COMMERCIAL Management, and the threat to survival

Press, Volume CXII, Issue 32958, 3 July 1972, Page 16

COMMERCIAL Management, and the threat to survival

(By the commercial editor) Every stock market analyst will tell you that one of the surest ways to profitable investment is to seek out and identify growth industries, and then to take a major position in the shares of the companies that promise the most growth in the most promising growth industry.

And they are not wrong.

The trouble is that the search is a never-ending one. Many industries thought of as solid growth industries have actually stopped growing; many others are actually in the shadow of decline.

Every major industry was once a growth industry. Many are now as dead as a doornail.

In most of those cases what is blamed for the decline is the change in demand, or changes in technology.

But in most cases the real fault was with management —especially the management concerned with policy, i.e. the directors.

Almost always they defined their business too narrowly; they were product-oriented rather than customeroriented.

The railroads did not get into trouble because the need for transportation declined; the transport business is flourishing. But by assuming that they were in the railroad business rather than in the transport business they let the customer’s requirements be satisfied by others. Hollywood got a drubbing from television, again because it defined its business incorrectly. It resisted television when it should have welcomed it as a great opportunity for expansion. TV is now a bigger business than the making of “movies”—a specific, limited product—ever was.

On reflection it is clear that no amount of product improvement—or, for that matter, improvements in production techniques — will make up for a vanishing market.

A classical example is the demise of the breeders of horses after the advent of the motor car. Perhaps a better example still is the fate of the makers of horse whips, for the same reason.

But it may be said that if the makers of horse whips had defined their activities as “the manufacture of things to make things go” or, a bit more scientifically, as “manufacture of catalysts to sources of energy,” they might now be flourishing as makers of car batteries, or carburettors. It would be possible to give many other examples, and to go back far into history. In fact, in the first chapter of the second book of the Holy Bible we read: "Now there arose up a new king over Egypt, which knew not Joseph.” And right there and then Israel’s troubles really began. Perhaps the most notorious example of short-sightedness on markets is the case of the American millionaire who around 1900 condemned his heirs to poverty by providing in his will that his estate be exclusively and forever invested in municipal tramcar securities. “There will always be a big demand for efficient urban transportation,” he said.

But there are examples all around us, if we are prepared to see.

This week we read in two different company reports, T. J. Edmonds and A. S. Paterson, about far-reaching changes in the grocery trade.

Our meat companies are changing from a productoriented approach to a mar-ket-oriented one. It is no accident that Hellaby—from an

investment point of .view one of the best firms in the industry—is the closest to the market. The reason for this soliloquy is the report by the directors of the Christchurch Gas Company, published about three weeks ago. The winds of change are blowing in this industry, with the threats to survival coming especially from the side of the supply of raw materials. However, the report was impressive. It gave a clear account of the directors’ thinking, and some of the measures they were taking—all of which must be very reassuring to the shareholders. No danger here of management losing its grip—although gas companies al! over die world have had to battle against the tides recently. The company suffered a small decline in profit during the year, but is paying a 7| per cent dividend—-one-third of it free of tax—which compares favourably with the other gas companies. However, these things are only short term considerations. It appears that for the longer term, shareholders are going to be well served by their directors. And this is most important, for in the last anaylsis, when you invest in shares, you invest in management.