Century Champions

By Christian Stadler

The obsession with quarterly earnings and the inability to learn from the past are probably the two most dangerous trends in finance today. In a study of firms which survive the Great Depression, two World Wars, the Oil Crisis, and the recent Financial Crisis I offer five big ideas how firms can succeed in the long run. It is a story of intelligent conservatism that emphasises the efficient use of resources and a cautious approach towards change.

“No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.” On March 11, 2008 Jim Cramer appeared confident that the New York investment bank will be just fine when a viewer of his CNBC show Mad Money wanted to know whether he should pull out his money. Three days later the Bear Stearns’ stock price fell 92%. Jim Cramer did not look good that day. At the same time he cannot be brushed off as a clueless TV host. Starting of as a stock broker for Goldman Sachs he soon found his own hedge fund in 1987. 14 years later he retired with a commendable track record of 24% average annual return. Jim Cramer made a mistake that is all too common in the world of finance. He offered definite predictions and on top of this did so based on a few financial ratios.

While I do not dispute the importance of key performance indicators I am not comfortable with the notion that they capture a company’s current state of affairs, let alone its future potential sufficiently. In order to achieve this, an understanding of a firm’s business environment, as well as its strategic direction and the ability to implement it is required. “Modern strategy research emphasises that companies succeed if they find a unique position that competitors are unable to copy.” Still, this does not rule out the possibility to offer broad directions. In search for these broad directions I started a research project in 2003. Together with a team of eight (three PhD students and five graduate students) I compared nine 100 year old European companies which outperformed the stock markets by at least the factor 15 over the last 5 decades with nine competitors which were less successful. Our intention was to identify how firms were able to stay aligned with their business environment and hence successful for decades. Five ideas emerged which should help companies to set priorities and investors to pick companies which are on track to enduring success. As a note of caution I want to add that also the Century-Champions were sometimes beaten by their competitors – though they prevailed in the long run.

Idea #1: Exploit before you explore

At the beginning of the 1990s Netscape revolutionised the internet. Its browser held market shares of up to 90%. When Microsoft introduced a technically inferior product in August 1995 this seemed a rather foolish move. To everyone’s surprise Microsoft’s efficiency beat Netscape’s superior product. Microsoft integrated the Internet Explorer with its existing Office product for free and consumers had no longer a reason to install the Netscape Navigator.

This is all too common. “Contrary to what most business magazines seem to suggest, breakthrough innovation is not a guarantee for success. Rather than focusing all their efforts on exploring for new ideas companies should spend sufficient time and resources on exploiting existing ideas and products. The battle for dominance in the ulcer medication market illustrates this point very clearly.




In 1976 SmithKline’s introduced the first ulcer medication, Tagamet. As prior to Tagamet the patients had to undergo surgery, the new drug became an immediate best-seller. Five years later Glaxo launched Zantac. Without any apparent medical advantages over Tagamet conventional wisdom suggested to use a lower price to capture a fraction of the market. But Glaxo decided to use the doctor’s familiarity with the new type of ulcer medication to its advantage. The company provided an aggressive sales force with the perfect argument when they charged a premium price. In addition they partnered with Roche in the US, to muster enough boots on the ground. The combination of these relentless efforts paid off. Although SmithKline invest heavily in R&D and generated more patents during that time, Glaxo beat them in terms of revenues and profitability. In short, exploitation beats exploration.

Rather than focusing all their efforts on exploring for new ideas companies should spend sufficient time and resources on exploiting existing ideas and products.

Idea #2: Diversify into related businesses

In August 1824 a new fire insurance corporation was registered in Aachen. Lead by David Hansemann the new firm quickly established itself in a highly competitive market. Not unlike today many insurance companies were dragging their feet when claims were submitted. Hansemann took a different approach. To highlight his intentions he committed 50% of profits to charity. In 1842 the company quickly paid up after a big fire in Hamburg. Although the claims surmounted to 320.000 Taler and resulted in financial difficulties, premiums increased sharply in subsequent years as customers understood that they could rely on the Aachener Feuer-Versicherungs-Gesellschaft.

In short, the future looked bright. Still, the company did not achieve the same status as Century-Champion Allianz. Why?

The main issue was the positioning. For decades the company stuck to fire insurance products. Even the first attempts to broaden its scope were merely targeting other products at the familiar agrarian customer segment. Only 99 years after the registration in Aachen serious diversification took place. The company missed the greatest opportunity the industry ever saw: industrialisation. In contrast, Allianz expanded diligently and continuously right from the start to cover the entire scope of the insurance industry.


Idea #3: Remember your mistakes

Planning to introduce a new knowledge management system? Don’t waste your money. Despite Facebook and Twitter personal contact still matters! For example, when a drilling engineer in the Gulf of Mexico is in trouble he will hardly look for a computer system to note down his thoughts. He will make a call instead as it is much easier to discuss the issue with someone else (particularly an acquaintance).

If you want to solve less specific problems you are even less likely to refer to knowledge-management systems. Tacit knowledge is probably best shared via stories. Companies love to tell heroic stories. The salesperson of the year receives a bonus and the boss brags how the team pulled out of a tight spot together. Such symbols and stories are important. They motivate and provide direction.

At the same time we know that not everything turns out as envisioned. A crisis is easily forgotten. That’s not surprising. Who wants to remember mistakes? Mistakes, however, provide a unique learning opportunity. What’s more, heroic stories from headquarter are often met with cynicism while employees will be more receptive for lessons drawn from a crisis.

Century champions are prepared to learn from their mistakes. Take the case of Shell. Prior to World War II Shell was led by Sir Henri Deterding. Deterding’s strong personality and impressive record gave him a position of unchallenged power. Unfortunately it also put him into a position to consider financial and moral support for Adolf Hitler, whom Deterding saw as the man most likely to stop communism. Luckily for Shell, Deterding retired in 1936 without making any embarrassing commitments. The company did not forget its narrow escape. In 1964, the board rejected advice from McKinsey & Co. to install a powerful American-style chief executive officer. Instead, they opted for a Committee of Managing Directors (CMD) to lead the company as a collective. While this was never popular with the outside world, it allowed the company to develop more balanced decisions and remain one of the world’s most successful corporations throughout the second half of the 20th century.


Idea #4: Manage your finances conservatively

Unless you’re a historian, you have probably never heard of the Fuggers, a German merchant and banking family. In the 16th century, though, they were the reigning masters of the universe. The Fuggers bankrolled Europe’s greatest empires and had a particularly close relationship with the Habsburg family. In the mid-16th century Anton Fugger decided that none of his successors was capable to lead the business empire in the future and started to distribute the firm capital to his heirs. His intention was to wind down the firm’s activities. Yet his intention was only reflected in the reduction of capital. The Antwerp office continued to write large loans and when Charles V started a new war against France, the Fuggers were fully back in business. When some of their customers, decided not to repay the Fuggers racked up substantial losses. They no longer had the capital to sit out a series of crisis. A rapid decline was set into motion.

This is a fate all too familiar. Companies are under constant pressure to grow. Great companies understand that this cannot be done at the expense of solid financials. In the 1920s top company Siemens for example valued its assets in a much more conservative manner than AEG. This allowed Siemens to handle the Great Depression much more effectively. After the Second World War AEG continued its more aggressive stand and pursued growth at all costs. The company vowed to match Siemens in terms sales but did so at the expense of profits. Year after year their obligations increased and eventually they were unable to avoid bankruptcy.

“At the moment the memory of the recent financial crisis is still fresh but sure enough as time passes analysts will increase their call for aggressive expansion.” Those companies intending to succeed in the long run are well advised to resist.

Companies are under constant pressure to grow. Great companies understand that this cannot be done at the expense of solid financials.

Idea #5: Manage change in culturally sensitive manner

Consider the following scenario: An email from headquarter pops up in your inbox announcing a substantial transformation. Everything will be turned upside down as neither structures nor culture seem appropriate any longer. A few days later the CEO passes by to lay out the vision. Everything, of course, will become better. Workshops will follow and you will join a new department. Not unlikely you and your colleagues will be sceptical. Why is everything that you have done up to now supposed to be wrong? Restructuring will disrupt operations. In any case you have done your job successfully for more than 20 years and can probably sit out the CEO who will move on in a couple of years.

Does this sound familiar? Leaders often introduce new ideas without considering existing traditions. This is most likely the case if the person comes from outside. Although the new ideas might be perfectly sensible no transformation will succeed unless employees are won over. In 1962 AEG appointed a new CEO with strong ideas but little time for traditions. The result: many of the most capable and experienced managers leave. No substantial changes materialize and the managers surrounding Hans Heyne are referred to as ‘Heyne’s Würstchen’ (Heyne’s little sausages).

Companies are well advised to take existing cultures and traditions into account. New ideas will not flourish if they are ignored.

Around the same time Century-Champion Siemens successfully transforms taking a culturally sensitive approach. In 1965 a merger between Halske and Schucker, the low and high current power business respectively, is announced. The company takes four years before they implement the merger, allowing for the engagement of employees. Even then, subcultures are allowed to remain. For years this has been captured by referring to the “Männer von Schuckert und die Herren von Halske” (the men of Schuckert and the sirs of Halske). Arguably the convergence was only completed in the late 1980s when another transformation process was initiated. At the same time this allowed for a successful transformation with substantial changes and continuous commercial success.

Companies are well advised to take existing cultures and traditions into account. “New ideas will not flourish if they are ignored.“

I see two dangerous trends in the world of finance at the moment. Firstly, the obsession with quarterly earnings and secondly, the inability to learn from the past. My study was an attempt to confront these two issues. While the ideas might seem inappropriate today, I want to emphasise that these ideas helped companies to survive the Great Depression, two World Wars, the Oil Crisis, and the recent Financial Crisis. They also helped them to successfully navigate the introduction of new technologies such as television, air travel, and the internet. While these ideas might not pay off in the short run, there is no reason why they should not allow companies to handle new challenges in the coming decades.

About the Author

Christian Stadleris Associate Professor of strategic management at Warwick Business School. He is the author of Enduring Success. What we can learn from the history of outstanding corporations. http://www.enduringsuccess.com

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.