According to a recent New York Times article, companies are taking in record profits, up 42.2 percent on average. But they are also holding onto their cash like Scrooge. Shareholders are happy because they’re profiting. But without reinvestment, the economy can’t grow, workers remain unemployed, and innovation is stifled.
That’s not a sustainable strategy, nor a desirable one. In the article, “Industries Find Surging Profits in Deeper Cuts,” the reporter notes that companies from Harley-Davidson to General Electric to Hasbro to Ford are cutting jobs to improve their profit margins.
In this same article, Ethan Harris, a chief economist at Bank of America Merrill Lynch, says, “As long as corporations are reinvesting, the economy can grow.” But that’s not happening. And that’s not good news for any of us.
To be sustainable long-term, companies have to invest in their futures. And this means investing in innovation, research and development, and market selection. If a company discovers the next big market, that drives growth, profitability and hiring.
Since the economic collapse, Americans have a natural distrust of large corporations. Now is the time for corporate America to invest in growth and innovation. Long-term, that’s an approach that will reap rewards, create jobs and re-establish America as the world’s innovation center. Businesses need to operate with hope and commitment to the future. Right now, they are sending a message of retrenchment and fear (and some would say, greed). That is not going to instill confidence on Wall Street or among consumers.
With more than a 40 percent increase in profits, what else is corporate America going to do with all that cash?
As long as companies can maintain profit growth by cutting costs, they probably will do so. Harley’s thoughts to reduce their cost structure so they can be profitable at lower revenue numbers makes sense on the surface. Companies can – and should – grow by reducing or eliminating value on overmet customer needs.
But that’s where the risk lies. If Harley doesn’t know which needs are overmet and they pick wrong, then they risk eroding their foundation for long-term growth. The aversion to loss is no excuse for not investing savings from cost reduction into addressing important unmet needs. This enables companies to leapfrog competitors who are also retrenching to improve their profitability. Remember, Apple is growing phenomenally in a recession because they are doing a fantastic job of satisfying their customer needs. This is not a mystery. It’s good business!
Customer needs don’t care about the state of the economy; they exist independently from it. Investments to understand all of your customers’ needs helps you to identify where best to reduce cost and where best to be prepared to raise and create new value. There’s never been a better time to invest in knowing your customers needs NOW.
Once Harley and others run out of options to reduce costs to drive profit growth, they will seriously look for options to drive top-line growth. By then, we can only hope it’s not too late.
Great post. I completely agree with what you said about companies needing to invest in their futures by investing in innovation and research and development.
US corporations are, as ever, focused on the next quarter’s results to the detriment of the longer-term. The reasons have been well-rehearsed over the past couple of years – incentives for senior executives that are misaligned with long-term value creation, limited ability of shareholders to exert influence except by selling the stock, a parasitic financial sector, and so on.
The result is not only the pernicious failure to invest in innovation that you rightly bemoan. It is resulting in an overworked, over-stressed, and demoralized middle management that is likely to jump ship as soon as the economy turns around, depriving large corporations of their most experienced people just when they will be most-needed.
The only upside to the situation is that, when these people leave, they typically swear never to return to Corporate America – making them the potential entrepreneurs whose innovations could drive the next wave of real value creation.
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Tony,
You are right on the money. What we are seeing are the results of very short-term thinking. One can argue the reasons why, like fear, risk aversion, greed, but the situation is concerning. My question is “how are new jobs going to be created?” Think about some key breakthrough technologies like the integrated circuit, laser, cellular telephone, internet, etc. They created whole industries and millions of new jobs. Where is the next big innovation coming from? As you stated until corporate America invests in the future, the job situation isn’t likely to improve very quickly. Innovation and product development are the keys to future success.
Agreed. I think it actually helps to simply call attention to these facts published by the NY Times and others. It is only a matter of time before things start to turn around, and corporations begin to get antsy. They aren’t ALL idiots. At some point soon, they’ll get nervous about being out of the innovation game and be able to convince shareholders it is time to take some of that cash and invest in their futures.