The Race to the Bottom
It’s a dark, rainy Wednesday morning in October 2023 and Phil is sitting at his desk on 5th floor of the Reading office. He can hear the chatter outside his glass office and as he looks up he can see people gathered around a whiteboard, energetically drawing up ideas. His stomach is churning and he can feel a lump in his throat…
How can I tell them?…we do this every year, all that time and energy getting people all fired up and then they take the wind out of our sails.
A budget freeze till the end of the year, no travel unless authorised from the very top, let all contract staff go and delay all “non-essential” spending…so basically put the brakes on AGAIN!!..
In times of economic uncertainty, an easy trap for leaders and managers to fall into is a cost cutting mindset. Typically freezing “non-essential” spending, often including key projects, in order to maximise year end profits.
Whilst a perfectly natural reaction to uncertainty, history shows that this can be a dangerous trap…
Aside from anything else, it sends a very strong signal and one that you may not wish to send. A signal that these changes aren’t as important as you said they were. And that becomes infectious very quickly. It’s also harder to recover the momentum when the new budget year kicks back in.
Longer term, this stop, start approach to critical initiatives, whilst having the appearance of being financially prudent, actually becomes the opposite as the company begins to fall behind in terms of capability. The trouble is that the long term impact is hard to spot, while the immediate benefit is more tangible—like the doughnut today with its instant sugar high versus your longer-term health.
And there’s something else:
While you are busy cost-cutting, it’s very likely that a start-up somewhere is busy investing and getting ready to disrupt your market.
I saw this happen in a big way in the music industry in the late ’90s, and many times since.
In other words, a short-term, risk-averse mindset tends to creep in just when a more aspirational and entrepreneurial leadership style is what’s really needed. The trouble is that by the time the effects of short-term thinking become visible, it’s often already too late.
The Ownership Model Conundrum
One factor that often encourages this mindset is the ownership model. Publicly traded companies, driven by the need to satisfy shareholders, often face pressure to deliver immediate returns. Unfettered, this can encourage a short-term focus, as companies prioritise quarterly earnings over long-term thinking.
Majority-owned companies, such as family-owned or privately held firms, often have a little more flexibility to pursue long-term strategies. A generalisation for sure but with some truth behind it. When you think about the motives and drivers, it makes some sense.
There’s a cultural dimension too: Japanese companies, for instance, have in the past tended to take a longer-term view than Western organisations, partly driven by national values—another generalisation but with some evidence.
In essence this comes down to the appetite of leaders to take some short term pain for the long term gain. To meet the short term pressure from shareholders head-on with a more compelling alternative. There are plenty of examples of publicly traded companies successfully implementing long-term strategies despite shareholder pressures.
Fit the Leadership Style to the Environment
In times of relative stability and certainty, a managerial mindset can be successful, focusing on year-on-year growth, acquisition, streamlining, and running a steady ship. It can bring solid and consistent returns for everyone.
But times of change and uncertainty require a different kind of leadership mindset—something far more transformational and disruptive. A force that ignites change and unites people behind a clear and compelling story.
The kind of leadership that breaks through the status quo and short-term thinking, regardless of the ownership structure. One that drives a compelling long-term narrative that unites people and, crucially, builds a sense of belief and possibility.
Microsoft, Alphabet, Amazon, and Tesla are just a few of the more obvious examples of companies that have successfully implemented long-term strategies despite shareholder pressures. In the case of Microsoft, the company had drifted into the short-term “managerial” mindset and managed to break free under Satya Nadella. He focused on turning around the culture—a long-term strategy that has been key to their phenomenal comeback and ongoing success.
What Does Transformational Leadership Look Like?
Transformational leadership is the kind that inspires employees, building a culture of innovation, and focusing on long-term sustainability. It’s more entrepreneurial than managerial. The boat captain who doesn’t just steer the boat but also inspires the crew to believe they can win the race—to give more than they thought they were capable of, to weather the storms, and pull together towards victory.
Some common characteristics that define the transformational leadership mindset include:
- Visionary: Transformational leaders have a clear and inspiring vision for the future.
- Charismatic: They have a magnetic personality that draws people in.
- Inspirational: They motivate employees to go beyond their self-interest and limiting beliefs.
- Intellectually stimulating: They challenge employees to think critically.
- Empathetic: They pay attention to individual needs and development.
- Leading by Example: They walk the talk.
- Brave: They are courageous enough to challenge the status quo, take some personal risks, and lead through uncertainty.
Some examples of leaders who have embodied this approach include:
Jeff Bezos (Amazon): Bezos consistently prioritised long-term growth over short-term profits, focusing on customer obsession and innovation. His relentless long-term vision helped Amazon dominate multiple industries, from e-commerce to cloud computing.
Reed Hastings (Netflix): Hastings transformed Netflix from a DVD rental business into a global streaming giant. Despite initial resistance and short-term losses, he focused on long-term innovation and customer experience, which disrupted the entire entertainment industry.
Elon Musk (Tesla, SpaceX): Musk’s commitment to long-term sustainability and innovation drove Tesla and SpaceX to become leaders in electric vehicles and space exploration, despite years of financial uncertainty and short-term losses.
Howard Schultz (Starbucks): Schultz returned to Starbucks during its struggles and focused on long-term initiatives such as retraining employees and improving customer experience. His actions, though painful in the short-term, were critical in turning Starbucks into a global powerhouse.
Sara Blakely (SPANX): Blakely’s entrepreneurial leadership and focus on long-term growth allowed SPANX to thrive without compromising on innovation and quality, despite intense competition.
The Alternative Isn’t So Compelling
History is the harshest judge and there are countless companies that have failed due to short-termism. Kodak’s reluctance to embrace digital photography, despite inventing the technology, led to their failure because they were more concerned about protecting their traditional business, which disappeared anyway.
Blockbuster famously passed up the opportunity to buy Netflix, focusing instead on maximising short-term revenue from DVD rentals.
The major music labels lost their way and made losses for many years, focusing more on protecting the physical market revenues than growing a presence in the digital world, despite the clear signals from consumers at the time that the future was digital.
Breaking Free
So how can you break out of this short term mindset? Here are a few practical steps you can take:
Focus on market trends and core value, not just financials: Keep an eye on longer term trends and disruptive innovations, both in your market and beyond – imagine the future.
Appeal to what matters to people – Everyone from employees, executives, even investors are also human and can be persuaded. The key is to identify what they truly value and aspire to and then show them a compelling vision that delivers it.
Make the comfortable feel really uncomfortable: Get employees, executives and investors out of their protective mindset by clearly showing the impact of the “do nothing” picture in 12 or 24 months time if they stay as they are. That can be a bleak prospect in a fast changing environment—and exactly what you need to get buy-in for a long-term strategy.
Focus on creating momentum – You won’t get everyone on board immediately, but you don’t need to. You just need enough to create a movement—momentum will build if you create the right conditions.
Establish a learning culture: Encourage experimentation and risk-taking by celebrating lessons learned, even from failures. A culture that rewards learning is more adaptable and future-proof. It’s also more likely to challenge the status quo.
Measure and reward long term results: Ensure that people are also measured and rewarded for the longer term and discouraged from decisions that undermine the longer horizon. Of course short term goals are important but only within the context of the future health of the business. The banking crisis in 2008 gave us some valuable lessons.
Invest in people…always: Prioritise learning and development, especially when under pressure, to ensure that innovation and adaptability remain a priority. Whether you empl0y 50, 500 or 5000 people, why wouldn’t you want all of them obsessively focusing on the future and having the skills and mindset to grow the company?
Conclusion
Short-termism isn’t necessarily doing anything wrong; in fact, it could be argued that it’s in line with the leadership mandate of maximising shareholder value. But at what cost in times of high change and uncertainty?
History is full of big-name companies that “couldn’t fail”…and yet they did.
Nokia’s CEO, Stephen Elop, when they were bought by Microsoft in 2013, said: “We didn’t do anything wrong, but somehow, we lost.”
What the leaders above, and many other like them, have demonstrated is that you can break through the “managerial” mindset and get to some far more entrepreneurial. Maintaining a forward looking, transformational mindset is much more likely to lift you and everyone in the company out of the “doom loop” to a more positive future.
And if you’re worried about the macro-economic climate, it’s worth remembering that many of the world’s most successful companies were either formed or grew significantly during periods of recession.
History also shows that real opportunity lies on the other side of the hard stuff.
Leave a comment below with your insights and experience. Reflect on your own organisation and whether the current leadership mindset is the right one for what lies ahead.
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