Due Diligence
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Our latest perspective - What's behind under-performing listed companies?
Outperform through the downturn
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Decreased uncertainty, improved decisions
Global Advisors is a leader in defining quantified strategies, decreasing uncertainty, improving decisions and achieving measureable results.
We specialise in providing highly-analytical data-driven recommendations in the face of significant uncertainty.
We utilise advanced predictive analytics to build robust strategies and enable our clients to make calculated decisions.
We support implementation of adaptive capability and capacity.
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Global Advisors’ Thoughts: Outperforming through the downturn AND the cost of ignoring full potential
Press drew attention last year to a slew of JSE-listed companies whose share prices had collapsed over the past few years. Some were previous investor darlings. Analysis pointed to a toxic combination of decreasing earnings growth and increased leverage. While this might be a warning to investors of a company in trouble, what fundamentals drive this combination?
In our analysis, company expansion driven by the need to compensate for poor performance in their core business is a typical driver of exactly this outcome.
This article was written in January 2020 but publication was delayed due to the outbreak of Covid-19. Five months after South Africa’s first case, we update our analysis and show that core-based companies outperformed diverse peers by 29% over the period.
Management should always seek to reach full potential in their core business. Attempts to expand should be to a clearly logical set of adjacencies to which they can apply their capabilities using a repeatable business model.
In the article “Steinhoff, Tongaat, Omnia… Here’s the dead giveaway that you should have avoided these companies, says an asset manager,” (Business Insider SA, Jun 11, 2019) Helena Wasserman lists a number of Johannesburg Stock Exchange (JSE) listed shares that have plummeted in recent years.
In many cases these companies’ corresponding sectors have been declining. However, in most of the sectors there is at least one company that has outperformed the rest. What is it about these outperformers that distinguishes them from the rest?
The outperformers have typically shown strong financial performance – be that Growth, ROE, ROA, RONA or Asset Turnover – and varying degrees of leverage. However, performance against these metrics is by no means consistent – see our analysis.
What is consistent is that the outperformers all show clearly delineated core businesses and ongoing growth towards full potential in these businesses alongside growth into clear adjacencies that protect, enhance and leverage the core. In some cases, the core may have been or is currently being redefined, typically through gradual, step-wise extension along logical adjacencies. Redefinition is particularly important in light of the digital transformation seen in many industries. The outperformers are very seldom diversified across unrelated business segments – although isolated examples such as Bidvest clearly exist in other sectors.
Analysis of the over- and underperformers in the sectors highlighted in the article shows that those following a clear core-based strategy have typically outperformed peers through the initial months of the downturn caused by the Covid-19 outbreak.
Strategy Tools
PODCAST: Effective Transfer Pricing
Our Spotify podcast discusses how to get transfer pricing right.
We discuss effective transfer pricing within organizations, highlighting the prevalent challenges and proposing solutions. The core issue is that poorly implemented internal pricing leads to suboptimal economic decisions, resource allocation problems, and interdepartmental conflict. The hosts advocate for market-based pricing over cost recovery, emphasizing the importance of clear price signals for efficient resource allocation and accurate decision-making. They stress the need for service level agreements, fair cost allocation, and a comprehensive process to manage the political and emotional aspects of internal pricing, ultimately aiming for improved organizational performance and profitability. The podcast includes case studies illustrating successful implementations and the authors’ expertise in this field.
Read more from the original article.
Fast Facts
Fast Fact: Great returns aren’t enough
Key insights
It’s not enough to just have great returns – top-line growth is just as critical.
In fact, S&P 500 investors rewarded high-growth companies more than high-ROIC companies over the past decade.
While the distinction was less clear on the JSE, what is clear is that getting a balance of growth and returns is critical.
Strong and consistent ROIC or RONA performers provide investors with a steady flow of discounted cash flows – without growth effectively a fixed-income instrument.
Improvements in ROIC through margin improvements, efficiencies and working-capital optimisation provide point-in-time uplifts to share price.
Top-line growth presents a compounding mechanism – ROIC (and improvements) are compounded each year leading to on-going increases in share price.
However, without acceptable levels of ROIC, the benefits of compounding will be subdued and share price appreciation will be depressed – and when ROIC is below WACC value will be destroyed.
Maintaining high levels of growth is not as sustainable as maintaining high levels of ROIC – while both typically decline as industries mature, growth is usually more affected.
Getting the right balance between ROIC and growth is critical to optimising shareholder value.
Selected News
Term: Strategic Positioning
Strategic Positioning refers to the process of creating a distinct image and identity for a company or its products/services in the minds of the target market, differentiating it from competitors. Michael Porter, a leading authority on competitive strategy, introduced this concept as part of his framework for achieving sustainable competitive advantage. Porter emphasized that strategic positioning involves making deliberate choices about which activities to perform and how to configure them to deliver unique value. This can be achieved through cost leadership, differentiation, or focus strategies (as outlined in his “Generic Strategies” model).
Related Theorist: Michael Porter
In the evolving landscape of business strategy during the late 20th century, companies grappled with the challenge of standing out in increasingly competitive and globalized markets. It was in this context that Michael E. Porter, a Harvard Business School professor, introduced the powerful concept of strategic positioning—a pivotal shift from simply competing to truly differentiating.
Porter’s work drew upon microeconomics and industrial organization theory to analyze not just the structure of industries, but also how companies could outperform their rivals by making clear, deliberate choices about the value they create and how they deliver it differently than others. Prior to Porter, much of strategic thinking centered on participating in attractive industries and responding reactively to market pressures. Porter, however, reframed the discussion: firms should proactively define their position by deciding what unique combination of activities they would pursue—and, crucially, what they would not.
This insight led to the articulation of the now-classic “Generic Strategies” model: cost leadership, differentiation, and focus. Porter’s research revealed that companies seeking to occupy a strong, defensible competitive position should commit to one of these strategies. Firms that failed to do so—who tried to “straddle” between methods—often found themselves “stuck in the middle,” lacking a clear identity or advantage. His frameworks, such as the Value Chain and the Five Forces, provided analytical tools to guide these strategic choices, moving beyond intuition to systematic, evidence-based decision making.
Strategic positioning, as Porter defined it, is more than branding or marketing spin. It is about the underlying choices that shape a firm’s identity in the marketplace: the mix of products, the nature of customer relationships, and the configuration of activities that together create distinct value. Through this lens, competitive advantage is not a product of luck or circumstance, but of intentional differentiation and operational effectiveness.
This approach transformed management thinking and remains foundational for firms seeking sustainable success. Strategic positioning continues to inform how organizations choose where to compete and how to win—emphasizing that in a crowded world, clarity of purpose, distinctiveness, and the courage to make trade-offs are the bedrock of lasting advantage
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