The Three Tensions: Winning the struggle to perform without compromise
Dominic Dodd and Ken Favaro
Wiley £18.99 MT
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Dodd and Favaro are senior guys from Marakon, a strategy consulting firm. When I was in the main swim of strategy consulting, more than 10 years ago, Marakon was all about teams of analysts crunching away in corporate finance departments, calculating economic profit and economic value for every slice of the business. The CEO and CFO loved it; line managers were a bit baffled.
Economic value doesn't get much mention here. The theme is that large corporations wrestle with three core tensions: between profitability and growth, the short-term now and the long-term future, and the whole (of the corporation) and its parts.
The argument is that CEOs should not choose one side or the other, or flip between them with the business cycle. You have to perform well on both sides of the tensions to deliver the best long-run performance and total shareholder return (TSR).
The authors' analytical proof is a measure they call 'the batting average': how often a company achieves good performance on both sides of a tension in the same year. They measure this for a dataset of 1,000 public companies from 1983 to 2003. The profit vs growth batting average captures how many years a company grew both sales and profits, not just one or the other. The short-term/long-term batting average captures how many years a company achieved earnings growth two years running.
So this is an ideas book. As a business stories book, its batting average is close to England's second Ashes test. The case studies are cursory, with little analysis. How does it do as an ideas book?
Early on, the authors say: 'Batting average is a better predictor for TSR than any other single measure of operating performance. This is a striking finding. A company with years of booms and busts in profitability and growth... is less likely to have high share price performance than a firm that reliably meets both objectives of positive profitability and real growth at the same time most of the time.' (The italics are theirs.)
What can we say to this blinding insight? Like, duh? This is like a government survey that spends years of research grants to find that poverty is a problem of not having any money. This is NOT a striking finding. It is a non-striking finding. What would have been striking would have been if volatile and inconsistent performance on growth and profits produced a better TSR.
As for the 'whole vs parts' third tension, that vanishes from the analytical framework of the batting average, because - as the authors say - it's impossible to measure. It also proves hard to discuss: the chapter on this tension ends up with diagonal assets acting as the glue or bridge or something between conflicting horizontal assets and vertical assets. I was pretty horizontal by that point.
So in terms of big idea, what we have here just don't cut the mustard. Nul points, 95 all out. Yet there are interesting facts and ideas lurking in this book at the next level. Interesting fact: TSR, total shareholder return, is not correlated with any of: industry growth, corporate portfolio diversity or corporate acquisitiveness.
This is really QI, Quite Interesting, and flies in the face of many management assumptions - that it's better to be in growth markets and to have a narrow portfolio focus, or that organic growth is better than acquisitions. Many strategy decisions have been based on these assumptions, and this book argues that they are wrong - or rather not systemically correct.
Interesting idea: companies that consistently grow revenue AND profits tend to have a strong orientation around customer benefit. Customer benefit is not to be confused with customer focus, which talks about segments, retention, share and so on, but with an exclusively producer-oriented agenda - how can I squeeze more from my markets? A customer benefit mindset, in contrast, is all about how to make my customer's life and product/service experience better, and more profitable. If I get that right, my sales and profits will follow.
This is a not-unique but still powerful insight, and brought me up short on a consulting project, where I had been drifting into the customer focus mindset. Either of these topics would have made a better book, if less of a 'big idea'.