|  Replicon Group  Newsletter Q2 2009 Issue   |    www.replicongroup.com

Four Challenges in Growth Company Strategy Formulation

(Artikkeli luettavissa suomeksi sivulta: http://www.replicon.fi/kasvustrategian_4_tukijalkaa.htm)

An excellent growth strategy combines the resources and capabilities of a company into a unique set of activities that fit seamlessly together. Additionally this strategy takes into account current and future market environment. The target is to form a sustainable competitive advantage with minimum amount of uncertainty.

Main challenges (excluding direct product related challenges):

1. Integrating growth strategy with financial resources and possibilities is a challenge that all growth companies face.
2. The second challenge is dynamic analysis of the industry.
3. The third challenge of our strategic analyses is the resources and capabilities of the company.
4. The fourth challenge is in refining the activities that the company conducts.

All growth companies need outside financing for the growth of their business. Thus it is absolutely vital to have an outstanding financial plan with realistic alternatives to cope with future risks.

On the other hand without dynamic knowledge of the industry it is very difficult to make superior strategy for a company. On top of seeing what is the current situation of the industry one has to analyze the recent developments in main forces of the competition, e.g. customer and supplier power, threat of new entrants.

All plans should take into account the resources and capabilities of the company. An outstanding company concentrates in activities that efficiently use internal resources of the company and at the same time exploit the understanding of the market situation in order to form sustainable competitive advantage - now and in the future.

Source:  http://www.replicon.fi/4_challenges_in_growth_strategy.htm

FOCUS ON US intra year growth and implications to the financial markets, P. Hirvonen *)

In recent economic reports there have been some promising signs that the Chinese economy can weather the global economic turmoil (once again). This is encouraging for the whole global economy. At the same time elsewhere in the world weak economic climate continues. Especially in Europe and in Japan economic situation is likely to worsen in coming quarters. For this Newsletter we have updated the growth outlook for the US economy.

According to preliminary US Q1 GDP statistics the total GDP decreased 2.6% from year earlier. Especially noteworthy was the 2.2 percent annualised increase in personal consumption expenditure (PCE) from the previous quarter. PCE makes some 70% of the total demand in the USA. The fact that US PCE was boosted by lower inflation and significant tax brakes was in line with our assessment on the economy.

After carefully analysing Q1 GDP figures and combining that data to current situation e.g. in the stock market, we are happy to announce that we can keep our -2.5 % US GDP growth forecast unchanged. Even though our medium expectation of the US economy in 2009 is unchanged, there exist some downward risks that investors should take into account.

According to the preliminary GDP figures US Q1 savings rate increased to 4.2 %. This is a very significant increase from 1.9% on average in 2008. It is important to note that continued increase in the US savings rate could cause the US economy to resume downward trend towards the end of the year. This would mean a W –shape recovery in the USA and likely that a more sustainable growth would start only in 2010 or even later. In this low scenario US GDP contracts 4% in 2009. Growth slow down would mean clearly lower corporate profits.

After the recent rally in the stock markets lower corporate profit outlook in US could mean lower share prices.

(Note: Replicon does not make economic forecasts on regular basis and it is not planning to introduce such service. Only in current exceptional situation it makes sense for us to make forecasts for the US economy. Hopefully also other readers find them useful.)

*) The author has analysed US economy and markets as an economist, investment strategist and professional investor on continuous basis during the years 1993-2001. According to an independent follow up by University of Jyvaskyla his team was among the best forecasters of Finnish GDP growth during the years 1996-2001.

US Growth Outlook and Its

IMPLICATIONS TOWARDS THE STOCK MARKET (MAY 2009): 

From early December onwards (when Nasdaq Composite was 1445.56) we have been mostly positive on the stock market. This view has been based mainly on expectation of the bottoming of the US economy and appealing company valuations. (The selling signal we gave by e-mail on 13th of February (Nasdaq=1534.36) was temporary in nature and, after the slump in Nasdaq Composite to 1268.64, we were in a hurry to resume our positive stance when Nasdaq Composite had already climbed to 1431.50!)

STOCK MARKET OUTLOOK (from NASDAQ at 1759.10)

Replicon MDF model portfolio has been fully invested in stocks, except for the above mentioned 1 month period, and thus we have been relatively comfortable with recent rally in the global markets. As is evident there are many long term investors that have been significantly underweighted in stocks and are now covering there perceived short positions. In our view current “short covering” creates a selling opportunity for rational, long term investor.

Nobody can say how much further this kind of a rally will go on, but because of still existing risks for the US and the global economy, we find it reasonable to reduce equity weighting in current situation. Replicon MDF portfolio will probably keep its 25 % cash weight until next quarterly update in Q3/2009.

*) The author has analysed US economy and markets as an economist, investment strategist and professional investor on continuous basis during the years 1993-2001.