5 proven ways to manage short-term/long-term tensions

Do you find it difficult to spend serious time and effort on developing long-term growth plans for your business? And where you have been able to create a great strategy with brilliant financial returns is it virtually impossible to get the funding? If so, it’s hardly surprising. More than half of Finance Directors say that they would cut a project with a positive net present value in order to hit short-term profit targets.

Yet a persistently short-term focus is damaging for company performance. Take, for example, a 2005 study by McKinsey of nearly 300 Fortune 500 companies. It showed that returns to shareholders of companies that delivered short-term and long-term results were nearly 50% greater than those solely focused on the short-term. Whilst many companies aspire to balancing short-term results and long-term growth, external pressures and internal processes mean that strategy development activities quickly turn into a budget-setting exercise.

So what can you do to manage the conflicts between your near-term demands and your longer-term goals? In this week’s newsletter I propose 5 proven ways in which you can improve your company’s chances of maintaining this dual focus.

  1. Create a compelling long-term vision. A clear goal that engages you, your management team and the rest of the organisation, can provide the inspiration for near-term activity. All short term actions become steps on the journey to the vision. In the 1980’s, for example, Jack Welch set clear, stretching goals for General Electric. He required all GE business units to “become number one or two in every market we serve and revolutionise this company to have the strengths of a big company combined with the leanness and agility of a small company.”
  2. Establish medium-term themes. Sometimes an end goal is not enough. It is too distant to influence daily decisions. Creating medium-term strategic themes provides a link between your 10-20 year aspirations and next quarter’s results. For example, as part of their turnaround in the early 1990’s, the Asda executive established its “formula for growth”. The formula was based on six themes that provided the focus for all major investments, and led to the company’s successful turnaround and ultimate purchase by Wal-Mart:
    • Truly different (larger!) stores;
    • Offering 5-10% better value;
    • Stunning fresh food from craftsmen;
    • 25% unmatchable mix (own label focus);
    • A serious clothing offer (the birth of George!); and
    • Sold and served with personality.
  3. Introduce non-financial measures. Financial measures can only measure past performance, but non-financial KPI’s can act as an indicator of future health and performance. For example, market share and customer satisfaction measures can give a sense of the company’s momentum and possible future performance. At Reckitt Benckiser innovation is management’s key focus for growth, and so executives pay a lot of attention to the percentage of sales from new products.
  4. Focus on the journey as well as the destination. Many companies develop in-depth future strategic positions. It is less common for the equivalent effort to be put into finding the best route to delivering strategy. It is vital to spend the time developing a suitable path that delivers short-term performance as part of a longer-term growth campaign. At Alcan, for example, executives demand that managers develop at least three alternative strategies when asking for corporate resources.
  5. Keep something up your sleeve. In his book, Good to Great, Jim Collins describes how Abbot Industries, a US healthcare diagnostics company, found ways to free money for growth initiatives. Whilst the Executive Team set external expectations of future profit growth at, say, 10%, it would then set internal targets that were much higher, say 20%. They then kept a list of entrepreneurial growth projects, called Blue Plans. After the half-year the Executive Team would select a profit figure that was higher than external expectations but less than its actual performance. The difference would be used to fund the Blue Plans, allowing Abbott to deliver short-term results as well as systematically investing for longer-term growth.

The bottom line

Delivering short-term results is difficult for many companies, never mind spending time and effort to build longer-term growth. Yet successful companies find ways to focus on both dimensions. These practical, proven steps are ways in which they establish this dual focus. Make it a (short-term!) priority to take one or two of these ideas and incorporate them into your management activities.

 

To find out more contact Stuart by clicking here or call +44-(0)1636-526111.