Thought of how and why companies becomes good to great to bad over few decades
Most of you have read this year annual report of Berkshire Hathaway. On that annual report, Charlie Munger with no business educational background give such advices/opinions to Buffett on how businesses are being run. The point in that message is that there is not a need to have strong background in the first place to analyse stocks. It can be easily argued that Benjamin Graham did not have such background when he developed his security analysis. I would be very much disappointed if I see or heard from someone that it is required to have economic degree to aid one's security analysis. The bottom line is that security analysis should be not seen as rocket science.
Right now, my aim here is to discuss the book called 'Good to Great to Gone' which I recently read. It is my interest to understand how and why the 'good to great' and 'good/great to gone' stages have happened. I just want to avoid stocks that are in 'good/great to gone' stages.
The book is centered on Circuit City. 'Good to great' stage seems to be the result of the following:
1) Plan is to be agreed among top management - probably verbal and inter mindset form
2) That plan must be easily executed by middle and lower managements with the available resources which are required. Resources can be the right people, right human skills, floor space, etc.
3) Targets need to be realistic - not looking for cheapest price, biggest store, etc. Rather, targets should be based on the critical success factors identified by competent top managements.
4) Companies should be ready to change themselves, while sticking in the same industry, in the face of fast-changing business environments. IBM excels this area very well in the last few decades. I believe that there is low probability of success to change the industry in order to improve profitability.
The likely causes of 'Good/great to gone' stage are the following:
1) Management is too focused on short-term targets instead of long-term targets. On the management literature, there is no hard and fast rule on how to balance short-term targets and long-term targets. Logically, short-term targets should support long-term targets.
2) Poor succession plan. I believe that BRK does not have this problem even though Buffett has not named the next CEO. Picking the wrong person can easily ruin the company. That is what happened to Circuit City. Each time I like the stock with strong organisational culture and reasonably solid financial history, I held myself back from pressing 'buy' button when I learnt that there is recent change in CEO. For that, I wait to see how the new CEO runs the company.
3) Misused company resources - buy back its own stocks at expensive price especially when they can be used for more suitable means of improving the company's situations.
With these said, I would like to think more about how to identify them quantitatively - I have not come up such quantitative measures constructively. As such, quantitative facts should complement qualitative facts, leading to one obvious conclusion in our security analysis. I hope I can present these on the future blog post with case study.
Right now, my aim here is to discuss the book called 'Good to Great to Gone' which I recently read. It is my interest to understand how and why the 'good to great' and 'good/great to gone' stages have happened. I just want to avoid stocks that are in 'good/great to gone' stages.
The book is centered on Circuit City. 'Good to great' stage seems to be the result of the following:
1) Plan is to be agreed among top management - probably verbal and inter mindset form
2) That plan must be easily executed by middle and lower managements with the available resources which are required. Resources can be the right people, right human skills, floor space, etc.
3) Targets need to be realistic - not looking for cheapest price, biggest store, etc. Rather, targets should be based on the critical success factors identified by competent top managements.
4) Companies should be ready to change themselves, while sticking in the same industry, in the face of fast-changing business environments. IBM excels this area very well in the last few decades. I believe that there is low probability of success to change the industry in order to improve profitability.
The likely causes of 'Good/great to gone' stage are the following:
1) Management is too focused on short-term targets instead of long-term targets. On the management literature, there is no hard and fast rule on how to balance short-term targets and long-term targets. Logically, short-term targets should support long-term targets.
2) Poor succession plan. I believe that BRK does not have this problem even though Buffett has not named the next CEO. Picking the wrong person can easily ruin the company. That is what happened to Circuit City. Each time I like the stock with strong organisational culture and reasonably solid financial history, I held myself back from pressing 'buy' button when I learnt that there is recent change in CEO. For that, I wait to see how the new CEO runs the company.
3) Misused company resources - buy back its own stocks at expensive price especially when they can be used for more suitable means of improving the company's situations.
With these said, I would like to think more about how to identify them quantitatively - I have not come up such quantitative measures constructively. As such, quantitative facts should complement qualitative facts, leading to one obvious conclusion in our security analysis. I hope I can present these on the future blog post with case study.
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