Sunday, August 12, 2007

Mow Your Yard

Vicki Wozniak, of Edgewater Park, New Jersey, decided to let her suburban yard go “natural.” Rather than having a yard of neatly trimmed grass, it is overgrown with wildflowers. She put a small pond on the 1/8 acre lot and let the bushes go untrimmed.

Vicki claims she is building a beautiful natural habitat for birds, butterflies and other creatures. She has gone so far as to get her yard certified as a backyard habitat by the National Wildlife Federation. She even has a sign in her yard to prove it. She is proud of what she it doing to help the environment.

The township and the neighbors don’t quite see it that way. They see it as a dangerous health hazard due to the mosquitoes breeding on the property. In addition, it just doesn’t look like a normal suburban yard. It’s just not the way things are supposed to be done.

She has been summoned to court to make her yard conform to normal standards of neatness. She has been notified by the city that: “Your property has become blight to your neighborhood, with its overgrown landscaping, bushes and weeds…There is accumulated debris and is in an unsafe condition.”

So much for the green revolution—all is well and good as long as it is not in your neighborhood.

Just as residential communities have standards for the way things are supposed to be done, so does the business community. Residential communities want yards to be clean, neat and efficient. Business communities want companies to have clean, neat and efficient operations, portfolios and balance sheets.

If a resident doesn’t follow the rules, the government steps in and mandates changes, which can go as far as mowing down your habitat and then giving you the bill. If a company gets outside the realm of efficiency, investors will step in and mandate changes. If the management refuses to comply, they can lose their jobs.

Sometimes, it comes from activist investors. Sometimes it comes from hostile takeovers. Other times it can come from hedge funds or private equity funds, or maybe a nervous board of directors. Whatever the source, they come in and demand that you “clean up your act.” If you do, THEY reap the rewards of neat and efficient operations, portfolios, and balance sheets. If you do not, they find someone who will.

Now Vicki Wozniak believed that she had good and legitimate reasons for what she was doing. These reasons did not convince the township.

Business leaders could also believe that there are legitimate reasons for their “untidy” businesses. For example, they might think that a balance sheet “overrun” with cash is good, because it creates the stability needed to focus long-term and take appropriate risks. Or they might like having an “untrimmed” portfolio of businesses because they believe the diversity protects them from problems in any single sector. Or perhaps they like having a looser style of operations, because it fosters more creativity.

Regardless of the reasons, others will see it as inefficiencies and swoop in to take control. They will strip out the cash (and give some to themselves). They will clean up the portfolio (and pocket some of the benefits). They will make the business run leaner (and pocket some of the benefits).

Of course, there may be something even more insidious going on here.

The insidious principle here is that if a company fails to do comprehensive strategic planning on the inside, pressure will come from outsiders who do their own comprehensive strategic planning. And you may not like the way the outsiders plan your business. Therefore, it is better to do it yourself.

Companies would rarely admit to abdicating or ignoring strategy. However, what goes for strategy might not be comprehensive enough. Strategy needs to be more that just slapping higher performance targets on doing pretty much what we’ve always done. Just saying “get 20% more profits out of your division” may not be enough. Perhaps the company should not even own that division. Perhaps the division should be repositioning itself in a new direction which would temporarily lower its profits.

Every so often, one needs a zero-based strategy session to question the status quo and ask some tough questions:

1) Do we have the right portfolio of businesses (is it properly trimmed)? Should some portions be jettisoned? Do we need to acquire new businesses to optimize the portfolio? Will we unlock additional value to the firm if we spin some divisions out (in whole or in part)?

2) Is our balance sheet properly trimmed? Is there too much cash in the company? Are we leveraging our debt to the right levels? Is our dividend policy appropriate? Should we be buying back stock?

3) Are our businesses being run as efficiently as they could be? Are we using best-in-class principles? Are we missing opportunities to get more profits out of the investment?

4) Are we focusing our businesses on the right opportunities? Are they adapting to the changing environment? Does the product mix have dead weight in it that should be discontinued?

5) Does the division have a path to win? If it cannot win in its space, can we move it to a space where it can win? If it cannot win, then why are we bothering with it?

There are many groups out there who are looking at all sorts of firms all the time and are asking these types of questions for each firm. In essence, they are doing comprehensive strategic planning for your business without your knowledge or consent. If they think that their strategy is better than yours, they will swoop in and take drastic action.

Therefore, you cannot just rely on small, incremental planning. You cannot afford to get a little lax or sloppy. You cannot afford to ignore the bigger picture of how to radically reconfigure your company to maximize its returns. You cannot afford to ignore the balance sheet as part of your strategic plan. Even if you have the endorsement of the board (just like Vicki had the endorsement of the Wildlife Federation), it may not be enough.

I suspect that if Vicki had only devoted a small portion of her yard to the green revolution, she could have gotten away with it. Similarly, if a company truly believes that some alleged “inefficiencies” are good for the business, they could probably get away with it if most of the business appears neat and efficient.

However, Vicki got too far out of the norm. So now she might end up losing it all. Similarly, if a company gets too far out of the norm, the leaders could end up losing control of the company.

These outsiders, if they take control, might get too radical in their corporate surgery. In their quest for the greatest efficiency (and their greed to put as much in their personal pocket as possible), they may swing the pendulum too far in the other direction. The company could get saddled with so much debt, and have so little flexibility to take risks, that it could go bankrupt. To continue the analogy, they may cut the grass so short that it burns out and dies.

Therefore, it is better if the insiders do their homework and ensure that their “yards” never get so overgrown that they draw the interests of these parties. Never get yourself into a position where outsiders are doing more sophisticated strategic thinking and modeling of your company than you are. MOW YOUR YARD.

We live in sophisticated times, when outsiders can scrutinize companies from afar and swoop in if they think they have a better strategy. Top notch, sophisticated, comprehensive strategic planning—which is willing to look well beyond the status quo—needs to be done internally so that the company benefits, rather than some outsiders. Beat them at their own game by keeping yourself so efficient that they have no incentive to come after you.

These outsiders are doing all of this analysis over hundreds of companies. You only need to do it for only one company. Surely you can find enough time to do that.

No comments:

Post a Comment