Weekly Thoughts

Here are three things that caught our eye this week:
 

Magic Moments

This week we listened to Alex Schultz, Facebook’s VP of Growth, speak at Stanford’s “How to Start a Start-up” series. He offered some insightful comments for how all companies, regardless of industry, can think about expanding their operations. Somewhat counter intuitively, he argues that the single most important factor for growth is retention. While retention comes from having a great idea, a great product to back up that idea, and great product-market fit, from an operational standpoint, retention can be created by aligning your organization to drive customers towards the “magic moment” that gets them hooked on your service. Schultz notes:

“What do you think the magic moment is for when you’re signing up to Facebook? See your friends. Simple as that. I’ve talked to so many companies, and they try to get incredibly complicated about what they’re doing, but it is just as simple as when you see the first picture of one of your friends on Facebook, you go ‘Oh my God, this is what this site is about!’”

Schultz argues that companies should think deeply about what the “magic moment” is for their product, and focus all efforts on getting customers connected to that moment as fast as possible. Connecting people to this ‘magic moment’ is what makes them stick with the product and what makes them tell their network about your service.

To ensure that business operations are aligned with this objective, he argues that “what you really need to think about, is what is the North Star of your company: What is that one metric, where if everyone in your company is thinking about it and driving their product towards that metric and their actions towards moving that metric up, you know in the long-run your company will be successful”. For example:

“Zuckerberg talked at Y Combinator about getting people to tell friends in 14 days; that is why we focus on this metric. The number one most important thing in a social media site is connecting to your friends, because without that, you have a completely empty newsfeed, and clearly you’re not going to come back; you’ll never get any notifications, and you’ll never get any friends telling you about things they are missing on the site.”

We believe that growth through organic operational expansion is the best way we can deliver results for our customers, employees, and investors. As we evaluate companies, and eventually switch from ‘search mode’ to ‘operational mode’, we look forward to identifying and optimizing our business for our client’s ‘magic moments’. Our inner data-nerds also eagerly await the opportunity to define and analyze our ‘North Star’ metric.

Lecture here
 

US Blue Chips

We read several articles this week which highlighted the struggles of blue chip US stocks. IBM, Coke, and McDonald’s have all announced disappointing earnings recently and their stock prices have taken a hit. The problem is that each business has a core market that is showing no growth or is in outright decline. From the abnormal returns blog:

“What is interesting is that these companies are not necessarily losing out to direct competitors. McDonald’s isn’t getting crushed by Burger King. Coca-Cola isn’t losing big chunks of market share to Pepsi. They are losing out because the markets they are targeting are undergoing dramatic shifts. Everyone today knows soda, even diet, isn’t good for you. Coke can buy as many non-soda brands its can but that will not prevent the long term decline in its core sugar water business.”

The problem for companies as big as Coke and McDonald’s is that they aren’t nimble enough to pivot towards faster growing markets, at least not on a scale that moves the needle. From the Wall Street Journal:

Significant growth is always a challenge for very large companies, which long have had to shift gears to contend with smaller, more-agile competitors. It gets harder still when the economy is sluggish.

“Large-cap companies are constantly reinventing themselves,” says Gina Martin Adams, a strategist at Wells Fargo Securities. “The trick today is that global growth is slower than it was in the last two decades, and the result is an intensely competitive environment that forces companies to be more nimble, highly efficient and more productive.”

For us, the experience of these companies provides some important lessons. First, as business owners we aspire to achieve scale over time, but not at the expense of losing insight into what our customers want. Maintaining the capacity to tweak our product or service is one of the key advantages of a smaller enterprise and one that we are keen to protect.

Second, growth for growth’s sake should never be a primary focus. Despite lack of growth, for example, McDonald’s and Coke have core businesses that continue to produce a lot of cash. While cash alone cannot save a company from competition, it does provide flexibility and opportunity to respond to market dynamics, making it a key driver for corporate longevity.

See more here, here, here and here
 

Dose Response

Outside of the office, we are passionate fitness enthusiasts. As a result, sometimes our attempt to perfect our physical training influences our business thinking as well. In that context we read an interesting article this week concerning recovery. From the Whole 9 blog:

Let’s review the biological concept of hormesis as it relates to recovery. Hormesis is an adaptive process that occurs as the result of a specific “dose” of a stimulus. In simple terms, you could summarize it as “the dose makes the poison” meets “what doesn’t kill you might make you stronger.” Hormesis describes the dose-specific response to a stimulus; whether something’s net effect is beneficial, harmful, or neutral depends on the “dose.”
…
Exercise is an excellent example of hormesis in action. An appropriate “dose” of physical stress provokes a positive adaptation in your body (you get fitter), but dosing progressively larger and larger amounts of exercise can be seriously detrimental to your health.“

At any company we acquire, we will be looking to create some positive adaptation operationally. That said, we also understand that too much change, too quickly, could have adverse effects on the quality of business practices already in place. Our challenge as managers, therefore, is to find the “minimum effective dose” which will help take any business we acquire to new levels of performance.

Full article here

Have a great week,

Your Chenmark Capital Team