Firm foundation is key to business success
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The Pont du Gard is an inspiring bridge. Part of the 50-km-long Roman aqueduct that brought water to the city of Nemausus (N卯mes) in the South of France and built almost 2,000 years ago, it took 15 years to build. It is a magnificent structure and a testament to sound engineering.
My engineering background means I was trained to deal with absolutes. For example, gravity is gravity. Either you account for it or the laws of physics bring you back to reality really fast. There is no cheating physics.
That absolutist background means I鈥檓 often amazed at the cavalier attitude displayed in business. Here, if the math doesn鈥檛 add up, the attitude seems to be 鈥淚t鈥檚 okay, we have alternatives.鈥
Accounting practices are modified or the bill is passed on to someone else, for example. We end up with popular companies that have never turned a profit, as markets reward growth and the possibility of future profits, over evidence that the company鈥檚 value proposition is actually sound.
Growth that satisfies markets means moving fast, and in today鈥檚 world, this results in cutting corners. That is tolerated. In fact, it鈥檚 expected. 鈥淢ove fast and break things,鈥 is Facebook鈥檚 motto. It seems to be the rallying cry for the whole of Silicon Valley.
Of course, tremendous growth can result in casualties. Enron鈥檚 collapse took a toll. Similarly, when the 2008 toxic-asset bubble exploded, people got hurt.
Unfortunate, but we are assured that鈥檚 all in the past. Governments bailed out players too big to fail 鈥 you and I picked up the tab, thank you very much 鈥 and everybody got a second chance with lessons learned.
Look at The We Company. It was valued at US$47 billion ahead of its announced IPO. Within days, its value was 鈥渃orrected鈥 to US$15 billion and has since dropped to US$8 billion. It has since cancelled its IPO, and some now consider it as distressed assets.
A correction of this scale before it hit public markets would suggest things are changing. For once, the private equity backers who helped build the house of cards did not convince public markets to buy their shares before the structural weaknesses revealed themselves. So we鈥檙e all right now, aren鈥檛 we?
No, we鈥檙e not, because nothing major has changed. The We Company鈥檚 failure to launch is likely due to specific circumstances rather than new regulations or other systemic safeguards.
Take a look at Uber鈥檚 stock, down below US$33 from its IPO price of US$45 in May 2019. Recall that US$45 was considered low for the IPO. Peloton IPO鈥檇 a couple of weeks ago at US$29 per share but is now in the US$21 neighborhood. SmileDirectClub, Slack and Lyft all IPO鈥檇 this year and are all down at least 30 percent over their original prices.
While these failed IPO stories may suggest the private-equity model of startup support has reached its limits, take a further step back and it becomes clear the problem has spread. The 鈥渕oving-quickly-at-all-costs鈥 mantra has metastasized beyond Silicon Valley, to industry 鈥 Boeing 鈥 and even politics.
Back to fundamentals
The news on how Boeing designed the latest 737 exposes evidence that it favored profits over safety. However, maybe Boeing鈥檚 problem isn鈥檛 Boeing鈥檚 alone. Maybe it鈥檚 a problem of our time; one of markets expecting ever-more growth, ever-more profits, ever-less 鈥渇at鈥 in organizations. At some point, doesn鈥檛 cutting fat from an already lean organization mean cutting into the important muscle that supports it?
If we鈥檙e honest we should admit that we鈥檙e a greedy species. Who among us can take a look in the mirror and say 鈥淚 have enough?鈥 Satiety does not seem part of our genetic coding. We should self-regulate, but can鈥檛. Perhaps we should rely on an adult to do the regulation for us. Like, well, an actual regulator.
Silicon Valley鈥檚 funding model fostered many successes and, in some cases, moving fast and breaking things is desirable 鈥 if the cost of failure is acceptable. However, there are settings you cannot afford to fail in. NASA did not send people to the moon by launching rocket after rocket expecting them to explode. Instead, they built on victories, always aiming towards safety.
We would do well to build more often upon victories. That may mean more regulation, less growth, and less profits. But in return we may gain longer, sustainable results. Maybe we ought to swap out some of that 鈥渕aximizing shareholder value鈥 thing for a reasonable rate of return.
It is no accident that Roman aqueducts have lasted 2,000 years. It took time and money but the results are unparalleled. Let鈥檚 aim to be remembered not because we occasionally achieved double-digit growth but because we built something substantial, impressive and able to stand the test of time.
The author is professor of Strategy at IMD.
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