Business Performance: Over‐emphasis on financials? Mike Bourne Steve Macaulay Are companies in danger of over‐emphasising the financials? Now, that is quite a contentious issue and to explore that today is Professor Mike Bourne. Mike, how can we possibly over‐emphasise the financials – particularly at the moment in the current situation? Mike Bourne Companies have got to survive and they have got to live for today, especially in the market that we are in; but if they ignore the future it really hits their long term development, their survival and their share price. So it is a real issue for companies today. Steve Macaulay Let’s have a look at this in more detail. Every single managing director I would speak to would say, of course the future is important, but what is your experience having gone into a number of companies and seeing how they actually operate in practice? Mike Bourne Well you have got companies that are really focusing on the financials in terms of their bonus structure and that really makes people very short term. I have got one organisation I am working with at present where divisional managing directors are actually turning round and saying if I deliver my bonus for this year, I am going to destroy the business over the next two to three years. And suddenly they are realising that because they have been doing that for two or three years, they haven’t been investing in the future capabilities and resources that their company needs and it is a real issue. We have got another client that is in at present, who we have been taking through the process of thinking about their strategy and for the last twelve months they have been recovering from a reorganisation – they have got the structure right, but they haven’t focused on what they needed to deliver. And so by making the strategy very explicit to them, getting them to plan, we have taken the heads above the parapet and actually in the short term turned their financial performance round by thinking about the future. Steve Macaulay So thinking about the future is key, even though managing for today is really, really important? Mike Bourne It is; just take a couple of examples. BT, for example a few years ago was performing exceptionally well, quarter on quarter profitability was great. What was happening to the share price? It kept falling. The reason for that was the analysts didn’t believe that they had actually addressed the technological changes that were happening in the marketplace, that one day was really going to affect the business. Hence, profits up, share price falling. Let’s take a second example; Tesco a few years ago announced they expected the UK grocery market to fall. It wouldn’t grow as fast as it did in the future as it had done in the past. What happened to Tesco’s share price? It actually went up on that announcement simply because the analysts believed that maybe Tesco understood what was happening in the UK market and were doing something about it. www.cranfieldknowledgeinterchange.com July 2011 1 So actually, sometimes outing bad news to analysts is a refreshing approach because analysts then believe that you understand the structural problems that are affecting your business and are prepared to do something about it which improves the future. Steve Macaulay So the message has got to be, then, keep a close ear to the ground about what are the key indicators of things that in the future are going to hit you if you don’t do something about it; and then make sure you do it. Mike Bourne That is absolutely right; you have got your current performance, but it will only last for so long. Your customers are being courted by your competitors – what are the new products, services, the things that you can do in the future that will keep them loyal to you and grow your business? That is what it is all about and analysts understand that as much as they understand the last quarter’s results. Steve Macaulay And that is based on hard‐nosed experience of you watching companies and seeing how they actually perform as opposed to the way they say they are performing? Mike Bourne It is doing that and talking to the buyer side analysts who are looking at the data that is in front of them. Steve Macaulay Mike, thank you very much. www.cranfieldknowledgeinterchange.com July 2011 2