Long-Term Focus
6 December 2010:
The management of many organisations takes place on a short-term basis. Attention goes primarily to the current year's results, or even the current quarter's. Only investments with a short payback period get approval. This short horizon obstructs the process of structurally strengthening the organisation's position. If the organisation does make investments, it often agrees on an unrealistically rapid path of growth to round off the calculation of the business case. This leads to years of frustration for all concerned. Summer Champions focus on long-term success. Their policies reveal hefty investments in activities ensuring return only in the long term, like product development and training.
Amazon's CEO Jeff Bezos told an interviewer from the Harvard Business Review 'We are willing to plant seeds and wait a long time for them to turn into trees. I'm very proud of this piece of our culture, because I think it is somewhat rare. What I have found - and this is an empirical observation; I see no reason why it should be the case, but it tends to be - is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company.'
This short-term focus in companies - but also in politics, for instance - is a relatively recent phenomenon. In the Middle Ages, construction continued on huge buildings for generations and farmers worked the land with circumspection to preserve it intact for subsequent generations. The paradox, now that life expectancy is higher than ever, is that the horizon for decisions has become shorter and shorter. Canon's time horizon would be called 'medieval' given that framework. Their corporate website defines its aim as 'pursuing sound growth to ensure that Canon continues to thrive for one hundred, and even two hundred more years'.
As early as the 1960s and 1970s, McDonald's realised the advantages of owning its establishments' land and buildings. Ownership is more expensive for the first five years, but after that it becomes much more advantageous due to not having to pay rising rents. McDonald's still owns the majority of the real estate of its establishments, both of its own restaurants and those of its franchisees, making it one of the largest real-estate owners in the world and giving it a strong competitive advantage.
The same goes for Disney; it also embraces long-term thinking as a principle. This company too owns most of the real estate of its amusement parks. Disney reveals its long-term approach in other areas as well. When its competitors in animated films were using six to eight frames per second, Disney maintained a standard of twenty-four, making old Disney films look fresh and modern even now.
Disney also maintained a strict distribution strategy for DVDs, meaning that it took the films off the shelves after six months, even if they were still in demand; only after five or ten years did Disney reintroduce them. In the short term, this strategy restricts turnover, but in the long term it maintains demand.
The films often produced more revenue on their second release than on the first. Since 1992, six of the eight bestselling DVDs have been Disney's. In practice, many forces prevent managers from targeting long-term growth. Bonuses are often linked to achieving short-term financial goals. Stockholders and investors are impatient. Telecom expert Paul Budde explains in his blog how short-term thinking and shareholder focus limits large telecom companies.
By running their media portals as closed operations with their own applications, and charging external content providers up to 80% of their revenue for entry, they made these services very expensive and restrictive. As a result, mobile operators generate less than 1% of mobile revenues from content services.
By way of contrast, Apple launched its iPhone based on an open applications platform. Two years later it has 140,000 applications and in 2010 the revenue generated by these apps will overtake the portal revenues from the telcos. Budde states: 'More than 80% of these apps are free, but already the other 20% create more revenue than the combined proprietary portal business. Yet in our discussions with mobile operators over the last decade they always say that they don't see a business model in free content - this is invariably followed by their standard sentence "and this would not be in the interest of our shareholders".'
David Packard of HP writes in his memoirs: 'It is always possible to improve profits for a time by reducing the level of our investment… but in the long run we pay a severe price.' Ultimately, stakeholders benefit from structural long-term success. Expectations must be managed smoothly, though. Amazon got away with many years of losses because it had never promised anything else.
The long-term focus of Summer Champions translates into their interactions with stakeholders - suppliers, employees and the broader public.
Suppliers
Summer Champions cherish firm long-term relationships with their suppliers. They do not go after the lowest price in the shortest term, but target maximum long-term value. They do make heavy demands on their suppliers, but if suppliers meet these demands, Summer Champions prove themselves to be loyal customers, generating more business. This stimulates suppliers to invest heavily in the client relationship, thus giving the Summer Champions large advantages in costs, quality and innovative power.
Caterpillar has a 'Certified Supplier Program' with 1100 suppliers. Once it is part of the Caterpillar network, a supplier can profit for decades. For instance, Michelin has held the rights to supply Caterpillar with tyres ever since 1960; TC Industries has worked as a manufacturer for Caterpillar since 1948 and Harrison's Steel has been supplying steel to Caterpillar and its predecessors since 1914.
Starbucks too maintains a long-term vision regarding suppliers. Starbucks adheres to strict criteria for coffee farmers, including issues like bookkeeping, the environment, employees' living conditions and coffee quality. This demands adjustments to the production methods and long-term investments of its suppliers. They go to the trouble, though, because they know that once Starbucks starts doing business with a supplier, it continues for a very long time.
McDonald's chose from the very beginning to use a limited number of primarily smaller suppliers. These developed custom-made products together with the company. For many of these suppliers, McDonald's is now by far their largest customer. Ray Kroc said they were so terribly busy that they didn't have the time to negotiate with a lot of different suppliers from week to week, so he told his suppliers that one day they would have gigantic turnover from McDonald's business. Innovations that suppliers developed especially for McDonald's, including chicken nuggets, frozen hamburgers and a great number of processing innovations (see details further on) were of decisive importance for McDonald's success.
IKEA's policies are for the long term too. Although IKEA aims keenly at cost price, it does maintain long-term relationships with its Chinese and Eastern European suppliers. After the Soviet 'liberation', many Polish suppliers ran into problems and IKEA provided financial support to keep them afloat.
As a rule, Summer Champions also regard their employees with the same long-term vision. Summer Champions do ask a great deal of their employees, but they also invest heavily in them, preferring to retain them as part of the company for long periods. Different Summer Champions (eBay, Cisco, Google, IKEA and Starbucks) have been on the Fortune list of 'best companies to work for' in recent years.
In the early years, Howard Schultz of Starbucks was profoundly aware of how essential it was to hang on to the 'baristas' or bar personnel because they had personal contact with the clients and knew their preferences by heart.
Even when Starbucks was still incurring losses, Schultz managed to convince the board to give all the employees full cover for medical expenses. He calculated that lower acquisition and training expenses and higher client loyalty would ultimately prove this the best financial option as well.
David Packard said in a speech in 1960: 'We do not intend to have a "hire 'em and fire 'em" operation. Our rigid requirements of technical competence … requires that we have good people at all times. So we feel it is our responsibility to provide opportunity and job security to the best of our ability.'
The recession that began with the credit crisis in 2007 put a variety of Summer Champions under severe pressure. Heavily hit companies like ArcelorMittal, Caterpillar and Starbucks were unable to avoid letting people go on a major scale. As many as possible went via voluntary arrangements, but some had to be involuntary. Where possible though, Summer Champions tend to look for ways of making costs flexible through voluntary pay cuts and shorter working hours.
Carol Velthuis started her career at Unilever managing brands such as Boursin and Lipton. After working as a strategy and marketing consultant at Arthur D. Little she founded Quintel Strategy Consulting. She has supported clients in managing large and complex processes. She teaches on the MBA programme at Rotterdam School of Management and regularly publishes in various media.
Source: Finance Director Europe, First published on 2/12/10
