Posted 06/27/2020

Business Strategy Analysis - A Fresh Take

5.0

Quality

competitive advantage frameworks strategy value traps

A quick recap of a recent conversation on Telegram that revolves around identifying high quality companies with a strategic analysis framework

Business Strategy Analysis - *A Fresh Take* [Telegram]

  • Recap: Great discussion around resources that lay out a framework to analyze businesses. From Helmer’s 7 Powers to Collins’ Good to Great, the below resources help build on a lot of the business strategy fundamentals with new, critical concepts.

  • Comment: These frameworks are critical to making good business and investment decisions. In particular, counter-positioning / disrupting yourself (short term pain, long term gain) is a KEY point in analysis that many overlook - and often leads to investing in value-traps and/or missing the big winners in new spaces. Just ask* Scott Galloway* - the famous NYU professor/strategist - who pitched Long Macy’s (M), short Amazon (AMZN) on 5/1/2015 (source here)...

    • How’s that gone?* Don’t see any headlines or trackers around this?* AMZN is up 537%, M is down 91%. His spread is NEGATIVE 628% on this trade. That’s the risk of value traps (e.g. M) vs. winners (e.g. AMZN).
  • Highlights:

  • Check out the book 7 Powers by Hamilton Helmer

    • Thanks to @jlm278 for the recommendation + review of the book
    • The 7 powers: Scale economics, Network economics, counter-positioning, switching costs, branding, cornered resource, process power
    • Author is a strategist + active equity investor - the book is useful in helping people identify qualities of high quality / strategically well positioned companies.. As well as helping business owners improve their internal strategies
    • The 7 company-specific powers he lays out are meant to drive sustainable competitive advantages and differentiated returns
    • Many are relatively well-known, but others are more novel - likely counter-positioning: when a newcomer adopts new + superior biz model which incumbents can’t (or won’t) mimic because its value destructive to their existing business

      • Think about* JCPenney or Sears* ignoring any real investment / strategy around leveraging the Internet* - *now they are either bankrupt or on the verge of bankruptcy, while Amazon continues to grow stronger

  • Check out this Stratechery article on the Innovator’s Dilemma - it walks through the concept of counter-positioning, just under a different name

    • On the counter-positioning point above, management teams incentives structures are often very short-term in nature - so they are focused on maximizing short term margins and profits (even if it destroys long-term shareholder value)

      • This is what we see manifesting today in markets - the CEOs at banks (JPM/Jamie Dimon, etc.), airlines, auto OEMs and so on have simply used low interest rates to buyback shares and pay themselves.. NOT invest in the future. And as a result we are seeing massive growth of the ‘disruptors’ - from Amazon, to Tesla, to Spotify
    • Jim Collins’ book Good to Great is another excellent resource along these lines - the best companies look to disrupt themselves, and always think about building a self-perpetuating flywheel around their core competitive advantage

    • Ignoring these key frameworks/concepts can destroy your wealth:

      • Just ask Scott Galloway - the famous NYU professor/strategist - who pitched Long Macy’s (M), short Amazon (AMZN) on 5/1/2015 (source here)...

      • How’s that gone?* Don’t see any headlines or trackers around this?* AMZN is up 537%, M is down 91%. His spread is NEGATIVE 628% on this trade. That’s the risk of value traps (e.g. M) vs. winners (e.g. AMZN).

In terms of companies that embody/embrace the above frameworks, here's a quick list that comes to mind (below). Throw up your thoughts as well.

  • Winners

    • AMZN
    • W
    • CVNA
    • SPOT
    • NFLX
    • GOOGL
    • TTWO
    • ZNGA
    • ~KMX
  • Losers

    • F
    • M
    • JCP
    • CAR
    • HTZ
    • AMC
    • AMCX
    • Most banks
    • Most airlines
   Reply

Other Winners

VRSN

CPRT

ROL

FB

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