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I feel like there are four stages of company development that need distinct sets of people. 1. Pioneers who can survive and search for a successful direction.

I feel like there are four stages of company development that need distinct sets of people. 1. Pioneers who can survive and search for a successful direction. 2. Generalists who can take that direction and establish a foundation. 3. Specialists who can take that foundation and build something that can succeed on a large scale. (I don't like the Specialist label, but I couldn't think of a better one.) 4. Optimizers who can grow and refine a large-scale business. Many companies (Microsoft, for example) make the mistake of promoting themselves as a stage 1 or 2 company when they function like a stage 3 or 4 company. They keep looking for Pioneers who are going to be unhappy and quit after a year when what they really need are Optimizers. It's not that later-stage companies can't benefit from having and keeping Generalists, it's just that the company is too large to be doing the things that Generalists enjoy. They don't need somebody who can build a server one day and code a new contact page the next. They need somebody who will spend six months working on a project that makes a certain kind of transaction 10% faster.

mathattack 13y ago
I'd add a 5th. "Maxing the value of a mature or declining business." Many companies overinvest on #4, when the business has moved to step 5. IBM played this very well. Blackberry, perhaps not so well.
- jtbigwoo 13y ago
  Good point! Just because a business isn't growing doesn't mean it needs to shut down immediately. There are still companies that make buggy whips.
- wtvanhest 13y ago
  I'd argue that what IBM did well was build a consultancy business. That is where a lot of their growth came from over the past 5 years. Their core business is being used as a cash cow and brand for their new business.
  - mathattack 13y ago
    True. I view the move to services as a way of monetizing the brand. Historically their HW and SW weren't always the best, but people knew you could call their support with a problem. Now they've found a way to get paid for the support as demand for their big iron shrank. They've done a lot of acquisitions too, but not wasteful ones. They still do share buybacks every year, which suggests they know their place as a shrinking company, so they invest profits in shrinking the amount of outstanding shares. You know something is up when Warren Buffett is investing in them. :-) Compare this to other mature tech companies who blow away all the shareholder wealth once the growth stops.
    - wtvanhest 13y ago
      Yeah, I've found that companies are usually bad at knowing when to buy back shares. I'd usually prefer them to just pay a dividend, but you are definitely correct that they [IBM] are much better with being shareholder friendly than a lot of tech companies. I really like the framework proposed by the OP and added by you. [Added] IBM
      - mathattack 13y ago
        Dividend paying stocks outperform non-dividend payers over time, so you're on the right track. Giving the owners their money back keeps mature firms from wasting it. (This is very different from high growth firms who have a high cost of capital) The upside on buying shares back is that it doesn't force people to reinvest in the company - it just shrinks the ownership base as the company shrinks. The OP deserves the credit. He did the harder thinking.
        wtvanhest 13y ago
        When I said dividend, I should have specified 'special dividend' one that is paid out once in a large cash payment. "The upside on buying shares back is that it doesn't force people to reinvest in the company - it just shrinks the ownership base as the company shrinks." That upside is really not important for professional investors when dealing with mid cap or larger companies. Assuming best case that management teams are genuinely looking out for shareholders rather than inflating the stock price for their options, management teams are not very good at predicting when their own stock is under/over valued. Most investors want them to return cash to shareholders in most cases as liquidity for companies like IBM is so big that it doesn't matter if they must buy back shares. Since it is professional investor's jobs to value the share price, they are in a much better position to decide whether the share should be bought or not. Also, dividend stocks have supposedly performed better over history, but dividends is not a recognized alpha factor by the main finance research relied upon by market participants(1). Dividends go in and out of favor depending on a number of factors, right now, its probably the market's expectation of raising rates set against the background of increasing demand for income. Professional investors like dividends because they can simply put that money to work somewhere else. (1) There are papers that say dividends are a factor, but I'm not aware of one that is widely implemented. Anything beyond fama-french's 3 factor model doesn't have widespread acceptance yet. There are a number of other models in use, especially by quant funds, but they are not public and tested in public.

mathattack 13y ago

I'd add a 5th. "Maxing the value of a mature or declining business." Many companies overinvest on #4, when the business has moved to step 5. IBM played this very well. Blackberry, perhaps not so well.

jtbigwoo 13y ago
Good point! Just because a business isn't growing doesn't mean it needs to shut down immediately. There are still companies that make buggy whips.
wtvanhest 13y ago
I'd argue that what IBM did well was build a consultancy business. That is where a lot of their growth came from over the past 5 years. Their core business is being used as a cash cow and brand for their new business.
- mathattack 13y ago
  True. I view the move to services as a way of monetizing the brand. Historically their HW and SW weren't always the best, but people knew you could call their support with a problem. Now they've found a way to get paid for the support as demand for their big iron shrank. They've done a lot of acquisitions too, but not wasteful ones. They still do share buybacks every year, which suggests they know their place as a shrinking company, so they invest profits in shrinking the amount of outstanding shares. You know something is up when Warren Buffett is investing in them. :-) Compare this to other mature tech companies who blow away all the shareholder wealth once the growth stops.
  - wtvanhest 13y ago
    Yeah, I've found that companies are usually bad at knowing when to buy back shares. I'd usually prefer them to just pay a dividend, but you are definitely correct that they [IBM] are much better with being shareholder friendly than a lot of tech companies. I really like the framework proposed by the OP and added by you. [Added] IBM
    - mathattack 13y ago
      Dividend paying stocks outperform non-dividend payers over time, so you're on the right track. Giving the owners their money back keeps mature firms from wasting it. (This is very different from high growth firms who have a high cost of capital) The upside on buying shares back is that it doesn't force people to reinvest in the company - it just shrinks the ownership base as the company shrinks. The OP deserves the credit. He did the harder thinking.
      - wtvanhest 13y ago
        When I said dividend, I should have specified 'special dividend' one that is paid out once in a large cash payment. "The upside on buying shares back is that it doesn't force people to reinvest in the company - it just shrinks the ownership base as the company shrinks." That upside is really not important for professional investors when dealing with mid cap or larger companies. Assuming best case that management teams are genuinely looking out for shareholders rather than inflating the stock price for their options, management teams are not very good at predicting when their own stock is under/over valued. Most investors want them to return cash to shareholders in most cases as liquidity for companies like IBM is so big that it doesn't matter if they must buy back shares. Since it is professional investor's jobs to value the share price, they are in a much better position to decide whether the share should be bought or not. Also, dividend stocks have supposedly performed better over history, but dividends is not a recognized alpha factor by the main finance research relied upon by market participants(1). Dividends go in and out of favor depending on a number of factors, right now, its probably the market's expectation of raising rates set against the background of increasing demand for income. Professional investors like dividends because they can simply put that money to work somewhere else. (1) There are papers that say dividends are a factor, but I'm not aware of one that is widely implemented. Anything beyond fama-french's 3 factor model doesn't have widespread acceptance yet. There are a number of other models in use, especially by quant funds, but they are not public and tested in public.