In the Boardroom

A company’s management is more than familiar with the strength in its own pricing, costs and demand. However,  less clear might be how these compare with industry-wide averages. It is precisely this benchmarking which the use of detailed sector data affords.

For example, if a company’s pricing varies periodically under contract, then a knowledge of the most recently struck industry pricing should help forearm its management at contract renewal.

Knowledge of the conditions downstream should prove extremely useful ahead of negotiations with its customer. For example, producers of auto-components could monitor car prices and volumes. This then could help strengthen the negotiating hand of those component makers aware of improving trends in car sales.

For example, suppose a company’s supplies were received under some form of fixed-term contract. In this case a knowledge of recent trends in such negotiations should help avoid nasty cost surprises at contract renewal. Let us consider again producers of auto-components, whose material costs might be fixed under say a six month contract. In this case a sharp rise in the price of steel or primary plastic should help warn that an approaching contract negotiation might prove difficult.

We would suggest that on noticing a turning point in the performance of the sector in which it operates, or the market of its customers, or indeed that of its suppliers, a company’s management could take appropriate action. This might involve seeking supply-side improvements if material and fuel costs appeared to be heading upwards at a time when the evidence indicated little power to raise selling prices commensurately.

It should be reasonable to assume that past experiences act as reliable case studies for “what-if?” type management forecasts. For instance, a specific sector’s performance through a particular economic cycle could be considered a reliable guide to its most likely prospects under similar conditions, such as its behaviour when the currency was strengthening, or interest rates were changing swiftly. Such a retrospective historical analysis should prove invaluable entering fast moving economic waters.

Consider the last two decades for instance. Since 1991 the pound has fallen to close on unity with the Dollar, as well as having scaled to a height of almost two. Over the same period official lending rates have ranged from painful highs of 15%, to historic lows of 3.5%. Moreover the UK residential housing market has enjoyed bouts of quite extraordinary strength as well as having suffered harrowing price and volume declines. The period has also included change of Governments, the launch of ‘the single European market’, the birth of the euro, as well as a multitude of currency crises, from the Rouble, the Won to the Peso.

The data can be used to gauge a given sectors long-term strength in pricing and sales. The resulting comparative analysis should be of use in helping inform management strategy when considering exiting a particular market and possibly entering another, or in committing capital to an existing operation.

As well as containing measures of absolute trading performance for each sector our presentational template includes a relative reference. For example alongside the year-over-year change in the margin and sales of each manufacturing sector we include the comparable measures at the level of headline manufacturing. By including such references our presentational format allows users to visualise a sector’s relative as well as its absolute performance.

Corporate consultants often do little more than deliver to their clients data which has been simply lifted from the databanks from which we draw. More competitive access to the same data would clearly help reduce consultancy budgets.

As investors have become increasingly keen to engage in regular briefings with management, such demands have drawn ever more on the latter’s resources. In this regard access to reliable and timely data should help mitigate against such demands, by giving management a sector template for its own market, as well as for its customers and suppliers.

When senior managers move within a group, often across quite different divisions and countries,  their effectiveness is often limited until they have become familiar with their new market.

As a briefing tool we would argue that the use of a standard template to represent a sector’s trading performance will help orientate managers quickly and effectively to its salient trading dynamics, both past and present.