Stumbling Corporate Stars

In “Why Companies Choose to Fail”, we indicated that the decline and eventual failure of a leading corporation is a long term process that occurs in phases http://www.eamonhoey.com/?p=476 . A company walks down the performance ladder in successive steps. Key indicators signal that a company has become a “stumbling star”.

 

Key Indicators to Help Identify “Stumbling Stars”

 

Below are four indicators to help identify companies that are “stumbling stars” and may soon join the ranks of the “departed”. We did not list stock price as a key indicator. It is a trailing indicator, a reflection of past performance, and is of little forecasting value. A constant declining stock provides notice “this is a sick puppy”.

1.    Record of Poor Growth

Companies that are in early stages of decline are not growing at the same rate or faster than the market. Their growth has been arrested. They are at the top of the curve, in the early stage of decline.

 

Decline happens to market stalwarts, blue chip companies, and century old firms. Companies that investors relied upon to perform through the ups and downs of the market begin to fail, they become stagnant. They fail to keep pace with the market.

 

Data from S&P Capital IQ referenced in The Wall Street Journal[1] shows that:

  • One third of Dow Jones Industrial Average (DJIA) companies posted shrinking or flat revenues during the past 12 months
  • Revenue growth for half of DJIA companies didn’t outpace US inflation rate of 1.7%.

Revenues that are flat or which do not keep up with inflation are sure signs a company is falling behind the market, they are in decline.

Some companies, as reported in FP500, saw decline in revenues between 2002 and 2012. BCE’s revenues declined by CDN$2.2B. It lost more than 10% of its 2002 revenues. Similarly, Bombardier declined by almost $3.5B. Ford Motor Co. of Canada Ltd. declined a whopping $12.1B. That was greater than its 2012 CDN$9.4B revenues! Buying a Ford may be the last you own. Investing in BCE may bring you declining returns. Working at Bombardier may provide a very uncertain future.

2.    Trapped by Silos

When a business is in imminent collapse, its “stovepipes”, silos of authority, become barriers to customer service. Each silo becomes inward looking, satisfying its own needs, rather than outward looking, focused on the customer. In failing companies, the front line people lack authority to serve their customer. Everything flows to Head Office for approval. Up, down, and across the organization chart decision making flows. There is little coordination between the silos. In my experience, Air Canada’s silos prevent frontline people to serve their customers. By contrast to Southwest Airlines they lack authority. They are servants to the bureaucratic silos rather than to their customers.

Consider that for at least a decade General Motors was aware that some of its vehicles had faulty ignition switches. The $0.57 faulty switch resulted in the death of at least 13 people. Yet GM’s bureaucratic silos did little beyond holding meetings. The problem was not corrected until it became public. The existence of inward looking silos is a sign a company is trapped in a spiral of decline.

3.    Corporate Obesity

Companies lose focus and effectiveness as the Leadership, in a bid for growth, moves the business away from its core business. They wander away when they acquire businesses in non-adjacent markets. They make undisciplined investments or fail to abandon investments that have long lost their original promise.

A sure key indicator a company has lost its focus is when activist investors mount a bid to break up a company. Take the case of DuPont Co., the 212 year-old chemical giant. Currently, activist investor Trian Fund Management LP is pushing to divide DuPont’s assets into two distinct companies and sell off assets that are non-core. DuPont has an overly complex and bloated corporate structure. It has seven lines of business with little relation to one another. Amongst its assets are a hotel, theatre, country club, and a golf course. This makes it difficult for investors and the company to gauge its prospects. Shedding non-core assets would enable DuPont to improve performance, increase its focus, and remove complexity. There are similar calls to break HP into two separate entities. These are but two examples of bloated organizations that are on the decline because of their refusal to undertake a vigorous program of abandonment and weight reduction.

4.    Leadership’s Language

Listen carefully to a CEO’s language. You will hear slogans and frothy promises pour forth. These indicate there is trouble in paradise. You might hear them say:

 

  • “We are making progress on …..”
  • “Our recent recapitalization will ensure our long term viability”
  • “To provide for growth we will undertake significant acquisitions”
  • “We are closing the gap ….”
  • “Our restructuring is taking hold”
  • “Our intensified focus has resulted in new efficiencies and cost savings”
  • “These changes in our senior Leadership will strengthen our team and provide renewed focus”.

 

Do the above key indicators help you identify a “stumbling star”?

 

 

What other key indicators do you see as being a sign of a “stumbling star”?

 

 

[1] Theo Francis, Mike Esterl and Joann S. Lublin. "Clouds Darken for America's Blue Chip Stocks." The Wall Street Journal, October 22, 2014.

 

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