Small-Ball: A Winning Business Strategy
Ride & develop your winners, and consider strategic alternatives for the under-performing. Whether you are running a business or a Major League Baseball team, this principle is critical to long-term success.
In the world of Major League Baseball, the season is in full-swing. We are now seeing the fruits of off-season trades and improved (or drastically neglected) training regimens. While each team’s success is ultimately gauged by wins & losses, baseball teams (like businesses) are really a portfolio of talent. Management teams in baseball spent all offseason best positioning their squads for long-term success. Management teams don’t have that luxury. There is no off-season.
As an economic recovery is in its early innings, repositioning a business for long-term success is of utmost importance. There are a multiple of examples in recent headlines. Whether it be Cisco re-focusing its business on its core competitive advantages or Google’s new leadership entering new markets and placing increased focus on social media, stepping back & evaluating a business on a “sum of the parts” basis is a critical component of a firm’s long-term strategic planning process.
At Bridgesphere, we help companies develop strategies to increase the value of their enterprise. For us, that often means helping management gain a critical understanding of which teams, business units, or divisions create value — and which endeavors are underperforming, or even detracting from the company’s value. It’s a lot like baseball. Further develop and grow your winners (whether they be teams, business units, or other reporting segments), and either improve or consider strategic alternatives for those who are less productive.
Analyzing your business as a portfolio
Whether a company formally segments its business into divisions, units, or other reportable segments is often irrelevant. Any business of modest complexity is, in actuality, a portfolio of activities – all with the goal of driving profit and value. However, using traditional accounting and financial metrics to measure the successes & failures of a portfolio of business units is of little value. It can even lead to misleading results, causing management teams to devote less time to the ideal business units. Often, the failure of using an ROIC framework causes companies to abandon future winners altogether. Just consider the past divestitures of companies like Sara Lee and Sears.
Why do some companies abandon winning business units?
Different business units often have distinct strategic asset allocations. As a result, a comparison of balance sheets on a division-by-division basis is often like comparing apples to oranges. Taking this premise a step further, these distinct balance sheets often drive drastically different income statements. Some of these differences are result of a division’s operations (level of R&D investment, human capital intensity, working capital requirements, lifecycle attributes). Income statement differences are also a function of a series of accounting decisions (whether assets are leased vs. owned, the life of asset depreciation, how a business unit is financed, etc).
Using traditional accounting and financial metrics to compare these business units is of little value. The balance sheets aren’t comparable, traditional margin and profit metrics are plagued with distortion, asset efficiency is often ignored, and little insight is garnered as to which business units are actually driving the value of the entire enterprise.
In our view, Major League Baseball has the right idea. Go down any team’s roster, and you are presented with a uniform series of statistics from which you can analyze the value-creating attributes of each player. Pick any team, and you will see that different players add value in unique ways. Some players add value through power statistics (home runs & RBI’s). Others add value through consistency (batting average, on-base-percentage, etc). Baseball gets-it. Their measures of success and failure are uniform and comparable.
Management teams aren’t so lucky
In the corporate world, wins are manufactured in a similar fashion. An individual company’s success, whether formally measured in the capital markets (i.e. stock price), or profits distributed to a company’s partners is really a product of a portfolio of business endeavors. Wins and losses are a function of the “talent on the field”.
The problem lies in the notion that the accounting statistics of a company’s business units are rarely comparable. In order to create a winning company, each business endeavor must be creating value in their unique way. At Bridgesphere, we help our clients play Corporate Small-Ball, insuring that each business activity is strategically, financially, and competitively positioned to add value to the consolidated business. We provide a uniform set of metrics and principles that allow management teams to “ride their winners” and either divest or fix troubled endeavors.
Here’s how we do it
In order to play Corporate Small-Ball, it’s not enough to be able to see the “forest from the trees”. It is absolutely necessary to see the forest AND the trees. We empower management teams to make value-creating strategic decisions by utilizing one metric & framework that removes the distortions created by each business unit’s operations, accounting assumptions, financing & lifecycle attributes. This approach allows our clients to independently assess each business unit’s performance AND VALUE on an apples-to-apples basis.
In order to empower management to better analyze, assess, and manage each individual business unit, we first gain a comprehensive understanding of the consolidated business.
From a high level, we recognize that a business’ performance and value are derived from five things:
- Performance (as measured by return on invested capital)
- Growth (the reinvestment of free cash flows into the business)
- Strategic Asset Allocation (the mix of assets invested into the business)
- Cash Flow Attribution (the various sources of free cash flow)
- Lifecycle Attributes (where a company is positioned on the corporate lifecycle)
We start by independently analyzing each of these constructs and identify the key drivers of value for the consolidated business. The resulting analysis is like observing the high-level statistics of a baseball team. We know the business’s win/loss record (its value), and we can observe which strategic-financial attributes are critical to the business’s success (margins, asset efficiency, growth, earnings quality, etc).
Drilling down into a company’s portfolio of businesses
In order to obtain an accurate assessment of which business endeavors create value versus those that are value-destructive, we observe performance, growth, asset allocation, cash flow attribution, and lifecycle attributes for each division, team, or other reportable segment.
This is where things get incrementally more complex (for us), but significantly more valuable (for our clients).
In baseball, an analysis of a team as a whole is of limited value. In order to assess a team’s long-term prospects, one must garner a thorough understanding of each individual player using a single set of comprehensive, yet uniform statistics. Such an analysis garners significant insight into which players add value, and what areas of the team must be improved in order to generate more wins on the field.
On the ball field of business, Bridgesphere empowers management teams with greater insights into their individual business units, thereby enabling management to devote the ideal level of financial and strategic resources to the endeavors that will maximize the value of the consolidated business.
The premise is simple: better manage each business unit as a stand-alone entity (whether measured by retail concept, product line, geographical territory, engagement team, etc). Honing the long-term strategy of each business unit with a holistic visibility of each unit’s value attributes empowers management to:
- Hone a long-term strategic plan that will maximize the value of each business unit.
- Align capital, time, and focus to the business units that will maximize the value of the entire enterprise.
- Communicate how business performance & management’s strategy are creating value for stakeholders.
Whether your business is a portfolio of unique business entities, a retailer with multiple concepts, a restaurant with locations across a collection of geographies, or a services firm with a diverse collection of engagement teams, creating a Business Box Score can be the difference-maker – the difference between a strategic plan and a strategic vision that is conducive to creating value.
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