x Abu Dhabi, UAETuesday 25 July 2017

The perils in short-termism

The Life: Is the prospect of short-term gain for a company making some leaders compromise when they do not need to?

Pepsi, which had launched a 10-year plan to focus future profit and growth on healthier products, has reset its plans. Hoang Dinh Nam / AFP
Pepsi, which had launched a 10-year plan to focus future profit and growth on healthier products, has reset its plans. Hoang Dinh Nam / AFP

Recently, PepsiCo's chief executive, Indra Nooyi, revealed a strategic "reset" in which the company will aggressively market its core products - soft drinks and salty snacks.

On the surface, there is nothing surprising about investing in your core offering. But for Pepsi, it seemed that the company was eating its words, so to speak, and raised all sorts of questions.

A few years ago, Pepsi launched a 10-year plan to focus future profit and growth on healthier products. The chief executive at the time said Pepsi had no choice but to move in a healthier direction, as consumers had gradually defected from carbonated soft drinks and a cloud of criticism overshadowed the company's largest business - snacks by Frito-Lay.

This abrupt strategic "reset" is being undertaken in response to investor concerns. As Kelly Brownell, a professor at Yale University's Rudd Center for Food Policy and Obesity, has said: "The quarterly pressure of profits makes companies have to respond to short-term gain."

Since junk food still sells, perhaps better than investors were led to believe at the onset of the health focus, Pepsi has had, disappointingly, to change direction.

Commercial decisions such as this raise several questions of which business leaders need to be cognisant when responding to short-term challenges, as some of these questions trigger discussions among employees.

"Is all of the talk real?"

It is natural for employees to ask such a question. Scepticism appears when there is a divergence between talk and action. It is confusing when an organisation espouses a particular message, or direction, and then shifts course, apparently catering to a contrarian voice.

"Is the company just focused on money?"

Setting value aside to make crass commercial decisions that cater to shareholder demands reinforces the perception that "it is only about money". Should a business forget about all other types of motivation? An old adage matters here as well: what gets measured matters most. So, if an organisation just measures money, especially short-term gain, it will have to live with the consequences.

Leaders should consider the long-term impact of short-term thinking. They must be fully aware of the long-term limitations that come from maximising what is good for today.

In the instance of Pepsi, refocusing on the core business may be good in the short term, but it makes the company vulnerable to niche businesses or competitors that are interested in healthier options. Shifting the course of this big ship will take two to three years. Shifting it back will require another laborious period.

Short-term reactions are music to the ears of nimbler competitors.

Obviously, questions and concerns about the future direction of the business emerge in the employees' minds. While some actions may yield a short-term gain, or quarterly impact, they can be detrimental for long-term productivity, as employees may become cynical about a leader's motives, words and actions.

Tommy Weir is an authority on fast-growth and emerging-market leadership, the author of The CEO Shift and the managing director of the Emerging Market Leadership Center

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