Thinking Through Opportunity Cost & Corporate Strategy as EPS Season Approaches

Thinking Through Opportunity Cost & Corporate Strategy as EPS Season Approaches

Making Numbers Is Not Enough

The hallmark of a great company is not one that simply meets or beats consensus estimates with some regularity.

Imagine if Reed Hastings and Netflix chose not to pursue the company’s over-the-top (“OTT”) strategy when investors where hungry for DVD profits.

Imagine if Jeff Bezos and Amazon scaled back their ambitions when investors grew weary of further investments in distribution centers.

Imagine if Andy Florance and CoStar decided to stop investing for growth because investors wanted to see 30%+ operating margins.

The Right CEO at The Right Time

What is the cost of not having the right CEO in the chair?

What is the opportunity cost associated with CEOs and Boards who lack intellectual curiosity and the courage of their convictions?

What is the opportunity cost associated with CEOs and Executive teams who are wed to the status quo, who worship the cash cow even when the sacred cow is no longer growing or worse yet, in decline? (think Microsoft’s inability to launch itself into mobile some 10-15 years ago).

Corporate Strategy Matters

Investors place too much focus on immediate-term results. Reported results are a function of operating decisions made in the distant past.

Investors should weight reported results less and allocate more time and effort toward understanding a given company’s strategic drivers and operational execution. Hold management teams accountable to this end – particularly if your firm is a large shareholder.

If companies are unwilling to share their strategic rationale – trim or sell off your position.

CEOs and Board members that haven’t developed strategic plans that link to operating plans and operating budgets are unqualified to be CEOs and Board members.

Developing and refining corporate strategic plans and having the courage and will to execute them is not easy. However, a high degree of difficulty is insufficient reason for management teams to treat strategy as an afterthought.