You are on page 1of 34

Business Performance in Crisis:

Flat-footed, Ill-prepared and Slow-Reacting

By Dave Livingston, Managing Principal, Llinlithgow Associates ( )

Dave is a management consultant primarily focused on improving enterprise performance by coupling

strategy with execution thru the design and implementation of workable, integrated management systems.
He blogs on this and related issues in Economics, Markets & Investments and specific industries and
companies at, his BizzXceleration blog. Where you can keep current on the state
of the Economy, the implications for Markets and read explorations into business performance for
Industries and specific companies.


How we cope with the economy of the New Normal will depend on how well businesses adjust
to the slow growth, over-capacity and strong worldwide competition. In other words all our well-
being depends on how well businesses do in re-thinking and re-engineering themselves.
Sadly, the prospects in general aren’t very good, when you survey the landscape. Here we
examine how businesses adapted during the crisis from December, 2008 thru the end of 2009.

Because most businesses ignored the warning signs that had been visible since 2006, clear
since 2007 and undeniable in early 2008 they were largely caught flat-footed by the crisis in
the Fall of 2008. Having been blindsided they reacted slowly like deer startled by the
headlights on a dark country road. And, like the deer, with the excuse that nobody could have
seen this coming.

Here we survey those reactions across the broad spectrum of general business responses, lay
out and examine the principles that should have governed their responses and should be the
principles that guide them going forward and consider the implications for performance, profit
and earnings. We also investigate particular companies that did well heading into the crisis by
already having major re-construction projects underway. In particular we take a deep dive in
examining the complete overhaul of Wal-Mart which began major restructuring in 2004,
established new strategies and controls and completely re-thought all aspects of its operations.
Those include product development, market branding and merchandising, store operations
and logistics and technology as well as its international operations. In other words we take
WMT as an exemplar of the kind of deep-seated re-thinking that every business will need to do
but few are.

We also offer up major explorations of how disruptive this decade is going to be and the crisis
in leadership that contributed to so many of these problems.
Table of Contents

1. Let the Triage Begin: Business Performance vs. "Stupid Is" 3

2. Survivor: Search for the Next "Blue Chips" 5

3. Economy vs. Earnings Cage Match: Outlook, Business Performance & Realities??? 7

4. Time, and Past to Play Bizzball: Economy to Business Performance 9

5. Good Boats, Good Captains: Applying the Investment Mantra for Profit 11

6. WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize 13

7. Predator Prey Symbiosis: Crisis, Leadership and Values 17

8. Disruption vs. Innovation: Change, Response, Resilience 20

9. WMT as Exemplar II: Diving Into the Details of the Retail Enterprise 23

10. About Llinlithgow Associates 28


1. Business Management in Crisis 29

2. Leaders and Examples 30

Page 2 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Let the Triage Begin: Business Performance vs "Stupid Is"

December 11, 2008

In many ways this is one of my sadder posts with no grain of schadenfreude in it, not matter the justifications. You
see we' ve been warning first about the very visible slowmotion slowdown for well over a year. And well over six
months ago we warned that the economy had crossed the Rubicon of tipping over into a severe downturn that
was likely to last longer and be deeper than anybody was yet anticipating. In fact deeper than most are still
anticipating. The general reaction to those warnings, both to the blog posts and private warnings to my networks,
was to poopoo the arguments, tell me that things weren' t that bad and all we were really facing was a lack of
confidence and things would begin turning around "real soon now". Just wait. Well we' ve waited and the news
continues to worsen at an accelerating rate on a worldwide basis. Here' s the real danger though. Like my network
and readers most executives were and are being caught flat-footed and ill-prepared. As they scramble to catch up
with readily perceptible realities they are again making decisions, likely to be hurried and therefore bad ones, on
the fly. As Forrest put it, "stupid is as stupid does" and there are a lot of very ostensibly bright people about to
prove him righter than right. In this post we want to review the general business situation and outlook but start by
putting a stake in the ground regarding the state of the economy.

State of the Economy

Let's start with one large and overly

complicated chart that collapses a lot of
the economic arguments we' ve made
recently and been making for all this
time into one lump so we can put that
topic to bed. As usual these charts are
in YoY terms and the first sub-chart
shows GDP, GDP ex-trade and
Employment. Notice that for the first
time in nearly 30 years GDP and GDPxt
diverged because of the accounting
problems with inflated imports,
particularly oil. The more revealing pure
domestic indicator (GDPxt) shows a
very steady slowdown that peaked in ' 04
! Talk about your weak recovery and
non-organic growth. It also shows a
tipping (recession) beginning in Q407
that accelerated in Q208, and compared
historically, looks headed for the

The consequences in part two are job

growth that was anemic and, measured
by jobs net of 150K/month or
450K/quarter, never dug out of the hole.
We' re now almost six million jobs in the hole. Which in part three is a terrible harbinger of future demand declines,
as measured by the sum of the changes in real wages and employment. The best leading indicator we' ve found.

Page 3 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Bottom line - this is likely to get a lot worse before it begins to flatten out. And NOBODY is prepared or
anticipating or doing the right things as far as we can tell.

The Wrong Stuff: Flat-footed Executives

In the readings below, which are extensive, you' ll find excerpts on the situation facing businesses in the
economy, particularly problems with earnings, warnings and debt loads. That' s followed by a section on Industry
changes, structure and dynamics with three cases in point from Autos, Retail and Pharma. One of our key
mantras is Economy-Industry-Company. In other words the Economy defines the ecology in which particular
species (industries) thrive...or not. And how well an individual member (company) does is dependent on the
general health of it'
s species niche as well as individual performance. The three chosen industries represent a
perfect smorgasbord with Autos being the poster child of denial and sustained malfeasance, Retail suffering from
being over-built and over-hyped/marketed but nonetheless not in denial. Just facing the worst of the stormfront.
And Merck, as the representative of Pharma, illustrating after the death of their chemistry-based business model
the kind of forward-looking changes in research, development and innovation necessary to put themselves on a
new path.

Individual business performance is never just a

single item however. It is the confluence of many
separate pieces that have to all work in concert. As
we try to illustrate with the graphic. First you need a
clear and accurate strategic vision that defines what
value you provide to the marketplace. Next you
need to be able to deliver on that vision thru
Marketing, Sales and Customer Service in the
shorter-run. And thru satisfactory operational
capabilities in the blocking and tackling in the long-

As Warren says we' re in the process of finding out

who' s been swimming naked. And it looks like the
answers are going to be beyond ugly. The third part
of the Enterprise Performance Mantra is
accountability - that is you have to set goals, provide
resources, measure outcomes, develop the right kinds of infrastructure and ultimately hold people accountable for

So that'
s our second major mantra – Strategy + Execution + Accountability = PERFORMANCE.

Where you care is all over the place from your job to your investments to the overall health of the economy. As
Carl Icahn observes (again if you backtrack some of our earlier posts on Enterprise Performance) lots of
corporate execs have been falling down badly on the job and are about to be found out. Stupid is indeed is!

In addition to the mantra there are two really stupid mistakes we' re likely to see a lot of in the coming months.
What we' re looking for are the companies who avoid them. In general we' ll see a lot of blind meat-axe cost cutting
which'll actually leave them worse off in the long run and is only justified if, in the leveraged euphorias of the last
several years, they got themselves into such bad financial positions that no options are left. The hard, courageous
and intelligent alternative is to carefully way each of the functions and initiatives of the enterprise, judge it's value
and needs in both the short- and long-runs and make judicious cuts while continuing to support high-value, high
operational leverage investments. The two typical areas that ware likely to be damaged are people and

Our final section points to some fundamental longer term changes that are happening at deeper levels in the
global geo-economic ecology with both China and India moving up the value-stack while at the same time

Page 4 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
watching growing deteriorations in their old value propositions. As/when/if we come out of this mess the world will
have changed on us yet again.

January 21, 2009

Survivor: Search for the Next "Blue Chips"

Now that the Inaugural is past us it'

s time to really "look forward" to
the New Year, in as much as you can. The reality is that we all will
one way or another - that is voluntarily or not. If you haven't gathered
our view is more than a tad bleak since our anticipation is for more
bad economic news with the downturn continuing into 2010 and
future growth rates lower than potential. Further we see the
problems spreading and worsening worldwide and none of this being
factored into valuations and earnings estimates. The saddest fact is
that none of this foreseeable tsunami was factored into business
management decisions and performance, with some notable

Earlier today we had an e-chat with an old colleague about his management not only being caught flat-footed and
now in emergency response mode but also making blind and panicked short-term tactical decisions. As it
happens noone is immune to the pains we are all experiencing and the risks of more are widespread, but some
enterprise are reacting better than others and are better positioned. After the break you'll find some selected
readings on those exemplars who are well-positioned, including Wal-Mart, MickeyD' s, Cargill and Rolls Royce.

Considering the Exemplars

Before you skim those readings you

might want to take a gander at this
interview with Lee Scott of WMT on
Charlie Rose.
w/9952 ) And listen carefully please.
Among the many pearls of wisdom you' ll
hear is a key one - although not quite
phrased this way. That key is that WMT
was locked into it' s old business habits
and wasn' t listening to it'
s customers.
Once they started listening they
stopped, thought and re-factored
themselves. But that process didn' t start
last year - it started at least four years

And in the process WMT halted excess

store growth and reduced it's capital
budgets, re-thought product
management and store operations and started focusing on value delivery. Whether you know it or not this
represents a huge shift from the paradigm that drove them from their founding. The old driving philosophy was
growth and efficiency - now it'
s profitable growth, control, effectiveness and profitability. And last year'
s results
speak for themselves. We try and capture that in this composite graphic summarizing their strategy from their last

Page 5 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
major annual analyst presentations. The more extended discussion of WMT'
s whole re-factoring is here ( Time to
Sell WMT ? I: Thinking the Unthinkable) and serves IOHO as a good example of somebody talking the right talk
and walking the right walk.

Keys to Survival and Prosperity

WMT' s current relative prosperity results

from fundamental strategic and operational
changes they committed to years ago. The
same is true for other major companies
we' ve looked at in prior posts (check the
Enterprise Performance and Company
archives) like HPQ and HD. They all
illustrate the same key challenges being
met. Executive management is subject to
several conflicting pressures. It must first
balance off the short- and long-run
requirements for health, sacrificing neither
for the sake of the other. At the same time
it must establish a balance between
strategy and operational capabilities.
Strategy without execution is fantasy
while execution without strategy is

In this environment executive management is faced with many tough choices. But the all too common one is to
make the "easy" tough choice and meataxe costs and heads on the basis of immediate cost savings rather than
doing the hard work, the hard thinking and the morally difficult work of thinking thru the best balance. Finding
places where you want to be and don' t and then reinforcing the former even at the expenses of the latter. In terms
of the accompanying graphic that means establishing an overall strategy for each of your major functional areas
and then translating that into operating plans, resource plan and accountability controls that are continuously
monitored against the real-world. Not what we' d like it to be. Our exemplars are the companies that have
translated this conceptual framework into real-world actions. Now you need to find them.

Tough work indeed. It will separate the winners from the losers.

So, whether you' re an employee, a business partner or an investor find those "Buffetesque" companies who are
not reacting with panic, whose management is exhibiting skill, calm and courage and will survive as well as
possible in this continuing unpleasantness as well as be better positioned for the future.

UPDATE: Reading this morning' s mail just got a Booz & Co. newsletter that eventually led me to a recent survey
of their which is sadly synergistic with our points here and in the prior post on the dismal outlook for all the flat-
footed executives. Whereas we' re relying on news, our network and anecdotes they did a worldwide survey. The
results are startling indeed. A more complete excerpt along with a pointer to a dloadable discussion is now
included in the readings. Frankly we don't think the news could be worse. We also would refer you to our prior
post on the outlook for enterprise performance: Let the Triage Begin: Business Performance vs "Stupid Is" ; as well
as, of course, the complete archives which attempt to beat this topic to death - apparently "meaninglessly" in
terms of behavioral changes.

Page 6 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
February 08, 2009

Economy vs. Earnings Cage Match: Outlook, Business Performance & Realities???

Let's focus on some of the implications and repercussions of the prior set of posts and pull them together to
understand why things are headed into the "facility" with regard to business performance and earnings outlooks.
Why in other words we talk about and mean smackdown, unfortunately with two very badly ill-matched
opponents. In this corner earnings, which look like your kindergarten teacher, and in the other corner it'
s "The
Rock" ! The readings excerpts after the break go into some specifics from the stimulus package outlook/realities
to market and earnings performance to some specific on representative industries and/or geographies.

Market's Lost Decade

But let's begin with a look back at past

performance of the market over the last
decade (courtesy of Lloyd Norris and the
NYT [if you want to see some of previous
arm-wavings try Value Analysis &
Valuation]). This almost explains itself but
what it shows is market returns for the
previous ten years for each year, and this
year's for the last decade is -5.1% !!!
Abysmal and the worst ever, so far. But if
you believe our unending litany of
Cassandra warnings this is likely to go on
longer than the terrible '70s! So start
factoring that into your thinking. (And
skim the readings - btw if you click on the
highlighted titles they are URL' s in disguises and you can read the whole thing in case you missed that notice).

Smacked in the Kisser: Market vs.


We' ve taken multiple shots at looking at market

trends and the relationship between the market
and the economy but the common meme that
markets lead and that there' s some disconnects
appears to be deeply embedded in analysts DNA,
beyond hope of eradication even with genetic
surgery. The composite chart shows the YoY
changes in GDP vs the Sp500 on top and W+E
vs the SP500 on the bottom.

The logic is GDP => Profits => Earnings, part of

the genetic denial barrier, while W+E => GDP,
hence the strong and obvious correlations. So if
there's any remaining doubt the if the Economy
keeps heading into the crapper earnings will
follow right along now would be the time to go
onto some other reading.

Page 7 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Lie-ins and TIGRS and Bears: Earnings

Yes, most of the funny wordings are deliberate to

make our point, which is that analysts have been
too wildly optimistic for years, missed '
08 badly
and, in continued mis-placed optimism, are likely
to miss ' 09 as badly or worse. The chart at right
borrows multiple sets of data, the two charts on
the left source from a Mauldin newsletter while
the tables on the right are the running S&P
operating earnings estimates from S&P' s web site
at various times (NOTE: Mauldin and S&P are
reporting different numbers so you can' t directly
compare them. Never-the-less....).

On the left notice where ' 08 started and ended up

- the only small ray of light is that reported ended
up higher, but that may just be the different
(apples vs potatoes) data types. Now look at ' 09,
which shows the same appalling drop, and also
shows ' 08 > '
09 ! Yet S&P is reporting that the
analysts are estimating a significant rise in ' 09 !
Which is completely contraditory to Mauldin' s
message and all our analysis. Oh what surprises
lurk in the self-decieving minds of men, or in this
case business executives, since almost all
analysts merely collect, filter and pass on what they're being told. Not what their independent and informed
analysis would show. Even with all that S&P is reporting an estimate PE of ~12 to go with that EPS of $68.88.
Hmmm....well 12 X $68.88 = 827. Which means that at best the market will be flat in ' 09. Would that it might be
so. On the other hand 12 X $42.26 = 507...ouch, ouch, really ouch. And in line with all our earlier guestimating
about L.T. market trends and outlooks.

A real key here is that phrase "business executives tell" we' ve pointed out (Let the Triage Begin: Business
Performance vs. "Stupid Is", Survivor: Search for the Next "Blue Chips" ) most executives are dealing with a
completely unexpected tsunami they didn' t anticipate (ignored) and were caught flat-footed and very ill-prepared.
Worse, based on the McKinsey and Booz surveys we reported on, they aren' t responding well at all, and in fact
seem to be shell-shocked and frozen in place. In the readings you' ll find excerpts talking about the US and
Chinese auto industries, the Mining industry, Retail and the Japanese electronic manufacturers. To put the shoe
on the other foot there are a couple of retail counter-examples where two of the best retailers in the world are
being aggressive and taking advantage of the windows of opportunity here.

Bottom line? There' s a huge pile of equine excretory output in train car loads headed for the rotary impellers and
s going to get splatterred all over us all. And NOBODY is prepared or preparing.

Page 8 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
February 16, 2009

Time, and Past to Play Bizzball: Economy to Business Performance

You ever feel lie you' re shouting at the wind, or

screaming at the tide to go out when it clearly
wants to come in ? Over the last year or so we' ve
often felt like the oceanographer vacationing in
Thailand who saw the tides suddenly surge out,
and knowing that was the immediate indicator of
a tsunami, screamed at the vacationing
beachcombers to run. Only to be ignored. In the
last several posts (State of the World: Crisis
Metastasis, Strains and Fault Line, Economy vs.
Earnings Cage Match: Outlook, Business
Performance & Realities ???) we'
ve tried to focus
on the "Big Picture" economically and take it
down to issues of business performance. Judging
from what we' re still seeing and hearing though
the wave is a 100'crest, racing for the shore and
everybody' s still standing around going OMG, will
you look at that!

Our new mantra is Policy-Economy-Industry-Company, from the old E-I-C which took a predictable policy
environment for granted. In case you didn' t notice the biggest post-WW2 economic package was put together in
three weeks and a major new set of regulatory principles for salvaging the Finance Industry was announced. We' ll
dive into the details some other time but both are enormously better than the punditocracy would have you think,
or the political opposition for that matter. Later we can talk about self-interested expediency at the expense of the
public good. But this not just a top-down macro-driven environment, it is a meta-topdown environment utterly
dependent for the next several years on the efficacy, efficiency and timliness of worldwide public policy. You' d
better hope "they" get it somewhat right or be prepared to
kiss it goodbye.

Economic Situation

The readings after the break provide more interesting

excerpts on the US and World Economies; as we mentioned
in our last integrated post it'
s not just the US facing the worst
post-war downturn. In actual point of fact the rest of the
world is in much worse shape, getting worser faster and the
threat of socio-political breakage is exponentiating. Just as a
reminder here' s the US economic situation composite chart
we put up in our previous post on the subject, and rather
than re-review it in detail we simply suggest you compare
the current situation to equivalent periods in prior downturns.
Then ask how much farther the downturn will have to
proceed to be proportionately equivalent. A lot, right?

Well also just for "fun" here's the latest world economic
outlook from the IMF chart and the key chart from Davos on
major geo-political risk factors. Just refresh yourselves a little

Page 9 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
bit or go re-read the earlier post. A drink or three might be in order. Are there any questions - go back to the Four
Factor chart and ask yourself how you' d grade the situation in each quadrant? How ' bout and D- for the things
we' ve just talked about?

Which leads to the question of business performance. If you' re headed in stormy weather and rough seas you' d
best be prepared to sail in tough conditions, swim or drown. As we mentioned (Survivor: Search for the Next "Blue
Chips" (UPDATE)) the general reaction seems to be to default to the D-position. Hard to breath water, don'
t you

Business Outlook: Performance vs.


Our central theme on this blog is business

performance and what it takes to develop and deliver
it. You can see that worked out in individual company
posts, in industry analysis - most recently with the
easiest whipping boy the FinInd (Rescue, Recover, Re-
Design, Re-Build: Finance Industry Futures) and in
multiple deep dives on analyzing performance factors.
Running thruout every single one of those posts is our
BizzXceleration Blueprint for how to play Bizzball, in
one form or another. From the simple to the more
complex to the company specific. We even went and
mapped ( Masterclass: Buffett on Investing and
Business Analysis)our approach the best post-war
value investor of our lifetimes. So as you skim the
excerpts in the business section bear in mind that the
tsunami' s headed in and the survivors are not going to be random.


Specifically we start the business section off we a column from Jim Jubak proposing his own, consistent,
approach to screening for performers and follow that with several readings on the general business situation. One
is about the extension of Moneyball to Basketball and how it' s impacted the Houston Rockets that serves as a
good template, followed by a great Seth Godin post on the self-inflicted suicide of the Music Industry for failing to
re-think itself. That' s complemented by two "financial readings" that tell you what the flotsam and jetsam will be;
one on a wave of bad debt and bankruptcies which are just beginning and another on the dawning realization that
profits will stay in the crapper for a long time (Wow, Deja Vu', All Over Again ! Economy vs Earnings Cage Match:
Outlook, Business Performance & Realities ???).

That's followed by a pair of complementary stories about improving the focus on Customer Service as an
immediate way to get some air. Finally there are some specific stories about Tesco (adapting well), the Pharma
Industry (a badly broken R&D model that' s destroyed their business model and they' re scrambling just not well)
and the trials and tribulations of Dow Chemical who was "blindsided" by the credit crunch and downturn which
destroyed two major transformative deals. Frankly we think in the context we and others have been talking about
both were built on the proverbial House of Cards and "they should have seen it coming".

Well if we can only throw back one Starfish at a time it'

s still a saved starfish.


1) Japan's leadership is in political crisis and apparently completely unable to pull together the requisite policy
actions and strategies to address their problems.

Page 10 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
2) Eastern Europe' s excessive external debts and mounting economic crisis is threatening Western Europe'
financial system with systemic risks; think of it as sovereign sub-prime.

3) The Investment Community continues to look for the best of it and refuses to face the brutal realities of the
situation. This is, in it'
s implications for lack of grasp, valuations, flat-footedness and shell-shock both exemplar of
all that'
s bad about executive reaction AND a major warning sign for market and business outlooks!

March 05, 2009

Good Boats, Good Captains: Applying the Investment Mantra for Profit

The title is a play on the last one and a famous epigram of the greatest of the Greek Stoic philosophers,

We should act as we do in seafaring: “What can I do?”—Choose the master, the crew, the
day, the opportunity. Then comes a sudden storm. What matters it to me? my part has been
fully done. The matter is in the hands of another—the Master of the ship. The ship is
foundering. What then have I to do? I do the only thing that remains to me—to be drowned
without fear, without a cry, without upbraiding God, but knowing that what has been born
must likewise perish.

That might be taken as a bit fatalistic or depressing until you parse it out some and realize it says to bear up with
fortitude as long as you' re able and before you get in trouble do your darndest to make sure all the preparations
are in place. And if you pick a bad boat with a terrible captain and then insist on sailing into the teeth of a
hurricane at least don' t whine about it. If you'
re a previous reader you' ve hopefully gotten the correct impression
that we have a definite point of view here that' s centered on providing the right tools to forecast the weather, build
or pick the right boat and captains and sail with style, grace and profit.

The prior post laid out our macro mantra with pretty pictures and everything. A key part of that was
Industry/Company analysis and we had an opportunity today to run the deep framework by a friend who' s a Wall
St. analyst. His questions turned a scheduled hour into a really tough but enjoyable three and we ended with a
key one: how do you use this approach to make investment decisions? Can you show a link between stock prices
and business analysis? You can consider this post part of our answer and the graphic below the illustration!

We think at this point it'

s absolutely clear that we' ve shown that the economy drives business, that good
businesses generate profits which result in earnings. Then you have to ask are the earnings you read about
sustainable, the result of structural capabilities? Or the artifacts of flukes or financial engineering? In all our
passes at Industries (Auto, Finance, Tech, Retail) and Companies (Dell, HD, WMT, Citi, GE, we applied the
same approach over and over again. The last post laid out the ginormous graphic of the macro-mantra and dove
into the Geo-politics and Economy while the two preceding ones dealt with the Markets - and have sadly all too
accurate. We did a little digging around, and perhaps giving ourselves some benefit of the doubt, matched stock
prices to prior recommendations and/or assessments. And captured the results in the next graphic.

Page 11 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Proof of the Pudding: Recommendations vs. Results

Back last summer we took a pretty

deep dive on Wal-Mart and tried to
draw everybody' s attention to one of
the most far-reaching, fundamental
and effective re-engineering
transformations we' ve ever seen or
heard about. In some ways at least on
a par with what US military forces did
in re-thinking their Iraq strategy and
doctrines. And in that same Sept. 5th
post we also suggested that you Sell!

Now that results of that look almost

mystic and we admit the timing was
fortuitous but the logic was not. The
Street was concocting tall tales that
WMT had created some new magic
that would let it escape unscathed and
we disagreed. Similarly in Aug we
published a strong....strong Sell Tech
recommendation after warning in the
Spring and last Fall (of '07 that is)
because our economic analysis
suggested that capex spending would
tip over in normal cyclic behavior.

On the Industry front our first pass on the "Death of Wall St. As You Know It" was last March, preceded by storm
warnings and we' ve been using the Auto Industry as our poster child of organosclerotic suicide for almost 18
months. Perhaps we' re being a little overly generous but if you backtrack we'
d argue not to much so, even when
we didn't scream run for the door as we did with Tech and WMT. You can judge.

The Simple Questions Repeated

In the readings below you' ll find yet another

collection of business related readings that
start with an excerpt from Buffett' s latest
letter (two actually) using his summary of
the economic situation to kick-start and then
comparing Immelt, Buffett and a key VC as
exemplars of good management (btw IOHO
both Immelt and Warren are getting bad
press that exagerates their actual failings
unreasonably). Let' s go back to a previous
graphic and put it as clearly and simply as
we can manage:

1. What is the fundamental value of the

business? Is it aligned with the market
opportunity? And carry that down into
Divisions, Product Families, etc. for large

Page 12 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
2. Are the Marketing and Sales functions aligned with and reinforce the business strategy and model? Can they
explain themselves to the market and the customers?

3. Are the Core Operations (Software Development for MSFT, Logistics and Store Ops for WMT, or Design and
Manufacturing for GM for example) capable of delivering on the promises ? Are the key support functions what
they need to be?

4. Are clear goals set, resources honestly allocated and people held accountable ?

By and large you can judge most of this from a careful reading of the business and trade press backed up by a
review of the annual report, SEC filings and analyst presentations. DELL' s troubles for example were predictable
when they started cutting corners on customer service - a fundamental part of their value proposition !
Contrawise, as you' ll read below, Exxon has been husbanding and hoarding resources for years and now has
huge cash reserves to start buying up reserves. Or again Carol Bartz has on-boarded at Yahoo and appears
willing to put the kind of adult supervision and good business practice in place that they've lacked for years. And
on and on.

You can pick the right boat and the right captain who can sail these storms. There is NO REASON to resign
ourselves to our fates! Or so we think. Try may like it. Or at least please drown quietly without excessive

March 13, 2009

WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize

Having put five posts up in a sequence that started with
a strategic market analysis and ended with survey of
the Econ/Mkt/Business factors at play we want to dive
into what we love to do and focus on the outlook and
performance of a single company. We last looked at
WMT for such a dive in Sept.. In fact around Sep. 5th
we asked the then unthinkable question of Time to Sell
WMT ? I: Thinking the Unthinkable and found ourselves
the fortunate recipient of a truly prescient prediction
since it'
s stock "collapsed" the next week.

Now that' s timing but much as we' d like to claim credit

we didn' t anticipate the full impacts of the worldwide
collapse of the credit markets a couple of weeks later.
And all things are relative of course. Only MickeyD' s
and WMT came out of ' 08 with rises in their stock
prices among major companies! In fact if you' ll take a
careful look at the accompanying chart it looks like our
timing couldn' t have been better. Yet our
recommendation wasn' t based on magic chart reading
or luck but on the application of the
Economy/Markets/Industry/Company Mantra.

In this case the economy was weakening faster than

most thought into a more severe downturn, that wasn' t being reflected in valuations and earnings estimates (the
continuation of realities denials by analysts IOHO) and WMT had, as we analyzed, done a superb job of re-
thinking and re-factoring itself as well as positioning brilliantly for a down-scaling customer base. Nonetheless it
wasn' t going to escape the consequences of a receding tide. It was, is and will be revealed however as having
been swimming clothed but in SEAL assault gear with a full combat load and in really buff condition. Really,

Page 13 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
really,..., really buff. In fact we think WMT has re-thought and re-built itself as profoundly and smartly as about any
other example we can think of and serves as a poster-child of the kind of executive leadership and resilient
company we think you ought to be looking for. Which is really odd, strange and exciting because as recently as
Oct07 the WSJ headline was "Wal-Mart Era Wanes Amid Big Shifts in Retail". Look again at the chart and
carefully... '04 saw the continued drop in the stock as the failures of the old WMT became clearer, was flat for
three years as they "struggled" and, just about the exact time the story hit began a year long surge. What you're
looking at is a vast divergence between the analysts and press's grasp on WMT's business and the realities. As
we now know from Lee Scott' s wonderful Rose interview (A conversation with Lee Scott, CEO of Wal-Mart) they
began, and he led, the beginnings of a re-thinking in ' 04 that began to take shape and get traction in '05, '
06 and
'07. Those are the anomolies one wants to search out !

Divergences, Anomalies and Case Theory

What we' d like to do now is take the

deeper dive into the details of WMT' s re-
factoring and see if there' s real substance
that maintains our "Out Perform" rating.
And comparing and contrasting that with
the market' s evaluations. By way of
illustration take a careful lookat this
composite graphic which shows Scwab' s
quantitative rating system on WMT, the
Yahoo Finance summary of recent
analysts opinions and the P&L, Balance
Sheet and Cash Flow financials drawn
from their. All information that you can get
to readily yourselves. (sorry ' bout the should probably go look for

But Schwab rates them a D because of

poor fundamentals and a terrible recent
down momentum. Well, duh ! On the
other hand the P&L tells us they're
growing revenue like mad and profit as
well while the Balance Sheet is fairly
strong and tells us that they'
re using
Payables to finance Inventory, their life'
blood and they have a lot of PPE, i.e.
stores. The Cash Flow tells us they
generate $18-20B per year of cash flow
and are maintaing a VERY strong
investment strategy, even at the expense
of drawing down the balance sheet.
Overall we' d have to say the Schwab
ratings are short-term (sighted ?) and
overlay quantitative. On the other hand
the balance of the analysts seem to share our opinions though upgrades/downgrades recently are balanced on
both sides.

WMT's Views of the World

The questions then become how are they really doing, how do they see the world and what do they think will
happen ? More deeply and importantly, the devil being in the details, what are they doing under the covers. To

Page 14 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
answer those questions we' re going to go deeper into excerpts from their Oct07 annual analysts presentations
which tell a really in-depth story, if you are prepared to dig thru it and understand what they'
re telling you.


The composite graphic shows the % of

growth in US total retail sales captured by
WMT in the UL corner. Amazing, but are they
efficiently run and making money ? The UR
corner talks about the growing awareness of
and adoption of a disciplined capital
management strategy instead of just cookie
cuttering one darn store after the other - their
strategy for decades. That' s an enormous
mindset change in the corporate DNA.

The LR corner shows their corporate

performance compared to five of their biggest
competitors in Retailing and, on the whole,
they' re more efficiently and profitably run than
any of them. And they manage to create
tremendous growth profitably while sustaining
investment for the future by, as the LL corner
illustrates, by developing a set of strategic
metrics and objectives that prepresent the
translations of analysis and re-thinking into simple rules of thumb that can be used to to run the business straight-
forwardedly, simply and comprehensibly.
Bravo Zulu indeed.


So how does WMT management see

things (or more accurately how did they
see things and how well is it holding up)?
Here the UL corner lays out there views
on key strategic objectives from sales
growth to stores to key capital measures
the operating metrics we discussed
above. A little sanguine but much more
forethoughtful than most, by far.
Reflected in the UR corner where they
clearly didn't anticipate they downturn'
depths but were setting up for it

Considering where most folks were in

Fall07 truly prescient. The LR corner
though is the payoff... it shows the fundamental re-thinkings where EDLP is being supplemented by major new
strategic focii while being kept as the fundamental base of the company. Price Leadership + Brands + Store
Experience + Integrated (thematic) Marketing = a whole new Integrated Go-to-Market strategy based on a deep
and profound re-thinking of operational requirements and investments in capabilities.

Page 15 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
What they Really Did: the Re-Factored WMT

Here' s one way to think about what they did do.

The graphic at right is the analyst presentations
translated, abstracted and mapped to our
BizzXceleration framework. To understand why
this is sto startling you have to cast your mind back
to the WMT that was that kept cookie-cuttering one
store after the other. And then tried to clone
(impose) they same model (product mix, culture,
etc.) abroad and came a big cropper in Japan and
Germany. In this framework old WMT would be a
monolithic block where each of the key strategic
and operational and control elements was the
same as it was 5, 10 or 20 years ago.

Now they' ve re-factored each of these elements

enormously but instead of pure cloning used them
as a starter to create distinct platforms for the US,
including new formats, International (Developed,
Emerged and Emerging) and major product
categories. And adopted and adapted them to local
circumstances on a store level while integrating the
pieces into a cohesive whole.

Lessons and Implications

If that'
s a lot to swallow let'
s wade thru the details on each of these areas and see what they look like. Then you
can reach your own conclusions as to whether or not our assessment is accurate and what it means. There are
several bottomlines here including and beyond WMT.

1. If WMT's turn-around is well-grounded and sustainable on all these dimensions they have
positioned themselves incredibly well for the future in the US and across the world. They will be
able to move from strength to strength and are a definite Outperform. Whether that translates as a
Buy depends on your reading of the Economies and Markets. We'd say hold off for now.

2. The Retail industry as a whole is very over-built and under-managed with many chains in
jeopardy. What WMT has done is a model for thinking about retailers in general. If they can't show
where they're creating their own equivalents for a WMT-like makeover pass on by. That
extrapolates back up the chain to their suppliers as well from CPG manufacturers to consumer
electronics to home furnishings and apparel.

3. Even more broadly what WMT appears to have done applies to almost any company or industry,
suitably adapted and re-formulated. Look for the re-thinkers who are executing well...those will be
the good companies to put on your watch list. be continued.

Page 16 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
March 08, 2009

Predator Prey Symbiosis: Crisis, Leadership and Values

This post is something of a bookend for the last one (Good

Boats, Good Captains: Applying the Investment Mantra for Profit)
which dealt with screening and analyzing companies that are
likely to do well. If it wasn'
t perfectly clear a critical factor is the
honesty, integrity and leadership of management, particularly the
executive team as a whole. Here we' re going to dive a tad
deeply into the consequences and causes of bad management.
In the readings we use the terrible example of the sturm und
drang over Wall Street bonuses as our jumping off point for a
deeper exploration of executive leadership.

Make no mistake about it - it' s a critical factor, Wall St. as a

whole with some major exceptions violated both fundamental principles and their own long-term self-interest and
broke the rules of social responsibility. A strong, even harsh conclusion ? Perhaps but we think if you' ll follow us
thru on the arguments the logic is worth considering. And matters as much to you as a tribesman voting on who
will be the tribal warchief and take responsibility for his life. The cartoon, drawn from this week'
s Economist on the
implosion of Bear captures the situation without further discussion IOHO.

Predators vs Prey: a Balanced Ecology

We entitle this post Predator vs Prey because the thinking in

population biology and ecology that describes the interactions
between predators and prey nice represents the inter-actions
between aggressive pursuit of profit and a focus on careful,
cautious focus on value. Think of the blind pursuit of profit, in
the short-term, as being the rough equivalent of a predator
species so blinded by kill-lust that it reduces the prey species
below a sustainable minimum. These charts are drawn from
the Wikpedia discussion of the Volterra-Lotke equations on P-
P interactions; one of the first and sustained excursions into
mathematical biology and still in use today to some extent.

The top chart shows how the cycles in population of the two
species interact over time. When the prey population gets too
large because there predator species is too small there is a
population explosion followed by a surge in predators. In other
words when the picking' s get too easy the predators get more
aggressive. The problem of course, say in the second
component, is that if the population of prey falls below minimal levels the population won'
t renew itself and the
entire system collapses. Hmm...making more sense now.

Page 17 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Looking for the Balance

In any human socionomic ecology most folks

would like to have a decent job (fair day' s work
for a fair wage) but the system as a whole
requires people who are willing to be both
aggressive and step up and take responsibility
for companies and other organizations and
institutions. For a healthy institution or a
healthy total system the two populations need
to be in some sort of balance or excess
complacency will collapse it while excess
aggression will destroy it.

The key driving questions are the tradeoffs

between Interests and and Focus (or
timeframe). Most folks can get away with most
of their efforts directed in the short-term and
their own narrow self-interests. I like to think of
us as Hobbits. Then there are those who focus
on the Big Picture, that is on broad interests but don'
t inject a strong sense of reality into their thinking.

Contrawise there are those who' s focus is strictly on their own short-term self-interest and aggressive and
responsible behavior segues into excess predation. What' s required is a large enough portion of the population
who aggressively pursue a broader set of interests. This is the group one would choose executives from - those
prepared to act in the institution'
s broad interests, balance them against their own immediate gains and be
prepared to sacrifice for longevity, stability and prosperity.

Leadership is NOT an Accident

Lest you think we' re talking out of our hat on this we point you to the
feel-good story of the year - the landing of Flight 1549 in the Hudson.
We' ve all come to know, at this point, how much of a miracle that
was. But if you click on the graphic you' ll be treated to a 2 minute
simulation that plays out in real-time to give you an idea of just how
little time these guys had to make the right decisions in no time at all.
That capability was not created by accident but was the result of
years of training, experience, thinking things thru and preparing for
that one moment when it was all on the line. In crisis we all react as we' re trained, whatever the source of the
training. (The graphics didn' t turn out as well as we hoped; it if won'
t "fly" for you try clicking here for the Flight1549
Simulation or .

Page 18 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Ecological Stewardship

Several years ago Peter Drucker published what we think is the greatest management book of all time
(Management: Tasks, Responsibilities, Practices ). Despite it'
s being published in 1973 it's diagnosis of what' s
required of management and executive leadership is a prescient diagnosis of the failures we' re all victims of over
these last several years. Drucker puts forward a simple list of critical task for Management.

1. Make the work productive

That is lay it out logically and efficiently and make sure it' s effective. How would you rate the Finance Industry
given the disaster' s we' ll be suffering thru for years to come ? Given that the last decade's worth of profits have
been destroyed and the viability of many nameplate firms is gone we' d say an ungentlemanly D- would be

2. Make the worker effective

My friend Bob Sutton wrote a great book(The No Asshole Rule: Building a Civilized Workplace and Surviving One
That Isn't ) last year which has resonated with a lot of folks. Given that what Drucker is talking about is the socio-
psychological aspects of the workplace environment Bob wouldn' t have been able to write that book if many
deserved a gentleman' s C. Yet the list of firms who create worker-friendly environments also tends to be the list of
firms who perform well. Given how notorious the Finance Industry is for terrible workplace environments where it' s
dog eat dog and devil take the hindmost an F- seems appropriate.

3. Take Social Responsibility

And by this Drucker doesn' t mean something namby-pamby like "Save the Whales". Instead he means that
Management are also members of the larger society and have a responsibility to see that it prospers, not just the
firm. Instead he focuses on those things that an enterprise or other institution can do. If you work in a Hospital or
University is the institution taking care of the legitimate interests of all it'
s constituents and stakeholder? If you
work for a private enterprise that enterprise still exists within a social matrix - is it acting responsibly? Better by far
to be proactive in solving problems before society as a whole decides to solve them for you because your benefit
is grossly exceeded by your damage.

One example he uses is Theodore Vail and the

definition of ATT' s purposes. Vail made
absolutely sure that instead of becoming a
regulated business that the company was
respectful of the general public interest. On
this, there being no grade lower than F-, we' ve
probably reached the point where the Finance
Industry is expelled from school for bad
behavior. And their reward is going to be a new
regulatory regime imposed on them over their
protests. A sound awareness of the
socionomic ecology would have had the
Industry stepping forward early and forcefully
to develop workable and responsible
regulatory behavior and institutions. Instead
we' ve gone thru the Tech Bust, Enron and
WCOM and the near-death of Western
Civilization in the last two years.

Page 19 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Drucker published this magnum opus in 1973. Sadly almost none of it'
s concepts and prescriptions have seen the
light of day. As Ye Sow, So Shall Ye Reap!

And just in case you think we' re making to strong a case or exaggerating it we offer up this refresh of the High-
frequency economic data we' ve used so many times before. Without going into detail we' ll just say that a terrible
economic situation appears to have crossed over yet another tipping point into really serious problems. The
bottomline point here, to come full-circle, is that responsible, statesmanlike stewardship of the Company or
Institution will determine who indeed are the "Good Captains and Good Ships" you want to go storm sailing on!

March 15, 2009

Disruption vs Innovation: Change, Response, Resilience

On the "oh what an interesting, small world"

topic a friend's post led me to an HBR post
which in turn led me to a series by John Hagel,
John Seeley Brown and Lang Davison on the
coming "singularity" - a major, discontinuous
disruption in the business and geonomic
environment. As it happens their diagnosis of
the reason has to do with Technology - not a
surprise given their backgrounds but a tad
narrow. We happen to disagree with them on
the trigger, agree with them on the singularity,
think it'
ll be even bigger than they say and
involve more factors.

The nature of the singularity - the appearance

of continuous disruptions that will prevent a
return to some sort of punctuated equilibrium
for a long-time. Having spent the last six
straight posts diving deeply into the
dimensions of the Singularity and documenting
it with big inventories of readings we won' t
review it but you may recall this "kitchen-sink
graphic" that was our Mantra Mandela...the
mantra being Geo-
politics/Economy/Industry/Company of course :).

The accompanying graphic tries to represent the scope and scale of these disruptions we' ve been documenting
on a firm, industry, economic and geo-political level as well as relate it to our on-going concern with enterprise
and organizational performance. One of the interesting excerpts is a post by Irving Wladawsky-Berger on re-
architecting the enterprise from a holistic perspective. Couldn't have put it better ourselves - in fact that'
s such a
central concern of ours it shows up in most posts directly or in-directly and has it's own archive.

One of our key findings is that with occasional exceptions very few concerns are prepared for the changes they' re
failing to meet now, let alone the singularity. Which, btw, is a matter of leadership among other things, which is
why the readings start off with Cramer' s recent startling Mea Culpa on the John Stewart Show.

On the other hand there are the WMT' s and MickeyD' s of the world who have started and made serious progress
on "whole enterprise" re-factorings(WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize); also a
matter of leadership ! The readings contain excerpts from a bunch of the key posts on disruption and response

Page 20 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
and then another slew of carefully selected examples from just starting to profoundly well along. We' d also point
to P&G as another exemplar for resilience and innovation (Sailing Into the Storm: From Execution to Innovation) as
well as a host of the Tech Industry archives that dove deeper into various models of change and innovation. For
the rest of this post, having discussed "big picture" and enterprise disruptions we'
d like to focus on the lower R.H.
component of the Mandela and talk about industry innovation and the Next Big Thing (NBT), which is a primary
driver of all the rest and/or an enabler.

Innovation and Disruption

The History of the NBT: This little graphic

illustrates the socionomic history of the US,
and to some extent all developed
economies depending on when and where
they got on-board the train. As note quite a
sidebar notice when you match these
changes and their disruptions you get an amazingly good match to the 18 year cycles that the market mavens
keep talking about. A correlation, and we think a causal linkage, that as far as we can tell hasn'
t been explicitly
made elsewhere. But one that explains an enormous amount about company, industry and economic
performance as well as the associated socionomic changes.

Post-WW2 Business Changes: if the

previous chart tell us how technology,
business and social change led to
Industrialization and the emergence of Mass
Markets this one breaks down some of the
more recent history for how that evolved.
Consider that post-WW2 we had four major
new industries (Plastics, Pharma,
Electronics, Transportation) that were based
on pre-war invention, wartime investment
and innovation and post-war

The entire "golden" age of the ' 50s which saw the rise of a prosperous middle class for the first time in human
history was built on these foundations. At the same time all these disruptions matured and at minimum leveled off
or began to decay. For example the Pharma industry has been pursuing mega-blockbuster hit derived from it' s
chemistry-based R&D strategy and associated business models and strategies. Yet we' ve known and noticed that
that model is beyond exhausted and there' s no more major value being created. The industry is struggling with a
disruptive shift to a biology-based model and clearly hasn' t found the way forward as yet. They' re not alone either,
as the top bar shows - between maturity, value saturation, a globalizing economy, you can sort and
categorize the headlines and business book titles and consulting gurus of the last four decades. So what happens

The Next Wave of Innovation: well here' s where

we think things are going. This isn't an entirely ill-
informed prognostication but it's not cast in
concrete either. That said it'
s held up pretty well
over the last few years while we' ve developed
and used it. Basically we see three phases which
are probably more over-lapped and inter-
dependent than shown but still representative.

The current phase where enterprises need to re-

invent themselves as WMT, have done, but
few others; and which'
ll exponentiate in the next

Page 21 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
decade as the foot-dragging and systemic disruptions accelerate. The emergence and evolution of new firms,
worldwide competition and new industries and the morphing of old ones. For example this last two weeks has
seen newspaper bankruptcy announcements galore but nobody has come up with a viable New Media business
model yet. TBD and watch this space. (Key Postings Vb (Technomediatainment): Maturities, Barriers and

Putting It All Together

If you put all the pieces together into one chart

here' s what we end up with. Disruption will indeed
continue. Whether the Singularity will be
continuous small- to medium-scale on-going
disruptions or drumbeats (Taiko anyone ?) of
major structural changes we' ll find out. But if you
think there's some merit and evidence so far for
the historical accuracy and current assessment
consider the last phase. Right now we' re trapped
in an environment where there is no NBT
because it takes years to go from idea to
invention to innovation to investment to
market/industry development. On the other hand
that means that you can see a lot of it coming if
you know where to look.

The other huge disruptive force will be the need

to face up to the narrow window of bringing all the
world's people into a prosperous middle class in a stable and effective geo-political environment. In other words
this weekend' s G-20 crisis conclave might just be a good rehearsal for the bigger changes coming down the pike.
And it's by no means guaranteed that we' ll work our way thru with style and grace. But considering the
alternatives let'
s hope so.

On that assumption though think about the world we face from an opportunity point of view - P&G circa the ' 50s
except for billions of people and whole new sets of consumer products and all that implies for all the associated
industries. Not to mention new biologics, energy and materials solutions and on and on. Future generations may
look back on it as a great age of romance, discovery and innovation. After all they' ll have to won' t they ? Or not
care at all ! But when you dig back into the last great age of exploration you find out that things weren' t so easy
and romantic at all !

Readings and Observations

The last part of the readings brings us full-circle back

to the questions of enterprise response to these crisis
(Risks + Opportunities, right?). Stories cover the
range from manufacturer' s struggles with lean to
Chrysler' s desperate gyrations to get itself out of a
terrible box to the Pharma industry' s metastasizing
shakeouts that' s crossing a cusp point this last week
or so. Talk about punctuated equilibriums ! Or
punctured as the case may be. On the other hand
there' s a great story on MickeyD' s continuing renewal
and adaptation efforts as well as the beginnings of
Yahoo' s long postponed ones.

And then two of our favorites. One on how that big old
stick-in-the-mud Exxon has suddenly woken up - or

Page 22 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
was it carefully positioning itself ? :) And then a really interesting new initiative from WMT in medical records that'
startling and stunning in some ways but leverages existing capabilities in others. In this era of needing to
holistically re-think business management we' ll close with two final observations.

One is that the ultimate arch-guru of management Peter Drucker provided the single best bible for re-thinking the
firm we' ve ever seen (Management: Tasks, Responsibilities, Practices by Peter F. Drucker). Sadly though he wrote
it at the time and found that the pre-war innovations and post-war adoptions had reached saturation and we
needed to move to a whole new level. Sadly?

Well he published that book in 1973 and as far as we can tell none of his breakthru ideas and approaches has
been tried. The second is that, among all the other factors, you need to understand industry dynamics and
structure (Key Postings V: Industry Analysis - Enterprise, Industry Ecology, Evolution). For example one reason
that XOM is so brilliantly positioned is that it's built up huge cash reserves, vast technological and management
capablities and timed it just right. (Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions) You see
when you look at the accompanying chart we' re still in a world where, if growth resumes, demand will be greater
than supply and then' s not the time to invest in exploration, reserves or acquisitions. NOW is!

March 17, 2009

WMT as Exemplar II: Diving Into the Details of the Retail Enterprise

Earlier we took a pretty deep dive on WMT(WMT as

Performance Exemplar: Re-Think, Re-Factor, Re-
Energize), at least from a top-down, strategic
perspective that was somewhat well received
(judging by readership and feedback). Here we
propose to "de-construct" that top-down view with a
more bottom-up view of key details including the
virtual enterprises made up by the different
business units, Marketing & Branding, Product
Management, Store Operations, International
Operations and Support Functions (Logistics, IT).
At the same time this exploration serves two other

We ended the last post on innovation(Disruption vs

Innovation: Change, Response, Resilience) by
pointing to the need for understanding industry
dynamics and used the Oil Industry as one of
several possible examples. [Other Industry
Examples: Auto Market Structure, IT Industry Stack
Evolution, Finance Credit Environment, Technomediatainment Stack, Air Industry Network]

The processes and functions of the enterprise are as critically important where processes are how you run the
enterprise while functions are the things you do. The great re-engineering revolution failed because the
consultants doing the analysis created greenfield process architectures that lacked a grasp of the functional
details that business experts needed to supply. Those changes still lie in front of us as vital necessities. The
accompanying graphic lays out an idealized Retail Enterprise Architecture that is a blueprint for what an ideal
Retailer needs to do. And let us re-assure you is that it wasn' t invented and composited in a vacuum - it' s the
result of well over a decade of accumulated work with many retailers of all sizes and across all geographies. [The
equivalent graphic for Manufacturer's]. So with all that said let's take our dive into WMT for it'
s own sake and as
exemplar; and keep the enterprise architecture in mind as a checklist.

Page 23 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Business Unit Performance

The accompanying graphic speaks to key

business units as enterprises within an
enterprise. In fact given WMT' s size, scale and
scope each of these units is in fact a major
industry leader in it'
s line of business. At the
same time each of these business units is
embodied in each store in one form or another.
Here four key BU' s are shown.. Home
Furnishings and Apparel are somewhat old hat
so let'
s consider Grocery.

Back in the early ' 90s WMT wasn' t in the

industry but was thinking about. They went from
no presence to, 10 years later, both WMT and
Sam' s separately were each in the top 10. The
industry mounted a massive effort to re-think
itself with ALL the industry groups, major
retailers and CPG manufacturers and every one
of the major consulting groups involved.

As it happens I led one of the task forces responsible for re-thinking distribution and store replenishment and we
came up with a breakthru in how those operations should work. Like every other major component of this massive
initiative (Efficient Consumer Response[ECR]) almost none of them were adopted (on this one, Flow-thru
Replenishment - THE critical enabler for complex store level stocking) almost the only adopters were Wakefern
(parent of Stop-N-Shop) and (sorta) Target. The real point is that WMT is well along in the process of simlar
disruptions in other major industries with it'
s entry into Electronics and Health. Watch out CC and the pharmacy

Marketing and Store Operations

This next graphic conjoins a complete re-thinking

and re-map of WMT' s Marketing strategy with
Store Operations. For literally decades their motto
was EDLP, Every Day Low Price, but they' ve since
evolved that into a major new theme that still builds
on that history. That theme is "Save Money and
Live Better" which should resonate at any time but
is perfectly suited for these times. At the same time
they're also carrying it down to the store level.

We' ll talk more about how that message and

strategy is, and must be, carried down to Product
Management and discussed Marketing Strategy re-
factorings in the prior post. But on the store level,
which is vital for making this credible, they're
basically taking their blueprint for an ideal store
enterprise in, rather like applying the sort of
business blueprint we talk about with our
BizzXeleration framework, to each and every store. And notice the synergies between changing the store rollout
plans, more efficient and controlled capital management and operational level performance improvements. That' s
what we' d call a virtuous cycle indeed!

Page 24 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Product Management & Logistics

This next graphic links the re-vamped

Marketing Strategy to specific product
categories. EDLP meant that the sole
previous strategy was Price Leadership;
now they' ve expanded that tremendously
to create new value-creating dimensions
and directions. As shown in the UR corner
that means getting the world' s best brands
into WMT store. It also means, on the store
level and in the core enabling operations,
other major changes.

In fact the LR corner is in some ways the

most stunning change. For almost the last
two decades WMT has been on the "usual
suspects" list for best use of logistics and
technology but their highly effective
logistics operation was designed to put a
standard unit into a standard store and
NOT adapt to local sociographics and variable demand patterns. In fact a few years ago when they tried to move
up-scale in Target' s part of the value-equation by putting more fashionable apparel in their stores the effort failed
miserably because the logistics operation couldn' t support it (at least as best we could judge).

For the LR corner to be feasible, workable and profitable implies a huge re-factoring of those operational
capabilities. In other words WMT must have developed a complex and adaptive flow-thru distribution and
replenishment operation. Logistics is both the most under-appreciated operational capability, and like none other
but IT touches all other aspects of the enterprise, and represents the largest un-tapped source of performance
improvement in almost every company in America ! The synergistic links between better links between logistics
and the rest of WMT' s operations creates yet another reinforcing virtuous feedback loop. Without these changes
the entire new Marketing, Product Management and Store Operations strategies would be likel to fail as well. Yet
judging from their performance all the piece parts are clicking along in a highly synchronized fashion. Talk about
orchestrating a revolution!

International Operations

Several years ago WMT went into Japan and

Germany and had many fact the
word failure again comes to mind. At the same
time they did much better, though not
exceptionally so, in Mexico and Latin America,
and eventually in China. Places where their
basic EDLP mantra and the associated
enterprise blueprint played well. Further along
they went full-bore into England by buying a
local chain, ASDA, and have since become a
force in the market. A particularly challenging
one because England is home turf for what we
think is the best example of a flexible, adaptable
and astute retailer Tesco who thru similar
strategic thinking and operational execution
managed to drive Marks and Spencer into a
defensive crouch and over-take them as the
largest and most profitable retailer. But all that

Page 25 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
doesn' t mean WMT gave up internationally as the graphic illustrates. Instead they again re-thought their approach
and capabilities and adapted old and new core capacities to the idiosyncrasies of each market' s special
characteristics. Now they'
ve segmented each market by stage of maturity, created a three-pronged international
strategy, developed multiple alternative formats and built up local supplier relationships. If the Chinese want dog'
feet WMT will find a good supplier ! Look out Carrefour and Aldi' s!

Adaptive Flexibilities

Let's take that down a level and look at

their specific strategies in two
representative international cases. The
UL corner summarizes the overall
worldwide opportunity and specifically
breaks out Japan, which tells us that they
plan to stay and compete thru adaptation
and value. It also tells us very explicitly
that the highly fragmented Japanese
market presents huge under-served
opportunities for them.

Which, as shown in the UR corner, they

are specifically addressing with a
carefully thought out and customized
operationally-based strategy. Similarly
the LR corner takes a major emerging
market, Brazil, and indicates the size and
scope of the market potential there. Again a decent display of local knowledge and focus. Finally the the LL
corner rolls all that up and lays out the quantitative aspects of the overall international strategy. A strategy that
shows every promise of being effective.


The last remaining enabling capability we' ll

focus on is Technology. An area as we' ve
mentioned where WMT has been one of the
top 10 enterprise in the world for decades. The
reason they were so effective was that they
drove Tech spending by business needs
instead of letting tech idiosyncrasies constrain
operational capabilities and strategic choices.

Tech folks tend to be fascinated by bright shiny

things while business folks tend to leave them
without adult supervision. Bridging that cultural
gap is the other biggest black hole of
enterprise strategic re-vitalization and has
been for decades. Yet WMT' s IT folks haven' t
been resting on their laurels - far from it. The
UL corner is one of the best simple
representations of business-driven IT we' ve
ever seen but you may need to decode it a bit
to get that.

Page 26 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
At the top you see how they' ve aligned their IT focus around each major business unit and/or corporate function.
At the bottom you see the major functional objectives and management principles they' ve developed and
deployed to ensure effective alignment is delivered. Finally the next two parts of the graphic show you how their
spending is allocated to drive innovation and how they link IT strategy to critical business value objectives. We
have to tell you that there are very few enterprises, even very well known ones, that manage their Technology like
this. Again WMT qualifies as an exemplar. And again, think about the synergistic linkages back to all the other
functional and process components of the ideal Retailer and their strategies.

Closing the Loop: WMT Enterprise Framework

Let's come to the bottomline here by re-using an

earlier chart that abstracts and summarizes the
new WMT enterprise that we used in the prior
post. Like we said earlier if you built this graphic
for the old WMT it would be a simple monolithic
block with no differentiation. The reason for their
prior international failures as well as their
attempts to move up-scale. Now they' ve created
an enterprise built around customizable
components that can be adapted to each country
and region that also has huge new operational
capabilities in each critical functional and product
area. That means for example that in developed
economies they' re a new threat to folks like
Circuit City with their branded electronics and
supporting capabilities. It also means that they
have an ability to go effectively into Developed,
Emerged and Emerging markets flexibly.

Now the real question is who else has done as

much? Don' t think of this as just a WMT story.
Think back to the last post on Innovation (Disruption vs Innovation: Change, Response, Resilience) and ask
yourselves - who else is prepared to meet the challenges for change, adaptation and innovation that are already
here and putting enormous pressures on every firm. Darn few in general we think and fewer yet in Retailing.

November 17, 2009

Reality vs. Delustion Check: Earnings, Performance, Outlook

s time to return to our knitting, a bit, and focus on business performance. But we' re going to come at by
combining readings and comments on earnings and key company stories with a composite view on earnings,
earnings/PE outlooks and some economic data. Having built up all this machinery digging thru PEs, Profits and
the Economy it seems like a perfect opportunity to bump the financial data against the economic information and
outlook. So in the readings section you' ll find some very interesting stories providing an overview of the earnings
story followed by another major section with specific stories on the Banking Industry, Auto Industry (the "Task
Force"), WMT, Berkshire & Warren, Merck and MSFT & AAPL. Each selected not just because they a names but
because they are deeply representative of key trends and issues in their industries.

Page 27 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Earnings Reporting and Outlook

About 90% of the SP500 have reported and

apparently 4 of 5 have beat estimates on the high side.
Which is one of the best numbers in a long time. Of
course it helps that YoY comps are against pretty bad
numbers and that tailwind will work even more in
everybody' s favor next quarter. The interesting thing,
especially with the energizer market running like crazy,
is that heading into this season the headline mantra
was something like "we believe the economy' s
recovering, that they' ll beat, but will they grow
revenue?". The answer is that they didn' t. And that'
after managing earnings expectations down again. And
playing what' s increasingly the unusual game with as-
reported earnings vs. unadulterated ones.

This table is worth your time to read, parse and

contemplate. It shows the Earnings, % Change and PE
Actual/Estimates from several different time periods
direct from S&P (Dec08, and Feb/Jun/Aug/Nov09) for
two time periods, varying with the time the estimates
were issued.
In Dec08 for example the estimate was for $65.73 for
2008 but it came in at $49.51. The 2009 estimate
started at $81.52 for a 24% increase, then dropped to
$68.88 and 19.2% by Feb09. By Jun09 the estimate
was down to $55.61 for only a 12.3% increase,
dropped to $54.28 in Aug09 and is now at $56.39.
Seems to have converged but does that give you a
huge hit of confidence?

Meanwhile the Nov09 estimates for 2010 are for earnings of $75.03 for a 33% growth rate with a PE of 14.57.
Now that's not an outrageous PE estimate though from our earlier (many times) assessment it's pretty optimistic.
But a 33% growth rate seems more than a tad optimistic based on the last thirty economic posts and the data
we're seeing. In any case $75.03 X 14.57 = 1093 on the SPX! say the least.

Page 28 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Earnings & PE History and Outlook

The next pair of charts look at Operating vs As

Reported earnings and PE' s historically for 1988
thru the quarter before this one and forward to
2010. Apparently this little modest recession we
went thru isn't going to have any serious impact on
earnings or valuations in the opinions of S&P
analysts. One of the things we found fascinating
was the growing gap between Operating and As
Reported earnings. Now OpEarn are pre-finance
and other screwing around while AsRptd are after
all the maneuvers any CFO can think of are
included. Nonetheless they tracked very well
indeed from 1988 thru 1998, even 2000. But that
gap has been growing (as the red trend lines

Now it looks to us as if we starting to rapidly segue

from the reality to the delusion part of our title.
Shall we pause a moment to let you contemplate
these charts? We really urge you to think about it.
At the end of the day the key to this is how' s the
economy going to grow - a topic on which we' ve waxed eloquent from time to time.

Even if we say so ourselves.

Re-introducing Economic Realities

To get a better idea of how realistic those estimates

are let's retrieve a couple of charts on Profits from
the National Accounts as compared to GDP and
another on historic PE Ratios from S&P' s own data.
NB: on the latter it's interesting that S&P have just
completed a major re-design and overhaul of their
web site and, for the life of us, we can' t find the
historical data we used to generate the chart.
Nonetheless give that parts of it run back to 1936
we' ve probably got what we need. Certainly with the
National Account data running back to 1950 reliably
we' re in good shape.

On the top chart we' ll repeat the key point - up until

de-regulation Profits grew cumulatively right along
with GDP. Then there began to be a major
divergence with Finance profits booming thru the roof
while Non-Finance profits lagged GDP until this

That latter is an important telltale - the reason we had

a jobless recovery is because companies were
neither hiring nor investing in capital equipment. With
earnings coming in strictly on the basis of cost-

Page 29 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
cutting and not revenue growth, with a very week economic outlook and an extended period of below potential
growth what do you think the future will look like. The there'
s the Finance profits. Judging from Street behavior
over the last several months they think it's business as usual (BAUie!). We think we' re never going to see the new
normal finance industry looking like the one and have really dug into their business performance analysis to back
that up.

Finally there'
s the historic PE data. We won' t repeat ourselves but judging by the historical averages the PE' s in
S&P' s outlook are, shall we say, a tad aggressive. Which leads to the question that sets up the whole last section
of the readings selection. We' ll let you take yourselves thru those, even if it'
s only to skim our excerpts. But you
have to ask yourself where' s the performance going to come from?

The reading set we found extraordinarily fascinating was Steve Ratner' s article and interview after he finished up
with the Auto Task Force. You know what their major finding was? That management and execution was beyond
abysmal. Think about that - allegedly bad enough for the government to have to take over two major corporations
(one of which - Chrysler - they thought not worth saving). But for them to find appalling bad management ... well
what more can we say?

If all of our economic analysis is anywhere close to target the entire next decade is going to call for extraordinarly
competent management on the part of business. Based on all this how likely are we to see the necessary
performance in the new normal of the reset economy?

Page 30 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
About Llinlithgow Associates
Customer Problem
• Value Proposition
Llinlithgow Assoc. is a management consultancy focused • Business Model
on evaluating businesses to reduce risk, leverage under- • Strategy
developed opportunities in operations and increase
overall enterprise performance to improve investment
Management System
Marketing, Sales &
•Budgeting system
Our approach is based on BizzXceleration, a proprietary Service
•Management Controls
framework with 25 years of development, to review and •Operating Plans
• Customer value focus
• Process Discipline
analyze Business Models and Strategy, key operating •Resource Development • Business-driven
functions and supporting infrastructure and management
systems. From there we develop comprehensive,
integrated operating plans that tie all the components of
the business into a high-performance enterprise. Core Operating
• Functional Efficiency
Several years ago Michael Lewis published an interesting • Inter-function
book on how the Oakland A’s took a systematic look at Integration
how the game really works, and what investments in •Value Alignment

players, strategies and tactics were most likely to result in

the most wins for the lowest cost. Our approaches are similar in taking a systematic look at the whole business, each of the
major components and the best way to tie everything together into a high-performance system.

We start by looking at the basic core value proposition and it’s translation into the Business Model and Strategy. Typically we
next examine Marketing and Sales operations, where it is possible to reduce operating costs by 30%, shorten the sales cycle
by 30% and increase the closure rate by 30%. This is primarily the result of establishing good processes and discipline.

BizzXceleration is comprehensive but integrated across the total reach and range of business activities and issues. And
emphasizes a pragmatic, workable approach that results in a stepwise path to performance improvement. We believe that our
approach mitigates business risks, improves operational performance and can lay the groundwork for 10-30% EBITDA
improvements in post-deal execution.

If you would be interested in further discussions, more detailed descriptions or the review and testing of specific opportunities
we would enjoy hearing from you. We can be reached at .

Page 31 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Warren Buffett' s Letters to Berkshire Shareholders As the year progressed, a series of life-threatening problems within many
of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon
turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young:
“In God we trust; all others pay cash.” By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had
produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have
never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to
business contraction, and that in turn led to even greater fear. This debilitating spiral has spurred our government to take
massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted
out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on
unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states
bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave
willingly. Whatever the downsides may be, strong and immediate action by government was essential last year if the financial
system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been

Business Management in Crisis

Swinging the axe THE headlines screamed that January 26th was “Black Monday” for jobs, after firms such as Caterpillar,
Corus, Home Depot, ING, Pfizer and Sprint Nextel announced cuts of several thousand jobs each, due mostly to the rapidly
deteriorating global economy. Alas, the consensus among the corporate bigwigs gathered this week at the World Economic
Forum in Davos was that this marked only the beginning of the axe-swinging, and that there are blacker days to come.This
proved to be one of the big points of difference between the company bosses and the politicians brainstorming in the
mountains. The politicians are primarily concerned with restoring demand enough to reverse the rising trend in unemployment;
for many of the corporate leaders, ensuring the survival of their firms takes precedence over saving jobs. The difficult decision
they face is not whether to cut, but how to do so in a way that strengthens their competitive position in the medium term rather
than seriously damaging it. The gloomy mood among bosses in Davos makes the worst-case scenario outlined in a new
forecast from the International Labour Organisation (ILO) seem the most plausible of its possible outcomes. Equally candidly,
many bosses admit that the crisis is giving them a chance to restructure their firms in ways that they should have done before,
but found a hard sell when things were going well. As a rule of thumb, a careful cull of the 10% of lowest performers can make
a firm leaner by removing fat without damaging muscle. It is going beyond the 10%, as many firms are now starting to do, that
poses the real risks to a firm’s competitiveness. During the relatively modest downturn at the start of this decade, for example,
many professional-services firms cut too deeply, especially in their lower ranks, and found they were poorly positioned when
strong growth resumed sooner than expected, says Heidi Gardner of Harvard Business School. This crisis is revealing how
few firms have really thought through their talent strategies, says Mark Spelman of Accenture. Claims that “our workers are
our most valuable assets” are too often platitudes, the emptiness of which is now being revealed. But those firms that have
thought seriously about their talent needs have the opportunity to get ahead of those that haven’t, says Mr Spelman, not just
by shedding poor performers but also hiring scarce talent from outside, in what is now a buyer’s market.

Searching for More Tools to Trim Costs Prompted by slackening demand for consumer electronics and automobiles, chip
maker ON Semiconductor Corp. will cut 1,850 jobs -- nearly 13% of its work force -- and close four fabrication plants by early
next year. But that' s not all. ON is also suspending bonuses and raises, cutting discretionary spending, idling factories for as
many as 12 weeks and requiring managers to take as much as six weeks off without pay. Employees at ON and elsewhere
are learning that in this recession layoffs are only part of the pain. Many companies are also cutting the pay, hours and
benefits of those who survive. On Thursday, Hewlett-Packard Co., which was already cutting 24,000 jobs following a big
acquisition, cut salaries by 2.5% to 20% and reduced contributions to employee 401(k) plans. Last year, HP asked employees
to take unpaid vacation days and extended a planned holiday shutdown to two weeks. On average, employers cutting costs
have implemented five belt-tightening measures and are considering four others, according to a January survey of 513 U.S.-
based companies by consultant Towers Perrin. There are no comparable data from earlier recessions. But Laura Sejen,
director of the strategic-rewards practice at consultant Watson Wyatt Worldwide Inc., says companies are trimming costs in
more ways than in previous downturns, when they relied more heavily on layoffs. She and other experts cite two principal
reasons for the shift: The speed and depth of this recession is forcing employers to cut costs steeply, and many also worry
about retaining enough talented workers. When the economy recovers, "those may be heads you wish you hadn' t cut," Ms.
Sejen says.

Page 32 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
Leaders and Examples

For GE' s Immelt, Blue-Chip Blues A sliding stock market is turning up the heat on executives at blue-chip companies. Just ask
General Electric Co.' s chairman and chief executive, Jeffrey Immelt. "There' s a real drumbeat of negative sentiment out there,"
said Peter Sorrentino, a portfolio manager at Huntington Asset Advisors in Cincinnati, which owns GE shares. "I' m not sure it
is legitimate." He said Mr. Immelt and other GE executives have been making strides in shrinking the company' s riskier
financial units and being transparent about company strategy. Beyond the broader market decline that dragged GE down
Friday, some speculated that GE was also hurt by a report from Sanford C. Bernstein & Co. analyst Steven Winoker that
predicted lower profits at GE because of "declines never seen before at GE Capital." Others speculated that short-sellers also
weighed GE' s shares down. In past years, half the company' s profit came from financial services, which have been hit hard by
losses and delinquencies during the credit crisis and economic downturn in the past 18 months. GE, one of the largest
corporate-bond issuers, saw liquidity seize up last fall and had to use a government bond-guarantee program to issue bonds in
recent months. It also had to sell commercial paper to the government last fall when such short-term funding markets dried up.
"This is not a great scenario to have government as debt investor," said Mr. Immelt earlier this month, in an interview with The
Wall Street Journal. "But you don' t have a lot of options." In recent weeks, many institutional investors believed the company
was out of the woods as its stock price hovered between $10 and $15 and the company made moves to reduce its debt, shrink
its financial business and cut costs through layoffs. At the same time, it has been focusing on its more profitable industrial
businesses. "You can' t fault them," said Deane Dray, an analyst with FBR Capital Markets in New York. "If they had been
asleep at the switch during this process, you can criticize them. But they have been pretty proactive." Mr. Immelt and other
executives have indicated the company shifted into survival mode last fall as major banks began failing and stress on GE' s
finance unit intensified. It stepped up the business-unit reviews the company is known for. "Everything we used to do weekly,
we are doing daily. Everything we used to do monthly, we are doing weekly," he said. But, in the past year, GE has been
unable to sell underperforming businesses such as its $30 billion private-label credit-card operations and its appliances and
light-bulb units. GE now must hold and operate those businesses.

GE’s Immelt Accepts Blame Amid ‘Opportunity of a Lifetime’ General Electric Co. Chief Executive Officer Jeffrey
Immelt, two weeks after turning down $11.7 million in bonus pay, took responsibility for eroded investor trust and
said he will work to restore faith in GE. “Our company’s reputation was tarnished because we weren’t the ‘safe
and reliable’ growth company that is our aspiration,” Immelt, 53, said in his yearly letter to shareholders dated
Feb. 6 and released yesterday with the annual report. “I accept responsibility for this. But, I think the environment
presents an opportunity of a lifetime.” A “brutal” global economy means GE and capitalism itself will have to be
“reset,” Immelt said. He’s shrinking GE Capital to provide just 30 percent of total profit this year, down from about
half in 2007, to ease investors’ concerns and try to stem the freefall. “We intend to reset this business to be
smaller, less volatile and more connected to the GE core,” Immelt wrote of GE Capital. As for the economy, “we
are going through more than a cycle. The global economy, and capitalism, will be ‘reset’ in several important
ways. The interaction between government and business will change forever. In a reset economy, the
government will be a regulator; and also an industry policy champion, a financier, and a key partner.” The CEO
made it clear he intends to see GE through the crisis. “The current crisis offers the challenge of our lifetime,”
Immelt said. “I’ve told our leaders at GE that if they are frightened by this concept, they shouldn’t be here. But if
they’re energized, and desire to play a part in transforming the company for the future, then this is going to be a
thrilling time to be a part of GE.”

• Immelt’s Shareholders Letter, GE’s Annual Report

Warren Buffett' s Letters to Berkshire Shareholders Most of the Berkshire businesses whose results are significantly affected
by the economy earned below their potential last year, and that will be true in 2009 as well. Our retailers were hit particularly
hard, as were our operations tied to residential construction. In aggregate, however, our manufacturing, service and retail
businesses earned substantial sums and most of them – particularly the larger ones – continue to strengthen their competitive
positions. Moreover, we are fortunate that Berkshire’s two most important businesses – our insurance and utility groups –
produce earnings that are not correlated to those of the general economy. Both businesses delivered outstanding results in
2008 and have excellent prospects. As predicted in last year’s report, the exceptional underwriting profits that our insurance
businesses realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for
the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we
hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008.
Charlie and I find this enjoyable. Over time, most insurers experience a substantial underwriting loss, which makes their
economics far different from ours. Of course, we too will experience underwriting losses in some years. But we have the best
group of managers in the insurance business, and in most cases they oversee entrenched and valuable
franchises.Considering these strengths, I believe that we will earn an underwriting profit over the years and that our float will

Page 33 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.
therefore cost us nothing. Our insurance operation, the core business of Berkshire, is an economic powerhouse. Charlie and I
are equally enthusiastic about our utility business, which had record earnings last year and is poised for future gains. Dave
Sokol and Greg Abel, the managers of this operation, have achieved results unmatched elsewhere in the utility industry. I love
it when they come up with new projects because in this capital-intensive business these ventures are often large. Such
projects offer Berkshire the opportunity to put outsubstantial sums at decent returns.

• Buffett'
s Berkshire cuts jobs broadly, more coming

Michael Moritz: Lessons from a Long-Ball Hitter Can great companies be built in bad times? Some of that is true. In bitter and
cold times only the brave are going to venture out into the cold and the lily-livered posers are going to stay tucked into their
bed clothes. It makes life easier for us. The people we are meeting are the genuine article as opposed to the pretenders. The
only people who venture out are on a mission, which is what you need. What about Cisco ? (Sequoia invested in Cisco two
months after the 1987 stock market crash.) For us, Cisco is always the company we think of when we think about bad times. I
had been here a couple of years. I was the guy who sat around the table and said nothing. The one thing I remember was the
vociferousness with which they talked about the business. They had a mantra: "We network the networks." Many investors
had already passed on the opportunity. What people forget is that many companies were doing something similar: DEC, IBM
(3Com, and many startups. There were 20 companies. So why did it succeed? They had a very good understanding of what
the customer wanted. They didn' t have to run any advertisements until Year Five. They had a very aggressive sales machine.
John Morgridge, the CEO, had lived through some tough experiences. He had this wonderful mixture of experience and an
avuncular calming presence and a taste for frugality. They didn' t do anything extraneous. They outsourced manufacturing. It
allowed them to ramp up quickly. So what has changed? What has changed is that there are more smart people elsewhere.
Good ideas spread more quickly. Are there any benefits to building a business in a downturn? There' s less frenzied money.
There' s more time to think. The hiring environment is a lot easier and the money goes a lot further.

Page 34 of 34

Strategy without execution is fantasy. Execution without strategy is thrashing.

Either without a management system is unlikely.