28 October 2016
Big firms such as HSBC and Li & Fung that are involved in traditional sectors tend to make long-term plans for the future, but the lofty goals are sometimes unrealistic. Photos: Bloomberg, RTHK
Big firms such as HSBC and Li & Fung that are involved in traditional sectors tend to make long-term plans for the future, but the lofty goals are sometimes unrealistic. Photos: Bloomberg, RTHK

Why companies find that long-term plans often don’t work out

HSBC Holdings (0005.HK) has outlined a new version of its roadmap for the future.

The plan, which involves “10 Strategic Actions”, is seen as key to the bank’s financial performance and share price in the years to come.

The lender has stopped talking about a 3-Year Plan announced two years ago, apparently because the UK-based banking giant is nowhere near the goals set in the document.

Return on equity, for instance, was projected in 2013 to edge up to 12-15 percent. But the actual figure at the end of last year was a mere 8.5 percent, forcing the bank to revise the target to 10 percent.

Minority shareholders of the bank have had their fair share of disappointment over the years.

HSBC Holdings is not alone in this regard.

In recent years, five out of six firms that launched such three-year plans have had a bumpy ride.

Apart from HSBC, the companies that had mapped out three-year goals were Hong Kong Exchanges and Clearing (HKEx, 0388.HK), Li & Fung (0494.HK), Shui On Land (0272.HK), Li Ning Co. (2331.HK) and Esprit Holdings (0330.HK).

Except HKEx, the rest all fell short of the lofty aims laid down in their plans.

And, in the face of frustrating results, they have had to scale down their goals or postpone or extend the implementation time and again.

Some individual shareholders may be on pins and needles due to changes in the plans.

Several facts can explain why long-term planning can hardly come to fruition.

The first thing is the accelerated globalization and emergence of an Internet-based economy. The shifting landscape requires big firms to be adaptive and swift in altering strategies.

No one knows this better than IT firms. That’s exactly why we seldom hear any “X-Year Plan” from Tencent Holdings (0700.HK), Alibaba, Google or Facebook.

The tech firms know that in the present age, you will lose yourself in an entirely different world if you fail to follow latest developments, let alone make hollow long-term projections for the future.

Tencent chief Pony Ma Huateng once noted that his decision to pour resources to develop WeChat came just a few hours after he got an e-mail from his staff.

His biggest nightmare is that one day he wakes and finds himself suddenly being left behind by the constantly evolving Internet. He is concerned so much about keeping pace with new developments that he even avoids long vacations.

Baidu founder Robin Li Yanhong often cautioned that “bankruptcy is always only 19 months away for Baidu” (a warning used to remind his staff that in the fast-changing Internet world, new technology and new market can suddenly surface and render the company obsolete).

To these leading entrepreneurs in innovation, an “X-year Plan” sounds just too medieval and unrealistic.

Just like saving money and being austere is seen as a virtue, carrying out plans in an organized manner is a traditional wisdom some companies still value.

Yet these firms must be mindful to make sure that their plans are pertinent to the actual situation and that they won’t lag behind when the time changes.

They should avoid rigid adherence to set goals and approaches as they need to move in tune with shifts in the market and economic situation.

More than often, a long-term plan is used for shoring up morale and investor confidence when the business is at low ebb.

Over the years we have seen similar scenes at annual meetings of HSBC, Shui On, Li Ning and Esprit. As these firms had already been sagging, and their failure to attain stated goals is not surprising.

Li & Fung started to make such plans in its heyday during the 1990s and they worked out quite well for some time. But in recent years, the company failed to deliver on promised results as the regional supply chain and sourcing sector has been stuck in a prolonged downturn.

All this said, I tend to give credence to HSBC’s 10 Strategic Actions.

These initiatives – which are not a three-year plan in another name – are highly implementable and the outcome can be seen within just a year or two. Some actions and changes have already got underway. These are the kind of “plans” for the new era.

Investors can expect something concrete this time.

This article appeared in the Hong Kong Economic Journal on June 11.

Translation by Frank Chen

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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