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A sustainable business requires a business model and a company culture that can stand the test of time, William Schaff says.
It doesn't seem that long ago that we were in the throes of innovation. Everyone was dreaming of becoming the next big-shot venture capitalist or enlisting friends and family to fund development of the next big "thing." Was that really only a measly two to three years ago? Given the meltdown in technology share prices, you'd think we were talking about a century ago.
Times have definitely changed, and there aren't the same kind of millions being thrown after new ideas in the software or Internet space. And you know what? I, for one, am glad. It's for the better, especially in the long run.
The economic rewards in our society have historically gone to those who build sustainable businesses. Clearly, many of the companies that boomed in the late '90s weren't sustainable businesses. Some had decent technologies, even good products, but they weren't good businesses. They got their just reward. They got acquired by real businesses or just passed away.
Why do I point out what we already know? Because too many managers and investors forgot that it's very hard to build a well-run, sustainable business. It's not just about managing Wall Street analysts and next quarter's earnings. It's not just about revenue growth, although that doesn't hurt. It's definitely about profitability, but that can move up and down over economic cycles. It's about maintaining a business model and a company culture that can stand the test of time. It's about shaping businesses that can evolve as the competitive climate changes without becoming obsolete. Also, as we have learned, it's about being conservative with your spending, yet remaining innovative enough to know when to invest to compete with newcomers. No wonder good businesses are hard to find.
A great business is rarely about "best-of-breed" products. Even with modest products, companies can be great if they focus on the three most important aspects of their long-term business success: customers, shareholders, and employees. There are times when one constituency may dominate over the other two, but a management team that succeeds will always keep all three in focus at the same time.
For example, one might argue that if a company takes care of its employees first and foremost, then customers and investors will be well served. But one of the fastest-growing expenses is employee benefits, with medical-care spending per capita in the United States estimated at around $5,000 a year and HMO premiums rising at double-digit rates. Or, steady profit growth might be foremost on the minds of investors, but in rough times it's sometimes necessary to sacrifice short-term profits to build strong customer relationships, with the hope that the relationships translate into growth in a recovery. We don't have to mention what happens when employee morale or customer satisfaction goes down the tank. But if expenses continue growing much faster than revenue, decreased profit will reduce investors' taste for risk in the equity markets, and thus cut off fuel to the engine that drives innovation, product development, and business expansion.
So where do we go? Innovation will always be a part of the landscape, but it will return to familiar places such as incubation within larger firms or development by true entrepreneurs who measure success one customer at a time (and who build companies on very low budgets).
One company that's shown that it can reinvent itself is IBM, transforming itself from a goliath in hardware into a services and software vendor. Strong customer satisfaction has allowed companies such as PeopleSoft to weather the economic downturn. Even large companies such as Intel have done well to keep employee morale high during the tech downturn. What's your nomination for the company that best keeps all three parties--customers, shareholders, employees--in focus at once? Send your nominations to me at email@example.com.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index.
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