Silent dogs - What annual reports say, or do not, about competition
This recent Economist article started a spirited debate here since our competitive intelligence service for public companies is one of our key offerings. If you missed it, you can get the main points from the summary below:
What explains the remarkable strength of corporate profits and the sluggish growth of real wages in recent years? One explanation is that industries are getting less competitive. Work by The Economist found that two-thirds of American industries were more concentrated in the hands of a few firms in 2012 than in 1997.
Research by AXA Investment Managers Rosenberg Equities into the language used in American annual reports points in the same direction. Sherlock Holmes famously talked of the significance of the dog that did not bark in the night. It may be similarly important that companies refer to rivals much less than they did; usage of the word “competition” in annual reports has declined by three-quarters since the turn of the century. Business is less cut-throat than it used to be.
Our adviser and expert on competitive intelligence, Earl Harvey, had some strong opinions on the subject worth sharing.
"Over my career, the level or intensity of competition has declined significantly when the economy was humming along with steady growth. My simplistic view is, as the demand of goods and services starts to exceed the supply side, companies start focusing on how manage growth and much less on their competitors. Within the companies I worked, the senior executives were more concerned with the growth rate of their competition than the industry drivers and dynamics. I tried to leverage the financial statements by describing how the results were reflecting industry forces at work. My work with Kevin, was my attempt to leverage his big data knowledge and economic expertise into reflecting economic indicators and financials as industry perspectives. The biggest challenge – Michael Porter said it best “You are NOT the industry, you are a participant in an industry.”
Another factor I observed during economic growth were the high levels of compensation for senior executives. When a senior executive compensation plan pays out 10’s of million dollars in cash bonus, his only goal is top line growth. You all know that scenario, so I will not labor the point. While President Trump is over dramatic and “off-script”, he is the poster child for most large corporate senior executives. The amount of distorted comments, bogus financial comments, and absolute falsehoods from corporate leadership is unbelievable. Your (BEA) products reveal some of these distortions, and anyone with true competitive intelligence psyche should desire the analysis.
Several years ago a Harvard Professor wrote an article saying there was no such scenario as ‘competitive advantage’. Several leading executives from BIG companies ate this up like candy. As usual, the facts were in the details. The author invented the title as a marketing phrase for selling the analysis and his book. The underlying hypothesis was that technology was evolving at such a rapid pace that no company could maintain technological leadership. I agree with that view in a big way.
In a growth economy the purchasing focus should migrate from technology to customer service. So, this should be reflected in your models, and I believe it will.
Finally, the knuckleheads in Washington DC passed a tax reform bill which will act like a stimulus, but in my opinion, it is going to overheat the economy – we are already seeing signs of this. When the best worldwide economists, state this is not a good strategy, our knuckleheads in Washington DC ignored them and played to an uniformed public. Yep, the individuals in Washington are playing checkers, while the rest of the world is playing 3-D chess. Why this morning rant? I believe your team can sell the products and services you all developed to monitor the numerous challenges that reflect the chaos about to surface within our overall economy. - Earl"
Weaker (less) competition, low market volatility and a stock market that will keep going up forever... Enjoy it while it lasts but be ready for the return to reality when the party's over. If you get soft, the White House won't be able to protect you when the ROW comes to eat your lunch.