Bad industries or bad managers?

In the five years to the end of the 2011 financial year, the weighted average profitability of the nation’s 1000 or more large businesses with revenues from $50 million-plus to more than $60 billion (BHP Billiton) was a 13 per cent return on shareholder funds after tax (ROSF), or two and a half times the 10-year bond rate.

Three of the nation’s 19 industry divisions averaged above 20 per cent (mining, retailing and communications) and four averaged less than 5 per cent (health, education, transport and public administration and safety). So, it would appear there are some bad, some ordinary and some good industries in the economy.

And yet, when we look at the 100 best performing companies in the same five years, almost all the nation’s industries are represented.

The weighted average ROSF was more than 10 times the long bond rate; the lowest industry averaging over 40 per cent! This suggests that good managers can make a success in just about any industry.

It would seem that so-called “bad” industries are those industries in which there too many “bad”, inefficient or out of date management practices. This is true of agriculture, utilities, hospitality and several others. Most of them have balance sheets weighed down with excessive passive assets (land, buildings, equipment stock and debtors).

IBISWorld’s findings in the past four decades of analysing Australia’s industries and its largest companies (including the BRW Top 1000) reveal that top enterprises consistently follow many of the same guidelines to succeed.

Firstly, most stick to one business at a time and do not diversify. They aim instead to dominate some segment(s) of their market. Secondly, they tend to make innovation a priority and value their IP. Most top enterprises outsource non-core activities to enable growth. They have good, professional financial management, don’t own “hard” assets and value organisational culture. They plan from the outside in and try to anticipate new industry lifecycle changes. They follow world-best practice, develop strategic alliances and value leadership first, management second.

Enterprises following guidelines such as these tend to consistently report ROSF profitability more than four times the 10-year bond rate. All guidelines are important, but especially critical are: innovation (including unique IP); planning from the outside in; strategic alliances (especially when overseas); and organisational culture.

And, of course, leadership is never a delete option.

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