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Posts from the ‘Strategy’ Category

Investing in Georgia: An Emerging Economy?

Dawn over Tbilisi, Georgia

Sunrise over Tbilisi, Georgia

At the age of 12 my father bought my sister and me some shares in an investment trust called Aberdeen New Dawn. I remember the excitement of being given the prospectus and reading how the trust was investing in growth companies throughout Asia. The investment did well and fuelled my interest in overseas investing. Later, I read James Clavell’s novels Noble House and Taipan, tracing the fortunes of companies trading in the Far East. For me, the idea of investing in Emerging Markets has always appealed.

georgia map

I’ve recently returned from my second trip to the Republic of Georgia. This is the country where according to Greek legend Jason and the Argonauts found the golden fleece. Sitting in a strategic location, Georgia forms the bridging point between Europe and Asia – in fact it was on the ancient silk route. Still today, it is a major transit point for goods to the neighbouring countries of Azerbaijan, Armenia, Iran, Turkey, Russia and beyond across the Caspian Sea to Turkmenistan.

Georgia has natural resources of oil, gas, gold and valuable minerals such as manganese. Since independence from the USSR in 1989, the economy has taken a while to rebalance and the two wars with Russia over South Ossetia and Abkhazia did not help. However, despite these conflicts, the country has enjoyed high levels of GDP growth (see below). The economy has bounced back from the recession of  2009 -2.75%. Moreover, foreign investment is consistently on the rise (see below).

FDI Georgia. Source: National Bank of Georgia Inflation Report Q2, 2012

FDI Georgia. Source: National Bank of Georgia Inflation Report Q2, 2012

Georgia GDP Growth (OSCE, 2012)

Georgia GDP Growth (OSCE, 2012)

I’ve previously invested in Georgian oil. However, oil investments require large capex and more wells tend to be dusters than winners. On my latest visit I was asked to consider investing in tight oil plays USD1m for each well and if successful payback in 6 months. Horizontal wells, if successful, should yield 3.5 months payback. Unfortunately, with my limited means and with oil already in my portfolio, I declined the offer. However, please get in touch if you would like to know more.

Currently my risk appetite is lower so I asked my Georgia hosts where they saw other interesting investment opportunities. Two areas of investment were suggested (1) fixed term USD 12 month deposits of USD300,000 to 10,000,000 with Georgian banks attract interest rates of between 7%-8%. (2) Investing in infrastructure with an estimated return of 20% per annum.

I’m looking into both of these investments at the moment. Fascinatingly an ROI of 20% doesn’t attract local investors as the local real lending interest rates are in the region of 18% – 20%. If it is possible to borrow money internationally at low interest rates, we may just have a winner!

Real Lending Interest Rates average 2000-2011 (Source World Bank taken from http://www.iset.ge/blog/?p=1100)

Real Lending Interest Rates average 2000-2011 (Source World Bank taken from http://www.iset.ge/blog/?p=1100)

Best wishes to you all for a Happy and Prosperous 2013.

Further Reading:

The ISET Policy Institute:
http://www.iset.ge

National Bank of Georgia inflation report: http://www.nbg.ge/uploads/publications/inflationreport/2012/inflacia_2012_q2_eng_9_nov.pdf

European Bank for Reconstruction and Development (Georgia page):
http://www.ebrd.com/pages/country/georgia.shtml
 

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Mind-maps: Structuring Idea Generation

Achievements mind-mapped using Mindomo software

Inspiration can be found in unexpected places. Personally, I think I have some of my best ideas in whilst out running. I once heard that Richard Branson finds inspiration whilst taking a bath containing the secret ingredient of Badedas “Horse Chestnut” bubble bath.

Unfortunately, if we were to go for a quick jog or worse still, undress and take a bubble bath at the office, our colleagues might be a little shocked! Besides which, we might like to take a more structured approach towards idea generation which we could incorporate with the rest of our team. One approach we can use is called a mind-map.

This is a fun process and works particularly well with teams. Get out a large sheet of paper (A4 will do) and some pens. At the centre write your inspiration word or words. From this central “thought point” you write down your ideas and connect them to the centre point with a line. You then write-down subsequent ideas, which stem from your previous idea. Your diagram grows organically with each new idea out from the centre. Pictured below is a hand-drawn mind-map. I drew this to structure my thoughts around my successes in my last job. I used “Achievements” as my starting point.

A mind-map drawn the old fashioned way with pen and paper

Working with pen and paper is fine, but not so great when presenting to the board or for a report. The mind-map at the start of the article is an updated version written using the Mindomo software. It’s free and easy to use. Give it a go.

In conclusion, Mind-maps are a visual way of mapping your thoughts and also a neat way of presenting a holistic view of a given topic.

References:

http://www.mindomo.com/

How to present a strategy visually: try a “Strategy Canvas”

Getting buy-in for a new strategy is difficult. Often we present vast swathes of data, colourful graphs and pages of text to convince our audience of how brilliant our strategy is and to show how much hard work we have done. To communicate strategy effectively however, it simply needs to be clear and concise. So, how can we best present a clear strategy and communicate it to an audience?

Strategy Canvas for Southampton MBA Strategy Project (Bally Shoes case study).

A well-known phrase in the UK is, “a picture paints a thousand words”. In this regard, one of my favourite ways to communicate a strategy is using a strategy canvas. Steven Yeo, COO of HPS Pharmacies in Australia, and fellow MBAer, introduced it to me. We were taking part in the European Summer School of Advanced Management (ESSAM), in Aarhus, Denmark. Steven suggested that we present our new strategy to our client, CBMI, in the form of strategy canvas. I’d never heard of this approach at the time. However, every time I’ve presented a strategy canvas since, it has proved to be a winning formula. Hence I’d like to share it with you.

ESSAM G14 Consulting Team (L-R Steven Yeo, Phil Hatcher, William Ellis, Ivan Christiansen, James Burrows) 

The concept was developed by Kim and Mauborgne (2002) and published in the Harvard Business Review under the title, “Charting Your Company’s Future”. The study focused on helping a team of senior executives from a struggling firm develop a new strategy. The new strategy resulted in an increase of overall revenues of over 30%.

Drawing a Canvas

So how did they do it? Firstly, Kim and Mauborgne, gathered the senior executives together and showed them how to draw a strategy canvas. They were asked to select the most important value drivers for the firm, or “factors of competition”, placing these criteria on the x-axis. On the y-axis was a scale “high or low” denoting how much the firm invests or provides (in terms of price) in this area. Once the criteria had been selected, the strategy canvas depicting the firm’s existing strategy was drawn.

Add Competing Strategies

Next, on the same canvas, the senior executives were asked to draw the strategies of competing financial services firms. The completed canvas showed in simple graphic form how their company’s offer differentiated, or was similar to, their competitors.

Get Customer Feedback

Kim and Mauborgne’s next step for the senior executives was to ask customers which of the criteria (x-axis) on the canvas were important to them. This gave insight into the areas which a new “customer focused” strategy should concentrate. Combining the two sets of data enabled the senior executive team to create a new strategy that was both customer focused and differentiated.

Create Differentiated Strategy & Communicate it

Having created the new strategy, and a strategy canvas to go with it, the senior executive team then used the canvas to communicate the idea to the rest of the firm. The strategy canvas was widely circulated, pinned on notice boards etc and became a reference point on which investment decisions were made.

Strategy Canvas (Kim and Mauborgne, 2002). This example from their paper shows the old and new strategy devised by the team.

I’ve used an approach similar to this many times. I find it a great way of presenting a strategy in a simple format. Kim and Mauborgne’s 4 step process of how you can create a strategy canvas is presented below. Following this I’ve shown you the strategy canvases of two case studies in which I’ve used this technique.

Kim and Mauborgne (2002) 4 step process:

1. “Visual Awakening” – shows your current strategy in relation to your competitors
2. “Visual Exploration” – ask your customers what is important for them, explore new products and services, which factors can you change?
3. “Visual Strategy Fair” – Get feedback on potential strategies from customers past, present and competitors if needed. Using this feedback you create your new strategy.
4. “Visual Communication” – show a before and after profile on the same graph to show your audience where change is occurring. Any changes in the business have to fit into this new profile.

Case Study 1: CBMI (ESSAM consultancy project)

Strategy canvas for CBMI (dark blue line) presented by G14 Consulting at ESSAM 2010.

We presented a “visual awakening” strategy canvas to the team at CBMI (dark blue line). Our aim in this consultancy project was to look at ways of creating additional income streams for the business. Our canvas showed how CBMI and competitor innovation networks had different business models and offered diverse customer value propositions. CBET (green line), a Canadian entity, exhibited best practice networking amongst the analysed group and arguably provided a source of value that enabled CBET to charge its members and therefore provide incremental income. The canvas clearly showed CBMI in which areas it could improve.

Case Study 2: Bally Shoes (Southampton University MBA Strategy Presentation)

Strategy Canvas for Bally Shoes Case Study: Southampton MBA Strategy Project.

A further example when I’ve used a strategy canvas was for an MBA project based on an IMD case study of Bally shoes. Here we presented our findings on the strengths and weaknesses of the shoe retailer in relation to its competitors. The strategy canvas enabled us to present the relative strengths of Bally (red line) in the areas of Distribution & Retail and Quality. However it also enabled us to highlight the company’s relative weakness in the area of Style, Marketing & Comms, Supply Chain and Customer Service.

In conclusion, this is a flexible way of presenting strategy and showing the conclusions of many data sets in a simple picture. I recommend Kim and Mauborgne’s paper: it’s a good read and presents additional simple tips on creating winning strategies. Next time you present a strategy, consider using a strategy canvas. I’d be interested to hear how you get on.

Further Reading:

Kim, W. & Mauborgne, R. (2002) “Charting Your Company’s Future”, Harvard Business Review, June.

Kaplan, R. & Norton, D. (2000) “Having Trouble with your strategy?  Then map it” Harvard Business Review, September.

Surfing the Kondratieff wave of business

Long-term business cycles: The Kondratieff Wave (kondratieffwinter.com, 2012)

We all have to be reminded every so often that business is cyclical. It is nice when things are going well, it makes us feel good, and makes us feel that we have taken all the right decisions.

I remember chatting to a client in the depths of the stock market crash of December 2008 and him saying, “Will, we’re going to look back on this moment as the best buying opportunity ever!” He was right, it was a good time to buy and I only wish that I had had more cash available to buy at that time. However, I have little doubt that there will be further great buying opportunities in the future!

Some of you may have read Benjamin Graham’s book “The Strategic Investor”, first published back in 1949 and widely credited as being the book on which Warren Buffett bases his investment philosophy. Graham talks about the length of bull markets lasting between 3 & 5 years, the difficulty of course is identifying when you are actually in a bull market and not in a false rally. Still, if your stocks have been going up over the past 3 years it might be worth taking a closer look at the market for signs of increased turbulence, the bull market may be ending.

Business cycles are of different durations, in amongst the market noise there are longer economic cycles which can be identified. The most famous long-term analysis of business was done by Kondratieff. This shows the very long-term cycles in the business environment. He described the cycles in terms the seasons with inflation (spring), stagflation (summer), beneficial deflation (autumn) and deflation (winter).

According to the blog Kondratieff winter, we are now entering a long deflationary cycle.

Reading:

Kondratieffwinter.com (2012) http://kondratieffwinter.com/blog/k-wave/kondratieff-summary/

Graham, B. (1973), The Intelligent Investor, Harper Collins Publishers, New York, New York, USA.

Succession Planning: The King is dead, long live the King!


“The most useful piece of business advice I have been given is to start planning for my successor on day 1”. These are not my words but those of a CEO interviewed on BBC Radio 4.

Succession planning can be difficult but it is a vital issue for any business. Royal families across the world adopted a simple policy that the first-born son would succeed to the throne. Many family companies still follow a similar policy (Fiat, News Corp etc). This is a nice clear-cut system that everyone understands. Of course, I am not saying that this is necessarily the best system.

Sometimes in a company there is no “heir apparent”. Queen Elizabeth I “the virgin Queen” had no heir and chose not to nominate one for fear that it would diminish her power. The problem is that if no succession planning is apparent people get worried. Remember the falls in Apple’s share price whenever questions were raised about Steve Jobs health?

Elizabeth I of England

Succession planning is not just a case of addressing our own mortality or the chance that we might have an accident; it is true for everyday projects. Management Consultants are often criticized for advising a company for a couple of weeks on a change, making a change and then leaving. Unfortunately, if the right measures are not in place, the changes are less likely to “stick”.

One of the lessons that I, and the team learned in Kenya was to start planning our departure and transmission of roles from day 1. We had left our planning too late and so, on leaving, our Kenyan team were unsure of their roles. Despite our best endeavours our local team was only 90% sure of the procedures and roles that they had to fulfill. Had we started planning from day 1, that 10% confusion might have been avoided.

When is the right price not the right price?

Sometimes things really are too good to be true. Often, if the price of something is too low, it is too low for a reason.

Many times while working in investment management my then boss would tell me “it may be a bargain William, but that price is telling you something”. Often he was right; the depressed price was a signal that there was an underlying problem with the company of which we were unaware.

Most recently, this happened to me in Kenya. I was getting stuck into my second week of the CBSM primary school build. We had established a good network of suppliers and barring a few minor problems with undersize foundation stones, things were going well.

Foundation stones being delivered of varying quality

However, money was tight (donations are most welcome by the way) and we were keen to save costs. Interestingly, in Kenya the cost base for a build is inverted to what you would find in Europe. There, labour is cheap and materials are incredibly expensive. For instance, our unskilled labourers were earning 250KSH per day –roughly €2.50 a day. A bag of concrete costs in the region of KSH800 or €8.00.

The foundations require vast quantities of aggregate (stone chips) and these arrived at site in 30 tonne loads. Initially, we had negotiated a price of KSH2,500 per tonne with our supplier Joseph, he always delivered on time, kept us in touch if there was a problem, and the goods were always to the right quality. By this time however, the build was attracting lots of local (unwanted) interest. People in shirts (as opposed to t-shirts) were turning up to the site. An unusual spectacle in this poor area, these turned out to be local suppliers who brazenly informed me that it was my “duty” to give them some business as it was a “community project”. I was reluctant to change suppliers as we had already established a simple functioning supply chain, with good stock control and I didn’t like their attitude. However, I am always interested to know the market price for goods so I asked for quotes for aggregate from two of the “shirts”. Kebaba bid KSH2,300 per tonne and Joshua bid KSH2,400.

Chatting to Masika the construction manager (white shirt) while a local supplier looks on

At first glance, here was a considerable saving to be made. Potentially we could save KSH6,000 per load. I was still unwilling to change suppliers. Besides, the local Kenyan team didn’t know these two locals. I decided to have a meeting with our trusted existing supplier Joseph. I decided to adopt an open book policy and presented him with the two quotes and asked if him for his thoughts. He looked at the paper, paused for a while and then reduced his price by KSH100 per tonne. He complained that the lowest bid was too low, there was simply no profit in that deal for the supplier after transport and other costs were added. Now, better understanding his supply chain, I could make a balanced decision. I therefore accepted Joseph’s bid of KSH2,400 told the other suppliers that our books were closed and asked them to leave the site.

Part of the CBSM build supply chain

The next day there was an uproar! Whilst I was procuring steel from Bungoma, the police had arrived and finding Kebaba (the low bidder) at the gates to the site, arrested him. Allegedly, he had been stealing aggregate (diverting lorries) from a government site. Had we taken Kebaba’s offer, there could have been serious repercussions not only for the build but also for the charity.

When dealing with suppliers it is important to understand their costs and know their business. Japanese companies such as Toyota are well known for taking a long-term view on business relationships and for the high transparency of the bidding process. For instance they often build-in an accepted profit margin into a deal. Moreover, if they then ask for further cost savings they will work with the supplier to ensure that these can be met and not at a price which damages the long term future of the supplier. After all, we want to ensure that suppliers can deliver in the long-term on cost, quality, time and also invest in their businesses. Ultimately this will be to our benefit too. The diagram below shows an “open book” 2 way communication strategy which can be used when dealing with suppliers as suggested by Lamming (1996).

2 way flow of information between supplier and purchaser

Sako (1992) in his analysis of UK and Japanese firms found that 3 types of trust are needed for good buyer-supplier relationships:

1. Contractual trust – the adherence to formal, legal promises
2. Competence trust – that either side is capable of delivering what has been prominsed.
3. Goodwill trust – which borders on “ethics”, trusting that appropriate behaviour will ensue.

Joseph is such a supplier. He delivers on time, on cost and to the required quality. I trust him and we communicate well; both giving and receiving information on the build. I also noticed that his trucks were in good condition and his employees were well looked after. Here is a man who is building his company for the future. Hopefully next time I receive a low bid from a supplier it will act as a warning light and I will be on my guard. In finance we have a term “KYC” for Know Your Customer, I think my experience in Kenya has taught me that the acronym “KYS” Know Your Supplier is equally valid.

Further reading:

Sako, M. (1992) Prices, Quality and Trust: Inter-firm relations in Britain and Japan. Cambridge. Cambridge University Press.

Brown, S, Lamming, R, Bessant, J and Jones, P. (2006) Strategic Operations Management, 2nd Edition, Elsevier Butterworth-Heineman. Oxford. UK

Next: Succession planning: The King is dead, long live the King!

The Anchoring Heuristic and the Mzungo effect.

I’ve just returned from Kenya. Hopefully, I’ve successfully defeated the flourishing Amoebas in my intestine. I thought you might like to hear about my recent experience with the anchoring heuristic whilst building a primary school for the children’s charity CBSM Kimilili, in western Kenya.

Some of the 250+ pupils at CBSM School Kimilili enjoying lunch

I find it both exciting and challenging working with cultures different to my own but often such differences can lead to mistakes being made; for instance our lack of knowledge of the environment means that we are working with incomplete information. In such situations we are likely to draw on our previous experience, which may have little bearing or relevance to the current problem. These subjective judgements are called heuristics.

Heuristics are “a method of solving problems by finding practical ways of dealing with them, learning from past experience” (Oxford Advanced Learner’s Dictionary). Heuristics are often good; they help us make decisions quicker. However, by being aware of when we may be using them we can hopefully make better, more balanced decisions.One such heuristic is the “anchoring and adjustment” heuristic. Research has found that individuals tend to anchor their subsequent answers around a given starting point (Johnson, 2011).

Let’s take a look at buying cement, an expensive commodity in any country. On the school build we needed to purchase and have delivered 150 bags of 32.5N Bamburi cement for blinding the foundations. Lacking transport, we had to source the cement from hardware shops in town rather than buy from the wholesalers in Bungoma. I was sincerely advised at this point that I would be subject to the Mzungo (white man) effect and it would be impossible for me to get a fair price.

Mixing the cement and aggregate used in the blinding

Loving a challenge, I suggested that Masika, the construction manager and I work separately; we would each take a different side of the town, meet in the middle and the winner with the lowest price would win of a bottle of (cold!) Tusker beer. Well, I won the beer, having found a price of 5KSH lower than Masika!

Masika the Construction Manager, Agnes Kuhne and Dominik Klimmek at site

It was during the cement negotiations that I realised I had succumbed to the anchoring heuristic. We roughly knew the price of cement direct from the factory; add on a margin for the wholesalers and then for the retailers and we therefore assumed that the very best price (BATNA) might be KSH850.

Checking the quality of the cement before accepting the delivery

Sure enough, each hardware shop was quoting around the KSH860/870 mark, give or take KSH10. I therefore based my negotiations around this figure. That was until I came to Highway Hardware towards the end of Kimilili’s main street. Here, the owner opened the bidding with a price of KSH835 for the 100 bags! I realised my mistake that I’d been anchoring my bids at the KSH850 level. Now my negotiations would start from this lower price. In the end, I managed to knock a further KSH5 off the price and settle at KSH830 for 150 bags including delivery.

The 150 bags of cement arrive at the school

I think this experience is a good example of the anchoring heuristic; it also shows us that the colour of our skin doesn’t necessarily mean we can’t get the best price.

First price anchored at the higher level, Highway price much, much lower.

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