Power Generates Performance but Performance Consumes Power

In 1997, when Amazon went public, its CEO, Jeff Bezos issued a manifesto – “It’s all about the long term.” Over the ensuing 14 years, Mr. Bezos has not only honored that manifesto he has become a leading practitioner of making investments in long term growth over decisions that favor short term earnings performance. The results speak for themselves with the company’s stock soaring 12,200 percent since its IPO.

By contrast, look at Kodak who has acted like a financial contortionist trying to find and deploy multiple short term gimmicks to keep a failed business model alive quarter after quarter and has finally had to throw in the towel. During that period of time, they missed numerous opportunities to capitalize on business growth innovations including the social networking potential of online photos. By staying exclusively focused on the short term, Kodak is in the process of systematically liquidating its entire business franchise.

What Amazon understood and Kodak didn’t is that power generates performance but performance consumes power. As such, when any company makes decisions that favor short term earnings performance they eventually liquidate their long term power to grow. There are two extremely strong forces within well-established successful companies that tilt the decision making scales toward the short term. The first is the company’s annual planning process which favors resource allocations to legacy businesses over new businesses. The second is the company’s incentive compensation plan which holds senior leadership teams accountable for delivering short term performance but not for making long term investments that increase the company’s power to grow.

Another good example of contrasting approaches to investing in the long term versus the short term is to look at Apple and Microsoft. From 2000 to 2004 both companies were primarily engaged in supporting their core businesses – for Apple it was the hardware and software to support the Macintosh Computer and for Microsoft it was the software to support Windows and Office. In mid-decade, Apple broke ranks and launched a whole new next generation business in music with the release of the iPod. That was followed later in the decade by the launch of a second next generation business in mobile phones with the release of the iPhone. As the decade was coming to an end, Apple launched yet a third next generation business in tablets with the release of the iPad. While all this was going on, Microsoft continued to pour the majority of its resources into its existing Windows and Office businesses. As the chart below dramatically illustrates, the market rewarded investments in long term growth from next generation businesses over short term performance from established businesses.