Aspire | Action | Acquire
Aspire | Action | Acquire

Profit or Perish

In The Billionaire Effect, John Sviokla and Mitch Cohen explore why existing corporations aren’t creating massive value the way self-made billionaires do[1]. How do most first-generation billionaires create wealth in highly competitive existing markets as opposed to creating entirely new markets like Apple, Microsoft, Facebook, and Google? Why didn’t the existing giants successfully extend their reaches that have come to be dominated by Amazon and Tesla?

In a separate article, it was written that a primary reason for large company failures to introduce blockbuster products and services is that scaling new ideas come at the expense of immediate profits, often beyond the tenure of the existing executive. In economics, this is described in terms of the Agency-Principal problem. The contribution to our understanding that the authors of The Billionaire Effect make is to divide key working partnerships [principals] into the roles of “producer” and “performer.”  This is consistent with the role of partnering between the “Action” and “Acquire” compass points.

The early titans of industry, notably Andrew Carnegie and Henry Ford, made different distinctions to Sviokla and Cohen’s observations. They divided entrepreneurs into “producers” and “promotors.” The promotors comprised bankers and stockbrokers; whose roles typically separated business ownership and management. It is worthy of mention that Frederick Allen, in his 1935 book Lords of Creation, wrote of the era that “Wall Street was a haunt of natural villains, of men of lower principle than elsewhere.”[2]

It was during the depression of 1873 to 1878 that Andrew Carnegie laid the basis of his great wealth. As told by biographer, Burton Hendrick, Carnegie used this time for “improving his plants, scrapping obsolete equipment, installing the most modern machinery, acquiring ore fields on an enormous scale, building railroads, founding steamship lines and developing an executive staff of the highest type.” He did so while his competitors, west of Pittsburgh, were “busy manufacturing stocks and bonds” during what is described as an orgy of stock-jobbing[3].

Henry Ford, not dissimilar to first-generation wealth builders, tells of his experiences during an early 1920s downturn affecting all automobile manufacturers. In his autobiography, Henry Ford wrote of having $20 million in the bank and $59 million dollars in liabilities. The bankers wrote Ford, “did not suggest putting in an engineer [to improve production methods], they wanted to put in a treasurer.[4]” It should be noted that when Henry Ford II took control the family business was financially disorganized; having not made a profit since the start of the Great Depression[5]. Like Carnegie, Ford eschewed Wall Street. Unlike Carnegie, Ford did not distribute the shares of his company.

By contrast, General Motors, which would come under the control of the Du Pont Company, had a share placement of $28 million dollars underwritten by the House of Morgan; for which Morgan took a commission of $600,000 as shares at half par value. Morgan’s partners were wary of GM’s founder, William Durant, and only agreed to the deal, the bank’s first in the nascent automobile industry, because of Pierre S du Pont’s involvement;[6] hence, demonstrating the importance of quality partnerships.

A more recent take on the distinction between producers and promotors, is the 1985 boardroom eviction of Apple’s co-founder, Steve Jobs, after the company became publicly listed and was facing extensive cost blowouts and delays in producing the first Macintosh computer. Unsurprisingly, Facebook, not dissimilar to the Ford family model, and Google’s [Alphabet Inc] founders have maintained voting control.

[1] John Sviokla, and Mitch Cohen, The Self-made Billionaire Effect How Extreme Producers Create Massive Value (New York, NY: PortfolioPenguin, 2014), 2.

[2] Frederick Lewis Allen, and Gretchen Morgenson, The Lords of Creation: The History of America’s 1 Percent (New York: Open Road Integrated Media, 2017), 320.

[3] Burton J. Hendrick, The Life of Andrew Carnegie (London: William Heinemann Ltd, 1933), 378.

[4] Henry Ford, My Life and Work: An Autobiography of Henry Ford (Lockport, N.Y: Snowball Publishing, 2012), 116-120

[5] Richard Bak, Henry and Edsel: The Creation of the Ford Empire. (Hoboken, N.J: Wiley, 2003), 284-5.

[6] Alfred D. Chandler, Jr., and Stephen Salsbury, Pierre S du Pont and the Making of the Modern Corporation (New York: Harper & Row, 1971), 478.