, he referred to thisreverberated across the sector.Ž As the epilogue to this story, and in light of the pain he caused toprofessional services firms American Information Systems andmaker of Web site performance monitoring software, and 85%of Tokyos Global Online Japan. The spending spree continuedin 2000 with the purchase of e-business testing service providerKeyLabs and UK-based Grenville Consulting. The feather in thefirms cap was its acquisition of GlobalCenter, the Web-hostingunit of Global Crossing.Ž high-tech flyer: Exodus Communications. This is a company thatB. Chandraskehar and B. V. Jagadeesh„and began to blossom onthe shores of California in 1994.THE WELL-TIMED STRATEGY The niche that Exodus sought to fill was Web hosting.Ž Thisservice would allow Exodus clients to outsource their Internetoperations to the companys so-called server farms. These high-the Internet. As Internet usage grew exponentially in the late 1990s, Exodusbig business. It eventually grabbed a fullThis was a company, however, whose executive team had Wireless and Digital Island.As with the Nortel example, this Exodus story also has a darklyturned the reins of the company over to a more experiencedŽ THE WELL-TIMED STRATEGY A very cautious Integrated Device Technology refuses toIDT Corporations iconoclastic CEO hits the sell highŽbulls eye by dumping Net2Phone shares to AT&T at thetop of the market. Flush with cash, he then masterfullyMicrons legendary CEO scoops up cheap semiconductorfabsŽ at the bottom of the industry cycle to eliminaterivals fairly quickly, consolidate market share, and getgreater scale and competitive advantage.Ž„Sol Berman, PwC Consultingtelecom executive was fooled by the recession. Yet clearly,for every naïve buyer of every wildly inflated company, therenecessarily must also have been a savvy seller. That is why a central To gain further insightinto this question, lets move on to a tale of two telecom IDTs.Ž s.Ž of overpriced assets that didnt fit, we [were] very selectiveand ended up at the end of the downturn with a half-„Greg Lang, CEO, Integrated Device Technology is Integrated Device Technology.Ž Its a Santa Clara, California-high-performance semiconductors and modules mostly for thetelecom networking industry but also for the computer market. With the brevity of a haiku, the preceding quotation from IDTsGreg Lang says it all. Rather than succumb to splurging onand wound up counting its cash rather than chopping offIDT could stand for Invest in Distressed Telecom„David Hamerly, Hoovers Online illustrates an almost perfect mastery of both parts of the buy low,international callback technology.Ž This call re-originationŽtechnology allowed IDT to reroute international calls throughcheaper U.S. wires and thus avoid the high rates charged byoverseas carriers. In this way, IDT could offer paid calling cardsat bargain rates to connect its mostly lower-income and immigrantand iconoclastic Howard Jonas. bulls eye more squarely than Jonas did when he sold off a largestake in IDTs Internet telephony subsidiary Net2Phone. Heeager AT&masterstroke companies struggled to survive.This is only part of the IDT story, however. Jonas did not justhe went on his own acquisition spree, scooping up bargain assetswith high strategic value at obscenely low prices.phone card competitor PT-1 forjust $26.1 million in cash„a tinyearlier. This elimination of a key rival allowed IDT to gain controlboost revenues to the $1 billion mark, and achieve gross marginsacquisition of Winstar Government Solutions. This was a companythe Internet over the critical last mileŽ to its customers. Byproviding last-mile capability, Winstar thus was an excellent fitIncredibly, the purchase price for Winstar was a mere $42.5bargain basement price werent low enough, IDT paid for roughlystock. Crowed Jonas about this particular deal: It might not toptheDutch settlers buying the island of Manhattan for $24, but itTHE WELL-TIMED STRATEGY The Legendary Mr. Appleton Picks Some Low-Micron has a record of making the most of adverseconditions. Thus, we have come through each market cyclestronger and more energized. We will pursue opportunitiesthat arise from the current volatility and use them to„Steve Appleton, CEO, MicronMicron got a good deal there, 25 cents on the buck.Ž„Andrew Norwood, Gartner Research The Micron story illustrates analmost perfect marriage betweenabout a highly astute Master Cyclist executive who has perfectedPurchasing chip fabrication facilities fromeliminate rivals and increase market share while cutting costs andexpanding production capabilities in anticipation of the nextcyclical upturnlowly nightshift line operator while still in college and worked hisscooped up four internationally dispersed semiconductorfabrications plants from Texas Instruments. These acquisitions the time by many analysts, Texas Instruments also agreed to allowstrategic coup, We ended up with about $3 or $4 billion worthe ended up with about $3 or $4 billion worthAppletons legendary lightning struck again in April 2002. He tookadvantage of the recession-battered Toshiba to buy a DRAMallow pricing to return to profitability. In a celebration of thismemory business in the face of a significant industry downturn.Ž When Ruthless Patience TrumpsTHE WELL-TIMED STRATEGY Fair Isaacs tigerŽ patiently stalks its HNC Software preySo far, we have seen companies such as Nortel and Exodusof their acquisition strategies. We have also seen other companiesWith this last example, I want to underscore that one of the most just the opportunistic swoop.Ž Rather, it is that antonym ofFair Isaacs Acquisitive Tiger Waits Patiently atthe Watering HoleThe tiger does not hunt out in the open like the lion. It waitspatiently in the long grass, perhaps near to the waters edgeƒ When the prey comes within 20 meters, the tiger attacks.Ž„The Open Door Web siteFair Isaac is one of the leadersin so-called credit-scoring systems.phone companies. In 1999, Fair Isaac and its brilliant CEO, Tom Grudnowski, beganwhat turned out to be a three-year hunt for HNC software. HNChad been spun off fromthe U.S. Department of Defense in 1986.The company owned a patented form of predictive technologyŽrange of activities and applications. Accordingly, HNC offeredobvious strategic synergies for Fair Isaacs run up the analyticalAfter its first look at HNC in 1999, Grudnowski and his executivemarket„was considerably overvalued. However, later that year,HNC spun off one of its own business units called Retek. ThisAt this point, Fair Isaac took a second look. Again, however, it symptomatic of a broader tech bubble„the acquisition would notbe accretive to earnings, no matter how strategically attractive in HNCs stock price„came the third look at HNC. At this point,Moreover, it did so at a huge discount relative to the original 1999Its like a dream acquisition ƒ Its been a long time thatthe combined company could offer soup-to-nuts services, acquisitionŽ indeed„one highly accretive to earnings preciselybecause it was so well timed.THE WELL-TIMED STRATEGY Key Points THE ACQUISITIVE MASTER CYCLIST BUYS LOW AND SELLS HIGH


Acquisitions and Divestitures€ Companies acquire other companies for manymight open new markets or own a complementarynew technology, be a crucial link in the supply€ Whereas the dictates of corporate strategy tell ustactical implementation of that strategy. € Reactive Cyclists, intoxicated by the bullish fumesof a late-stage expansion, often turn the buy low,sell highŽ rule completely on its head. However,€ Reactive Cyclists that debt-finance their acquisitions€ The Master Cyclist never impulsively make an€ The acquisitive Master Cyclist uses a highly This page intentionally left blank The Art ofThe Art ofCherrCherry PickingŽy PickingŽand Other and Other WWell-TimedimedTactics of theactics of theHumanHumanResourResourcescesManagerManager4 Take away my people but leave my factories, and soongrass will grow on factory floors. Take away my factories but„Andrew Carnegieand inalienable truth. So it is with the business cliché that peopleTo understand the full extent of this problem, consider this profilehikes, rising oil prices, an inverting of the yield curve, and otherTHE WELL-TIMED STRATEGY warnings of a possible recession (as discussed more fully inChapter 11, The Master Cyclists Favorite Forecasting ToolsŽ), thestages of an economic expansion. Moreover, it often does so atlabor market.to fire, or lay off, a large portion of the workforce. The resultantthey know that with the loss of good employees, their job just gotthat much harder. The end result: Along with the least wantedworkers being laid off, the company loses some of its bestThe problems do not stop here, however. Traumatized by thedownturn and now wary of ever going on another hiring bingeafter the recession has bottomed and the economy is flashing newsignals of a likely recovery. While its rivals begin hiring some ofthe best talent at bargain wages, the Reactive Cyclist team remainsAs you will now see, a number of very well-timed HR strategiesTHE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER Cherry PickingŽ the Talent Pool inAnticipation of RecoveryTHE WELL-TIMED STRATEGY Avon lovesa persistently rotten economyŽ because itbiotech industry to lock top scientist talent intoagainst the industry grain to stock up on elite stockCountercyclical hiring may ƒ provide a company with acompetitive advantage. By engaging in bargain huntingduring downturns and hiring talent that would probablynot be available during upturns, a company may gain a„ProfessorsCharles Greer and Timothy IrelandIn the deep dark depths of a recession, thelast thing that manypickŽ this labor market with the goal of staffing the company withthe most talented workers at bargain wages. it is able to deploy a more highly skilled workforce withAvons Million Women MarchTo Andrea Jung, a persistently rotten economy is abeautiful thing. Others may see falling sales, lower profitsand layoffs, but Jung, the chief executive of Avon ProductsInc., sees an ever larger pool of women she can recruit tosell Avon cosmetics to an equally large pool of women whocannot afford department store creams.International Herald TribuneAvon Products is the worlds largest door-to-door cosmeticsqueen. It fields an army of almost 5 million Avon LadiesŽ whoproducts range from perfumes and toiletries to clothes, jewelry,and home furnishing; and Avon boasts almost $8 billion in salesa year. As the economy turned down in 2001, Avons CEO, Andrea Jung,and her executive team recognized that the downturn wouldresult in an ever-larger pool of womenŽ to recruit to sell itsproducts. Moreover, the Master Cyclists at Avon also understoodthat in a weak economy, Avons products would be moreattractive to all those women who would not be able to affordTo bring this talent into the fold, Avon revitalized an old programcalled Sales Leadership in which the companys top performersequally aggressive initiatives allowed Avon to expand itsworkforce by almost one third„or by roughly one million people!THE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER The results of Avons countercyclical hiring strategy and millionwomen marchŽ was nothing short of spectacular. As CEO Jung. As CEO Jungof depressed stock prices, Avons shares rose 16 percent,Nor was this march up the performance scale a one-year wonder.In 2003, earnings increased by another 25 percent to a record$2.78 a share while Avons share price increased 25 percent to anall-time high. Moreover, Avons success carried right into 2004,with another 27 percent increase in earnings per share and a veryProgressives Generals Go with a [We] hired and trained over 3,000 external new claimsrepresentatives for a net increase of over 1,500. A softemployment market afforded us high-energy adjuster„Glenn Renwick, CEO, Progressive Insuranceoccasion of a recession to transform cheap raw recruitWith more than $10 billion in sales and more than 25,000employees, Progressive has become the third largest auto insurerin the market. It also offers a host of other insurance products foreverything from motorcycles, RVs, and snowmobiles to collateralTHE WELL-TIMED STRATEGY of economic indicators, one of the most important of which is the. At first glance, following the unemploymentbeforean expansion begins in earnest and move down beforeHowever, in this particular case, Progressive closely follows thelittle or no experience in the industry and then training these rawimportant for Progressive because, as a service organization, laboris one of its largest expenses. Of course, the best time to cherry pick such talent right off theThat is preciselywhat Progressive did during and immediatelymarketŽ to add high-quality, high-energy adjuster trainees.ŽIsis Pharmaceuticals Patiently Waits toWhen strategies require very high-quality or highly skilledemployees who cannot usually be hired during upturns,countercyclical hiring may be particularly attractive.Ž„Professors Charles Greer and Timothy IrelandTHE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER The particularly astute variation of Isis Pharmaceuticals on thisillustrates how a company patiently relied on short-term contractand industry downturn to increase hiring of permanent, highlyof her husband and brother, Osiris. This company name is quiteapt because Isis Pharmaceuticals seeks to use its leading-edgeantisense technologyŽ to restore the health of people afflictedwith shorter-term commitments.However, when the recession hit and conditions in the companysown industry deteriorated markedly, Isis took a very differentMoreover, it hired many of the most highly skilled workers on apermanent basis at more stable market wage rates. In this way,THE WELL-TIMED STRATEGY In this climate of austerity, Lehman Brothers ƒ is buckingthe trend: In an effort to reinforce its critical mass in badtimes, the firm expanded its head count by more than 20percent [through the March 2001 recession].ŽBarronson Wall Street as one of the most aggressive of traders in theofferings of financial services include both investment andof the bursting of the stock market bubble, most of Wall Streetsas Credit Suisse First Boston, Merrill Lynch, and Goldman Sachsall implemented dramatic cuts. More broadly, securities firms cutMoreover, along with these job cuts came significant pay cuts forTHE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER Of course, it vastly helped Lehman in terms of providing the cashposition of having a large labor market from which to choose. Not only was the company able to hire some of the best laid-offtalent from its rivals. Taking a page out of Progressives book, itbigger rivals for business when better times return.ŽProtecting Your Workforce DuringTHE WELL-TIMED STRATEGY Programmable chip wizard Xilinx preserves its highlyskilled workforce during a recession using creativeforced vacations.After big workforce cuts, the surviving employees becomeoverburdened, make more mistakes and accomplish less. Asmorale and productivity slips, so will profits. The [TrendsResearch Institute] refers to the downsizing trend asThe Post-Standard, Syracuse, New York Nothing can kill employee morale faster than massive layoffsperhaps supplement the workforce as need be with moretemporary hires. This effectively begins the process of reducingthe permanent workforce because normal attrition will begin tocost burden when new permanent workers are hired at premiumpackages just months later.A second more subtle response, perhaps necessary if theearly-retirement programto accelerate the rate of attrition. Thislikewise can prove particularly effective in managing labor costsStill a third type of response as the recessiontakes hold is to offeror other forms of leave„and thereby cut costs while preservingexceedingly good use by the computer chipmaker Xilinx.Xilinx Zealously Protects Its Intellectual CapitalCompanies should realize that their most talented workersare the most marketable and could be in high demandknow they are valued and discuss their roles in the futureof the organization.Ž „Susan Gebelein, Personnel Decisions International THE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER design specialized integrated circuits. These circuits can then laterbe produced in large quantities for distribution to computertook hold. Instead, the company and its CEO, Wim Roelandts,with layoffs per se but rather with a highlyknowledge workers.With this tactical gambit, Xilinx offered its employees a year-longjust to lay off people to shore up its bottom line because it knewTHE WELL-TIMED STRATEGY hiring these workers, picking their brains, and then effectivelyPerhaps best of all, under this protective tactical HR umbrella,Ultimately, Xilinxs tactical HR gambit had a very lucrative payoff.was able to offer a suite of innovative new products in each of itssubstantially degraded through layoffs. The result was aMost broadly, the Xilinx team seems to have learned an importantspending by the telecom industry and the profit performance ofTHE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER Making No-LayoffsŽ Policies Workthe Master Cyclist WayTHE WELL-TIMED STRATEGY Nucor Steel uses wage and work-hour flexibility, tacticalrather than recession liability.Drowned out by the layoff headlines is the heartening newsthat a few companies still offer job security. Whats more,although the recession has reduced their number, many inthe no-layoff club are tops in their respective industries:Nucor is the nations most profitable steelmaker. SouthwestAirlines, which hasnt had a layoff in its 31-year history, isthe most consistently profitable airline. The duckcommercials are generating record sales at insurer AFLAC,which has had no layoffs in its 47 years.Ž„U.S. News & World ReportEvery company that adopts a no-layoffsŽ policy implicitlyacknowledges a fundamental economic tradeoff between the costAs Xilinxs executive team clearly understood, this tradeoff isparticularly important in higher-skilled occupations such asAvoiding such higher costs is not the only reason that somecompanies opt for a no-layoffs strategy. A second is thatcompanies often bundle the promise of no layoffsŽ with higher Finally, as a third checkmark in the plus column, no layoffs helpDespite these benefits, companies that adopt no-layoffŽ policiesand hire with the business cycle seasons. Rather, as one of thekey findings of this book, the real long-term success of any nolayoffs policy comes buffer the company and its workforce from recessionary risk.supportive organizational culture to keep „Jim Coblin, vice president of human resources, Nucor With more than $6 billion in annual sales and roughly 10,000employees, Nucor offers its customers both hot- and cold-rolledlargest U.S. producer of steel joists and girders.the fact that many of the steel industrys largest customers are inTHE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER investor confidence that can flag in the days and months leadingNucors most important HR tools and tactics include the following:of productive capacity.A highly flexible and cross-trainedŽ workforce that can beorganizational culture that breeds a fierce loyalty amongemployees and a uncommon willingness in todays times toflexible. For example, the annual bonuses for line personnel anddepending on conditions. Moreover, slowdowns can also result inmorepain as conditions warrant. managers pay, which is based on the companys return on equity,approach proves particularly effective at building loyalty andmorale in the lower ranks„and staving off any and all attemptsby union organizers to bring Nucor into their fold.THE WELL-TIMED STRATEGY employees are moved off the production line and givenany of its modernization and routine maintenance efforts during downturns.flexibility„facilitated as it is by a highly supportive organizationalThe (Not-So-) Well-Timed ContractTHE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER resources management, it is useful to warn of the dangers ofnegotiating long-term labor contracts in the late stages of aneconomic expansion. Typically, in this stage of the business cycle,unions have maximum bargaining power, and companies arehungrily. The example of United Airlines shows that entering intoan overly expensive long-term labor contract at the wrong timeindustry wherepattern bargainingŽ is the norm. The shock wave from the United contract is stillreverberating through the airline industry nearly a yearafter the carriers management ƒ offered hefty pay raisescontract caused management groups industrywide toswallow hard and pilot unions to reassess their demands. Itset a new gold standard for pilot compensation at the large„Dallas Morning Newsincrease per year thereafter.Airlines as the carrier paying the highest labor costs in the airlineindustry where pattern bargainingŽ for the unionized legacyexcerpt indicates, the pattern set in the United contract was anew gold standard for pilot compensation.Žaftermath of this severe Reactive Cyclist stumble by Unitedshelp drive the company into bankruptcy in the aftermath of the11 terrorist shock to the industry. Those United pilots, who justTHE WELL-TIMED STRATEGY cost upstarts such asJet Blue to fly an Airbus through.forŽ exist. However, the real villain in the piece is not the greedythe contract negotiations white flag.THE ART OF CHERRY PICKINGŽ AND OTHER WELL-TIMED TACTICS OF THE HUMAN RESOURCES MANAGER Human Resources Management€ The Reactive Cyclist continues to hire at premiumto a further exodus of some of the companys best€ The Master Cyclist deploys a wide range of toolsCherry PickingŽ the Talent Pool in Anticipation ofRecovery€ At the recessionary trough, the labor pool will be€ By such cherry picking,Ž the Master Cyclist gains askilled workforce with lower labor costs than rivals. THE WELL-TIMED STRATEGY Protecting and Preserving the Workforce During€ Both attrition and early retirement programs can be€ Sabbatical leaves, tiered pay cuts, forced vacations, highly skilled workforce in a downturn and preventMaking No-LayoffsŽ Policies Work€ No-layoffs policies can keep morale high and boostproductivity. € Companies that bundle a no-layoffs policy with€ However, the real long-term success of any no-only ifworkforce from the ravages of the business cycle.The (Not-So-) Well-Timed Contract Negotiation€ Never negotiate a long-term contract in the heat of MacromanagingŽMacromanagingŽYour Production,our Production,InventorInventory, and, andSupply ChainSupply Chain55 This year is shaping up to have the roughest truck-market conditions in at least seven years, and perhapsThrough it all, Paccar is expected to remain in theblack. Every year since 1939, it has trudged throughwar, inflation, high interest rates and oil crises tochurn out profitƒŽ„Luke Timmerman, up inventories as a recession approaches inevitably suffer ininventory write-downs. More subtly, a large inventory overhangTHE WELL-TIMED STRATEGY Bloating the inventory as a recession approaches is not, however,the only„or perhaps even the worst„sin of the Reactive Cyclist.companies that fail to increase production and buildinventories in anticipation of an economic recovery are often leftat the starting gate by far more nimble rivalscompetitors able to offer the latest products and styles in far moreabundance as the economy kicks once again into high gear. In this chapter, I review some of the major dosŽ and dontsŽ ofPerhaps even more important, I also introduce you to the criticaldifference between the old-schoolŽ micromanagementmacromanagementInventory ControlMACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN Ciscos executive team rejects the use of macroeconomickey industry-specific indicators can help an executiveteam safely navigate past recessionary shoals„but only if either an internal or external forecasting capability and thereforeThe second, and perhaps even less-forgivable sin, is that somecompanies actually have the relevant forecasting information in-house to make the right decisions! However, because of either thestructural impediments in the organization to getting theinformation to the right decision makers, the company chooses toignore that information.People see a shortage and intuitively they forecasthigher. Salespeople dont want to be caught withoutsupply, so they make sure they have supply byforecasting more sales than they expect. ProcurementWhat Forio has just done is illustrate the classic bullwhip effectŽthat befell Cisco when it spectacularly bungled its production andThis bullwhip effect describes a situation in which so-calledunderlying real demand for a product. To see more clearly howthis bullwhip effect works, consider that in the middle of theshortages in the market, in turn, created a frenzied situation inback order much more product than theyorder two routers hoping to get one.)THE WELL-TIMED STRATEGY realinventories to meet the ever-growing magazine: Wenever built models to anticipate something of this magnitude.Žbetween an ever-growing phantom demand and a suddenlyshrinking real demand. However, because of the companys lackConexants Generals Ignore Some SpecificRecessionary DataCommunications chip suppliers, smarting from thedouble indignity of quarterly revenue declines andprocess by accepting their lot and moving on. ƒpretax charge of $148.6 million for inventory reservesgross margins as production costs exceeded sales.Ž „Electric Supplies and Manufacturing Online through the Internet bubble skies„only to fall on the sword of itsown hubris. Spun off by the defense company Rockwell insixfold. However, by the end of 2002, the company had devolvedMACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN mistake as Ciscos and totally ignore the increasingly urgentConexants supremely overconfident top execssimply ignored readily available company data indicatingIndeed, within Conexants own supply chain management shop,Ždistributor locations and in Taiwan were going up, that waferan order was shipped a few days late. These internal indicators allturning down. When combined with the external indicators of a falling stockConexants own internal data should have been a strong clue forthat flew recklessly on the wings of hope and past performancelong-term contracts that locked them into overly optimisticsemiconductor market in late 2000, revenue performancedowns and other special charges over the next two years. Perhaps the most incredible thing about this abysmal performanceDecker, tried to put on this titanic disaster. As the lead off to theTHE WELL-TIMED STRATEGY $1.5 billion and shareholders lost more than $1 billionin equity„Conexant strengthened product portfolios and marketpositions throughout fiscal 2001 while carefullymanaging cash and expenditures during the deepest,most abrupt business reversal in the history of theForgive me, but there was absolutely nothing that was carefulwas very well signaled and anything but abrupt.Ž Industry IndicatorWe agree that there has been some recent weakness ina short-term correction.Ž „Arthur Nadata, presidentand CEO, Nu HorizonsThe Canadian-based Nu Horizons isa leading global distributor ofignore its own internal recessionary forecasts like Conexant.However, its CEO did heavily discount a very important leadingdemand for product. Once this ratio dips below one, it indicatesThats a clear warning sign of possible trouble ahead.MACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN indicates, he clearly did not heed this signal. Rather, he saw thea short-term correction.Ž In Nadatas defense, one might argueTo be frank, that argument simply does not wash. When Nadatasthan a well-calculated contrarian gambit. After all, a whole slewMacromanaging!„Your InventoryTHE WELL-TIMED STRATEGY Walgreens chain management circles around CVS.The superior inventory recessionary dust. MACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAINInventory turns are all about cash. ƒ The faster youturn your inventory, the more cash you can generateout of business, [and] the more you can invest.Ž„Dennis Miller, CFO, Eckerd Drugsand Walgreens„and two trucking giants„Paccar and Navistar„difference between micromanagingmacromanaginginventory turnover ratio over the course of the business cycle.advice is to keep your inventory turnover ratio as high asThe faster inventory turns, the lower the holding costs,and the better your cash flow. This implies that, when a businessbecomes totally efficient at managing its inventory turnover, theThe equally standard prescription to achieve this high turnoverNote, however, that it is arguably as important from a Mastermacromanageyour inventory turnoverratio. As a practical matter, this means tactically increasingratio by cutting production and trimming inventories when yourat a time when it is most likely to be needed. the inventory turnover ratio by building upinventories! In this way, your company will be better positionedthan rivals to offer the broadest range of the latest products as the These dynamics suggestthat the conventional measure of auniformly high and horizontal line for the turnover ratio over allphases of the business cycle does not offer the best metric ofsuperior performance. Rather, ideally, the turnover ratio shouldmove in a wave-like patternWalgreens Goes to the Head of theThey [Walgreens] invented the centralized pharmacy system.Ž„Ken Petersen, CEO, Eckerd DrugsWalgreens often generates more revenue„around $40 year. Whichever way you want to count it, these two companiescan claim the number one and number two positions in the highAs a practical matter, drug retailing is a noncyclicalŽ sector withsuch as chemicals, semiconductors, and trucking. That is why it isa good sector to demonstrate the virtues of inventory and supplymicroIn fact, Walgreens is an absolute demon when it comes toWalgreens adopted point-of-sale bar code scanning withIt boasts a highly efficient set of distribution centers. It quicklytestimony to its hegemony in the centralized pharmacy kingdom,any one of its customers can go into any Walgreens anywhere incontrast, rival CVS haslagged far behind in the micromanagementthe ever-fleet-of-foot Walgreens. THE WELL-TIMED STRATEGY Figure 5-1 illustrates the critical difference betweeninventory using the examples of Walgreens versus CVSNavistar. For now, however, lets just focus on the top of Figure5-1. It contrasts the inventory turnover ratios of Walgreens versusMACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN Inventory TurnoverInventory TurnoverWalgreen Co. CVC Corp.199819992000200120022003199819992000200120022003PACCAR Inc.Navistar International Corp.Walgreens: The Superior MicromanagerPaccar: The Superior Macromanager Walgreens keeps its inventoryturnover ratio uniformly highwhile CVS lags far belowPaccar defensively increases itsratio in anticipation of therecession while Navistar gets left Micromanaging vs. macromanaging yourinventory turnover. inventory turnover occurs over the course of the business cycle.In fact, this is exactly the kind of flat-lineŽ pattern you wouldmicromanagement yardstick of highest inventory turnover ratio,you clearly can see that Walgreens is the superior performerentireFrom a Master Cyclist perspective, however, view of the inventory management problemmacromanagementof inventory turnover to that of Navistar.Inventory PunchBig rigs are designed to take punishment from theelements of Mother Nature and the road, but everyfew years they take a beating from the economy.Ž„Luke Timmerman, PACCAR has established a consistent record ofearnings through all phases of the economic cycle,achieving annual profits for 65 consecutive years and„Mark Pigott, CEO, PACCAR 2003 AnnualReportTHE WELL-TIMED STRATEGY not be more different in their approaches to managing the businesscycle. The Master Cyclist Paccar was founded by William Pigott, Sr.recession or recovery. As a company treasurer once put it, Wehave the ability to turn off the spigot and turn it on. ƒ In a cyclical, Workers appreciate how [executives] dont go relations between the companyand its unions seem to be good.ŽMoreover, from the very first new employee orientation, everyworker is warned that the truck business is cyclical and theythis is how it is. It helps get you mentally prepared.Ž It is in largerather than the oppositions. It is also in large part because of itsAs for Navistar, it seems to inhabit an alternative universe. In fact,first smokeless diesel engine). Yet this is a public companyMACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN Navistar started out as the farm equipment manufacturerInternational Harvester in 1902 and added trucks to its line inThe joke, however, is that the more Navistar changed its name,rampage shootingŽ that killed five employees) and charges ofever did was to divest its construction equipment and farmliabilities so large that they dwarfed the companys net worth. These and a murderers row of other mistakes earned thebumbling Navistar a very embarrassing Were #company posted the worst total return to shareholders of allcharge in 1995. In fact, in an interview with the John Horne did talk a good game, vowing in 1999 that blowout boom years in the trucking biz in 1998 and 1999, HorneNow lets go back to the bottom of Figure 5-1. You can vividlyTHE WELL-TIMED STRATEGY In particular, in the figure, Paccar is clearly driving turnover ratio in anticipation of the 2001 recession„swiftlyturnover ratio falls dramatically. Now heres the punch line: Atthis point in the business cycle, thebetter cash flow position„and unlike Navistar, Paccar willIn the struggle for survival, the fittest win out at theadapting themselves best to their environment.ŽTo end this chapter, I want to focus on two members of a veryan order is made for it.build-to-orderproduction-to-orderthat they obviate the need for holding large inventories andDells Pioneering Build-to-Order System ChewsThe business model is relatively simple. Dell takesorders over the phone and through its Web site.each order, making and shipping a PC usually onlyMACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN Using its pioneering build-to-order system, Dell has been able todays! The result is an inventory turnover ratio that is absolutelyoff the charts„more than a very powerful weapon to seize marketshare from rivals whenever the economy has softened or plungedinto recession It has to do with Dells ability to exploit anproducts that had quickly become obsoleteintegrated circuitswill double every year.Ž However, suchobsolescence does not result from the ever-increasing speed ofinto play as well such as physically smaller hard drives with largerNow here is the important point: Faced with large amounts ofobsolete inventory, Compaq, HP, and Gateway all had to cutwith its lean-and-mean build-to-order system, Dell could offer thediscussed in the next chapter, the result for Dell was an avalancheTHE WELL-TIMED STRATEGY Would Charles Darwin Live in a KB Home?KBnxt allows us to truly construct each home one at ain our name, not Homes. We really are able to givethe entry-level, production home buyer a very„Bart Pachino, senior VP, KB HomeFormerly known as Kaufmanand Broad, KB Home operates in 15region in Arizona, California, the Carolinas, Colorado, Florida,Georgia, Nevada, and Texas. Through an aggressive acquisitionstrategy, it has become one of the largest home builders inAmerica. Building for first-time, move-up, and active adult buyers,KB Home offers an excellent example of an organization thattransformed itself from a Reactive Cyclist into a superb Mastermarket. KB Home dodged the bankruptcy bullet that hit many oflearned from its traumatic business cycle experience and quicklyOne important form of this Darwinian adaptation involved themore formal use of regional forecasting and market survey tools.As housing market analyst William Walter observed, Ten yearsMACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN that the area would appeal to people. Today, KB Home choosesArguably, however, the even more important step KB Homesmade its inventory and production decisions. In particular,production-to-orderconstruction on a home until a contract existed with a buyer. elegant way with a marketing strategy aimed at turning the stockTHE WELL-TIMED STRATEGY The DosŽ and DontsŽ of Production and Inventory Control € Reactive Cyclist executive teams that fail to € Reactive Cyclists that fail to an economic recovery often lose market share to MACROMANAGINGŽ YOUR PRODUCTION, INVENTORY, AND SUPPLY CHAIN € Reactive Cyclists companies that fail to build eitherMicromanaging„and Macromanaging!„YourInventory Turnover€ Micromanaging your supply chain means keepingyour inventory turnover ratio as high as possible tocut cost and improve cash flow. € Micromanagement tools can be deployed€ Macromanaging your supply chain meansincreasing the inventory turnover ratio by cutting€ Macromanaging also means allowing the inventoryturnover ratio to fall through increased inventory€ By tactically building inventories as an expansion€ In build- and production-to-order systems, no This page intentionally left blank Master CyclistMaster CyclistMarketingMarketingThrough theThrough theBusiness CycleBusiness CycleSeasonsSeasons6 When the economic climate changes, the best retailers„Robert Tillman, CEO, Loewsand pricing offer some of the richest insights into buildingcompetitive advantage in all of management. One effective tacticreduced noiseŽ levels in the market. This counter-cyclicalchanging both the marketing messages and product mix to fit theTHE WELL-TIMED STRATEGY Countercyclical Advertising Kmarts Mac the KnifeŽ CEO slashes advertising duringWal-Mart.jump-starts its business with a brilliant countercyclical [W]e intend to have a record year. How? In adownturn, everyone cuts advertising. So if you justmaintain advertising, you stand out. And we aregoing to increase our advertising.Ž „Jack Kahl, president and CEO, Manco Inc. Advertise! And better yet, advertise a lot. Why?Because, there is ample evidence to support the factthat maintaining or increasing your advertising andmarketing investment in slow [recessionary] times isactually more effective than in good or growthperiods. A key reason is that when the marketing andtalking sounds that much louder. „John Kypriotakis, founder, Lysis Internationalcountercyclical advertisingin building the brand and expandingbudget is fairly liquid. This liquidity makes it an easy target forthe Reactive Cyclist bean counters and cost cutterswhen bad times hit. However, one of the most enduring lessons of theit is typically far more expensive to buyback market share lost to a rival who aggressively advertises in adownturn than it is to hold on to that market share byIts FaceThere is no doubt we made a mistake by cutting tooperform a turnaround miracle„and within 20 months he managedcommonly regarded as the best measure of retail performance. Itprevious year.) However, Conways boast proved empty. In fact,archrival Wal-Marts same-store sales rose even faster, and muchwhite-hot economy.With the onset of the March 2001 recession, the beleagueredagainst Wal-Marts everyday low-price strategy. This price cuttingwill be tactically consistent with our discussion of pricing over theTHE WELL-TIMED STRATEGY course of the business cycle in the next chapter. However, in amisplaced devils bargain,Ž Conway decided to payŽ for theprice cuts by blatantly violating another Master Cyclist principle:summer, at a time when families were starting to do their back-to-school shopping. The cuts then accelerated into November aspossible way. Much of the brunt of the cuts was borne by Kmartsweekend customer visits and sales well below target, Wal-MartsWal-Mart did so by increasing its own advertising. and November; in contrast, Wal-Mart saw revenues increase. Byrecession, Kmarts board fired Conway. However, in the Alice inWonderland world of executive compensation, Conways Macthe KnifeŽ walked off with almost $10 million. Dells Countercyclical Ad Coup The continued investment in marketing activitiesduring tough economic times has really paid off included many of the biggest names in the industry at the time„from Apple and IBM to Digital. even while its competitors were quick to cut back. Without theto its customers.to be an unbeatable combination. Within a decade, Dell vaultedTHE WELL-TIMED STRATEGY YUM!s Pizza Hut chain hawks its large-dish delights as aEl Pollo Locos value proposition of cheaper dark-meatspecials for dark recessionary times allows this not so We shift our product line with cyclical movements„particularly leveraging different cycles in different„Ray Holdsworth, CEO, AECOM Technology Corp.also understands the enormous tactical advantages of changingproduct mixYUM!s Pizza Hut Makes It a Family AffairŽPizza Hut ƒ is secretly testing a new and permanentbudget pricing strategy. It is believed to be a directresponse both to the recession and to the entry ofMcDonalds into an already crowded market. ƒ Rivalsare studying the Pizza Hut initiative carefully.Ž Fried Chicken, Taco Bell, and Long John Silver. However, YUM!sPizza Hut chain offers the best example of a company tacticallyTo compete with low-priced local foods and other cheaperalternatives during the 2001 recession, the ever-value-consciousIt particularly highlighted pizzas low cost per person.Taking a page out of the countercyclical advertising book, Pizza by almost 30 percent.El Pollo Locos Dark Meat for Dark TimesIve never been a white-meat type, not even as a kidƒ My entire nuclear and extended family lunged forparts. My dream bird is a flat-chested chicken with„Author Elaine Corn, for All Seasonsproduct mixThat is a lesson to be learned from the tactical gambit of anotherfast-food franchiser„the fast-food, flame-grilled chicken chain ElPollo Loco.then even prosper.That is exactly what El Pollo Loco pulled off as the 2001 recessionincreasesthe next chapter, this scenario represents a dangerous strategyViewing this dangerous landscape, the companys anything-but-strategy with the introduction of its first discounted-price deal inTHE WELL-TIMED STRATEGY credit with its customers for offering an abundance of food at agreat value„all the while boostingprofit margins!The housing industry ƒ is a good example of marketingmanagement action in a recession period: Faced withgrowing uncertainty and slower-growing disposablehomes, on the other, many potential buyers left themarketing mix by offering smaller, cheaper houses.Ž „Professor Avraham Shamanumber-one homebuilder in the United States. Historically, homebuilding, as an industry, has suffered from recessionarydownturns„downturns often marked by great variations inhousing market conditions across different regions. To cope with this extreme cyclicity and regional market volatility,Each division has several staff members who track local trends,and building permits. One virtue of this decentralized structure isthat all the available forecasting information is sent up to thechain for national analysis. increased the proportion of lower-. This tactical shift in the product mix to thelow end of the pricing spectrum is a function of one of the mostimportant lessons Centexs executive team has learned afterTHE WELL-TIMED STRATEGY The Nature Conservancys transformational retargeting ofinvolves the careful retargeting of ones customers and markets asas effective for nonprofit organizations as it is for profit-seeking Singapore Airlines Thinks Twice About Before you pick up the hatchet, assess your customers.Identify the long-term profitability of each marketsegment. Should a recession hit, your best customerstypically provide an even greater share of your profits,destroyers.Ž„Mercer Management Consultingshareholder being the Singapore government. This upscale carrierThe carriers careful retargeting of its market came about quitecustomer audit. This audit unexpectedly identified the companysquickly came to understand that if it slashed the wrong 10 percentfirst-class end„the team could destroy 100 percent of the firmsThe retargeting strategy that emerged from this realization wasstraightforwardtimes of the 1997-1998 Asian financial crisis. However, it shouldmore To implement this strategy„and keep peace with the beanThe Cut 2 part of the equation involved cutting many short-haulsophisticated entertainment systems, and in-flight gaming to betterThat this airline doesindeed reflect the epitome of luxury traveltargeted at the high end of the market is evident in this excerptSingapore Airlines is spending $500 million to upgradethe interiors and services of its aircraft fleet despite anexpectation that it will see profits down significantly ƒredesign will see first class seating cut from 16 seats to 12would be like a cross between the inside of a Rolls-Royceand a sleeper on the Orient Express train, done out inwood panels and leather, with seats that stretch out totwo-metre-long beds. Business class will be cut from 65seats to 58 in total and will also be remodeled. There willbe minor remodeling in economy class.As an outgrowth of its retargeting strategy, Singapore Airlinesand regularly dominates the Business Traveler Asia-Pacific TravelAwards. More broadly, because of this strategic retargeting„andTHE WELL-TIMED STRATEGY The Nature Conservancys TransformationalA major gifts staffer had been cultivating aprospective donor from a leading telecommunicationsthe fund-raiser knew that the stock was currentlytrading around its 52-week high. Utilizing the alertsystem in the new fund-raising software thatinformed the fund-raiser of a looming optionsask of the donor to this expiration. The result: thedonor gave several thousand shares of the stock to theNature Conservancy and was also able to avoid some„Cecile Richardson, The Nature ConservancyThe Nature Conservancy is a inspirational and transformationalstory about how the largest conservation group in the worldsuccessfully retooled and retargeted its fund-raising operation inmembership contributions to fund its operations„with the steadystream of gifts resulting largely from an emotional connection toIn the wake of the 2000 stock market collapse, however,urgent wake-up call, the Conservancys executive team undertooka major strategic shift„one that had all the hallmarks of a sound For starters, while many other nonprofits were laying off workers,increasedits Major Gifts staff. Moreover,cherry pickingŽ seasoned fund-raisers at bargain rates who hadbeen laid off or recruited from foundations and other non-profitsbased in and around Silicon Valley. systematic retargeting of its customersŽ (that is, its ). Tofacilitate this effort, the Conservancy added a new Principal Giftsteam to specifically retarget high-net-worthŽ donors. Although high-Perhaps most inventively, the Conservancy also instituted severalraising team. One program allowed its Principal Gifts staff to orderWall Street Journal, ForbesBarronsThis subscription effort was not just to improve their businesscycle and financial market literacy. It was also to help them thinkA second Strategic Gifts Training program featured a seminar onindicators might affect the timing and type of charitable giving forprograms turned out to be quite valuable is evident in thepreceding excerpt from Cecile Richardson that led off this example.As for the happy ending to this Master Cyclist story, the AnnualChronicle for Philanthropys Top 400 ranks the fund-raising totalsof the major charitable organizations. Between 1999 and 2002,beforethe Nature Conservancy had fully retargeted its donor base,it ranked between number 10 and number 14. However, sandwiched neatly between the powerhouse YMCA and thephilanthropic Trojans of the University of Southern California.THE WELL-TIMED STRATEGY € The Master Cyclist marketing team aggressivelyBuilding the Brand Through Countercyclical€ Increasing advertising during a recession can be a€ Despite compelling evidence that countercyclicaladvertising is a highly effective strategy, many€ Because consumers respond more to product valuethan to style in recessionary times, it is important to€ Movements in the business cycle, and the relatedtrigger the need to retarget ones customers orones market. This page intentionally left blank Pricing the CyclePricing the Cycleand Managingand ManagingCredit andCredit andAccountsAccountsReceivableReceivable7 Knowing the elasticity of demand for your products ƒis a key to determining pricing strategy.Ž „James Stotter, founder, Busimetrics almost any price increase for popular products; butwhen money is short, demand for many products. Cost-plus pricing, which ignoreseshas proven disastrousƒ.Ž„Professor Edward Cundiff, Journal of MarketingTo understand how the Master Cyclist executive prices the cycle,Ždifficult but important concepts in all of economics: for a suburban commuter, or doctors services for the seriously ill. THE WELL-TIMED STRATEGY just do without them if prices rise too high.executives who learned about price elasticities in their collegecan vary significantly across the business cycle. In particular,Why this is so should be both logical and intuitive. As the wordsof Professor Edward Cundiff in the preceding excerpt indicate,inelastic. However, during recessions, when money is shortŽ andthe job situation turns uncertain, consumers become much morevalue oriented and less willing to spend, indicating a higher, morethe most important principles in economics: face of price-elasticŽ product demand will decreaseincrease„profitsincrease in revenues from a price hike is more than offset by afall in the number of goods actually sold.PRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE THE WELL-TIMED STRATEGY Goodyears Price Gougers Snatch Defeat fromthe Jaws of VictoryWe will be aggressive in increasing prices whereDuring 2001, we increased tire prices in marketsaround the world. ƒ Our sales declined.ŽGoodyear is the largest tire maker in the United States and ranks Desperation then hitAs an offset to this misfortune, however, Goodyear received aPerhaps the team was right„at least initially. However, Goodyearevident in the first excerpt leading off this example in which thewhen market conditions warrant.Ž Unfortunately, with the onsetPRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE We have a philosophy and a strategy. When times aretough, you build share.Ž„A. J. Lafley, CEO, Procter & GambleWhile Goodyears executiveteam was getting it wrong, Procter &skirmishŽ with archrival Kimberly-Clark. This example furtherWith profits sagging from recessionary conditions, Kimberly-Clarkaimed at exposing the smaller Huggies packs and urgingdisplays in retail outlets and the awarding of some in-your-faceŽTHE WELL-TIMED STRATEGY Cycle RiskArden Realty did not lease to the highest bidder or thelargest tenant but to the tenants with provenperformance, credit quality, and long-term leasingability. In doing so, Arden lowered its risk ƒ.Ž„Christopher Hartung, analyst, Wells Fargo SecuritiesSouthern California has certainly had time to gaze from theand almost 19 million square feet of rentable office space in all.At the beginning of 2000, as the supply of office space began toway and turn the situation quickly around in a real estate sectorRather, Arden much preferred those tenants who, over the courseof any economic downturn, would be best able to maintain afive-year lease. In effect, this well-timed strategy combined a rentPRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE aggressively. By the end of 2001, Ziman proudly pronounced, WeTHE WELL-TIMED STRATEGY are problematic when a recession hits. Very often, in the headyand often overheated days of a late-term expansion, corporationsreceivables to build in anticipation of an expansion. However, Technologies and Finova illustrate the dire consequences ofLucents Ultra-Easy Credit Policies Lose Billionsmore dynamic. At a growth rate of more than 14percent a year, the market will approach $815 billionby 2003. That growth is being propelled by customerdemand for next-generation networks: convergednetworks that deliver new services in any form„voice,data, or video. This is creating a wealth of„Richard McGinn, chairman and CEO, Lucent TechnologiesThis excerpt from Lucents 1999 Annual Report perfectly capturesthe tech bubble began to burst. Within two years, this is acompany took with it one of the most powerful engines ofPRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE effect (discussed in Chapter 5, Macromanaging Your Production,financing many of its acquisitions with high-priced debt. Still, one of the most subtle but important contributing factors torecession, Lucent continued to offer huge financing packages tosales revenues. In effect, the company was saying here, takethe mounting risk of default.Lucent in an extremely cash-strapped position. This, in turn,As a final comment on this Reactive Cyclist disaster, anyonereading Lucents annual reports will find it exceedingly difficult to Absolutely not. Did Hardly. THE WELL-TIMED STRATEGY accounts receivable„and into several other lower-profile assetssuch as reserves against receivablesŽ and bad debt charges.ŽFinovas Bonfire of the Reactive Cyclist VanitiesHedging of business cycle risk was thought to havebeen accomplished by creating numerous lendingdivisions ƒ that focused on different industries; i.e.,health care, time share, hospitality, franchiserestaurants, etc. Unfortunately, in each case we werelending to the unbankable borrowers within eachindustry group, which all would have financialdifficulties during a general down business cycle.While our senior management team was well read,they did not publicly give attention to macroeconomic„Glenn Gray, COO, Finovaeventually was spun off from Dial in 1992. It wasnt until 1995,however, that Finova really kicked into high-gear growth. This isPRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE As to what exactly Finova was doing to earn its Forbes stripes, well,lender was to offer lavish credit to extremely high-risk ventures.New York Timesnew, or too indebted to go to banks.Ždesperate to obtain credit that Finova could charge them suchhowever, so very wrong with Finova was how the companyblatantly ignored the dynamicsof the interest rate cycle as itgenerated its loanable funds.that it would, in turn, lend out. At least on the surface, it did sorates, lending high, and then earning profits on the spread.ŽA big difference with Finovas strategy, however, is that it lackedTHE WELL-TIMED STRATEGY chose to obtain the bulk of its funds from short-term commercialpaper that had expirations of one year or less. In this way, Finovacould maximize the spread between the short-term funds itborrowed and the long-term funds it lent. But as long as the spread between short- and long-term rates remainedThis combination of targeting high-risk borrowers, runningunhedged, offering lavish credit, and borrowing short term tofund its long-term growth would prove to be absolutelyincendiary when the Federal Reserve began raising short-termrates and the economy began to slow. In effect, the spark for theunderstanding of how a downturn in the business cycle and anAs the economy softened, one of Finovas largest single borrowersdefaulted on a huge loan. This default forced Finova to take anastonishing $70 million charge on its earnings. that something might be desperately wrong with the Finova houseseverancepay on his way out the door.Together, these charges and Eichenfields suspiciously timed exitfirst caused the company to miss its first quarter 2000 earningsgoals and then ignited a plunge in the companys stock price. InPerhaps even worse, Finovas own credit rating was significantlyPRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE Together, this sudden turn of events could not have come at aworst time in the interest rate cycle. As the Fed inexorably turnedup the short-term interest rate screws, as the economy steadilyAs its short-term paper became due, Finova was unable to secureadditional debt financing, and this final squeeze ultimately spelledthe end of Finova as a working concern„ironically a little moreconcern through movements in the business cycle, interest ratethe companys actions, but also by the excerpt leading off thisteam actually believed it was well hedged with respect to businesscycle risk because its loan portfolio was spread across manydifferent industries. However, what the team did not understand isindustries, all would have financial difficulties during a generaldownturn.Ž In this scenario, having a true Master Cyclist on FinovasTHE WELL-TIMED STRATEGY PRICING THE CYCLE AND MANAGING CREDIT AND ACCOUNTS RECEIVABLE Pricing the Cycle and Managing Receivables€ Price elasticity measures how sensitive buyers are toin purchases. € One of the most important principles in economics€ Reactive Cyclist executives often ignore thisprinciple and try to compensate for falling revenuesThe Dollars and Sense of Procyclical Pricing€ During recessions, when money is shortŽ and the€ The Master Cyclist executive cuts prices in badrecessionary times to protect or build market shareand raises prices in good expansionary times toManaging Credit and Accounts Receivable€ The Master Cyclist tightens credit and more Authors Note on the Master CyclistBefore moving on to the next three chapters on riskmanagement,external shocks to the economy range from war and terrorismretarget old markets.THE WELL-TIMED STRATEGY AUTHORS NOTE ON THE MASTER CYCLIST RISK MANAGEMENT WHEELŽ
The Master Cyclist Risk Management Wheel This page intentionally left blank ProactiveProactiveProfiting fromProfiting fromOil Price Spikes,Oil Price Spikes,Interest RateInterest RateHikes, andHikes, andExchange RateExchange RateRisksRisks8 Union Special [was a] small,Chicago-basedmanufacturer of sewing machines. Its sales were in1980s it had no explicit foreign exchange rate riska strategy; i.e., it bet the entire company on thechanges in the floating exchange rate. ƒ The resultesult„Professor ThayerWatkinsmaterials such as steel, silver, and wheat. Multinational companiesTHE WELL-TIMED STRATEGY have a strategy! However, as Union Special painfully found out,huge losses and a loss of autonomy. To manage„and leverage„the specific risks associated withhedgingŽ tools at its disposal. These tools necessarily include thedeployment of financial derivativesŽ suchas futures and optionssuch as Good Humor-Breyers, Southwest Airlines, and RoyalCaribbean Cruises. However, the Master Cyclist team is also highlybalance out risks„as demonstrated by the virtuoso performance Gamblebut merely use them for hedging. You will likewise see withWashington Mutual how a seemingly savvy management teamthe company far beyond its hedging limits.PROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS Good Humor-Breyers uses sophisticated industry-specificingredients such as butterfat and vanilla for its heart-exploit the companys sophisticated forecasting For the past hundred years, candy companies havefaced the problem of selling a product in intenselyThe companies have responded by setting up highlyrelatively stable product prices and preparedness inthe war for market shareƒŽMetals WeekThe New England Confectionary Company usesabout 100 tons ofto make its NECCOwafersŽ and otherfor its car, truck, and SUV production, and the U.S. airline industryannually burns through about 20 gallons of jet fuel. Given these magnitudes, it is no wonder that one of the biggestmaterials. One common method to hedge such commodity priceand options. These risk-hedging tools enable companies to lockOf course, if the market price turns out to be lower than thehedged price, a company loses on the hedge. However, a smallhedging loss is often far preferable to a much larger loss that canIn the examples of both Good Humor-Breyers and Southweststrategies and tactics. But there is an important differenceWhereas Good Humor-Breyers opts for a complete illustratesa more nimble THE WELL-TIMED STRATEGY opportunism is the true mark of a Master Cyclist.Attack About ButterfatButterfat, the essence of junk food, isin short supplybecause manufacturers have been using more of itover the past couple of years, responding to thepublics demand for richer foods and the rejection oflow-calorie products, which are often low on taste.ŽHumor-Breyers is the largest ice cream manufacturer andbutterfat to be heart disease, Good Humor-Breyers sees the realrisk to its bottom line.Thats why Good Humor-Breyers annual shopping hunt for itsall-important cheap butterfat is conducted with all the precisionAs for what moves the price of butterfat, certainly movement is related to the general business cycle. However, thiscase, the dairy sector.To manage this type of supply chain risk, Good Humor-Breyersfirst prepares a conservative annual plan based on prior-yearprices for butterfat as well as a thorough macroŽ analysis of thecheese production, butterfat production and costs, and cowproduction in terms of both headcount and yield per cow. PROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS futures contracts early in the year. And note that its not justbutterfat risk that this company seeks to hedge. With more thanice cream.No savings is too small these days in the global airlineindustry, where an unforeseen spike in crude oilforced carriers to turn to innovative„and sometimesdesperate„measures to cut consumption, drop by drop.ŽAviation Week & Space Technologytravel system that keeps its back-officeŽ costs low, a series ofcharismatic CEOs, and a unique organizational culture renown forThat said, Southwest Airlines also offers an example of a hard-own internal model is highly sophisticated and incorporates notuseful in Southwests fuel cost hedging tactics. dollar for most airlines„second only to the cost of labor.THE WELL-TIMED STRATEGY some fuel cost hedging, most typically only hedge less than and often well less than half„of their fuel needs.However, the Master Cyclist Southwest frequently,a close to 100 percent fuel hedge for the third and fourth quartersbased on an internal forecast of a significant shortage of crude oil.costs and saw its earnings increase for the year by more than 30past the $50 per-barrel mark, Southwest had a full 80 percent ofits fuel costs hedged at a price of $24 per barrel. ThiscontrastedRoyal Caribbeans Captains Remain CalmDuring Wars ChaosRoyal Caribbean Cruise Lines spends a lot of moneyat the fuel dock; but even though petroleum priceshave soared to their highest levels in five years, all isswaps; months before Iraq overran Kuwait, Royalincreases for much of its fuel needs this year „Wall Street JournalRoyal Caribbean Cruises (RCC) is the second largest cruise shipPROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS Wall Street Journalin the industry. With kudos thus delivered on the oil price shock front, RoyalCaribbean is, however, much more a story about how thiscurrency riskduring an equallymassive expansion that vaulted the cruiseline to its covetedposition in the industry today„a story to which we now turn.THE WELL-TIMED STRATEGY The captains of industry at Royal Caribbean find calmProcter & Gambles dumb and dumberŽ gamble againstthe (Bankers Trust) houseŽ offers a painful lesson in why Sir Freddie Laker ƒ pioneered low-cost trans-Atlanticpound was strong and the dollar weak. Business wasgood, and he contracted to buy American aircraft ata price set in dollars. When the dollar strengthened,not only was his pound revenue worth less in terms ofdollars, so more pounds had to be devoted to payingfor the new planes, but the weaker pound resulted infor the planes. The result was bankruptcy.Ž„Professor Thayer Watkinsof which, as Sir Freddy Lakerpainfully found out, are translationriskŽ and transactions risk.ŽTo understand in the United States but sells many of its products in Europe. Ifstronger dollar. This is the translation effectŽ„the effect ofconverting a currency such as the euro earned abroad into dollars., many multinational companies„from McDonalds and Merck to BMW and Toyota„use currencyUnited Kingdom like Laker Airlines was. However, to do yourbusiness, you must buy significant amounts of capital equipmentBoeing Corporation. If you contractually commit to paying for thethat delivery will not occuryou will get stuck with a much bigger bill than you anticipated.PROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS You might even wind up in bankruptcy as a result„just as Freddy Royal Caribbean shows usBuoyed by the success of the revolutionary cruise shipVoyager of the Seas[Finish shipbuilder] Kvaerner Masa-Yards havereached a preliminary agreement to build the fourthInternational. The companies have signed a letter ofnational. The companies have signed a letter of„PR NewswireRoyal Caribbean did not get to bethe second biggest cruise shipline overnight. Rather, the companys rise to prominence began inthe early 1990s when it kicked off its massive expansion. by buying its new ships from Europe. Each ship took about twoyears to build at a cost of about half a billion dollars; and to getthese ships built, Royal Caribbean had to sign multiple-ship andTo hedge its huge exchange rate risk exposure, the companysspecific risk out of play, Royal Caribbean can focus entirely on itscore competencyentertaining them well!THE WELL-TIMED STRATEGY conservative risk hedging differs significantly from the speculativeuse of derivatives by companiesthat often have no business evendipping their toe in those waters„as our next example involving Gamble demonstrates.(Bankers Trust) House[D]erivatives are financial weapons of massare potentially lethal.Ž „Warren Buffettexample, the inestimable Mr. Buffett„can simply bewrong.either war or bad weather.Where Buffett is right, however, is when financial derivatives aremisused in highly speculative ventures by government entitieslike Orange County, California, rogue bond traders like Nickoption pricing theory running a hedge fund like Long-Termalmost brought the international monetary system crashingmentioning. At the time, however, this loss was a corporatePROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS effectively betting against the house.Žwas that interest rates would remain stable. However, if interestwith Bankers Trust by an astonishing 20 to 1.wound up settling with Bankers Trust for a net $78 million gain.The lesson here, however, is not that thelegal system alwaysrewards stupidity. Rather, it is that unless you are in thePeddling Your Wares Through theTHE WELL-TIMED STRATEGY Countrywide Financial goesto the school of hard knocksmortgage lending and servicing markets.Washington Mutual illustrates how the best-laid hedging The Federal Reserve bumped up interest ratesyesterday by a bold half point, pushing a key rate tosignaled they were prepared to move even moreaggressively if needed to fight inflation ƒThe Feds action at mid-afternoon was immediatelymatched by announcements from commercial banksthat they were increasing their prime lending rate„„Associated Pressinterest rate cycleOver time, interest rates will move up when lifted by concernsover inflationary pressures and the raising of short-term interestrates by the Federal Reserve. At some point, however, if the Fedraises interest rates too swiftly, it will choke off the economy andthe game: Countrywide Financial and Washington Mutual. With Countrywide, we will see a company that has constructed arate cycle. By way of cautionary contrast, Washington Mutualoffers a great example of how an executive team might talk avery good hedging game. However, we will also see how its PROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS Countrywide Deploys a School of Hard KnocksLoan origination (or production) performs well wheninterest rates are low and falling as borrowers seek torefinance existing mortgages, so volume and marginsare higher. Conversely, loan servicing performs wellwhen interest rates are high and rising because lowerrefinance volume means income from the servicingbusiness is larger and more stable. When properlymanaged and balanced, however, they form a naturalproduce a stable and growing income stream.ŽCountrywide Financial is the largest independent residentialmortgage lending company in the United States At this point in itshistory, it is also highly successful„but this was not always so. Infact, Countrywide had to learn how to hedge its interest rate riskat the worst possible time and in the hardest of ways.To understand why, we need to go back to 1969„the yearCountrywide was founded. This was the year Neil Armstrong tookpercent barrier like Apollo 11 on its way to the moon.increasesTHE WELL-TIMED STRATEGY increaseCountrywide also traffics in noncyclical insurance products. Thatthis strategy has been highly effective is evident in what hasbecome an almost routine type of announcementfromCountrywides Master Cyclist CEO, Angelo Mozilo:Countrywide has delivered exceptional third quarterresults, establishing a new milestone in the companysearnings history. ƒ Our versatile macro-hedge strategyempowered the company to maximize opportunitiespresented by the refinance boom. The company set a newquarterly record for net earnings of $161 million.WaMus Gang That Couldnt Hedge StraightBy skillful hedging, lenders like Countrywide, WellsFargo, and Fannie Mae are able to smooth earningsthrough interest-rate cycles, producing strong profitsbe entering. But WaMus hedging, at least so far,„Shawn Tully, Washington Mutual is particularly interesting because it illustratesWhen CEO Kerry Killingerfirst joined WaMuŽ in 1982, it was avagaries of the regional economy and the large interest rate riskstypically borne by thrift institutions. Today, the company hasevolved into the largest thrift institution in the United StatesPROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS From almost the very beginning, Killinger and his executive teamwere determined to cure Washington Mutual once and for all ofTo understand the problem„and Killingers proposed cure„it isturn a profit and why they are heavily exposed to so-calledspread risk.Ž Such thrifts borrow money at short-term interestrates, repackage the funds at higher long-term rates as homemortgages, and earn their profits on the spreadŽ between short-and long-term rates. However, spread risk manifests itself everytime the Federal Reserve starts raising short-term interest rates toIn the worst-case scenario„one that can make a thrift institutionthat short-term interest rates rise long-term rates. In suchTo combat such spread risk„andvarious other risks associatedWaMu to be successful in all parts of the cycle.Ž At least part of this balanced business model looks a lot like theconstructed. Like Countrywide, WaMu has sought to be a marketIn addition, WaMu has adopted an interesting risk-managementTHE WELL-TIMED STRATEGY more vulnerable to spread risk, WaMu immediately resells themservicing rights to them. In contrast, WaMu holds on to itsadjustable-rate mortgage originations to earn interest income onIn principle, then, WaMu seems to have covered its bases. Inpractice, however, these best-laid hedging plans have, at times,rates began to rise in 2004, WaMu managed to lose billions on itshedges! That WaMus natural business hedge failed to deliver forWaMu is evident in this stinging rebuke from As expected, rising [interest] rates had indeed caused a big increase in the value of the servicing business:$1.7bn. That should have been enough to cover WaMusas well as the banks income from originations, leavingWaMu with a $63m loss from mortgage banking.As to what exactly went wrong at WaMu, the company failed todiversification, this was to transform itself from a mortgage-Instead, WaMus acquisition-happy CEO continued his freneticbuying binge of mortgage lenders well into the late stages of therate cycle turned inexorably back up„as it always does„WaMuWaMu was touted as a world beaterƒdidnt have the organizational or intellectual capacity to run aPROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS THE WELL-TIMED STRATEGY € Companies face specific macroeconomic risks € The failure to hedge these specific macroeconomicde facto€ Financial derivatives such as futures and options asStrategic Versus Tactical Hedging€ Master Cyclist executive teams employequally sophisticated analyses of industry conditions€ Strategic hedging completely hedges a particularcore competency.€ Tactical hedging„the true mark of the Master€ Translation risk describes the effect of converting acurrency such as the euro earned abroad into dollars. € Transaction risk arises when a company commits topurchasing foreign goods with the domestic PROACTIVE PROFITING FROM OIL PRICE SPIKES, INTEREST RATE HIKES, AND EXCHANGE RATE RISKS Peddling Risk Free Through the Interest Rate Cycle€ Spread risk manifests itself when short-term rates This page intentionally left blank When YWhen You Canou CanttBeat theBeat theBusiness Cycle,Business Cycle,Hedge Its Risks!Hedge Its Risks!99 Breaking away from being captive of domesticfor the last six years. Weve done that by geographicand market diversity, rather than product diversity.Weve gone to more countries. Weve gone to morecustomers in different industries.Ž„Kenneth Butterworth, Chairman and CEO, Loctitecut back on production, trim inventories, and ratchet down capitalto get top talent at bargain wages.THE WELL-TIMED STRATEGY bankrupt you. at least some of that business cycle risk. The tools most useful into the outsourcingoffshoringdifferent elements of the manufacturing and supply chain.WHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! by diversifying into services, Web hosting, and strategicoutsourcing. Always dominant in the air-delivery skies, FedEx and itsThe challenge is not to avoid business cycles but toThe challenge is not to avoid business cycles but toperform, on average, well. In my opinion, [it] is next tocyclicity. Steady income from the gas business,pharmaceuticals, and vitamins should help BASF.Ž„Jurgen Strube, CEO, BASF A lot of good synergistic and strategic reasons that might lead ato do with managing businessautomaker that also begins to produce light trucks might be ableto build larger manufacturing facilities and thereby realize Ž andlower unit costs. At the same time, ifsynergiescan help their company outperform a rival that focuses morevarious forms of business unit diversification. You saw, forexample, with Countrywide Financial in the preceding chapter,more stable revenues over the course of thebusiness cycle andWith the contrasting examples of Hewlett-Packard and IBM thatnow follow, you will see how two technology giants both soughtdiversification efforts.THE WELL-TIMED STRATEGY HPs Diversification Road Not Taken andFiorinas FollyWhile most analysts see the Compaq acquisition as thedefining moment of [CEO Carly] Fiorinas HP tenure,important. That was HPs failed attempt to acquirePricewaterhouseCoopers in 2000, which would havecreated a larger army of consultants with which toand IBM acquired PWC two years later. In the end„B to B MagazineHewlett-Packard is the second largest computer maker in theworld and a premier player in the much higher-margin world ofin the road at the turn of the century and wound up taking a verywrong turn.billion of almost getting it right. The $18 billion was the offer shemade in November 2000 for the 30,000-strong army of consultantsthat comprised the consulting wing of PricewaterhouseCoopersdot.com boom. But at least Fiorinas vision was right. She seemeddownturns. The second, more subtle, problem is that both personalmore like commodities sold at low margins„hardly a business youWHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! services area, and the PricewaterhouseCoopers acquisitionwouldstable. It is also because as the economy turns down, the demandmanagement and outsourcing go up. margin server market.Note, however, that Fiorinas vision of a natural-hedged HP camecrashing down just one month after her bold bid for PWC. Thiswas when a perfectly abysmal quarterly earnings report shaved15 percent off HPs stock price in a single day and made thehappen the following year would be as inexplicable as it was illWith its leaner, more efficient business model, Dells aggressivepricing not only hammered HPs margins. Dell also redoubled itsefforts to break HPs strong hold on the printer market. The resultwas, of course, Fiorinasundiversified folly.THE WELL-TIMED STRATEGY IBM Does a Robert FrostŽ on HPs Road Not TakenTwo roads diverged in a wood, and I„And that has made all the difference.Ž„Robert Frost Whether or not there is a softening of the economy [in2001], IBM should be in reasonably good competitiveshape. Of course, we all hope such a downturndoesnt occur. But if it does, the ebbing tide may notbeach all boats. For one thing, service offerings likeoutsourcing and hosting are cost saving propositionsfor our customers. Services, in this regard, is acounter-cyclical business.Žsuccessful transformation from a big mainframe-dependentThis transformation began in 1996 with the formation of IBMGlobal Services. By the 2001 recession, that transformation wasOne year later, IBM acquired PWC„the acquisitions equivalent ofthe Great Train Robbery.Ž It wasnt just that this acquisitionadded 30,000 additional highly trained individuals to its existingarmy of 150,000 consultants and brought IBM shoulder tooffered just two years earlier.WHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! Enron scandal, accounting firms like PricewaterhouseCoopersso the company was an all-too-eager seller. That IBM was able touse the currency of its own stock for most of the bargain-As a final coda to this example, it is perhaps also worthmarket with her Compaq gambit„IBM also sold off its entire PCthe cyclicity and commodization of that business forever.FedEx Takes to the Ground to Strategically DiversifyThanks to diversification and coordination among itsbusiness units, FedEx has been able to shift resourcesduring the recent economic downturn. ƒ In manycases, FedEx has been able to divert overnightbusiness to its cheaper ground shipment business.Before it had that option, FedEx would lose thosecustomers to rival United Parcel Service, Inc.ŽWell-Timed Tactics of the Human Resources Manager,Ž the pointwas made that a no-layoffsŽ policy is likely to be doomed tosophisticated understanding of business cycle risk.THE WELL-TIMED STRATEGY extremely high as the company depended entirely on airborneexpress delivery. However, over time, FedExs executive teamlearned a very important lesson: There is a critical complementaryrelationship between the air-delivery and ground-delivery marketsIn particular, during good times, the air-delivery markets tends tooutperform; when the economy softens, companies move moretoward ground delivery to save money. In practical terms, thisground-transportation dominant player United Parcel Service. however, kick into high gear in 1997. Thats when the companyshelled out $2.7 billion to acquire Caliber Technologies„one ofthat can easily help its customers move away from higher-pricedservices such as overnight delivery into less-expensive alternativesMore broadly, FedEx also has reorganized its operations in a wayreorganization involved the establishment of units that can handleovernight air shipments, ground delivery, regional freight,night air shipments, ground delivery, regional freight,economic malaise.Ž1WHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! THE WELL-TIMED STRATEGY Using a mastery of the intricacies of exchange ratescement magnate CEMEXtactically advances itsGeographic diversification enables us to operate inmultiple regions with different business cycles. For thelong term, we are trying to ensure that no one marketaccounts for more than a third of our business.Ž„Lorenzo Zambrano, Chairman of the Board and CEO, CEMEXwith the hedging of business cycle risk. By diversifying into newthat one of the primary benefits of geographical diversification isgeographical diversification can be so effective is that, as a matterof statistical truth, the business cycles and political conditions ofvarious countries are not perfectly correlatedŽ statistically. In layterms, this means that while Europe or Japan might becountries such as China and India and Vietnam and Brazil tend tountapped markets but also as excellent risk-hedging destinations. economy, there are significant transmission effectsŽ acrossto geographically diversify for risk-hedging purposes.This is a lesson we can learnwell from the globally diversifiedexecuted tactical gambit involving the opportunistic leveraging ofCEMEXGrabs the Asian Tiger by the ExchangeRate TailOur best opportunities have come at the worst timesƒ.We need to be in many markets to survive.„Lorenzo Zambrano, Chairman of the Board and CEO, CEMEXcompany that traces its originsall the way back to 1906. However,it wasnt until 1992, with the acquisition of the two main cementcompanies in Spain, that CEMEXbecame a truly multinationalpropelled it to its position of third-largest cement producer in theworld„behind only Holcim of Switzerland and Lafarge of France.been well timed to the global business cycle by its visionary CEO,WHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! Prior to these events, CEMEXhad long had its eye on a keystrategic acquisition in the Philippines.stock market down with it„Zambranos CEMEXscooped up 30Zambrano then followed that acquisition up with the purchase ofCEMEXdid not stop in the Philippines, however. It also grabbed25 percent of Indonesias largest cement producer, PT Sementhe company„to a point arguably well below its value. AlthoughCEMEXfought back quickly from the peso crisis and thecompanys undervalued position, Zambrano no doubt understoodOutsourcing and Offshoring RiskTHE WELL-TIMED STRATEGY A cross-town battle between Broadcoms chess players andConexants confederacy of dunces illustrates the virtues ofoutsourcing high-risk manufacturing while embracingAffiliated Computer Services rides the outsourcingown broadly diversified manner. Outsourcing ƒ can be cheaper andoffer theorganization more specialized knowledge, but can„Carl Weinschenk, TechRepublic.comemployees. Such outsourcing can be done domestically within acompanys own country or, alternatively, the outsourcing canmove offshoreŽ to other countries. Although outsourcing and offshoring might help to reduce theparticular true if the procedure or subassembly has been offshoredwhen there is a cultural mismatch with the offshoring partner.Moreover, even though a company might save on labor costseconomy if the company has not locked in prices in longer-termThat said, many companies nonethelessfind outsourcing andoffshoring to be valuable strategies in the reduction of businessWHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! Broadcoms Two-Pronged Diversification andOutsourcing StrategyWe are at once a company focused entirely onbroadband solutions, and yet a company that providesa diverse portfolio of products targeted to a number ofdifferent broadband communications markets. Thatdiversity provided us a level of stability not enjoyed byexpenditures low. The model was especially beneficial„Henry Nicholas and Henry Samueli, co-chairmen,BroadcomChapter 5, Macromanaging Your Production, Inventory, andto all its critical parts. Toward this end, the company makes highlysophisticated chips called integrated circuitsŽ that can be used inapplications, servers, and other networking gear.Žpronged strategy that quickly differentiated it from its neighborconscious effort to diversify its product line across all elements ofthrough a very ambitious acquisition program. However, unlikeTHE WELL-TIMED STRATEGY Broadcom chose to focus solely on the higher-value-added end of the business and offshored its production to chipThe excerpt leading off this example from Broadcomseffectiveness of this two-pronged narrow-diversification andoutsourcing strategy. During the technology crash of 2001, it wasstockprice while the incredibly shrinking ConexantŽ has fallenConexants Confederacy of Not So ulous DuncesConexant is a fabless semiconductor company withapproximately 1,400 employees worldwide.Ž „Conexant 2003 Annual ReportJust three years before, Conexants executive teamhad boasted infab-driven company into a fablessŽ former shell of itself withIn fact, the companys downfall began with the initial decision ofswinging industry cycles, invariably it is the large fabricationWHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! plunging prices. Moreover, chip fabrication is a processcharacterized by large economies of scale and rapid technologicalchange, so that the only way to be competitive in the market is toalways be the biggest and most modern fab on the block. So it was that within a year of its 1999 spinoff from Rockwell, thewith the really big boys„huge Taiwanese fabs such as Taiwaninsufficient to stay on the leading edge of chip production. model. However, in executing this new strategy, Conexantstumbled further. involving silicon germanium, or so-called SiGe, chips. Its fear wasthat if it sold off its fab, it might not be able to retain and furtherAs a result of temporizing over thisdilemma, Conexant lost anyopportunity to sell off its fab at a decent price near the top of thesemiconductor market. Instead, it wound up almost giving awaythe dollar.ACS Surfs the Outsourcing and Offshoring TsunamiRecord revenue, record profits, record net income,record earnings per share, record new businesssignings, and record cash flow all combined for aremarkable year for ACS.Ž THE WELL-TIMED STRATEGY Affiliated Computer Services is interesting because it illustrates theother end of both the outsourcing and offshoring markets. Givenits strategic positioning as an outsourcing provider, ACS has beenable to skillfully ride the tsunami of a powerful global trend. dreamed about: generate large profits, earnings, and cash flowwhile the economy was still suffering.management strategy, it is now well understood that outsourcingmicroFor example, by allowing more efficient companies such as ACSofficeŽ paperwork, outsourcing can reduce costs along the supplycourse of a decade to become one of the largest providers ofrevenue per year. Still and all, what is perhaps most interesting„WHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! IBM, ACS has built a very balanced portfolio of outsourcing andoffshoring services that are diversified both at the business unittechnology outsourcingŽ„the company offers Web program-largest part of its business: business process outsourcing. office functions of myriad companies„from billing, call centers,By cutting across such a wide swathstate, and federal government. Yes, it has done so to takegovernmentŽ„conservative code for privatizing many of thefunctions of government. However, this diversification strategybecause government business is far less prone to the vagaries ofToday, as a result of this diversification, ACS handles nearly halfas Texas and New York and smaller states such as Oregon andWyoming.THE WELL-TIMED STRATEGY WHEN YOU CANT BEAT THE BUSINESS CYCLE, HEDGE ITS RISKS! Business Cycle Hedging Strategies€ Because economic forecasting is not 100 percent€ Effective hedging strategies include business unitoutsourcing and offshoring.€ Companies engage in business unit diversification€ However, business unit diversification can also be€ Two business units are naturally hedged if their€ By geographically diversifying into new countries€ Nonetheless, the greatest benefit of geographical THE WELL-TIMED STRATEGY € The effectiveness of geographical diversification as aperfectly correlated. € Because the business cycles of Outsourcing and Offshoring Your Risk€ Outsourcing refers to work done for a company bycompanys full-time employees. € Offshoring refers to work outsourced to € By selectively outsourcing and offshoring non- SurSurviving„andProsperingProsperingfrom„thefrom„theEconomicEconomicShocks of WShocks of Warar,TTerrorism,Drought, andDrought, andDiseaseDisease100 When written in Chinese, the word of two characters. One represents danger. The otherrepresents opportunity.Ž„John F.KennedyA new kind of dangerous mountain warfare in Afghanistan andan ugly form of close urban combat in Iraq create lucrativeCeradyne to hawk its ceramic body armor. Terrorism sparks a boom in products as diverse as bomb-across Asia sets off a vaccine-development sweepstakes to thebenefit of large companies such as MedIummune and smallTHE WELL-TIMED STRATEGY by verydefinition, random. However, their after-effects are executive teams are, however, immediately able to parse both thetactical implications of a random shock as well as their possiblelonger-term strategic opportunities. These are just some of War and TerrorismSURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE Casino kingpin Caesars immediately retargets its markethapless United adopt a de facto tough-luckŽ policy.Exogenous shock, the term that economists use forevents from outside the economy but that affecteconomic activity, has a grim redundancy whenapplied to the Sept. 11, 2001, attacks on the N.Y.World Trade Center and Pentagon. The term literallymeans a blow from outside the system„like a fuel-laden jetliner crashing into a skyscraper.Ž„Edward Lotterman, Bismarck Tribune However, many of the economic adjustments that followed turnedand Southwest Airlines offer two important lessons in marketingCaesars Grounds Its Marketing Campaign Gambling is in some ways a recession-proofafford it„but even high rollers cant quite ignore thefear of terrorism, which made people less inclined totravel to Vegas and other gambling hot spots after theCaesars Entertainment was one of the worlds largest gamingWithin a week of the attacks, the company also laid off 5 percentof its workforce and cut hours for many more. To squeeze itssupply chain and creditors, the company then used its large sizeBy far, the most interesting and subtle response to 9/THE WELL-TIMED STRATEGY nation and the globe„Caesars quickly refocused on the largeSouthern California and other nearby regional markets that werewithin easy driving distance. only able to cut its losses in the short run. By the fourth quarterof 2001, Caesarsactually increased its revenues over the fourthWake of 9/11I encourage people to fly again but at the same time, at Southwest, we are known for our customerSouthwest Airlines In an earlier chapter, we saw Southwestfly circles around its11 likewise earnsthe company kudos in the marketing department.Southwest announced that any passenger with a confirmedregardlessemployee layoffs. In addition, on both September 21 and 24, thecompany significantly cut its fares. It furthermore waived any andschedules even as they instituted massive layoffs.SURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE powerful one„an increase in market share with a more loyalcustomer base. Perhaps not coincidentally, Southwests stockturned a profit in 2001.THE WELL-TIMED STRATEGY Progressives chess playersŽ perfectly execute an[A] recent survey commissioned by ProgressiveInsurance found that 50 percent of 1,000 peoplehabits as a result of increased costs at the pump.ŽCincinnati Enquirerforesight in hedging oil price risks. In this next example, however,Progressive Insurance Plays the Oil Price CardDont play checkers in a chess world.Ž„Ron VaraYou first encountered Progressive Insurance in the chapter oneconomic downturn. their discretionary incomes suffer from the oil tax.Ž lower per-claim costs at auto body shops. These factors, in turn,beforeprices crept up, however, Progressive moved to lower rates andAs Progressives new ratestook effect, its new revenues surged tomore than 24 percent while its profit margins surged above 7percent„more than twice the 3 percent average margin observedin the industry.SURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE THE WELL-TIMED STRATEGY El Pollo Loco correctly foreseesthat drought in Australia[W]hen it starts raining in Brazil to end a drought, itof coffee is sure to fall even as Starbuck profit marginsIn one of the most abiding images of chaos theory,Ž a butterflyaround the world. Other such forms of Mother Nature-inspiredslam coffee and cocoa prices; tsunamis off the coasts of Indonesiaand Thailand that can, in turn, lead to epidemics of cholera andearthquake in Taiwan that drives up semiconductor prices whileexample of how a company successfully coped with just two of The Logical Crazy Chicken Wrestles with While the federal government moves to increaseassistance to drought-stricken farmers, questions arebeing asked about the future of Australias corebreeding stock. Farmers just cannot afford to feedtheir animals, and they are being sold andslaughtered. That will have a far-reaching effect on„Australian Broadcasting Companymajor item on its production menu: chicken. and then hedge accordingly. Sometimes, however, it is simplydepartment team parse the possibly far-ranging effects of severalexports. Soon thereafter, the U.S. secretary of agriculture restrictedCanadian beef imports because of Mad Cow disease concerns. OnSo whats this got to do with chicken prices? Well, as thebeef prices rose, there would be a substitution effectŽ in whichSURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE for chicken before the price run-up and was not affected by theTHE WELL-TIMED STRATEGY Baby Boomers want second homes, their children arebuying their first homes, and new immigrants areseeking to put down roots.Žbedfellows. Together, these demographic groups represent two ofparticularly in the ever-inviting Sunbelt states such as Californiaand Arizona. It is precisely these kinds of powerful demographicseek to first identify and then go after, and KB Home proves tobe no exception to this rule.In Rancho Cucamonga, KB Home is developingoffering third-car garages, voluminous formalentryways, gourmet kitchens and fine finishes thatare selling in the $600,000s. A few miles away KBThe Press Enterprise, Riverside, California We previously introduced the Master Cyclists of KB Home withinrefocused its marketing position to target first-time home buyers.represented by the burgeoning immigrant population. KB Homesaw these immigrants as a firm foundation for maintaininghousing demand in the event of an economic downturn. level sixplexesŽ for its first-time buyers. It also is offering luxuryhomes at three times the price with those voluminous formalentrywaysŽ and gourmet kitchensŽ referred to in the precedingofferings to simultaneously capitilize on two importantRegulatory and Legislative ShocksSURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE Guidants political animalsŽ successfully lobby theFair Isaac strategically leveragesthe Patriot Act by The makers of medical devices are pouring millions ofdollars into a congressional lobbying campaigndesigned to get their products to market faster and. However, in at least some instancesstreamlining the regulatory process. In a slightly different vein,Guidant Creates Its Own Regulatory ShockŽShaping a public policy environment that supports„Ron Dollens, CEO, GuidantUnder pressure from Congress and the Bushfriendly measures that critics say further compromise safety.Ž„U.S. News & World ReportWith sales of almost $4 billion to roughly 100 countries, GuidantModernization Act. The purpose of this legislation was to speedTHE WELL-TIMED STRATEGY Its important to note, however, that Guidants political processFair Isaac Expands in a Post 9/11 WorldIn todays world, all government agencies have aheightened responsibility to safeguard our nationsinfrastructure and people. At the same time, citizenrights must be protected to ensure that civil libertiesare not violated. Fair Isaacs applications can helpyour government organization find the right balancein security management and privacy protection.Ž„Fair Isaac Web siteIn an earlier chapter, you saw how the credit-scoring maven FairSURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE as to reveal any money-laundering efforts on behalf of terroristnetworks. Under its far-reaching dictates, entities ranging frompawnshops, and travel agents must collect information ondetermineTreasurys Financial Crimes Enforcement Network. Last, buthardly least, the Treasurys Office of Foreign Assets Controlseeking to cost-effectively deal with a potentially onerousmanager for governmentŽ software with a heavy antiterroristmessage. As the companys Web site touts, this system hasAs a final Master Cyclist benefit, by targeting the government sectorcontributes to a more stable earnings flow. In large part because ofTHE WELL-TIMED STRATEGY SURVIVING„AND PROSPERING FROM„THE ECONOMIC SHOCKS OF WAR, TERRORISM, DROUGHT, AND DISEASE € Macroeconomic shocks range from war, terrorism,€ Although macroeconomic shocks are, by definition,€ Master Cyclist executive teams can quickly hedgeWar, Terrorism, and When Mother Nature Rages€ War and terrorism give rise to the need for newceramic armor.€ A drought in Australia can reduce beef exports andparsing Mother Natures economic implications.Riding Demographic Waves and Exploiting Regulatory Shocks€ Demographic shifts represent some of the mostpowerful forces that shape the business€ Most exogenous shocks are negative. However, insome cases, a company or industry can use itsregulatory shockŽ that opens new markets, stream-lines the regulatory process, or results in lower costs. This page intentionally left blank The MasterThe MasterCyclistCyclists Favorites FavoriteForecastingForecastingTools111 Forecasting is always difficult, especially when it isabout the future.ŽTheres no Holy Grail of economic forecasting; no„Lakshman Achuthan, Managing Director, Economic Cycle Research Institute first and foremost, learning how to forecast the business cycle inan accurate and timely manner. In this all-important task, theuseful ECRI dashboardŽ of growth and inflation indicators.forecastingmacroeconomic calendarTHE WELL-TIMED STRATEGY issued by government agencies and private institutionsaroundthe world on topics ranging from consumption, production, andfollowing this macroeconomic calendar, the Master CyclistTHE MASTER CYCLISTS FAVORITE FORECASTING TOOLS The (almost) infallible yield curve standstall atop thecurves Butch Cassidy and emerges as a valuable co-leading indicator.Although both prove useful, the ECRIs economicmean recessionary troubles are on the way. changes before the economy has changed. ƒ Thereare also coincident indicators, which change aboutbut these are of minimal use as predictive tools.ŽindicatorŽ is a perfect predictor of business cycle turning points. if not infallible. The Yield Curve Aint No Ouija BoardThe yield curve inverted a full 12 months before the2001 recession and more than half of corporateAmerica blew off this highly reliable recessionary„Ron Varaterm interest rates on Treasury securities. It has proven to be aturning points and ranks at the top of the Master Cyclists pyramid(almost) infallible leading indicator at different points in time.THE WELL-TIMED STRATEGY FIGURE 11-1The four faces of the yield curve. A normalŽ yield curve such as the one observed in Novembertypically 100 to 200 basis points because long-term bond investorsmust receive a slightly higher return to compensate for time risk.curve must go through a flat phase. However, not every flat curvewithin an eight-quarter horizon, it also had two false signals. in October 1992 to signal the beginning of what would becomelast six expansionary turning points.ignore its strong recessionary warning signals leading up to the2001 downturn. To see why the claims of CEOs such as JohnChambers that the brightest people in the world didnt see [thenormalŽ shape in June 1999 to the flat curve of November 1999THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS one year before the 2001 recession would officially begin. It is alsolong, extended collapse. such a powerful forecasting signal„digression here to discuss the underlying logic of the yield curvesThe Abiding Logic of the Yield CurveThe Federal Reserves decision this week to raiseinterest rates in order to ward off inflation was, asexpected, criticized from all corners. Manufacturerswarned that higher interest rates would drive up costsand drive away consumers. Labor unions predictedlayoffs. Politicians feared disgruntled voters.Žed disgruntled voters.Ž„New York Timesinterest rates aredetermined by two completely different entities.Note, however, that this subtle distinction is not evident in theTHE WELL-TIMED STRATEGY The yield curve signals the 2001 recession. New York Timesjournalism, even from excellent newspapers like the directlydetermined by theU.S. Federal Reserve. When the Fed is concerned about risinginflationary pressures, it begins raising two short-term rates„thefederal funds rate,Ž which is the rate on overnight loans betweenbanks, and the discount rate,Ž which is the rate the Fed chargesbanks to borrow short-term funds.Note, however, that it would be very wrong to assume that justbecause the Fed raises short-run rates that long-term interest rates. In fact, whether long-term interest ratesindirectlyhow long-term bond investors react to the Feds contractionarypolicies. To understand why, consider this typical yield curveOf course, the Feds goal is to bring the economy in for a softAt this point, these bond investors become far less concernedabout inflation and far more concerned that the Feds highlyAt this critical turning point, long-bond investors begin to expectlong-term bonds. This they do to lock inŽ the current, moreattractive long-term rate.THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS turn, drives bond prices up, and yields on the long end of theThe yield curve is such a powerfulforecasting tool precisely because it embodies the collective wisdomon the direction of the business cycleinterested in effectively managing the business cycle should keepof Web sites such as www.bloomber g.com or www.smartmoney. com The Stock Markets Early Bear Crystal BallThe stock market has predicted nine out of the lastfive recessionsŽ„Nobel LaureatePaul Samuelson[S]tock prices provide information that is notthese two indicators performed better than the yield„Professors Arturo Estrellaand Frederic Mishkinon the future direction of the economy. In this case, however, itTHE WELL-TIMED STRATEGY So how exactly does this work? Well, the predictive power of theinvestor expectations about a future stream of earnings. Becausea recession means lower earnings for most companies, stockwealth effect.Ž When the stock market goes up, investors arestimulative and expansionary effect on the business cycle. March 2000„the wealth effect goes into reverse. Consumers pullin their shopping horns, and the business cycle becomes morevulnerable to a downturn.is important to point out, however, that this famous quip came offthe Nobel Laureates cuff way back in 1965. That was then. Thisfollowing stock prices alone can be deceiving at times. However,when the information contained in stock prices is added to theinformation embedded in the yield curve, the predictive power ofand the even more powerful ECRI dashboard.THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS Warts and AllSeveral different rules of thumb have been applied tothe [Index of Leading Indicators] to determine whetherit is signaling a recession. ƒ [T]he most common ruleis that three successive declines in the index forecast arecession within the next nine months. predicted eight of the nine U.S. recessions since 1948,„Theodore Crone and Kevin Babyak, analysts, after the earlier discussion to learn that the yield curve and stockprices account for fully one thirdof the indexs weighting. job market, while building permits serve as a proxy for housingFinally, the arguably most obscure component of the LEI isvendor performance.Ž It measures how long it takes forAs for the forecasting performance of the LEI, we can see fromTHE WELL-TIMED STRATEGY the track record has been less than stellar. The problem is not thatfar too many false signals.Ž Moreover, it performs poorly insignaling expansionary turning points. Think of two indexes as the temperature and fuelgauges on your economic dashboard. You dont needto be a car mechanic to be able to read the fuel leveland the engine temperature of your car. Similarly,monthly glances at the [Future Inflation Gauge] willThe Weekly Leading Index will tell you if the economyis ready to race forward or about to run out of gas.Žthan 50 years ago by Geoffrey Moore„an economist andstatistician who is often rightly described as the father of leadinglater, developed the composite index method. And it was MooreToday, ECRI remains on the cutting edge of economic forecasting.The first gauge on this dashboard is the Weekly Leading Index. Itand has been designed to turn down before a recession and turnthe yield curve and stock prices. In addition, it includes corporateTHE MASTER CYCLISTS FAVORITE FORECASTING TOOLS supply, and a price index. One of the big advantages of the ECRIWeekly Leading Index over the LEI is that it is weekly„andtherefore much more timely.Together, these two gauges on the ECRI dashboard providebusiness executives a very simple but powerful forecasting tool.and the LTCM debacle, President Clinton warned thein 50 years. The Fed, in response, made three emergencyrate cuts. Recession fears became widespread. But whileapprehensive competitors were cutting prices, [DuPont]held its ground because the ECRI leading indexes itmonitored did not show a downturn ahead. As a result,it was able to handily outperform its competitors. complacency had once again set in. However, the leadingindexes that related to their business were pointing to acyclical downturn in late 2000. Knowing that, [DuPont]took preemptive steps, aggressively pushing sales andreducing inventories in the first half, in anticipation of ain the second half of 2000, they were well positioned,having already pared down inventories.THE WELL-TIMED STRATEGY the few firms to forecast both of the past two recessions. ItsA Bad Recessionary Moon Rising with Eight of the nine post-World War II recessions wereaccompanied by sharp increases in the price of oil.The last four recessions followed this pattern: the1973…1975 recession followed the oil embargo; thedouble dip recession of 1980…1982 followed therevolution and Iran-Iraq war; the 1990…1991recession followed the oil price spike induced by theGulf war; and the 2001 recession followed a sharprise in oil prices from 1999-2000. This would seem tobe persuasive evidence that oil prices play a strongrole in determining the business cycle.Ž „Marc Labonte, Congressional Research Service For U.S. corporations, the oil price shock indicatoris particularlyStates must import more than half of its 20-million-barrel-per-dayhabit. Adding to the strategic and political risks of this heavy oilmonopolistic OPEC cartel. THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS effect: Higher oil prices drive up production costs.turn, begin to produce less„and lay off people accordingly.side, every time OPEC cutsproduction and raisestheir purchasing power. To put it most simply, if it costs more tofill up the gas tank, less money is left over for a trip to the mallor a movie or the dry cleaner. Moreover, because the taxrevenuesŽ go to foreigners, there is no government to reinvest theNote, however, that although oil price shocks have beenglobal economy boomed despite such a run-up. This is why, justCyclist to follow points. That way, the Master Cyclist is less likely to be fooled byany false signal of a single indicator. THE WELL-TIMED STRATEGY The Blue Chip Consensus Survey turns the forecastinggang that couldnt shoot straight into a sharper Forecasts produced by economic models withhundreds of equations are notoriously bad atpredicting recessions because they tend to extrapolatethe recent past. This leads to big forecasting errorsnear turning points, because recessions are caused by abrupt changes in the behavior of firms Economic forecasts deserve to be taken seriously, notnecessarily because they promise to be accurate butbecause they are more useful than having noforecasts at all.Ž„Peter Bernstein and Theodore Silbert, Harvard Business Review suggests. Just considerthisOne of the moreefficient ways for any executive team to process the availableforecasting data is to subscribe to the Blue Chip Consensus Surveymost importantly GDP, the Consumer Price Index, the unemploy-ment rate, and the 3-month and 10-year Treasury securities. THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS as Motorola to consulting firms such as Global Insight and acade-mic institutions such as UCLA. Note, however, that in an important study, Andy Bauer, RobertEisenbeis, Daniel Waggoner, and Tao Zha found that any singleforecast is likely to be prone to considerable error, whereas Blue Chip Consensus forecast performs better than anyindividual forecasterCyclist relies on many sources of information to form expectationsabout the direction of the business cycle„and plans accordinglyfollowing the broader macroeconomic calendar,Ž which we nowdiscuss to complete this chapter. The Macroeconomic CalendarsTHE WELL-TIMED STRATEGY The [macroeconomic] calendar provides the dailydance of data that is the single most important source„When the Market Moves, Will You Be Ready? 1.The Consumer Price Index comes out unexpectedly hot andhousing, and financial services. 2.The monthly trade deficit balloons, and the dollar plunges.However, the stock prices of companies in export industriesbullish bump up on the assumption that with a cheaperdollar, they will sell more goods to foreigners. 3.News from the Department of Commerce that it hasthe wire early in the morning before the stock marketopens. With the economic recovery apparently alive andfollowing the macroeconomic calendar, the Master Cyclistexecutive team can effectively become its own economic forecasterMoreover, by watching on a regular basis how the stock, bond,any would-be Master Cyclist can go a long way toward buildingTable 11-1 provides a list of some of the most important economicHowever, IFor example, a report from Japan or Germany indicating a fallingGDP or rising unemployment can have a big negativeimpact ona U.S. exporting company. Similarly, a rapidly growing Indian orChinese GDP can push up the prices of oil and steel in the Unitedyour business.THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS 1.Construction SpendingDepartment of First business day Commerceof the month 2.Purchasing ManagersNational Association First business day Indexof Purchasing of the monthManagers 3.Personal Income & Department of First business day ConsumptionCommerceof the month 4.Auto and Truck SalesDepartment of Third business day Commerceof the month 5.The Jobs ReportDepartment of LaborFirst Friday of the month 6.Index of Leading Conference BoardFirst week of the monthIndicators 7.Consumer CreditFederal ReserveFifth business day 8.Productivity & Costs*Department of LaborAround the seventh quarter for prior quarter 9.Retail SalesDepartment of Between the eleventh Commerceand fourteenth of the 10.Producer Price IndexDepartment of LaborAround the eleventh ofeach month for the prior month 11.Industrial Production & Federal ReserveAround the fifteenth Capacity Utilizationof the month 12.Business InventoriesDepartment of Around the fifteenth of Commercethe month 13.Consumer Price IndexDepartment of LaborBetween the fifteenth and twenty-first of the 14.Housing StartsDepartment of Between the sixteenth Commerceand twentieth of the month 15.International TradeDepartment of Around the twentieth Commerceof the month 16.Consumer ConfidenceConference BoardLast Tuesday of the University of Michiganmonth;second and last Survey Research Centerweekend of the month 17.The Federal BudgetU.S.TreasuryThird week of the month 18.Durable Goods OrdersDepartment of Third or fourth week of Commercethe monthTABLE 11-1The U.S. Monthly Macroeconomic CalendarTHE WELL-TIMED STRATEGY THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS 19.Factory OrdersDepartment of About a week after the CommerceDurable Goods report 20.Employment Cost IndexDepartment of LaborNear the end of the monthfor the quarter for the prior quarter 21.Existing Home SalesNational Association of Around the twenty-fifth Realtorsof the month 22.New Home SalesDepartment of Around the last business Commerceday of the month 23.GDPDepartment of Quarterly;third or fourth Commerceweek of the month Citigroup brilliantly flipsŽ Travelers Insurance for billionsSector rotation in the market continues on Wall StreetIf you are in the right sector at the right time, you can„Peter LynchIt is perhaps fitting to end this chapter about learning how tosector rotation bull market and fall in a bear market, over different phases of thestock market cycle,Ž certain industry sectors tend to outperformŽothers. Figure 11-3 charts these typical patterns of sector rotationTHE WELL-TIMED STRATEGY The patterns of sector rotation.Note first in the figure that, as already discussed in this chapter,the stock market tends to be a leading indicatorŽ of the businessThis is why, again as noted earlier, the Master Cyclist pays veryAs important, however, the Master Cyclist also pays very closeattention to the demonstrable patterns of sector rotation depictedin the figure. You can see, for example, that the stock prices of technology (2) typically tend to outperform other sectors in thewhy is this so?Well, by the Late Bear phase, the Federal Reserve has significantlythis pent-up demand is unleashed. As consumers begin to splurgepharmaceuticals (6) will each have their day the Early Bear sun.earnings of these noncyclicals,Ž which people continue topeople need drugs no matter what the economic conditions.Finally, note that the energy sector (5) tends to peak in the LateboomŽ time, a combination of heavy energy demand andconstrained energy supplies can lead to a very sharp run-up inenergy prices. Anticipating this run-up and the sharp boost inenergy company earnings that it portends, investors pile intoenergy stocks and drive up their prices. As you have learned in this chapter, the unfortunate result of anysharp run-up in energy prices is often a collateral slowing of theCyclist management. What is perhaps most interesting about thisTHE MASTER CYCLISTS FAVORITE FORECASTING TOOLS is one in which stock prices tend to move countercyclicallydefensive sector, which stock investors prefer in recessionarytimes because of the stability of its earnings. Citigroup FlipsŽ Over TravelersSandy Weill got control of Citibank in 1998 bymerging his insurance company Travelers Group into it.The combination ƒ put Weill in charge of the worldslargest financial-services empire. Now, like a mankicking away a ladder after he has ascended it, Weillproposes to spin off the property and casualty division „Michael Sivy, CNN/MoneyCitigroups stellar sector-rotation play rightfully begins in early1998 when the legendary Sandy Weill was still CEO of theinsurance conglomerate Travelers. At this time, Weill approachedCiticorps CEO, John Reed, and pitched what would come to beknown as the mother of all mergersŽ„one that created acorporate powerhouse with more than 100 million customers inIn fact, this merger was so big that it actually broke the law„It is an interesting tale of American power politics as to how Weillto remove the Glass-Steagle strictures and allow the merger.It isas to how it turned out that the hard-driving EmperorŽ SandyWeill and not the cerebral John Reed eventually wound up asCEO at the helm of the newly formed Citigroup. However, fromTHE WELL-TIMED STRATEGY the multi-billion-dollar sector-rotation chess moveŽ that Weillwould make flippingŽ Travelers stock just a few years aftergaining control of Citigroup. Figure 11-4 illustratesthis brilliantsector-rotation play. THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS Citigroups brilliant sector-rotation play.Note first how the stock market, as indicated by the movement ofunderperforming insurance sector index IUX is reaching atroughIt is at this propitious point that Weills Citigroup makes a cashoffer to purchase all the shares outstanding of Travelers PropertyCasualty Corp. The result of the tender offer is that Citigroupa bargain price.Now look again carefully at the figure. You can also see theinsurance sector surging to a new high in late 2000 and earlyeven as the stock market is falling precipitouslyvolatile tech and energy stocks and run for the safety of the now-outperforming insurance sector. At this equally propitious point, Weill executed what has beendescribed at the perfect spinoffŽ of Travelers. It became the sixthlargest IPO in history and the largest insuranceoffering. This tactical sector-rotation play not only netted Citigroup severalgrowing part of the company„a business that the Citibank sideof Citicorp had never really warmed to. THE WELL-TIMED STRATEGY The Master Cyclist Forecasting Toolbox€ The Master Cyclist uses a select set of leadingtimely manner. An Overview of the Leading Economic IndicatorsŽ€ The yield curve is a very powerful forecasting toolof the economy.€ Yield curve inversions signal recessions. Steepcurves signal expansions.€ The stock markets predictive power derives largely€ The ECRI economic dashboard has two gauges: aWeekly Leading Index and a Future Inflation Gauge.This dashboard has proven to be a more powerful THE MASTER CYCLISTS FAVORITE FORECASTING TOOLS € Eight of the nine post-World War II recessions haveA Very Short Forecasting Model Story € One of the most efficient ways for an executivesubscribe to the Blue Chip Consensus Survey, whichhas performed better than any individual forecaster. The Wisdom of Following the Macro-€ By diligently following the macroeconomiccalendar, the Master Cyclist team can effectivelybecome its own forecaster. € By watching how the stock, bond, and currencyTuning in to the Patterns of Sector Rotation€ Although most stock prices rise in a bull market andstock market cycle,Ž certain industry sectors tendto outperformŽ others. € Cultivating an awareness of these patterns of sector This page intentionally left blank composition in which two or moreindependent melodies are juxtaposed inharmony. There is a sweet spotŽ in the expansionaryphase ofRather, the true measure of a corporations executivepolyphonicallyŽ at critical points and turning points begins to harmonically blend both pro- and countercyclicalstrategies and tactics into an ever-changing and highly profitableMy abiding hope is that the key points and insights of this booksufficiently motivate any executive team„regardless of companymeans of creating value for their firm and crafting a sharp andmanager or employee with your own story to tell about how yourYou can easily reach me by e-mail through my Web site at navarr o.com . I also urge any reader wanting to stayto frequently check this Web site; my research team continues toTo end, I want to leave you with these words of hockey greatWayne Gretzky, whose style of play on the ice perfectly capturessays this about his scoring strategy:I dont skate to where the puck is. I skate to where the„Peter Navarrowww.peternavarro.comTHE WELL-TIMED STRATEGY 213The MasterThe MasterCyclist ProjectCyclist ProjectssTTreasure Treasure Troveroveof Data and of Data and All-Star TAll-Star TeameamAPPENDIX A Are we merely studying a set of companies that justdecisions? Or was there something distinctive abouttheir process that dramatically increased theGood to GreatI began the Master Cyclist Project at the University of California-Corporate Strategy Tells Us OnlyStrategy answers two questions: Where do you want togo? And how do want to get there?Ž „Professor Kathleen Eisenhardt andShona Brownindustrial organization. field constitutes the intellectual backbone of modern corporateguru Michael Porter„who, inessence, crossed the Charles RiverŽof industrial organization into the best-selling book „a textbook and gospel of many business school strategyThe problem, however, with corporate strategy as it is taughtanalysis. That is, corporate strategy discusses in great detail THE WELL-TIMED STRATEGY the degree of product differentiation will determine industrystructure and competitive advantage and decisions to acquire or expand or diversify should be made.However, the strategy literature is largely silent on the timing of implementing such strategic decisions. This is preciselywhere the equally critical role of movements in thebusiness cycle and events and shocks in the broadermacroeconomic environment come into strategic play. strategy might dictate that a firm acquire a key rival to improveprice margins or perhaps vertically integrate to cut costs byacquiring a key supplier. However, the timing of such acquisitionsmight be in. This is because the acquiring firm might want to waitacquisitions are truly accretive to earnings.Perhaps not surprisingly, this lack of any systematic theory of theborrow funds at premiumrates and hire more workers atInevitably, these ReactiveCyclists find themselves stuck with hugeinventory overhangs, idle workers, and a big squeeze on their cashflow when the recession hits. It is precisely these gaps in both thecorporate strategy literature and accepted best-managementpractices that the research and key findings of the Master CyclistProject have sought to fill. If Its Raining in Brazil, Buydifferentiates what motivates investors to buy the stock of acompany to make decisions about such things as production levels,pricing, marketing, staffing, the timing of capital expenditures,Teaching Our MBAs Wellof managementeducation. In this regard, it is very unusual forTHE WELL-TIMED STRATEGY of my colleagues learn to teach simply by doing itŽ„and, in thepublish-or-perishŽ world of academia, spend most of their timecampus to teach economics in a virtual classroom,Ž cyber-learningformat.Several years later, I also had occasion to review a vastreformistŽ management education literature as part of theFrom these research journeys into what constitutes bestpracticesŽ in management education, I learned that any trulyeffective curriculum to train budding business executives in thecompelling considerations of management strategy. learn to apply macroeconomic analysis and the principles ofMaster Cyclist management across the spectrum of organizationalthe organizations they are assigned to analyze from a MasterCyclist perspective. This theydo through both formal interviewsand informal discussions with key management team members. An Army of MBA Talent andTreasure Trove of Data and Exampleshas been (1) the marshaling of a large army of highly skilled MBAof the individual company research into a large database for moreformal statistical analysis; and, ultimately, (4) the determination ofthe key concepts, findings, insights, and points of the project thatI have greatly enjoyed developing this project and urge anyonewho wants more information about it to visit the Master CyclistProject link at my Web site at www.peternavarro.com. Finally, Iwant to salute all the students who have worked on this projectover the years„each of whom is listed in Table A-1.I also particularly want to thank the following students for theirAllen, Len Ambrosini, Rafael Arredondo, Bret Bauer, BillBlackwell, Tracy Bremmer, Paul Callanan, Carlos Caponera, JasonChan, Jeff Chen, Yuh-Yue Chen, John Dakin, Keith Diehl, NianboDeng, Chad Doezie, Rich Dragon, Jason Eynon, Chuck Felder, JimFerguson, Francisco Galleno, Anu Grewal, Jonathan Hawkins,Gregory Herd, Sam Hoefer, Mike Hoffman, Brian Hong, SteveHouk, Allen Iftiger, Jon Iwanaga, Joseph Johnston, John Karem,Langley, Ben Luong, For Li, Ken Lu, Rosalind Lu, Kevin Matchett,Karen MacFarlane, Chris Metzger, Tao Mi, Kurt Myers, MitchTillman, Vu Tran, Henry Wang, Luis Vasquez, Ryan Vogel, RoseVu, Marina Wang, Jeff Wojciechowski, Phillis Wong, Calor Yan, J.Francisco Yanez, Po Yang, Hani Yassin, Chris Yount, Rick VanEyke, Jesus Zambrano, Er Zhang, and especially Lisa Munro andCecile RichardsonTHE WELL-TIMED STRATEGY TABLE A-1The Master Cyclist Project All-Star TeamKeith AbercrombyNavid AlaghbandJudy AllenCarlos AmayaLen AmbrosiniAndre AmiriJason AndersenAlberto AnonMohammad AnwarShahbaz AnwarRafael ArredondoLuke AucoinRuss BarlowRobert BarrosaIvan BatanovGregory BattersbyBret BauerBill BlackwellPat BlinnGeoff BremmerTracy BremmerSteve BrennemanTim BruceGreta BrushieAndrew BucklandGabriel CabanasPaul CallananBelen CalvoCarlos CaponeraPeggy CarlCornel CatrinaChristen ChambersJason Chan Frank ChenYi Chia ChenHanwen ChenJeff ChenMyron ChenYan ChenYuh-Yue ChenMichael ChilesShun ChowJulia ChuBrett ClarkeJeremy CollinsPetru CretuJohn DakinCharisma DavasiaAnthony De La FuenteRob DePratSharad DeshpandeJustin DiceKeith DiehlTed DivenRichard DragonRyan DuniganJason DunnFeili DuosiBrad EisensteinFrancine EnglandKraig EnyeartJason EynonLulu FanAndrew Fan Marcello FarjallaChuck FelderMac FellerJim FergusonGreg FerrellGary FrazierRodney FujiwaraAlejandro FungJeff FurgoFrancisco GallenoBill GeorgesMaya GowriW.W.GraingerJeff GreenbergAnu GrewalAnn Griffith George GuerreroGerald GutierrezMiluska GutierrezRichard HaagMichael HaddadinTodd HalbrookMay HanVinh Hang Paul HarmelingJames HarrisKeith HathawayJon HawkinsGregory HerdRobert HermansonZachery HicksDeAnna HilbrantsDamian HileyAndrew HillMyra HoSam HoeferMike HoffmanAndy HollywoodBrian HongGriffin HooverGriff HooverSteve HoukJennifer HuJeffery HuangTony HuangRaymond LeAllen IftigerJeff IgushiJacqueline InterianoJon IwanagaJohn JerneyJerry JewJulie JohnsonJoseph JohnstonCraig JulienScott JusticeGuillermo JuveraMbugua KaranjaJohn KaremChandrasekharKaripeddiArvind KaushikGo Kawasaki Stephanie KeKevin KeeganAlexander KhayatBoyeon KimRyan KimMakiko KobayashiAkiko Kondo John KoontzBryan KoskiAli KowsariMichael KrauseJason KrupoffDauren KylyshpekovMike LairdJanak LalanMaria LamBrian Lane Joy LangleyJohn LeeJennifer LeeVincenzo LefanteEric LiFor Li Chang W.LlengJack London Scott LovellKen Lu Gary LuKaren MacFarlaneBrendan MahonJay MallyaKumar MangalickDonald MartensScott MartinKevin MatchettKo MatsukuboJosh MauzeyNaomi McAuleyChris McBeeJennifer MeissenScott MerrillTHE WELL-TIMED STRATEGYChris MetzgerKurt MeyersHitendra MishraTao MiAvi MoghaddamRichard MorenoRobert MotoshigeAli MozayeniArt MundaLisa MunroMark MurphySusan MurrayKurt MyersMitch NeedelmanBen NewcottDanny NguyenLeo NguyenYutaka NishidaAndrew NiuAlex NormanJay NovakShawn OConnellSam OsbornScott PadelskyArchana PanukondaGerard PapaPuneet ParasharBrady ParkLynn ParshallDaniel PenrodDoug PetrikatMichael PoirierBrennan PriceHaralampos PsichogiosChris PurvisTauras RadvenisEvan RaelRajiv RajpurkarDavid ReevesIndira RenduchintalaScott RiccardellaJason RichardsonCecile RichardsonPraveen RikkalaJeff RootSantiago RydelskiMichael SaeediToru SakataIrina SauleaDominic SchafferSusie SchmittDmitry ShmoysMark SearightKim SentovichMax SerajChristina Seun-LeoHemant SharmaMelody ShiMarc ShioyaBrett ShipmanKyle ShorenAbhijeet ShrikhandeNapatorn SchulzTodd SiglerAlex SimampoVitas SipelisKevin SmylieMartin SobczakVihang SolankiRyan SolomonSachin SontakkeJesse SowellAlex StaniaJohn StedfieldJ.P.StoccoKojiro SugiuraKamran SyedKatrin SzardeningsMatt TappanMatt TarkaKevin TaysKevin TeetsScott TheodorsonMichael TillmanAriel TonnuVu TranDietmar TreesKevin TroutMitch TsaiDennis UlrichMike VachaniRick Van EykeKyri Van HooseLuis VasquezKrishna VenugopalApoorva VermaKate VezzettiRyan VogelRose VuBeth Walls James WalshHenry WangJessica WangMarina WangRick WarnerIlan WeinbergKatherine Wells Paul WilliamsonTim WiltonJeff WojciechowskiJennifer Wold Phillis WongErin WorlandJoyce WuRusen WuSilvia WuWeiya XiaoCalor Yan J.Francisco YanezJeff YangPo YangHani YassinSohmin YeeClinton YipSteve YoonChris YountPaul YuhasJesus ZambranoCatherine Zhou This page intentionally left blank 223A BusinessA BusinessCycle PrimerCycle PrimerAPPENDIX B Recessions teachcompanies to be prepared evenduring the good times, because a recession is like abattle„when youre in it, its almost too late to starttraining for it; if youre not prepared for it, you will„Leonard Jaskol, former chairman and CEO, Lydall, Inc.Second, I did not wantto bog down any nontechnical readersIn this appendix, however, I now offer a brief business cycleprimer. The two main questions we want to address are as1.What exactly is the business cycle and how are its2.What are the many factors that cause the economysback to expansion?The GDP Yardstick and Businessreal grossdomestic product, or GDP. realTHE WELL-TIMED STRATEGY strong expansion. Of course, if the GDP growth rate turns The roller coaster ride of the business cycle.of these phases of the cycle oscillate around a longer-termtŽ„ Of course, as you have learned in this book, during this businessflow with the level of economic activity as corporate earnings fallimportant to understand the business cycle. of the movements in the business cycle business cycle behavior in terms ofbusiness cycles are more like fingerprints„with no tworeally alikeThis point should be evident in Table B-1, which documentsWorld War II in both TABLE B-1The Business Cycle Since World War II Dates of Duration Maximum Dates of Duration Maximum Contraction(Months)Negative Expansion(Months)Positive Growth RateGrowth Rate Nov48-Oct4911-5.5Oct49-July534517.6 July53-May5410-6.3May54-Aug573911.9 Aug57-Apr588-10.3Apr58-Apr602410.9 Apr60-Feb6110-5.0Feb61-Dec6910610.3 Dec69-Nov7011-4.2Nov70-Nov733611.6 Nov73-Mar7516-5.0Mar75-Jan805816.3 Jan80-July806-7.9July80-July81128.0 July81-Nov8216-6.5Nov82-July90929.8 July90-Mar918-3.2Mar91-Mar011207.1 Mar01-Nov018-1.6- National Bureau of Economic Research (NBER) and Federal Reserve BoardTHE WELL-TIMED STRATEGY You can see in the second column that since World War II, thechallenge to accurately forecastin particular. In fact, there are three main explanations forbusiness cycle volatility recession„each of which has its ownRecessionary Apocalypserandom, external shocks to the economic system. These so-called events such as oil price spikes, increased government regulation,which undid much of the contractionary effects of the wave ofera of prosperity„albeit at some expensFiscal and Monetary Policy equally powerful second explanation is tied much more directly. However, it can be thrown off course by policy errors andmiscalculations, or, in the worst case, by Machiavellian (or Bozo)THE WELL-TIMED STRATEGY chairman might overestimate the threat of inflationary pressuresturn out to be recessionary overkill. In fact, this is what manyeconomists have accused Fed Chairman Alan Greenspan of doingoverheated economy.the months leading up to an election to„as many economistsbelieve that President George W. Bush did prior to his 2004are safely in for another term.As a final comment on the political elementsof the business cycle,there is a very clear policy implication„espoused most famouslyFrom this bigger-picture perspective, a large variety of factorssuch as a reduction in consumer income, a falloff in corporatebusiness, investor, or consumer confidence; intense spurts of speculative activity; and even instabilities in global trade flowsTo see just some of these interrelationships, consider the period and intense stock market speculation. However,when Fed Chairman Alan Greenspan chose, in his controversial with a series of interestand consumption levels suffered, too. All of this helped push theEvery Explanation Is RightŽ„Depending onOf course, if you have been following this narrative closely, you to some degree. Indeed, at any givenMoreover, some of the factors we have discussed, such as oil that jolt theeconomy off its course. However, other factors, such as falling of any recessionary effects over a longer time frame.manage their way through the business cycle is to understand thisprocess in all its richnessTHE WELL-TIMED STRATEGY executives will be better able to interpret all the dataThe Master Cyclists Favorite Forecasting Tools.Ž That is This page intentionally left blank 233NotesNotes rong at Cisco,Aaker is the E. T. Grether Professor of Marketing and PublicBusiness, Texas Christian University. Ireland is at the College ofBarronsThe inventory turnover ratio is calculated by dividing the cost ofgoods sold by a firms average inventory investment.equipment and elevators and engineer-to-order where productrequirements (for example, a specialty motor or HVAC system).THE WELL-TIMED STRATEGY Watkins is a member of the Economics Department at San John Gilbert, Gen Re Capital, September 2004 Newsletter, Issue Case Study, Bankers Trust, March 1, 2005.The Fed does have some ability to directly influence long-termtime through its different phases.New York. Mishkin is the Alfred Lerner Professor of Banking andBauer, Andy, Robert Eisenbeis, Daniel Waggoner, and Tao Zha,The Federal Reserve granted Citigroup and Travelers a two-yeartrial period prior to the merger. In the interval, CongressBliley Financial Services Modernization Act of 1999.THE WELL-TIMED STRATEGY Eisenhardt is Professor of Strategy and Organization at Stanfordin Brazil, coffee beans will be cheaper, Starbucks will make a fewJournal of Economic PerspectivesAmerican Journal of Distance EducationJournal of Computing in Higher EducationManagement Learning and Education This page intentionally left blank INDEX
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INDEX Aaker, David, 16retargeting the customer andAffiliated Computer Servicesoffshoring, 165-166Avery, Sewell, 13Avon, 58-60Bankers Trust, 140Buffet, Warren, 139bullwhip effect, 78-79butterfat, 133Caliber Technologies, 157Carnegie, Andrew, 56Cartwright, Peter, 23-24Chandraskehar, K. B., 44 Cundiff, Edward, 112customers, retargeting, 104-108temporary labor, 18Flir, 170 macroeconomic calendar, 200-202Good Humor-Breyers, 131-134Goodyear, 114-115Greer, Charles, 58Grudnowski, Tom, 51Hartung, Christopher, 117no-layoffs policies, 68-71no-layoff policies, 68-69, 71Device Technology),industrial organization, 214International Harvester, 88build-to-order, 89-90production-to-order, 89-92InVision, 170Isis Pharmaceuticals, 58, 62Jagadeesh, B. V., 44Kennedy, John F., 170Killinger, Kerry, 143Kvaemer Masa-Yards, 138 Laker, Sir Freddy, 137Lotterman, Edward, 171macroeconomic calendar, 187,markets, retargeting, 104-108GDP, 224-226Miller, Dennis, 83Montgomery Ward, 13Nadata, Arthur, 81Nature Conservancy, retargetingNavistar, 88-89no-layoffs policies, 68-69, 71offshoring, 161, 165-166 Paccar, 86-89pattern bargaining, 71Pigott, Sr., Willliam, 87Porter, Michael, 214PricewaterhouseCoopers (PWC),PWC (PricewaterhouseCoopers),retargeting customers andRoelandts, Wim, 66 Shama, Avraham, 103Stotter, James, 112Strube, Jurgen, 151synergies, 152temporary labor, 18Timmerman, Luke, 76, 86Travelers, 206, 208U-V-WCalendar, 202Vara, Ron, 174Viisage, 170Waitt, Ted, 19-20, 22Walgreens, 84-86Walter, William, 91war, 172Washington Mutual, interest rateWatkins, Thayer, 130Weekly Leading Index, 195Weill, Sandy, 206Weinschenk, Carl, 161Weitzen, Jeff, 19-20Welstad, Mr., 19Winstar Government X-Y-Z Reference critical business yitFREE!Sign up for a 30-day Enterprise Trial atwww.safaribooksonline.com/bizdemo.aspacross all books in the library simultaneously to pinpoint exactly the chapter, sentence and example youneed. Read books from cover to cover. Or, flip right to the page you need.Preview Safari as our guest at bus.safaribooksonline.com or sign upfor a free enterprise trial at www.safaribooksonline.com/bizdemo.asp. simultaneously. books by category. Peruse the latest titles from todays most authoritative answers in an instant! How Ordinary People Create Extraordinary ProductsBY CRAIG M. VOGEL, JONATHAN CAGAN, AND PETER BOATWRIGHTtion that targets customer emotion, self-image, and fantasy, not just product function. Youll read the hidden stories behind BodyMedias SenseWear body monitor, Herman Millers Mirra Chair, Swiffersmops, OXOs potato peelers, Adidas intelligent shoes, the new Ford F-150 pickup truck, and many other winning innovations. Youll meet itable reality. These design revolutionaries have a healthy respect waves„and deliver the most exciting breakthroughs. Along the way, the authors deconstruct the entire process of design innova-tion, showing how it really works, and how todays smartest compa-nies are innovating more effectively than ever before. whos intrigued by innovation or an executive who wants to deliver The 4 Secrets of Long-Term Business Success and FailureWhat keeps great companies winning, year after year, even as yes-terdays most hyped businesses fall by the wayside? Its not what you think„or what youve read. To “nd the real answers, strategic management expert Alfred Marcus systematically reviewed detailed fying 3% who have consistently outperformed their industrys aver-like Amphenol, Ball, Family Dollar, Brown and Brown, Activision, Dreyers, Forest Labs, and Fiserv. But their success is no accident: worlds most well-known companies. Drawing on this unprecedented Big Winners and Big Losers shows you what really matters most. Youll learn how consistent winners build the strategies that drive their success; how they move towards market spaces offering between agility, discipline, and focus. Youll learn how to identify the right patterns of success for your company, build on the strengths you tainable advantage one step at a time, in a planned and logical way.