One of the big issues we run into in strategic planning is the overwhelming pressure to maximize profits.
I’m not saying profit is a bad thing. Profit is, after all, what attracts investors and often, good management. In our society, it’s accepted that the primary responsibility of the company and its management is to optimize returns for shareholders. This view is correct, but it overlooks the thing that makes much of economics trickier than simple accounting – externalities.
In strategic planning, we take pains to examine some externalities which can affect the long-term profits of the organization.
For example, threats to a market (including the threat of displacement) may cause us to steer away from certain investments. This is because the growth prospects of that market are poor. There are some externalities that may not be calculable in the same framework that we use in decision making. For instance, we wouldn’t engage in unethical practices because the damage to our reputation or our industry or community would be bad.
Some of these choices do have measurably positive effects on profits.
The goodwill of the market makes an emphasis on certain positive practices a good choice for many companies. Being an attractive place to work with a good reputation also makes it easier to recruit and retain top talent.
Why then, do some people and companies make egregiously harmful choices in their management? The answer falls to three things that color our actions in every part of our lives: Awareness, Priority and Pressure.
Awareness is simple.
If we are not aware of the effects of our actions, we may make choices with outcomes that aren’t really of our choosing. Moral philosophers will tell us that this makes awareness and knowledge an important ethical responsibility of being human. In our complex world, however, it may not always be possible to have awareness of the consequences of our choices.
Priority often brings ethical dilemmas to managers.
We have a moral obligation to deliver a good return to our investors. At the same time though, we have a moral obligation not to injure our customers, employees and communities. Sometimes, greater priority given to immediate moral obligations may create situations where we make poor choices outside of those priorities. In extreme cases, these tendencies become so obvious that entire industries are perceived negatively. This often causes legal restrictions which are an attempt to force prioritization of things like safety and ethics. Beyond the legal risk, there are risks to markets and investment that can stem from such issues. For instance, BP suffered a measurable loss of market share and customer loyalty after the Deep Horizon oil spill.
Pressure is perhaps the most difficult issue when making decisions involving externalities.
For many industries, the threats faced by companies seem so overwhelming that profit and survival becomes part of the culture. In other cases, strong shareholders can push for higher returns regardless of the effects of externalities. Recently, companies in the information technology arena have suffered from this pressure, especially after going public. Many such companies, started and built by entrepreneurs with good intentions, succumb to the pressure to deliver growing profit numbers. Then they lose the cultural strength that built their success.
It’s critically important to be aware of these forces, and the effect they can have on the company’s deeper value.
While it’s possible to succeed for years without this awareness, poor strategic choices can lead to long term issues with market perception, investor perception and government regulation. Because it’s difficult to put numbers on these costs and benefits, we need to be careful when such issues arise. Simply put – the easiest decisions can be easily quantified, but the hardest, most important decisions, are very difficult to quantify.
What externalities could affect the future of your business?
Do you have a good sense of how they will play out in the real world? For a deeper look at these, and other issues, the Simplified Strategic Planning process offers a structured, well-tested approach to moving your organization forward with excellent analysis and decision making.
For great ideas on how to improve the quality of your planning, contact me at firstname.lastname@example.org. Consider holding a one-day workshop on Simplified Strategic Planning.
M. Dana Baldwin is Senior Strategist with Center for Simplified Strategic Planning, Inc. He can be reached by email at: email@example.com