Talking to Management, Part 3: The Competition

This column was originally published on RealMoney on April 18, 2007 at 10:42 a.m. ET. It's being republished as a bonus for TheStreet.com University readers. For more information about subscribing to RealMoney, please click here.

Editor's note: We're pleased to present David Merkel's five-part series on questions to ask the management of a public company. Each part covers a new set of issues and the reasons to raise them. In Part 1, Merkel explained the philosophy behind his approach and presented the big subjects he likes to get out of the way first. Part 2 addressed top financial concerns. Now, in Part 3, what you need to find out about the competition.

The Competition

What are you seeing that you think most of your competitors aren't seeing? Or: What resource is valuable to your business that you think your competitors neglect?

This question is an open invitation to a management team to reach into its "brag bag" and pull out a few of its best differential competences for display. The answer had better be an impressive one, and it had better make sense as a critical aspect of the business. Good answers can include changes in products, demand, pricing and resources; they must reflect some critical aspect of business that will make a difference in future profitability.

Consider two examples from the insurance industry, both of which are future in nature:

I posed this question to the CEOs of several Bermuda reinsurers, and the answer was: "We don't think that the profitability of casualty business is as profitable as the reserving of some of our competitors would indicate." That might have been a bit of trash talk; perhaps it was a word to the wise. I favor the latter interpretation.

Then there was a CEO who suggested that many specialty casualty insurers he competed against had underinvested in claims control. That's fine in the bull phase of the cycle, but it can spell trouble in the bear phase, when cash flow might go negative and skilled claims adjusters are hard to find.

If you could switch places with any of your competitors, who would it be and why? Alternatively, if you think you are the best positioned, who is next best, in your opinion?

This question usually won't get an answer in large forums. It's best saved for more intimate gatherings, because to the wider investing public, most companies portray themselves as the best. Also, in diversified corporations, it's useful to ask this question of divisional heads rather than the CEO. They have a closer feel for the competition they face on a day-to-day basis.

When answered, this query can yield new research vistas. Who knows company quality better than an industry insider? The response can bring out the unique reasons a competitor is succeeding -- and, potentially, what this company's current management team is doing to challenge the competitor.