MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Boeing: Rough landing

C. HUYGENS - Monday, October 14, 2013
"Any landing you can walk away from," wrote U.S. Army Air Forces photographer Gerald Massie after crash-landing his B17, " is a good one!" What was true in 1944 is true today: the good news is Boeing is walking.

However, the BP-like serial doling of Dreamliner-associated issues has taken its toll, and Boeing has been winged. For the first time in modern history, Japanese national air carriers are opting for the competition.

Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin published this thoughtful essay on innovation risk and its management in Forbes this past Friday. Read more.

The Steel City Re reputation metrics for Boeing show slow progressive value loss in its CRR Rank (Reputation Premium) from the 95th to the 89th percentile over the trailing 12 months. Notwithstanding daily meetings at Boeing hosted by CEO Jim McNerney, and his April 2013 declaration that "the original promise of the 787 is fully intact," the engineering issues have not abated -- the reputational volatility, termed Current RVM Volatility below (or Consensus Trend) evidence this persistent uncertainty. Stakeholders are no longer as confident (see Historic RVM Vol below) that Boeing is (or was) in complete control of its innovation processes.

Apple: Forward guidance needed

C. HUYGENS - Thursday, September 12, 2013
"Spare the rod, spoil the child," advises the behavioral dictum. Reputation controls expert Jonathan Salem Baskin believes the same holds for Apple Inc.'s (AAPL) stakeholders.

Writing in Forbes, the moderator of the Society's Mission Intangible Monthly Briefings and Managing Director of Consensiv notes that "…analysts of all stripes are opining that the company is long overdue for a big success. They’re wrong," he asserts. "It needs to give us a failure. Something spectacularly bad could be just what it needs."

The reputational value metrics from Steel City Re shown below paint an unattractive picture. It appears that in November of 2012, Apple Inc. fell off its pedestal and shed an enormous amount of reputational value (Reputation Premium) dropping from the 100th percentile of its peer group to around the 67th percentile. However, since then it has regained ground as stakeholders talked themselves into, again, unrealistic expectations.

Not so the investors. Consistent with prior observations of RVM volatility reported by Consensiv, the company's RVM volatility spike of 8% (Consensus Trend) in November was followed by market value turbulence. (RVM is a non-financial measure of reputational value). But even investors began to feel optimistic over the summer giving the stock price a boost from what was already a dismal performance for the year.

After years of having a coherent view of Apple and expectations of infallibility, all evidenced by a dangerously low Consensus Benchmark, stakeholders who forgot that real companies blunder from time to time are having doubts. But fears are still being masked by hopes, so disappointment hurts even more. Ergo, a very recent RVM volatility spike of hope and fear that was followed by more market value loss reflecting further disappointment. Read the full story here.

Nokia: Stained shorts

C. HUYGENS - Tuesday, September 03, 2013
Surprise, surprise! Shorting securities is a high risk gamble. Never mind that a key motivator is a deep-seated belief that a company is doomed. Dead is dead. But equity investors have a wonderful way to resurrect companies in advance of a sale. Nokia (NOK), pronounced dead by Huygens long ago, returns to help Microsoft (MSFT) address its own problems. The street says Microsoft is buying hardware, intellectual property, and a former Microsoft executive who may replace Ballmer.

Over the past five years, Nokia has lost 80% of its value falling from $21 to less than $4 on Friday. Today it is up 40% in early morning trading. Nokia shareholders are celebrating. Nokia shorts are turning to NetFlix (NFLX) shorts for advice. Microsoft investors are less enthused. The stock is down 4.75% in early morning trading.

That equity investors were surprised should not be surprising, looking at Steel City Re's reputational value metrics. Stakeholders as a group were seeing upside, but no there was no expectation of a major event. Stakeholders collectively were progressively giving Nokia some additional reputational premium that was pushing its equity returns to above average levels relative to the 72 peers of the telecommunications equipment sector. The expectations were for continued increase in the reputation premium (CRR). Also, while forecast stability, a vital sign, was only in the 14th percentile, the consensus trend (RVM Volatility) was below average suggesting a uniformity of expectations. These data all suggest that shorting Nokia at this time would have been a bad idea, but they also indicate that there was no real expectation of a major upside event.

Procter & Gamble: The king is dead. Long live the king!

C. HUYGENS - Monday, May 27, 2013
In December 2009, outgoing P&G CEO AG Lafley said, “I am retiring with confidence in Bob McDonald and his team. This is the right time to complete our management transition.” Last friday, wags were reading into communiques the reverse. "This is the right time to restore our former management transition."

There are several ironies about all this. First, after weeks of governance experts piling on to the idea that Jamie Dimon could not be trusted with both the CEO and Chairmanship roles at JPMorgan Chase, nary a negative word could be found suggesting that there was anything wrong with AG Lafley taking on the roles at P&G of Chairman, CEO and President. Second, there was near-universal accolades for Lafley's reputation as a giant in innovation -- a point Huygens disputed previously when he suggested that P&G's current problems are a direct result of Lafley's strategy.

However, as an American Pragmatist, Huygens appreciates that what matters is what the markets expect. It was apparent to all that under McDonald, P&G’s profit margins, market share and stock price lagged relative to peers such as Unilever PLC (UL), Colgate-Palmolive Co. (CL) and Clorox Inc. (CLX). In light of abysmal performance, those expectations, reflected in the Steel City Re reputational value metrics (or the Reputation Premium, Consensus Trend, and Consensus Benchmark as those metrics are explained by Consensiv) are informative.

This snapshot, taken at the close of markets last Thursday only hours before the announced change of leadership, shows evidence of stakeholder unrest peaking nearly three weeks ago when the Current RVM Volatility (or Consensus Trend) peaked at nearly 5% and was at the 73rd percentile of the peer group after nearly a year of hovering in a much lower state of anxiety at the 33rd percentile. Meanwhile, return on equity dropped to the 29th percentile representing a 10-point drop from September of last year and consistent with Huygens' projections.  Over the same period, the Current CRR Rank (Reputational Premium) dropped from the 95th percentile to the 83rd percentile.

The data suggest that McDonald's fate was sealed about one month ago. Owing to the time of sampling, the data do not show what the majority of stakeholders expect from Lafley going forward, although it is fair to say that the 4% equity boost Friday signals that equity investors, at any rate, are optimistic.


Dell: It tolls for whom?

C. HUYGENS - Sunday, January 27, 2013
Dell's endgame is nigh. The innovative business model that produced high quality low cost computers, and a service package to boot, has been overcome by events. Others are making computers better, faster and cheaper even as the market for PC's is being eroded by more powerful mobile solutions and remote storage.

Jonathan Salem Baskin, moderator of the Society's Mission Intangible Monthly Briefings, writes this for Forbes magazine (Jan 26):

Dell has suffered and languished for years. We all watched the long, slow slog, and at numerous points along the way the leaders of the business could have realized that things weren’t just ‘tough this quarter’ but ‘evidence of a deeper ill,’ and then done something about it. The company didn’t teleport to this point in time. I wonder if Dell failed to understand its reputation — the ongoing narrative of business performance, which has a closer connection to things like operating costs, profit margins, and how those qualities are valued by external stakeholders — and therefore missed its obligation to manage it? If so, it’s not fixable with marketing or financial legerdemain.


The reputational value metrics provided by Steel City Re affirm the above in stark quantitative terms. The company's reputational value vital signs, top left bar chart, show below median measures with decreasing volatility, a depressed CRR (measure of relative rank) at the 14th percentile, below median ROE, and an indication of expected change that is only a further exacerbation of ongoing negative trends. RVM (a measure of reputational value) volatility no longer follows sector or market concerns. The company's reputation is now wholly driven by expectations concerning its viability, not its profitability or renewed market engagement. The metrics are those of a company whose business model has evaporated - a failure of strategy at the highest managerial levels.

Boeing: A reputation problem

C. HUYGENS - Friday, January 25, 2013
Innovation is the process by which products and services are made better, faster and cheaper. Outcomes are uncertain, which means the process is inherently risky where risk is a threat to an outcome that is desired. Because innovation is also one of the six major drivers of reputational value, innovation risk presents reputational value risk.

On CNBC's Kudlow Report last night, Jonathan Salem Baskin, a member of the Society's Reputation Leadership Council and moderator of the Mission Intangible Monthly Briefings, explained this to Bob Crandall, former Chairman and CEO of American Airlines' holding company, AMR. Click here to link to the CNBC clip.

Hewlett-Packard: Come again?

C. HUYGENS - Monday, November 26, 2012
As you recall, HP announced last Tuesday losses tied to alleged fraud at Autonomy. Huygens opined that Steel City Re’s Reputational Value Metrics prior to Hewlett-Packard’s announcement of the $8.8 billion charge indicated that stakeholders were immune to further surprise. That interpretation was good, but not good enough.

Last week, HPQ’s reputational ranking was at the 33rd percentile and its forecast stability was the highest among 22 peers. That's a poor showing for what was once the icon of Silicon Valley, but its been a bad year. After all, in addition to the boardroom personnel shenanigans, H-P this past August took an $8 billion writedown on the 2008 EDS acquisition representing more than half the $14 billion purchase price. Likewise, H-P is believed to have written down most if not all of the value of its 2010 acquisition of Palm for $1.2 billion.

Back in September, the Motley Fool explained why HP’s reputation—based on expectations of innovation--was on a downward spiral.

-Lack of invention/innovation: Well we can say that HP has not lived up to its tag line-invent. HPQ has filed 1 patent a week on an average last year as compared to 44 filed by International Business Machines (NYSE: IBM) and 88 filed by Samsung…(I)f patent filing is taken as a sign of innovation power for the company, then HPQ has miles to travel before it is in par with its competitors.
-Lack of competing factor: The last CEO of the company Leo Apotheker made an announcement in the public which led to a huge negative impact on its business.… In such a situation instead of taking a hasty decision of separating the PC business from its umbrella brand, HPQ should have worked more on how to improve its operating margin and bring down its overhead costs in this segment.
-Technological Pace: HPQ - the pioneer of the mobile device, is … unable to keep up the momentum in the mobility space. HPQ launched its Touchpad in July 2011 – a ray of hope. But as a shock to many, they removed the Touchpad within 45 days itself - reflecting non competence in this arena.
-Over reliance on webOS: WebOS lacked that appeal to the consumer sector…and which caused the failure of its Touchpad.


And then there were the governance matters:

-Fragile / Inconsistent top management: One of the signs that the company is going down the drain is when we see that the top management is fragile or changing regularly. This is quite visible in HPQ where the CEOs have changed many a times with the likes of Carly Fiorina, Mark Hurd, Leo Apotheker and now Meg Whitman.
-Maligning its own reputation: HPQ is quite famous in the imaging and printing group – one of its major sources of earnings. HPQ was busted a few months back for putting less and less ink into its Printer cartridges. … In their attempt to earn pennies they lost the trust factor of many of their precious loyal customers.


With the latest metrics now available, Huygens interpretation of last week's numbers was only partly right. The vital signs (top right graph, below) show rock-bottom historical volatility of RV, a non-financial measure of reputational value, meaning, as The Fool explained, every stakeholder had good reasons to not expect much from HP. Current volatility, however, has jumped from the 10th percentile to the 52nd percentile, meaning, HPQ is now "average" among firms in this highly risky technology sector. It could have been a greater shock, but, as the metric show, it simply wasn't. The RVM volatility time series, (top left graph, below), shows last week's spike raising current volatility to a level only slightly above the median for the whole sector. HPQ's CRR, a measure of relative reputational ranking, dropped over the week from the 33rd percentile to the 10th percentile. ROE remained at bottom, and the forecast stability dropped from 1.0--the most stable--to the the 29th percentile and clearly not the worst in this sector. Forward looking measures, (right column, bottom two rows) are signalling further reputational value deterioration. (For a deeper understanding of the metrics, read: Reputation Stock Price and You: Why the market rewards some companies and punishes others).

Yes, when everyone expects you to fall, it's hard to elicit any startle responses. It is even harder to surprise anyone with a fall when you are already on the floor. And yet, mathematicians have long suggested that there must be some practical application for imaginary numbers. Now, Pippin?

 
 

Abercrombie and Fitch: Surprise, surprise!

C. HUYGENS - Thursday, November 15, 2012
Last Thursday, Huygens reported that there was a sense Abercrombie and Fitch's (ANF) innovative marketing had run out of steam. The stock price was in the dumps. According to the Steel City Re Reputational Value Metrics, it was ranked in the 44th percentile (CRR) but its ROE ranked a dismal 10th percentile. However, reputational volatility measures indicated among stakeholders an expectation of "a steady improvement in both rank (CRR) and reputational value (RVM)."

Thurday one week later, as MarketWatch reports, "on Wednesday, the New Albany, Ohio-based company reported a third-quarter results that were better than expected and raised its outlook for the year, as same-store sales in the United States, its top market, rose 2%. Internationally, excluding the United Kingdom, sales saw some signs of health as the retailer pointed to positive momentum in its new stores in China and Korea and flat comparable sales." The stock surged 34% to $41.92.

The Steel City Re Reputational Value Metrics provide intelligence on reputational value that, more often than not, appears to be a leading indicator of stock price movement. The RepuStars Variety Corporate Reputation Composite Equity Index (Ticker: REPUVAR), reported each week on this blog, is the most direct demonstration of the information content of Steel City Re's measures of reputational value.

Abercrombie and Fitch: 50 shades of reputation

C. HUYGENS - Thursday, November 08, 2012
Abercrombie and Fitch, the casual apparel retailer, established a reputation for innovative, sexy marketing. Reputation is an expectation that spurs stakeholder behavior. A&F Quarterly, the company’s catalog that featured photo shoots by fashion photographer Bruce Weber, was so racy that shoppers were required to prove they were over 18 years of age to buy them. It had a circulation of 1.2 million in 2002 and was branded ‘soft porn’ by critics.

Its marketing strategy, reports the Daily Mail (Abraham, 31 August 2012), appears to be failing to woo customers as effectively as they once did. In addition to 71 store closing in 2012, it expects to have closed nearly a quarter of its 1055 global stores by 2012. Sexy and vacuous is no longer innovative—in the US and Europe. Meanwhile, overseas in China and the Middle East, sexy is innovative. Sales are growing.

Were it only so simple for Research in Motion. The company that established a reputation for innovation in the smart phone arena—invented the genre as we know it—has slipped dramatically in the minds of its stakeholders. As discussed here and elsewhere, including the new book, Reputation Stock Price and You, it is simply no longer innovative. Catch up is a much harder game. Turning to the reputation metrics for both Abercrombie and Fitch (ANF) and Research in Motion (RIMM) from Steel City Re, the former is down in the dumps with upside potential, while the latter is similarly situated, but with a bleak future.

ANF's reputation rank (CRR) has been on a choppy ride down to the 44th percentile among its peer group and its ROE is in the 10th percentile. The many volatility measures, however, suggest a steady improvement in both rank (CRR) and reputational value (RVM). RIMM's reputation rank is in the 23rd percentile and its ROE is in the 12th percentile. However, its volatility measures forecast--actually, only hint--possibly a slight improvement.



Getting the Innovation Mix Right - Again

C. HUYGENS - Tuesday, November 06, 2012
Ken Jarboe, Chair of the Society's Public Policy Committee and President of Athena Alliance, a non-profit research organization dedicated to identifying, understanding, analyzing, and educating on the information, intangibles, and innovation (I-Cubed) economy, has kindly allowed us to run this posting from the blog, The Intangible Economy.

Clay Christensen makes a very important point in his essay in Sunday's New York Times "A Capitalist's Dilemma, Whoever Wins the Election." Unfortunately, it is a point that has been made before in a slightly different form over 30 years ago.

Christensen begins by noting that "innovation" is actually made up of three types:

  • Empowering innovations which "transform complicated and costly products available to a few into simpler, cheaper products available to the many." These are the new products and services that create jobs and new wealth. He cites the Model T, the first personal computers, the transistor radio and online services as examples.
  • Sustaining innovations which "replace old products with new models." These are the newest version of an existing product. As such, they create few new jobs but "keep our economy vibrant." They also account for the bulk of what we call innovation. The example he sites is the a Toyota Prius replacing a Camry.
  • Efficiency innovations which "reduce the cost of making and distributing existing products and services." These innovation generally reduce the number of jobs but may make the companies more internationally competitive (thereby saving some jobs).
Here is the important insight derived from this taxonomy: Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay.

The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine. In the last three recoveries, however, America's economic engine has emitted sounds we'd never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels -- and it's not clear whether, when or how we're going to get there.

The economic machine is out of balance and losing its horsepower. But why? The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations than in the past. We need to reset the balance between empowering and efficiency innovations. Christensen goes on to blame the situation on what he calls "The Doctrine of New Finance" with its emphasis on RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

I believe he has a strong point - but am not sure this is such a new problem. Over 30 years ago, Robert Hayes and William Abernathy published in HBR their seminal paper Managing Our Way to Economic Decline. They argued there are three tasks of a manager:

  • Short term--using existing assets as efficiently as possible.
  • Medium Term--replacing labor and other scarce resources with capital equipment
  • Long term--developing new products and processes that open new markets or restructure old ones.
Companies (and economies) fail when they concentrate on the first two tasks and ignore the third. Translated into Christensen's innovation terminology, economies fail when they emphasize efficiency (and sustaining) innovation (short and medium term objectives) over empowering innovation (long term objectives). Luckily, as history has shown, this emphasis can be overcome. Since the publication of the Hayes & Abernathy article in 1980, there has been a wave of empowering innovation.

As I've pointed out before, we overcame the competitiveness challenges of the 1980's by meeting them head on. We put in place a number of new government policies and companies engaged in a new wave of innovation. We need the next wave of policies to meet the new competitiveness challenges we face today. Christensen has outlined a few of his ideas in his article. There are many more that I could come up with. The point is not whether my list or Christensen's list is the right list. The point is to have a debate that recognizes the real forces underlying the problem. Simply cutting and "letting the economic work" is a recipe for a new round of managing our way to economic decline.
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