So Marks and Spencer goes back to basics. Its story is a paradigm of what happened to British business in the last decade - and a pointer to what may happen next. The company is widely criticised for not having changed with the times and there is a sense in which that is right. But in a deeper sense the problem is not that Marks & Spencer (M & S) changed too little but that it changed too much.
A decade ago, M & S was one of the British businesses most admired by its customers and competitors alike. But the company's market position was essentially mature. All across Britain, there was ready access to an M & S store. The company's core market for mid-range, practical clothing was not likely to expand much. There was more scope for growth in its food products but it met greater competition there. You could reasonably expect the company's sales and profits to grow in line with national income. A little faster, if M & S could diversify its activities and extend the scope of its powerful brand. A little more slowly, if its competitors got their act together. But the 5 per cent or so annual growth in profits implied by that picture was not enough to satisfy the stock markets of the racy 1990s. A premium rating demanded double-figure earnings increases. Was it possible that a business of the quality of M & S could not match that kind of target?
Of course it could. You can always squeeze a bit more out of any business. M & S increased its margins. It cut numbers at headquarters and limited the growth of its sales staff. It spent a bit less than it might have done on store enhancements. And, above all, it put pressure on the close supplier relationships that had been the traditionally distinctive feature of the M & S business system. And so the company delivered the kind of earnings growth the markets required - for a bit.
Eventually customers started to notice that value for money was not quite as good as it had been, that you had to wait to get the attention of a sales assistant, and that the shops were dowdy and so was some of the merchandise. These impressions accumulated. Gradually, the positive M & S anecdotes were replaced by negative ones. Suddenly the company's reputation fell off a cliff - and so did its profits.
It once puzzled me that in almost every business I encountered, a capable manager told to trim costs or staff by 10 per cent could easily find ways to do so. Could there really have been so much slack across so many areas of the corporate sector?
The answer is that in almost every business there are balances to be struck on the matter of service. How often should Railtrack inspect its rails and how frequently should it replace them? How large a sales force does a pharmaceutical company need and how much duplication and freewheeling enquiry should it allow in its research and development activities? How many customer service people do you need in a bank or an insurance company? How much time and effort should you devote to watching what your competitors are doing? Just how competitive does your pricing need to be? All of these are judgments: there is a wide range within which reasonable people and capable managers can reach different conclusions. It is never possible to be sure you have called these judgments correctly, but you can be sure that if you are pressed to shift the balance a little in one direction you will always be able to do it and to justify your decision. And there is the bonus that culling the weakest 10 per cent of an organisation will always improve the average. The problem will creep back - you make mistakes in hiring and some people's performance deteriorates over time, but for the moment you have a tighter, leaner organisation.
The effect of all these decisions is to enhance current earnings at the expense of future returns. It will always be difficult to assess whether the current gain exceeds the future loss; even with hindsight it will be hard to tell. But markets have been slow to recognise that businesses have been accelerating their recognition of profits. Instead, analysts have projected such future earnings growth forward and created expectations that will become ever harder to satisfy. That is why it is not just recession that will lead more companies to produce profit warnings and earnings shocks.
Nemesis will not usually come as quickly - or as abruptly - as it has for Railtrack and for Marks and Spencer. But the lesson of these two companies has implications for everyone. It is that growth in earnings won at the cost of long-run competitive advantage - especially when that competitive advantage is your reputation - will add to shareholder value only for the short time that myopia persists in both the product market and the capital market.
M&S is right to go back to basics. But it will learn that competitive advantage is more easily run down than built up. If it were otherwise, competitive advantage would not be a source of enduring profit for the few businesses that achieve it.
