GEIS: the helicopter and the trench view

One of the key expectations from any Group CEO is the ability to build businesses woven around ideas, transforming an idea into a great business. There are many examples of this in the tech business. To mention one among the most recent is ‘mobility’, not just a change of word from transportation but an entirely different idea around which to build a (new) business. This is quite a task as the environment today is intimidating (nonlinearity is one reason) with too many (seemingly) loose factors that come in the way of portraying a cohesive picture of what is happening and likely to happen. And, we know by now that more data by itself is of no help. If anything, it can be a hindrance.  

Appropriately organized information however helps us make sense of such a world, with the proviso that a good description can also be indicative. As I have never tired of saying, the finest evidence for this comes from sports, where different sets and sub-sets of information about a game (or match or race) by themselves reveal so much about the quality of the game and the players. Anyone going through statistics of any game in any sport can make a fair judgment about the relative merits of the players and teams. This is chiefly because people with a deep understanding of the sport have designed the information sets and sub-sets – they know what is important.

Those who follow the Indian business media would have read of some large business houses in India foraying into many different businesses – what is called horizontal expansion – each at a significant scale, while also vertically deepening their businesses. This is, of course, nothing new as conglomerates have been the defining feature of the Indian economy since independence, although there is now a significant difference: the minimum efficient scale of most businesses has gone up, a striking feature of the post-1991 Indian economy. Such horizontal expansion places enormous demands on the GCEO’s intellect to be able to fully comprehend such businesses, as the driving forces and their corresponding threshold limits will vary across businesses. The key to unravelling any sprawling empire is to combine financial (quantitative) data with appropriate qualitative aspects, so that together they make compelling sense. To give an example I have used before, the Bloomberg Terminal along with Bloomberg Businessweek in a single system.

Organize, Organize, Organize

We could start with a dashboard, drilling down further into specific areas to capture relevant summarized information. The dashboard of a Formula 1 car is a classic example of a small display holding a large amount of critical information. 

Some of that information is a summarized version of various Group businesses which show their relative health helping decisions on whether they be continued or discontinued. Since the value drivers of these various businesses will be significantly different, a summarized version of P&L, Balance Sheet and Cash Flow Statement, however well broken down is itself insufficient. It needs to be supported with an appropriately organized dashboard displaying the relevant key metrics and value drivers together with their diagnosis and prognosis. For example, for a pharmaceutical company, it can show, against revenues from patented drugs, information such as: patent expiry, news about firms filing for potential generics, likely replacements for the expiring patented drug, R&D pipeline with probable timelines – its own and that of nearest rivals. Or an FMCG company can plot trends in rivals’ sales relative to their own brands in different markets together with, wherever possible, information on counterfeits, leading to strategies on distribution and advertising & promotion. In sum, a sub-system showing financial data along with data that is non-financial but with financial consequences. Or as studies of military strategies demonstrate, guarding against an excessive focus on one area affects the quality of attention paid to others is a critical factor. The 80-20 approach should not be used blindly but calibrated to suit the times, especially to judge if any of the 20 may either decline or vanish or whether some of the 80 may grow into to the 20. Think of Nokia and BlackBerry! Or EBay’s PayPal. We can’t keep saying that the world is dynamic and not incorporate it in our analysis.  

Take the exciting case of EV cars, where Tesla has had a dominant position in the US for ten years. A new report by John Murphy in Bank of America’s annual Car Wars study, quoted in The Detroit Times, predicts that GM and Ford will overtake Tesla in EVs by 2025. The principal reason, according to Murphy, is that Elon Musk hasn’t launched new models and has also repeatedly delayed the launch of its Cybertruck. To quote Murphy: “One of the biggest mistakes that whenever they look back at this in five to 10 years, is that Tesla didn’t take greater advantage of the free money it could have gotten, raise much more, open capacity faster, grow much faster and shut the door. He didn’t. He didn’t move fast enough. He didn’t recognize what was going on in the market. He had tremendous hubris that they would never catch him, they would never be able to do what he’s doing, and they’re doing it.” (https://www.detroitnews.com/story/business/autos/2022/06/30/car-wars-predicts-gm-ford-surpass-tesla-ev-sales-2025/7779913001/). Since not just GM and Ford but every major auto company has EV put plans into operation, it is simply a question of collating them to present the picture of competitive threats. As an added incentive, the same portrait can include developments in battery technology.

Divide and conquer

One of the simplest ways of designing a GEIS is to bifurcate current and developing businesses, since key information will vary. Years ago, a big business group began facing multiple problems because they had more businesses under development (no revenues) than those producing revenues. At some stage, it became a serious problem and the Group went through a painful debt-restructuring program. Today, there are many serious players such as corporate advisory services who monitor listed companies and a Group CEO will certainly want to see in one place large ‘free cash flows’ and large leverages in the group, preferably with payment schedules, lending a clear view of which free cash flow can be used, if at all, to deleverage the group.  

Or let us say the GCEO wants to see the competitive position of group companies against the next three competitors. Years ago, Fortune magazine used to present competitor information for each Fortune 500 or 1000 or 2000 company, just below the summary data for each company but seems to have discontinued the practice. If this were furnished for all major businesses in a group separately and in a comparative chart, its information value is enormous. This can also be summarized in a simple tabular format, without any fancy visualization, with competitors and self in the Rows and the metrics in the Columns. In ‘one view’, the GCEO can see where they stand. This can be done in an aggregated and disaggregated manner to gauge the competitive position of the Group in any key metric. If you can grab an old issue of Fortune magazine, you will actually see what I am referring to.

Sensitivity analysis & Risk analysis: GVI – Group Vulnerability Index

A ‘Group picture’ can hide so much, even from the GCEO! As many infamous examples have shown, weak and non-performing units could get hidden under the glittering performances of some units within the group.

Let us examine one of the most important ways to understand a business’ vulnerability: sensitivity analysis, which evaluates the impact of any change in any of the key factors (price, fixed cost, variable cost, competitors’ initiatives) on the company’s sales, market share, break-even point and so on. Using the disaggregated information, it should be possible to construct a Group vulnerability index as an aggregate of several sub-vulnerability indices for each impact area, quantifying it with a weighted score. For example, you could assign greater weight to the quality of earnings, competitive threats and so on. Changes in the GVI can help monitor the progress or its lack in any of the contributing factors. In the case of commercial banks, one metric ‘VaR – value at risk’ captures all that is critical. Frankly, it depends on how well you understand your businesses and your rivals’.

Incidentally, sensitivity analyses is a widely used technique across many areas, business and technical. It can also be simply used as a qualitative judgment. Let me mention just one example. When cloud computing was just beginning to get accepted by businesses, most analyses placed a question mark on their analysis on just factor: Microsoft’s contemplated entry, observing that ‘all bets were off if Microsoft entered cloud computing’. Simply because, it completely altered the balance.

To conclude for now, GEIS is not just a holistic view but a view that can pin point all the holes.

This topic is going to be more and more important and I will keep revisiting.

Takeaways

CEOs of sprawling businesses need specialized information system: A Group Executive Information System

A single system integrating quantitative and qualitative data

Effectively combines aggregated and disaggregated data 

Guard against neglect of any area

Need a calibrated approach to the 80-20 principle

Can identify trouble spots amidst purple patches

Group vulnerability index can show a lot