I recently began reading 'Only the Paranoid Survive' written by the erstwhile CEO Andrew Grove. It is a fascinating book on the idea of 'Strategic Inflection Points' in the journey of any corporation. In the book, Mr. Grove refers to situations where new management can perform much better than old management - even when there is no difference in skill between both. His reasoning was interesting and I found it relevant to the post above. Below is one excerpt:
"Senior managers got to where they are by having been good at what they do. And over tie they have learned to lead with their strengths. So it is not surprising that they will keep implementing the same strategic and tactical moves that worked for them during the course of their careers- especially during their 'championship season.'
I came this phenomenon the inertia of success. It is extremely dangerous and can reinforce denial."
Here is another excerpt:
"Ever day, it seems, leaders who have been with the company for most of their working lives announce their departure, usually as the company is struggling through a period that has the looks of a strategic inflection point. More often that not, these CEOs are replaced by someone from the outside.
I suspect that the people coming in are probably no better managers or leaders than the people they are replacing. They have only one advantage, but it may be crucial: unlike the person who has devoted his entire life to the company and therefore has a history of deep involvement in the sequence of events that led to the present mess, the new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the situation. They can see things much more objectively than their predecessors did."
Sometimes I feel the fastest way to read a book is to learn about it from a passionate reader like you.
Surely opened my mind to valuing mismanaged companies with large potential and the catalyst that can trigger the positive chain reaction. Could be an Ah-ha moment for an investor.
Excellent piece, Rohith. As expected. So glad that you have started penning your thoughts for the world at large. You mentioned in the end, "The framework is a derivative and thus its 'trueness' is not as hard or true as that of hard sciences." Maybe in the next post you can expand on that or cover some of the experiences and learning related to situations where these principles did not work due to some larger force or exigencies. Best wishes. Keep writing. :)
Thanks Ankit. The 8 (initial) criteria that I indicated are an outcome of the principle not working in a few cases..
Care Ratings - Post the 2019 issue, there was a wholesale revamp of the board; one could argue that ratings business enjoying good market share is a marker of high quality; and there was change in CEO as well... But the CEO exited and an old-timer has been appointed to the role..
Remains to be seen how this will evolve..
Shanthi Gears - It was a good business bought by the Murugappa Group in 2012. But the cycle was against the business at that point in time. Also, it was already a well run business at the time (ironic, but for this framework, you need mismanagement if the returns are to be good). I believe both resulted in the returns not being great for a while.
I would not apply this to financials given my general discomfort with the sector. The leveraged nature of the business tends to magnify errors.
Indo Star comes to mind. Mr Sridhar of Shriram Transport fame joined to lead the business and even put a large sum in the company when he joined. But there were irregularities and the business went south.
Piramal Enterprises is a recent example where the outcome remains to be seen. The entire company has been revamped with lots of people from Axis Bank and KKR India coming in. It remains to be seen how it will pan out.
An update to the post:
I recently began reading 'Only the Paranoid Survive' written by the erstwhile CEO Andrew Grove. It is a fascinating book on the idea of 'Strategic Inflection Points' in the journey of any corporation. In the book, Mr. Grove refers to situations where new management can perform much better than old management - even when there is no difference in skill between both. His reasoning was interesting and I found it relevant to the post above. Below is one excerpt:
"Senior managers got to where they are by having been good at what they do. And over tie they have learned to lead with their strengths. So it is not surprising that they will keep implementing the same strategic and tactical moves that worked for them during the course of their careers- especially during their 'championship season.'
I came this phenomenon the inertia of success. It is extremely dangerous and can reinforce denial."
Here is another excerpt:
"Ever day, it seems, leaders who have been with the company for most of their working lives announce their departure, usually as the company is struggling through a period that has the looks of a strategic inflection point. More often that not, these CEOs are replaced by someone from the outside.
I suspect that the people coming in are probably no better managers or leaders than the people they are replacing. They have only one advantage, but it may be crucial: unlike the person who has devoted his entire life to the company and therefore has a history of deep involvement in the sequence of events that led to the present mess, the new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the situation. They can see things much more objectively than their predecessors did."
I loved reading your Article, very informative and inspiring. Thank you for sharing your knowledge Rohith. Wishing you all the very best in life.
Lovely article Rohith.
Sometimes I feel the fastest way to read a book is to learn about it from a passionate reader like you.
Surely opened my mind to valuing mismanaged companies with large potential and the catalyst that can trigger the positive chain reaction. Could be an Ah-ha moment for an investor.
Thanks for making my day.
This is a very generous compliment Sandeep. Appreciate it.
Excellent piece, Rohith. As expected. So glad that you have started penning your thoughts for the world at large. You mentioned in the end, "The framework is a derivative and thus its 'trueness' is not as hard or true as that of hard sciences." Maybe in the next post you can expand on that or cover some of the experiences and learning related to situations where these principles did not work due to some larger force or exigencies. Best wishes. Keep writing. :)
Thanks Ankit. The 8 (initial) criteria that I indicated are an outcome of the principle not working in a few cases..
Care Ratings - Post the 2019 issue, there was a wholesale revamp of the board; one could argue that ratings business enjoying good market share is a marker of high quality; and there was change in CEO as well... But the CEO exited and an old-timer has been appointed to the role..
Remains to be seen how this will evolve..
Shanthi Gears - It was a good business bought by the Murugappa Group in 2012. But the cycle was against the business at that point in time. Also, it was already a well run business at the time (ironic, but for this framework, you need mismanagement if the returns are to be good). I believe both resulted in the returns not being great for a while.
I would not apply this to financials given my general discomfort with the sector. The leveraged nature of the business tends to magnify errors.
Indo Star comes to mind. Mr Sridhar of Shriram Transport fame joined to lead the business and even put a large sum in the company when he joined. But there were irregularities and the business went south.
Piramal Enterprises is a recent example where the outcome remains to be seen. The entire company has been revamped with lots of people from Axis Bank and KKR India coming in. It remains to be seen how it will pan out.
Thank you, Rohith. This was very helpful.