Nov 25, 2024 | Change, Governance, Strategy
Should the ACCC have approved the $8.8 billion reverse takeover of Sigma pharmaceuticals by Chemist Warehouse?
Chemist Warehouse is by far the largest competitor in the $17 Billion retail pharmacy market. Sigma pharmaceuticals is a wholesaler serving all pharmacies, and holding a major share. On the surface the reworked Chemist Warehouse/Sigma pharmaceuticals company could exert undue competitive pressure on retail pharmacy competitors. They would be in a position to dictate price and terms by virtue of their scale. Surely not a good outcome for retail prices.
On that basis when recently asked my view I asserted that the ACCC had made a mistake in allowing this transaction. It seemed on the surface that the power of the combined group would logically result in higher barriers to entry, less innovation, the lessening of competition logically leading to higher prices.
However, on the flip side, is it the role of anti-competitive legislation to protect competitive enterprises in a vertical?
Retail pharmacies make anywhere between 25% and 65% of their revenue from non-prescription sales. The latter number being Chemist Warehouse share, the former being the bottom end of all other retail pharmacies. In effect, pharmacies operate as competitors to Woolworths and Coles for a big chunk of their revenue.
We have a paradox here reflected elsewhere in the economy, most particularly in the retailing of food and groceries. Should regulatory authorities be required to interrogate just the horizontal market for competitive pressure, or should they also reflect on the verticals in operation that serve as the supply chains?
Coles and Woolworths over the last 40 years have effectively created what was 20 years ago an oligopoly. They had swallowed up in one way or another almost all of the competitive retail chains, and the power of the wholesaler serving independent retailers was significantly diminished. To facilitate their own supply chains, they built and continue to innovate through the supply and logistics chain to squeeze costs out, in any way they can, while maintaining a good return to shareholders.
Aldi launched into the Australian market in the mid 90’s. They deployed a different business model offering a limited range of house branded products at discount prices in low rent locations. As the number of ALDI stores increased driving market share, so did their competitive impact on the market increase. Currently it would be wrong to consider Coles and Woolworths an oligopoly, as Aldi is a growing, and apparently financially viable competitor.
After consideration, I concluded that the ACCC had in fact made the right choice in allowing the Chemist Warehouse Sigma pharmaceuticals reverse takeover.
At the other end of the scale, we have the privatisation of natural monopolies where competition is next to impossible. The obvious example is Sydney airport, a privatised public monopoly that has conducted innovative programmes to gouge the travelling public. Such a natural monopoly should never be privatised.
It is stupid and naive in the extreme to think that a private corporation would not leverage their pricing power to the benefit of their shareholders when customers had no option, and no alternative was likely to emerge. Promises of regulatory profit limitation have proven to be a politically useful mirage, its true nature only apparent just after the ink has dried.
Nov 18, 2024 | Governance, Innovation, Leadership, Strategy
The latest economic complexity rankings put out by Harvard were recently released. Australia dropped from 93 in the world to 102. One place ahead of Yemen, one behind that manufacturing innovator, Senegal.
I had missed the report until an article in the auManufacturing LinkedIn group brought it to my attention.
The best that can be said about Australia’s drop from 93 in the previous ranking to 102 in this current ranking is that we have made possible the performance of the 101 countries that are above us.
This includes such stunners as Bangladesh at 100, Honduras at 97, Uganda at 96, and the home of Voodoo, ranking as one of the world’s poorest countries, Benin at 99.
To be fair, the ranking methodology struggles to adequately quantify the benefits accrued by services in its calculations. This compromises the ranking of Australia which has an advanced but hard to count services sector, while exporting mostly commodities, which is easy to count.
Nevertheless, while politicians are ensuring the public debate (aka playground squabbles) is around irrelevancies like the chairman’s lounge, long term challenges in education, aged care, housing, equality of opportunity, and economy wide productivity go uncontested.
Take education for instance.
This is a very substantial sector generating billions in economic activity by educating the children of our Asian neighbours. Many see it as a road to residence, which will benefit our economy doubly, as they have paid for their own education. However, many return home, enabling the ‘connections’ highlighted in the report as critical to complexity to be made. Meanwhile, for our own kids, we have continued to make getting an education more expensive to the point where it is becoming unaffordable in the absence of parental support.
In our wisdom, we are in the process of ringbarking this pathway to complexity.
How stupid can we be?
I recall in 1980 then Singapore PM Lee Kuan Yew warning that Australia was destined to become the ‘White trash of Asia’. It seems his warning is coming to pass.
PS. November 22. This ‘Visual Capitalist’ graph of the 30 largest exporters came into my feed today, adding some flesh to the bones of the index. The make-up of exports of several of them should lead to some deep thought. For example, Holland, Switzerland, Belgium, even the battered UK, where there are no hydrocarbons or minerals in the mix, outrank our commodity driven export mix. This is a solid indicator of the ‘complexity’ to which we should be building.
Nov 15, 2024 | Governance, Leadership, Management
We tend to think that the person on the top of the pyramid has the power to do whatever they wish within the boundaries of reason and the law.
To some extent this is true but there remains only five tools they can use.
Volume.
Price.
Costs.
Culture.
Strategy.
Everything in a business stems from these five fundamental tools when they are focused laser-like on customers..
A leader that has at their fingertips a few simple metrics that reflect these five tools, and focuses attention on the drivers will be successful.
The first three are quantitative. The fourth, culture, is much harder to define quantitatively. However, there are measures that will deliver insight, such as staff churn, Surveys into items such as psychological safety, diversity of training, thought, and experience, and team collaborative success.
Strategy is also qualitative, in that it cannot be measured except in hindsight, by which time, it becomes useful only as a lesson, and driver of future strategic choices.
The combination of culture and strategy, when they are mutually reinforcing, and aligned is a potent combination, that drives the quantitative allocation of resources, measured in outcome by revenue, price and costs.
Header generated by the newest shiny thing in a subsection of the toolbox: AI.
Nov 10, 2024 | Governance
Last Wednesday evening I was at a small(ish) gathering of about 50 owners of SME’s as news came through of the US election result.
It seemed everybody in the room was aghast.
Not only at the result, but at the size of it, and the continued failure of pollsters to even get close to calling it. This was despite the money and media time spent discussing, dissecting, and forecasting in the lead-up.
Now the question of the week is ‘how will it affect us?’
Speculate all you like, but the only thing we know for sure is that change is happening at an accelerating rate around us.
A quick look around the web at election results around the world over the past decade shows a consistent pattern: Voters are an unhappy and vindictive lot, increasingly demanding change that the established body politic fails to see and respond to. The result is that the global political status quo is heading for the round file. In its place is a fragmenting and polarised electorate providing fertile ground for dissention.
Look at what has happened in Australia over the last 20 years.
The Labor party currently holds the prime ministership with 33% of the primary vote at the last federal election. The coalition in its various forms scored 36%. Greens 12%. One nation 5%, United Australia 4% with 10% rats and mice. Since 2007 when Howard was dumped by the electorate, we have had Rudd, Gillard, Rudd, Abbott, Turnbull, Morrison, and Albanese sitting in the ejector chair. 7 changes over 17 years. Hardly a picture of stability, and who would be certain that in March next year we will not have another change.
We are at an inflection point.
Irrespective of who holds sway in the big house, climate change will march ahead, as will the changes wrought by technology. Conflict will increase in direct proportion to our inability to control it. The location of world manufacturing will continue to swing towards Asia as the compounding effects of Wrights law combined with technology turns the so called ‘western world’ into a manufacturing shadow of its former self. New materials emerging from AI driven labs will goose the rate of innovation in climate tech, zero carbon footprint, and the electrification of the world, while the social fabric is torn apart.
My generation, and the one that follows, which is largely now running the joint, are leaving a legacy for my grandchildren that history will judge poorly.
Oct 24, 2024 | Governance, Leadership
The cost of a wrong hire is huge, and for an SME can be devastating. Not only do you lose the money put into the process, but you also lose the time of those engaged, the opportunity to find that perfect candidate, and perhaps most importantly, the damage that a wrong hire can do for the implementation of the key activities for which they were hired to do.
The damage that a wrong hire can do to those remaining and the culture of the organisation after the problem is fixed can also be devastating.
There are a lot of fancy consultants out there with all sorts of testing regimes that claim to uncover the best candidate. They can add considerable value when used well.
However, we humans evolved successfully by being able to pick those with whom we could work harmoniously and productively, those who could earn our trust, and on whom we could rely. While we make mistakes, trusting our instincts drawn out by that most primitive of communication methods, talking, is the real test.
Over the years I have done a lot of recruiting for those for whom I worked, as a manager and advisor. Not all worked, mistakes are made, but a significant majority went on to add great value to their employers. When you make a mistake, recognising it early, and correcting it quickly benefits both parties in the long run. However, there are a range of conversation starters, often called questions, which can reveal the ‘fit’ a candidate will have with, and the contribution they can make to an organisation.
Why are you here today? This can reveal the personal motivation of the candidate, rather than enabling them to just respond about the skills they bring to the role. It turns it around to look at the ‘why’ they are seeking a new job. Having a real motivating driver is way better than just a general, ‘I need a job’ sort of response.
How would you like to be remembered? This can be asked in several ways, so that the response to those with whom you worked, and those to whom you were linked in more personal ways.
Would you rather be respected, liked, or feared? Often the response to this can reveal the leadership style they have, or believe they have. There is no right answer, but the ‘fit’ to the context of the role they may be walking into is important.
How would those around you now describe your personality and management style?
Very few are able with any accuracy to see themselves through the eyes of others. However, the response to this question can tell you a lot about their own self- image.
What would your current boss say if I rang him asking for a reference?
As with the question about how their peers would describe them, this question goes to their self-image. It also will provide cues about how they relate to the formal hierarchy
Tell me about the times you have failed? This question often puts people off, as they are cued into thinking about the success they have had, and how they might translate into the environment for which they are interviewing. Failing is a part of learning, and you can learn a lot from a conversation about the failures of a candidate, what led to them, how they responded, how they worked themselves out of the hole. And indeed, is it one of the failures that led them to be sitting in front of you now?
What did you want to be when you were a kid? This one can be a good conversation starter, and lead to discussion about the path towards where they are now, and why they took the choices they did along the way
Show me how you walk the talk. A conversation will always reveal what people want to be revealed, particularly the more personal things, hobbies, personal style, passions they may have commented on, so I dig into them. Once while interviewing for a plant engineer, I asked a candidate that question, and his response was along the lines that he was able to get people on the line to talk freely to him, to help him diagnose problems and opportunities they faced every day. Then he surprised me by saying ‘let me show you’. He stood up, grabbed a dust coat and hat from the stand in the corner of my office, and said let’s go. We walked into the plant where he demonstrates conclusively the ability he had just spoken about. He did a terrific job for a number of years afterwards, before being poached for a much bigger job, which he also did with distinction.
Can you tell me a joke? I would leave that to late in the day, but it can reveal how well they think on their feet, and communicate in an awkward environment, and connect to those with whom they are communicating.
Header cartoon credit: Dilbert’s mate aces an interview question: courtesy Scott Adams.
Sep 18, 2024 | Analytics, Governance
Economic Value Added, EVA, is another of those annoying acronyms accountants tend to use to confuse simple marketers. Therefore, it is a term marketers must understand if they are to hold their own in the boardroom.
EVA is a calculation used to measure the net cash flow from an asset, after taking into account the cost of the capital necessary to acquire that asset. It is often a part of a business case made to support a major investment or M&A proposition.
There are a couple of calculations that need to be made, all from the standard company accounts.
- The net cash flow is obvious, what comes in versus what goes out, as a result of deploying the asset.
- The cost of capital will be some combination of the cost of equity and the cost of necessary borrowings.
When the net cash flow is greater than the cost of capital, the asset is generating value. When it is less, it is destroying value.
The formula is simple: EVA = Net cash after tax – capital invested X the weighted cost of that capital.
The shortcomings of an EVA calculation are twofold:
- It is based on the past. The cost of capital yesterday is unlikely to be the same tomorrow. Interest rates bounce around, and the mix of debt and equity while not as volatile does change with circumstances.
- Increasingly business transactions are being done on the basis of intangibles. Costing the replacement value of intangibles, is a practise lacking discipline, consistency, and financial rigor.
Building a business case for an investment always requires deep consideration of the cash flow results of that investment. By definition, that requires a forecast of the future be done as the driver of that cash flow.
It is always easier to take the past and extrapolate, than to spend the time and energy building a strategic case for an investment. A strategic case requires that the relative costs and benefits of differing choices be articulated, in an environment of information scarcity. A much more demanding task than constructing a future that is the same as the past, and hoping that this time, it will be.
Header illustration by AI, in a few minutes.
