Performance impact of long-term approach to business
We are interested in research from McKinsey Global Institute and FCLT Global lends considerable weight to the idea that organizations that take a long-term view tend to outperform those with a business plan focused on short-term goals. Out of the group of 615 non-finance, publicly-traded companies with at least $5 billion in market capitalization in one year, just over one-fourth, or 164, were identified as long-term. This was determined by comparing them with 451 similarly-capitalized firms on metrics such as: Performance impact of long-term approach to business
- The ratio of capex to depreciation;
- Accruals as a share of revenue;
- The difference between earnings growth and revenue growth;
- The difference between earnings-per-share growth and true earnings growth; and
- The incidence of beating or missing EPS targets by less than two cents.
To eliminate sources of bias, the researchers compared companies with their industry peers in similar environments over several years. Their findings? Between 2001 and 2014, long-term companies outperformed the others in their group reflecting short-term values in the following ways:
- Increased their revenue by 47% relative to the others;
- Increased their earnings by 36% relative to the others; and
- Revenue growth experienced less volatility relative to the others over the study period.
As well, the financial crisis of 2008-2009 had less effect on long-term businesses’ R&D expenditures. Between 2007 and 2014, their spending grew by 8.5% a year, compared to just 3.7% annualized R&D spending for short-term companies. Another measure that backs up the contention that long-term thinking leads to tangible financial rewards: long-termers’ economic profit was 63% higher than their peers between 2001 and 2014.
Taking their analysis a step further, the researchers predicted that if the companies engaged in short-termism acted like the long-term cohort, an extra $1 trillion in economic activity would’ve been generated in the U.S. between 2001 and 2015. The analysis, they said, didn’t enable them to state that short-term thinking is detrimental to a company’s bottom line or that there was causation between long-term thinking and better financial performance. A more robust analysis of their theory would come from broadening the scope of the study to include longer timelines, more markets and varying types of businesses.