Grow vegetables and fruits.
This is my advice to all the entrepreneur wannabes who have written to me asking me what business they should invest in. Forget about tobacco. That’s a no no for very obvious reasons. If you want to have consistent high returns on your investments over the next 20 years without any guilty conscience, then take my advice and go fruity and go green.
Even though the Relative Industry Profitability Chart (below) is American centric, it is an eye-opener for long-term investors as to which industry they would like to invest in. When you participate in an industry that has a sustainable high returns over long periods, chances are, the majority of the surviving players stay profitable. There is sufficient margin in the whole value chain to keep everyone happy and well-fed.
But if you have owned an airline and you are an inefficient player, then you will be one of the unlucky 80% that has been bleeding non stop for 20 years. All the players along this value chain are suffering. From airlines, aircraft and engine manufacturers to catering units, it is no fun running a business that requires continuous cost cutting to stay afloat.
Why bother to invest into this business in the first place? Why bother to continue investing in an industry where the competitive forces are fierce? An economic landscape so brutally competitive that leads to low levels of industry profitability. These competitive forces are beyond the control of most individual companies and their managers. It is a reality that you have to deal with.
So is MAS flushing another RM6bil down the toilet? What is its net profitability/losses over the last 20 years? What do you think its return on equity will be like (if any) in the next 20 years? AirAsia has been making money in its first 10 years. What about the next 10 years? Is it sustainable? If this RM6bil is from your personal savings, which industry would you invest in? Airline industry or toiletry/cosmetic industry?
In her new book The Strategist published by Harpers Business,Professor Cynthia Montgomery quotes extensively from Michael Porter’sFive Competitive Forces that shape each industry’s competitive landscape differently.
From the nature of rivalry within the industry itself to the balance of power between the industry and it’s suppliers and customers, substitute products and potential new entrants.
The collective impact of these forces on the profitability of individual firm and in turn, on industries in which they operate, is called the industry effect.
Whether you are on your own, running a small business or managing a conglomerate, you have to be an effective strategist.
You must decide where your firm will compete, determine how it will win in those arenas, and build a business model that will deliver the desired results.
And figure out how it will win over the long run. And I assumed that you have decided to invest in an industry that can deliver high return on equity over the next 20 years. Or you will be singing Jackson Browne’sRunning on empty forever.
One last dry fact that I would like to add is strategy. It should not be static. As the external forces change, you should review the relevance of your strategy and if necessary, modify, adapt and adjust. If there is a major disruption in your industry, you might have to re-strategise, re-configure your business model to meet the new challenges and you have to move fast. Or you become irrelevant.
As for me, I am moving out of cosmetics. Ever in search of higher margin businesses, I am looking at the tobacco business. But after an intensive and extensive analysis of the tobacco industry structure, I have come to the conclusion that I am not smart enough to compete with the big tobacco boys and have absolutely zero chance of winning over the long-run.
As such, I have decided to go green and be a farmer. A big time farmer.
I will request from my generous government for a RM250mil loan at 2% interest. Plus an allocation of 10,000 acres of farmland at the foot of Cameron Highlands. I will set up supporting satellite farming communities that will be identified by fruit and vegetable type. From banana communities to kangkong to cucumber,
I will produce every conceivable fruit and vegetables that can be planted in our climate. And I am sure the Government won’t mind if I build an 18-hole golf course right in the middle of the vast farmland. Besides serving as the only recreation outlet for the farming community of Asean origins, I will line the fairways and hazards with mangosteen and durian trees.
Might even introduce a eat as you play programme to Singaporean golfers. A real value for money offer that they just cannot resist.
Never mind that I have no experience in farming nor running a golf club, but I promise to reduce the price of my produce to help lower the cost of living for all Malaysians and will do my best to increase by 40% the total export of fruits and vegetables.
With such noble intentions, I am pretty confident that my small request will be looked upon favourably. In the Malaysian context, I will be lauded as the supreme strategist, laughing all the way to the bank for the next 20 years.