I attended an interesting talk today by Greg Hackett, who founded financial benchmarking company Hackett Group before selling this to Answerthink and “going fishing for a few years”. He is now a business school professor, and has been researching into company performance and, in particular, company failure. Studying the 1,000 largest US public companies from 1960 to 2004 his research shows:

- company profitability is 40% lower in 2004 than in 1960, with a fairly steady decline starting in the mid 1960s
- the average net income after tax of a company in 2004 was just 4.3%
- half of companies were unprofitable for at least two out of five years
- 65% of those top 1,000 companies in 1965 have disappeared since, with just half being acquired but 15% actually going bankrupt.

He gave four reasons for company failure: missing external changes in the market, inflexibility, short term management and failing to use systems that would show warning signs of trouble. What I found most surprising was that the correlation between profitability and stock market performance was zero.

The research suggests that the world is becoming a more competitive place, with pricing pressure in particular reducing profitability despite greater efficiency (cost of goods sold is 67% of turnover, down from 75% in 1960, though SG&A is up from around 13% or turnover to around 18%). All those investments in technology have made companies slightly more efficient, but this has been more than offset by pricing pressure.

I guess this also tells you that holding a single blue chip stock and hanging onto it is a risky business over a very long time; with 15% of companies folding over that 45 year period, it pays to keep an eye on your portfolio.

A key implication is that companies need to get better at implementing management information systems that can react quickly to change and help give them insight into competitive risks, rather than just monitoring current performance. Personally I am unsure that computer systems are ever likely to provide sufficiently smart insight for companies to take consistently better strategic decisions e.g. divesting from businesses that are at risk; even if they did, would management be smart enough to listen and act on this information? It does imply that systems which are good at handling mergers and acquisitions should have a prosperous future. This is one thing, at least, that seems to have a growing future.

I attended an interesting talk today by Greg Hackett, who founded financial benchmarking company Hackett Group before selling this to Answerthink and “going fishing for a few years”. He is now a business school professor, and has been researching into company performance and, in particular, company failure. Studying the 1,000 largest US public companies from 1960 to 2004 his research shows:

- company profitability is 40% lower in 2004 than in 1960, with a fairly steady decline starting in the mid 1960s
- the average net income after tax of a company in 2004 was just 4.3%
- half of companies were unprofitable for at least two out of five years
- 65% of those top 1,000 companies in 1965 have disappeared since, with just half being acquired but 15% actually going bankrupt.

He gave four reasons for company failure: missing external changes in the market, inflexibility, short term management and failing to use systems that would show warning signs of trouble. What I found most surprising was that the correlation between profitability and stock market performance was zero.

The research suggests that the world is becoming a more competitive place, with pricing pressure in particular reducing profitability despite greater efficiency (cost of goods sold is 67% of turnover, down from 75% in 1960, though SG&A is up from around 13% or turnover to around 18%). All those investments in technology have made companies slightly more efficient, but this has been more than offset by pricing pressure.

I guess this also tells you that holding a single blue chip stock and hanging onto it is a risky business over a very long time; with 15% of companies folding over that 45 year period, it pays to keep an eye on your portfolio.

A key implication is that companies need to get better at implementing management information systems that can react quickly to change and help give them insight into competitive risks, rather than just monitoring current performance. Personally I am unsure that computer systems are ever likely to provide sufficiently smart insight for companies to take consistently better strategic decisions e.g. divesting from businesses that are at risk; even if they did, would management be smart enough to listen and act on this information? It does imply that systems which are good at handling mergers and acquisitions should have a prosperous future. This is one thing, at least, that seems to have a growing future.