One way to view this is companies have 2 buckets to allocate costs to:
1 - Ongoing operations
2 - Investments
Investors care about margins (% of sales) on ongoing operations, but tend to view investments with a "Return on Capital" (% of assets). Note that margins are on flow, where as ROC is on a fixed asset. The idea is that if you know the margin and growth of a business, you can come up with a long term value estimate. (If you're interested, I can write more about how this calculation works) It's also worth noting that this isn't the "optimal" way to make spending decisions. Good companies know that it's worth treating all expenses as a "Return on Capital" basis rather than purely optimizing on margins. (This can be called EVA or Economic Value Added)
What the article captures is the essence of good leadership and management. You can't be 100% long term - investors would never know if the money is being well spent. You can't be 100% short term - you'll never invest for the future, and will get crushed when the future arrives.
There is one caveat... If a company decides that it can no longer innovate, then the "Stop spending money, and return money to sharedholders via buybacks so that they can invest it elsewhere" actually does make sense. (Move capital from IBM to companies who need it to grow)
That only works as long as the founder or somebody equally powerful is in charge. Everybody else is beholden to the board and thus the short-medium term impact on the share price.
Amazon is. So is Google. Both have strong founders, and were very explicit in their IPOs about this. Even still, both need a certain level of profitability to sustain themselves. In addition, many companies that spend too much time in the future get complacent about the present. (Look at all the research at Xerox PARC that got commercialized elsewhere)
There are many other companies that either lack that credibility, or have a history of wasting money. (>50% of M&A deals subtract rather than add value to the buyer)
1 - Ongoing operations
2 - Investments
Investors care about margins (% of sales) on ongoing operations, but tend to view investments with a "Return on Capital" (% of assets). Note that margins are on flow, where as ROC is on a fixed asset. The idea is that if you know the margin and growth of a business, you can come up with a long term value estimate. (If you're interested, I can write more about how this calculation works) It's also worth noting that this isn't the "optimal" way to make spending decisions. Good companies know that it's worth treating all expenses as a "Return on Capital" basis rather than purely optimizing on margins. (This can be called EVA or Economic Value Added)
What the article captures is the essence of good leadership and management. You can't be 100% long term - investors would never know if the money is being well spent. You can't be 100% short term - you'll never invest for the future, and will get crushed when the future arrives.
There is one caveat... If a company decides that it can no longer innovate, then the "Stop spending money, and return money to sharedholders via buybacks so that they can invest it elsewhere" actually does make sense. (Move capital from IBM to companies who need it to grow)