The Economist

52 Business The EconomistJuly 21 st 2018

T

IME is one of the most disputed and confusing subjects in

business. Schumpeter is writing this column after attending a

conference which began with experts describinga new era ofex-

ponential technological change. It ended with a guru who had

studied 70 000 years of history and who confidently discussed

humanity’s fate over the 21 st century (it does not look good). In

the sessions in between specialists discussed Asia’s outlook in

20 30—though theystruggled to cope with Asia in 201 8 starting 68

minutesbehind schedule a dailylagwhich ifmaintained across

the intervening period would mean the fourth decade of the

centurywould begin seven months late.

In business well-established frameworks exist for everything

from corporate finance to supply chains and human resources.

Time is more slippery. Should firms act now or later? Quickly or

slowly? There are no clear rules. In a state-led economy the gov-

ernment controls the future to some extent settinglaws and allo-

cating resources in order to fulfil a vision as China hopes to with

its “Made in 202 5” plan for advanced-technology industries. But

in a market economy there is no grand plan just the individual

decisions ofthousands offirms competingin a spontaneous pro-

cess which Joseph Schumpeter likened to a gale.

A handful of cutting-edge firms are expressly designed to be

bold bets on how societies will function at a distant future point;

think of Tesla in electric vehicles or NVIDIA in advanced semi-

conductors. But few businesses are as focused or as novel as

these. Faced with the fogoftime the majorityresort to one oftwo

popularapproaches—theyeitherlionise the “longterm” orfollow

big futuristic “mega-trends”. Neitherare very satisfactory.

Consider the idea that firms should aim for the long term. In

June Jamie Dimon the boss ofJPMorgan Chase a bank and War-

ren Buffett a venerated investor criticised what they view as the

stockmarket’s obsession with quarterly earnings guidance. But it

is far from clear whether most firms are really run to hit quarterly

targets. Only 28 % of companies in the S&P 500 issue guidance.

And when bosses are liberated to act for the long term they often

stumble about in the dark. Ratherthan displayingprescience the

impulse ofmanyexecutivesis to followthe herd with debt levels

and acquisition activity typically rising at the peak of the eco-

nomicand stockmarket cycles.

Even if firms can see into the long term they must also juggle

several time cycles. Rather as banks raise overnight deposits and

make long-term loans companies mediate claims and commit-

ments of wildly different durations. The information cycle is in-

stant. The average firm in the S&P 500 carries 47 daysofinventory.

Budgets and tax filings are annual. Workers stay in their jobs for

years. The expected life of the assets of a typical S&P 500 com-

pany is 14 years and about 50 % of its market value derives from

its expected profits after 2027. Product cycles can last for decades:

PCs boomed in the 1990 s for example and did not face a big

threat until 2007  when the iPhone was launched.

The most common alternative to long-termism is to try to

identify “mega-trends” and build a strategy around them. Some

are fairly safe bets. India will consume more energy in the future.

Digital payments will become ubiquitous. The usual problem is

that everyone else has already spotted the same trends. Capital

pours into the opportunity pushing down returns. One example

is the frenzy over commodities and emergingmarkets in 2004 - 10.

Many multinationals lost their shirts on expensive acquisitions

and greenfield projects in saturated markets. Today’s red-hot

mega-trends are big data and artificial intelligence. While these

phenomena are real theirreturnswill probablybe in inverse pro-

portion to theirfashionability.

Lionising the long term and chasing mega-trends can thus

both be traps. Amore pragmatic nuanced approach makes better

sense. The first step is to maintain a balance between different

time horizons. It is no good brilliantly predicting consumer be-

haviour in 2027 if you misjudge counterparty risktoday. And it is

a hollow victory to beat expectations for one quarter’s results if

your main patents expire the followingmonth.

Second it is essential to have “optionality” or plenty of irons

in the fire. In hindsight it is tempting to assume that a successful

firm’s triumph was guaranteed. But this is not the case. Amazon

has had flops (its Fire phone and expansion in China) even as it

got the future right with its big bets on cloud computing and the

Kindle. Options are expensive to maintain since they often burn

cash. So the best firms mitigate this by providing consistent per-

formance in their“core” businessesin the here and now.

Last because events in the outside world are so hard to pred-

ict it pays to look inward. Culture is a squidgy concept but suc-

cessful firms need people who are adaptable but self-confident

enough not to be swungtoo much byfashion as well as balance-

sheets thatare strongenough to absorb mistakes. Goldman Sachs

has made a poor strategic choice over the past half-decade by re-

fusing to shrink its misfiring bond-trading division. But it still at-

tracts and retains brainy ambitious people and is well capital-

ised which should give it a decent shot at revival under its new

chief executive David Solomon (see Finance section).

Ticktock

The history ofbusiness is often told through inspirational stories

about destiny being fulfilled. Occasionally these paint an accu-

rate picture. AndrewCarnegie foresawthat America would need

an integrated national market for steel by the late 1 9th century.

Steve Jobs had a vision of how smart devices would change the

world and set about inventing them. But for most companies es-

pecially ones in mature economies facing the future is far more

prosaic. Balance optionalityand poise mattermore than an over-

whelmingconviction about the world in two decades hence. Too

much emphasis on the distant future isa waste oftime. 7

A minute of your day

Howcompanies should thinkabout the future

Schumpeter