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• Article | Management Science | March 2018

  Making the Numbers? 'Short Termism' and the Puzzle of Only Occasional Disaster

  Hazhir Rahmandad, Rebecca Henderson and Nelson P. Repenning

  Much recent work in strategy and popular discussion suggests that an excessive focus on "managing the numbers"—delivering quarterly earnings at the expense of longer-term investments—makes it difficult for firms to make the investments necessary to build competitive advantage. "Short termism" has been blamed for everything from the decline of the U.S. automobile industry to the low penetration of techniques such as TQM and continuous improvement. Yet a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investment to manage earnings and are rewarded for doing so. This paper presents a model that reconciles these apparently contradictory perspectives. We show that if the source of long-term advantage is modeled as a stock of capability that accumulates over time, a firm's proclivity to manage short-term earnings at the expense of long-term investment can have very different consequences depending on whether the firm's capability is close to a critical "tipping threshold." When the firm operates above this threshold, managing earnings smoothes revenue and cash flow with few long-term consequences. Below it, managing earnings can tip the firm into a vicious cycle of accelerating decline. Our results have important implications for understanding managerial incentives and the internal processes that create sustained advantage.

  Keywords: capability; Short-termism; system dynamics; tipping point; resource allocation; Business or Company Management; Earnings Management; Resource Allocation;

  Citation:

  Rahmandad, Hazhir, Rebecca Henderson, and Nelson P. Repenning. "Making the Numbers? 'Short Termism' and the Puzzle of Only Occasional Disaster." Management Science 64, no. 3 (March 2018): 1328–1347.  View Details

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• Case | HBS Case Collection | February 2018

  Aetna and the Transformation of Health Care

  Rebecca M. Henderson, Russell Eisenstat and Matthew Preble

  Mark Bertolini, chairman and CEO of the health insurer Aetna, faces a number of questions as he seeks to transform Aetna from a classic insurance company into a business that will engage much more deeply with its members around their personal health goals. His strategy depends on Aetna’s ability to facilitate behavioral changes amongst its members to live healthier lives and requires very significant investments in digital capabilities and on-the-ground community-orientated health care resources. Will it work? Can he implement it? The case explores both the strategic issues inherent in this potential transformation and the organizational and leadership questions that it raises. Bertolini is a highly purpose-driven leader, and the case allows for a rich discussion of the degree to which this changes both his strategic and his organizational options.

  Keywords: Health Care and Treatment; Insurance; Transformation; Behavior; Leading Change; Strategy; Insurance Industry; Health Industry; United States; Connecticut;

  Citation:

  Henderson, Rebecca M., Russell Eisenstat, and Matthew Preble. "Aetna and the Transformation of Health Care." Harvard Business School Case 318-048, February 2018.  View Details

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• Background Note | HBS Case Collection | October 2016 (Revised January 2018)

  Climate Change in 2018: Implications for Business

  Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar and Amram Migdal

  This note provides general information about climate change and its implications for business. Included is an overview of climate change science and a number of its impacts, including rising sea levels, changing weather patterns and extreme weather, pressure on water and food, political and security risks, human health risks, and impact on wildlife and ecosystems. Next, responses to climate change are outlined, including improvements in energy efficiency, moving away from fossil fuels, changes in land use and agriculture practices, and geoengineering. The note concludes with the debate over how much should be spent to mitigate and adapt to climate change, who should pay, and the implications for the private sector.

  Keywords: climate change; Environmental Accounting; Agribusiness; Economic Growth; Energy Conservation; Energy Generation; Renewable Energy; Energy Sources; Non-Renewable Energy; Globalized Markets and Industries; National Security; Government Legislation; Operations; Corporate Social Responsibility and Impact; Problems and Challenges; Risk and Uncertainty; Natural Disasters; Natural Environment; Environmental Sustainability; Pollution and Pollutants; Science-Based Business; Weather and Climate Change; Society; Technology;

  Citation:

  Henderson, Rebecca M., Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal. "Climate Change in 2018: Implications for Business." Harvard Business School Background Note 317-032, October 2016. (Revised January 2018.) (Click here for a complimentary copy on the Business & Environment Initiative’s site.)  View Details

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