The New Paradigm of Investor Relations

If you’re like me, you think of investor relations as a fairly staid field. As far as I can tell from the outside, IR is usually responsible for getting the annual reports and SEC filings written (with a healthy dose of accounting and legal input), managing earnings conference calls, and perhaps helping deal with the occasional company crisis. But of course it doesn’t have to be that way. In theory, investor relations should be educating investors on their company and industry, protecting the company’s access to capital. The communication channel should also flow the other way, keeping management apprised of potential risks to the company.

The wrong way

Probably 95% of investor relations departments don’t have this kind of mandate. To pick on a recent example, let’s consider Strabag, one of Europe’s leading construction companies. The firm recently shut down its communications Twitter account because no one was tweeting them. Of course, the company didn’t use the account for anything except for relaying analyst ratings and the status of its order backlog – not exactly captivating.

Strabag Twitter account

Strabag made a variety of mistakes. All marketing, but especially social marketing, is a content-driven activity. If you don’t have interesting things to say, no one will listen. You don’t have to be in a sexy business to come up with meaningful content (look at Zappo’s in shoe retailing), but you do have to think about what your audience wants to hear. Strabag could have engaged in a dialog with analysts, better understanding their information needs and perceptions of the company. A primer for investors unfamiliar with the construction market would have been even better. I won’t belabor all the usual social media points beyond that.

Tactically, Twitter is an awful channel for arbitrary data points (output is up 6%!) lacking context. Even order backlog is probably interesting to investors and equity analysts, but it should at least link back to a chart and spreadsheet showing the trend over time, comparisons with competitors, and implications. There’s no reason for online communications to mimic the dry facts of a stock ticker. Help people draw conclusions!

The right way

In contrast, I was blown away by the exchange between Reed Hastings from Netflix and a hedge fund short seller on Seeking Alpha (brilliant site, by the way). The hedge fund manager lays out his concerns about Netflix’s valuation, new competition, the costs and quality of licensed streaming content, and a few other reasons for his short position. Hastings addresses them all openly and dismantles most of them. Finally, the short seller posts again to say that he’s covered his position and why. For a business geek like me, their dueling analyses are such fun to read, and they do an excellent job of illuminating the company’s strategy, the industry landscape, and possible risks and upsides. I probably could have read Netflix’s entire 10-K filing and come away with much less understanding of their business than after reading those posts. It’s also brilliant investor relations, and Hastings and his team eliminated a potential stock performance issue, thus allowing them to stay focused on the core business. Now, this kind of response requires that your company actually have a very well thought-out strategy and evidence to back it up. Most firms probably couldn’t hack it, but it is something to aspire to.

Expand your mandate

Various corporate functions have been transformed from rote work to strategic assets over the last few decades. Human resources used to be about job postings and benefits management. Now, ideally, it’s about selecting, recruiting, and retaining the best possible talent. Traditionally, purchasing was probably one of the dullest jobs imaginable (no offense). However, in the context of strategic sourcing, the job is more about partnering with suppliers, understanding their impact on product quality and strategy, and forecasting the evolution of your industry value chain than just about issuing purchase orders.

The same thing needs to happen with investor relations. Investors are critical stakeholders in public companies, and we’ve seen various examples of firms crippled by short sellers over the last few years. Investor relations should be a strategic communication channel to cultivate a supportive investor base and to funnel market information back to management. It’s time to go beyond conference calls and financial filings.

3PAR Overbidding Is a Sign of Cookie Cutter Dell Strategy

One of the things that was so thrilling about Dell’s early business strategy was how clear and simple it was.  Dell built high-quality but essentially commodity computers faster and cheaper than anyone else and developed superior supply chain and order taking processes that took years and years for competitors to even approximate.  Looking at Dell and HP’s bidding for 3PAR recently, I think M&A run amok like this usually means the companies involved don’t have a lot of other strategy ideas to execute.  It’s a shame to see Dell trying to buy growth now in contrast to their early strategic clarity. Continue reading 3PAR Overbidding Is a Sign of Cookie Cutter Dell Strategy

A Twitter Market Sizing

I wrote about my hypothetical Twitter customer segmentation recently, and I thought I’d follow up with a rough stab at a market sizing for Twitter advertising.  The exercise is helpful one for thinking about Twitter’s business model and potential revenue, even if some of the numbers are placeholders. Continue reading A Twitter Market Sizing

Competitive Advantage by Michael Porter, Part 3

I’ve been doing a series on Michael Porter’s Competitive Advantage book and the value chain analysis framework.  Specifically, I’m using Clorox, Procter & Gamble, and Method Products to provide slight more concrete examples of Porter’s generic strategies and how to analyze them.  The value chain is an odd framework in that Porter uses it to conduct at least two different analyses, for cost advantage and differentiation.  The value chain approach to disaggregating what a company does is similar in both, but from there the two analyses diverge.  In this post, I’ll be doing a deep dive into cost analysis.  This type of work is especially important for figuring out whether a competitor has a true cost advantage (one of Porter’s generic strategies) and also for analyzing your company and competitors in general.

In my last post, I held Clorox up as an example of a cost leadership strategy, but I have realized since that I was wrong.  The company is actually pursuing more of a differentiation strategy.  See the Clorox background section below for details.  Nevertheless, let’s use the company as an example for a cost analysis.  Along the way, we’ll also compare them with Procter & Gamble and Method Products to continue to add more depth to our understanding of the overall value chain analysis.

This post is a long one, so my feelings will not be hurt if you choose to skim it.  Think of it as a reference work. Continue reading Competitive Advantage by Michael Porter, Part 3

The Trap of the Bad Revenue Model

It always puzzled me why services like Evite and Hotmail that were once considered groundbreaking more or less stopped releasing new features.  You can probably think of your own examples.  I believe the most important reason is the lack of a strong revenue model.  These companies start off with venture capital funding and offer a free service to reach critical mass.  They eventually plan to generate revenue from advertising or similar sources, but overall the revenue per user ends up being quite low.  Once they get past the venture capital stage, they often can’t afford to spend a lot on further product development and be profitable at the same time.  So they get stuck in a bad equilibrium where they can’t afford to build features that could pull in higher revenue and end up trying to optimize a mediocre business at the margins.  These companies are also tempted to start sacrificing the user experience in order to eke out more revenue.  Sites that bug you with pop-ups, excessive ad content, or other annoying tactics are basically admitting that they can’t afford to offer a good experience because the revenue per user is infinitesimal.  They’re perpetually scrambling for pennies. Continue reading The Trap of the Bad Revenue Model