This post is all about evaluating pre-gorilla companies. Those only interested in looking at firmly established gorillas are advised to click the little "next" thingy on your monitor. :)
We all know that the authors suggest buying a basket of stocks with the idea of consolidating gradually until only the emerged gorilla remains. It's apparent that many people here do not subscribe to that investment strategy, thinking that it forces us to buy weaker players. As an example, rather than buying a basket of CRM stocks for my real-money portfolio, I bought only Siebel. That decision has out performed my not-real-money Front Office Gorilla Game which initially also invested in Vantive and Clarify before they were weeded out.
Having studied Inside the Tornado, I believe it is worth evaluating the possibility of using the investment corollaries of management tenets discussed in the book. By example, if the book advises that the executive management team should execute Tenet XYZ, the investor's corollary is to question if the company is doing exactly that. To the extent that it is not, it is a weaker company not worth including in a basket of stocks.
Let's give it a try! As you read my suggested investors' corollaries, think about whether or not it is possible to have a reasonable understanding of each corollary without being an industry insider or a customer of the industry. My concern is that not having that special perspective might render these corollaries meaningless.
Heading into the Bowling Alley
To the extent that the answers to these questions about a particular company are "No," the company is less likely to move create a tornado.
1) Is the company putting all of its eggs in one basket (one market segment)?
2) Is the company's product a whole product, not one that is 80% complete and thus unable to satisfy the pragmatists who occupy the earliest stage of the mainstream market?
3) Is the size of the chosen market segment no larger than 2.5 times the planned total revenue of the company? (The idea is that the company wants to have 40% of the segment's revenue and can't do that if the segment's market is larger than the company's capacity to own it.)
4) Having decided on the market segment to "attack," is the market segement well funded and readily accessible to the sales force?
5) Does that market segment have a compelling reason to buy?
6) Is there no entrenched competition that can prevent the company from dominating the market segment?
7) If that segment is eventually won, does it offer leverage to win over other segments? In other words, is that market segment truly a head bowling pin that knocks over one or two other bowling pins when it falls?
In the Bowling Alley
"In the bowling alley" assumes the head bowling pin has been knocked down which means in turn that the company owns at least 40% of that market segment.
Again, answers to these questions that are "No" indicate a less than perfect company.
1)Similar to question #3 above, is each market segment about to be attacked no larger than 2.5 times the company's planned revenue for that particular segment?
2) Is the company selling directly to the end users and their superiors, as opposed to selling to the IT folks?
3) Is the company selling a pared down product that is whole, as opposed to an expanded product that is not yet whole?
Because the questions about executing within the tornado are almost exactly the opposite of those relevant to the bowling alley, I'll present them to you for consideration after I get on a plane and fly home. In the mean time, I hope to see a few responses about the efficacy of this approach to eliminating weaker players from our portfolios. I'll also post this in the other Game thread.
--Mike Buckley |
