“…you can’t make men work for money alone – you starve their souls when you try it; and you can starve a company to death the same way” – from the movie “Executive Suite” (1954, Robert Wise, Metro-Goldwyn-Mayer)
I had never seen the movie “Executive Suite” until one day last week when I caught the last few minutes on one of my favorite cable stations. In 1954, this masterpiece of a movie captured the essence of the conflict that many companies still face decades later.
Across industries, strategic decisions in many companies are influenced by concerns about the way Wall Street analysts will interpret them. Corporations have focused on short-term gain in the hopes of affecting share price. Auto manufacturers’ incentives, which are designed to pull sales forward simply to make monthly or quarterly numbers, are but one example of this dilemma.
These observations are reflected in a variety of studies on similar issues. Several papers by Mary J. Benner, Assistant Professor of Management at Wharton, assert that Wall Street analysts are reluctant to embrace the innovative efforts of companies when they are designed to expand their technological horizons. The bias is for extending current offerings as opposed to breaking away from the pack. This is remarkable given the fact that one of the top commandments in marketing is that an entity must differentiate itself from its competitors.
Wall Street analysts, of course, are not to blame for the effect they have on a company’s product decisions. Analysts are constrained by the need to be able to quantify the effect of any given action. As such, they must evaluate every decision in terms of its financial impact, particularly the short-term results. Net present value and payback period are critical financial metrics that must be accounted for, and rightly so. That said, corporations cannot live on near-term success alone. Yet leaders are still rewarded for the current month, quarter, or year despite the fact that their short-term success often comes at the expense of the future.
It is up to the management of every company to settle these matters for themselves. Strategic product moves must reflect a willingness to be true to the corporate mission, vision, and strategy. Ultimately, customers will judge such product choices. If leaders take the easy route and construct product portfolios to match analysts’ expectations, they will likely fail to satisfy customers who are the real arbiters of their success. The commitment to the corporate vision must serve as the counterweight that keeps the desire to please financial markets in its proper context. It has to be the overriding factor if a company is going to enjoy long-term viability beyond the next quarter, the next decade, or the next century.