For its reputation as a group of technocrats, the People's Action Party has been rather slow to embrace the internet.
These last couple of weeks, BG George Yeo made his first foray into the internet by making a few posts at ephraim loy's blog. These posts have drawn much attention, yet the response from the internet has been largely disappointing, since Yeo's posts have little to do with substantive issues facing Singapore, but are rather just an account of various events in his life.
Other attempts by PAP MPs to engage the internet community are now either defunct or benign. MP Penny Low set up a blog to cover the NDP 2005, but that blog is now devoid of activity. Dr Teo Ho Pin also set up a blog, but most of the posts seem to be short replies on relatively mundane issues.
On the other hand, other political parties have long since jumped on the internet bandwagon and have been vocal and explicit on politics. Goh Meng Seng's blog is about his 'political struggle', James Gomez has written extensively on his thoughts, and Chee Soon Juan relentlessly publishes fiercely political content.
Indeed, the rise of the internet as a major media platform for the future points towards serious challenges to the PAP's political hegemony. The free-for-all, democratic nature of the world wide web means that censorship of criticism on this medium is virtually impossible, and the kind of power that the ruling party is able to exert on the main stream media evaporates into insignificance on the internet.
Strong critics of the establishment not only abound in cyberspace, they also dominate the digital discourse. Bloggers and blogs such as Mr Wang, Gayle Goh, Yawning Bread and Singabloodypore all command a high readership and are unabashedly critical of policies and the press. Yet all three PAP bloggers have yet to engage any of the criticisms of the government in any meaningful way.
The recent acknowledgement of the impact of 'The Digital Age' by PM Lee Hsien Loong during his latest rally speech is a tacit admission that the playing field of the future will not be newspapers or television, which the incumbents currently have a stranglehold over. Rather, it will be the internet, where opinions can be published in an instant, at no cost, to everybody and anybody in cyberspace. And with the 'Intelligent Nation 2015' goal of getting 90% of all households on broadband, that means virtually the whole nation will be exposed not only to the opinions of detractors, but also to audio podcasts and videos which may portray the government in a less than favourable light.
But perhaps the PAP's lack of significant presence on the internet foreshadows the beginning of its decline. For years the state has dominated the press and broadcast media, disseminating messages favourable to its regime and censoring all that would threaten its power. And yet, as the Prime Minister calls for more engagement of Singaporeans, particularly in New Media, the PAP seems to lack bite and is clumsy, at best.
Without the ability to censor or control the internet, the PAP will be forced to engage its critics to remain credible in the eyes of Singaporean netizens. Meanwhile, a continued avoidance of substantive issues does no favour to improve its image. The internet is a new, levelling playing field, where authoritarian censorship no longer works.
As the Digital Age unfolds, it will be interesting to watch how the incumbents behave, as the tools for maintaining their dominance slowly slip from their hands, and as they enter the new treacherous waters of the internet.
Tuesday, September 19, 2006
Blackmores - A Strategic Analysis (Part 4)
Distinctive Resources/Capabilities Analysis
It is Blackmores’ less recognisable distinctive resources and capabilities that mould the organization into an “industry leader in Australia for more than 70 years.” (Blackmores, 2006). The more significant resources and capabilities that can be identified which provide Blackmores with a sustainable competitive advantage are as follows:
It is Blackmores’ primary policy to ensure high quality products, with “ingredients sourced from around the world.” (Blackmores, 2006) Marcus Blackmore, following in his father’s legacy has demonstrated that he has “not been interested in pursuing growth at the expense of quality or control.” (Quinlivan, 2006) This uncompromising effort to be a firm recognised for quality healthcare products was rewarded in 2003, when Pan Pharmaceuticals was closed down. Blackmores never did business with Pan Pharmaceuticals, as Blackmores’ “extremely capable audit team” (Quinlivan, 2006) did not recognise Pan’s products as superior in quality or control. This unflinching standard of quality has filtered through into Blackmores’ reputation as a whole.
(ii) Thriving internal culture, expertly trained staff and industry savvy CEO.
Blackmores has a company culture that has built great relationships amongst both employees and senior management. It is a culture in which effort and quality is recognised with both tangible and intangible rewards, Blackmores recently awarded “50 free shares to all permanent staff.” (ASX, 2006) In addition, the firm lives by the philosophy that “it’s impossible to be an effective organization without satisfied and engaged staff.” (Blackmores, 2006) Furthermore, empowering staff and allowing them to work in teams, has provided Blackmores with a further distinctive capability, “At Blackmores, very little gets done without teamwork and staff taking ownership of projects.” The firm’s expertly trained staff, working together, ‘keep the wheel in motion.’
Training and development of a highly skilled labour force is imperative to Blackmores’ mission. Blackmores is committed to employing “high quality staff… [often] qualified health experts.” Blackmores provides the community with trusted information by not only training their own staff, but by “educating [their] retailers [ensuring that their] consumers are provided with superior information on the Blackmores product.” (Blackmores, 2006)
Finally, it may be argued that it is Blackmores CEO, Marcus Blackmore that is the firm’s most valuable distinctive resource. It is he and his father, Maurice who “had ideas about health way ahead of his time,” (Blackmores, 2006) that have provided the firm with the tacit knowledge of not only how to run this complex organization as a business, but also an unparalleled understanding and passion for complimentary healthcare. It is Marcus’ strong political ties that enable him to spend up to 2 days a week lobbying the government for legislative reform, “we’ve moved over the past six months from a largely confrontational approach to industry to one of collaboration and consultation.” (Quinlivan, 2006) “Blackmores and the CHC (complimentary healthcare council) are currently working to oppose the proposed increase in TGA fees and charges and to have GST removed from complimentary medicines.” (ASX, 2006)
(iii) Purchasing power and extensive range.
With an exceptionally large market share within Australia, and growing market share in the Asian markets, Blackmores continues to grow its leadership strength in buying power. This unique bargaining power enables the brand to maintain its superior standard of quality, while becoming more cost effective.
Blackmores produces products servicing in excess of 20 different matters of health, ranging from weight loss and muscular pain to infections. This extensive range of products allows Blackmores to extend its brand equity into the various nooks and crannies of the industry.
(iv) Research and Development Capabilities
Blackmores is an undisputed leader in complementary healthcare research and development. It continues to refine its seasoned products and develop new ones. Blackmores’ joint venture with a research team at the Southern Cross University places it at the forefront of research and development. The recent appointment of a research manager provides the firm with a further distinctive resource and substantial tacit knowledge not available to competing firms. This innovation has been one of the key factors providing Blackmores with a sustainable competitive advantage.
(v) Reputation, brand image and awareness.
Brand image and reputation is critical to a firm’s success within the complementary healthcare industry. Particularly after the Pan Pharmaceutical debacle, there has been a heightened awareness of the need for quality when it comes to medicines and supplements.
Market research has established that “Blackmores is the most trusted natural healthcare brand in the market place.” (Blackmores, 2006) This brand equity has been established over decades and is extremely difficult for competitors to replicate. It forms perhaps the most important distinctive resource for the firm, and is the result of decades of hard work and is the result of the combination of its unique corporate culture, first-class operations, research and development capabilities, and all the other distinctive attributes of the firm.
In a market that demands the highest quality, Blackmores’ brand gives it a strong, sustainable competitive advantage over its competitors.
CONCLUSION
Strategic summary
The external market is favourable for Blackmores’ industry, with many growth markets in the Asia-Pacific region. The aging population of baby boomers will also contribute greatly to the demand of complimentary pharmaceutical products.
The company has a strong brand reputation and an established market position in the industry, with strong links to industry suppliers and distributors. Its capabilities in research and development give it valuable intellectual capital and tacit knowledge that is hard for other firms to replicate.
Implications for future strategy
Blackmores has a bright future ahead of it. If it can continue to execute the strategies it has been pursuing and continue to strengthen its branding and relationships with suppliers and retailers, it can expect to see its share price continue to grow as it rides the Asian economic boom.
It is Blackmores’ less recognisable distinctive resources and capabilities that mould the organization into an “industry leader in Australia for more than 70 years.” (Blackmores, 2006). The more significant resources and capabilities that can be identified which provide Blackmores with a sustainable competitive advantage are as follows:
- Guaranteed quality
- Thriving internal culture, expertly trained staff and industry savvy CEO.
- Purchasing power and extensive product range.
- Research and Development of existing and new products.
- Reputation, brand image and awareness.
It is Blackmores’ primary policy to ensure high quality products, with “ingredients sourced from around the world.” (Blackmores, 2006) Marcus Blackmore, following in his father’s legacy has demonstrated that he has “not been interested in pursuing growth at the expense of quality or control.” (Quinlivan, 2006) This uncompromising effort to be a firm recognised for quality healthcare products was rewarded in 2003, when Pan Pharmaceuticals was closed down. Blackmores never did business with Pan Pharmaceuticals, as Blackmores’ “extremely capable audit team” (Quinlivan, 2006) did not recognise Pan’s products as superior in quality or control. This unflinching standard of quality has filtered through into Blackmores’ reputation as a whole.
(ii) Thriving internal culture, expertly trained staff and industry savvy CEO.
Blackmores has a company culture that has built great relationships amongst both employees and senior management. It is a culture in which effort and quality is recognised with both tangible and intangible rewards, Blackmores recently awarded “50 free shares to all permanent staff.” (ASX, 2006) In addition, the firm lives by the philosophy that “it’s impossible to be an effective organization without satisfied and engaged staff.” (Blackmores, 2006) Furthermore, empowering staff and allowing them to work in teams, has provided Blackmores with a further distinctive capability, “At Blackmores, very little gets done without teamwork and staff taking ownership of projects.” The firm’s expertly trained staff, working together, ‘keep the wheel in motion.’
Training and development of a highly skilled labour force is imperative to Blackmores’ mission. Blackmores is committed to employing “high quality staff… [often] qualified health experts.” Blackmores provides the community with trusted information by not only training their own staff, but by “educating [their] retailers [ensuring that their] consumers are provided with superior information on the Blackmores product.” (Blackmores, 2006)
Finally, it may be argued that it is Blackmores CEO, Marcus Blackmore that is the firm’s most valuable distinctive resource. It is he and his father, Maurice who “had ideas about health way ahead of his time,” (Blackmores, 2006) that have provided the firm with the tacit knowledge of not only how to run this complex organization as a business, but also an unparalleled understanding and passion for complimentary healthcare. It is Marcus’ strong political ties that enable him to spend up to 2 days a week lobbying the government for legislative reform, “we’ve moved over the past six months from a largely confrontational approach to industry to one of collaboration and consultation.” (Quinlivan, 2006) “Blackmores and the CHC (complimentary healthcare council) are currently working to oppose the proposed increase in TGA fees and charges and to have GST removed from complimentary medicines.” (ASX, 2006)
(iii) Purchasing power and extensive range.
With an exceptionally large market share within Australia, and growing market share in the Asian markets, Blackmores continues to grow its leadership strength in buying power. This unique bargaining power enables the brand to maintain its superior standard of quality, while becoming more cost effective.
Blackmores produces products servicing in excess of 20 different matters of health, ranging from weight loss and muscular pain to infections. This extensive range of products allows Blackmores to extend its brand equity into the various nooks and crannies of the industry.
(iv) Research and Development Capabilities
Blackmores is an undisputed leader in complementary healthcare research and development. It continues to refine its seasoned products and develop new ones. Blackmores’ joint venture with a research team at the Southern Cross University places it at the forefront of research and development. The recent appointment of a research manager provides the firm with a further distinctive resource and substantial tacit knowledge not available to competing firms. This innovation has been one of the key factors providing Blackmores with a sustainable competitive advantage.
(v) Reputation, brand image and awareness.
Brand image and reputation is critical to a firm’s success within the complementary healthcare industry. Particularly after the Pan Pharmaceutical debacle, there has been a heightened awareness of the need for quality when it comes to medicines and supplements.
Market research has established that “Blackmores is the most trusted natural healthcare brand in the market place.” (Blackmores, 2006) This brand equity has been established over decades and is extremely difficult for competitors to replicate. It forms perhaps the most important distinctive resource for the firm, and is the result of decades of hard work and is the result of the combination of its unique corporate culture, first-class operations, research and development capabilities, and all the other distinctive attributes of the firm.
In a market that demands the highest quality, Blackmores’ brand gives it a strong, sustainable competitive advantage over its competitors.
CONCLUSION
Strategic summary
The external market is favourable for Blackmores’ industry, with many growth markets in the Asia-Pacific region. The aging population of baby boomers will also contribute greatly to the demand of complimentary pharmaceutical products.
The company has a strong brand reputation and an established market position in the industry, with strong links to industry suppliers and distributors. Its capabilities in research and development give it valuable intellectual capital and tacit knowledge that is hard for other firms to replicate.
Implications for future strategy
Blackmores has a bright future ahead of it. If it can continue to execute the strategies it has been pursuing and continue to strengthen its branding and relationships with suppliers and retailers, it can expect to see its share price continue to grow as it rides the Asian economic boom.
Blackmores - A Strategic Analysis (Part 3)
INTERNAL ANALYSIS
Value Chain Analysis: Primary Activities
Inbound Logistics
General Administration
Value Chain Analysis: Primary Activities
Inbound Logistics
- Extensive supplier checks means that Blackmores only receives the highest quality materials from its suppliers.
- All warehouse employees are given extensive training to ensure the most efficient use of human resources possible.
- Blackmores is moving its headquarters to a central location at Warriewood in order to more efficiently handle its operations.
- “Everything we do in our Operations area is dedicated to delivering a quality product.” (Blackmores, 2006)
Outbound Logistics/Distribution Channels
- Blackmores has various distribution arrangements depending in the country it is operating in. For instance, it has an extensive distribution network in New Zealand, with 1700 distribution outlets. In Hong Kong, however, it only distributes through one pharmacy chain store, as competition is highly intense in that market.
- Great reputation for quality.
- Blackmores has the highest brand awareness in its category and is the most trusted. (Blackmores 2006 annual report)
- Effective use of TV commercials to support the debut of new product lines, including Blackmores expansion into the arthritis segment with its Glucosamine product in 05/06.
- Changes in the Therapeutic Advertising Code have allowed Blackmores to use health professionals in its advertising.
- Use of the popular Blackmores website to actively communicate with consumers, including 164,000 active subscribers.
- Blackmores is committed to becoming a source of information regarding health issues:
- Effective use of the Blackmores website to communicate with its customers. The website won the Hitwise Top Site in the Health and Pharmaceutical category, and has 164,000 active subscribers who receive a fortnightly newsletter of health news.
- Blackmores Naturopathic Advisory Service fielded 55,000 calls over the past year, providing alternative health information to consumers and professionals.
General Administration
- Stable leadership over 30 years: Marcus Blackmore retains a 31% stake in the company.
- Strong commitment to core values which are reflected in all aspects of Blackmores’ business. These core values are: Trust, Leadership, Superior Performance, A More Natural Approach to Health
- Ability to successfully lobby for regulatory reforms.
- Strong professional ties with other healthcare professional bodies such as the Pharmacy Guild of Australia, the Pharmaceutical Society of Australia, and the National Pharmacy Students Association.
- Extremely strong commitment to quality at all costs creates a culture equally obsessed with quality.
- Strong commitment to social responsibility, with substantial donations to charity and a focus on environmental sustainability, provides an ethical culture and helps enhance the brand image.
- Places great importance on recruiting, training, and retaining high quality staff, and this is reflected in the fact that Blackmores one of 12 Hewitt Best Employers awards for 05/06. This helps Blackmores in attracting new employees, important as the company expands its business into Asia.
- Blackmores has a profit share arrangement where 10% of its Australian profit is shared between all permanent staff, and recently it gave each of its employees 50 shares in the company to reflect the value it places upon them.
- Training provided for Blackmores employees through the Senior Consultant Training course is recognised and in some cases interchangeable with the Pharmacy Guild’s National Training Course.
Technology Development, R & D
- Blackmores sends large contingents of staff to the main pharmaceutical and healthcare trade conventions around the world in order to stay in touch with the latest trends in healthcare.
- Blackmores regularly funds research into new alternative healthcares, a recent example being a study into the immune benefits of the milk protein lactoferrin, which culminated in a new Blackmores’ product, Immunodefence.
- Blackmores has relationships with several universities around Australia to ensure it stays on top of the latest research relevant to the industry. One of these universities, Southern Cross University, is the base for the Blackmores Research Centre, and the combined effect of all this research is to help Blackmores regularly produce new products.
- Focus on procuring from quality suppliers over cheaper ones has meant Blackmores has a greater reputation for quality than many competitors, and allowed it to dominate in the wake of the Pan Pharmaceuticals collapse of 2003.
- Extremely strong commitment to only procuring quality materials from suppliers:
- Use of quality control teams to ensure that suppliers are of the highest quality.
- Extensive product testing.
- Regulatory compliance.
Blackmores - A Strategic Analysis (Part 2)
Porter’s Five Forces Analysis
The intensity of rivalry among competitors in the industry:
One of the biggest competitors to Blackmores continues to be lower priced alternative complementary medicines. Bio-Organics and Herron are two brands that are competing directly with Blackmores and given their lower price products are sharing much of the market share with Blackmores. Additionally, there are added incentives to purchase Guardian products, such as Guardian loyalty cards. These factors help to boost Guardian owned products. Therefore, a possible improvement in the future for Blackmores is to introduce a loyalty scheme that will help retain their customers.
The bargaining power of buyers:
The intensity of rivalry among competitors in the industry:
- The industry structure is mainly that of monopolistic competition, with multiple firms competing for the consumer’s dollar. In the supermarket, 4-6 brands can be found selling relatively homogenous products.
- The high industry growth should help offset battle for market share, as competitors don’t need to steal one another’s customers. Market growth is increasing due to recent pushes towards complementary healthcare, for instance the work of the Complementary Healthcare Association lobbying the government and surveys undertaken by industry help to spread awareness of complementary healthcare among the aging baby-boomer population.
- The impact of regulatory bodies. E.g. if the Therapeutics Goods Administration tightens quality constraints, may erode profit margins of smaller firms, lead to push for economies of scale
- There are low switching costs between brands for consumers, though the Pan Pharmaceuticals debacle highlighted the importance of strong brand equity to maintain customer patronage. Also, if the healthcare products are viewed as commodities, buyers will focus upon price and service as their differentiators.
The bargaining power of buyers:
- Bargaining power of buyers is moderate to weak.
- Many buyers mostly accounting for a small proportion of total sales. The complementary healthcare industry utilizes 3 major distribution channels - Chemists, grocery stores and healthcare stores to access a wide range of consumers who generally all purchase relatively low volumes (ASMI, 2006).
- Blackmores has sought to differentiate its product via a quality focus and some competitors have a cost-focus. This Differentiation strategy helps to develop brand loyalty and is aimed at nullifying the impact of higher prices on consumer demand.
- No real threat of backward integration – given the diversity of customers.
- The customers are end-users, so there are no resale issues
- The absence of any real switching costs favorably influences buyer power, as it allows dissatisfied customers to change readily within the healthcare brands. Again, the focus on brand image and service helps to offset this lack of switching costs.
- The retail stores and distributors, however, have some bargaining power because they are able to influence the amount of shelf space given to Blackmores. However, Blackmores has a good working relationship with distributors and has a good share of shelf space amongst retail outlets.
- Generally quite weak, as there are many supplier companies selling relatively homogenous raw materials and commodity products – price, quality and service are the only real differentiators.
- That said, suppliers don’t need to contend with substitute products, except for advances made in specific healthcare products.
- The industry is a very important customer of the supplier group (Industry worth more than $1billion). It is a growth industry that suppliers would want to remain on good terms with.
- Supplier products are vital to the industry’s business, which gives them some power over the industry. However the push for quality and the high number of suppliers means it is difficult for them to utilize this as leverage.
- No real switching costs between suppliers, only real logistical issues. So again industry has the power to shop between suppliers.
- Suppliers do not pose much of a threat of forward integration – they manage a diverse portfolio of clients so it is unlikely to be cost effective to develop them within the niche healthcare industry. Furthermore, it would be difficult produce the diverse raw-inputs that are necessary to manufacture healthcare products.
- Synthetic medicines prescribed by professional doctors act as a substitute for the natural medication that Blackmores sells. However, the trend suggests a growingacceptance of natural healthcare products, such as those produced byBlackmores.
- Within the Asian markets that it is competing in, Blackmores will face intense competition from companies selling traditional Chinese medicines (e.g. Eu Yan Sang). Blackmores will have to work around cultural preferences for these products in countries like Taiwan, Hong Kong and Singapore.
- No major legal barriers to enter the market
- Few secrets to manufacturing of health supplements
- Main barriers to entry are the existing supplier/buyer relationships, and the brand name and reputation of Blackmores.
- Threat of entry by global multi-level marketing firms (e.g. Amway, Nu Skin, Unicity) which often sell nutraceutical supplements
- Another threat that could possibly undermine the success of Blackmores in Australia is the potential arrival of an international company with intact infrastructure taking over local businesses in Australia. Already there is an abundance of companies competing for a segment in the complementary pharmaceutical industry and therefore separating oneself from the rest is an issue Blackmores must attend to.
Blackmores - A Strategic Analysis (Part 1)
INTRODUCTION
Company Background
Industry Definition
EXTERNAL ANALYSIS
The Macro-Environment
Demographic and Sociocultural Trends
The ageing population of baby boomers in Australia is perhaps the most significant trend driving growth in the complementary pharmaceutical industry. These baby boomers form a large section of the population, and have had the highest median household incomes of any generation. They are increasingly leaning towards non-prescribed medicine to be the greatest form of treatment for their various physical ailments, as well as natural healthcare supplements to be a source of health and wellbeing. This demographic trend will continue to set the consumer agenda for the years ahead, and especially so in the healthcare industry.
Changing health environments on a national level has meant that people are tending to accept over-the-counter (OTC) products more regularly compared to prescribed medicine. Not only is it sometimes cheaper to purchase OTC products but the feedback from several complementary pharmaceutical companies has demonstrated consumers are more than happy with their results.
Growing acceptance of alternative medicine has dominated mainly the muscle/joint segment of the products produced by Blackmores. More and more people are seeking alternative medicines to combat their muscle/joint soreness, and Joint Formula with Glucosamine and Chondroitin (60 Tabs) continues to be one of their best sellers.
Global Economic Trends
In terms of the global arena there is no doubt that Blackmores is looking to further establish itself in the rapidly growing economies of Asia, which present many growth markets and opportunities for the company. In particular, Blackmores has found the Malaysian and Thai markets to be two of the greatest assets to the company. It has already been in Thailand since 1997, and Blackmores’ products are located in over 1,000 stores throughout Thailand.
Blackmores’ greatest form of overseas expansion lies in Thailand. The company has also made in-roads into Singapore, Hong Kong, Malaysia, Indonesia and New Zealand. However Thailand continues to be the best of the international entities. “The Blackmores business in Thailand has experienced an average growth rate of 20% over the past six years whilst the growth rate in the comparable sub-category is 10%” Further welcome news for Blackmores is that overseas it is not only the expatriates that are purchasing their products but also locals. It is this segment that the company is looking to pursue.
Regulatory Climate & Technological Environment
Regulators were previously quite adversarial towards the complementary healthcare industry. Marcus Blackmore has been actively lobbying for better regulatory conditions. The company also engages in extensive research and development activities. These regulatory and technological factors are discussed in more detail in the analysis of the firm’s internal environment.
Company Background
- Founded in the 1930s by Australia’s pioneering naturopath, Maurice Blackmores.
- Goal of the company is to shift the focus of the health system away from treating diseases to one that encourages people to accept responsibility for their own wellbeing
- It is a customer-focused company inspiring people to take control of, and invest in, their health and wellbeing. They are “leaders in developing and marketing products and services that deliver a more natural approach to health, based on our expertise in vitamins, minerals, herbs and other nutrients.”
- Blackmores’ industry is defined as the complementary pharmaceutical industry.
- This includes complementary pharmaceutical products, nutritional and health supplements.
- Companies in this industry are mainly involved with the purchase of raw materials and the conversion of these raw materials into natural medication products which are then distributed through retail stores, pharmacies and chemists.
- More established companies like Blackmores also have a strong sales service where qualified naturopaths and health experts provide advice to customers, in addition to established research & development capabilities to develop newer and better complementary healthcare products.
EXTERNAL ANALYSIS
The Macro-Environment
Demographic and Sociocultural Trends
The ageing population of baby boomers in Australia is perhaps the most significant trend driving growth in the complementary pharmaceutical industry. These baby boomers form a large section of the population, and have had the highest median household incomes of any generation. They are increasingly leaning towards non-prescribed medicine to be the greatest form of treatment for their various physical ailments, as well as natural healthcare supplements to be a source of health and wellbeing. This demographic trend will continue to set the consumer agenda for the years ahead, and especially so in the healthcare industry.
Changing health environments on a national level has meant that people are tending to accept over-the-counter (OTC) products more regularly compared to prescribed medicine. Not only is it sometimes cheaper to purchase OTC products but the feedback from several complementary pharmaceutical companies has demonstrated consumers are more than happy with their results.
Growing acceptance of alternative medicine has dominated mainly the muscle/joint segment of the products produced by Blackmores. More and more people are seeking alternative medicines to combat their muscle/joint soreness, and Joint Formula with Glucosamine and Chondroitin (60 Tabs) continues to be one of their best sellers.
Global Economic Trends
In terms of the global arena there is no doubt that Blackmores is looking to further establish itself in the rapidly growing economies of Asia, which present many growth markets and opportunities for the company. In particular, Blackmores has found the Malaysian and Thai markets to be two of the greatest assets to the company. It has already been in Thailand since 1997, and Blackmores’ products are located in over 1,000 stores throughout Thailand.
Blackmores’ greatest form of overseas expansion lies in Thailand. The company has also made in-roads into Singapore, Hong Kong, Malaysia, Indonesia and New Zealand. However Thailand continues to be the best of the international entities. “The Blackmores business in Thailand has experienced an average growth rate of 20% over the past six years whilst the growth rate in the comparable sub-category is 10%” Further welcome news for Blackmores is that overseas it is not only the expatriates that are purchasing their products but also locals. It is this segment that the company is looking to pursue.
Regulatory Climate & Technological Environment
Regulators were previously quite adversarial towards the complementary healthcare industry. Marcus Blackmore has been actively lobbying for better regulatory conditions. The company also engages in extensive research and development activities. These regulatory and technological factors are discussed in more detail in the analysis of the firm’s internal environment.
Monday, September 18, 2006
Do CEOs ever have a responsibility to "talk down" the share price of their company?
Talking down the share price of the company you are responsible for can often invoke an incendiary reaction from incumbent shareholders, especially if you have yet to build up the almost religious cult following that Warren Buffett has. And if you haven’t, doing so either takes
i. a strong sense of moral courage,
ii. a questionable sense of ethics,
iii. questionable business judgment, or
iv. a very good utilitarian reason to do so.
Talking Down in an Efficient Market
Assuming an efficient market, one can consider three main reasons why a CEO would want to talk down his company’s share price.
i. a strong sense of moral courage,
ii. a questionable sense of ethics,
iii. questionable business judgment, or
iv. a very good utilitarian reason to do so.
Talking Down in an Efficient Market
Assuming an efficient market, one can consider three main reasons why a CEO would want to talk down his company’s share price.
1. Public information does not reflect inside information
Under the information perspective for decision usefulness, markets respond rapidly and rationally to newly released public information. This means that market value diverges from intrinsic value only if public information does not reflect inside information, and the market has over optimistic expectations of the firm’s performance based on public information that does not give an accurate picture of the company’s inner workings.
When this happens, CEOs have an interest in ‘talking down’ their share price and releasing accurate inside information to the public, in order to manage shareholders’ expectations. The risk for the CEO is that the company will report future earnings that are below shareholders’ expectations that were based on faulty information. This could result in adverse consequences for the CEO’s job or compensation. This also allows the public to have better information of the internal state of the company, and avoids an over-allocation of capital to the company’s shares by the capital market.
2. The CEO wants to reduce expectations to make future performance seem better than it really is
Assuming public information more or less reflects the inner workings of the company, a CEO might be motivated to talk down the share price by making the company appear to be in worse condition than it really is, in order to make future earnings results seem abnormally high. A CEO stands to benefit financially from this practice when earnings performance is higher than expected, but doing so is ethically questionable, since it essentially involves deceiving shareholders and the market.
3. The CEO’s judgment is inaccurate
If public information is congruent with inside information, then a third reason why an honest CEO might want to talk down his company’s share price is because he has an overly pessimistic assessment of the company’s prospects. The converse is true if he tries to talk up share price in an efficient market with little information asymmetry – the CEO may be over estimating the prospects of his company. This is probably much more prevalent in practice.
Talking Down in an Inefficient Market
If, however, public information does accurately reflect inside information, and if a CEO is not prone to questionable ethical behaviour, then one has to consider relaxing the efficient market assumption in order to find reason to talk down the share price. With the advent of new fields of study like behavioural finance and comments of ‘irrational exuberance’ by such luminaries as Alan Greenspan, this may not be such an outrageous relaxation of assumptions after all. In fact, assuming that the market may not be efficient relaxes the need to assume that either:
a. information asymmetry exists,
b. a CEO is behaving unethically, or
c. a CEO’s judgment is inaccurate,
or any combination or permutation of the three.
Assuming public information reflects inside information, a CEO is honest and behaves with integrity, and the CEO accurately understands the value of his company, a CEO would be motivated to talk down the share price of his company if he noticed that the stock of his company was trading at a price significantly above its intrinsic value.
Doing so would:
i.Protect current shareholders from having an inflated sense of their wealth.
ii.Prevent a transfer of wealth, rather than a creation of wealth, from those buying the shares at the inflated price to those selling the shares at the inflated price. This is particularly important if we hold that prices eventually correct to reflect a company’s intrinsic value. When that happens, many retirement funds and children’s college funds can be destroyed overnight when share prices fall from lofty heights.
iii.Prevent the CEO & management team from being the victim of unrealistic expectations that are imputed into an inflated share price.
iv. Encourage efficient allocation of capital in the stock markets.
The very idea of an inefficient market, however, suggests that efforts by a CEO to persuade the market to 'rationalise' its pricing may well be unsuccessful. There is a significant chance that an inefficient market with irrational participants will ignore the talking down of the CEO, since the market has already ignored the public information available and has mispriced the company's stock.
Summary
Whether or not one believes the market is efficient, there are times when a CEO is rightfully motivated to talk down the share price of a company. And none other than Warren Buffet and Charles Munger "like the stocks of both Berkshire and Wesco to trade within hailing distance of what [they] think of as intrinsic value. When it runs up, [they] try to talk it down. That's not at all common in Corporate America, but that's the way [they] act." And if shareholders can suspend their immediate reactions of unhappiness towards such a move, they might well find that the CEO's actions are in the long run interests of the company as a whole.
_________________________________________
References:
Kerin, Paul (2006), "Tactical Retreat," Business Review Weekly
Scott, William R. (2006), Financial Accounting Theory, Person Prentice Hall
Tilson, Whitney (2003), "Charlie Munger's Worldly Wisdom," The Motley Fool
Under the information perspective for decision usefulness, markets respond rapidly and rationally to newly released public information. This means that market value diverges from intrinsic value only if public information does not reflect inside information, and the market has over optimistic expectations of the firm’s performance based on public information that does not give an accurate picture of the company’s inner workings.
When this happens, CEOs have an interest in ‘talking down’ their share price and releasing accurate inside information to the public, in order to manage shareholders’ expectations. The risk for the CEO is that the company will report future earnings that are below shareholders’ expectations that were based on faulty information. This could result in adverse consequences for the CEO’s job or compensation. This also allows the public to have better information of the internal state of the company, and avoids an over-allocation of capital to the company’s shares by the capital market.
2. The CEO wants to reduce expectations to make future performance seem better than it really is
Assuming public information more or less reflects the inner workings of the company, a CEO might be motivated to talk down the share price by making the company appear to be in worse condition than it really is, in order to make future earnings results seem abnormally high. A CEO stands to benefit financially from this practice when earnings performance is higher than expected, but doing so is ethically questionable, since it essentially involves deceiving shareholders and the market.
3. The CEO’s judgment is inaccurate
If public information is congruent with inside information, then a third reason why an honest CEO might want to talk down his company’s share price is because he has an overly pessimistic assessment of the company’s prospects. The converse is true if he tries to talk up share price in an efficient market with little information asymmetry – the CEO may be over estimating the prospects of his company. This is probably much more prevalent in practice.
Talking Down in an Inefficient Market
If, however, public information does accurately reflect inside information, and if a CEO is not prone to questionable ethical behaviour, then one has to consider relaxing the efficient market assumption in order to find reason to talk down the share price. With the advent of new fields of study like behavioural finance and comments of ‘irrational exuberance’ by such luminaries as Alan Greenspan, this may not be such an outrageous relaxation of assumptions after all. In fact, assuming that the market may not be efficient relaxes the need to assume that either:
a. information asymmetry exists,
b. a CEO is behaving unethically, or
c. a CEO’s judgment is inaccurate,
or any combination or permutation of the three.
Assuming public information reflects inside information, a CEO is honest and behaves with integrity, and the CEO accurately understands the value of his company, a CEO would be motivated to talk down the share price of his company if he noticed that the stock of his company was trading at a price significantly above its intrinsic value.
Doing so would:
i.Protect current shareholders from having an inflated sense of their wealth.
ii.Prevent a transfer of wealth, rather than a creation of wealth, from those buying the shares at the inflated price to those selling the shares at the inflated price. This is particularly important if we hold that prices eventually correct to reflect a company’s intrinsic value. When that happens, many retirement funds and children’s college funds can be destroyed overnight when share prices fall from lofty heights.
iii.Prevent the CEO & management team from being the victim of unrealistic expectations that are imputed into an inflated share price.
iv. Encourage efficient allocation of capital in the stock markets.
The very idea of an inefficient market, however, suggests that efforts by a CEO to persuade the market to 'rationalise' its pricing may well be unsuccessful. There is a significant chance that an inefficient market with irrational participants will ignore the talking down of the CEO, since the market has already ignored the public information available and has mispriced the company's stock.
Summary
Whether or not one believes the market is efficient, there are times when a CEO is rightfully motivated to talk down the share price of a company. And none other than Warren Buffet and Charles Munger "like the stocks of both Berkshire and Wesco to trade within hailing distance of what [they] think of as intrinsic value. When it runs up, [they] try to talk it down. That's not at all common in Corporate America, but that's the way [they] act." And if shareholders can suspend their immediate reactions of unhappiness towards such a move, they might well find that the CEO's actions are in the long run interests of the company as a whole.
_________________________________________
References:
Kerin, Paul (2006), "Tactical Retreat," Business Review Weekly
Scott, William R. (2006), Financial Accounting Theory, Person Prentice Hall
Tilson, Whitney (2003), "Charlie Munger's Worldly Wisdom," The Motley Fool
Saturday, September 09, 2006
Competitive Strategy: The Five Forces (Part 1)
When pursuing a qualitative analysis of a business, one of the key components of an analysis is the competitive dynamics of the industry the business is in. Michael Porter, in his book, competitive strategy, outlined the five key forces that determine the profitability of an industry. And while these five forces are not exhaustive, they form a useful guide to analysing a firm's competitive environment.
Force 1: Internal Rivalry Within the Industry
Internal rivalry refers to the state of competition between companies in the industry itself. A company in an industry characterised by low competition is likely to exhibit high amounts of abnormal profits. For example, Microsoft competes in the operating system industry, and has very little competition in this area. For all practical purposes, the company has a monopoly in the desktop operating system market, and faces very little competition. This enables it to raise prices and maximise profit, without having to worry about competitors undercutting its prices to compete away market share. A company such as Microsoft is said to be a price maker, since it has much power to set the prices of its Windows products.
Conversely, a business that is in an industry with a highly competitive market structure is likely to be a price taker. This means that it is forced to take the price that is set by the market. For example, the average soybean farmer's produce, with his few acres of farmland, only constitutes a drop in the ocean amongst the global soybean market. As an individual producer, the farmer has no say on the price of soybeans, since any attempt to sell his produce above the market rate will fail (nobody will buy his soybeans since they can get the same product at a cheaper price), and besides, he has no incentive to sell below the market rate when he can clear his barns at the going rate.
It therefore follows that companies that are within a competitive industry should seek to shape the competitive landscape so as to minimise competition, and derive competitive advantage. This, however, is the subject of another essay.
It therefore follows that companies that are within a competitive industry should seek to shape the competitive landscape so as to minimise competition, and derive competitive advantage. This, however, is the subject of another essay.
Even though a company might be in an industry with little competition, the competitive landscape of the industry can change rapidly once new competitors enter the industry. Thus, industries are attractive to the extent that there exist barriers to entry into the industry. For instance regional newspapers often operate with high barriers to entry. The large amount of fixed costs involved with purchasing and setting up printing equipment, coupled with the high editorial and administrative costs that are necessary to maintain a newspaper, prevent competitors from entering small regional markets. Customer brand loyalty can also create large barriers to entry, since there is little incentive for a reader to switch newspapers when he or she has been reading it for the last 20 years. High barriers to entry deter competition, and in turn help to maintain abnormal profits associated with lesser amounts of competition.
Conversely, an industry with low barriers to entry will invite competition, and companies in the industry will see any abnormal profits competed away rather quickly. For example, it is easy to set up a lemonade stall along the beach to sell drinks to passers by. Any abnormal profits, however, will quickly attract competitors who will rapidly compete away these profits. The lack of barriers to entry allows other enterprising individuals to quickly enter the lemonade market, and the lemonade stall owner can do little to keep them out.
Subscribe to:
Posts (Atom)