Chap 62: Assessing short term-and long-term performance

Chap 62: Assessing short term-and long-term performance

1. Definition: short term means the timescale within which decisions can be reversed without causing much damage. Long term is a timescale in which resource commitments make it hard to back down.

2. The importance of core competences

   • The idea of core competences is that these a fundamental learnings within the business that give it its inner strength within its particular expertise. Core competences are at the heart of a long-termist approach to business

3. Causes and effects of short-termism

   • Short-termism is when the actions of managers show an obsession with immediate issures rather than long-term ones. Often such managers will use lots of long-term words such as mission, aims, strategy and legacy.
     • The Institute of Directors produced an interesting list of possible symptons of short-termism.
       • Adoption of executive pay schemes that reward achievement of short-term financial goals
       • A disregard for longer-term risks in the company's products, services or business strategy
       • An excessive focus on acquisitions rather than organic growth
       • Overly zealous cuts in employment levels, which destroy the company's stock of human capital
       • Inadequate expenditure on research + development
       • Accounting adjustments that inflate current earnings

4. Effects of short-termism

   • The most important effect of short termism is underestimating or ignoring the opportuntiies that may exist in the long-term.
   • Performance reward systems may over-focus on short-term gains, encouraging staff to achieve profit today if its at the expense of tomorrow; in the ten years to 2014 WH Smith constantly pushed their prices up; this was great for short -term profit but at the expense of the long-term market share of this business.
   • Decisions that seem wise in the short term, but not down the line, such as when Waterstones sold off loss-making online book sales division - to Amazon.
   • Reluctance to invest in capacity, training, R&D and perhaps also in image-building advertising.

5. The tyranny of short-term reporting

   • In theory, the directors of a business are supposed to be looking ahead to the future while the managers get on with the day-to-day process of managing customer relations, suppliers and budgets.
   • But short-term reporting makes this very difficult to achieve

6. PLC Britain versus MitteIstand Germany

   • Germany, by contrast, has a business sector dominated by world-class, medium-sized but family-owned and run businesses - the MitteIstand. The value of the German stock market is only about 40 per cent of the value of annual German GDP.
   • For many years big businesses in Britain has meant publicly listed companies. with shares bought and sold on the stock market. Generally, the value of the British stock market is around 100-120 per cent of the value of annual GDP (the national income).
   • Whereas the business pages of British papers are dominated by the latest results from plcs, in German there is more likely to be reporting on business issues and market opportunities.
   • When Germans are asked about their MitteIstand, they mention two things: family-ownership and humane management. Economists would add in two other features: long-term thinking and a focus on doing one thing well.