12

Invest or Not, That is the Question

by | Oct 14, 2011 | PKF Texas - The Entrepreneur's Playbook®

Note: Running Fridays in FromGregsHead.comis a continuing series of tips brought to you by Greg Price. These run Sunday evenings during the BusinessMaker’s Radio Show on KPRC 950AM. Audio files can be found on the PKF Texas – Entrepreneur’s Playbook® page of the PKF Texas website.

One of the queries of the sluggish US economy today is why companies aren’t investing more. They certainly seem to have good reasons to: corporate coffers are full of cash, interest rates are at all-time lows, and a slack economy inevitably offers bargains. Yet many companies seem to be holding back.

A number of issues are at play, ranging from market volatility; to fears of a double-dip recession; to uncertainty about economic policy from current or future administrations. One factor that might go unnoticed, however, is the surprisingly strong role of decision biases in the investment decision-making process—a role that revealed itself in a recent McKinsey Global Survey.

Most executives, the survey found, believe that their companies are too stingy, especially for investments expensed immediately through the income statement and not capitalized over the longer term. Indeed, about two-thirds of the respondents said that their companies underinvest in product development, and more than half of the respondents said that they underinvest in sales and marketing and in financing start-ups for new products or new markets. Bypassed opportunities aren’t just a missed opportunity for individual companies: the investment dearth hurts whole economies and job creation efforts as well.

A couple of key takeaways that I noted during the survey was the acknowledgement that executives want to investment more, but biases in the decision making process are impacting investment decision making.  Of almost 1,600 company executives surveyed the expected return on investment in today’s economy would range from 37% on the low, to 54% on high side of being higher than forecast.  And when biases were eliminated, their expectations for ROI shot up immediately.

So why are so many businesses doing nothing?  Because it’s believed that it is safer to forego investment opportunity today and do nothing than to reach out and gain competitive advantage.  The problem with that analogy is that your key competitor is not staying pat. They are going to gain a significant ROI on their investment projects. Leaving the laggards behind in their dust.

Source: McKinsey Quarterly September 2011

Stay Connected