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Steinhoff lessons: Confused board, overpaid CEO sparked mess – Ted Black

JOHANNESBURG — The disaster that is Steinhoff will be studied in financial textbooks for years to come. But the astute Ted Black brilliantly puts his finger on Steinhoff’s pulse (or what’s left of it anyway) to outline some of the key reasons for the company’s failures. Jooste’s desire to compete with the likes of IKEA by building out a complicated structure as well as a confused board were key reasons for its meltdown, writes Black. – Gareth van Zyl

By Ted Black*

“Steinhoff is hugely complicated,” said Christo Wiese. Did he mean the firm is too big and too complex for a board to supervise effectively no matter what governance code there is?

More than a code, you need some strategic “rules” – ones that guide management in tackling the opportunities and challenges they face. Good strategy stems from making the right choices in a world of conflicting demands and vested interests. It has nothing to do with broad goals, vision, mission and values. Three rules we’ll look at concern focus, internationalisation and acquisition.

The headquarters of Steinhoff International Holdings NV.

The first, a “Golden Rule” advocated by Peter Drucker and confirmed by Richard Rumelt’s research, was that focus and concentration are the key to economic results – a most violated principle.

In 2008, 10 years since listing, Steinhoff’s annual report stated, “We have had ONE goal” but then expanded it by saying the group was, “Vertically integrated; geographically diverse; consolidating all points of contact from raw material to retail outlets across an extensive product offering that focuses (?!) on furniture, beds and related homewares; and in Africa includes building supplies, automotive products and vehicles.

Now compare that with IKEA – a company Jooste apparently wished to rival. Its last yearly summary report states, “Our business idea is to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.” That’s simple to understand.

Ted Black

From the start in 1943 the late Ingvar Kamprad, for whom wasting resources was a “mortal sin”, aimed for constant cost reduction and quality. IKEA’s managers don’t do it by laying off people and cutting capex – they weaken a firm. They do it by using all the brains employed to find ways to improve customer experience, reduce cost and add value.

A key question they ask is, “Would the customer want to pay for this?” The effect is endless change in the way their people do the work together along the entire Value/Cost stream; flying economy class; staying in moderately priced hotels; and no fancy offices.

Kamprad invested for the long-term but managed for day-to-day productivity improvement. He exemplified Peter Drucker’s dictum: “Keep your nose to the grindstone while lifting your eyes to the hills”.

His mandate was that profit could only be reinvested in the business or given to charity. The result is almost no long-term debt and more than 40% of its asset base is in cash and securities. Through its internationalisation strategy, it now operates with 355 IKEA stores in 29 countries generating $40 billion sales and a ROAM on operating assets averaging more than 12%.

For South African firms, socio-political and economic constraints threaten formation of value. The root cause is a government driven by defunct ideology. Under Zuma, the climate became ever more hostile to business and wealth creation. Instead of maximising opportunity, the prime focus has been to redress problems of the past – to “rob Peter to pay Paul”, believing “Paul” will keep it in power. This means internationalisation is a top priority for many South African firms.

Read also: Steinhoff: These 6 charts should have alerted the board – Ted Black

Jooste, unlike IKEA, didn’t internationalise. He grew Steinhoff in South Africa through acquisition of many vaguely related businesses and “went international” the same way. Today, the firm’s reach is also big but with just over half IKEA’s sales revenue. It operates with 50 brands in more than 30 countries through 12000 stores. Aping GE’s Jack Welch, the goal is to be #1 or #2 wherever it competes.

The advantage of an acquisition is you telescope years of learning and effort into one deal. However, the costs are big, especially when you buy stand-alone companies. Steinhoff’s asset base has grown at an average compound rate of more than 30% each year since 2000. Today, more than 50% of its assets are intangible – exactly like Dimension Data before its collapse in value nearly twenty years ago.

This is a picture of Steinhoff’s ROAM linked to intangible assets as a percent of the total asset base.

A single, focused, high-performance business is almost always sold for a hefty premium.

Under-valued firms are far more likely to be in a conglomerate that includes inferior companies. That’s when you buy the total portfolio and flog the ones you don’t want. Could that become Steinhoff’s fate because there are some jewels in it?

In the end, as Bruce Henderson, founder of Boston Consulting Group and “inventor” of business strategy said, “a business is a cash compounding machine, or it is nothing … and sooner or later will be swept away.”

Here is a picture of Steinhoff’s trended Free Cash Flow by period and cumulative. It sends yet another signal that could have alerted the Board many years ago.

 

Steinhoff’s situation is the result of a confused board and a typical, regal, overpaid CEO.

One who probably spent much time doing deals and explaining “his” strategy to analysts and investors to manipulate and improve the share price; walking fillies, equine and human, around the paddock; while relying on others to run the company beneath him.

Most CEOs are not “in charge”. They surf waves made by operating managers and the people who do the real work with customers. That’s where the seeds of strategy are sown – not in boardrooms.

Moreover, very few Chief Executives think like “Owners” – like Kamprad – who embed their philosophies deep into the organisation and are involved in the design of the business, its products and services.

“Owners” don’t dance to the tunes of capital markets. They focus on customers and they know that simplicity wins … every time.

  • Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at [email protected].
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