Leading from the Long-term

Mindsets, Strategy

About

We take a short look at the positive effects of long term on performance.

We live in a short-term economy, do we?

When we read any economic and financial news and we read about quarterly corporate earnings, th fear of economic stagnation. From Investpedia, recessions are visible in industrial production, employment, real income, and wholesale-retail trade. The working definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP), although the National Bureau od Economic Research (NBER) does not necessarily need to see this occur to call a recession, and uses more frequently reported monthly data to make its decision, so quarterly declines in GDP do not always align with the decision to declare a recession.

Look at the daily stock chart of a public company and you will see lots of ups and downs while its one year chart shows a steady increase of its stock price. If you manage within the frenesy of its daily activity and get lost into it you might end up making little or no money or losing some or a lot while somebody that had vision about the stock would see her or his capital increase substantially.

Which one makes sense?

Do you think that long-term high profitability is available for firms that can overcome crises by “competing for the future” or for firms that compete by restructuring and downsizing?

We have seen it. Businesses with no long-term vision with corporate earnings as their main indicators are no masters of their fate. They are at the mercy of the lifestyle of their CEOs and Founders, slave to shareholders value at all cost.

They master a few things: cost cutting, downsizing and restructuring.

General Electric fell prey to it as they focused on their past and present instead of creating a future only to see it stock fall from $32 (July 2016) to $7 (July 2020).

The value of long-term!

German law that governs publicly traded organizations requires for such organizations to have a strategic foresight system, that they plan their future.

According to the McKinsey Global Institute, a 2017 survey of C-suite executives suggest that pressure to deliver strong short-term results has increased in the past five years and, as a result, many executives believe their companies are using excessively short time horizons in their strategic planning.

In their MEASURING THE ECONOMIC IMPACT OF SHORT-TERMISM discussion paper dates FEBRUARY 2017, the McKinsey Global Institute using a data set of 615 large and mid-cap US publicly listed companies from 2001-2015 has created a five-factor Corporate Horizon Index.

It is based on patterns of investment, growth, earnings quality, and earnings management. It enabled them to separate long-term companies from others and compare their relative performance, after controlling for industry characteristics and company size. Their findings show that companies classified as “long term” outperformed their shorter-term peers on a range of key economic and financial metrics.

From 2001-2014, the revenue of long-term firms cumulatively grew on average 47 percent more than the revenue of other firms, and with less volatility. Cumulatively, the earnings of long-term firms also grew 36 percent more on average over this period than those of other firms, and their economic profit grew by 81 percent more on average.

Planning for the long-term 

Looking at our human nature, we deal with uncertainty by either (1) hoarding cash which may explain our personal or organization short-termism or we step back and build a relationship with the future. Planning for the future without losing sight of the short-term is the only way that we can solve the apparent Wall Street paradox that suggests that a business as only one of 2 choices, either focus on short-term profits or long-term value. Long-term focused organization solve this apparent paradox and this is done by embracing the all instead of sticking with the either/or mentality. Then and only then they can manage and defend their core business while leading from the future.

Adopting a long-term attitude through Futures Thinking (FT) or Corporate Foresight (CF) and managing with the Three Horizons Framwork (THF), organizations and individuals alike will benefit from many advantages because they will build a deep sense of psychological security, they will achieve stability through vision and empowerment, set horizons-based objectives, develop a strong vision that informs the present, articulate strategies that informs tactics, adopt best practices based on a sense of direction and comon sense and consequently achieve higher relevance in their market and consequently a higher financial performance.

What to do?

As we suggested, we promote the idea of studying the Three Horizons understanding them, playing and experimenting with them. Read more about it here.

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