The folly of following figures

Mar 07 2008 by Robert Heller Print This Article

Projections, plans, debates and decisions all depend on the provision and calculation of outcomes – forecast or achieved – gauged in monetary terms.

But how many managers actually pause to consider whether the numbers – even if they are rigorous, honest and well presented – are guiding them and their businesses in the right direction? Perhaps their priorities need to balanced more in favour of innovation.

This quote from the January 2008 Harvard Business Review is worthy of consideration:

"For years we've been puzzling about why so many smart, hardworking managers in well-run companies find it impossible to innovate successfully. Our investigations have uncovered a number of culprits…

"These include paying too much attention to the company's most profitable customers (thereby leaving less-demanding customers at risk) and creating new products that don't help customers do the jobs they want to do."

Further, authors Clayton M. Christensen, Stephen P. Kaufman and Willy C. Shih implicate three financial analysis tools in the conspiracy against successful innovation:

1) Discounted cash flow (DCF) and net present value (NPV) used to evaluate investment opportunities "causes managers to underestimate the real returns and benefits of proceeding with investments in innovation".

2) Considering fixed and sunk costs when evaluating future investments "confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack".

3) Focusing on EPS "to the exclusion of almost everything else" diverts resources away from the investments "whose payoff lies beyond the immediate horizon".

This issue of priorities was covered in my Essential Manager's Manual, recently re-released in a new edition (Dorling Kindersley, £25).

"Successful management," I say, "involves trade-offs and compromises to reach the best decision when several factors are involved. The aim of tradeoffs is to keep short-and long-term risks as low as possible."

You would be making a mistake to think that you can maximise investment and profits at the same time. Taking the long view means that short-term profit must be sacrificed for long-term success.

On the other hand, ambitious expansion plans might sometimes need to be trimmed in order to achieve satisfactory current returns.

Products are affected in a similar way: you can't maximise a car's acceleration whilst simultaneously minimising its fuel usage.

You might well end up with a business that is biased against successful innovation if you try to square this circle. And innovation should be high on your list of priorities in this tumultuous decade of the unfolding 21st century.

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About The Author

Robert Heller
Robert Heller

Robert Heller, who died aged 80 in August 2012, was Britain's most renowned and best-selling author on business management. Author of more than 50 books, he was the founding editor of Management Today and the Global Future Forum. About his latest title, The Fusion Manager, Sir John Harvey-Jones wrote: "The future lies with the thinking manager, and the thinking manager must read this book".