Beware 'accounting logic'

Strategy and strategic thinking is about the future, what is likely to happen, how the environment will look, what we need to be aware of and therefore what decisions should we be taking today.  It is frequently written that we are in a period of fast paced change and we need to be able to lead and plan in a complex environment under conditions of uncertainty.  The future is unlikely to be an extrapolation of the past so we need to ensure our thinking isn't dominated by projections based on the past.

In my travels as a manager and more recently as a consultant I have often come up against a phenomena which I label 'accounting logic', the use of primarily historical financial information as the basis for decision making.  Now I have nothing against accounting and accountants (though some think I have) but the information that they provide can't be given more weight than other sources of information when strategic planning but it often is used as the primary yardstick.

This can create a number of problems but one of the most critical is organisation and managerial inertia.  If the financial numbers are still okay then we don't need to change course despite what new information about the environment is known.  Management becomes wedded to the success of the past and misses the turn off to the future.  The following picture sums up the logic.......

History is littered with examples, one of the most famous being IBMs reluctance to embrace PCs as the mainframe market was just to lucrative.  Today, video rental stores and CD stores are soon to be extinct no matter how good their current cash-flow maybe.

The key point is you can't rely on financial information to paint you a picture of how the world will be it simply tells you how good it has been.  If you rely on 'accounting logic' when making decisions, well you're ok so far..............

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