By Philip Cross, September 12, 2022
Many people unquestioningly accept the canard that corporations focus too much on short-term earnings and neglect investing in a long-term vision. Clayton Christensen of the Harvard Business School always claimed firms are too focused on the immediate needs of their customers to make important innovations. Firms that favour “downsize-and-distribute” strategies over “retain-and-reinvest” strategies depress longer-term economic growth.
The economist Tyler Cowen argues in his book Big Business that such criticisms are overblown. There are plenty of examples of firms focusing on long-term results. Most examples of supposedly excessive short-termism actually reflect another firm’s superior ability to anticipate emerging new trends, like Netflix’s innovative model for delivering home entertainment (or at least once-innovative model).
Amazon is a good example of a firm planning for the long term. It did not post its first profit until seven years after its founding and then cycled in and out of profitability for several more years before becoming the world’s dominant retailer by reinvesting its earnings in on-line retailing and cloud computing. Founder Jeff Bezos burnished the myth surrounding Amazon, telling Wired magazine in 2011 that “If everything you do needs to work on a three-year horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”