The illusion of growth

I was recently stuck in traffic (not an uncommon occurrence in today's metropolitan areas) and it got me thinking about the fallacies associated with movement. The traffic i was stuck in was stop and go traffic meaning that we would move a few yards and then come to a complete stop. Because of this, some cars were taking an alternative route, which also had traffic. However the traffic in the alternative route- albeit just as heavy- kept on moving constantly. Even though the time spent may have been the same on both routes, the constantly moving one gave the illusion of movement and thus seemed more attractive to the time conscious commuter. In a company's life, just as in traffic, it is inevitable that there will be periods of stop and go movement. Notwithstanding that truism, companies are constantly punished at the stock market whenever they exhibit signs of a plateau in growth. This trend has become so widespread that companies no longer issues dividends for fear of being labelled "mature" with all the negative connotations that entails.

Industries too have cycles. From nascent to teething to high growth to maturity. Notwithstanding, companies are constantly looking for ways to spur growth as indeed they should. And one of the ways to growth is through acquisitions. However it becomes a problem when companies pursue the appearance of growth to the detriment of long term strategy. In hindsight, many of the mergers that occurred in the boom years were ill conceived and would in the long run not realize the benefits they touted. Hewlett Packard and Compaq's ill advised marriage is just one example of this. However the short-term benefits to the bottom line that occurred as a result of those mergers became so attractive that companies lost sight of the truism. The illusion of growth can never, in the long term, replace actual growth.

Venturing abroad

This weeks' "Economist" has a lead story on the impact of mobile telephony in emerging markets. According to the aptly tiled "Mobile Marvels" story which appears in the special reports section " and discusses the growth of services around mobile devices,..."in rich countries most such services have revolved around trivial things like music downloads and mobile gaming. In poor countries data services such as mobile-phone based agricultural advice, health care and money transfer could provide enormous economic and developmental benefits." While my intention is not to turn this forum into a critic of the august publication, I would venture to demur that an industry such as the US Mobile gaming, which generated $566 million in revenue in 2006 can hardly be called trivial.

Nonetheless the lesson that I took from this article is the wide array of possibilities that stem from simplified communication. Different societies at different stages in their life cycles have taken the marvel of telephony and used them to generate enormous business opportunities worldwide. However it is obvious that should a successful gaming company in the US attempt to expand geographically, it may be well advised to understand the different societal dynamics at play that may make gaming an attractive business venture in the US and maybe not so attractive in an emerging market setting.

As the recession starts to slow down and companies get out of their survival mindset and start looking for opportunities to grow, they may be tempted to diversify geographically. DuPont's foray into the sub-Saharan region is probably a harbinger of things to come especially because companies like IBM that were highly diversified pre-bubble, seemed to withstand the latest down turn better. Thus corporate strategy teams in companies looking to expand geographically should be alive to the different societal dynamics at play. Companies, like individuals have a winning mindset. And whilst it is easy to be tempted to transfer a business model that already works, it is equally important to conduct sufficient due diligence to ensure that that model will also work in the foreign market. In short, ensuring that there is flexibility to take into account local dynamics can often spell the difference between a successful foreign expansion or total failure.

Taking the long approach

Not enough has been made about the SEC's requirement for publicly traded companies to make mandatory quarterly filings. While the investor protection aspect of shorter-time periodic financial disclosures and transparency are laudable, the rule has, over time, led to a dearth of long term growth strategies in favor of short-term positive numbers. This has been exacerbated by Wall's Street's fixation with quarterly results and their resulting impact on share prices. In business school, you are taught that share prices are a reflection of a company's future earnings potential. This sensible approach to share pricing however, is at best distorted, or at worst ignored by the hullabaloo surrounding a company's short-term performance as packaged in the quarterly filings. Every quarter, CEO's trot out in front of analysts to present numbers that are increasingly gaining significance to the detriment of long term company viability. It is therefore tempting for corporations and strategy analysts to fall into the quarterly mind-set of measuring performance through a narrow prism of winning individual league games as opposed to clinching the championship game. Taking the analogy of the NFL, a team can go 16-0 during the regular season but if it does not win the Super Bowl then all that was for nought. Corporations therefore and strategy teams in particular ought to be able to have a wide view lens of the long term goal even while ensuring that short term Street expectations are met. Maximizing share holder value mandates hitting long term strategy goals even, dare I say, at the expense of periodic dips in value.

The Path of Least Resistance

Water, when it is faced with an obstacle, does not try to force a way through it. Rather, the flow will continue around the obstacle and the stream will continue merrily on its way. This is called the path of least resistance. An interesting thing happens however when the obstacle is left in place. Over time, the water will start chirping away at the obstacle and eventually will indeed find a way through the obstruction in its path. This is called the power of time. Corporations are faced with an array of obstacles, both known and unknown but mostly of the latter kind. While a well functioning strategy department that incorporates scenario planning can help to predict disruptive events (obstacles) and hence mitigate their effects, even the best corporate strategy teams cannot predict each and every obstacle that corporations face while trying to attain their goals. How a corporation reacts to unanticipated challenges is thus key. A well thought out response can make the difference between profitability and the bankruptcy court. While this seems to be a fairly common sense approach, it is astonishing how many company decisions including critical game changing edicts like hiring and firing of key players are made as knee jerk reactions to some fickle public caprice. While GE's stock has, together with the rest of the market, taken a beating from the effects of the current economic morass, it is fair to assume that none but the most pessimistic analysts can bet against a future GE turn around. One of the key characteristics of GE, that differentiates it from almost any other public company of its size is how patient the shareholders are with the CEO. Thus the GE CEO position is one of the safest in its class. Harking back to the water analogy, longevity of strategy seems an assured path to profitability. As long as a company has a sound strategy that is being implemented, then you should over time see positive results. The problem is that too often corporations allow the obstacles that will inevitably crop up to create a deviation from strategy or from implementation of the same. This is not to suggest that corporate strategies should be set in stone. To do so is to mistake the strategy for the goal. Rather the point is that the road maps that are strategies ought not to be abandoned just because a rock fell on the road. Instead while the corporation works to clear the road, it should remember that the goal is still down the path and just like water does, find a short term way around the obstruction while sticking with its long term objective for when the rock is cleared and it can continue towards its goal.


The CEO