During a recent round of interviews with Chinese CEOs, one executive made the following comment on the difference between business in China and in the west. “People from the West try to fight a disease by addressing the symptoms, while we in China address the root causes. The latter will take longer, but the solution will last longer.” This perspective says a lot about the approaches to business leadership found in many companies today. In many firms in the West there is almost an obsession with short-term performance – addressing only the immediate symptoms of challenges facing them – resulting in seeking out short-term answers to often long-term challenges.
Further support for this view was highlighted in another interview with a former CEO from Fortune top 50 company from the West. “Businesses don’t spend enough time on ideas or shaping the problem. They go for the quick solution. And they try to break everything down into three-year strategy bytes. But a lot of the changes that businesses need to make to be successful in the future take longer than three years to prepare. It takes time to create new ways of doing things, shift mindsets to be open to them and build the new capabilities that will be required.”
This short-term myopia in a period of long-term challenge is a fundamental threat to businesses today. But what is the cause of this? While not a complete answer, we suggest that one cause is a fundamental misunderstanding of how many executives think about – and put into practice – budgets, plans, and strategies.
Budgeting is an all too familiar process at most firms. Budgets focus on setting concrete targets for the next year (or quarter or month or even day), with such targets being used to measure and evaluate performance. The primary mindset associated with budgets is delivery on commitments by achieving immediate targets. In this view, change is viewed as an interference or expense to the organization. The success metrics for performance are clear—the budgets. You and your unit either achieve or miss the targets, with the key risk being missing these budgets along with associated performance incentives.
Planning is also a familiar for many firms. Planning processes are often formalized, typically focusing on the 2-3 year timeframe and on the existing areas in which a firm operates. These boundaries today reflect yesterday’s choices of products, markets and functions. In each area, planning typically involves rigorous analysis of opportunities and challenges, with a mindset of “What CAN we do” to address them and to avoid failure. In this process change is often viewed as a temporary, disruptive painful process that we must get through before things get back to normal. Success is judged against KPIs and milestones, with the primary risk being making judgments too soon, particularly in preparing for an increasingly uncertain future.
Strategy is a much overused and misunderstood concept in many organizations. Strategy involves framing the future opportunities and challenges, often looking outside or beyond existing firm or market boundaries. It involves identifying and making explicit the options or alternatives available to a business as the basis for making choices. Where the future is as uncertain and volatile as today, strategy does not involve fixing a predetermined end point, but rather selecting the path or direction along which the firm will focus and develop. Along this path, the strategic challenge for a firm, thinking beyond silos and as a whole, is to continuously learn, adjust and lead. In this context, change is a continuous necessity to build the firm’s long-term institutional strength. Given the extended time scale involved in fundamentally reshaping a firm’s activities and ways of working, delay in starting the process of letting go of the past and preparing for the future is the key strategic risk facing many organizations today.
In theory the overall process should be easy and as follows: Strategies should be used in defining plans, which are subsequently used in established in setting budgets. However in reality in all too many firms, this process has been reversed. Most attention is focused on budgets, generally in line with plans that are defined to mixed degrees of clarity and/or foresight. In many businesses, these short-term plans are mistakenly referred to as strategies, so the firm’s strategy becomes the implicit collective sum of budgets and plans. In a world of increasing interdependence, uncertainty and volatility, this misguided approach to strategy can endanger the long-term success of businesses.
Read more about some tools we have found useful to bring global trends alive in your organization today, as a counter-balance to short-term thinking in our recent special report: Bringing Global Trends Alive in Your Organization Today, Part 1.