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.

Competitive Advantage by Michael Porter, Part 4

Now that we’ve taken a closer look at analyzing cost advantage, let’s turn to differentiation.  The topic is a complex one, and to be honest, Porter’s organization of it can be a bit haphazard and difficult to follow.  I want to walk through the thought process in this post.  Once we have that foundation, the next post in the series will take a closer look at Procter & Gamble. Continue reading Competitive Advantage by Michael Porter, Part 4

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

Competitive Advantage by Michael Porter, Part 2

I recently wrote about Michael Porter’s concept of competitive advantage, and now I’d like to start really drilling down into the value chain analysis he uses to diagnose competitive advantage.  A value chain analysis disaggregates a company into its activities, grouped by function, to understand how different activities contribute to or detract from competitive advantage.  The analysis assesses both each individual activity and also how they are linked and configured.  Often, it’s the connections between activities that provide the greatest advantage and are the hardest for competitors to imitate, rather than just a handful of specific processes.

To bring the value chain to life, I thought I would take an example from consumer packaged goods that includes each of the generic competitive strategies:  cost advantage, differentiation, and focus.  I’ll be looking at Clorox, Procter & Gamble, and Method Products in detail over multiple posts.  I don’t know much about these companies to start with, so you’ll have a chance to see the good, the bad, and the ugly of a value chain analysis done from scratch. Continue reading Competitive Advantage by Michael Porter, Part 2

Competitive Advantage by Michael Porter

Michael Porter’s book Competitive Advantage was maybe the first business book to make an impact on my work.  I had just started working at a small consulting company after studying civil engineering, so I was fairly clueless about business analysis.  I had read about his Five Forces framework, but it didn’t really impact my work that much, perhaps because it was so concerned with industries rather than individual companies.  It didn’t seem that relevant to my day-to-day work.  In Competitive Advantage, Porter lays out his theories on competitive strategy, (you guessed it) competitive advantage, using value chain analysis to understand those concepts, and a few related topics.  Unlike industry analysis, the value chain felt insightful and actionable.  Since then, I’ve used it often to evaluate clients’ strategies and to conduct competitive analysis.  I thought I’d repay my intellectual debt by devoting a few posts to really digging into Porter’s concepts, where they work, and where they sometimes fall short. Continue reading Competitive Advantage by Michael Porter, Part 1