The most common complaint among senior executives is that the short-termism of capital markets and the board, along with the need to meet or beat quarterly earnings, is limiting a company to invest in riskier innovation – but many supposedly game-changing innovation projects that align with long-term business strategies are not getting board level approval.
The short-term performance pressures result in an excessive focus on quarterly earnings, with less attention paid to strategic fundamentals and long-term value creation. Many executives respond to these pressures by cutting research and development and foregoing innovation investment opportunities.
It’s important to manage earnings, but companies must avoid short-termism. By optimizing for the current quarter, can this really impact the strategic health of an organization over time? Believe it or not, it’s actually possible for board members to help management navigate business complexities and push innovation without allowing short-term pressures to undermine the organization’s focus on long-term performance of the firms.
We’re not talking about moonshots here – which is not what the markets want most companies to do – but calculated risk-taking is expected in order for a company to sustain competitive positioning, or to leapfrog the competition. With this inevitable tension, companies need to understand their investors’ expectations.
There is always a dilemma between managing big bets versus EPS. Companies need to track investments and efforts in innovation, rather than discouraging investments because they reduce earnings. These strategic expenses, such as developing IPs, innovation projects, and investment in human capital, need to be reflected properly. We should look at the total economic value add.
Some argue that companies should stop providing corporate earnings guidance. If companies’ revenues and earnings are on a long-term rising trend, they would be more than happy to issue guidance, and for those who are on a decline, they would prefer to avoid it. I don’t think quitting the guidance game is a good idea. Rather, the big story around the value creation model is what is needed to justify any lack of earnings growth. If investors don’t like your guidance, maybe it’s because they are not buying into your long-term plan, or you simply lack a strong foresight-based strategy to manage expectations. I am not ignoring the vast amounts of internal time and energy that goes into ‘making the quarter return’ otherwise can be used for planning and building the futures.
Making long-term bets is hard these days because of the speed of change and technological progress. But if we base our long-term strategy on human behaviour, which is something that doesn’t change easily, it can be a better way to determine your business boundaries and value propositions to justify mid-term investments. Still, long-term investments beyond 7-10 years are hard these days – unless you’re in energy, pharma, or aerospace. The 5 year plan is the new long-term.
Original Post: http://idr.is/the-5-year-plan-is-the-new-long-term-plan/