Becoming a Student of your Industry

I was hiking in Snowdonia with my mate Phil a few weeks ago.  I love hiking both for the amazing surroundings and also the opportunity to be off-grid and have a good wide ranging chat.

Phil and I have known each other for over thirty years having originally worked together as big pharma sales reps.  One of the questions Phil has asked me is what advice would I give to a new salesperson entering their career.  My answer perhaps unusually?  Spend time to study your industry and its history as I think this builds your credibility with current and future customer discussions.

Our discussion also turned to leadership and Phil mentioned Jack Welch who is often cited as one of history’s great business leaders. For those of you who have not heard of him, Welch ran General Electric from 1981 to 2001 and compounded the share price at 20.9% a year.

He was also infamous for a tough approach on being no1 or no2 in each market they operate or get out and promoting the top 10% and firing the bottom 10% performers in the company. He was on the cover of everything with Fortune magazine naming him manager of the century and he has written a number of books on leadership.

I have been studying compounding in the last few years and when I went home, thinking about this conversation about Jack Welch I re-read The Outsiders by William Thorndike.

Thorndike's book asks a deliberately narrow question. If you judge a business leader purely on the compound return earned by the shareholders who backed them, who actually comes top?

Not the ones with the best PR but the ones whose shareholders ended up with the strongest returns. Thorndike's methodology was to make the book you had to beat the market and your own industry peers by a wider margin or longer period than Welch did, with the eight people below achieving it.

John Malone of TCI, Bill Anders of General Dynamics, Katharine Graham of the Washington Post, Warren Buffett of Berkshire Hathaway, Henry Singleton of Teledyne, Bill Stiritz of Ralston Purina, Tom Murphy of Capital Cities and Dick Smith of General Cinema. 

What they were all incredibly good at was something that is rarely in a CEO job description – capital allocation or put simply deciding where the cash goes.

Whilst these companies were huge US conglomerates, I think the principals apply to all businesses.  Do you invest in sales or R&D, do you pay down debt or use it to acquire another company?  Do you pay dividends or invest in cap ex? Do you go for growth or cash break even?

The other thing they shared was that they measured themselves on value per share, rather than vanity metrics such as size, revenue growth, headcount or market share. 

I really like this as to me it follows the simple principle that a directors most important role is to act in the best interests of its shareholders. Why do any shareholders invest in a company? It has to be to receive a strong return.

I've spent my career in and around medical technology businesses both as a founder, as an investor and serving on boards. It's a sector where the capital allocation question bites unusually hard and certainly I think food for thought for every business leader.