Sunday Strategist: Why Smart Companies Are Playing Dumb



Netflix, which has been granted a Dr. Fauci-size moment by the current pandemic, reported some numbers this week that were, to put it technically, boffo. Some 16 million net new customers signed up to pledge allegiance to the Tiger King (or, in my house, The Octonauts). That’s more than double the company’s forecast.

What’s interesting is what came next. Chief Executive Officer Reed Hastings said viewing and membership growth will likely decline in the months ahead as the company waits to see how long the Covid shadow will be. “We don’t use the words ‘guess’ and ‘guesswork’ lightly,” he said. “We use them because it’s a bunch of us feeling the wind.” The smartest executives have adopted a similar communication strategy in the age of coronavirus: Act dumb.

Here’s outgoing AT&T chief Randall Stephenson on Wednesday: “Bottom line, we have very little visibility into the broader economic situation.” And Delta Air Lines CEO Ed Bastian the same day: “These are truly unprecedented times, and the path to recovery is uncertainty and will likely be choppy.” The word “unprecedented” has been uttered on about three-quarters of S&P 500 earnings calls this month. More than 70 companies have scrapped forecasts altogether since the end of February. But this should come as no surprise—between 2007 and 2009, the share of U.S. companies that provided earnings guidance dropped from 77% to 60%.

In short, the current earnings season has provided no insight on a recovery. In fact, it’s probably muddled the outlook further. Not surprisingly, the spread between analyst earnings forecasts—so-called estimate dispersion—isn’t narrowing; it’s lingering at record highs. To be fair, executives have every right to be gobsmacked. CEOs typically don’t double as epidemiologists. More important, there’s very little upside to them hazarding guesses.

Covid has granted the world’s business leaders a rare and precious opportunity to be largely inculpable. Even after the subprime crisis, most companies didn’t do much in the way of risk-based forecasting. Apparently they still don’t. The order of the day is: thoroughly spook investors, underpromise, and, hopefully, overdeliver at some point in the not-so-distant future.

There’s plenty of evidence that companies try to take their lumps in concert with the economy at large and investors tend to be more sanguine about crummy earnings reports when the market on a whole is a dumpster fire. Harvard experts on corporate governance noted this week that investors may not be so forgiving for long. As the crisis deepens, there will likely be a push for more disclosure and possibly universally comparable metrics. It’s not hard to imagine a world where CEOs have to fess up what share of their workforce is at home every quarter, as readily as cost of goods sold or any financial line item.

The savviest executives will go a step further and use the pandemic to retool their businesses entirely. Larry Burns, a former corporate vice president who helped steer General Motors through the Great Recession, calls the current turmoil in the economy “ground cover” under which big strategic moves can be made with relatively little scrutiny. “A crisis is a terrible thing to waste,” he says. The subprime crisis allowed GM—albeit under the shadow of bankruptcy—to sell or shut down a crowd of so-so brands: Hummer, Pontiac, Saab, and Saturn. It also let the company close about a quarter of its plants and roughly 40% of its dealerships.

The current crisis, Burns points out, is a good opportunity for executives to kill off nonessential initiatives, hoard cash, and buy assets on the cheap. Netflix is accelerating its push into animation and getting its writers gathered on video chats to bang out new content. It’s also doing a little shopping. The company has long pushed to shorten the window between when a film is screened and when it is streamed. Now that theaters are shut, the negotiation is pretty one-sided. Rest assured, Hastings and company aren’t playing dumb when they hop on Zoom with Hollywood studios.

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