Week #176

Understanding the Need for Investments

Human nature should keep us constantly on the lookout for new innovations which will deliver the next breakthrough; the silver bullet which will propel ones organisation out of mediocrity, towards both achieving & surpassing ones goals. Our natural & inbuilt human dissatisfaction with the status quo ensures we are relentlessly extending & scanning the horizon for the new & exciting, which will deliver a change in effectiveness for our operations.

I think this compulsion is an important driver in our striving for continual improvement which has historically delivered so much progress & the general quality of life we currently enjoy. When applied in a disciplined way, new technology is a driver of both progress & productivity. But this search for “the new” also harbours a negative side which unless recognized can have a destabilising & ultimately destructive impact on organisations. Without assuming to know anything about your specific business or role, I do have some initial suggestions.

Firstly, let’s look at the impact of ‘the new’ in general & the relationship between innovation & productivity. It is a widely held view new innovations drive prosperity & productivity & therefore growth in general. This is understandable and there are many examples where breakthrough technology has achieved outstanding results. Apple Computers Inc would probably be a flag bearer here. But surprisingly, this is certainly not the norm.

To demonstrate, Jeremy Siegel in his most recent book, The Future for Investors¹, looks at business success from a shareholders perspective, measured by return on investment. He finds strong evidence; firms with the highest level of capital expenditure over long periods suffer the worst performance across the entire stock market. The truth is most capital expenditures provide investors with poor returns. It is so easy for management to be talked into expenditures because ‘everybody else is doing it’!

In a similar vein, Jim Collins reviews the role of innovation in his Good to Great² companies. He refers to the constant search for change & dramatic breakthrough as ‘The Doom Loop.’ Surprisingly, he concludes the most successful companies define what they are good at, & stick to it. He refers to these companies as hedgehog companies after Isaiah Berlins’ famous essay, The Hedgehog & the Fox. The fox is fast, sleek & cunning, but keeps on changing strategy. The hedgehog by comparison is an unlikely creature having none of these attributes, but knows one big thing. Hedgehog companies’ simplify a complex world into a single organising idea, a basic principle concept unifying & guiding everything they do. For a hedgehog, everything which somehow does not relate to one idea holds no relevance.

And here lies the crux of the point. Spending on innovation, technology or whatever it is you believe may increase productivity must be done in a disciplined manner which adds to the delivery of this single unifying idea, of what makes your enterprise unique. In order to do this you must firstly know what the idea or principle is. It sounds simple, but often you are highly likely to follow the latest fad & invest in tomorrow’s dinosaur – as it seems large percentages in fact do.

Let me be clear here, I am not suggesting investment is not important. Clearly it is. What I am suggesting however is the vast amount of expenditure is undertaken in a manner giving no thought to how this investment relates back to the organisations competitive advantage. So, before investing, we need to decide if it is relevant to the business. And in order to this, you must first know what your unique brand position is. Do your people know what this is for your organisation? Most don’t!

Whatever the case, if you wish your organisation to thrive, you really need to understand what you are wishing to stand for. And, it seems once you know what this is, digging yourself a hole & making like a hedgehog is the best plan. Just keep on doing what you are doing; & if you spend anything with a view to boosting productivity or efficiency, make sure it is allocated towards getting better at that for which you stand.

Have a good week.

kenn butler

1. Jeremy J. Siegel, the Russell E. Palmer Professor of Finance @ Wharton School of Business in Pennsylvania. ‘The future for Investors, why the tried & true triumph over the bold & new.’
2. Jim Collins, ‘Good t Great’. This book addresses a single question: Can a good company become a great company, and if so, how? Jim Collins is a teacher of enduring great companies — how they grow, how they attain superior performance, and how good companies can become great companies.