Managing for Long-Term Success and Profitability
 |  August 29, 2008

Business Success and Profitability Long-TermGood management has nothing to do with short-term successes and the management elixirs that allegedly led to them. This seemingly banal insight results from a long-term, historical perspective like [Peter] Drucker’s. It cannot be achieved by judgments based on quarterly results, but rather emerges from a deeply rooted understanding of the durable, unclouded by short-term spectacular success stories. Not the momentary “how” is important, but rather the seminal “why.” (Herman Simon, Management Beyond the Day)

Despite well-established management principles that require a long-term perspective be used when evaluating all business decisions and the countless organizational failures and disasters that demonstrate the consequences of ignoring such strategic thinking, many corporations continue to repeat those same mistakes and seemingly fail to learn their lessons. This may be due to the pressures placed on companies to be “profitable” for the next quarter that motivate senior executives to quickly maximize share prices while ignoring the potential negative effects to the long-term profitability, value, and survivability of an organization. Another explanation for this dysfunctional approach may be the flawed compensation systems and executive contracts that reward management for short-sighted profitability decisions without demanding accountability for the long-term organizational profitability and taking into consideration the impact on the long-term value and competitive position of a company.

The irony of an excessive short-term focus on increasing profitability, without regard to the long-term consequences and effects on the employees, the customers, the partners and suppliers, and the overall position of the business is that it offers only a temporary solution and often doesn’t promote or guarantee the long-term competitiveness and success of the organization. Such management decisions usually highlight a reactive rather than a proactive approach to management. In reactive mode executives let emergencies dictate policies and make decisions only after the fact, often too late to prevent the significant damage.

A notable example of the consequences of short-term management thinking can be found in the US auto industry. Earlier this month General Motors announced a stunning $15.5 billion second-quarter loss and 17.7% sales drop. This followed on the heels of Ford Motor Company’s $8.7 billion loss and 13% sales decline reported in August 2008. Previously Ford reported a record $12.7 billion loss in 2006 and $2.7 billion loss for 2007, while GM posted a loss of $2 billion in 2006 and a massive $38.7 billion loss (the biggest ever for an automaker) for all of 2007.

While the two US auto giants have been languishing in some of the most severe crises in both their companies’ histories, both Honda and Toyota are showing steady growth and solid profitability.

In July 2008 Honda announced an 8.1 percent rise in profitability and $1.8 billion net profit for the fiscal first-quarter while Toyota still reported a fiscal first-quarter profit of $3.23 billion despite a 28% drop in profitability. (Note: GM and Ford’s fiscal second-quarters correspond to Honda and Toyota’s fiscal first-quarters and cover the same April 1, 2008 through June 30, 2008 calendar period.)

While GM has been the undisputed global leader in total vehicles sales, in the first half of 2008 Toyota has surpassed it. For the first 6 months of 2008 Toyota reported sales of 4.82 million vehicles (a 2.2% increase over last year) while GM recorded only 4.54 million vehicle sales (a 3% decrease from 2007). If this trend continues through the remainder of 2008, Toyota will take over the number one spot as the largest auto manufacturer in the world.

I believe that a key reason why both GM and Ford find themselves in the desperate situation they are in is due to a failure of their management teams to strategically plan and lead their companies with the long-term perspectives in mind, despite the increasing losses reported in 2006 and 2007. While some changes are coming and both companies seem to have gotten the message that smaller, better quality, longer performing, and higher gas mileage vehicles are what the consumer demands, it’s astounding to see that it took them so long to notice and take proactive steps to respond to the changing needs of the market. Those same warning signs and information was available to other auto executives in the industry. Why is it that management at Honda and Toyota, and many other companies heard and understood the signs, while executives at GM and Ford did not?

This lack of strategic long-term thinking is evidenced by the continuing average engineering of many of the car models in their lineups, the so-so customer satisfaction of their customers, the failure to effectively and expediently negotiate with the powerful unions that hindered the faster changes and improved productivity needed to remain competitive in today’s global environment, the inability to detect and stay abreast of long-term consumer trends and market conditions (both local and global), the continuing lack of focus on quality, reliability, and fuel economy demanded by the marketplace, and the inability to make the tough decisions and take corrective action as soon as possible in order to minimize the damage to the company’s bottom line and long-term profitability.

Profitability is extremely important only as long as it increases the long-term value, survivability, and growth prospects of a company. True and healthy profitability can only be achieved through hard work, focus, and continuing improvement and innovation, that provide real, sustainable, and increasing value to shareholders (owners), customers, and employees. The other kind of short-term “profitability” is merely an illusion that allows the company to be destroyed from the inside for some minimal gains to decorate shareholder reports.

Management must focus on the long-term profitability and growth of the corporation and constantly monitor and measure other key factors that present a much more accurate picture of the overall performance of the business: (a) increased value of the company as a whole (where profits and assets are key elements), (b) increased market share, (c) increased customer retention and satisfaction, (d) lower employee turnover, (e) better brand position, (f) lower production costs, (g) increased manufacturing efficiency, (h) lower transaction costs, and (i) increased employee productivity.

Making sure that the larger picture is not missed while a company continues planning and operating month to month or quarter to quarter and making a “profit” is very important indeed. It is the role of the senior-management/senior-executive team(s) to set the tone and dedicate the necessary company resources and time that will provide management the ability to operate for the long-term. Too many corporations unfortunately, have senior executive teams that are too busy playing politics, or defending their “turf”, or trying to boost their egos, or worrying solely about next quarter’s performance or their own personal gains to think about the future of the organization and its people. They act more like feudal lords or rock stars than the genuine corporate executives tasked with the duty to take care of the employees and assets of a company and insure the long-term growth of value of the owners.

Laura Nash in her book “Good Intentions Aside” also explains how short-term decisions are justified:

But although managers may know intellectually that long-term commitment pays off and short-term corner-cutting can be self-destructive, many nevertheless reason, speak, and act in short-term language. When complexity or doubt threatens to overtake a manager’s confidence, efficiency, pragmatism, and impatience easily combine to create the unambiguously motivating message, “Just get the job done now.”

The cliché, “the fish rots from the head” ultimately holds true. As long as top executive teams continue to perpetuate the same short-term focus and do not change the overall company culture, little if anything will ever change. That is indeed unfortunate since only those companies that understand the reality of the current global marketplace and global competitive environment will be around long enough to reap the benefits.

If the long-term implications of decision-making are given low priority the danger exists that by the time management realizes what has happened it may be too late. I have often used the example of the Titanic. If you want to steer a multi-hundred thousand ton ship and be ready to turn when needed, you need to not only take care of the tactical issues (engines running, batteries charged, crew fed and trained, navigation on track, etc.) but also keep an eye far ahead to be ready to steer the ship of any dangers and allow ample time for it to turn and avoid the iceberg.

With such a large ship, just like a large corporation, turning the darn thing around or steering it in the proper direction takes miles/months. If the correct command(s) are not initiated far enough in advance, you risk loosing the whole thing. Failing to look further out is ultimately more important than making sure the current issues are being dealt with. A ship will survive if an engine stops running or crewmembers make minor mistakes, but without keeping a vigilant watch far ahead to help steer clear of icebergs and other dangers, the ship runs the serious risk of collision and may eventually sink. Same with an organization, delaying profitability and making a few mistakes in the short-term will indeed affect the company, but missing the critical change (technological, managerial, cultural, demographic shifts, customer satisfaction, etc.) will ultimately bankrupt a company.

Just look at the ongoing worsening situations with both Ford and GM and you can see a perfect example of how upper management’s inability to properly plan and manage for the changing conditions of their business and the marketplace has brought disastrous results to both companies. By avoiding the long-term implications of their strategies and management approaches, executives are gradually bringing these companies to the brink of bankruptcy while their key Japanese competitors, Toyota and Honda especially, are experiencing consistent growth and increasing profitability. Will these executives ever learn?

One Response to “Managing for Long-Term Success and Profitability”

  1. 1) |  Top | Sep 18 2008 | HarryV

    If only executives across the US would follow this approach even half of the time, our corporations would be flourishing and the American economy the envy of the world. One would think the universities where these CEOs and vice-presidents got their education and MBAs emphasized the necessity of a long-term view and an emphasis on, as Chris so eloquently stated, an INCREASE in VALUE and profitability for the long haul. Great quote from Herman Simon too!