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Sunday, 16 August 2015

Is Your Business Bottom Line Driven? Far Better to be Long Term Driven!

Regular readers of this epic will know that I am an enthusiastic listener to the BBC World Service and a few days ago they ran a very interesting discussion in short v long termism in business.

Taking part were an academic, a hedge fund manager and a leader of a large corporate.

Most of the debate was centred around large cap corporates and the pressures put on them to deliver shareholder value.  The corporate leader felt that this militated against the way that he wanted to run his business.

It is all about the dichotomy between short termism driven by the market which demands constant growth of both turnover and profits against the long term view with the emphasis on the customer, good service and engaged employees.

The corporate leader was decidedly a long term advocate and derided the bottom line driven businesses which he said had capitulated to the demands of the stock market.

He said that his business, apparently like Warren Buffett, had made a conscious and courageous decision to ignore the share price and to orientate the business towards the customer.

The majority of SMEs do not have the pressure of having to accede to the demands of the market but in the end they also have to drive shareholder value.  Fortunately this cannot be measured on a daily or even hourly basis on a FTSE or Dow Jones look alike but the requirement exists nevertheless.

Generally while the owner/s of an SME can generate a satisfactory lifestyle, the real value of the business lies in its potential sale value at some time. This can and does vary over time and only becomes relevant at sale or inward investment time.

In his early days at GE the legendary Jack Welch like many other corporate leaders was bottom line driven and below average performers in the business lived in a state of constant fear for their future.

His views seem to mellow over the years but the demands of the market were still a strong influence on the ethos and culture of GE.

The question to ask is, do we want to run the business with the bottom line as the only driver with all that implies, or do we look to the long term, to build a loyal customer base, a great reputation for product and service and a happy and engaged workforce?

Perhaps in the corporate world Enron is an excellent example of the short term bottom line driven approach, and Apple of the long term, innovative, customer driven ethos.

This not to say that the long term culture ignores shareholder value but perhaps it is angled more towards stakeholder value which takes into account customers, suppliers, employees and the community as well as shareholders and investors.

 As long as the shareholders and investors accept that the business is in it for the long term with the probable and consequential growth in value then the customer driven ethos is far more likely to deliver the goods than the bottom line driven business.

If you can excuse the mixed metaphors it's the choice between the shooting star with fast burn out or the long slow route to a successful outcome.

The bottom line is merely a measure of the success of the way the business is run and is not an end in itself.

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