Stick to the knitting

Phil Ruthven’s article, ‘The secret to success’ in the February 2014 Company Directors magazine concludes that the most successful companies are those that operate either in one industry sector or operate a core business (e.g. construction, finance, manufacturing, retailing) over several industries. Successful companies also innovate, use world’s best practice and have a unique organisational culture and leadership. According to his company’s recent survey, these are the attributes of successful companies regardless of the industry they’re in.

IBISWorld analysed the profitability of 555 companies with a combined revenue of $2.1 trillion between 2009 and 2013 using the weighted average return on shareholder investment after tax (ROSF), similar to return on investment, (or ROI). It is a measure of how well a company uses shareholder funds to make a profit.

The survey showed that ‘classic conglomerates’, those owning multiple, unrelated businesses in several industries, continue to perform very poorly. (Ruthven says that ‘classic conglomerates’ now only work in developing economies.) Adsteam, which disintegrated in the early 1990s, held the record for diversification, owning companies in 82 different industries. Pacific Dunlop and BTR Nylex were each in 56 different industries before they crumbled.

Some conglomerates have whittled themselves down to 15 industries but Ruthven says that’s still too many for them to make it onto Australia’s best-performing list.

Today’s best performing companies stick to the knitting and concentrate on doing what they do exceedingly well. The top performer is Rondo, followed by Bechtel Australia, Philips Electronics, Hatch Associates, John Deere, Philip Morris Federal Express and Schindler Lifts. British Tobacco, Revlon, Mars, Pandora, and Apple also made it into the top 25 performers.

Diversification as a successful business model may return as part of the business cycle in due course, but until then, the message is: Stick to the knitting.

Discussion questions

Leadership seems to be a critical ingredient of a successful company. How many reasons can you think of that would explain this?

Innovation is another critical element of success. How many reasons can you think of that explain this?

How would the strategy of a conglomerate differ from that of a single-focused business?