Perhaps the most crucial aspect of any business is putting in place the right strategy. After all, a company can have a great product, increasing demand for its services and a competitive advantage when it comes to costs, but unless it can adopt the right means of operating and focus on the most profitable regions, products and customers, then it could still fail.
Strategy, therefore, is a hugely important consideration for investors.
For example, Rio Tinto Limited (ASX: RIO) is enduring a difficult period at the present time, with a weak iron ore price driving down its revenue and profitability. This has prompted it to make a number of key changes to its strategy so that, while its financial performance is undoubtedly disappointing, it is arguably better than it otherwise would have been and could improve significantly in the long run as a result of a refreshed plan of action.
One thing which Rio Tinto has done is to increase its production. Not only does this help to reduce the impact of a low iron ore price on its profitability, it also puts additional pressure on the company's rivals. And, with Rio Tinto also taking steps to generate efficiencies and reduce its cost base, it has the potential to outlast a number of its rivals and emerge from the current downturn with a greater market share and in a stronger relative position.
This logical strategy, alongside sound finances, means that Rio Tinto has considerable long term appeal while it trades on a forward price to earnings (P/E) ratio of 15.9. In fact, with the company's balance sheet being only modestly leveraged as evidenced by a gearing ratio of 50% and Rio Tinto reporting free cash flow of US$4.4bn in its first-half results, its shares could bounce back from their 23% fall since the turn of the year.
Similarly, Suncorp Group Ltd (ASX: SUN) also appears to have a sound strategy. The diversified financial services company is focused on generating efficiencies and is in the process of investing up to $75m so as to improve its operating systems and logistics, with the aim being to deliver around $170m in cost savings over the next three financial years.
This, plus a vertical integration strategy within its general insurance business, should help the company to increase its bottom line at an annualised rate of 10% during the next two years and push its return on equity ratio into double figures. And, with a renewed focus on cross-selling, Suncorp is set to make use of its status as a truly diversified financial operation, which is likely to provide a further boost to sales and profitability.
With Suncorp having a sound strategy and trading on a P/E ratio of 14.4 versus 15.7 for the ASX, it has upward rerating potential so as to turn around its 4% share price fall since the turn of the year. And, with a yield of 6%, it beats the ASX's yield by 140 basis points, too.
