Family Business Owners Can Use Xerox’s Comeback Strategy to Help Improve their Wealth Management

Published: 18th January 2012
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Some of the greatest business breakthroughs happen when ideas or best practices are borrowed from one industry and applied to another completely different industry. For example, FedEx borrowed the spoke-and-wheel business model from the Federal Reserve banking system. This can also be applied to the financial industry. For example, you could borrow Xerox’s comeback strategy to help improve your personal finances.

Xerox was a dominant player in the copying market having about 86 percent of the market in 1974. By the early 1980s, Xerox found itself in pretty bad shape, increasingly vulnerable to intense competition from both the US and Japanese competitors. It ignored new entrants like Ricoh and Canon who were consolidating their positions and gaining a lot of transaction in the lower-end market and in niche segments. As a result, Xerox’s market share in copiers took a nosedive, having just 17 percent of the market in 1984.

In 1982, David T. Kearns took over as the CEO and began to focus on quality control. He implemented a benchmarking program to combat the competition and regain market share. The program encouraged Xerox to find ways to reduce their manufacturing costs. Benchmarking against Japanese competitors, Xerox found out that it took twice as long as its Japanese competitors to bring a product to market, five times the number of engineers, four times the number of design changes, and three times the design costs.

Xerox went on to become one of the best examples of successful implementation of benchmarking. While family business owners may already be using benchmarks in their business management, very few are using the strategy for their wealth management. For example, benchmarking can serve as an invaluable tool to determine if you are receiving an acceptable rate of return on your investments.

In regards to personal wealth management, family business owners can be benchmarking at least 3 or 4 things, just like Xerox did. On a real high level, owners can compare their portfolio returns to what they need to achieve their goals. Maybe that number is 5 percent, maybe it is 8 percent, but there is no reason to take additional risk and chase returns if the goal does not warrant it. A comparison can not only provide a snapshot of the progress being made, but also provide the business owner the opportunity to make adjustments to the goal or the portfolio as needed.

At the next level, the family business owner can compare the overall portfolio returns to a suitable underlying benchmark. One possibility is to compare the returns and volatility of the portfolio to a similar portfolio of indexes. An index is a small sample of a category that is representative of the whole, it represents the average of the whole. A simplified hypothetical example is that if we have a portfolio of 50 percent bonds and 50 percent stocks we could compare the returns and risk to a portfolio consisting of 50 percent of Lehman Aggregate Bond Index and 50 percent to the Russell 3000 Index.

At the most micro level, owners may also look at the volatility and return numbers of the individual investments in the portfolio. The performance of the underlying investments can be compared to underlying indexes as well as other similar investments in the same category. In general, we would hope that the investments are not only beating the indexes but also in the top half of their class when compared to other similar investments over some acceptable time frame. Family businesses can use these comparisons as part of their decision-making process to help decide whether or not hold to a particular investment.

In wealth management, comparing results to a suitable index or benchmark can help family businesses make smarter choices with their money. Owners should ask their advisor to compare the results to a meaningful benchmark. To be realistic, you are not always going to outperform the benchmarks. But a reasonable expectation is to be close or better than the underlying indexes over long periods of time, say 3-5 years.

Rather than waiting until their personal finances take a nosedive like Xerox did, owners should take action now, talk to their advisors, and start applying benchmarking to their financial strategy.

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