5. When is a Company (or CEO) Focusing on The Long Term?

Are there metrics that would reveal this perspective?

A question analysts seldom ask, and that many CEOs would perhaps be unprepared to answer, is “What is the time horizon you are managing toward?” It would be interesting to compare the responses of executives to the actions and investments their companies are taking to see how well they match. Companies that have biased toward investment in efficiency innovation (seemingly most large companies!) would seem to be managing toward a very near-term horizon. Conversely, many companies that invest in the next wave of market-creating innovation come under criticism from the investor community. Of course, no CEO would admit that they weren’t focusing on the long term, so how can investors determine whether a company is maximizing its potential versus managing short-term performance?  Are there metrics that exist or should be created to reveal the potential future outcomes of the company?

In BSSE, we devote several class sessions to exploring the proposition that the metrics we use most commonly to judge performance are “innovation killers”— ratios and time-based formulas that systematically discourage investment in long-term growth. Have you come across any performance metrics that provide a window into long-term performance?

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3 thoughts on “5. When is a Company (or CEO) Focusing on The Long Term?

  1. I wonder if a diversified revenue stream is an indicator worth investigating. In company annual reports, one can find the revenue split between different divisions of the company (e.g. Corning’s 3-4-5 framework and its business segments: display technologies, environmental technologies, optical communications, life sciences, specialty materials). Would a wider, diversified spread of business segments be one sign of a company that’s open to exploring new markets and investing in market-creating innovations?

    1. Nate, I think you are right that evaluating the evolution of the mix of revenue streams is critical to understanding whether a company is willing to invest revenue from “old ideas” into “new ideas” successfully. If an “old business” makes up a large percentage of a company’s revenue streams for a very long time, it is possibly the case that the company simply can’t find, or is unwilling to invest to try to find, new revenue streams. The risk, of course, is that old revenue streams eventually exhibit slowing growth or “stall points” to cite the book Derek Van Bever and Matthew Olson published in 2008, as these businesses become commoditized, face increasing competition, and are disrupted by others with better, faster, or cheaper products or services. So, it seems an unchanging revenue mix would, over time, signal a lack of a culture that supports long term investment, and possibly, vice versa.

  2. Though it’s difficult to define an exact metric, I would look for signs that the company has the built the *capability* to create new businesses into its fundamental operations. Does the company have a division dedicated to testing new ideas, identifying new business models, and (most importantly) *scaling* those new businesses without crushing them under the wheels of the existing business? This is not just an “innovation lab” in San Francisco but rather a demonstrated ability to develop (or acquire and successfully integrate) completely new business lines. If I can find evidence of that, I would believe the company is investing successfully in the long term.

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