> Charan makes a rather controversial assertion in the introduction to this section: if your company isn’t growing, then it is dying. The argument goes something like this: in a world that grows every day, a company that is standing still or doing ‘just fine’ is falling behind. A company that is overtaken by a competitor eventually gets boxed in. It loses many of its advantages over time. Charan’s conclusion: growth is imperative to business
Counter proposal: how about we don't destroy our own planet.
If I could change one thing about corporate culture, I think it might be this attitude of "success necessarily produces growth". There is nothing wrong with reaching a successful size and staying there.
A good company charges money to solve a problem. The company only needs to be as big as the problem. Anything beyond that is just an exercise for investors. There is nothing wrong with that per se, but it should not be viewed as the only way to be successful.
Having said all that, I don't think Charan's assertion is "controversial" at all. In fact it seems to be the default assumption in virtually every publicly traded company.
Not weighing in on either side of this debate, but from a systems perspective it can be incredibly difficult to keep a complex system in a fixed state. Businesses are no different, so if something is working to get you "up" to the local maxima (let's say this is the "right" size) it's really hard to predict when & how to keep you there, and instead keep doing the same thing that seems to be working. It's hard to find examples of companies that are static, outside of the largest public or government enterprises; most are cycling between growing and shrinking.
I agree with you, but it might be worth noting that a business which is not increasing profits in absolute terms is shrinking due to inflation. In other words if their costs increase 5% and their revenue increases 5% then a 5% increase in profits is expected.
Luckily in the supposed alternatives, like the middle east (which has lending+interest, they just lie about it for religious reasons. "It's not interest, it's just a administrative fee per dollar lent. Not Interest! No sir!"), or China. Or China's efforts in Africa, for example. Luckily there nature is doing well!
> The new manager believed he could gain significant market share by cutting prices. He was successful—at first. Sales grew over the next three months, and so did the unit’s share of the market. However, the competition responded in kind... all the price cutting caused revenues, profits, and cash generation to shrink throughout the industry, hurting Global Building along with everyone else.
Isn’t it wonderful when business is more anti-market than straight up socialists and everyone’s like “yeah, that’s obvious”. Feels kafkaesque for sure.
A sales rep who negotiates a 30-day payment term instead of a 45-day payment term is cash-wise. The company can get the money sooner and is able to put it to use elsewhere.
Well yes but at the cost of the customer’s goodwill. Now you’ve potentially lost the customer in the long-term for an extremely low short-term benefit. “Premature optimization is the root of all evil” should apply to business as much as it does coding.
That really depends on the customer's liquidity and cost of capital. Some customers will be happy to take shorter payment terms in exchange for other concessions. Everything is negotiable. And many customers will agree to net-30 terms in writing, but then refuse to actually pay that quickly and dare you to cut them off.
Deals with customers are always going to involve tradeoffs like this; if the 30-day payment term is standard but you offer an increase to 45-days that will earn some goodwill at the expense of those 15 days, for example. If a customer has a very different time-value of money than you do, giving them a discount for prompt payment could end up working well for everybody. It's also not a short-term benefit if they are a recurring customer.
I can't seem to find the article now, but I remember reading about somebody buying food for their restaurant and getting 50% discounts for paying immediately instead 30 days later. There are some obvious drawbacks to this, but it's also easy to see how the restaurant can come out ahead with a discount that large.
> A sales rep who negotiates a 30-day payment term instead of a 45-day payment term is cash-wise. The company can get the money sooner and is able to put it to use elsewhere.
I don't understand using a sales rep as the first example.
Don't you just tell the salesperson how their compensation is tied to deals signed, revenue, and the speediness of payments?
Doesn't that formula alone tell you what the behavior will be?
Agreed on the value of educating employees about what's important to the business, but isn't sales an exception, due to convention of how their compensation is structured?
Comp is typically aligned to Revenue rather than payment schedule, unless the rep is involved in the A/R process which is unusual but not unheard of. The incentive comes from deal language standards for which exceptions must be approved by senior leaders for things like delayed payments or other arrangements.
In the above scenario, the more likely situation would be the rep goes to bat internally for a 45-day term so they can close a larger or more favorable deal that management will be incentivized to approve.
I'd say it's more common nowadays, otherwise it's easy to sell tons of stuff with 90 day invoices, take your bonus, and run off 6 months later with massive outstanding AR.
I for one would really like to know why the CEO gets paid so much, why are the employees not getting paid proportionally, why RTO is absolutely necessary, why the stock buybacks are necessary when investment in the business is going down, etc.
> why the stock buybacks are necessary when investment in the business is going down
The business theory answer is that buybacks are used when there is no better investment opportunity.
Let's say the stock trades at 10 times earnings. Can you fund an internal project that's going to return 10% a year? [0] Can you buy another company that will return 10% a year? If not, then a buyback gives the best return to the company's owners (aka shareholders) because they owner larger slices of the same pie.
[0] Plus a small cushion for risk. And not just "we project this will return $HUGE amount" but something that can realistically happen.
So, basically, when a company buys their own stock back (or issues a dividend), they are saying "We can't think of a single thing better to do with this money than simply hand it back to investors who might be able to put it to better use!" Doesn't give me a lot of confidence in the company, to be honest.
Why? The company is good at what it does. It generates money. Someone else is expert at something else, but needs capital. Why do you need one company to do everything on Earth?
Warren Buffet's wealth comes from finding companies who are good at what they do, and moving money from ones with excess cash to those that need more cash.
Would you rather put your money or capital into a company that promised to never do buybacks? To never, ever give you a return on your investment? Why would you buy that stock? Why would anyone ever buy that stock from you?
> why the stock buybacks are necessary when investment in the business is going down
Boeing is a very recent egregious showcase to how fucked up this behaviour can get.
I'd like to live in a world where shareholders' returns are not the goal, just a side-effect of good business.
I still cannot understand why stock buybacks aren't limited, actually I do not understand why it exists at all but since I'm not educated enough can't really argue with substance against it, it just doesn't sit right that a company (like Boeing) can spend a lot more cash flow on stock buybacks than R&D... R&D creates something of real value, stock buybacks just enrich shareholders (and hence, a company's C-suite), it's so self-serving that I really do not understand how it's even legal.
1)Buybacks can shake out the short term investors.
2)It can also signal that the company thinks its own stock is cheap.
3)It "has no effect assuming the market is perfectly efficient".
And these reasons are repeated ad nauseum. I could see this be a thing if a hostile takeover is on the horizon, but poison puts are common when issuing debt, so no hostile takeovers have happened in a while. Basically I see a buyback as a way to take cheap money accessible by a company for investment, and the company uses it to finance shareholders to get a return elsewhere because the company isn't creative anymore. (Companies hit hard walls regarding physics when they keep r&d over their few cash cows over and over, and r&d is too risky to go to an area that they don't already have internal proficiencies).
Can't comment on Boeing specifically, but if a company has a bunch of cash on hand and doesn't have enough plausible projects to invest in that could return better than the benchmark rate, then I think it makes sense to return it to investors.
Even in a well-run company (Apple?) it's reasonable to imagine that cash on hand could exceed the company's present capacity for new research projects. Scaling up an R&D department could take quite a bit of time, and it might not make sense to sit on that cash while they do it.
Apple is an edge case because of their incredibly strong market position, and their ability to maintain such high profit margins should be inviting a bit more antitrust investigation. But in this case, I'll accede the point for Apple's buybacks.
But while there are some cases that are still able to do stock buybacks while plowing resources into R&D, there are companies that are lagging due to ineffective or underfunded R&D (Intel) or are cutting safety critical corners (Boeing) to maximize shareholder return. These are significant companies that provide critical goods and services that aren't exactly fungible, and it would build a lot more trust in them and market systems as a whole to see them take the initiative to improve their situations over plowing money into buybacks while begging for public funding or regulatory exceptions.
> Can't comment on Boeing specifically, but if a company has a bunch of cash on hand and doesn't have enough plausible projects to invest in that could return better than the benchmark rate, then I think it makes sense to return it to investors.
Isn't that what dividends are for though? Stock buybacks distort the valuation detached from what the market is pricing the company, it still does not make sense in my mind.
From the company's perspective, dividends and buybacks are economically equivalent (i.e. they are giving a certain quantity of cash to shareholders)
However, from the shareholder perspective, buybacks are more tax-efficient since those who sell their shares pay taxes on the gains, and those who hold end up with a larger share of the company and no tax.
This is all according to theory. In practice, there does also seem to be a sort of received wisdom among managers that buybacks are better for companies because they can cut them in times of trouble, whereas investors will perceive cuts in dividend as somehow foretelling bankruptcy.
Buybacks at market price don't distort the valuation. You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out.
A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it.
> A buyback is a more efficient dividend. It doesn't force a realized gain, and stockholders can choose the size of their cash out whenever they want, instead of the company forcing it.
That goes into financial accounting engineering, something I'm really not fond of, efficiency in dribbling taxes due is not something I consider an advantage, it's a bug of the system.
> You could make the same wrong about claim about dividends distorting market price my making the stock temporarily more valuable shortly before the dividend pays out.
Probably another inherent issue I see in the current system, dividends should be paid out in proportion to the time an investor held the shares, they took higher risk by holding them for longer and deserve the full reward, someone just speculating right before a dividend payout should not have much reward since they had no skin in the game while the company accrued their extra cash in hand to be paid out.
The current incentives reward more speculative and short-term decision making rather than companies generating the most value to society in the longer term. I do not think that's the most efficient way to price companies: return of shareholder value, that should be a consequence of a good company, not an objective in itself (as it's been since the Jack Welch plague over MBAs).
Again, I look at the case of Boeing, a company that gained a lot of value due to producing good products, with quality, and the downfall it's going through from maximising shareholder value with buyback programs, cutting corners, etc. The current incentives do not punish this kind of egregious behaviour enough.
On the contrary - they are serving customers, the same way I serve dinner for my family. Diced, sliced, with juiceless bits thrown away, and leftovers given to chickens.
If you served dinner like they served customers, you would be apathetically serving cut up pieces of your family to the members that remain, while charging them an exorbitant price, then taking them to court if they dare post a bad review.
Also, I agree with your point, but the title of the book is still accurate, the content of the book is literally what the CEO wants you to know, not what you should know.
Counter proposal: how about we don't destroy our own planet.