10 September 2014

Short Termism vs. Long Termism - in The Week before This Week

Power to the People

It’s been a few weeks since I have been inspired to put digit to keyboard.  Whilst there has been plenty going on in the world most of it struck me as “same old same old”.   TWb4TW tries to spot an aspect of recent news stories from which we can all learn something useful.   My feeling about most of the news over the last few weeks has been more “when will we ever learn”!
However last week the Times published an article from Sir Charlie Mayfield, Chairman of John Lewis, in which he advocates the need for a “surge in alternative ownership” of businesses.   By this he meant, employee owned businesses like John Lewis, mutuals and family owned businesses where ownership is passed down the generations.  His argument was that different forms of business ownership drive different behaviours with regards to whether a business is being managed for the short or long term.  Sir Charlie believes this is largely caused by how value is realised from different forms of ownership. Even though long termism is regarded as a “good thing” and short termism a “bad or at least less good thing” for most owners the primary means of value realisation is to sell the business to another business or to the public market.   It is therefore not surprising that many businesses are managed for short term results.
Because employee owned businesses like John Lewis can never be sold Sir Charlie claims that “they have no alternative but to focus on future earnings. This means that every one of our 90,000 partners at Waitrose and John Lewis has an incentive to make this Christmas better than the last one. Because we don’t have the option of selling our shares and investing in another business, we have no option but to throw all our energy, passion and talent into making this one better. Year after year”.

Now you see it, now you don’t
Sir Charlie then goes on to make what for me is the most significant point in his article.  “That relentless focus on continuous improvement is a powerful competitive advantage …”.  However the point then disappears because he then asserts that only alternative ownership, employee owned, long-term family owned etc., fosters a culture of continuous improvement over the long term. Whilst I do agree that ownership models have an influence I do not agree that this means that one ownership model will lead inexorably to short-termism, whilst another will guarantee long-termism.
For example the Co-op had an alternative ownership model, being owned by its members/customers.  It did have a long term perspective but this unfortunately went backwards over its 170 year history, resulting in inevitable decline and near collapse.  Conversely here are examples of public market owned companies who practice and thrive on long termism.
Berkshire Hathaway - Warren Buffet ONLY invests for the long term.  30 years ago one share in BH would have cost you $1,000. Today one share will cost you over $200,000!  Many employees are millionaires and his shareholders think Buffet is a god.
ARM Holdings - a great British technology success story that took on the mighty Intel and won.  ARM chip designs power the world's mobile phones, tablets and many other technology products.  Winning long term is the only game to play in their world. 5 years ago their shares were less that £2, today they are nearly £10, in spite of analysts from leading financial institutions and banks consistently talking the shares down.  Employees who hold the shares and have become millionaires were delighted to prove them wrong.
Next - Simon Wolfson has consistently under promised and over delivered. Without a single acquisition and just sticking to its retail knitting in stores and online Next is now more profitable than M&S and shares have risen from less than £20 five years ago to over £70 now.  This continuously improving profitability has delivered special dividends and share buybacks that have made Next shareholders very happy.
Toyota – need I say more!
A “relentless focus on continuous improvement” is the common factor driving the success of Berkshire Hathaway, Arm Holdings, Next, Toyota and of course John Lewis itself.  The Co-op did not and got left behind.

The proof is out there
So it is not necessarily the ownership model itself that determines whether a business is managed for the short or long term.  I believe that the main reason and this is worrying, is just how few people understand just how powerful a “relentless focus on continuous improvement” actually is, just how big a competitive advantage this can create and just how much more profitable those few businesses that practice a “relentless focus on continuous improvement” can become.
You don’t need to take mine or Sir Charlie Mayfield’s word for that.  More than 30 years ago Robert Buzzell and Bradley Gale proved the link between “relative perceived quality” and superior financial performance.  This was not just their opinion or even their direct experience.  It was from an analysis of the performance of over 450 companies in the PIMS (Profit Impact of Market Strategy) database at the Strategic Planning Institute.  Read their book “The PIMS Principles” to find out more.
This analysis was reinforced by the work of Vinod Singhal, professor of Operational Management at the Georgia State Institute of Technology in Atlanta. Singhal studied the financial performance of 600 companies who had won the major quality awards – Baldridge, Deming, Shingo and best supplier awards from major US companies.  He compared financial results over ten years of these award winners with those of 600 similar companies who had not had won awards.  This involved the analysis of over 12,000 sets of accounts!  This study demonstrated conclusively that the quality award winners outperformed the non-award winners by over 100% and more on all key financial measures.  Yes more than 100%, twice as profitable, successful and sustainable!

If it’s not long term it will be short term
Whilst there are many individual examples, experiences and anecdotal evidence that a “relentless focus on continuous improvement” creates powerful competitive advantage these are backed by solid in depth research and analysis that proves this to be a fact.  However actually achieving a “relentless focus on continuous improvement” and reaping the rewards takes time, hence long termism.
My view is that the biggest influence on whether a business is managed for the short or long term is not the ownership model but whether the leadership, investors and other direct influencers of the business strategy actually understand that “relentless focus on continuous improvement creates powerful competitive advantage” and know why this works.  Without this it is highly likely that the business will be managed for the short term, leading inevitably to underperformance and then failure over the long term.
Unfortunately not a lot of people know that, or more significantly understand that.  Hence short termism rules!

So that was something from  the week before this week that caught my attention. I hope you found some of the above thought provoking and useful for you and your business. I trust you had a good weekend and hope you have a great week this week - and through continuous improvement an even better week next week.

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