The Weekly: Edition #52 - July 3rd, 2020
Culture of Adaptation
Morgan Housel recently wrote a thoughtful piece on the necessity to adapt to changes in the business environment that is especially pertinent given the challenging economic environment and the acceleration of certain trends brought about by the pandemic. As owners navigate these uncertain times, it is necessary to take a step back to assess the changes that are occurring and strategize how to survive in a post-covid world. Last week, we discussed how a culture of long-term ownership allows organizations to be flexible in how they approach strategic decision making. In parallel with this idea, we would like to add that long-term survival requires a culture of adaptation. In his piece, Housel points out that an owner needs both a stacked hand and a great game plan to ensure the longevity of their business:
"Companies have a high failure rate in their first three to five years. Then the challenges plateau. Averaged across industries, a business in its 25th year has roughly the same probability of dying as it did in its 10th year:"
What exactly does a stacked hand look like? An advantage over your competitors in the form of lower cost, higher speed, higher quality or some combination of the three. Even so, no castle stands forever:
"If you invest in 100 high-risk startups, you probably expect 40 of them to fail. Then if you move on to investing in 100 mature public companies, 40 of them will probably fail, too. They might stick around longer than the startups, but the end result is the same. What does that say about competitive advantage? Or the concept of moats? It says that those things, to the extent they exist, are rarely permanent."
Moats are routinely discussed in a static sense, as if they exist in some form or fashion for most businesses. But the facts simply don't bear this out. Indeed, the facts show that every business, year after a year, decade after decade (Lehman), has a non-zero percentage chance of extinction. And the longer your organization is in business, the faster you have to run to remain in place because the competition only intensifies as you near the top of the industry, especially when 10% better means 100% of the potential profits. The incentive for improvement is ever-present. As Jeff Bezos would say, it's always Day 1.
The irony of constant improvement is that as your moat grows, your company becomes more comfortable with its advantaged position and resistant to change - and corporate inertia sets in. The moat becomes more vulnerable as adaptation becomes less tenable:
"Two, some advantages create new disadvantages. Most species tend to get bigger over time because big things are strong. But being big also makes you slow, clumsy, and unable to hide. “The tendency for evolution to create larger species is counterbalanced by the tendency of extinction to kill off larger species,” one study wrote."
So how does an owner avoid stagnation and extinction? In today's tech-centric, information-saturated, 24-7 world, owners must instill an attitude of flexibility and a culture of adaptibility because the only thing that is certain besides death and taxes... is change.
From the Permanent Equity Team, Happy Fourth of July!
Keep Running! (Collaborative Fund)
+ "There are 32 million businesses in the United States. The Bureau of Labor Statistics tracks how many of them die each year, and how old they were at death. Dig through the numbers and one thing’s clear: there is no age at which business gets easy."
Wirecard auditors say elaborate fraud led to missing billions (Bloomberg)
+ "EY, as the accounting firm is officially known, finally sounded the alarm last week, when they refused to sign off on Wirecard’s 2019 financial report. (The firm remains the auditor of record). That set off a cascade of events that started with Wirecard admitting it couldn’t locate billions of euros in cash, followed by the ousting and arrest of former Chief Executive Officer Markus Braun before Thursday’s insolvency filing."
Summer update: Tech and the new normal (Benedict Evans)
+ Benedict Evans' mid-summer update is a masterpiece worth exploring for its data on where technology is growing or maturing, how we will connect in a post-covid world, and what areas covid-19 is accelerating change.
Online shopping during COVID-19 exceeded 2019 holiday season (Adobe)
+ "The key finding in the May analysis is that e- commerce shopping levels during COVID-19 (April to May) were higher than what retailers saw during the 2019 holiday season (November to December). Indeed, consumers spent over $153 billion online in the last two months ($70.2 billion in April and $82.5 billion in May), which is 7% higher than the $142.5 billion spent online during November and December 2019. Additionally, the recorded online spend is $52 billion more than what retailers typically see during April and May."
Adobe 2020 Digital Economy Index Report (Adobe)
+ "BOPIS (Buy Online Pickup In Store) orders maintained a YoY growth of 195% in May, leveling off after the sharp upward trajectory seen in March and early April. We'll likely see this growth draw down further as stores re-open."
The house servant who pioneered the franchising business model (The Hustle)
+ "Ray Kroc is often credited as the “father” of the franchising business model. But 60 years before McDonald’s, a woman named Martha Matilda Harper built her own formidable franchise of hair salons — the first of its kind in the US — and trained hundreds of underprivileged women to run their own businesses. Harper not only pioneered franchising but is widely credited a trailblazer of the modern hair salon industry, which is now a $20B market. An ex-servant who escaped poverty, she built an empire of 500 salons all over the world. And she did it all during a time when women were largely silenced in their entrepreneurial pursuits."
We'd love your help.
If you stumble across something great, send it to weekly@permanentequity.com.
If you know an owner, operator, or someone who works with SMB's, please give us the highest compliment and send them our way. You can find previous The Weekly issues here.