Making the numbers?
Subtitle: "short termism" & the puzzle of only occasional disaster
By: Hazhir Rahmandad, Nelson P. Repenning, Rebecca Henderson
Contributors: Repenning, Nelson P., author; Henderson, Rebecca, author; Harvard Business School
Series: Working paper / Harvard Business School -- 15-027; Working paper (Harvard Business School) -- 15-027
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 46
Description: Much recent work in strategy and popular discussion suggests that an excessive focus on "managing the numbers" -- delivering quarterly earnings at the expense of longer term investments -- makes it difficult for firms to make the investments necessary to build competitive advantage. "Short termism" has been blamed for everything from the decline of the US automobile industry to the low penetration of techniques such as TQM and continuous improvement. Yet a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investment to manage earnings and are rewarded for doing so. This paper presents a model that reconciles these apparently contradictory perspectives. We show that if the source of long-term advantage is modeled as a stock of capability that accumulates over time, a firm's proclivity to manage short-term earnings at the expense of long-term investment can have very different consequences depending on whether the firm's capability is close to a critical "tipping threshold". When the firm operates above this threshold, managing earnings smoothes revenue and cash flow with few long-term consequences. Below it, managing earnings can tip the firm into a vicious cycle of accelerating decline. Our results have important implications for understanding managerial incentives and the internal processes that create sustained advantage.
Notes: "October 2014" -- Publisher's website.

Includes bibliographical references (pages 36-38).