Building for the short term vs. building for the long term is a topic that is often discussed when it comes to blockchain and digital currency networks. There is a belief that several projects launch with a sole focus on short-term success; this typically looks like a project existing for what seems to be just one goal, generating profit without a roadmap that will allow the business to persist into the future.
However, in Dr. Craig S. Wright’s latest blog post, “The Short versus the Long Term?,” he explains why this is not always the case, and takes a look at short and long-term decisions as well as social impact and the effect they have on a business’s ability to survive.
“Many executives of current organisations attempt to argue that the very reason for their existence is to create profit (Friedman, 1970/2007),” Dr. Wright writes.
“But, if corporations merely existed to make a profit, any firm that is not making the best rate of return for their industry, but the economy as a whole, should stop running. For instance, if the returns on financial shares come in at 7 per cent and your organisation is making a profit of 3 per cent, the argument that profit is all that matters would dictate that you shut down the company and reinvest the funds.
The people who found companies do so under the expectation of returns knowing that there is a chance of losing money. As such, it is clear that companies are formed not only to make a profit, but for other purposes.”
Businesses have goals beyond making a profit. As Dr. Wright said, if that was not the case, you would see more businesses shutting down after they failed to profit. What is ignored in the “businesses only exist to profit” idea, is that some enterprises have goals that will make the world a better place, goals beyond generating profit—even if that means they must operate at a loss for a few years.
“Short-term profit can often come at the expense of long-term gains,” Dr. Wright writes.
“For instance, a car manufacturer does not exist merely to make a profit, but to provide clients with a form of transport. An example I will start with would be the case of Tesla.
“The purpose being promoted by the founder and others in the firm is to deliver a form of transportation that does not require the use of fossil fuels. There are some negatives to it, with many of the inputs to lithium batteries being obtained from conflict zones and being toxic (such as cobalt), but the aims of the founders in creating social change are evident.”
In 2019, Tesla was not profitable and had a net loss of $862 million. However, Tesla has goals beyond profiting, they have set out to solve a problem that will benefit the world (cutting down fossil fuel usage). Despite profit and short-term success, Tesla has a plan in place that will impact the world, and Tesla’s bottom line, in the long term.
“As Simpson, Fischer, and Rohde (2013) explained, long-term profitability, and the pay-offs from acting in accordance with ethical systems such as conscious capitalism, can produce better long-term returns for organisations,” Dr. Wright writes.
This is playing out to be the case with Tesla, which reported its first full-year profit in 2020 bringing in $721 million.
Ethics in business
Sometimes, ethical and conscious capitalism even takes place at the expense of a profitable industry.
“All positive changes come from the actions of a few individuals that go against the decisions of the status quo and the many,” Dr. Wright writes, before going on to explain how slavery was a global industry that was commonly accepted and extremely profitable, but was brought to an end because there was a higher demand for social change.
The example of Tesla operating at a loss to pursue its greater goal of reducing the amount of fossil fuels used in the world, and the example of slavery being brought to an end even though it was a profitable industry, drive home the idea that not all businesses exist for the sole purpose of generating profit. And even if the industry does exist for the sole purpose of generating profit, it does not always mean that the business will survive into the future, there are other factors in play beyond profit, such as ethics and the impact the business or industry has on the world.
“Whether we’re talking about corporations or other bodies, the primary reason that any entity is formed is never merely profit,” Dr. Wright says.
“Not all social change, and for that matter not all change, is good, but the individuals who start a movement or a company seek what they believe is the best outcome. We need to weigh it not merely with the returns to the individuals, or even with economic returns to society and our countries, but with the change that can occur. All change will impact some people positively and others negatively. Here lies the difficulty: making decisions that have long-term impacts on more than ourselves involves a deep level of thought that not many seek to pursue.”
If you’re looking to learn more about short term and long term success, the factors that are at play beyond profitability, and the effect they have on an enterprise’s outlook, you are going to want to read Dr. Wright’s latest blog post, “The Short versus the Long Term?” on CraigWright.net.
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