Decoding a Company's DNA

All Washed Up

Let's examine the changes in Procter & Gamble's (PG - commentary - Cramer's Take) DNA structure. This 175-year-old company consistently produced high-quality products and overlaid them with stellar brand-building to dominate its markets. Even as the product superiority gap inevitably shrunk, the company's branding power kept a steady revenue stream flowing, even from 56-year-old products like Tide detergent.

In contrast, Wal-Mart's (WMT - commentary - Cramer's Take) DNA structure can be summarized by Sam Walton's phrase, "Stack it high 'n let it fly!" The company sells Tide more efficiently than anyone else on the planet. P&G's brand power makes folks yearn for Tide, and Wal-Mart's price leadership leads them to its door.

As Wal-Mart scaled to more than $200 billion in revenue, it found that it had the volume to clone Tide and sell it as a store brand. Compelled by the price difference, shoppers decided to try the store brand, and they began to abandon Tide in droves. When they encountered Wal-Mart's store brand for paper towels, dishwashing detergent, etc., they also started switching -- rapidly.

What happened to P&G is cataclysmic. Its advertising generates store traffic for Wal-Mart, but consumers end up switching to store brands, which have zero advertising budgets. It's clear who'll win this uneven battle. P&G's business model now looks a lot different, and its genetic blueprint is completely unequipped to handle the shift.

In general, as the mass-merchants scale their store brands, the consumer packaged-goods companies will have a harder time competing. There's nothing P&G can do, and unfortunately, investment returns for P&G shareholders will be very lackluster over the coming decades.

Programmed for Success

To further illustrate the predictive powers of DNA decoding, consider the situation with Oracle (ORCL - commentary - Cramer's Take), Sun Micro (SUNW - commentary - Cramer's Take) and Microsoft (MSFT - commentary - Cramer's Take). Oracle and Sun had the right idea about the big markets that open systems and relational databases would eventually represent. Both companies scaled rapidly as they took off. In parallel, Microsoft set its sights on dominating desktop operating systems and low-end relational databases like Access and SQL Server.

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Mohnish Pabrai is the managing partner of Pabrai Investment Funds, an Illinois-based value-centric group of investment funds. At time of publication, Pabrai held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback at [e-mail]. You can access his Web site at www.pabraifunds.com.