Turnaround, Transition, Transform or Innovate?

November 12, 2019 By in Corporate Transformation Tags:
This entry is part 1 of 4 in the series Corporate Transformation

Corporate strategy begins with an understanding of the current state of the firm. The state of a company can be defined in multiple ways and my corporate framework uses leader, obsolete, stressed, and distressed. Corporate leadership is generally well understood – the company  and the economy are doing well and the executive team’s goal is to remain ahead of the competition and in tune with its clients’ needs by innovating. However, the phrases corporate turnaround, corporate transition and corporate transformation are often used, especially in challenging economic times, but there is no clear agreement amongst business executives and board directors as to what these terms mean. This confusion in terms of defining the state of the company usually leads to catastrophic strategic failure since any strategy that does not understand the current state of the company cannot address the issues faced by the company.

Disagreement about these issues is partly due to a lack of a general consensus on definitions but also partly due to the negative connotations they can evoke. In the minds of business executives the phrase “turnaround” immediately signals a distressed company which is considered an unacceptable message. At this point minds close. Executives avoid discussing what distressed might mean in this context and why it should be considered unacceptable. At one end of the scale are companies with large negative cash flows, no cash, no current assets, high short term debt, and facing legal action. Such a company is easily understood to be distressed. But at the other end of the scale is a company with multiple product/service lines that have high barriers to entry, each generating strong free cash flow. This is a successful company. The question is where on this scale does a company switch from distressed to a leader?

This question can be decomposed into three questions: 1. What is the corporate health scale that we are using? 2. What are the possible corporate states a company can be in? and 3. Where on the scale is each corporate state positioned?

Continue reading →

Profit without Value

April 1, 2019 By in Analysis Tags: , ,

The debate of value creation versus value extraction is an important one when markets are developing and is a crucial driver of share prices. The danger, however, is that the impact on share prices is opposite to the impact on the value of the company. The result can be business destruction to the benefit of a single stakeholder.

What do we mean by value creation versus value extraction?

Value creation is developing the ability to keep producing value, e.g. building a productive asset.

Value extraction is monetizing, or liquidating, value, e.g. selling a productive asset.

Continue reading →

The Investing Edge: The Win / Pay Odds Gap

September 11, 2017 By in Investments Tags: , , ,

Investing is too often looked at using a handful of academic models. Successful investing involves thinking about the investment process in as many different ways as possible. This article takes a look at investing using alternative views.

From Betting to Investing

Many of the ideas used by the investment community are adopted from the horse track and casino betting communities. Much of the failure that has dogged the investment community is due to rocket scientist PhDs misunderstanding the successful models of plebeian punters. The use of betting as an example is not an endorsement, just history.

To understand how the securities markets work you have to look no further than the horse bookies. Bookies take bets from the bettors. This is the first point that the public begins to misunderstand how betting, and therefore investing, works.

There are two potential misunderstandings:

  1. Assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win.
  2. Assuming that the bookie offers one to one payout odds, i.e. pays $1 for each $1 that is bet.

Grasping the significance of these statements is the key to successful investing. The bookie, equivalent to the investment bank or broker, will always make money. Always. They do this because they do not set payout odds depending on which horse they think will win, they set payout odds based on how people bet. Continue reading →

Shuaa and ADFG 2019 performance

April 27, 2020 By in Analysis

Unfortunately Shuaa Capital did not provide pro forma comparative 2018 financials, after it acquired Abu Dhabi Financial Group (“ADFG”) in 2019, for its 2019 audited financial statements. The board of director’s report states “…comparatives within this report for the newly combined segments are not provided, as they are no longer relevant.” This seems odd, at least on the asset management side as both companies had asset management businesses during that period.

Shuaa Profit Questions

There are a number of questions regarding the profits of Shuaa Capital after it acquired ADFG.

Large drop in profits

The combined entity announced a profit of AED 45.7 million in 2019. The profit for ADFG in 2018 was AED 57.2 million and that for Shuaa in 2018 was AED 28.5 million. To calculate the pro forma consolidated profit in 2018 needs related party and consolidation information in terms of profits of 2018 profits of Shuaa derived from ADFG and vice versa. At one end of the scale, if there was no related party or consolidated profits between Shuaa and ADFG, the pro forma profits would be AED 85.7 million, i.e. the 2019 profit of AED 45.7 million is a decrease of -47% from the pro forma of 2018.

Continue reading →

Human Weak Links: Addressing the Right Problem and the Role of AI

March 25, 2020 By in Risk Tags:

To paraphrase Voltaire:

Common sense is not that common.

The idea that when faced with an issue we need to first pose the right question is a broadly accepted concept. The corollary to that is to then answer the question. Also a well understood concept. But the next step, develop a solution that addresses the answer, is too often a stumbling block. Sometimes it is easier to develop a solution to something related. Sometimes momentum makes the team build on an original solution. Whatever the reason, the work done in the question and answer phase is effectively discarded.

The Human Weak Link

An example is electronic passwords. The theory and application of electronic password systems is quite advanced. But the early systems developed and deployed failed to provide the security results expected. The answer was quickly identified: The weak link in security systems is human interaction. Then a massive failure occurred in attempting to rectify this issues. Instead of solving for root cause of the “human problem” the teams involved in providing solutions focussed on specific issues one by one.

Continue reading →

Executing a Corporate Transition

January 24, 2020 By in Management, Corporate Turnaround, Corporate Transformation Tags: , ,
This entry is part 4 of 4 in the series Corporate Transformation

In this fourth article in a series on corporate transformation focused on my experience in the GCC I look at how to execute a corporate transition. In the first article of the series I described how I use a SWOT matrix to define four different corporate states and the relevant strategy for each state. This article focuses on strong firms in stressed markets. Such firms need to transition their product and service offerings to meet the new challenges of the market. This is the simplest form of corporate transformation as the company is starting with a strong management team and the market challenges are known. At this point an organizational diagnostic has been performed and an internal team has been assembled. In terms of strategy, the triage in terms of removing executives is probably unnecessary. What’s left is executing an adaptive strategic plan.

Don’t just give a man a fish

The conventional approach to change management is hiring consultants to map out the current state of the company, the market direction, the future state of the company and to provide the transition plan. Although a solution is provided the client is left to figure out how to execute the change plan on their own. This like giving a man instructions on how to fish. If you’re a fisherman, you know that this doesn’t work.

A relatively more recent approach is to hire the likes of Alvarez & Marsal or AlixPartners who provide an interim management team to lead the change management project. This solves the issue of how the change plan is executed. But the client still hasn’t learned how to fish, they have simply paid someone to fish on their behalf.

My approach of leading a team assembled from the client’s employees allows for not only knowledge transfer but also direct experience and practical skills transfer. This difference in philosophy means that my goal is to build change management capability into the company and allow the company to then effectively manage the change on their own. This is an important difference to simply managing a single change process.

Continue reading →

Strategic Planning in Transformations and Turnarounds

January 22, 2020 By in Strategy, Leadership, Corporate Turnaround, Corporate Transformation Tags: , ,
This entry is part 3 of 4 in the series Corporate Transformation

This is the third in a series of articles on corporate transformation, focused on my experience in the GCC. In the first article I developed a framework to define the current state of a company: leader, obsolete, stressed, and distressed. Identifying the current state then allows me to select a strategy type to develop: innovate, transform, transition, and turnaround. In the second article I introduced the first phase of strategic planing, which is the organizational diagnostic. This  first phase determines which of the four states the company is currently in. In this third article I describe the main phase of strategic planning that I use.

Organizational triage

The organizational diagnostic will usually result in identifying some quick wins that will have a material impact on the business. When a company calls in external executive management to manage change there are usually two main reasons:

  1. The existing executive management is competent in its job and just needs support planning and executing change while they continue to run the business; and/or
  2. The existing management cannot or will not effect change.

Which scenario is present will come out during the organizational diagnostic phase. If the second scenario is present it is critical to resolve the issue immediately. This leads to two immediate tactical changes necessary for the development and execution of a transformation / turnaround strategy.

Continue reading →

Corporate Transformation: Organizational Diagnostic

December 3, 2019 By in Corporate Transformation
This entry is part 2 of 4 in the series Corporate Transformation

This is the second in a series of articles on corporate transformation, focused on my experience in the GCC. In the first article I developed a framework to define the current state of a company: leader, obsolete, stressed, and distressed. Identifying the current state then allows me to select a strategy type to develop: innovate, transform, transition, and turnaround.

With this framework I have a foundation on which to develop an effective strategy. The first step is to determine which of the four states the company is currently in. The conventional term for this is  organizational diagnostic. Organizational diagnostics are a well studied subject in academia, each major consultancy has its own methods for performing a diagnostic, and great companies will also have  their own methodology. In reviewing these different methodologies I was unable to find one that was effective for the companies that I was involved with, be it as an executive, board director, investor or transformation manager. So I had to develop my own, sometimes using relevant parts of the methodologies developed by others.

Failure of Conventional Organizational Diagnostics

My starting point was understanding the challenges in applying conventional diagnostic tools to companies in the GCC. The common theme is that the GCC has seen several centuries worth of evolution in their economies happening within about a 50 year period. I will touch briefly on a few of these challenges.

Continue reading →

Startup Fundraising: Entrepreneurial Blind Spots

April 8, 2019 By in Entrepreneurship Tags:

The trouble with entrepreneurial fundraising is that it is an activity which most entrepreneurs will engage in only a few times and yet it has a massive impact on their startups. Unlike other, predominantly managerial, activities which are performed weekly if not daily, fundraising is relatively so infrequent that it is hard to build up a skill set and / or experience effectively.

Continue reading →