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Transitioning from a "Short-Term Profit Taking" to a "Long Term Value Creation" Mindset

Short Term-Long Term Business StrategyHere is the second in a series of three blogs authored by Sobel & Co.'s Jeff Sisco:

In our previous blog discussion, I introduced you to a concept that I believe is severely destructive to most businesses—the quarterly economy trap.  The quarterly economy trap is an approach to managing a business in which the executive and his or her advisors maximize short-term profits to the detriment of long-term value creation. This approach is extremely painful for us to see in the valuation and strategy practice. Our primary mission is to assist our clients in the creation of long-term, sustainable value in their businesses. Long-term value creation and short-term profit taking rarely, if ever, co-exist.

So my last blog post piqued your interest in long-term value creation over short-term profit taking. But you are immediately faced with a challenge.  “How do I change the mindset of my strategy team and advisors away from short-term profit taking and toward a mindset of long-term value creation?” The answer to this question has a few key parts. Some solutions will be easier than others, but in our experience all are manageable.   

The first step in any major shift in corporate mindset or culture—yes this will be a cultural shift for your company—is to explain to your key stakeholders why shifting mindset away from the short-term, toward long-term value creation is critical to your goals. Companies are collections of people. The literature in the fields of organizational behavior and human performance tells us that people accept change more readily, and perform far better, when they understand the “why” of their actions. Tell your people your goals. Tell your people that in order for the company to accomplish these 2-3 very ambitious goals, you must begin to think longer term than this accounting period, this quarter or even this fiscal year. This will be a big undertaking as everything from compensation and bonus structures, to human resource initiatives, to your physical plant is typically driven by shorter-term thinking.

After you explain the why to your key stakeholders it is critical to lay out the how. That same literature we relied on in organizational behavior and human performance regarding the why is equally applicable to the how. Executive management must provide parameters and guidelines for how this shift in mindset will take place. I must make a critical distinction at this point. To me, the how is not a roadmap for how to think. I view the how as guard rails on a highway. How is a set of parameters that your stakeholders use to get to your desired end state or goal. Obviously, without the why, there can be no how. You will end up with a highway to nowhere.

After you establish the how, it is critical to establish the when. In our experience, it is extremely difficult to effectively measure meaningful change when you have an open ended timeframe for completion. In the case of moving toward a shift in culture and mindset, the when might seem like a moving target. This is true, but only to a point. As the leader of the mindset shift, it is critical that you set the pace with meaningful actions.  The sooner and more consistently you do this the better.

So far, in parts 1 and 2 of this series, we have explored the trap of the quarterly economy mindset and the shift in culture and mindset necessary to avoid it. In part 3 of this series, I will discuss what long-term value creation looks like and why making the shift is one of the most strategically important decisions you can make for your business. 

Our valuation and strategy practice has created a unique service offering that bridges the information gap between value and strategy. Knowing that a privately held company cannot look to the market place to understand its value, we created a product that is vital to your strategic planning process. Our Value Intelligence service gives senior executives the insight into firm value that is critical to the formulation of strategy. In addition to providing you with a Calculation of Value, we identify several financial drivers that impact long-term value creation in your business. Lastly, we also identify the top 3-5 risks to your company’s ability to create value in the next 1-3 years.

If you have any questions or would like to discuss a valuation or strategy engagement, please contact Jeff Sisco at jeffrey.sisco@sobel-cpa.com or at 973.994.9494