Competition is increasingly across traditional industry boundaries rather than within them, while the conversation between business and society is moving towards shared value and responsible capitalism.
What doesn’t seem to be changing is business leaders’ focus on hitting short-term targets—a focus that puts annual or quarterly returns ahead of long-term success.
This is a problem. The changes we’re seeing demand fundamental shifts in what organisations do and how they do it, but making these shifts requires time and resources. Unfortunately, leaders are under so much pressure to maximise short-term returns that they ignore or minimise the work needed to guarantee long-term, sustainable success. They’re caught in the short-term trap.
Four critical pressures are tightening the trap. The first and most obvious comes from the financial markets. CEOs know that missing one performance target will have an immediate impact on their stock price, and that missing more than one can put their job in danger. A big part of this is the dominance of short-term traders seeking a quick profit over long-term investors.
The second short-term pressure comes from competition. The commoditisation of products and services, plus demanding consumers who expect more for less—or for nothing—are squeezing profit margins and threatening existing models. Some business leaders are responding to the root causes, but those with short-term outlooks are spending more and more time trying to find quick fixes.
The third factor, which tends to be more of an issue for business leaders in high-growth markets, is the sheer number of immediate opportunities to make a quick fortune. It’s easy to see why businesses in China or other rapidly expanding markets might prefer real-estate speculation, for instance, to the slow slog of building a long-term business.
The fourth and biggest reason keeping leaders and organisations in the short-term trap is probably the hardest to admit: it’s their comfort zone. Businesspeople tend to make it to the top because they know how to deliver short-term results and have all the tools and tricks packed neatly in their kitbag. But trying to use yesterday’s tools to address the problems of the future is not a recipe for success. Doing this will hold a company back from the changes it needs to make.
Escaping the short-term trap does not mean focusing 100 percent on the long term. It’s more about balance. Business leaders should have an ‘and-and’ agenda, where they take a long-term point of view while at the same time managing their business here and now.
This involves “two-directional thinking”. In other words, executives look forwards from where they are today and backwards from their vision of the future—at the same time—to identify their strategic priorities.
More specifically, some leaders tell a portion of their top executives—perhaps 10%—not to worry about today’s profits, but rather to develop relationships and business models that help their company to prepare for the future.
Above all, escaping the short-term trap means rethinking what it means to be a leader and how leaders should evaluate their success. One measure of success is the company’s results during a leader’s tenure: profit margin, share price and so on. The second, more powerful measure is the strength of the organisation they leave behind.
If you are a leader, ask yourself this question: in ten years’ time, who will care whether or not you hit your budget this quarter? Won’t more people care that you reshaped your organisation into one that is still successful long after you have left?
Thomas Malnight is professor of strategy and management at IMD business school in Lausanne, Switzerland
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
