Revenue, earnings, and market cap are the three ways forward-thinking companies outperform their short-sighted counterparts, according to McKinsey analysts.
No business leader can deny — these are powerful incentives. Especially in turbulent times like these.
• Why, then, does short-term financial business thinking persist?
• What do long-term business goals look like at the early-stage startup phase through to the mid-market and onto commercial and enterprise levels?
• Most importantly, how can leaders establish worthwhile long-term goals and set their teams on a trajectory to achieve them?
Good questions. Let’s take a look.
Why Long-term Business Goals are Important
Every business leader wants both short- and long-term success. But short-term thinking comes naturally. It’s not a challenge to address squeaky wheels, especially when under pressure to regularly report wins.
No, what makes a substantial difference to a company’s future performance is long-term thinking.
Financial benefits
- The higher earnings, revenue, and market capitalization mentioned above: How much, on average? Respectively, 36%, 47%, and $7 billion.
.png)
Source: Measuring the Economic Impact of Short-Termism, McKinsey Global Institute
• Relaxed standard deviation: This means fewer fluctuations, in general, over time. These reduced and buffered swings project a reassuring steadiness.
• Eighty-one percent increased economic profit: Among other things, McKinsey research also shows that those companies’ earnings earned more over time than the short-term goal setters’ did — the opportunity cost of capital investments.
• More loyal, unswerving investors: In a Harvard Business School analysis of over 70,000 earnings calls, leaders using the verbiage of long-term financial objectives attracted more long-term investors. Conversely, leaders who spoke in terms of “latter half” or “weeks” enticed short-sighted investors who held companies’ stock for shorter durations.
• Better shareholder returns: Companies that took a long-term view in the McKinsey study rendered higher total returns to stockholders than companies with short-termism pervading corporate management.
Nonmonetary benefits
Building the kind of company you’re proud of doesn’t mean just making more and more money. Some benefits of long-term goals aren’t financial at all, including the following:
• The ability to better withstand catastrophic events: McKinsey’s researchers also found that forward-thinking leaders built companies that weathered storms such as banking-industry collapses, global natural disasters, and pandemics.
• Confidence: Leaders with a long-term vision showed more willingness to make bold, agile moves when needed to serve those future goals, according to another recent McKinsey cross-reference study.
• Mental clarity: Teams are free to work cohesively with shared, unwavering distant goals and short-term milestones to help guide the way.
• More efficient operations: That same integrated team spirit can mean less time wasted rerouting for short-term diversions.
• An impressive positive societal impact: The McKinsey study showed firms with long-term goals created an average of 12,000 more jobs. They were also less likely to cut jobs just to achieve earnings expectations. And these added and saved jobs alone, if applied to the rest of the country’s companies, would add up to $350 billion a year to the GDP. That economic encouragement could be felt at every level of life.
Why short-term thinking persists anyway
Short-termism rewards instant gratification. Leaders are incentivized to creatively cut corners. Psychologists at McGill University said these rewards solidify brain structures and mental patterns, making it harder to escape the trap of proximate benefits every time the pattern is repeated.
Leaders of privately-owned companies sometimes dismiss this warning as inapplicable, because the transparency of quarterly earnings isn’t a rhythmic part of their corporate experience. But analysts at Ernst & Young found that openness is just one of many factors that go into corporate short-sightedness, and overcoming them all would benefit our entire society.
As McKinsey senior partner Michael Birshan, partner Thomas Meakin, and senior partner Kurt Strovink wrote: “New CEOs find it daunting to make decisions they know will generate value over the longer term, but in the process, create short-term pain that may dominate their tenures.”
Thankfully, acknowledging the mentality of immediacy — and staying on top of it — is the hard part. Breaking free and establishing long-term financial objectives (and achieving them) is simple.
10 Tips for Strategic, Long-term Goal Planning
Small and large companies will have different long-term goals (which we’ll illustrate in a moment). However, both can benefit from these tips when setting long term business goals:
1. Learn the main goal-setting frameworks.
One of the most dramatic goal-setting strategies is known as the BHAG method. “big, hairy, audacious goals” are great for motivational speeches and vision-casting brainstorm sessions. But they can easily get out of line with your company’s values. By nature, BHAGs tend to be so far removed from your employee’s day-to-day duties that individual teammates can become disenchanted each time they’re reminded of it.
Another approach is abbreviated OKR, which stands for “objectives and key results.” These are a bit more strategic than the buzzy BHAGs of visionaries. OKRs are also more organized. A company (sometimes a department) usually selects between three and five long-term goals and arranges the same number of measurable performance outcomes, or results, under them. When those results are achieved, usually the goal is accomplished as a happy by-product.
Next up are S.M.A.R.T. goals. These are “specific, measurable, achievable, relevant, and time-constrained” goals. They’re popular because they can be applied to units as small as individual people and their families, all the way to commercial businesses and governments. The mental exercise of vetting every goal through these filters makes this framework a favorite for business leaders everywhere.
The final conventional goal-setting framework is known as MBO. This acronym stands for “management by objective.” It involves employee participation and accountability, making the achievement of the goal a collective experience.
Knowing the types of goal-setting philosophies can help you choose the best one for your industry and team, so get to know the options before moving forward.
2. Involve employees.
You don’t need to choose the MBO framework to involve your teammates’ individual voices in plotting your course. In fact, Dr. Jac Fitz-enz and SuccessFactors Research conducted a study titled How Smart HCM Drives Financial Performance and found that 44% of high-performing companies aligned their business goals with the goals at the managerial level. Of the weaker-performing businesses, none did.
3. Remember: short-term goals are not the enemy of long-term goals.
Short-term goals should feed into your distant-future goals. They’re there to support the business’s values and long-term plan. Anything that doesn’t should be dismissed as a business-breaking distraction.
4. Run all potential goals through your mission statement and values.
The word “Integrity” was displayed predominantly, ornately in the lobby of the Enron office — right up to the day the company was exposed as a scandalous villain. Did they lack goals? Not at all. They simply allowed their goals to negate their most important commitments.
5. Hire a consultant.
An outsider can ask questions about your business that you wouldn’t have considered. Those pressure tests may reveal both opportunities and risks you wouldn’t have even known were there.
6. Use multiple financial-modeling methods to assess every idea with data (and eliminate the underperformers).
Contact Ignite Spot to learn what kind of forecasting a virtual CFO can perform for your company. Based on the analysis and modeling of an outsourced expert, you’ll have multiple trajectories to choose from.
7. Involve opportunity cost assessments.
With every potential long-term goal comes the real cost of not achieving another goal. Get the hard data on all of your options before choosing and committing your whole business toward accomplishing the wrong one.
8. Include concrete time lines and define/designate roles.
Each team member needs to take some sort of ownership for your business’s long-term goals. Now that you’ve established what they are, assign tasks to move the business toward those objectives.
9. Establish milestones for short-term wins everyone can celebrate.
Think of short-term wins as dots on a connect-the-dots journey. Eventually, they complete an entire picture — the overarching goal. Celebrating them helps every team member stay committed to your long-term business goals.
10. Plan for pivots, not distractions.
Avoid the pitfall of changing long-term goals flippantly because you’re “agile.” Nimble companies change tactics to respond to cultural and market-specific shifts. By contrast, flighty and indecisive leaders allow long-term goals to be abandoned altogether in favor of distracting short-term wins.
Need help setting goals for your business? Download the free business checklist to learn the 8 factors that give you a competitive advantage.
Examples of long-term goals for early-stage startups versus established companies
Small businesses share many goals with their enterprise counterparts. Yours will include data points (percentage points, dates for completion, amounts, etc.) specific to your company and objective, but these ideas will get you started.
Some typical long-term goals for a smaller business:
• Secure funding.
• Acquire a competitor.
• Become profitable.
• Increase market share.
• Manage growth, profitability, and cash flow simultaneously.
• Achieve 360-degree compliance.
• Achieve double the industry-standard CSAT.
As a company grows, some commercial- and enterprise-level specific visions like these may emerge:
• Reinvest liquidity wisely.
• Diversify streams of income.
• Experimental R&D.
• Integrated reporting.
• Implement TQM (total quality management).
Clarity before, during, and after long-term goal setting
Today’s economic stressors may have you feeling like you’re in survival mode. Remember: the businesses that will emerge successfully from these crises are those that establish and stay grounded in their long-term goals.
The first step of forging and achieving your long-term goals is financial clarity. Ignite Spot’s expert accountants give you eye-opening reports and dynamic projections to envision — and then achieve — your business goals. Download our pricing guide today to find the right accountant for your business.
.webp?width=300&height=67&name=image%20(4).webp)
.webp?width=160&height=160&name=Gold%20(1).webp)
