Why short-term thinking is the biggest threat to your business
In January of 2009, Unilever announced that it would no longer report its earnings quarterly because it recognized that pressure for quarterly profits discourages investments in the long-term value of the company. The message came on Paul Polman’s first day as Unilever’s new CEO. He would later quip that he made the controversial move strategically because “I figured they couldn’t fire me on my first day.” Polman was wise to be worried. In the aftermath of the announcement Unilever’s stock plunged 22%.
Reports from the Harvard Business Review, The Aspen Institute and McKinsey & Company also decry what has come to be known as short-termism in corporate America. In Polman’s words: “I don’t have any space for many of these people that really, in the short term, try to basically speculate and make a lot of money.” But despite the clear costs of managing huge companies for the short term, in mainstream business, it is still common practice.
So what does this have to do with private companies and small businesses that are not subject to the pressures of the stock market? Plenty.
Short-termism dominates private and small business too, and it is just as dangerous. Consider the following example:
You are in a crunch with a lot to get done and not enough time to do it. You are negotiating a contract renewal with a vendor, and you hand it off to an employee to save time. But when they show you the deal, you are very disappointed. As a good business person, you are trying to keep your costs down and get the best price possible, but this employee negotiated an increase in costs, not a decrease. You know your loyalty should be worth something and that you can get a better deal. You wonder why the employee doesn’t get that - and come to think of it, this isn't the first time this employee has let you down. You decide to let them go at the end of the month and try to find someone better.
In the meantime, you resign yourself to skipping a networking event you were planning to attend for business development so you can work late and fix the contract. By the end of the month you have successfully extracted discounts from the vendor and hired a new employee who you hope will be better than the old one.
This is what being a smart business leader looks like right? You have to make the though calls and be willing to put in the extra hours. You have to maximize your margin. You have to cut the dead weight and get the right people on the bus. This is the path to success. Isn’t it?
While the actions you took are all totally logical - even savvy - in the short term, they have dangerous implications in the long term that are likely to erode the foundation of what you are trying to build.
If you think about it you have been on the other side of that negotiating table too - under intense pressure to make the sale only to realize that the terms of the deal leave you almost no margin but plenty of resentment. Six months down the road, when that client is in a pinch and needs you to pull off a miracle, do you set all of your other work aside to come through? Maybe not.
Further, most business leaders drastically underestimate the costs associated with turnover. Cutting dead weight and demonstrating to your team that you will not tolerate mediocre work may seem like a good idea in the short term, but in the long term this approach contributes to a workplace culture in which people hide mistakes, pass the buck, and keep an eye out for opportunities in other companies. None of that is good for business.
Finally, you know that it is a bad idea to blow off important tasks like business development in order to put our more urgent fires, but when a fire is burning you can’t just walk away can you? Of course not.
So what do you do differently?
Ask yourself what is most important for your company to succeed over the long term. If you are up on the latest business research, your list may look something like this:
- Strong, collaborative relationships with vendors.
- A workplace culture that prioritizes learning and improvement.
- A clear, measurable vision for where the business is going.
Let’s replay this example with these priorities in mind:
You are in a crunch with a lot to get done and not enough time to do it. You are negotiating a contract renewal with a vendor, and you hand it off to an employee to save time. But when they show you the deal, you are very disappointed. As a good business person, you know collaboration is key but this employee focused only on price and didn’t open a dialogue with the vendor. You know your loyalty should be worth something and that you can get a better deal for everyone. You wonder why the employee doesn’t get that - and come to think of it, this isn't the first time this employee has let you down. You decide to take them to lunch by the end of the month to discuss how they were trained and to discuss ways to improve the training system in the future.
In the meantime, you fire off an email to the vendor asking for an extension so you won't have to skip a networking event you are planning to attend for business development. By the end of the month you have successfully extracted training ideas from the employee and had a collaborative meeting with employee and the vendor that strengthen the relationship and created a contract that creates more value and less costs for everyone.
This is what being a smart business leader looks like right? You have to make the disciplined investments in people to maximize your value. You have to constantly improve your systems and engage everyone on the bus. This is the path to success. Isn’t it?
Are you ready to hear more? Join Nathan Havey, the Founding Partner of Thrive (a company that helps business leaders create high performing workplace cultures) for a half-day workshop on this topic at our office in downtown Denver on October 6th!
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