Rich man, poor firm

Michael Porter, the Harvard strategy professor, often asserted in his many writings that it is common to see company owners in developing countries enriching themselves by siphoning off profits and dividends, and investing in non-core-business activities, which limits the growth potential of their companies as they are left with little capital for expansion.

One is reminded time and again in Jordan of this observation. It is pervasive, and addressing it would be the greatest single achievement of economic reform.

Businesspeople in Jordan tend to own many unrelated
businesses.

Typically, one would see a family that owns a farm, a bank, a factory, a gas station and a hotel. Yet none of these businesses would be in synergy with the other businesses.

In other words, being successful in one form of business does not mean that the skill and experience is transferable to other businesses, and thus there are no economies of scope (lowering the average cost by being involved in producing more than one good or service).

And when the company tends to do well, businessmen immediately become real estate moguls as they plunge their earnings into real estate investments.

Typically, the original business remains vulnerable to market fluctuations and has little support based on its historical success as the business cycles create ebbs and flows in terms of revenues and profits.

Usually, a businessperson would compliment himself for not having reinvested into his core business but gone instead into a portfolio type of diversification, while he may have contributed through his own actions to the mayhem of his business.

Mark Twain put it so brilliantly in Pudd’nhead Wilson’s Calendar: “Behold, the fool saith, ‘Put not all thine eggs in the one basket” — which is but a matter of saying, “Scatter your money and your attention”; but the wise man saith, “Pull all your eggs in the one basket and — WATCH THAT BASKET.”

Twain’s comment should be a golden rule for specialising production, gaining superior knowledge and expertise, and becoming competitive.

Ignoring such a requisite, which is consistent with what Porter advocated, means that one opts for lower returns and mediocre performance in exchange for a safer investment.

So why is such a common sense rule not followed?

The answer must be that there is little trust in the business environment, which encourages all people to diversify and not expand.

This goes far beyond the fact that the market in Jordan is small; it is small because, among other things, businesspeople keep it small.

Furthermore, some may say people go into real estate and ignore their businesses because, in addition to real estate being almost risk and bureaucratic hassle free, the rate of return on real estate has been highest among all investments in Jordan.

This is true for the most part; however, the real estate market has been made lucrative as people shied away from other investments and because the business environment is not so vibrant, thus there is a self-fulfilling hypothesis here.

Fixing the business environment and making it predictable, stable, institutional and modern would change the portfolio approach to doing business in Jordan.

It would also address the tendency to impoverish the firm to enrich the CEO.

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