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Introduction

BizzXceleration publishes a newsletter on the state of the economy, the current market situation and investment outlook
and business performance. We have been publishing these somewhat formally since 2006, and since 2003 in other
formats. Since 2006 our track record for assessing the state of the economy has been pretty good, though we invite you
to verify that for yourselves. On the next page you’ll find summary comparison tables that look at four prior editions and
compare them on the Economy, Markets and Valuations, the Investment Outlook and Business Strategies. While we’ve
missed certain major things, for example the collapse of oil prices last fall, on the whole we’ve been able to correctly
assess each of these elements reasonably well. After the summary comparisons you’ll find extracts summarizing all four
of these previous editions plus the current Summer 2009 edition.

BizzXceleration is a proprietary methodology for business performance improvement of Llinlithgow Associates, a

management consultancy. Llinlithgow focuses on assessing and improving business performance by linking strategy to
operational capabilities and designing integrated operating plans that translate goals into executable value delivery. Our
primary target markets are Private Equity investors and their portfolio companies and Small and Medium Businesses
looking to improve their profitability and performance.

As we developed the Bizz framework we found that understanding the “ecology” that businesses must operate in was
necessary and as a result we evolved a simple set of easy to understand and analyze toolkits for assessing the economy,
understanding markets and, of course, had a unique methodology for performance improvement. As these have evolved
and been tested by real world events they have performed well.

The economic tools in particular have allowed us to anticipate ahead of many observers what the economic situation was
and would be. But the real power of the approach is not in the three major components. It is in their connections and inter-
actions. For example understanding the business cycle and its behavior helped us to accurately predict the drop in capital
spending and correctly assess the outlook for the Technology Industry. Similarly being able to understand the downturn
led to a better investment outlook for retail and consumer related companies and stocks. At the same time our BizzX
Framework, which you can think of as Moneyball for Business, or Bizzball, allows us to uniquely analyze the revenue,
profit and earnings outlook for industries and specific companies. For example, based on our assessment of the Auto
Industry, we recommended disinvesting in Autos in the Spring of 2008 when most observers had a positive outlook. We
also recommended disinvesting in Technology in the Summer and published our sell recommendation on Wal-Mart in
September. That was despite a very long and detailed examination of WMT that found a major overhaul of strategy and
operational capabilities. Which means that we know view WMT as a longer-term Buy !

Based on this track record we’re making earlier editions available for free with a sliding pricing scheme for more recent
editions. Each earlier edition builds a set of machinery and provides background on understanding each of the major
components that is still readily applicable today. Or at least that’s our opinion and we hope we’re giving you the
opportunity to evaluate that for yourselves. The most recent edition will be made available, usually on a quarterly
schedule, after our subscribers have had several months of direct access.

Not to put too fine a point on it but somebody could have made a lot of money any time in the
last four years using these tools, finding and recommendations.
We hope that you find these newsletters a valuable and useful offering. If you have any questions, comments,
disagreements or other concerns please contact us directly.

With Regards,
Dave Livingston
Llnlithgow Associates.

Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management
system is unlikely

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 Finance BizzXceleration –
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Business
Operations
Linking capabilities to strategies
for enterprise performance
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Economy 1. Review the business cycle and how weak it is; poor
employment creation
2. Point out that it was held up almost entirely by Housing
3. Outlook is soft and weakening (Cinderella’s and NOT
Goldilocks’ economy)
Markets & 1.The economy drives the markets, provably, using the
right toolkit.
Valuations
2. Returns have been mediocre at best, ~ 3.5% ’00-’06,
and promise to be flat.
3. Valuations are too high based on the economic outlook.
4. Future prospects are therefore poor !
Investment 1. Still too much funding available at low rates so
valuations will be driven higher.
Environment
2. Returns are likely to be poorer
3. Need to shift focus from financial to
operational engineering
Business 1. Need to look at the whole enterprise and the
connections between different key, neglected
Strategies
functions.
2. Key functional areas with significant short-term
potential are marketing & sales and core
operations.
# 1& 2, 3 4 .
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Economy 1.Cindy’s ball is over and it’s time to begin a long, ugly
clean-up process; i.e. a serious downturn is well underway
and recovery will be slow and painful
2. Biggest problem is public policy preventing a “major
decline” (that’s euphemistic !).
3. Employment drops have cross a tipping point.
4. Housing collapse is triggering major credit market
breakdowns.
5. Major downside risks so start preparing and
positioning.
Markets & 1. Markets held up by profits that are unsustainable; major
additional downside exposures.
Valuations
2. Economic outlook not reflected in valuations and PE
Ratios.
3. Grahm-Dodd value formulas indicates huge downside.
4. NO margins of safety apparent in outlooks or
discussions.
Investment 1. To summarize in word, TERRIBLE !
2. PE’s are extremely optimistic and reflect best
Environment
possible outcomes, not realities.
3. Investments are severely exposed to poor
return challenges; anticipate sub-par growth.
4. Start screening future opportunities based
on operational performance potentials.
Business 1. Introduced BizzXceleration Blueprint for
integrated evaluation of Strategy, Functional
Strategies
Execution and Management System.
2. Applied BizzX to entire Auto Industry and key
sectors as representative example of
performance screening and evaluation.
3. Use Blueprint as foundation for screening.
Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.
Page 2
BizzX Newsletter Spring, 2008
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1. General economy continues to slow but Investment fell off a cliff
due to a drop in Residential Investment.
2. Housing is decelerating rapidly and conditions worsening
3. With no Housing ATM Consumption will slow and then Capex
Spending.
1. Liquidity is still plentiful and driving markets, including thru
buybacks.
2. Earnings holding up but likely to slow in line with economy.
3. Apparent valuations holding up but there is a gradual
compression in PE’s indicating future return problems.
1. Deal-making and investing is largely liquidity and leverage-
driven.
2. Liquidity readily available on very loose terms
3. Deal multiples are very high; jeopardizes future returns.
1. Introduced the metaphor of BizzBall modeled on Lewis’s
“Moneyball” arguing that performance is the result of interactions
between operational functions and strategy
2. Sketched simple model of total enterprise analysis.
3. Re-emphasized need to focus on operational engineering as
opposed to financial in deal-making.
, 8 9
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1. Dire economic environment with worse to come.
2. Drop in GDP, Consumption & Employment worse than last two
recessions
3. Looking back to 1960 indicators are this will be worst post-war
drop; mine canary of Retail Sales already worst ever.
4. Worldwide impacts are worse as trade collapses
5. Growing major geo-political risks due to socio-political
instabilities in Developed and Developing countries.
Key problem is vicious feedbacks between Credit, Markets, US &
World Economies and Housing.
Credit markets are beginning to self-repair but fragile.
More credit shocks in store however due to Economy.
Markets seriously exposed to downside (S&P in 400-600 range ?)
Entering period of PE’s in 10-12 range for sustained period.
1. Analysts continue to miss earnings thru failure to grasp
economy.
2. Problem is direct feed from rearview mirror of execs.
3. Investment community still not grasping depth of economic
problem and keeps “looking for the best of it”.
4. Potential once in a lifetime opportunity given PE’s.
5. Need to Triage existing investment & opportunities.
1. Present/discuss application of Blueprint to Triage assessments
and opportunity rankings.
2. Lay out approach to balance Strategy, Operational Execution
and Management System looking for inter-actions (Bizzball).
3. Execs caught flat-footed -> Ill-prepared -> Meat-axe
responses
4. Execs shell-shocked, not adapting, not adopting brutal
req’ts !
5. Need to fight ahead of curve, not keep falling farther behind.
 Finance BizzXceleration – BizzX Newsletter Spring, 2008
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Linking capabilities to strategies
for enterprise performance

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Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.

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 Finance BizzXceleration – BizzX Newsletter Spring, 2008
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for enterprise performance

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Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.

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 Finance BizzXceleration – BizzX Newsletter Spring, 2008
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for enterprise performance

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Summary

Warren Buffett is famous for his observation that one shouldn’t invest in things without thoroughly understanding
them. He doesn’t mean only invest in things that are easy to understand – while he doesn’t discuss it much
anymore he spent thousands of hours over decades building up a widespread and deep knowledge of many of
the industries and firms he subsequently invested in. As he himself has said he can make a decision in one phone
call because he’s already invested the effort in knowing the background. The lesson is that there are opportunities
for those who understand the business models and strategies, operational capabilities and management
capacities of potential – or existing – investments.

And a sustained period of sub-par growth is likely to test the performance capabilities of all enterprises. Not to
mention what’s likely to happen if the economy actually does tip over into a deeper and more prolonged downturn
as many expect, including ourselves. But the real thing to think about is what opportunities are likely to be
presented ? Back to our earlier observation that the best returns come from two things. Being in when things don’t
look good, as they didn’t in ’01. And knowing how to fix the problems and increase value – as the top performing
LBO firms did and do. There will be some significant opportunities as, and after, we go thru these adjustment
processes if one is prepared to take advantage of them.

Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.

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 Finance BizzXceleration – BizzX Newsletter Spring, 2008
Admin
Business
Operations
Linking capabilities to strategies
for enterprise performance

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We rather like to use metaphors to wrap the more technical discussions of economics, markets and valuations
and business performance in the hope that they will help put some emotional conviction and weight behind our
logic. The last Newsletter warned that the “recession” that wasn’t here was and would be clearly visible and that
all the risks would be to the downside. In contrast to the ’07 general argument we put it that instead of Goldilock’s
economy it was Cinderella’s – and that the party was more than over and the aftermath was going to be a terrible
cleanup. Things have actually turned out much worse, despite the widespread reaction that took a very jaundiced
eye and poopoohed the conclusions as being grossly over-pessimistic. If anything we were grossly over-optimistic
and didn’t anticipate the vicious feedback between a credit market collapse and a rapidly down-turning economy.

Now we need to turn to military history metaphors – last Fall was akin to the Battle of Moscow in which Russia
came close to final defeat and collapse, and was saved only by huge losses, heroic measures and last-minute
miracles. Russia won that battle in ’41 but then had to fight the Stalingrad campaign, which is still one of the most
horrendous in history, in ’42. But they eventually won that one too and went on to start the long road back with the
Battle of Kursk in ’43. If Stalingrad was the end of the beginning Kursk was the beginning of the middle game.
We’re facing our Stalingrad in the efforts to re-build and repair the financial system and kick start the economy,
which means we’re still facing a long and difficult road.

Specifically the downturn is going to be worse than most are still anticipating, the credit markets are still
dysfunctional and facing more losses, downgrades and defaults and the future “recovery” will be a “muddle-thru”
one that will see a long, drawn-out period of slow, below potential growth. Worse, valuations have yet to drop to
reasonable levels and, as we come out of this downturn, are very unlikely to return to the levels we’ve seen over
the last several years because growth will be lower and earnings as well, liquidity will be more scarce and risk
more expensive and decision-makers (hopefully) more cautious and judicious. To survive what’s coming investors
and business management need to quickly but effectively triage their portfolios for survivors, prospects and
roadkill. Sorry to be blunt but that’s the situation that we’re in. Worse a significant majority of executives were
caught flat-footed and ill-prepared and are slow to react; in fact many are still in shell-shock and not adapting to
the emergencies of the moment. Instead they’re taking quick decisions, using meat-axes to cut costs and making
strategic positioning difficult, if not impossible. Yet in being careful, analytical and disciplined opportunities can be
created out of this chaos. Let’s dive into the details some more by looking at the Economy, Credit Markets, long-
term Valuations and the pathways to opportunity.

Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.

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 Finance BizzXceleration – BizzX Newsletter Spring, 2008
Admin
Business
Operations
Linking capabilities to strategies
for enterprise performance

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We’re going to stick with our military metaphors because they are all too accurate. In the last edition we compared the
situation to the Battle of Moscow where Russia was saved by last minute miracles, with Zhukov’s troops literally marched
thru the streets for a parade and on to the front. That was in 1941 and in 1942 one of the bitterest battles was fought over
many months – that was Stalingrad. The metaphor is all too apt because that battle wasn’t the beginning of the end or
even the middle but was still being fought to halt the German onslaughts. There’s been a lot of optimism about green
shoots and a rapid recovery, which are misplaced, misreads of the economic data, in effect mistaking 1941 for 1944.
We’ll dig into that in more detail but part of the confusion lies in how the data was reported and part of it is confusing a
reduction in the rate of decline with the beginnings of a recovery.

In point of fact, at best and with some serious downside risks, we’re beginning a bottoming process that could go on for
the rest of the year and will be followed by a weak, drawn-out and slow recovery. Beyond the bottoming and recovery
processes there’s a question of what the new normal will be; we think we’re facing a sustained period of de-leveraging,
risk re-pricing, and reduced consumer demand as balance sheets are re-built that will retard growth and business
prospects for some time. Put another way we’re facing a long period of structural adjustment to try and make back some
of the last three decade’s excesses. All of those factors will play out sequentially and have enormous implications for
profits and earnings, for the markets and valuations and especially for business performance pressures. As Mr. Buffett
likes to keep pointing out we’re in the process of discovering who were the naked swimmers, who was wearing a suit and,
especially, who are the weak and strong swimmers. Recent surveys by McKinsey, Booz and the Boston Consulting Group
indicate that majorities of senior executives don’t feel their companies have the proper short-term or long-term response
plans in place. The suddenness of the downturn caught many companies ill-prepared and flat-footed and they aren’t
reacting well. Worse, once they do react, it’s often in panic-mode instead of a disciplined fashion that balances short- and
long-term considerations and allocates resources effectively as well as efficiently. A common observation now is that a
good crisis should not be wasted but the risk of the crisis wasting too many enterprises is all too real. We’ll dig into that as
well.
Summary and Conclusions
If you put all this together it illustrates the need for businesses to re-think themselves, to translate that re-thinking
into new strategies and business models and to couple those with innovations in operational capabilities. It also
illustrates the need to understand the broader dynamics of the Industry and the Economy. Those companies who
do well at all four of these will be the ones that are best positioned for the tough new world they’re facing. Sadly,
they are few and far between. Several major consulting firms (McKinsey, Booz and Boston Consulting) have
conducted studies in the last several months that found that many, even most, companies and executives were
caught flat-footed by the downturn, are still shell-shocked and are, in the opinions of their own executives, not
adopting the necessary strategies of sufficient depth and force to respond effectively. Therein lies the differences
between the companies that will prosper, merely survive or become roadkill. But as WMT and others show it is
possible to re-think, re-factor and re-build for this new environment and become successful. Which leads us to
summarize as follows:

1. The economy is beginning a bottoming process where the rate of decline has slowed but the level is still
poor and is facing a weak recovery with very poor job creation and below potential growth for years.
2. Markets and business decision-makers are still struggling to come to grips with these issues. Markets
would appear to be more than fully valued though sentiment may continue to drive up indexes; the risks
are to the downside. At these levels the economic fundamentals do not indicate a strong outlook for good
returns. NB: this suggests a fundamental re-thinking of investment strategy away from the traditional buy-
n-hold and asset allocation and more toward a strategy based on structural trend analysis and investing
in market anomalies.
3. Businesses were caught flat-footed and ill prepared by the downturn and are still struggling to adapt, let
alone take advantage of the crisis to re-position themselves. The businesses and industries that are worth

Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.

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 Finance BizzXceleration – BizzX Newsletter Spring, 2008
Admin
Business
Operations
Linking capabilities to strategies
for enterprise performance

investing in are those that are taking constructive steps to systematically and comprehensively re-factor
themselves. Sustained pressures of a weak recovery mean that such efforts are vital, beginning as soon
as possible.

Strategy without execution is fantasy. Execution without strategy is thrashing. Either without a management system is unlikely.

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