This is an important distinction, because within this specific context, those who set out to run a business and put a focus on earning a profit ahead of how they earn a profit, will have more difficulty succeeding. The reason they will find success more difficult is that a building and sustaining a successful business requires a longer-term perspective, while placing a primary focus on profit tends to drive a short-term perspective. How much did we earn this year? Can we do better next year? Or worse, how much did we earn this month? Can we do better next month?
A major reason for a short-term focus on profits is that investors and managers want to reward themselves too soon, based on an arbitrary temporal measurement. By doing so, they often place themselves in a direct conflict of interest with their managerial responsibilities. Too often short-term incentives create moral hazard because they encourage actions that result in a diminishing value proposition for customers relative to their many alternative choices in the market. Distribution of profits in the form of wages or dividends to serve the short-term desires of employees can strip the business of needed re-investment of capital required to create and retain customers for longer-term success.
I doing research for my soon to be completed book tentatively titled Thinking Like Disney: The 9 Principles of Walt Disney's Business Success (Theme Park Press, www.themeparkpress.com), I came across this story about two Southern California tourist attractions competing for essentially the same market: Marineland and SeaWorld, that drives this point home.
The story comes from Harrison "Buzz" Price, in his book Walt's Revolution! By The Numbers. Price was a research consultant who specialized in theme park feasibility studies, and who got his start in the business working for Walt Disney in the early 1950s. It is a story about what can happen when entrepreneurs and business executives confuse the purpose of a business, and focus on working for and rewarding themselves ahead of working for and rewarding customers.
The biggest lesson I took away from this exposure to the fearless foursome who managed SeaWorld, was its powerful message on the value of aggressive reinvestment. SeaWorld's true competitor is Southern California was Marineland, located on the Palos Verdes peninsula nearby Los Angeles Harbor. Marineland had opened earlier, shortly before Disneyland opened, and with direct access to the huge Los Angeles County market, much larger than the San Diego market, drew 1.6 million in its first year. Marineland's policy, however, was minimum reinvestment, essentially nothing. The investors, a New York syndicate formed by Henry Harris of Harris Upham, had taken a risk and succeeded. Now it was time to pay off the investors with maximum dividend distributions. To misquote an old hymn, "Yield Was The Temptation". Thereafter, without the benefit of new attractions, attendance went steadily down. It was a dumb policy. They had a great running start, a year ahead of Disneyland, and squandered the opportunity of an early lead in the Southern California attractions business.
And then came along George [Millay], Milt [Shedd], Dave [Demotte] and Frank [Powell], working the same extended market with more or less the same kind of project but located in San Diego, a long way from the heart of the rich Los Angeles market. They reinvested every cent available form cash flow: no dividends, no fancy amenities, and no fancy salaries. SeaWorld, which had started out at the 500,000 level in the mid-sixties had grown to over two million attendance by 1975 and it had hit 3.8 million by 1988.
Meanwhile, Marineland went steadily downward to the 800,000 level by 1971. It could not compete with rapidly expanding SeaWorld. Later on, three or four subsequent owners of Marineland could never find the key to turning the park around by investing in later years with "higher cost dollars" (new investment cost more after a decade and a half of inflation). Marineland closed in 1985. Playing catch up with current money after under investing in prior years is not easy. It was a clear demonstration about the importance of reinvestment that would have made a fine Stanford Business School case study (maybe even a Harvard one)....Walt Disney understood the need to bring his own aspirations in line with those of customers. His ability to always measure his business decisions within the customer framework was one aspect of his entrepreneurial genius. I provide many examples throughout his career in my book.
