A quarter-century ago, in June 1986, the stock traded at about $8.60. It went more or less sideways for twenty years, during which time the company beat back Japanese competition (as the legendary CEO Henry Schacht put it through an agonizing decade of restructuring and process improvement), regained profitability, and lost it again due to ill-begotten new product lines and renewed operational problems. If you finally lost patience and dumped the stock in early 2003, you'd have gotten six or seven bucks a share and a small tax write-off to ease your pain. And you'd have missed the subsequent eight-year run that has taken the stock to about $110 today.
Talk about managing for the long-term! But it made me wonder: When it comes to investing--or strategy--how do you know whether you are being patient or passive? I heard the Cummins story at a conference on corporate governance at the Kellogg School at Northwestern University. Most in the audience were members of corporate boards. The moral was that directors and senior executives should fight the forces of short-termism and drive with patient relentlessness toward the strategic horizon. But what if that horizon is a mirage? At dinner afterwards, a bunch of us listed famous growth companies--their CEOs celebrated in cover stories in Fortune, their choices described in cases at Harvard Business School--whose performance over the last ten years would sorely strain even the most far-sighted observer.
There was Cisco, whose stock tumbled after the dot-com/telecoms crash and hasn't moved since: $19 a decade ago, $17 today. Wal-Mart is another sideways wonder, ambling from $49 to $56. And a trinity of downward-facing gods: Dell ($26 a decade ago, $16 now); GE ($37 to $20); and Microsoft ($36 to $25). (Disclosure: I own three of these stocks now and at one time or another have owned all five.) To be sure, stock price is far from the whole story of performance. As Rotman Business School dean Roger Martin points out in his brilliant new book Fixing the Game, Microsoft's real earnings have tripled in the period while its stock (somewhat diluted) has sagged.
Still, whether you're talking stock or strategy, ten years is a long time. When great companies stall like this, one or both of two things has happened:
A company once able to out-execute its rivals has lost that edge. Compeitors always nibble away at an execution gap, encroaching on what Michael Porter calls the "productivity frontier." That's a huge threat to companies whose growth story was built on less on strategic differentiation than on operational superiority, like Wal-Mart and Dell. (Toyota, too.)
A company needs a new strategy and business model, because the old one no longer cuts it. Microsoft is the clearest example here. Something is strategically awry when a great B2B company is stalled in the workplace and kicking butt in the recreation room. The Beast of Redmond was wrong-footed by the Web and again by mobility and the cloud. It'll be interesting to see if Microsoft's Nokia and Skype deals are part of a transition to a new business--computing model less dependent on the desktop, or if mobility and video conferencing merely become sidelines--or annexes of Office.
Whether rooted in operations or strategy, growth stalls are scary: Many companies never pull out of one. It's extremely difficult to build a whole new operating model. What Wal-Mart once did to Sears-moved to a whole new plane of operational efficiency-Amazon has done to Wal-Mart. It wasn't a matter of talent-ironically, Amazon built a whole new kind of retailing partly with IT and logistics talent it hired from Wal-Mart. Dell, too, had an operating system that was the envy of its industry and a role-model for the world; but, with that advantage competed away, the first great e-commerce company has so far failed to find another way to win.
As for strategy, look at Cisco and GE. Cisco was clearly right to see that there was a fortune to be made in consumer networking and products. (Just ask the folks down the road in Cupertino at Apple.) For Cisco, though, this was a false adjacency; it couldn't win that game and, in trying, the company sacrificed strategic coherence. That is what John Chambers needs to rediscover, not just by divesting what doesn't fit but by finding new growth in the company's sweet spot, which is creating networks that link big systems, whether in companies or complex ecosystems like an urban infrastructure. GE, for its part, has spent a decade repositioning its ginormous portfolio--radically remaking GE Capital and organizing its industrial businesses around the themes of sustainable infrastructure and health care. It's not coincidental that infrastructure is the single biggest business opportunity in emerging economies and health care the biggest in developed ones.
Which of those stocks would you buy, sell, or hold? Which of those managements would you stand behind?