Is it possible to invest in tomorrow without damaging performance today? Ken Favaro, writing for Strategy+Business, looks at short-term/long-term tension and how to get over it.
Peter Drucker wrote that leaders should keep their noses to the grindstone while lifting their eyes to the hills – meaning every business must reconcile the needs of the present with the needs of the future.
According to Favaro, almost 60% of companies fail to achieve this “acrobatic feat”, instead opting to favour one side over the other. The result, argues the author, is “a kind of corporate schizophrenia” where organisations flip-flop between visionary forward thinking and aggressive cutbacks.
The blame for short-term/long-term tension is often put on an increasing shift towards short-termism. But Favaro believes the real culprit is the widespread and misguided belief that short-term/long-term strategy is somehow an either-or proposition.
The author lists five strategies – here dubbed the “gang of five” – which perpetuate this myth and further aggravate the tension. They are:
1) Financial engineering – including methods such as cutting costs, avoiding dilutive acquisitions and buying back shares to increase earnings per share.
2) Price leadership – a strategy directed by an organisation’s goal to be the lowest-cost provider in the market.
3) Innovation leadership – attempting to “out-innovate” the competition by leading research and product development.
4) Cross-selling – leveraging current customer relationships to sell additional products.
5) Share leadership – committing to always being the market leader.
The first two strategies cause companies to grossly underinvest in their futures, while the last three lead to excessive investment.
The gang of five might produce temporary growth but, insists the author, profits are rarely sustainable using these methods and they only ever aggravate short-term/long-term tension.
Instead, Favaro urges companies to derive their strategies from answers to these five questions (the “strategic five”):
1) What businesses should we be in?
2) How can we add value to our businesses?
3) Who are our target customers?
4) What is our customer value proposition?
5) What capabilities make us best at adding value to our businesses and delivering their value propositions?
Favaro concludes: “The inescapable fact is that companies must invest in their future if they are to have one, and they must produce earnings today in order to create the wherewithal for doing so.”
Only by asking themselves the “strategic five” can companies develop sustainable strategies that lead to sustainable profits.