Talking to Management, Part 3: The Competition

On a competitive basis, who has the most to lose in the present environment?

Some executives won't name names, but they might be able to point out what characteristics the worst-positioned competitors don't have. In commodity businesses, the executive could point at those with bad cost structures. In businesses where value comes from customization, the executive could say, "To be a real player, you can't just sell product, you must be able to assess the needs of the client, advise him, sell the product, install it and provide continuing service, leading to ancillary product sales."

As commodity prices move down, the recent acquirers and developers of high-cost capacity fare the worst. With life insurance today, scale is becoming more and more of an advantage. Smaller players without a clear niche focus are likely to be the losers; that's one reason I don't get tempted to buy most of the smaller life insurance companies that trade below book value. Given their fixed expenses and lack of profitability, they deserve to trade at a discount to book.

Key Points:

• Asking what the competition is missing lets management open its brag bag.
• The answer had better impress and be a critical aspect of the business.
• Trash-talking of rivals is a red flag of hubris.

Editor's note: We're pleased to present David Merkel's five-part series on questions to ask the management of a public company. Click here for Part 4, questions on pricing and products.

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