A friend recently asked me how to build a 100-year-old sustainable company. I thought about it for a while and decided to invoke the assistance of my trusty googlizer to look up the oldest business in the world. Kongo Gumi, the oldest, continuously operating corporation in the world came up.
Established in 578 AD in Osaka Japan, this construction company remained in family hands for 40 generations. Certainly, I could glean some insight from this success story. But alas, the story had an unhappy ending. Kongo Gumi dissolved into bankruptcy in 2006.
After considering all the textbook methods of analysing company success from strong competitive advantage, to erecting and fortifying barriers to entry, investing in better ways of producing your goods and services, establishing a strong brand or reputation and focusing on growing markets, I had generated a list in my head of rather un-instructive dribble.
According to leading investors, the keys to building a long-term successful business revolve around building something you understand, that you do better than the competition and that your market wants, needs and is able to pay for, at a price level that generates profits for you. Simple. But Kongo Gumi did all this for many generations. They built the first Buddhist temple in Japan. They were the first Japanese construction firm to use cement in their buildings. They were first to use CAD/CAM technology in Japan. So, what went wrong?
There may be all kinds of operational, market and or management issues that complicate the picture. Throughout the whole 1,400 years of this company with hundreds of leaders, not one of which had an MBA, some added value and others detracted. Some left the company stronger than when they started and some left the company weaker. That could be measured in dollars and sense by the ledger or stacks of cash in the safe. But the company survived. It was sustainable.
What was critical, throughout these years, was that cash flow had to be positive, more often than not, or management would begin to eat into reserves previously built up. Throughout these years, there must have been periods of great abundance and periods of great scarcity. And in the end, what we know, is that cash flow was sacrificed enough that they were running out of reserves.
The owners were motivated to gamble the company’s future on excessive, unsustainable and unsupportable debt. When tough market conditions hit in 2006 the company was forced to declare bankruptcy and be taken over by another construction company. The company had survived 1,300 years of poor market conditions by focusing on cash flow. And in the midst of the greatest building boom in Japan, Kongo Gumi did not focus on the cash flow.
Cash flow is the common variable among all companies that must be positive, more than negative, to ensure survival. This might be the most important variable to monitor to ensure long-term viability of an organization. When cash flow is declining, work backward to figure out why and how to improve or your company will not be sustainable and thrive.
Michael Cooper offers a research service to help people invest in 100-year-companies. To learn more about his research newsletter email [email protected]
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