Short-term gains, long-term problems
Response to the following problem:
In recent years, many businesses have been criticised for failing to consider the long-term implications of their policies on the wealth of the owners. John Kay argues that some businesses have achieved short-term increases in wealth by sacrificing their longer-term prosperity. He points out that: The business of Marks and Spencer, the retailer, was unparalleled in reputation but mature. To achieve earnings growth consistent with a glamour rating the company squeezed suppliers, gave less value for money, spent less on stores. In 1998, it achieved the highest (profit) margin in sales in the history of the business. It had also compromised its position to the point where sales and profits plummeted. Banks and insurance companies have taken staff out of branches and retrained those that remain as sales people. The pharmaceuticals industry has taken advantage of mergers to consolidate its research and development facilities. Energy companies have cut back on exploration. We know that these actions increased corporate earnings. We do not know what effect they have on the long-run strength of the business - and this is the key point - do the companies themselves know? Some rationalisations will genuinely lead to more productive businesses. Other companies will suffer the fate of Marks and Spencer.