Photograph When a business is going well, I’ve seen leadership teams conform to an unwritten 80-20 rule of thumb: They spend about 80 percent of their time focused on growth for the long term and only 20 percent managing the short term. But when things are not going well, I’ve observed the opposite: The temptation is to focus almost exclusively on the short term, with leaders spending a mere fraction of their time looking ahead.
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An ultra-short-term focus, however, is not sustainable. As pressing as today’s demands are, as businesses continue to struggle with impact of COVID-19 and economic uncertainty, leaders should strive for balance between the short term and long term to produce value that benefits all stakeholders.
Admittedly, maintaining a long-term view has been challenging for business leaders who, over the course of the last year, were confronted Consider dental supply companies, whose sales in the U.S. were cut At the other end of the spectrum, there has been dramatic growth in areas such as telehealth, which was projected to see a 65 percent increase in demand in 2020 alone. Even this positive scenario can cause management to concentrate almost exclusively on short-term opportunities to capture market share rather than on anticipating future customer requirements.
Absent a long-term view, leaders may inadvertently shortchange future prospects and value creation.
Generating value
In good times and in challenging ones, business leaders need to allocate capital and people for the benefit of all major stakeholders — employees, customers, shareholders, and society in general. As my colleagues and I wrote in a recent article in the Journal of Applied Corporate Finance, leaders have a responsibility to produce “sustainable increases in long-run value, and then help the stock market reflect, or prospective buyers recognize, that value.” A key practice in establishing long-term value creation is to use the net present value (NPV) test. In financial terms, an investment passes the NPV test when the discounted present value of its projected cash flows over time is greater than the cost of producing those cash flows.
Absent a long-term view, leaders may inadvertently shortchange future prospects and value creation.
What sounds straightforward becomes far more difficult if management is not investing enough of its energy and focus on the long term. Of course, any crisis and its impact must be managed in the short term — for example, controlling costs, avoiding supply chain disruptions, and rightsizing the workforce. Value creation, however, requires a longer-term view.
What leaders can do
In a world of uncertainty, company leaders and boards of directors need to keep perspective Focus on the known. Management and boards need to focus on what is known. For example, the pandemic is not going to last forever, nor will it be over within a few weeks. The latest projections from the World Health Organization are that COVID-19 vaccines will likely not be widely available until mid-2021 in developed economies, and it will be 2022 before the rest of the world gets vaccinated. Based on these projections, how would a company’s business be affected in the next three to four months, six to 12 months, or one to two years? By running various scenarios, management can decide on the best responses to both crisis and opportunity, which is especially helpful in capturing a stronger competitive advantage as the pandemic subsides and the next business conditions emerge.
Rightsize human capital. One reason a company grows faster than its competitors is that it has the best people and a low turnover rate. Amid a crisis, however, focusing almost exclusively on the short term may lead to decisions to lay off massive numbers of people without considering the cost of finding the right talent in the future or the implications of the best people being hired
Keep a balanced perspective. As business resumes and evolves, companies can get back on track with a balanced perspective — which can be gained Although the future seems uncertain, that doesn’t mean business leaders cannot plan for it. Leaders can focus on the major areas that impact shareholder value: growth, profitability, capital requirements, and cash flow. Focusing on value creation for the long term will help companies weather the current storm and emerge even stronger.