The Hunters and the Hunted

THE HUNTERS AND THE HUNTED
PRESENTED TO: ENERGY DAILY
THREATS TO COAL: CONSOLIDATION, CLEAN AIR, CLIMATE CHANGE,
CENTURY21 TECHNOLOGY

21 JANUARY 1999
BY: W. DOUGLAS BLACKBURN, JR.
BLACKACRE LLC
  
THE HUNTERS AND THE HUNTED

COMPANIES FAIL BECAUSE THEY FOLLOW THE WRONG STRATEGY. COMPANIES FAIL BECAUSE THEY FOLLOW THE CORRECT STRATEGY INEPTLY. THERE ARE THE HUNTERS AND THERE ARE THE HUNTED. THE QUESTION I POSE THIS MORNING IS: “CAN THE HUNTED LEARN TO HUNT?”

THE LIFE CYCLE OF A BUSINESS HAS THREE STAGES. CREATIVITY, EXCITEMENT, RAPID GROWTH, FINANCIAL CLIFFHANGING AND A CAN-DO ATTITUDE CHARACTERIZE THE EARLY STAGES. AS THE BUSINESS GROWS, IT BEGINS TO INSTITUTIONALIZE ITSELF, INSTALLING ALL THE TRAPPINGS OF BUREAUCRACY. IN ITS FINAL STAGES IT IS ATTACKED BY ITS SUCCESSORS-THE SPIRITED, INNOVATIVE, FAST MOVING HUNTERS. FOR MOST BUSINESSES, THIS STAGE IS THE BEGINNING OF THE END. UNABLE TO COMPREHEND WHAT IS HAPPENING TO THEM, UNABLE TO RESPOND BECAUSE OF INFLEXIBLE CORPORATE MIND-SET, AND LACKING THE PASSION NEEDED FOR THE FIGHT, THEY SUCCUMB.

BUSINESS, LIKE COUNTRIES, SURVIVE BY DESIGN. THE HUNTERS ARE NOT ONLY LEAN AND MEAN, BUT THEY RESPOND FASTER, PRODUCE HIGHER QUALITY AND ARE MORE INNOVATIVE THAN THE HUNTED. THEY THRIVE ON THE RAPID CHANGES IN MARKETS, TECHNOLOGY, EXPECTATION OF CUSTOMERS, COMPETITORS, ENVIRONMENTAL CONCERNS, WORLD POLITICS, FINANCE, AND THE WORK FORCE.

HUNTERS DON’T FORGET HOW TO HUNT. A COUGAR CAN BE TAMED TEMPORARILY BY CAPTIVITY AND REGULAR FEEDINGS, BUT ONCE RETURNED HUNGRY TO ITS NATURAL HABITAT, A COUGAR QUICKLY REGAINS ITS PRIMACY AS THE DOMINANT HUNTER.

MANY FAMOUS MINING HOUSES HAVE SUCCUMBED DURING MY THIRTY YEAR CAREER:

EASTERN ASSOCIATED COAL CORPORATION
ISLAND CREEK COAL COMPANY
OLD BEN COAL COMPANY
ZEIGLER COAL COMPANY
AMAX COAL COMPANY
MAPCO COAL COMPANY
ARCO COAL COMPANY
UNITED COAL COMPANY
BLUE DIAMOND COAL COMPANY

SOON: P&M COAL COMPANY
CYPRESS AMAX COAL COMPANY

THESE COAL COMPANIES DID NOT EXHAUST THEIR RESOURCES AND DIE AN HONORABLE DEATH; THEY WERE CONSUMED BY THE HUNTERS. DID THE STAKEHOLDERS OF THESE HUNTED COMPANIES RECEIVE THE MAXIMUM VALUE-PROBABLY NOT!

WRONG STRATEGY

HOW DID THEY BECOME THE HUNTED? PERHAPS THEY FOLLOWED THE WRONG STRATEGY. THIS MANIFESTS ITSELF IN SEVERAL WAYS. FIRST, A LACK OF FOCUS OFTEN LEADS TO A WRONG CONCLUSION. WE PRIDE OURSELVES, AS BUSINESSMEN, ON ANALYZING THE SOCIAL, POLITICAL AND ECONOMIC RAMIFICATIONS OF OUR DECISIONS. IN FACT, WE ARE TOO GOOD, OR MORE PRECISELY, TOO PRECISE IN OUR ECONOMIC ANALYSIS (THANKS IN LARGE PART TO LOTUS ABUSE). OUR MAJOR ERRORS GENERALLY OCCUR WHEN WE FAIL TO PROPERLY EVALUATE THE SOCIAL AND POLITICAL EFFECTS OF OUR DECISIONS. NOTE ESPECIALLY, THE FUROR WHICH HAS ARISEN OVER MOUNTAIN TOP REMOVAL IN WEST VIRGINIA. ALTHOUGH EXTREMELY LIMITED BY APPLICATION, OVERREACHING BY PERMITTEES HAS JEOPARDIZED THE VERY LEGAL REGIME WHICH CREATED THIS OPPORTUNITY.

IN THE ELECTRICAL GENERATING INDUSTRY, WHAT WILL BE THE EFFECT OF THE GROWING GREEN MOVEMENT ON PERMIT EXTENSIONS OF AMERICA’S NUCLEAR GENERATING CAPACITY? IF PLANTS CLOSE PREMATURELY, CAN FOSSIL FUEL STATIONS REPLACE THIS BASELOAD? IF NOT, WHAT? IF NOT NOW, WHEN?

INAPPROPRIATE DIVERSIFICATION IS ANOTHER SERIOUS STRATEGIC ERROR. AS THE PUBLIC CLAMORS FOR PREDICTABLE, SUSTAINABLE GROWTH OF EARNINGS, CEO’S TROT OUT THE ELXIR OF DIVERSIFICATION TO SMOOTH EARNINGS’ SWINGS. THIS ALMOST ALWAYS RESULTS IN MEDIOCRITY, NOT VALUE ENHANCEMENT FOR THE SHAREHOLDERS. BESIDES, IF A SHAREHOLDER WANTS TO DIVERSIFY HIS RISK PORTFOLIO, ALL HE HAS TO DO IS DIAL-UP SCHWAB.COM. IT IS MUCH MORE DIFFICULT FOR A CEO TO ACCOMPLISH THIS. FEW DO.

ANOTHER FLAWED STRATEGY IS THE NARROW CONCENTRATION ON COST CONTROL. HERETICAL AS IT MAY SEEM, SLAVISH DEVOTION TO COST CONTROL DISTRACTS MANAGEMENT FROM THE OPPORTUNITIES PRESENTED TO IT. REVENUE GROWTH, GROSS MARGIN GROWTH, AND THROUGHPUT EFFICIENCY OFFER GREATER VALUE GROWTH AS THE LAW OF DIMINISHING RETURNS WORKS ITS WILL UPON COST DECLINES.

FINALLY, THE FAILURE TO PUT THE CUSTOMER AT THE FOREFRONT OF MANAGEMENT’S SIGHTS IS A SUREFIRE WAY TO MISS MANAGEMENT’S TARGET OF CREATING AND GROWING SHAREHOLDER VALUE.

RIGHT STRATEGY POORLY EXECUTED

JACK WELCH DESCRIBES GENERAL ELECTRIC AS AN A LEVEL COMPANY WHICH DESERVES A LEVEL PLAYERS. “ LET THE B AND C LEVEL PLAYERS PLAY FOR THE COMPETITION”. NOT ONLY DOES GE RECRUIT A LEVEL PLAYERS, THEY HAVE THE MOST EFFECTIVE AND ADMIRED TRAINING PROGRAM FOR THEIR MANAGEMENT. THIS PROGRAM IS ACTIVELY LED BY WELCH, WHO SPEAKS TO EVERY CLASS AT ITS TRAINING CENTER IN GROTONVILLE, CONN. THE HUNTERS ATTRACT AND RETAIN TOP LEVEL PLAYERS BY OFFERING THEM REAL RESPONSIBILITY, TRAINING AND PERSONAL GROWTH NOT AVAILABLE ELSEWHERE. THE HUNTED DRIVE OFF THE SUPERIOR PERFORMERS WITH THEIR BUREAUCRATIC INEPTITUDE.

THE HUNTED FIND THEMSELVES IN THE VICIOUS SPIRAL OF NOT JUSTIFYING EXPENDITURES ON TRAINING, TESTING AND PROCESS IMPROVEMENT BECAUSE OF THE COSTS INVOLVED. THEY DON’T HAVE WELCH’S VISION THAT THESE ARE INVESTMENTS NOT EXPENSES. SOON THE COSTS INCREASE, DUE TO THE SECOND LAW OF THERMODYNAMICS, ANYWAY.

THE HUNTER’S MANAGEMENT HAS A COMMITMENT TO THE RELENTLESS PURSUIT OF EXCELLENCE. PROCESS IMPROVEMENT IS NOT A PROJECT, IT THE WAY THEY DO BUSINESS. HUNTED MANAGEMENT HAS THE PROJECT DU JOUR- DEPENDING UPON WHAT SEMINAR THE BOSS LAST ATTENDED.

THE MOST CONSISTENT CHARACTERISTIC OF THE HUNTED IS THE INERTIA CREATED BY THE INEXORABLE BUREAUCRATIZATION OF THE COMPANY. INITIALLY, RATIONALIZED BY THE NEED FOR THE SYSTEMIZATION OF PROTECTION OF THE SHAREHOLDER’S ASSETS, IT INEVITABLY BECOMES THE PROTECTOR OF THE STATUS QUO AND THE STATUS QUO’ERS. EARLIER, I SPOKE OF THE THREE STAGES OF A CORPORATE LIFE CYCLE. THE THREE CONCOMMITENT STYLES OF MANAGEMENT ARE RISK TAKER – CARE TAKER – UNDERTAKER.

THERE MUST BE A LAW OF MANAGEMENT THAT BUREAUCRACY DRIVES OUT ALL THAT MAKES BUSINESS FUN AND FULFILLING. IF NOT, THERE OUGHT TO BE!

STRATEGY

THE HUNTER MAKES A CHOICE ON TWO LEVELS OF STRATEGY. HE MUST ANSWER ONLY ONE QUESTION, ULTIMATELY. DO I BUY, SELL OR HOLD? IN THE ENERGY EXTRACTIVE BUSINESS, THE HUNTER HAS A BROAD, NATIONAL/INTERNATIONAL PRESENCES OR A STRONG REGIONAL PRESENCE. THE HUNTED IS OFTEN CAUGHT IN THE MIDDLE WITHOUT THE ABILITY TO BE EFFECTIVE IN EITHER. TO BE CAUGHT IN THE MIDDLE IS FATAL!

THE MANAGEMENT METHOD EMPLOYED TO IMPLEMENT THE STRATEGY IS OFTEN THE KEY DETERMINANT IN THE SUCCESSFUL EXECUTION OF THE STRATEGY. ALL TOO OFTEN UNDER ACCOUNTING/LEGAL LEADERSHIP, COMPANIES HAVE RELIED EXCLUSIVELY ON THE COST WORLD MODEL. COST CONTROL IS KING; ACCOUNTANTS MAKE THE RULES; ACCOUNTANTS/LAWYERS RULE. RISK TAKING WHICH BUILT THE COMPANY IS REPLACED WITH RISK AVERSION.

THIS MODEL IS NOT ABLE TO ATTACH VALUE TO INTANGIBLE BENEFITS AND SYNERGY. THIS RESULTS IN LOST OPPORTUNITIES. THE FOCUS ON LOWEST COST DISTRACTS FROM THE PROPER GOAL OF THE CORPORATION TO MAXIMIZE GROSS MARGIN. TIGHT CONTROLS SLOW DECISION MAKING WHICH RESULTS IN FURTHER LOST OPPORTUNITIES.

WITH 76% OF SUPPLY CONTROLLED BY THE TOP 20 PRODUCERS, GAINING ECONOMIES OF SCALE THROUGH MERGERS AND ACQUISITIONS IS NO LONGER THE EFFECTIVE CORROLARY OF THE COST WORLD MODEL. THE LAW OF LARGE NUMBERS IS IMMUTABLE.

THE HUNTERS INTUITIVELY SELECT THE THROUGHPUT WORLD MODEL. THROUGHPUT IS ALL THE MONEY MADE THROUGH SALES LESS DIRECT EXPENSES. RETURN IS THROUGHPUT DIVIDED BY EXPENSE. INCREASING PROFIT FROM THROUGHPUT IS THE HIGHEST LEVERAGE FORM OF IMPROVEMENT. PROFIT FROM LIMITING EXPENSE AND INVENTORY IS LESS SIGNIFICANT. EXPENSE, IN THE SHORT RUN IS FIXED. HUNTERS KNOW THAT PRODUCING MORE IN THE TIME PERIOD LEVERAGES PROFITS AND, IS NOT, WITHIN NORMAL OPERATING TOLERANCES, CONSTRAINED. THE THROUGHPUT WORLD PARADIGM IS THE HUNTER’S MODEL.

MANAGEMENT’S SECOND STRATEGIC DECISION IS OPERATIONAL. HUNTERS SEEK OPERATIONAL EXCELLENCE THROUGH ELIMINATION. ELIMINATION OF: WASTED MATERIALS, VALUELESS ACTIVITY, VALUELESS TIME, AND VALUELESS VARIANCE. HUNTERS SEEK CUSTOMER INTIMACY WHICH RESULTS IN PRODUCT DIFFERENTIATION AND GROWING MARKET SHARE THROUGH WIN-WIN TRANSACTIONS. FINALLY, HUNTERS DEMAND FAST DECISION MAKING CYCLE TIMES. THEY DON’T TOLERATE BUREAUCRACY. HUNTERS MAKE IT EASY TO DO BUSINESS AND EASY TO DO BUSINESS WITH.

CONCLUSIONS AND PREDICTIONS

THIS PERIOD OF CONSOLIDATION IS COMING TO ITS NATURAL CONCLUSION. THE TOP 4 COMPANIES CONTROL 40% OF THE SUPPLY AND WILL SEE SMALLER GAINS FROM CONTINUING MERGER AND ACQUISITION ACTIVITIES.

COMPETITION IS ALIVE AND WELL! THE ENERGY POLICY ACT OF 1992 WILL FURTHER FOCUS OUR CUSTOMERS. FUEL IS THEIR LARGEST VARIABLE COST AND THEREFORE A MAJOR DRIVER. HUNTERS WILL COMPETE AS STRONG NATIONAL OR REGIONAL PLAYERS TO HELP THESE UTILITIES SOLVE PROBLEMS THEY MAY NOT EVEN REALIZE THEY HAVE. THE HUNTED, CAUGHT LIKE DEER IN HEADLIGHTS, WILL CONTINUE TO DISAPPEAR. THE ECOSYSTEM WILL BE HEALTHIER.

FOR THE HUNTED WHO WISH TO REESTABLISH THE LICENSE TO HUNT: DEVELOP A GOOD STRATEGY; FOCUS ON THROUGHPUT DECISION MAKING; SEEK CUSTOMER INTIMACY; STRIVE FOR OPERATIONAL EXCELLENCE THROUGH CONTINUOUS IMPROVEMENT AND FIGHT BUREAUCRACY LIKE THE HUNTER FIGHTS OFF THE BITTER COLD.

THE COUGAR IS A MAGNIFICENT ANIMAL. THE PREY LIVES A SHORT LIFE OF QUIET DESPERATION.