Sustainability

Posted on by Fred Wilson & Jason Li

086-sustainability

When I was in business school 25 years ago, I don’t recall the term sustainability used. Maybe it was, but it certainly didn’t register in my brain. The mantras that I recall were return on investment, shareholder value, revenue growth, and driving efficiencies in the business.

But as I look at many of the challenges facing businesses today, it seems to me that the focus on performance and efficiency often comes at the cost of sustainability. This talk by Clay Christensen really drives that point home. The recent history of the steel industry in the US is a case study in managers doing everything they were taught in business school and in the end they bankrupt the business.

Going back to business school, they teach you the value of a business is equal to the present value of future cash flows. If the company is likely to stay in business forever, then the value is most likely way higher than a business that is going to be out of business in a decade. The present value of a hundred years of cash flow is likely to be larger than the present value of  ten years of cash flow.

And sustainability is all about figuring out how to be in business forever. It is about business models that are win/win and lead to happy long term customer and supplier relationships. It is about avoiding the temptation to overeach. It is about avoiding the temptation to mazimize near term profits at the expense of long term health. It is about adapting the business to changing market dynamics. It is about building a team and a culture that can survive the loss of the leader and keep going. And it is about many more things like this.

I am tempted to develop a course on this topic. I think we need a lot more of this type of thinking in business. It seems in such short supply these days.

 

From the comments

andyswan added:

Nice…love this topic.

Sustainability means having a purpose/mission that will be valuable and applicable 50 years from now.

“We sell daily deals” vs “we bring new customers to small businesses”

“We are a search engine” vs “we make all the data in the universe easy to find”

“We have a social mobile app for checking into product categories” vs. “We sell hype to gullible investors”

The Swan exercise:  Come up with your mission statement.  Something you can etch into marble today, with the vision that this same piece of marble will be set above the entrance to your HQ 50 years from now.

Of course this is just a first step in creating a sustainable business….but it’s a big first step.

And Harry DeMott added:

Lots of great comments in the thread – but I didn’t see anything on incentives

One of the reasons why we have become so short term in our thinking – so unsustainable in our actions – is that the world has gone there.

We have serious problems in the U.S. Solving them probably means making some tough choices which are likely to get politicians sent home at the next election – so they all take the easy way out and kick the can down the road. What’s the incentive to solve the problem in Washington D.C.?

Likewise, in companies we used to see long careers where the corporation would protect its family in good times and bad – and now we see massive stock option grants at the top and computerized traders pushing buttons to determine whether the CEO is going to be worth $10M or $100M. So what’s the incentive for decision making there? Move the jobs, cut the labor force – get yours while you can – because sure as the sun will rise – there’s no job security but what you make yourself.

Education. What’s the incentive there? Teach to the test or be censured.

The environment. what’s the incentive there? Make gas as cheap as possible otherwise you get thrown out of office. Increase profits at the expense of tour future, why? because lobbyists allow it.

Unless we drramatically realign the incentives in the system, we can’t even begin to think about sustainability – and unoless the framework for our thinking is malleable enough to change over time to reflect the current conditions, we are unlikely to be able to think sustainabiliy in the future.

 

This article was originally written by Fred Wilson on November 21, 2011 here.