Race to the Bottom

The rate of change of technology over the last thirty years or so has been faster than ever in human history. One fun game is to watch an old movie or old documentary and try to estimate when it was made. There are clues in hairstyles and fashion and even in the way people speak to each other. But recently the biggest clues have been from the technology used.

What do the telephone landlines look like? The computers? Do they have mobile phones, and what size are they and what do they look like? What applications are people using - instant messenger, text and so on – and what about the photography? The current few years will be instantly recognizable in a few years time based on almost everyone lugging around a huge smartphone and using it pretty well the whole time – except when it being recharged.

With the speed of emerging technologies, anyone trying to make predictions has ended up looking foolish more often than not. Many companies have risen too, only to fall with a wrong bet or the next wave. I have noticed a couple of trends that seem to have generally held true through the chaos.

One trend is that predictions and early use of any particular technology are always more highbrow or elitist than later reality.

It was thought newspapers would be great educators, but before long the most popular columns were astrology, celebrity gossip and soft porn. Then came TV, initially filled with plays and documentaries but nowadays giving way to reality shows, sport, more celebrity gossip, and attempts to make us shop.

Movies are the medium that surprises me the most. I love watching real films about real people doing believable, everyday real things, but it seems I am pretty well alone in this, such is the prevalence of aliens, superheroes, escapist fantasy, war and spurious violence. Oh yes, and more porn.

The internet has spawned some wonderful practical business models, from Amazon to Uber. But what have been the most popular areas? Arguably, they are shopping, music, self-promotion, gambling, dating, and, most especially, porn. Computer games can be as simple as mind puzzles, but many of the ones that have really taken off have been based on some sort of warlike combat. Even here there is exploitation of women: I hate the advertising for one popular game that seems to be for teenagers yet features a woman with a most unlikely breast size.

Perhaps most telling have been the social uses of computers and now mobile phones. The development of e-mail was not hard to predict, and even now its uses are quite traditional, with business a mainstay. But who saw instant messaging? By the time I had even heard of it, my twelve-year-old daughter was using it three or four hours a day, mainly to flirt. Then came text, which for a long time I didn’t see the point of or use, perhaps because flirting is the main use once again. This translated to photo apps, with the most interesting being Snapchat, in which photos and messages are automatically deleted after a few seconds. Why is this so popular? Because it allows for more edgy flirting, notably using nudity.

Technology has probably been one driver of the rapid pace of social liberalization over the last generation. And that change has been rapid indeed. Female emancipation, and acceptance of homosexuality, trans gender variations, and BDSM have all progressed quickly. I love watching “As Time Goes By” on PBS, not least because I see a lot of myself in the Geoffrey Palmer character. In an episode last week, one of the girls chose to immediately cut off a relationship with a guy who made a remark about wanting to be beaten, on the grounds that he was clearly a pervert. That was only thirty years ago.

I don’t intend to sit in judgment over this, though I do find it great to observe young people these days having so few hang ups about sex and relationships compared with my own experience. The trend must confuse social conservatives mightily, as they preach libertarianism while observing in horror its effects on their codes of morality. It is interesting to note that given half a chance, most of humanity will rush to commit as many of what used to be considered deadly sins as quickly as possible: perhaps the early clerics’ sanguinity about human nature was not misplaced. Considering this also helps to understand, if not support, the attitude towards the west among the most religious and conservative societies.

A second observation about the technological revolution concerns the devices involved. A repeating theme is that the core functions and equipment become ever more wonderful, but the ancillary items lag way behind.

So, nowadays we all have beautiful mobile phones. But the batteries are way too heavy and run out with annoying regularity. If I have to travel with my PC, the machine itself is light, but all the cables I need multiply the weight and the bulk. Early computers had beautiful interfaces once you were inside an application, but required gobbledygook to gain access or fix issues.

My third observation is about a neglected category of potential users, that is older people. It is understandable that designers initially focus on cutting edge applications for early adopters or the mass market. But in my view they have missed opportunities later in the game from the elderly.

Even now most mobile phones have tiny screens with even smaller keyboards, which are highly impractical for arthritic hands and failing eyes. Early computers had so many fancy functions that older potential users were deterred by the complexity.

Further, some of the greatest potential to add value comes from the old, and not only because they are plentiful and often wealthy. These new applications reading heartbeats and other medical indicators are being marketed to fitness fanatics, while the ones who actually need it are the frail. Similarly, using technology to simplify compliance with a regime for taking medication can save lives. Even leisure applications like e-mail and photos could be redesigned for older users, via a simplified device with few large buttons.

What can we learn from these trends? It may be that companies focused on ancillary features or mature users represent the best investments. Technology companies should make sure their staff does not make the common mistake of assuming all potential users are like them, in other words young and highly technical. Some voices representing other demographics would help. I am still amazed every time I open a user manual – are these things ever tested on real human beings?

The first trend also has a message about where to focus as a startup or for which startups to invest in. Choose applications that reflect humanity in its realistic base instincts rather than ones for humans we might see as more admirable or acceptable to priests. I can’t imagine where that will lead next, but we won’t have long to wait before we find out.  

In Praise of Managing Decline

Management textbooks abound with advice about how to grow a business, and with case studies of success in doing so. We must all look to Porter’s five forces and to blue oceans to identify opportunities, then act as a disrupter before we are disrupted ourselves. There are many ways to innovate, and to acquire and motivate the most exciting talent.

This all has its place. But actually, most of the time companies are stuck in a less exciting place, that might be termed managing decline. If you think of the classical life cycle of a company, with its early adopter and rapid growth phases eventually being replaced by a more modest growth, then a plateau and finally a stately retreat, most of the time is usually in the latter phases. We should not forget, most of the money is there as well.

Further, in some ways managing the initiation and growth phases are easier. The vision is clear and appealing. The company is small and the hierarchical structure simple. Setting goals is simple, as is attracting talent and even money, if the vision is appealing enough. And growth conceals so many sins. Project overruns and cost laziness can be obscured by growth, since cost metrics in cents per unit usually improve while the unit denominator is increasing.

Most of my career at Shell I was managing decline, though of course we never described it as such. We had an established product in an established market with a loyal customer base and good margins. We had to keep challenging our cost base, and focus on keeping the existing customers happy. Disrupters came along and our market share often declined gently, and we usually reacted by slowly managing gross margins upwards and taking advantage of incumbent advantages by such means as loyalty programmes and squeezing suppliers.

It is not a surprise that little is written about managing decline since it is not all that sexy. Further, even those of us actively managing decline spend our days pretending that we are doing something else, making business plans to steal market share, acquire competitors and sometimes to expand markets and products.

Yet managing decline is not easy and it is critical. Most big non-tech companies you can think of are in this game, except perhaps in China. Think Ford, Nestlé, McDonalds, the Post Office, Time Warner Cable, Chase Bank. Whisper it softly, but large parts of Apple’s and Google’s businesses are pretty mature already. The archetypal companies for this phase are the cigarette manufacturers, whose product is essentially obsolete but still selling. These companies have some of the best long-term shareholder returns of all sectors.

Managing mature businesses require special skills. The clue comes from the original BCG matrix, where mature businesses are labelled cash cows. What cash cows need to produce is cash. A lot of the key is about being very disciplined with new investments and in eliminating parts of the balance sheet. In Shell I once termed a model for part of our European retail business OPM, standing for Other People’s Money. If you can retain a steady net income while reducing capital employed you can grow your return. So manage down capital, sell off non-core assets (and even core ones with care), and manage working capital carefully. All these moves restrict strategic freedom, but that is a fair sacrifice in many a mature business. Growth and investment and risk are allowed in mature businesses, and one trick is to hive these parts under separate management.

Important in a mature business is to really know what the purpose is, where it aspires to excel. Gradually activities can be trimmed back to the core, but the core needs protection and must not be milked too hard. That part is almost spiritual, and it also serves to retain an underlying motivation to staff.

Another key is to simplify and standardise the business as much as possible. Outsource parts of the supply chain, and use partnerships to share costs as well as to try to lock in additional customer loyalty. It makes more sense to join industry associations once a business is mature, since standardisation can reduce costs while creating some entry barriers. Scale can also be added via merging with rivals: in this case either be the one bought out or be very careful not to overpay, for goodwill on the balance sheet can kill a mature business.

Finally, be on the look out for long term liabilities that might become crippling to a smaller business. This can apply to fixed assets, but nowadays the main example is pensions. A mature business can find the number of pensioners exceeds the number of employees, and it is often the pension liability that condemns a mature business, so be smart enough to see it coming and take mitigating steps.

So there are many unwritten textbooks on the subject of managing decline in companies, and I recommend it as a career specialisation, there are many benefits to both you and your company to doing this well. Furthermore, there are numerous parallels for the skills in arenas outside business.

I was drawn to this blog subject by a neat Economist article about how cities are learning to manage decline. Even though urbanisation continues at pace globally, there are growing numbers of cities with declining populations. Detroit is the clearest example, and years of neglect demonstrate how not to manage such problems.

Usually, cities spend years in denial, and fail to cut the costs in time, and in the end build unsustainable deficits, especially over public sector pensions, and have to serve the remaining residents with inadequate operational budgets. If they only saw things coming in time, they could trim costs, work out pension deals, and reshape the city and its boundaries. Seemingly in Germany, many cities are physically contracting, buying up semi-derelict areas and returning them to nature. This is a novel concept to me, and an interesting one; I wish them luck and hope others can learn.

It is not just cities that can learn the good principles of managing decline, but countries too, whether economic, demographic or military decline. Sound planning can help, rather than policies based on denial or recklessness. The case of military decline or decline of political influence is particularly pertinent for the USA. Almost all the lessons from companies can be applied.

Keeping it simple means being less ambitious with foreign policy and focusing on home priorities. Cutting costs means rebalancing trade, encouraging immigration to keep up the base of productive workers, and challenging investment on vanity projects (while growing it on operational things like domestic infrastructure). Identifying a practical and spiritual core thatis defensible is important. Standardisation and partnership means ratifying UN conventions and using multilateral approaches wherever possible, in a more humble way than currently. The time of projecting exceptionalism should be over. It is hard to learn these lessons in time, as all previous hegemons would attest.

Finally, what is life itself if it is not one long decline, at least after we reach our forties? A keyword for mature businesses is harvesting, and this is what we can aspire to in the second halves of our lives as well. The same lessons apply. Notably, a spiritual core can act as a guide in later life. We should simplify where possible without sacrificing what really matters to us. We should reduce and simplify our balance sheets, and make sure especially that our property suits our needs before it becomes too difficult to move. We should become less fussy and less demanding of our friends as well.

Harvesting can be a glorious time, and with good luck can extend a long time. Viewed sensibly, it involves very little sacrifice. For an individual, a city, and country or a company, these can be the golden years.   

Family Firms

I’ve always been interested in family firms because I come from one. My great-father founded Bobby’s as a milliner (hat shop) in Margate around 1900, and he and his son built up a small empire of department stores through the following twenty years, mainly around the south coast of England. I still meet people who can remember Bobby’s and most do so fondly, the stores were associated with class for many years.

I enjoy watching “Mr. Selfridge” on PBS and sometimes wonder if it could have been “Mr. Bobby”. I never met my paternal grand-father, since he died a year to the day before I was born – the reason I was given his names as two middle names. From what I hear he, like Harry Selfridge, was a bit of a character. It must have helped to be a swash-buckling society type in those early days of modern retail, and his flaws were as evident as well, including a propensity for gambling and a wandering eye.

Family folklore believes that the firm over-expanded and was caught out by the great depression, being forced to sell out to Debenhams. Debenhams retained the store names until the early seventies, the point at which brand management became very influential to senior managers. You can still find remnants of my family legacy carved into buildings around the south coast.

“Rags to rags in three generations” is a saying in England, one with an equivalent in other cultures. It expresses the theory that fortunes are often won and then lost again over a span of about a hundred years. My family follows the pattern. Frank, the founder, was a dreamy-eyed entrepreneur. Arthur, the builder, had a forceful if flawed personality. Harold, my Dad, inherited more of the flaws than the forcefulness, and might be said to have had things a bit too easy in his early days. Then there is me, without really much of a remaining legacy to follow and making the choice to take a different path.

Last month The Economist published a good survey of family firms. Perhaps the whole concept of the family firm is cyclical, not just the life cycle of a typical example. For the survey found that a couple of generations ago most successful businesses had a leading family. Then the concept seemed to hit a rocky patch, just like Bobby’s. But somehow it is making a comeback now.

Partly the comeback is due to the growth of Asia in business. Korean Chaebol are just one example of an Asian cultural approach of keeping things close to the family, and now Chinese, Japanese and other Asian firms are gradually conquering the globe without discarding their methods. But there is more to it than Asia. The Economist quoted the German Mittelstand as a set of enduring companies that usually had a dominant family and a paternalistic culture.

True to form, The Economist conducted an analysis of the strengths and weaknesses of family firms. The weakness is obvious. Family firms are anything but meritocracies.

Rather than selecting leaders based on talent alone, a family firm finds roles for the family, talented or not. So a founder will probably be great for the swashbuckling early phase, but may struggle when teamwork and patience need to replace autocracy. An elder son may give fresh impetus, but may be a spoilt brat resented by everyone in the firm. There may be several sons (or daughters), all with their eye on the main prize and unable to work together or divide the spoils. There may be no sons at all, or at least no children who actually want to take over the mantle. Any outsider joining the firm has to recognize that their ladder to the top will depend on ingratiation with family members, patiently waiting for delayed retirements, and might even necessitate marrying a chosen daughter. All of these issues multiply if the firm manages to survive into a third generation.

Given all these handicaps, it is truly amazing that family firms survive at all. Rags to rags is indeed much more common, but a great many firms manage to avoid that curse. Most have near-death experiences along the way, for example the fate of the Ambani brothers of Reliance, unable to work with each other after their founding father died and in the end surviving by splitting the company in two. Somehow, more survive and even thrive than one would think made any sense.

Why? We have to look at the other side of the equation, the advantages.

Family firms tend to have enduring leadership, with a consistent core purpose and strategy, pursued over multiple years without taking undue notice of temporary setbacks and short-term results. The culture and ethos of the company comes from the founder, and is often plastered all over the walls of the premises next to portraits. It is clear what the core values are, and the leaders epitomize them and demonstrate them.

Next, family firms are usually careful whom they borrow from. Most debt comes from domestic sources or from a local bank with a long-term relationship. Debt itself is often avoided or at least kept as a small portion of the balance sheet.

Finally, family firms engender genuine loyalty among staff. People tend to stay at such firms longer. They buy into the strategy and will work hard not just for themselves but for the family as well. Their rewards may not come consistently or even commensurately to their efforts, but they sense that they are treated fairly and that they will not be laid off except as a genuine last resort. If the family boss says something, they are inclined to believe it.

None of these advantages are fixed or guarantees of success. The stable strategy may be a misguided one or become obsolete. The inheriting son may not value long-term employees in the same way, and might force through reckless investment programmes. Worst of all, they may come to embody an ethos contradictory to that plastered on the walls.

It is these moments when a family firm is most vulnerable. But some can use these principles to help them through such potential crises and to emerge stronger on the other side.

The Economist made all these points, and concluded that the family firm is far from dead, and may even continue to outperform more conventionally managed competitors in many cases. And then the survey rested its case. In my opinion, it failed to ask the obvious next question.

What stops all firms having the advantages of family firms?

When you look at the so-called list of advantages, you can actually paraphrase them. You can simply describe the firm as well-managed. All firms should strive for clear values, consistent strategy, a long-term approach, managed debt, and authentic staff loyalty. And, with sound practice, the list is attainable by any firm.

So most non-family firms are actually poorly managed. Why? Well, when I started at Shell, I would say that the firm enjoyed most of the positive attributes. Even when I left, it still had many of them. To an extent some were lost, it is clear to me what the prime causes were. Managers became greedy, joined in the share-option and bonus circus and lost sight of their values. They started listening to consultants, bankers and financial analysts. And they started serving the master of the quarterly earnings report.

Shell is more immune to these diseases than most, because it has a deep legacy and still has conservative debt practices. But most publicly quoted firms have sold out to the new masters completely, spouting shareholder value and ignoring strong basic principles. To be fair, there are strong elements to such scrutiny, but I do feel that overall it has failed in its primary purpose of value creation.

Wall Street and the so-called investment community are the real villains of this piece. Despite competing against privileged, upper-class spoilt brats, sometimes talentless and usually fighting among themselves, shareholder capitalism has not convincingly won. Now isn’t that a scandal?

If I had somehow inherited Bobby’s intact and it was still independent, my conclusion from all this would be to avoid taking it public at all costs. As a small investor, my conclusion is to ignore virtually everything I read from financial analysts. And as a citizen, my conclusion is to ignore any political party or argument sponsored by these charlatans.

Now that would have been a neat conclusion to the survey in The Economist! Ah, but let me quickly check where their sponsorship and finance comes from. Oh yes, that explain it!