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Why short-termism could stunt your financial performance

A study conducted by the McKinsey Global Institute has gathered data showing that companies with a long-term strategy outperform their short-termist peers on several financial metrics.

The research group's conversations with c-suite executives suggest that business leaders have come under greater pressure in the past five years to deliver strong short-term results (see graphic below). This has driven companies to use excessively short time horizons in their strategic planning.

Higher R&D spend and jobs creation indicate long-term success

But research by McKinsey now shows that companies with a long-term vision have far higher levels of revenue, earnings and economic profit. They invest more in research-and-development (R&D) than firms with a short-term view and, importantly, they continued to invest in R&D throughout the financial crisis. Firms with longer-term strategies have stronger growth in market capitalisation and also have far stronger jobs growth.

Five factors showing long-term vision and growth

The research acknowledges the difficulties of measuring the phenomenon of short-termism and its impact on financial growth. However, it approached the issue by using five factors to measure a company's long-term outlook and financial performance in its Corporate Horizon Index. The factors are based on patterns of investment, growth, earnings quality and earnings management and the study tracked 615 large and mid-cap US publicly listed companies.

Compelling findings suggest financial advantage of long-term vision

Some of the study's findings include:

  • From 2001 to 2014, the revenue of long-term firms cumulatively grew on average 47 per cent more than the revenue of other firms, and with less volatility. Earnings grew 36 per cent more and economic profit grew 81 per cent more.
  • Long-term firms invested more than other firms from 2001 to 2014. Long-term companies spent almost 50 per cent more on R&D than other companies and they continued to increase their R&D spending during the financial crisis.
  • Long-term companies exhibit stronger financial performance over time. On average, their market capitalization grew $7 billion more than that of other firms between 2001 and 2014. Their total return to shareholders was also superior.
  • Long-term firms added nearly 12,000 more jobs on average than other firms from 2001 to 2015.

For more details on McKinsey's report follow this link.

CTMfile take: The findings of McKinsey's study make a pretty compelling case for choosing to invest in R&D and jobs in the long-term, rather than giving into the pressure to produce value in the short-term. 

This item appears in the following sections:
Cash Flow Management & Forecasting
Cash Flow Forecasting
Investing Short-Medium Term Surpluses
Best Practices & Benchmarking in Operations

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