Competing in the Knowledge Economy : The Knowledge Value Chain (KVC)

My colleague Robert Reiss studies CEOs — especially their successes and failures — in order that others might benefit from them.  His Internet show The CEO Show produces interviews from these CEOs on leadership, and how they make their organizations ‘tick’.  His book (with Jeffrey J. Fox) The Transformative CEO (McGraw-Hill, 2012) gathers some of their stories, principles, and accomplishments.

Robert characterizes the CEO’s primary job as getting the organization from here to there.  Whatever resources are required to do that, it’s his or her job to make sure they’re in place — fully resourced, focused, and firing on all cylinders.

Robert sensed intuitively that the CEOs he interviewed on his show were adding substantial value to their organizations.   But was what seemed subjectively true also objectively verifiable?  When Robert wanted an independent test of his hypothesis, he turned to The Knowledge Agency®.

The TKA test

TKA devised a test using a widely-accepted benchmark — the change in the stock price during their respective tenures as CEO.  But market conditions were very different over the differing time frames we tested — even staying flat in a down market like that of 2008-09 would be judged superior. To adjust for such variations, we gauged the results against the return from the overall market, as measured by the return on the S&P 500.

So our benchmark metric was stock price return in excess of the return from the S&P 500.  We tested the eleven of Robert’s ‘transformative’ public companies having market capitalizations over $1 billion.

The envelope, please

The results were astonishing.   As shown in the table, the median gain was 44 percent over the benchmark, with the range from a slight loss against the benchmark to an excess gain of more than 5400 percentage points.  These results were for periods of time ranging from 5-23 years.

Only one company (Xerox) did not beat the market over the CEO’s tenure — and on further examination we found that in fact it did for most of that CEO’s tenure, until the sharp recession of 2008-09.

Click here to download a short article from The CEO Forum magazine based on TKA’s Transformative CEO study.

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It’s not the latest Halloween ritual (sorry, couldn’t resist), but rather the basic choice every investor, corporate executive, analyst must make in forecasting what’s most likely to come next.

If you had been paying attention in March, you could have made 48.2% since then on your investment in the DJIA index.  If you did, congratulations—but don’t spend the money just yet.

With some of the world’s major stock markets up by over 50% in six months, it’s clear some kind of serious rally is under way.  But is it a trend—a genuine rally that signals a bottom, and an end to this long recession?  Or is it just a tick—a “sucker’s rally” that gives everyone false hopes before plunging us to even greater depths?

So far, in some respects the stock market is behaving like it did during 1929-30.  In the figure below, you see where we are now compared to where “we” were in 1930.  (The numbers are accurate, however the timelines are not drawn to scale.)  Then, as now, we lost about 50%, then in short order gained about 50%.  (Note to poets:  This does NOT put us back to where we were, but rather at 75% of that.)

Now some are forecasting that the next bull market is already under way, and that DJIA will double from here, putting it well over 25,000.  That the recovery, in other words, will be V-shaped, as shown by the dotted gray line.

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“The death of one company is a tragedy; the death of one million is a statistic.”

Originally said of catastrophic human events, so it is too with “The Economy”.  It’s too easy to get lost in the quantified abstractions of the aggregate, and thereby lose focus on the realities that drive individual business enterprises.

If “The Economy” exists in any sense as an economic reality that can be acted on, it’s only in centrally-planned top-down economies.  On the other hand, in a free-market, unplanned economy, “the economy” is the sum of the activity of individual firms.  Firms in turn are the sum of individual businesses or products.  Product markets are aggregations of individual customers.  Customers are aggregations of individual transactions.  Up to that point, it’s like fractal geometry—there’s always another level deeper you can go.

So while it’s sometimes a useful shorthand to say the economy is expanding, contracting, or WHATEVER—it’s really a gross oversimplification.  As such it blurs the actual reality, and causes unintended consequences—for example, lulling us into a sense that all is hopeless until “the economy comes back.”   It’s almost as if we ascribe supernatural powers to this abstraction.

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Now the tough get going.  The economy will come back—not because it decides to come back, but because we together make it come back.  How long this will take to happen, no one can say for sure.

This much is clear:  silly season is over.  Things like having not one, but two places on your block that serve expensive coffee that takes a long time to make, are over.  Things like getting funding for business models that are “cool”, but that have no hope of ever making money, are over.

Value creation doesn’t stop in a recessionary economy like this one—but it does change, sometimes dramatically and very fast.  Value can migrate from one economic sector another.  This is because each “value chain” interacts, and displacements in one—like you lost your job—cause displacements in another—like cutting out the overpriced coffee. Read the rest of this entry »

In my last post “Our radar has failed”, I offered the view that the current financial crisis is actually more than that—it’s a crisis in the ways we use information to make business decisions.  We’ve obviously come to another “Where do we go from here?” moment.

So, where DO we go from here?

I’ve identified four guiding principles that I believe frame a way to move ahead in the ways we use information to manage our economy and society going forward.  These are Vigilance, Integrity, Transparency, and Accountability.  (Each is first defined below using Merriam-Webster’s Collegiate Dictionary.)

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Once again, our radar has failed.

The current financial meltdown is much more than a serious financial crisis. It’s even more than a crisis of confidence. It’s no less than a fundamental abuse of information and its pivotal role in our economy.

When our economy started in pre-historic times, we bartered for goods and services. Then money was invented—first stones, then metal coins, then paper—and finally, ledger entries. No less an expert than Walter Wriston (then president of Citibank) said over twenty years ago that the fundamental financial resource is now information.

Modern information technology long ago dwarfed earlier record-keeping methods. A typical teenager now carries with her several times the amount of data contained in the Encyclopedia Britannica. And these technologies gave us assurance that, to paraphrase the Who, “We could see for miles and miles.” With modern technology and record keeping methods, the story went, we could undertake transactions of far greater scale, scope, and complexity than ever before. And the “systems” would warn us if anything was wrong.

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Financial Intelligence Requires a Deeper Look
 

New York, NY - Arising Group, Inc. recently completed intensive exercises in financial analysis with Tim Powell of The Knowledge Agency® (TKA).

George Karshner, Executive Vice President at Arising Group, said that understanding the financial fitness of a company is essential to proper due diligence.  “Companies targeted for M&A or involved in litigation may not want to reveal their true financial condition,” Karshner said.  “A company’s public relations team may put on a happy face, but to know the true health of a company you need to look at their public filings and financial statements and understand the implications of the different business ratios,” he added.

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January 11, 2008, NEW YORK—The Knowledge Agency announced today that the new clinic Financial Intelligence:  A Value-Based Approach^TM is completed, and has now successfully completed field-testing at a major corporation.  “I’ve tried to put into a bottle those must-know things about using financial analysis to discover your rivals’ strategies,” says clinic developer and leader Tim Powell.  “These are skills I’ve developed and used every day in my work as a financial analyst, including ten years as a consultant in the Big Four firms.”

The one-day clinic is typically given at a client location, and includes practical modules that use real-world case examples.  Also included is a live exercise in which participants analyze their own company, then a major rival, for clues to the competitive dynamics in your industry.

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