Business Book Review

Saturday, November 04, 2006

Thinking Inside The Box - by Kirk Cheyfitz - Nothing Lasts Forever

Nothing Lasts Forever

One of the fundamental functions of a business is to keep an eye fixed on the future, not the distant future, but the immediate future. When Peter Drucker suggested that marketing and innovation were the two basic functions of business, he would subsequently define innovation as “purposeful innovation.” He advises following three straightforward guidelines, regardless of the type of business: 1) keep it simple; 2) concentrate on the needs of today, not some imagined future; 3) look for clear opportunities and avoid big risks. Businesses must be dynamic, and companies have to change. Any company that fails to renew itself ensues its own doom. But that does not mean that businesses should be constantly undertaking fundamental change. The key to renewing a business is to make it an evolutionary process. It is in actuality a process that is more responsiveness than revolution, an essentially conservative process.

Companies must always remain sensitive to changes that could affect their growth, profits, and results. Drucker writes that success comes to those who systematically analyze the sources of innovative opportunity, then pinpoint the opportunity and exploit it. Conservative, meaningful change usually comes from one, or a combination of four sources: technology (which can have direct and indirect effects), government policy (in the form of changing government subsidies, taxes, and regulations), changes in customer needs and lifestyles (how they live and what they need are what drives business), and competitors (new competitors or new initiatives by established competitors). Success—and even survival—depends upon the response to the opportunities afforded by change. Response—renewal—is therefore a constant process that goes on every day in every business sector. Successful companies are those that keep a single-minded focus on the problems of day-to-day management along with the application of imagination and vision as to what will happen in the near future. The challenge of both operating and renewing a business each day is to regard all conditions as both passing and permanent.

Risk and uncertainty are always part of the picture no matter how well a company is managed. Many businesses steer a course through trouble that inevitably lies ahead, and others will not be able to do so. It is important to understand when it is prudent to get out of the business. For public and private companies, strategies to exit business are similar: sell publicly, sell privately, break-up (spin off a division or a part of a larger company as a separate business), merge (acquire or join with another company), refinance, or write-off.

The way to accomplish the best exit possible is to plan for it. The best time to plan on getting out of a business, in fact, is before getting into it. Arriving at a good way out depends a great deal on established markets for the business being exited. If there is a strong history of M&A activity in a given business, if there are widely accepted methods of valuing the business, if banks are in the habit of lending money to such businesses—all of these are important signs that favorable exits will be available under most circumstances. Failure to secure a profitable exit renders all the other rules of business retroactively meaningless. Generally speaking, it is simply impossible to succeed in a business where there is no good way to get the money out of the corporation and into its owners’ pockets.

Just as important is the rule that exits have to be fair to everyone involved; powerful insiders cannot be allowed to exit and leave everyone else behind. Conduct of this sort, as has been observed all too frequently in major corporate scandals of 2001 and 2002, has led from bad feelings to lawsuits to congressional investigations, criminal prosecutions, stock market crashes, and what the author describes as a general breakdown of our economic system. The legitimate end of all corporate activity is to enrich the individual members of the ownership community; giving everybody in the community fair access to the exit is at the center of management’s responsibilities. Understanding, of course, that rewards have to be related to the contributions made and the real risks taken by each group of members. Most good exit strategies are very straightforward sales, involving some variation on the theme of a business is developed and then sold, either to the public or to a larger firm in the same business. Other exits are more complex, involving complex transactions that move companies from high-risk businesses to lower-risk ones, stabilizing the entire corporation and setting the stage for an orderly exit.

Endnotes by chapter and a subject index are provided.


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