Superior Competitive Advantage: The key to survival in 2017

At the close of every year, we all have that moment when we think about the past year and what we would have done better. We also consider what we learned from the past year that will enable us make positive strides in the coming New Year. Resolutions, many would call them. For premier companies and others, the resolutions of the management team is to achieve more growth in the bottom line. But can they achieve this when growth forecasts look so bleak? How can they remain formidable when the macro environment is so hostile on a global level? The answers lie in the numbers. The numbers are what allow these companies to develop a strategy that can allow them to navigate the business environment of 2017. Here is how.  

Durable Competitive Advantage

Taking a leaf from Warren Buffet’s ideology of what makes a company attractive, there are lessons that premier companies in Zambia can learn from on how to remain relevant in 2017. The investment maestro seeks out companies that have durable competitive advantage. Now, TFHZPC understands that the New Year Stock Exchange (NYSE) is light years ahead of LUSE in terms of transaction volume, however, the fundamentals of business remain the same.

Over the course of the year, through our corporate intelligence investigations of companies on LUSE, we have observed there are companies that exhibit “Buffetology alignment”. These are companies that sell a unique product, service or are a low cost buyer. These 3 approaches to business fundamentals for many companies in Zambia will be key to ensure they survive the coming times.

As liquidity tightens, financial institutions will need to develop product offerings that are both unique and give customers an opportunity to differentiate the products they are offered in order to get the best value for money deal. For the food industry, economies of scale as demand for lower costing food sources will be key in ensuring growth in revenue and profits. This will be made possible through further integration of the value chain that will enable companies within that industry to be low cost buyers. For the real estate industry, product bundling may be the means of selling a unique service by players in that industry. With consumers becoming shrewder with their investments, product offerings that allow them to get the most out of the transaction will be key.

In order to achieve superior value, an inventory of resources and capabilities will have to be conducted. An assessment of the company’s assets and their time to expiry will be important when making strategic decisions that may require pursing an economies of scale approach. It is impossible to grow your production level when your equipment or animals are getting old.

Another concern is the turnover of inventory. Carrying stock will be expensive in 2017. Therefore, being able to move the goods off the shelf will be key in growing bottom line. As consumers scale back on spending, price elasticity of demand will be crucial in deciding what price movements to have in place for the products in stock.  Some companies will be tempted to drop prices in order to boost revenue growth however it will be pointless if they do not consider the low cost buyer of raw materials or component services that make the final deliverable. This is how they will be able to protect competitive advantage and increase value. 

The Macro Environment Explained

For a while now, we have brought you blogs about the fundamentals that make premier companies in Zambia special. We have talked about how the macro environment has influenced some of the success and failure of these companies. But whilst drinking a glass of wine at an exclusive pub in Lusaka, a native asked the question “this macro you keep blabbering about on your ka blog, it’s just politics affecting business!!” as he scoffed at the thought that it was only in one dimension. Putting down my glass of 2010 Merlot from the vineyards of the south of France, I endeavored to empower this entrepreneur on the macro environment. Or simply put, the marketing environment.

Know the 3 Cs

Premier companies know that it’s all about customers, company and competition. Any company that forgets any one of these Cs has no right to be in business. Yes TFHZPC said it. Understanding the external forces allows a management team to understand the various elements that affect the 3 Cs and how the course of the company can ultimately change overtime (when fortunes turn). The 3 Cs allow companies to bring visibility to what they are doing: marketing. In order to achieve this however, they must conduct market research.

Although, market research is an arduous task, it is a necessary ‘evil’. Some companies have convinced themselves that they have the ultimate product and hence do not need to do any market research (marketing myopia). Other companies have enjoyed so much power that they have extended their stranglehold to their suppliers (“Boss, will only pay you for this supply if customers buy, if they don’t sorry your goods will be a waste”). Others find themselves at odds as to whether adoption of technology is the right way to do it (think of those banks that have taken so long to bring ATMs to their customers). And finely, our favorite is the lies that customers tell. It’s often hard to tell whether a customer is telling the truth as to whether they will buy your latest offering or not. Think of the paradox of pub goers. A new place opens up and the owner of the establishment decides to put a surcharge at the door after building up the hype and “BOOM”, customers don’t show up even when they promised!  

Survival Toolkit

The marketing external environment is influenced by a number of factors but for simplicity they can be categorized as Social, Technological, Economic and Political and Legal forces (STEPL or PESTL). Social demographics looks at what trends are in the environment. What is moving and shaking your customers in the moment? Technology changes are key to understanding how consumer experiences are evolving (the rise of social media through the use of smart gadgets). Economic issues evolve around your GDP, Taxes, Interest rates etc. Political and Legal are interlinked as depending on who is in charge the legal system does get a nudge. However, understanding the political landscape is vital as it can allow a company to position itself accordingly depending on how and what policies are implemented (one policy statement can bring a rise in the number of your competitors in a heartbeat).

The market research process can feel like an academic exercise, however we believe with the way the marketing environment has evolved premier companies and others will need to consider investing in it in order to remain relevant. The times are changing, companies must stay in tune or else they risk ignoring one or all of the 3 Cs. 

When Dominoes Fall – Of Demergers and Divestures

History always provides us with lessons for the future. We at TFHZPC draw our strength from our ability to use numbers to decode historical trends that can provide an indication that supports our ‘gut feel’ on how the strategic tendencies of premier companies will be shaped.

We take you back with our insight into the financials of CEC in our review of their 2015 performance. We walked you through “destruction of value on Nigerian soil due to explosive Naira”. The 11 November 2016 SENS Announcement from LUSE on them disclosed a strategic move by the group to demerge from the investment vehicle they had created in 2013 whose purpose was allow the group to explore the power sector across Sub-Saharan Africa (backed by $100m in their piggy bank). Enter Naira land and Diamonds of Sierra Leone.

We followed the macro developments on these investments and of note was the paradox of tumbling naira which possessed a credible threat to creation of value in President Buhuri’s “backyard”.

Enter SENS announcement from LUSE on 29 November 2016, CEC Plc decides to divest from diamond land. Although they argue that the country remains an attractive investment destination, we decode that the move is purely to protect shareholder value. Rightly so we might add. The rule of every finance manager is to accept all projects with a positive net present value. However, circumstances in the macro environment may lead to the NPV moving target hence an astute management team will take the decision to change course to protect value.

However, strategic decisions are not without consequences. In the case of nairaland, verbatim from the SENS report read:

“The Board has, therefore, determined an impairment of USD99,999,999 which implies that the carrying value of CEC Africa in CEC Plc books reduces from USD100 million to USD1;”

The aforementioned will certainly appear in next years published financials which we will be digesting at publication. We are still firm believers of accepting all positive NPV projects however, we also know that when the project is not a success, the numbers in the financials will show.

No Systemic Risk for Zambia’s Financial System

We have seen some of the headlines coming from popular publications and we are dismayed by the some of the social media sentiments on the stability of the financial system that supports premier companies in Zambia. For the record, we are not experts on the Zambian banking system, however, we do know what systemic risk looks like when we see it. In short, recent happenings at a known bank are not indicative of systemic risk. Far from it.

What is Systemic Risk?

Before you rush to your bank and start withdrawing your hard earned “dividends”, its important to know what systemic risk is. But wait! Why are we calling it systemic..risk? Well, the formal definition is mandatory in this situation because of the alarm that social media has raised. It’s so hostile that even the central bank had to issue a cautionary note over this matter of the banks it supervises (read it here).

We are not faced with the collapse of our financial system. Far from it. According to investopedia.com, systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy. In this case we are talking about our financial system.

We have been monitoring the health of premier financial companies and we glad to note that all of them have taken (and are taking) the steps to protect shareholder value. We know this from the ratios on performance, liquidity, risk and efficiency on their recent financial statements. Our expert assessment shows that their numbers are not indicative of rocking our financial system hence BOZ is within its faculty to ‘school’ the social media novices.

So before social pundits mislead the masses, think of 2002’s Sarbanes-Oxley Act and 2008 financial crisis that was caused by systemic risk (which ultimately led to Dodd-Frank). Recall there were many exotically package financial instruments that went belly up and had the US government bailing out several big name banks. Furthermore, listen to the “macro story” as told by the Finance Minister in his latest budget speech. We envisage “quantitative easing” by way of additional liquidity being availed onto the Zambian market with fiscal policies to support them being the crucible of financial hope. In short, the outlook of many of our bank’s balance sheets over the coming months will have quite a few positive surprises. We are bullish on banking in Zambia. 

Many Faces of Premier Companies – How To Not Be Myopic

In his famous Harvard Business Review article, Theodore Levitt told stories of how the US railway industry forgot what business they were in and were fast overtaken but road and air transportation. We have been reviewing some of the behaviors of certain premier companies and it’s clear to us that some of them chose to not be myopic.

With a macro environment that has become hostile to many companies, few Zambian companies are stepping up and making the kind of strategic adjustment that will render their businesses to run ad continuum. These are companies that have answered the quintessential question “What business are we in?” The sort of companies that have realized that growth industries are few and far between. Management teams that know that their responsibility is ensuring their companies do not suffer fateful purposes ergo realizing that if caught in a self-deceiving cycle they would render their businesses obsolete. Decision makers that realize that regulation, when in effect, must be given the seriousness that it deserves or else their business could face foreclosure. Adapt or die.  

CEC is one premier company that lives up to the bill of non-myopic. If the management team were asked, “what business are you in?”, we envisage a response that could possibly be partly shrouded in camouflage albeit protecting company strategy. However, they are an energy company with interests in telecommunication. They have been steadily working at increasing the scope of their vertical chain but at the same time, have looked at their resources and capabilities and discovered means of creating competitive advantage through resources that would traditionally condemn them to the status of a non-energy company. However, just because one is a farmer, it does not stop him from selling water if it’s in excess. The paradox of reserve capacity demands that if you are a player in a game and your resources allow you to compete in a nontraditional market, it would be folly to ignore that value creation potential that capacity gives you. This is essentially what CEC has done…is doing. On the back of its resources, it has been able to spawn off new businesses such as CEC Liquid and Hai Telecom.

As we continue to adapt to the current macro environment, entrepreneurs will need to dig deeper and assess the various resources and capabilities that they have. Bounded rationality will become a liability for anyone in business who chooses not to adapt. When the environmental pressures increase, strategy will demand self-reflection and an answer to the proverbial question: “What Business Are We In?” Ultimately, every Zambian desires to create value.