China’s Belt and Road Strategy

China’s Belt and Road Strategy The final big topic is China's Belt and Road Strategy, also known as the Silk Road Initiative. If China is setting up a network of interconnected sites to seamlessly move its products from China over land, sea and air to its biggest market, which is Europe in terms of proximity, a lot of the initiative’s success is going to come down to this: How does it manage a railway line? How does it manage a port? Can it get the efficiencies? Can it make it successful? Can it be profitable? Can it be profitable in such a way that the state-owned company that runs the port is successful? Do the consumers who buy the product feel the price is reasonable? Does the Chinese supplier feel that the price to ship makes it economical for them? Do the little transit towns that connect the railway lines and ports feel that the rail company is doing a good job, they're paying a good salary, volume is going up and it's worthwhile? [bctt tweet="Stakeholders need to feel that they're gaining something. But for that to happen, the port or the railway line has to be profitable—but not at…

From Start-up to Operational Efficiency

From Start-up to Operational Efficiency The combination of Fiat, Chrysler and Peugeot group is creating a new holding company which is looking to merge the assets all these M&A bankers and M&A strategy consultants talk about—efficiency, synergies, etc. By default, most mergers fail. But this merger is interesting because given the size of the asset base—the millions of cars made, the number of factories around the world—this is going to come down to operational efficiency, which is very hard to achieve. Here’s the insight, which SCR-Advanced members can see in the operation strategy study. Going from 0% to a 90% increase in operational efficiency is obviously something to celebrate, but you need to ask yourself: Given your competition, given where you want to compete, given the price point you want to compete at, what is the operational efficiency you have to achieve? [bctt tweet="Given your competition, given where you want to compete, given the price point you want to compete at, what is the operational efficiency you have to achieve?" username=""] It's not difficult to know this. Remember the cost-volume-profit curve. The bigger your fixed cost base relative to your variable cost base, you need much more volume, but your price typically goes…

Catching the Next Big Strategy Wave

Catching the Next Big Strategy Wave We’re going to stay in the telco sector for now. There have been on-again, off-again stories about how the New York Stock Exchange wanted to delist the three largest Chinese telco players. I've been a strategy consultant for a long time—all the way to partner and senior partner in corporate strategy and corporate finance. I've worked with telco companies all the way back when SMS was still a big thing, and companies were trying to figure out how to protect their SMS business. I worked at a time when internet service providers were seen as a cash cow. I worked at a time when Apple was negotiating to launch the iPhone and when Facebook began. In every single big value shift in the telco sector, the telco companies got left behind because they saw themselves as the provider of the plumbing on which all the other fancy stuff sits. They saw themselves as a real estate company, and they didn't care who built what on their real estate. They just felt they had to own the property, and it didn’t matter if someone built an extremely valuable building that generated a ton of cash.…

Nuances of a Private Equity Strategy

Nuances of a Private Equity Strategy Private equity and various forms of investment management have become the en vogue form of financing. Twenty years ago, it was investment banking, but now private equity has become the de facto, most elite form of financing—at least from a reputational and PR perspective. Private equity has gone through different phases of growth. A big part of their focus was saying, “You're a conglomerate, and you’re not able to extract the maximum value from this because you have multiple conflicting demands on your capital and management time. So, why don't we buy this from you? We’ll pay you a bigger premium than you would get if you managed this business by yourself. We believe that with the right kind of focus, we can create a lot of value, and we'll make a return so everyone's happy.” As private equity firms grew and started piling in funding from institutional shareholders, instead of just going after divisions of big companies, they started going after entire companies. But there are only so many big companies and divisions you can acquire in established Western markets. Then private equity firms started moving outside the US. In the latest shift,…

Fear Is Not a Strategy

Fear Is Not a Strategy The Chinese government has done a phenomenal job in shepherding the economy to where it is today—a legitimate contender to be the largest economy in the world. China will almost certainly be the world's largest economy if it isn’t already. Invariably, there’s usually a mistake measuring GDP, so by some measures we don't know which country has the largest economy right now. As China has grown, sometimes we overestimate its abilities and sometimes we underestimate them. Sometimes we decide we don't want to play in a sector because the Chinese are too strong. And sometimes we underestimate them and say we can’t play in the sector because the Chinese are never going to enter it. Fear cannot be a strategy. You can’t make a decision not to do something because you think someone is too strong—unless you’re certain they're too strong and you’re certain you can’t respond to that. You see this often when companies make decisions. They'll say something like company X is very innovative, very creative, the world leader in its field, and it has a reputation for harnessing artificial intelligence, the internet of things, cloud capabilities, blockchains. They're very good at it,…

Electric Cars – The War Will Be Fought on the Operations Front

Electric Cars - The War Will Be Fought on the Operations Front Recently, there have been three big announcements in the automotive sector as it relates to electric cars. First, several major contenders that are challenging Tesla in the Chinese automotive electric car market have made plans to ramp up production. I've looked at the cars and read about them. They look quite impressive, and I think competition is always good. While I'm sure Tesla will do very well, it's good to see competition for electric cars because it spurs all players, including Tesla, to do better, greater work. Helping the markets understand that it's a serious player in electric cars The next big topic is that Hyundai made an announcement that they are in advanced talks—although nothing has been finalized—to build electric cars for Apple. The last big story is that GM has rebranded itself as part of a greater push to show that the new GM is going electric and isn’t wedded to the GM of the past. These stories are all about electric cars. Hyundai made that announcement to help the markets understand that it's a serious player in electric cars. People have questioned Hyundai’s electric credentials, but…

Strategy is Hard: Coty’s Acquisition of Kylie Jenner’s Cosmetics Brand Example

Strategy is Hard: Coty’s Acquisition of Kylie Jenner's Cosmetics Brand Example "It's too early to say if Coty’s acquisition of Kylie Jenner's cosmetics brand was a good decision or a bad decision. We’ll only know if the acquisition was a good or a bad decision if it works relative to what Coty planned to do in the first place." If we read about what a company is doing, understand the drivers of value, the levers of profits and apply a few frameworks, it’s common to think we could easily understand why they’ve chosen a certain path. We’d also think it's easy to understand what a company is doing and why by listening to what the CEO says and looking at their press releases and investor statements. When companies communicate, they want to say enough to please their stakeholders while keeping important pieces to themselves so they don't share too much with competitors. There’s more to deducing strategy than just the public information a company releases. [bctt tweet="When companies communicate, they want to say enough to please their stakeholders while keeping important pieces to themselves so they don't share too much with competitors." username=""] Coty’s acquisition of Kylie Jenner's cosmetics brand…

Deep Specialization Creates Deep Value

Deep Specialization Creates Deep Value There is a great article in the Financial Times on deep specialization. It looks inside the font factory and the man who shapes the world's letters. A font factory is basically a studio that designs the style of the letters you see published in, well, everywhere. We don't take fonts very seriously. When you read any publication, you don't worry about the font. But a font creates a certain atmosphere that impacts you. The impact of fonts I went to Helsinki, Finland once, and I was astonished by how well designed that airport was, particularly the fonts in the airport. The font was very clean, and I was shocked by how well it was integrated with the airport. It was as if someone designed the font and then designed the airport around it. There was symmetry. After seeing that, I fell in love with that font and have decided to use that kind of thinking in everything we're doing. That's the impact of fonts. You can imagine what this man’s career discussion was like. Can you imagine how many people told him there's no future in designing fonts? No one even knew what a font lab was, or…

The cost of revolutionary ideas

The cost of revolutionary ideas Most people don't have the confidence to push through revolutionary ideas. There was an article from the Financial Times about the makeover of Claridge’s in London, which is one of the most prestigious hotels in the world. While Claridge’s was being renovated—one of the most extensive renovations of any building in the world—they kept the hotel open. Guests continued coming in, and nobody knew what was happening. Imagine you are the owner of this hotel, and you're telling investors about this diabolical idea to renovate the entire hotel while continuing to run it normally. You have to find an engineering crew, architectural crew, design crew and environmental permitting crew that will accept your plan to do this—and it's basically never been done before. You have to explain what you want, which most people wouldn't understand because you are the visionary. Then you have to make sure you get what you want. You also have to deal with criticism in the press because everyone says it's never been done, and therefore you cannot do it. The confidence to defend what you’re doing, and be able to explain it Everyone says they want to be insightful and have revolutionary ideas, but…