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Big Idea: Prioritize Long Term Invesmtent Mindset Over Short Term Profits

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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Your POV

Does your organization take the long view or prioritize short term profits?  Are you reinvesting enough into innovation? Add your comments to the blog or reach me via email: R (at) ConstellationR (dot) com or R (at) SoftwareInsider (dot) org. Please let us know if you need help with your AI and Digital Business transformation efforts. Here’s how we can assist:

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Constellation Research recommends that readers consult a stock professional for their investment guidance. Investors should understand the potential conflicts of interest analysts might face. Constellation does not underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly, such as through employee stock-purchase pools in which they and their colleagues participate. As a general matter, investors should not rely solely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, they should also do their own research—such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC—to confirm whether a particular investment is appropriate for them in light of their individual financial circumstances.

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