Tech companies keep falling for the ‘Forever Fallacy’. Why Smart Leaders Should Know Better

Most of the big tech companies this week declare your quarterly earnings, for the most part, they are ineffective, The best thing you can say about most of them is that everyone expected things to be bad, and the companies acted on that expectation. I think it’s a good thing to live up to the expectations.

Except, these are companies that have experienced explosive growth — for the most part — over the past decade. Amazon, Google’s parent company Alphabet, Microsoft, Facebook (now Meta), Apple and Tesla have all exceeded $1 trillion in market cap in the past year. Many of them have reached $2 trillion.

Much of that growth happened during the pandemic, a time during which none of the usual rules of business came into force. Consumers signed up for streaming services for entertainment while movie theaters and sports stadiums were closed. He bought more laptops than ever before, mostly for remote work and school. They signed up for businesses as they tried to figure out how to connect their teams when they weren’t together in the office.

All this led to record sales numbers. Tech companies responded by hiring more people, building factories and warehouses, and spending money as the line continued to move up and to the right.

Then things got worse. As if a global pandemic weren’t enough, it was followed by supply chain disruptions, making it harder to obtain everything from toilet paper to semiconductors. The employees decided that they would rather leave their jobs than go back to the office.

Once the pandemic began to subside, people started going out, and back to stores, and movie theaters, and baseball games. In other words, they went back to a version of the normal that looked like much before the pandemic. It seems smart business leaders would have envisioned such a thing, but instead, most of them assumed that explosive growth during the pandemic was here to stay.

I call it the “forever illusion”. It’s actually quite simple. The perpetual fallacy is the belief that the circumstances that led to the extraordinary development will continue indefinitely, even if they apparently are not. The idea is that development, no matter how irrational, will continue because it is permanent because of changes in circumstances.

Not all business leadership can make a more dangerous mistake. Think about how ridiculous this argument would be if you heard the CEO of Peloton talk about how the pandemic increased demand, not because someone couldn’t go to the gym, but because suddenly your product has become a big deal. Realized the appeal of scale. Simply the law of large numbers says that eventually you reach all the people who are likely to be your customers and you stop growing (watch Netflix).

At least Netflix acknowledged in its letter to shareholders, saying that “COVID tarnished the picture by significantly increasing our growth in 2020, leading us to believe that our slowing growth in 2021 is ahead of COVID.” was due to grow.”

That idiom – pull forward – is a fancy way of saying that a change that would otherwise have taken a long time, happened much more quickly because of an unforeseen event, e.g., a pandemic. This means that the development that you would have seen in, say, 10 years, happened in a very short period of time.

Tech companies weren’t the only ones who used that phrase to explain how the world was changing during the pandemic. Experts, and op-eds, and articles were talking about how COVID has “pulled forward” the way people work, where they live, and how they shop. Those changes were here to stay, he said.

Except, they weren’t. Some of them, sure, but not most of them — especially not the ones tech companies were relying on.

As you might expect, a lot of those companies are paying a very real price now. Google, Microsoft and Facebook have said they will slow or stop hiring. All three didn’t live up to expectations this week, with Facebook’s parent company Meta reporting its first year-over-year decline in quarterly revenue.

Netflix recently announced that it is introducing an ad-supported tier as it has lost subscribers for two consecutive quarters after a decade of growth. Amazon hired a lot of people and built a lot of warehouses and is now trying to offload a decent sized portion of both.

Peloton – Well, Peloton got it all horribly wrong. It built too many bikes, pledged $400 million for a new factory, and then ended up with warehouses full of inventory it couldn’t sell. It replaced its CEO, laid off employees, and is attempting a massive change in strategy.

The reason is the same for each one of these companies. They all believed that what is giving them success will always be there. As we have seen, this is an illusion.

Look, maybe it’s just human nature. When things are going well, we want them to keep going well, especially when it brings rewards like recognition and, more importantly, huge stock bonuses. We will not think that circumstances beyond our control that led to our great success can change. If they do, the situation may get worse.

If your job is to talk about your company and get the stock market excited about your future growth, you’re probably more likely to fall forever. It’s not really your job though. Your job is not to assume that things will always be as great as they are now. Your job is to be realistic about the future and to position your company for anything that lies ahead.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.