What Management Must Learn From Finance

Given the cliché that professionals are often inward looking, and talk mainly to each other, it perhaps should not be a surprise that the discipline of management pays relatively little systematic attention to financial and market data, even though making money is a vital goal, and key to very survival, of any private enterprise.

Management writers often identify a firm as a “model of management” or a “success” because mode of operations correspond to the writer’s own preferences as what good management comprises, without always signaling that the firm in question is experiencing mediocre financial results, or that the global consensus of detailed reviews by expert financial analysts is that the firm has limited prospects of doing better in future.

The Use Of Financial And Market Data In Management

London Business School professor Julian Birkinshaw and Harvard Business Review are therefore to be congratulated for the article in the current issue of HBR, “How Incumbents Survive and Thrive,” which systematically examines the revenues of all of firms in the S&P 500 and the Fortune 500 in 1995 and in 2020.

The analysis shows that the list of firms considered as the stalwarts of 1995 in each sector is remarkably similar to the list of “mainstays” in 2020. Most the 1995 firms still exist “in some shape or other.” In some cases, the identity of the leading firm in any particular sector may have shifted, but the sector lists are remarkably similar. The systematic attention in the article to public financial data is useful and quite unusual in management writing. It should become a more general practice.

The Need For Additional Financial Data

At the same time, the article’s analysis is limited to examining revenues, and does not examine profitability or market value. Profitability over time—which sheds light on past performance—was removed from the analysis because “most companies are more profitable today than they were back then.” This is a questionable reason to jettison this vast array of important information from the analysis. The relevant question is: by how much? To answer that question, we would have to look at the actual numbers by firm.

The article also dismisses the usefulness of “market value because of… rosy views of Big Tech.” But “rosy views of Big Tech” is not a valid reason for eliminating any share price data from analysis.

True, stock price information needs to be evaluated carefully, given the tendency of the stock market to follow popular public narratives, ahead of data analysis. But, over time, reality tends to take over from the current popular narrative and the trajectories of stock prices over time provide valuable information about performance, regardless of different public narratives at any particular time.

Thus, stock market valuations a year ago reflected “rosy views” of tech stocks at a time when interest rates were near zero and inflation was low. These valuations were sharply corrected when inflation rose and interest rates are now expected to rise. A view of stock prices through these different periods sheds important light on the firms’ eventual trajectories.

Mere Survival Does Not Disprove Absence of Digital Disruption

The article makes the claim that it has disproven the “myth” that firms are struggling to cope with digital disruption. It draws on revenue data which shows that most big firms of 1995 were still in business in 2020 “in some shape or other”.

To establish that claim, the article would have needed to examine profitability and stock price information. Mere survival does not prove absence of struggle to cope with digital disruption. The reality is that  most digital transformations are failing.

Generalizations Vs Anecdotes

Additional financial information could also help readers deal with implementing some of the article’s recommendations. For instance, the article recommends, “don’t make generalizations based on anecdotal and high-profile examples.”

Lack of attention to profits and stock prices however leads the article itself, in places, to reach anecdotal conclusions of its own. It cites some firms as successful or unsuccessful when the profitability and stock price data suggests otherwise. For instance, the article cites the UK chain of book and stationery stores, WHSmith, as a success story, without mentioning that its total return is below the average of firms in the FTSE Small Cap Index.

The article also states that “Microsoft, for example, has struggled to compete with Google in search” without mentioning that Microsoft uses search differently from Google (as an element of its other products) and that, overall, Microsoft’s total return (+377%) has out-performed Google’s Alphabet (+215%) over the last 5 years.

Digital Technology Is Not A Disease

The HBR article correctly recommends that regardless of which approach you choose to deal with digital technololgy, “you must embrace digital technology to improve operational effectiveness.” Digital technology is thus not a disease that needs to be resisted or avoided. It is an opportunity to be taken advantage of, by making necessary shifts in management.

To read parts 1 and 2 in this series:

Part 1: HBR’s Four Different Takes On ‘Digital Disruption’

Part 2: The Hardest Part Of Becoming A Digital-Age Winner

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