Ahead of the Curve by Philip Delves Broughton

Author:Philip Delves Broughton
Language: eng
Format: epub, pdf
Publisher: Penguin USA, Inc.

Chapter Ten

ETHICAL JIHADISTS

Business is the activity of making things to sell at a profit—decently.

—EDWIN GAY,

SECOND DEAN OF

HARVARD BUSINESS SCHOOL

Despite the onslaught of recruitment, there was still a course of academic study to pursue. Besides more finance, the second semester would introduce us to strategy, negotiations, entrepreneurship macroeconomics, and business ethics. Strategy was taught by a Swiss professor, Felix Oberholzer-Gee. He looked like the quintessential academic, with round glasses, hair brushed forward, and an absentminded gaze when he walked across campus. But he had spent five years in the injection-molding business in Switzerland and then another five in the economics department of an investment bank. He brought a wry worldliness to the classroom and quickly became a favorite of the section.

Harvard prided itself on its strategy department, not least because it was the core of the general management program. Establishing and executing a strategy was precisely what a general manager did. We were not being trained to be excellent financiers or operations managers but rather good generals. We were learning how to marshal disparate forces and resources to pursue the goals of creating and capturing as much value as possible. Strategy was not about filing the right accounts or making sure the machinery worked. It dealt with the big picture: building and managing a business to make superior returns over the long term.

The first thing to understand about strategy, we learned, is that it is not operational efficiency. You could run the best laundry in the world, but if what you were doing was quite simple and thousands of others could do it, you were not going to make any money. You lacked, as Felix liked to say, “a great strategy.” A beautifully run restaurant with the greatest chef in the world could be an economic disaster, while owning a few grubby fast-food franchises could make you a millionaire. Being very good at doing something was absolutely no guarantee of financial success. I recalled Steenburgh in marketing telling us, “A good product alone won’t get you there.” So the first challenge for the strategist was picking the right thing to do.

Felix showed us a graph of the distribution of returns on equity of major American companies over the past twenty years. Most returned between 10 and 15 percent a year. But a few had returns on equity over 20 percent. What were they doing that enabled them to do this? The most profitable companies year after year tended to be in a few sectors: pharmaceuticals, high-technology, financial services, discount department stores, and oil. The worst major industry to be in was airlines. There were exceptions, such as Southwest, which had done phenomenally well. But even Southwest, we had to assume, would eventually struggle to escape the broader trends of its industry. Picking the right industry, one with a sound structure, where your chances of making a profit were highest, was where good strategy began.

In 1980, a Harvard Business School professor called Michael Porter published an article, “What Is Strategy?,” that laid out the five forces he believed determined a company’s ability to capture value.

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