Due Diligence
Your due diligence is probably wrongGlobal Advisors: a consulting leader in defining quantified strategy, decreasing uncertainty, improving decisions, achieving measureable results.
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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Thoughts
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
Quote: Richard Koch Author, investor, strategist
“The 80/20 Principle asserts that a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards.” – Richard Koch – Author, investor, strategist
The quote, “The 80/20 Principle asserts that a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards,” originates from the acclaimed British author, entrepreneur, and strategist Richard Koch. This principle, also widely known as the Pareto Principle, suggests that in many aspects of business and life, a focused minority is responsible for producing the majority of results. In practical terms, Koch observed that 20% of activities typically lead to 80% of the value or outcomes—whether those are profits, happiness, or productivity.
Koch’s sharp insight into this pattern did not emerge in isolation. He built his career in environments where optimizing results and leveraging limited resources was essential. After earning an M.A. from Oxford University and an M.B.A. from The Wharton School, Koch launched his professional journey with the Boston Consulting Group, before becoming a partner at Bain & Company. There, consulting for leading global organizations, he recognized that the most significant outcomes often stemmed from a narrow selection of strategic moves or high-leverage initiatives.
Leaving Bain in 1983, Koch co-founded L.E.K. Consulting and became a serial investor and entrepreneur, with ownership in businesses such as Filofax, Plymouth Gin, Betfair, and FanDuel. Across these varied ventures, Koch repeatedly saw the 80/20 rule in action—whether identifying the most profitable customers, streamlining operations, or focusing on the few core products that drove sales.
About Richard Koch
Richard Koch (born July 28, 1950) has become a globally recognized voice on strategy, entrepreneurship, and the science of effectiveness. Beyond his consulting work and private equity investments, Koch has authored several influential books, most notably The 80/20 Principle, which has sold over a million copies and been translated into 35 languages. His writing popularized the application of the Pareto Principle beyond economics, demonstrating its practical relevance for business, personal development, and lifestyle choices.
Koch’s personal journey reflects the core lesson of his message: by identifying the vital few factors that matter most, and minimizing time on the trivial many, individuals and organizations can multiply their effectiveness and reward. He has credited his mastery of this principle as the key to amassing significant wealth and achieving a form of early retirement, allowing him the freedom to invest, write, and speak across the world.
Today, Koch’s 80/20 Principle stands not just as a tool for efficiency but as a transformative lens for reimagining how we approach challenges, prioritize resources, and strive for lasting success.
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