| Author |
Message |
basant
Admin Group
Joined: 01/Jan/2006
Location: India
Online Status: Offline
Posts: 18403
|
   Topic: Why companies fail?
Posted: 18/Feb/2008 at 5:07pm |
Originally posted by Janak.merchant1
Dear Basant,
It might be a good idea to start following 2 new topics.
Why comapnies fail? Mistakes at the corporate levels.
Why investors fail? What makes them take dumb decisions and incur losses.
There can be many many reasons for such failures. By noting them, writing about them and understanding them we can become better investors.
It is the human tendency to like the views which generate optimism and conversely dislike those who take opposite views. PArticualrly in stock market during boom times.
Best wishes,
JM
|
Edited by basant - 18/Feb/2008 at 6:53pm
|
|
'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in
|
 IP Logged |
|
|
|
 |
|
smartcat
Senior Member
Joined: 29/Mar/2007
Location: India
Online Status: Offline
Posts: 4243
|
Posted: 18/Feb/2008 at 5:32pm |
Janak, by 'Why do companies fail', do you mean a company going bankrupt?
Companies mostly go bankrupt only because of poor management quality.
- Dishonest management (Eg: Enron, Worldcom) and/or
- Management that does not have the "vision" (Eg: Premier Automobiles).
By 'vision', I mean a management that is not able to adapt to changes in its business environment. Two contrasting Indian examples are Premier Automobiles (PAL) and Hindustan Motors (HM).
Premier Automobiles (PAL) used to make Padmini cars while HM makes the good old Amby. Inspite of the onslaught of the Japs, PAL continued making old Padminis hoping that the taxi market would continue to buy their products. They made a lame attempt to tie-up with Peugeot but they couldn't execute the JV properly. Tata Motors walked in Indica taxi and killed off PAL.
Hindustan Motors (HM) too could have continued making Ambassador depending on our beloved politicians to continue buying their cars. But they cleverly tied up with Mitsubishi, introduced the latest models, used the factories to manufacture engine/chassis parts for Ford India & other MNCs and now are diversifying into real estate.
I'm not trying to say HM's management is "visionary" or in the league of Narayan Murthy - it is just that one company is surviving (HM) and the other is not (PAL) - because management of HM had the foresight of the impending doom and quickly made changes to its business model.
|
|
IP Logged |
|
|
|
Janak.merchant1
Senior Member
Joined: 14/Jan/2008
Location: India
Online Status: Offline
Posts: 364
|
Posted: 18/Feb/2008 at 5:49pm |
Hi Smartcat,
No I do not mean only bankrupties. It can be anything. Product failure, taking lots of debt for expansion, not taking competition seriously, not innovating ... anything that destroys or lessens its competitveness.
I felt that if we share our experiences, all of us can learn and not repeat the mistake while investing.
I know of certain mistakes. What we can do is without may be not naming the companies, we can discuss those mistakes.
Companies sometimes go bankrupt becos of unforeseen laibilities like what happened to the asbestos companies abroad.
What you mentioned about Fiat and HM is true.
Lets us all contribute to these types of discussion to become informed investors. All thanks to Basant setting up TED.
Best wishes,
Janak Merchant
|
|
I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money.
|
|
IP Logged |
|
|
|
kulman
Senior Member
Joined: 02/Sep/2006
Location: India
Online Status: Offline
Posts: 9319
|
Posted: 18/Feb/2008 at 5:50pm |
| My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row. |
| Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. |
| The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in some area such as marketing, production, engineering, administration—or, sometimes, institutional politics. Once they become CEOs, they face new responsibilities. They must now make capital allocation decisions, a critical job that they may never have tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve… [and] in the end, plenty of unintelligent capital allocation takes place in corporate America. (That’s why you hear so much about “restructuring.”) |
Perhaps these words from Buffett answers the question partly.
|
|
Life can only be understood backwards—but it must be lived forwards
|
|
IP Logged |
|
|
|
Janak.merchant1
Senior Member
Joined: 14/Jan/2008
Location: India
Online Status: Offline
Posts: 364
|
Posted: 18/Feb/2008 at 6:01pm |
Dear Kulman,
Thanks a lot for reminding us about these statements. Warren is great. No doubt abt it.
It is absolutely true that capital allocation is extremely important. Very few corporate heads understand this. Few who understand that are usually owners.
Many times top management is not aware of the leakages by their own subordiantes. Those certain "yes sir" crowd keep on milking the companies they work for by cheating in various ways. Over a period of time, these tendencies creep in as others also see that they can get away with such things. By the time, if and when the management-owners realise their mistakes, it is too late.
best wishes for reminding god ka statements.
JM
|
|
I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money.
|
|
IP Logged |
|
|
|
Janak.merchant1
Senior Member
Joined: 14/Jan/2008
Location: India
Online Status: Offline
Posts: 364
|
Posted: 22/Feb/2008 at 8:24pm |
Originally posted by kulman
| My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row. |
| Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. |
| The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in some area such as marketing, production, engineering, administration—or, sometimes, institutional politics. Once they become CEOs, they face new responsibilities. They must now make capital allocation decisions, a critical job that they may never have tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve… [and] in the end, plenty of unintelligent capital allocation takes place in corporate America. (That’s why you hear so much about “restructuring.”) |
Perhaps these words from Buffett answers the question partly.
|
One incident that comes to my mind immediately about corporate mistake is Fevicol entering the Chikki business. Do u feel there is any synergy in that?
|
|
I love my money, not my opinion. So i am ready and willing to change my opinion for the sake of protecting my money.
|
|
IP Logged |
|
|
|
avinashpai
Groupie
Joined: 19/Feb/2008
Location: India
Online Status: Offline
Posts: 90
|
Posted: 22/Feb/2008 at 8:22am |
|
Wow that's news to me. Did Fevicol actually enter the Chikki biz? That should have been doomed from the start what with people expecting Chikki's made from Fevicol! :)
On a more serious note, diversification by itself could mean that no synergies exist in businesses. Look at all the people venturing into Power, Infrastructure, Real estate, Retail etc these days. A few years ago IT was the poster boy of these diversification champions.
To answer your question - My observation has been that companies fail typically because they cannot see change. When the see it they try to bury their head in the sand and pretend it will go. Adaptability is the key for a company to survive. The Premier example cited above is a an example. Bombay Dyeing is actually another example though today they survive on the 'Real Estate' story. Think of Onida, BPL and they were industry leaders a few years ado and then came the Koreans. These guys didn't adapt - be it competition, changing technology, legislation etc.
As regards why investors fail, that is a long story way too long for me to pen here. Some factors include - buying on rumors, buying for immediate gratification, over leveraging, tracking markets too closely (On a daily basis markets give you volatility and you see returns and losses over the medium term) with the result that one makes emotional decisions (happened to me and threatens to happen in situations even now when I track too closely), frequently churning portfolios, listening to analysts.
Lastly many people tend to believe that they are the best investors themselves and tend to have a larger than actual view of themselves as investors. I think it is a good idea for people to hand their money to proven fund managers and concentrate on their main business. When they come back after an extended period they would find that they have made money in the markets.
|
|
Beware the Black Swan. It may be lurking down the corner. Technical Analysis may help you find it in a hurry!
|
|
IP Logged |
|
|
|
kulman
Senior Member
Joined: 02/Sep/2006
Location: India
Online Status: Offline
Posts: 9319
|
Posted: 22/Feb/2008 at 9:32am |
Originally posted by avinashpai
Wow that's news to me. Did Fevicol actually enter the Chikki biz? That should have been doomed from the start what with people expecting Chikki's made from Fevicol! :) |
I'm hoping that it's one-off strategic error. The chikkis, thankfully are not mixed with their flag-ship brand of adhesives!!
|
|
Life can only be understood backwards—but it must be lived forwards
|
|
IP Logged |
|
|
|
Active Topics
Memberlist
Calendar
Search
Help
Register
Login
