In the early 2000s, a lot of firms believed that growing monthly turnover was more important than making profit.. After an OECD meeting that I had attended in Izmir, a businessperson came to me and told me that they were producing and selling goods like crazy, but they were not making any profit at all. However, the basic rules of the economics tell us that “producing in great numbers” is not the prerequisite to making profit.
The “law of diminishing returns” states that increasing the production volume by disrupting the balance between the factors of production, while holding all others constant; will at some point result in lower output, hence causing the company to suffer losses.
Despite this very fact, the size of the companies has been the top appealing factor to Banks and Financial Institutions in the 1990s.. Their profit margin, on the other hand, remained a secondary matter for two apparent reasons: First, they thought that a company would eventually make profit if it was large enough. The other reason involved something that was well known by all but hardly uttered: “Those companies don’t declare profit properly in order to avoid paying taxes anyway. So, we should better focus on their turnover.” Well, it was sad… but true.
This twisted mentality of both companies and financial institutions paved the way for 1994 and 2001 financial crises. Up to that date, Turkey hasn’t been able to create a globally known brand. Well, we still don’t have one today either, but we have hope.
Then, something happened. Instead of achieving a big turnover, increasing the market capitalization by growing the number of salespoints became the top goal for companies in the early 2000s. This commitment gave birth to the adoption of a new policy among the companies, under which they increased their production capacity despite the existing supply chain challenges, grew unsustainably using loans with low costs, low down payments, and finally had their shares listed on a stock exchange.
So, instead of resilient, strong, and healthy firms, the fat ones were born due to this policy that dominated the markets in the 1900s and early 2000s. Having realized that they will never become a global brand, some holdings integrated acquired brands into their portfolios, while some tried to become a global brand by increasing their export volume and buying manufacturing facilities abroad. And the rest continued to get fatter and fatter.
I always tend to smile whenever people ask me why Turkey cannot create any global brand. The way to become a globally known brand has nothing to do with the size of the company. On the contrary, if you want to become a global brand, there are a few essential qualities you have to have in the first place, such as the ability to survive in the face of financial challenges, to build a strong and respected company history, a sense of responsibility towards customers, ability to establish effective communication and good relations with suppliers, obviously, good morals and a high sense of ethics, ability to produce and deliver goods and services that match the national and international, constant innovation, staying up-to-date with the latest technology, choosing the right type of human capital, an effective financial management, transparency, an organisation operating just like an orchestra, and finally good governance skills.
“From Fat and Lazy to Healthy and Strong Companies…”
Obviously, the fact that you have all of these qualities doesn’t mean that you will become a brand.. But at least, you can have the chance to cease to be a fat and lazy firm. The fat firms who are comfortable in their own niche tend to draw power from politics, foreign trade regime, even from the informal economy just to be able to avoid competition. This way, they gain access to financial resources; quite undeservedly, they are given the opportunity to meet all consumer demand alone; they are provided with undeserved incentives, and sadly, they are causing Turkey to lose reputation because of their incapability of creating value.
Based on my experience, I can tell you that financial institutions are too well and forgiving when it comes to such firms. In Turkey, there are a lot of fat and lazy firms that are indebted more than their assets will pay, let alone making profit.
The sad thing is that the way company executives manage their own health is quite similar to the way they manage their own companies. Turkey has Europe’s highest rate of obesity. In a survey that reveals the number of “people who spend 2 hours a week exercising”, Turkey ranks last overall compared with other OECD member countries. So, regardless of scale and age, most people and companies in Turkey are all fat. Only 1% out of nearly 2 million companies follows the basic principles of organic growth.
Due to this approach in Turkey, “doing business without money, only with cheques”, the companies had the opportunity to grow their businesses without needing the capital. But sadly, they haven’t created any value at all. When we consider the fact that the average value of Turkish exports per kilogram is around USD 1, we can see the gravity of the situation.
But enough with criticism of these companies, I also have a couple of advice for them, such as the following:
- Initially, create the right planning and capacity for financing and supply; stick to their plans, ignoring all conjunctural ups and downs.
- Hire high quality employees; listen to the professionals with better educational background than the top executives, give them initiatives to lead.
- By using the good governance, develop an inspection mechanism that will not interfere with the professionals’ way of doing their jobs,
- Choose the executive board members among people with core critical and rational thinking skills,
- Avoid undertaking endeavours that must be delivered by the next generation,
- Focus on preserving the company’s good reputation, rather trying to make money first,
- Achieve optimum growth and ensure the instantaneous monitoring of risks by making use of high technology,
- Avoid launching too many companies in order to stay financially strong,
- Never use company funds for personal expenses,
- Always attach the utmost importance to justice and education.
The companies that do not follow these golden rules will always be doomed to fail as a fat and lazy entity. I think it would the smartest behaviour for big companies to consider themselves as the closest candidates that can become a brand and act accordingly.
I wrote this article when the pandemic started, around late March. I guess that still holds true. You will find many articles like this one in my latest book “Re-Introduction to Economics”.