BALANCING SHORT-TERM PLANS AND LONG-TERM OBJECTIVES

Balance is not just critical to making good decisions. It is also an important aspect of how an organization operates. At every level of the organizations I've been a part of, the following is a frequently asked question: “Are we running the organization for the short term or the long term?” The answer that people want to hear is “for the long term.” In fact, if you answer anything else, you will appear naïve. But if you say you are managing for the long term, the most likely next question will be, “Then why are we spending 95 percent of our time focusing on the short term and the current quarter?”

As I engaged in self-reflection, the answer became clear to me: we were running the organization for both the short term and the long term. Having held the position of CFO and then CEO of a large, publicly traded global company, I can assure you that you also have to manage the short term because you have the responsibility to report your progress quarter by quarter to senior management, the board of directors, and shareholders. (I used to joke that I was not really at Baxter for twenty-three years, but rather ninety-two quarters.)

Most organizations establish several short-term goals for any given year: sales and earnings targets, manufacturing a certain amount of product, and so forth. Meeting these objectives requires managing for the short term. However, that given year represents not only the “short term” but also the fifth year of a long-term plan that you established five years ago ... and the halfway point in a ten-year plan. In other words, at any given point, you need both to achieve this year's results and to plan and invest for the next four, five, or even ten to twenty years. It's a matter of looking at the organization holistically, focusing on the short term yet never losing sight of long-term goals.

How this works in the real world can get tricky. Let's say your company projected that it was going to earn $2 per share this year. At the same time, the organization is committed to investing for the future. Therefore, the plan for this year includes investing $300 million in R&D. The R&D investment isn't going to generate any sales or earnings for the next few years, but it is essential for the company's long-term growth and success. Now, let's assume that the actual sales generated this year are less than the company planned, and margins are disappointing. As a result, earnings will fall short of expectations. One way to achieve your projected earnings would be to cut R&D investment for the year to $200 million. That way you'll have enough profit to hit the $2-per-share target. If you make that decision, however, you have sacrificed the long term to reach a short-term objective. You are broadcasting to the world not only that short-term results fell short of expectations but also that the company's future will probably be less attractive because R&D investment for the long term was reduced. In this scenario, it would not be surprising to see the company's stock price decline significantly because of concerns over the current state of business and future prospects.

Fortunately, the opposite is also true. Let's suppose that the company is on track to make its projected $2 per share in earnings and will continue with its plans to invest $300 million in R&D. However, the head of R&D informs you that a project the company has been investing in is doing so well that, with an extra $100 million investment this year, a product could be commercialized and approved in three years instead of seven. If you increase R&D spending, however, earnings will fall short of the target, resulting in $1.90 per share instead of $2.00. If the company does a good job of explaining that earnings are lower because of accelerated R&D investment for a promising project, the news will probably be favorably received, and the stock could go up significantly.

There are many scenarios in which you must balance two different goals—for example, managing the company for growth and also for return, or treating every person on the team with respect and managing a lean organization that may have to lay off 10 percent of the workforce in order to be globally competitive. These are not “either-or” scenarios; rather, they require a balance between two objectives. Your actions will sometimes lean toward one end of the spectrum, and at other times the opposite. What is most important is to be mindful of the entire spectrum so that you can keep everything in balance.