Short Termism

In this comprehensive guide, delve deep into the core concepts of short termism, its implications, impacts, and debates surrounding it in the field of Business Studies. Discover how short termism shapes various business decisions, influences corporate finance, and contributes to broader socioeconomic outcomes. Gain insightful knowledge through real-life case studies, clearing misconceptions along the way, and understanding the key differences between short termism and long termism. Begin your journey towards understanding this crucial concept in modern business.

Get started Sign up for free
Short Termism Short Termism

Create learning materials about Short Termism with our free learning app!

  • Instand access to millions of learning materials
  • Flashcards, notes, mock-exams and more
  • Everything you need to ace your exams
Create a free account

Millions of flashcards designed to help you ace your studies

Sign up for free

Convert documents into flashcards for free with AI!

Table of contents

    Understanding Short Termism: A Comprehensive Guide

    Short termism, also termed as myopic behaviour, is a concept in business and economics which refers to the concentration on immediate revenues or quick results at the expense of long-term success. It signifies a focus on short-term objectives rather than considering the company's future.

    Clearing the Basics: Short-termism definition

    Critically analysing short termism gives a clear view of how it impacts a company's strategies and progress. This term is typically used in business contexts where companies put short-term gains ahead of long-term stability and growth. The term, 'short-termism' refers to the practice of prioritising factors and actions that generate quick results, usually within a fiscal year, rather than the actions that would potentially lead to sustainable, long-term growth. Some examples of such short term practices include reducing expenses, downsizing, and outsourcing. Short-termism is represented in a business by the equation: \[ ShortTermismFactor = \frac{ShortTermGains}{LongTermGains} \] where a higher Short Termism Factor indicates a stronger emphasis on short-term gains compared to long-term growth.

    Common Misconceptions about Short Termism

    While short termism does involve focussing on immediate results, it does not involve completely disregarding long-term goals or objectives. It is a strategic approach, and not a reckless pursuit of quick profits. This implies that while short-term gains are prioritised, they are not achieved at the cost of the company's overall long-term plans.

    Importance of Short Termism in Business Studies

    Short-termism plays a crucial role in business studies. Here are a few points that highlight its significance:
    • Helps in understanding the strategic orientation of a company.
    • Helps in analysing the financial strength of a company in the short run.
    • Defines the company's attitude towards risk.
    • Potentially reflects on the decision-making process of the management.
    An excess of short termism, however, can lead to problems. These might include lack of innovation, lowered investment, and unwanted risk-taking. It is, therefore, important to strike a balance between short-term objectives and long-term growth. This balance essentially forms the backbone of successful business development and progress.

    Let's take the case of a popular fast-food chain. Short termist behaviour might involve it opting the downsizing or reducing quality for quick profits. But it might consequently suffer in the long term due to degrading customer satisfaction. Therefore, while the company might achieve short-term profitability, its long-term reputation and customer loyalty might suffer, thereby affecting its overall success in the long term.

    The Debate: Short Termism VS Long Termism in Business

    Now that we've defined short termism, let's toss it into the ring with its apparent opponent - long termism. The comparison between the two makes for an intense debate.

    Key Differences: Short Termism and Long Termism

    Short termism and long termism represent two fundamentally different approaches towards conducting business. Their main differences lie in their time horizon, their strategies, their risk profiles and their performance metrics.
    • Time Horizon: Short termism focuses on immediate targets usually within a fiscal year, while long termism takes into account future goals, often spanning over several years or decades.
    • Strategies: Short term strategies tend to be more concrete and tactical, like cutting costs in certain divisions to increase immediate profits. However, long term strategies are more abstract and strategic, like investing in research and development for future growth.
    • Risk Profiles: Short termism typically involves higher risk as it seeks quick returns, while long termism tends to be more risk averse, with the goal of sustained growth over time.
    • Performance Metrics: Performance in short termism is assessed on immediate gains or quarterly results, while in long termism, performance is viewed in terms of long-term value creation, such as brand reputation or customer loyalty.

    Which is better - Short Termism or Long Termism?

    The endless debate about which approach is superior doesn't have one definitive answer, as it highly depends on the specific business situation, the industry, and the external business environment.
    Short Termism Long Termism
    Pros: Immediate returns, Quick feedback, Flexibility Pros: Sustainable growth, Stability, Brand reputation
    Cons: High risk, Potential long-term damage, Lack of innovation Cons: Slow growth, High investment, Potential short-term losses
    Businesses need to decide their stand on the short termism vs long termism debate considering their current position, their future goals, and their risk appetite. Some businesses might succeed by adopting a blend of both strategies, benefiting from the quick results of short termism while also laying the groundwork for a sustainable future through long term strategies.

    Let's take a technology start-up for example. It might need to adopt short termism initially to gain quick market traction and return on investment for its stakeholders. But with time, as it establishes itself, it might gradually shift towards long termism, investing in innovation and building its reputation in the market. This fluid shift from short term to long term strategies can thus, be a key component of successful business growth.

    Practical Insights: Short-termism Business Examples

    To give further insight into the workings of short termism, it is often best to look at examples of businesses that have implemented this strategy. Many firms, both large and small scale, have been known to practise short termism, some with success and others with less fortunate outcomes.

    Popular Companies Practising Short Termism

    Several well-known corporations have been cited as examples of firms that have practised short termism, generally in response to specific market demands or internal pressures. Kodak, a renowned photography company, made a drastic short-term decision in the late 2000s by declaring bankruptcy in order to resolve immediate liquidity problems. This step allowed Kodak to restructure its debts and continue operations, but it came at the significant cost of damaging its corporate reputation and eroding its market share. General Motors (GM), faced pressure in the late 1990s to cut costs and raise its stock price in the short term. The company therefore decided to sacrifice investment in new technologies and vehicle designs, focusing instead on outsourcing production and cutting labour costs. The strategy did create an immediate upturn in GM's financial results, but also resulted in a decline in product quality, which damaged the company's long-term competitive position. Another instance of short termism is seen with BlackBerry. In its quest for quick sales and immediate profits, the company began churning out multiple devices with similar features and failed to focus on innovation, leading eventually to a decline in its market position.

    Case Studies: Business Success and Failures due to Short Termism

    It's instructive to analyse specific case studies that showcase the success and failures of businesses due to short termism. Royal Bank of Scotland (RBS) is an example of failure brought about by short termism. In the early 2000s, RBS engaged in aggressive expansion activities funded by substantial borrowing. The goal was to achieve short-term growth and higher shareholder returns. However, this strategy amplified the bank's exposure to the global financial crisis of 2008, resulting in its eventual collapse and a significant bailout funded by taxpayers. In contrast, consider the case of Netflix, which seems to have managed a balance between short-term objectives and long-term growth. Beginning as a DVD-by-mail service, Netflix quickly adapted its business model in response to short-term market trends and technological advancements, transitioning to a streaming model. This short-term strategic shift brought Netflix immediate gains, but the company also continues to invest heavily in long-term projects, notably the development and production of original content, securing a dominant position in the market for years to come. In both cases, it's clear that short-term decisions can have far-reaching consequences. Companies need to make careful assessments of the potential risks and benefits, both immediate and future, when choosing their strategic focus. These examples and case studies shine a light on the complex considerations that companies must navigate when dealing with the challenges of business strategy and market pressures. They underline the key understanding that a balance must be struck between achieving short-term gains and maintaining a long-term strategic focus.

    Uncovering Reasons: Short Termism Causes and Effects

    Delving deeper into the world of business strategies, it's vital to understand what triggers companies to opt for short termism and to acknowledge the impacts of this choice. From the causes to the effects, every aspect shapes a business entity's journey, making it essential for any student of Business Studies to have a firm grasp of these concepts.

    Why Businesses Choose Short Termism: Causes

    The move towards short termism in businesses does not happen without a trigger. Several factors drive companies down this road, each playing a notable role in shaping a firm's decision-making process. One of the primary triggers for short termism is the relentless pressure from shareholders for immediate returns on their investments. In a competitive market, stakeholders want to see swift ROI (Return On Investment), which often prompts companies to adopt short-term strategies. This can be represented by the formula: \[ ROI = \frac{NetProfit}{CostofInvestment} \] where \( ROI \) denotes return on investment, \( NetProfit \) signifies the net gain from the investment, and \( CostofInvestment \) is the total money invested. Other factors include:
    • Economic Volatility: Fluctuating economic conditions often lead companies to concentrate on their short-term survival, thereby overlooking long-term strategies.
    • Market Competition: The pressure to stay ahead of competitors compels businesses to show immediate results, encouraging a focus on short-term gains.
    • Management Incentives: Managers' compensation might be linked to short-term performance markers, motivating them to meet immediate goals.

    Immediate and Long-term Impacts of Short Termism

    The consequences of short termism can be far-reaching and influential, spanning from immediate effects to long-term impacts. The immediate impacts are often financial in nature. For instance, a cost-cutting measure such as staff reductions can lead to a significant increase in a company's net profits. Similarly, divesting from non-core business areas can lead to immediate capital generation. This can be represented by the financial performance equation: \[ NetProfits = TotalRevenue - TotalExpenses \] with \( NetProfits \) being the net profits, \( TotalRevenue \) representing the total income or revenue generated by the company, and \( TotalExpenses \) denoting the overall costs incurred by the business. However, these immediate gains may come with long-term costs. The long-term implications could range from employee dissatisfaction to reduced innovation. Here are a few possible long-term effects:
    • Reduced Innovation: Companies prioritising short-term gains often cut back on research and development, thereby stifling innovation.
    • Loss of Goodwill: Firms using measures such as downsizing to improve short-term profitability may damage their reputation and lose goodwill, affecting the company's long-term sustainability.
    • Lower Quality: In a bid to cut costs, a company may compromise product or service quality, negatively impacting its market position in the long run.
    The adoption of short termism, therefore, is a strategic decision with considerable risks and rewards. Businesses must weigh the immediate benefits against potential long-term setbacks before embarking on a path driven by short-term gains.

    The Ripple Effect: Short Termism's Impact on Corporate Finance and Beyond

    Discussing short termism without examining its effects on corporate finance and the wider socio-economic environment would provide an incomplete picture. From influencing strategic decisions to altering the dynamics of the economy, the impact of short termism is far-reaching.

    How Short Termism Influences Business Decisions

    At the heart of a company's operation lies a series of business decisions, each meticulously crafted to guide the firm towards growth. However, these decisions are significantly influenced by the presence of short termism, often with critical outcomes on the company's overall performance. One of the defining impacts of short termism on business decisions revolves around financial management. When a company adopts short termism, it often forgoes long-term investments, particularly those with deferred benefits such as research and development or employee training programmes. Impressively, the focus shifts towards actions that can generate quick results. This change of priority often shapes financial decisions within the company.

    Table 1: Comparison of Financial Decisions under Short Termism and Long-term Focus

    Short Termism Long-term Focus
    Cutting staff to reduce expenses Investing in employee development
    Avoiding costly research and development Investing in innovation and future-proofing the business
    Additionally, short termism can reshape marketing strategies. In an attempt to drive immediate sales, companies might opt for promotional tactics that lure consumers in the short run but fail to build lasting relationships, brand loyalty or customer retention. In terms of resource allocation as well, the shadow of short termism looms large. Funding is often diverted from long-term projects or sustainability initiatives to areas that promise immediate returns, leaving areas that are crucial for the future under-resourced or overlooked.

    The Socioeconomic Outcomes of Short Termism

    The fallouts of short termism are not confined to the precincts of a company but often spill over into the wider socioeconomic realm. One of the key socioeconomic outcomes relates to employment. Firms operating under short termism tend to favor cost-cutting measures such as layoffs which, while profitable for the firm in the immediate sense, contribute to unemployment rates and have broader negative social impacts. Similarly, rampant short termism can lead to income inequality. When firms emphasize immediate profits and stock prices, incomes often accumulate disproportionately among executives and shareholders, leaving less for employees.

    Table 2: Socioeconomic Outcomes of Short Termism

    Area of Impact Possible Outcome
    Employment Rise in unemployment from cost-cutting layoffs
    Income Inequality Disproportionate wealth distribution towards executives
    On a national level, reduced investment in research and development impedes economic progress and growth. Over time, countries harboring companies excessively focused on short termism may see a decline in their competitiveness, stifling national economic prospects. In conclusion, while short termism can offer immediate financial rewards, the broader impacts on business decisions and the socioeconomic environment cannot be ignored. It's therefore crucial for firms to strike a careful balance, considering both their short-term gains and the long-term health and sustainability of their companies, employees, and economies.

    Short Termism - Key takeaways

    • Short Termism: Is a strategic approach focusing on achieving immediate results or profits while not disregarding long-term goals or objectives entirely.
    • Role of Short Termism in Business: Guides strategic orientation of a company, helps in analyzing company's financial strength in the short run, defines a company's risk attitude, and can influence management decision-making process.
    • Short Termism vs Long Termism: While short termism focuses on immediate gains and higher risk, long termism focuses on future goals, sustainable growth, and is more risk averse.
    • Causes of Short Termism: Predominant triggers include pressure from shareholders for immediate returns, economic volatility, high market competition, and performance-based management incentives.
    • Effects of Short Termism: Immediate impacts are often financial while long term impacts include reduced innovation, loss of goodwill, and potentially lower product or service quality.
    Short Termism Short Termism
    Learn with 30 Short Termism flashcards in the free StudySmarter app

    We have 14,000 flashcards about Dynamic Landscapes.

    Sign up with Email

    Already have an account? Log in

    Frequently Asked Questions about Short Termism
    What are the negative impacts of short termism in business management?
    Short termism in business management can lead to reduced long-term growth and stability, as immediate profits are prioritised over sustainable strategies. Also, it may hinder innovation and human resource development. Moreover, excessive focus on short-term results often leads to unethical business practices.
    How does short termism influence investment decisions in businesses?
    Short termism can lead businesses to prioritise immediate gains over long-term profitability, often leading to sub-optimal investment decisions. It can also deter investment in long-term projects or research and development, potentially stunting innovation and future growth.
    What strategies can businesses implement to overcome the challenges of short termism?
    Businesses can overcome short termism through long-term strategic planning, investing in research and development, focusing on sustainable practices, and providing regular training to staff. Stakeholder engagement and setting long-term performance incentives can also promote a long-term outlook.
    What factors contribute to short termism in a business environment?
    Factors contributing to short termism in a business environment include pressure for immediate profits from shareholders and investors, executive compensation plans tied to short-term results, quarterly reporting requirements, market competition, and instability or uncertainty in the business environment.
    What are the possible signs of short termism in business financial reporting?
    Signs of short termism in business financial reporting can include focusing primarily on quarterly earnings reports, emphasising immediate profitability over long-term strategy, neglecting research and development expenses, and selectively highlighting short-term figures to project a favourable image.

    Test your knowledge with multiple choice flashcards

    What are possible long-term consequences of adopting short termism?

    What are the immediate financial impacts of short termism?

    What are the pros and cons of short termism and long termism in business?


    Discover learning materials with the free StudySmarter app

    Sign up for free
    About StudySmarter

    StudySmarter is a globally recognized educational technology company, offering a holistic learning platform designed for students of all ages and educational levels. Our platform provides learning support for a wide range of subjects, including STEM, Social Sciences, and Languages and also helps students to successfully master various tests and exams worldwide, such as GCSE, A Level, SAT, ACT, Abitur, and more. We offer an extensive library of learning materials, including interactive flashcards, comprehensive textbook solutions, and detailed explanations. The cutting-edge technology and tools we provide help students create their own learning materials. StudySmarter’s content is not only expert-verified but also regularly updated to ensure accuracy and relevance.

    Learn more
    StudySmarter Editorial Team

    Team Business Studies Teachers

    • 14 minutes reading time
    • Checked by StudySmarter Editorial Team
    Save Explanation Save Explanation

    Study anywhere. Anytime.Across all devices.

    Sign-up for free

    Sign up to highlight and take notes. It’s 100% free.

    Join over 22 million students in learning with our StudySmarter App

    The first learning app that truly has everything you need to ace your exams in one place

    • Flashcards & Quizzes
    • AI Study Assistant
    • Study Planner
    • Mock-Exams
    • Smart Note-Taking
    Join over 22 million students in learning with our StudySmarter App
    Sign up with Email

    Get unlimited access with a free StudySmarter account.

    • Instant access to millions of learning materials.
    • Flashcards, notes, mock-exams, AI tools and more.
    • Everything you need to ace your exams.
    Second Popup Banner