Who's in My Strategic Group?

I have a friend, let's call him Sam, who manages a $250 million dollar portfolio for a small group of private investors. Sam is among the most successful managers in the business. On June 8, 2005, I called to ask him what stock he was trading:

He said: “The Home Depot.”

I asked: “What was the closing price?”

“Thirty-nine sixty seven.”

“How many shares were traded?”

“About seven million.”

“What was the low for the year?”

“Thirty two bucks.”

“What’s the company’s P/E ratio trailing twelve months?”

“Sixteen ninety two.”

Then I asked: “Who are Home Depot’s top three competitors?”

Sam said, “Lowe’s.”

“Who’s number two?”

“Just a minute while I look that up.”

A long silence, except for keyboard clicks.

“I’m not sure who that is. What do you think?”

Sometimes even the most astute financial managers forget that performance is relative. Unfortunately, identifying competitors is not as easy as you might think.

DIFFERENT VIEWS OF COMPETITION

Financial managers and marketing managers often have entirely different competitors in mind. CFOs may think first of companies with which they compete for capital. Since capital markets are global, the CEO of AT&T may include France Telecom in the list of competitors even though the French monopoly has few North American customers. AT&T and France Telecom only compete for capital today. Maybe they'll compete for customers tomorrow.

On the other hand, product markets tend to be bounded by geography and end use. The president of AT&T's North American Business Services (NABS) might list WorldCom, Sprint, BellSouth, and Qwest as top competitors. These companies share a large number of customers, but the NABS division is not a public company. It’s not traded on any stock exchange so we can’t assess the effectiveness of the NABS division in its competition for shareholder value. Perhaps in the future we can.

In either of these cases, the companies that managers think are their competitors will change from year-to-year, if not from quarter-to-quarter. Strategic groups are inherently dynamic collections of companies that compete simultaneously for customers and capital. The boundaries of a strategic group are fluid. Learn more by viewing my short audio slide show on Chapter 3 "Who's in My Strategic Group."

~V