Short Term Thinking Crushes Traditional Companies In Fight Against Digital Giants
If legacy companies want to compete with data giants in the age of extreme capitalism, spending capital on innovation needs to STOP being sacrificed for short-term profits.
In 2005, a survey by the Duke Fuqua business school showed that 55% of CFO's at 400 of America's largest public companies would rather sacrifice their firm's economic value to meet a quarterly expectation. Sadly, not much has changed since then.
Don't believe me? Look no further than the airline industry post-COVID-19.
Take American Airlines, which filed for bankruptcy in 2011 but became profitable again by 2014. During six years of record profits, the airline still failed to put together a rainy-day fund for a crisis. It also failed to modernize its technology systems, aircraft, and operating procedures to improve digital channels, enhance analytics, and develop better planning capabilities. Instead, it spent $12 billion of its positive cash flow since 2014 in stock buybacks. American isn't alone, either. Most airlines spent 97% of their free cash flow on buybacks from 2010 to 2020.
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