Are you creating a corporate dust bowl?


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The economic devestation of the Dust Bowl during the Great Depression is pretty well known.  What is less well known are the underlying causes that enabled the severe drought to do such widespread economic and environmental damage.  You can read more details here, but in a nutshell, the farmers planted crops that were immediately profitable and did not plant crops that replenished the soil or grew deep roots to maintain the topsoil.  The result was depleted soil that was easily kicked up by the winds when the drought came along.

I can't help but notice similar behaviors in companies in their pursuit for quarterly profits.  The news is full of Wall Street darling companies that have milked their current products and processes to realize short term profits, at the expense of investing in longer term initiatives.  These companies have no ability to withstand a disruption when it occurs in their industry which, like a drought in the weather, will inevitably occur at one time or another.

It seems that it would make sense to valuate companies based on their ability to strike a good balance between near term profitability and investment in longer term ways to provide their value to the market.  On the surface, most people will tell you that they actually do this.  But when you look deeper, this assessment is often made by superficial accounting of things such as R&D spending as a percentage of company revenue or profit.  What is usually missing is a clear understanding of the actual value a company provides to its market (as opposed to just the products it sells to its market), and a deliberate investment in new ways this value could be provided by either evolving current offerings or disrupting them.

This type of assessment is not easy to do, therefore, it's not often done.  As the pace of macroeconomic and technological chance increases, I expect to see more companies being lost in the wake of market disruption.  Most will blame the market conditions at the time - just like those who blamed the dust bowl on the drought.  Precious few will recognize the fact that it was their own actions that enabled the disruption to wreak such havoc on their business.