Zooming Out and Zooming In

Zooming Out:

You should zoom out and see the big picture. If you're too close to the situation, you'll get entangled in things that don't really matter. And, they really shouldn't matter. Go too close and you'll get caught up with the noise at the signal.  

While this is true for many aspects of life, let's discuss in the context of business and investing. 

When you zoom out, you'll ask questions like; 

• Am I even in the right business?
• Does it even make sense to be in this business?
• Where is this business headed in 5, 10, 20 years from now?
• What need does this business serve?
• Will this need even be there 5, 10, 20 years from now?

For example, an auto ancillary manufacturer, let's say a gearbox manufacturer may be very profitable right now; but if electric vehicles disrupt the internal combustion engine; will there be a need for gearboxes ten years from now?  

• And even if the need is there, how likely is it that my business will still be relevant fulfilling that need? 
• After all, people still consume news and will continue to do this even a couple of decades from now. But, will they do it via paper newspapers?
• What will happen when millions of people who read newspapers die?
• Will a new generation of younger people replace them?
• Is the light that I see at the end of the tunnel coming from an oncoming train?
• What are the big threats to my business?

It's only when you zoom out that you'll be able to ask a penetrating question about the relevance of the industry or study 5, 10, or 20 years from now.

When you're too close to a situation, you do not notice small incremental changes. You do not realize the seriousness of the threat that your business faces because you're focusing on the daily MIS report provided to you by your accountants. Well, such MIS reports may have some utility in helping you make day-to-day operating decisions; they also camouflage the big changes that are occurring in your industry. 

To see those changes, you've to step back and ignore the noise in the data. To isolate the signal from noise and see the long term trends in the data, you have to ignore daily, weekly, monthly, quarterly, and sometimes even annual MIS numbers. 

You have to focus on long term trends. You have to look outside your own little industry to see what's happening to other industries and how 

• technological changes, 
• demographic changes,
• regulatory changes,
• and changes in consumer behavior are impacting those businesses.

And, you'll never be able to do that, if you keep going back to the same desk every working day and meet the same people on those days. 

To get wiser; you need to get out. Sometimes, you are also too emotionally attached to something. Zooming out helps in getting a more detached view of the problems you're facing. When you zoom out and detach yourself; you can ask tough questions like; 

• Does it even make sense to grow this business or is it like throwing good money after bad?
• Is my ego interfering with my making rational choices? 
• Do I really have to pursue this thing? Why can I not let go of it?
• What will happen if I do and what's preventing me from letting go?

The farther you go, the easier it would be to let go...

Zooming In:

Sometimes you have to zoom in. Because you need to have intricate detail to really understand what's going on. 

How does this company really make its money?

Let's look at the segment data to find out. 

Let's look at the MIS prepared by the accounts department to answer questions like;

• Which business segments are creating value?
• Which business segments are destroying it?
• Which products/ divisions/ regions/ markets consume cash and which ones generate it?
• Where are the cross-subsidies? 

There is nothing wrong with cross-subsidies. It's rare for a new product, a new division, a new region, or a new market to start generating cash from day 1. 

It is okay for mature cash-generating product/ regions/ markets to incubate new ideas. But you won't exactly know until you zoom in, open the box and see what's inside. When you zoom in, you will get access to the information that will help you understand the unit economics. What's the per-unit cost, per unit revenue, per-unit profit, per unit capital employed?

And, that will help you build better models to reflect business realities using a top-down approach. When you zoom inside the DuPont formula; you will be able to see the contribution to return on invested capital from margin and turnover. 

You will be able to conduct peer analysis. And come to useful operating and capital allocation decisions. You will be able to ask questions like;

• Am I charging a too low price for my product? 
• Should I use raw material X instead of Y?
• Should I outsource some or all of my product?

Conclusion:

So you see, you need both zooming out and zooming in. 

You need to master both the techniques and find the right balance between the two.

All thanks to Prof. Sanjay Bakshi for the inputs.

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Thank you very much for your time!

You may contact me in case you need to ask or tell me something. 

I am waiting to hear from you.

With respect,
Aaditya Chhajed

E: chhajedaaditya@gmail.com
M: +91-9404055222.

You can connect me on Instagram at @chhajedaaditya

Aaditya is the founder of Aaditya Chhajed Financial Advisory Services, a Wealth Management Firm in Pune. 

He loves helping family, friends, and, clients make better financial decisions. He believes learning is perpetual.

He is a commerce postgraduate and Chartered Accountant. He has also cleared all levels of CFA(US) in the first attempt. 

Disclaimer:
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all investment-related documents carefully.