Building world-class businesses for the long term: challenges and opportunities


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Building world-class businesses
for the long term:
challenges and opportunities
BY Gillian Lees, Head of Corporate Governance, CIMA

Published in: Economy & Finance, Business
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  • I will talk for about 20-25 minutes – I think what would be most useful in this session is to think about some of the obstacles facing companies that want to take a long-term approach. So I’ll go through some of the slides pretty quickly to give us plenty of time for discussion. I’ll therefore just try to quickly set the scene.This is a new report and it is really useful to be able to share our thinking. But I’m just as interested in hearing your views and feedback.Explain context for report and why we chose the case studies - lead up to major CIMA conference in SA
  • And so, to address the issue of building world-class businesses, the first question we must ask is, where are we now? Businesses are facing challenge and change from every direction: see list aboveFinding the new normal can feel like a near impossible task. But one theme is dominant in the current debate – a condemnation of short-termism and a promotion of long-term thinking.
  • One of the major changes that has taken place over the past few decades is the changing dynamic of the shareholder community. An explosion of new players such as hedge funds, sovereign investment funds, private equity funds and others has broken down the premise of common interest. As Ira Millstein, an expert in corporate governance at Yale University has painted a picture of boards of companies confronted by “the explosion of organizations such as hedge funds, private equity funds, state-owned enterprises, sovereign wealth funds, pension and mutual funds of all varieties, and combinations of them all. This array has created for corporations and their boards a "zoo" of owners with different stripes, teeth, sensors, claws, vision, strength, will and attitudes. This situation is exacerbated by the proliferation of investment techniques and instruments , leading to a sharp focus on shareholder value and an emphasis on short-term results.
  • Cadbury had LT vision and had been around for 100 years.Hostile takeover $19.4bn driven by Short Term investors.Hedge fund ownership grew 5% to 31% in attempt to make short term killing. No long term viewAlso recent Cable Review and Haldane paper on excessive discounting. There is a market failure that demands a public policy response.
  • Meanwhile other models are being studied from Germany to Japan. Professor Julian Franks from the London Business School has suggested that the form of capitalism found in Asia and other emerging markets is more efficient and effective than the Western one.So how does the corporate world tackle this challenge? The genuine need for short-term stewardship can distract managers, even those with the best intentions, from their long-term vision. On top of this, defining the long term and embedding it into today’s operations are more complicated that they may seem at first glance. The herd mentality also contributes to placing more urgency on short-term pressures than necessary.
  • However a handful of companies including Unilever, Ford, Berkshire Hathaway and AT&T are finding ways to side-step some of the distractions of the short term. For example by stopping the publishing of quarterly guidance. The key is to identify ways to operate a company profitably in the short term without losing sight of long-term goals.Thomas Lingard, director of global external affairs for Unilever observes the challenge of marrying short-term with long-term goals. I quote: ‘Where you get tension is often when people haven’t thought creatively enough about the challenge. You have to do both. It not about saying the short term doesn’t matter.’
  • CASE STUDY: Shifting performance targets to the long termSelling new cars is a volume game, right? The more shiny sedans that leave the showroom, the better for the dealership.A close look by CIMA at Van den Udenhout (VdU), a dealership with VW/Audi outlets through the Netherlands, showed such ‘common sense’ can destroy value when reinforced by inappropriate performance targets. Like most car dealerships, VdU was organised around profit centres: sales, service, finance and insurance, service, and leasing. Profit centre managers were given ambitious monthly targets, generally linked to transactions, such as the number of cars sold, and, not surprisingly, managers focused on transactions.Customer relationships, however, are far more important to new car dealerships than individual transactions. Selling cars is not particularly profitable, and incidental customers—those who buy a car and are never seen again—generated hardly any profit. Financial services, maintenance, and body work have a much greater impact on the bottom line, yet the performance leaned heavily on sales volume and paid little heed to building long-lasting customer relations and expanding the network of loyal customers. To change the attitudes and behaviours of sales staff and managers, VdU had to redefine how it measured performance, in essence shifting from a short-term focus to a long-term one. It had to go from an emphasis on profit centres and transactions to one on profitability throughout the customer life cycle. The change required that company gather new streams of data and inaugurate a different set of key performance indicators.No hard metrics are available, but VdU was confident that the success of the new approach would become evident to the whole organisation by the end of 2010, thus further reinforcing desired behavioural changes. (More details of this case can be found in Using management accounting to lengthen the time frame of managers, E. Pieter Jansen, University of Groningen, Research Executive Summary series Volume 6, Issue 11, CIMA, 2010.)
  • As you can see from this slide, company statements and business literature offer a full range of potential horizons from one year for small enterprises to, in the case of Unigen Pharmaceuticals, a US/South Korean genetics firm, 100 years.Industries that depend on long-lasting, capital-intensive assets, such as energy and steel, often look 30 or 40 years ahead when making investment decisions. For those that need significant time for product development, such as branded pharmaceuticals, the planning horizon is generally about 15 years ahead. But when fast-paced changes in tastes and technology are factors, such as consumer electronics or fashion, anything beyond a two-year horizon could be meaningless. Size, potential environmental impact, the pace of change and investment timelines, among others, need to be factored into the equation.
  • Long-term means different things to different companies. Yet much of the confusion over how to plan for the long-term can be cleared when companies actively distinguish between a long -term perspective and a long-term planning horizon.The perspective provides a vision of how the company imagines the world, ideally, 20, 50, even 100 years into the future. It provides a North Star that guides the company, offers a sense of purpose and provides an argument for or against today’s decisions. Conversely, the planning horizon must be more practical. It should offer targets that are far enough into the future that creativity isn’t stifled because of time limitations, yet near enough to the present that changes need to begin immediately for the targets to be reached.The crux of the challenge is in creating a smooth seam where long- and short-term needs meet.
  • Being able to work with future uncertainty and translate this into short-term action can be a major competitive advantage. Along with aligning the two horizons, communication and commitment are critical factor for success.Unilever provides a good example. Ice cream cabinets—those ice boxes at corner stores featuring Magnums, Cornettos, and other treats—traditionally used hydrofluorocarbons (HFCs) as refrigerants. The problem was that these refrigerants had a very bad impact on climate change as the gases can be a thousand times worse than carbon dioxide for global warming. Unilever wanted to shift to cabinets that ran on hydrocarbons, which had less environment impact, but which were not commercially available. Refrigerator suppliers may have been willing to develop better cabinets, but the costs could have been prohibitively high. When the company publically committed to changing its 2 million ice cream cabinets globally, suppliers were assured the scale needed to finance development and keep unit costs down.Most companies do not have such unilateral power to shift the market. But by working openly with customers, suppliers, regulators, and—within the bounds of anti-trust laws—even competitors, they can exercise surprising influence on the course of industries.
  • And so to the practicalities. CIMA believes that a world-class, sustainable business must focus on a basic set of priorities. These are: A strategy that effectively connects short-term actions with long-term aspirations. Cost leadership A durable supply chain Satisfied customers Innovation Motivated staff
  • This conclusion has been derived from the CIMA Business Success Wheel. This is a unique business tool which aims to provide a broad view of the key drivers of organisational success. When successful, this approach can create enduring corporate value and organisations that prosper - not just for weeks and years but for decades.
  • There is no guarantee of company success but focusing on the fundamentals will create a sound base upon which to build corporate value and could offer businesses an early warning or game-changing shift in the markets.The CIMA Strategic Scorecard was originally developed to help company boards oversee strategy more effectively and dynamically. As you can see it focuses on the four key areas of strategic development. But its basic framework can also highlight the areas that companies must address to maintain a sustainable business model. In essence, the framework sets the business model in a broader dynamic context. Once a company has developed a clear sense of its vision and purpose, it needs to understand how the external environment and the associated risks and opportunities affect this vision. It should generate and evaluate a range of strategic options, selecting the most promising ones based on its concept of vision and purpose, then move through to effective implementation.
  • These were the case studies that we looked at – but they are really just examples.Let’s hear from you.
  • Let’s consider some key questionsHow do you define long term in your organisation? Do you think it is long-term enough?What are the individual, organisational, market and environmental factors that drive a short-term and long-term perspective? Which perspective do you think in dominant?Does your organisation have a clear cascade of objectives from the high-level, long-term to short-term operational goals?How do you manage the link between short and long-term?Are your KPIs driving the behaviours that contribute to long-term value creation and are targets being set that foster short-term behaviours?And let’s come up with more:What questions would you want to ask?Do you feel that you discount the long term excessively?What public policy changes are required to foster a longer-term approach?
  • Building world-class businesses for the long term: challenges and opportunities

    1. 1. Building world-class businesses <br />for the long term: <br />challenges and opportunities<br />Gillian Lees, Head of Corporate Governance, CIMA <br />July 2011<br />
    2. 2. What is the ‘new normal’?<br />Current challenges:<br />Modern communications<br />Globalisation<br />New kinds of investor<br />Backlash against short-termism<br />
    3. 3. New CIMA report<br />Building world class businesses for the long term – <br />challenges and opportunities<br />
    4. 4. New breeds of investor<br />‘A ‘zoo’ of <br />owners is emerging with different stripes, teeth, sensors, claws, vision, <br />will and <br />attitudes.’<br />Ira Millstein, Yale University<br />
    5. 5.
    6. 6. The challenge ahead<br />Short-term stewardship v. long-term value creation<br />
    7. 7. Getting the balance right<br /> ‘Where you get tension is often when people haven’t thought creatively enough about the challenge. You have to do both. It not about saying the short term doesn’t matter.’<br />Thomas Lingard, director of global external affairs, Unilever<br />
    8. 8.
    9. 9. Long-term planning horizons<br />Sectors<br />
    10. 10. Defining long term goals<br />Perspective<br />Future vision – 10, 20, 50 or 100 years ahead<br />A ‘guiding star’ to guide, offer a sense of purpose and an argument for today’s decisions<br />Planning horizon<br />Practical targets that look into the future but address changes required in the present<br />
    11. 11.
    12. 12. So how do we make money?<br />Short-term actions + long-term aspirations<br />Cost leadership<br />Durable supply chain<br />Satisfied customers<br />Innovation<br />Motivated staff<br />
    13. 13. CIMA Business Success WheelTM<br />
    14. 14. CIMA Strategic ScorecardTM<br />Strategic Options<br />StrategicPosition<br />Strategic Implementation<br />Strategic Risks<br />
    15. 15. Case studies<br />Li & Fung – supply chain<br />InterfaceFLOR – cost leadership<br />Tesco - workforce<br />SABMiller – customer focus<br />Tata Motors - innovation<br />
    16. 16. Questions to consider<br />What key factors are driving your approach?<br />Do you have a clear cascade of objectives?<br />