This is a follow-up post to the previous post on “Investing in Adaptability”, and I will highlight 4 aspects which a Company needs in order to adapt and survive to ensure the corporation can prosper and carry on in the future. These are taken from the book ‘The Living Company” by Arie De Gaus and he highlights the four factors as follows:-
1) Sensitivity to Operating Environment – Companies which can react fast and decisively in the face of changing circumstances will have a better chance of survival as they evolve not just their business model, but also their products and services to suit customers’ needs and wants. Companies should constantly be on the ball and alert about the changing economy, and how the various factors which affect their industry come together to produce subtle changes in the environment which may cause their competitive advantage to either strengthen, or erode. For example, a company in the oil and gas industry has to keep up with trends in oil prices, as well as E&P activities of oil majors to see if they can secure business, and how best they can serve these customers and in what ways. Companies should also be alert of how they can offer new products or services or to re-package them (as Ezra had) to make their existing offering more attractive to potential customers. There could be shifts in their environment which caused them to react in certain ways; and to be pro-active and a first-mover is always more advantageous than being a mere follower. A firm has to be innovative and to be able to anticipate changes before they occur; a passive Board of Directors and Management Team will always lag behind the competition as they are unable to innovate to stay ahead.
2) Cohesion and Identity – This is more an internal trait which will permeate the entire organization and is part of the overall corporate culture. I believe that companies which can articulate a coherent set of procedures, processes and guidelines to all staff concerned is in a better position to forge a distinct and clear path to corporate success. This is because the goals and objectives of the organization are aligned and with all employees in agreement and understand, this facilitates inter-personal working relationships and helps to create better efficiencies at work. An example is Swiber’s “Cause No Harm” policy which is instructed to all staff and is already assimilated as part of the corporate culture (one can visit Swiber’s website for more details). A company which implements such a policy (as well as related, similar policies) can help to create a shared corporate identity and foster cohesiveness.
3) Ability to tolerate decentralization of control and diversification – From this phrase, I will take it to mean that an organization must be able to effectively decentralize in order to create a more interactive working culture, which in turn will promote constructive feedback and spur improvements in all areas of work. This will in turn translate into greater efficiency and effectiveness amongst staff. From what I learnt in Management Theory back in school, an organization is considered to have a mechanistic, task-oriented structure if it has many layers of Management and titles. Examples would be assistant, executive, senior executive, supervisor, assistant manager and manager. A more “flat” and organic structure which is representative of decentralization would just mean there is one layer of assistant, executive and manager; effectively removing the need for so many “sub-layers” and redundant titles. A flatter structure means that sharing is more effective (less layers to pierce to get the final message across) and work can be completed in a more expeditious manner. Diversification will refer to the breadth of activities which an organization engages in, and it especially apparent when a company wishes to expand its product and service offerings. In the process, new relations are forged with suppliers, customers and other stakeholders (e.g. bankers), and it is important that ties are kept close with existing stakeholders as well, in order to avoid projecting an aura of neglect for established stakeholders and a preference for the “newer” ones. Thus, new staff needs to be hired and separate teams assembled to tackle the increase in volume of work, and to ensure intra-company and inter-company ties are not strained or lost in transition. If all this sounds too theoretical, then it can be summed up in a nutshell – take care of your stakeholders, be they new or old, and they in turn will take care of your welfare.
4) Financially Conservative – Companies which are financially prudent in their spending are able to conserve cash for opportunities, and also attract financiers to support them in times of need due to their strong balance sheet. By this, I mean that the company keeps a cash stash and does not expand too aggressively during good times, so as to prevent a “Ferrochina” kind of situation from occurring once the tide suddenly turns and demand (as well as financing) dries up. Plans for capex (capital commitments) and pursuit of expansion into new territories (which generally cost money as you need to set up new subsidiaries or joint-ventures to establish a firm foothold) should be well-calibrated decisions which take into account the most dire of situations, in order to properly buffer against any sudden storms (such as the current sharp and protracted downturn). A company should ensure it has strong operating cash flows and also strong support from its bankers before it embarks on any expansion involving debt, because once the plug is pulled, the company will be like a fish without water! A very conservative company will always weigh and mull over their decision to expand against the backdrop of the economy and take into account any uncertainties relating to the industry or political situation in order to arrive at a well-thought out decision. For example, China Fishery had scaled back plans to acquire more purse seiner vessels and fishmeal plants in 2008 when the crisis swept across the globe and dried up financing, and they began to consciously conserve cash by withdrawing capex plans and also by declaring a share dividend instead of a cash dividend.
The above 4 factors are just the tip of the iceberg when it comes to corporate survival, and my previous post on adapting will add on to what has been said and discussed here. Readers are free to contribute their thoughts and ideas as well on what makes a company able to survive through the years.
Note: I will be covering China Fishery and Swiber’s 1H 2009 results briefly in a subsequent post, but will not touch on Boustead and Tat Hong as it is their 1Q 2010 results release. For a summary of Tat Hong and Boustead’s results, kindly check my portfolio review as at end-August 2009.