Action: Insure that you are investing enough in innovation to prepare for the day when your profitable business becomes obsolete. Peter F. Drucker
In a larger economic sense, then profit, if correctly invested, should create economic or job growth. If so, then we should then be concerned if the latest statistics are correct, that there has been no net job/employment growth at all over the last 10 years (with financial services rising to 32% of GDP in the US). Either, there have been no profits, none of the profits have been re-invested, or the investments have not born fruit. Which is it?
I have certainly seen numerous situations in which once successful businesses have become white elephants. It has also always taken investment in innovation to go to the "next level". The good news is, there are many ways in which to give business a new life.
Example 1: Supply chain reinvention. Western Digital, one of the pioneers in storage media, found itself "wallowing" in the late 90's. Even those profits which were supposedly retained in the firm were illusory. Western Digital had indeed sustained hard financial blows late in 1997; the company went from debt-free to $513.1 million in debt between December 27, 1997, and March 28, 1998. While Western Digital stock went as high as 54 and split at 44 in 1997, it had yet to regain its original value a year later, going as low as 14 . Funding was tight, and Western Digital raised money the old-fashioned way: they sold $400 million of zero coupon convertible subordinated debentures. The Dow Jones Newswiresreported on February 12, 1998, that Western Digital "intends to use the net proceeds of the offering for general corporate purposes." A month before, the company had broken ground on a new manufacturing facility in San Jose, California. WD had decided to re-invest, and restructure its supply chain to focus on partner IBM. entered into a special partnership agreement whereby IBM would share its areal-density giant magnetoresistive (GMR) heads with Western Digital, and IBM in turn would have a foothold in the PC peripherals market. It was hoped that this partnership would ensure that Western Digital would be a force to reckon with well into the next century. New facilities were built in Minnesota next to labs and close to IBM facilities. The success of the stock and other indicators show us that turnaround is possible... but without the capital injection it would not have been. Those "profits" wasted in previous years had now become the "new cost" of business.
There have also been numerous examples of companies "close to death" but being rescued by others. I wrote recently about Maxstor and the purchase by Seagate (no stock improvement, because it was simply the "new cost" of doing business, which should have been injected earlier). EDS is another such story. Yes, Michael Jordan (the brilliant turnaround CEO) was able to more than double stock value after he took over the ailing outsourcing giant, and cleaned it up by going concentrating on the core business (and ditching the others). However, that was the end, more capital was needed to replace the "squandered" profits which never went back into the business, and EDS was sold to HPQ.
I guess the bottom line here is: Ya pays me now or ya pays me later. If you neglect to fund change/innovation and take the profits, you will be the white elephant on the block. Prettying up the "pig" only gets you so far.
Isn't it the common practice for Investment bankers and such to take the profits in bonuses? How will our GDP dominating Financial industry rejuvinate in the future?
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