Question

Explain why it is important for a firm to plan for the long term and whether it's ever appropriate for it to prioritize short-term gains.

Answer 1

Every business is started or set up with the intention to continue its business operations forever to the extent possible. To reach its organizational goals of achieving greater market share, reaching market leader position, targeting number of product lines, etc. it is important for a firm to plan for the long term gains rather than concentrating on short-term gains. A particular business activity or a set of business activities may result short-term losses to the firm but to taste the long-term gains, firms must accept such short-term losses and strive to reach the long-term gains.

In certain circumstances, it is appropriate for a firm to prioritize short-term gains instead of looking at long-term gains. That is, short-term gains shall be prioritized when a decision shall be made with respect to operating performance. For instance, there is a special order received by the firm but the special order is not affecting firm's normal business and other customers. However, the special order would require firm to reduce its normal selling price per unit. Firm shall evaluate the special order by comparing the reduced selling price per unit with variable cost per unit associated with and decide whether the firm can accept the special order or not. Here, firm must prioritize firm's short-term gains with respect to net income associated with the special order instead of looking at firm's long-term gains of product leadership, etc.

Another instance where firm must prioratize short-term gains over long-term gains may be that there is a new competitor who enters the market where an existing firm already has established its name and does business successfully. With a long-term objective of reaching market position, new firm tries to offer its products and services at a lower price than the price offered by the existing firm to its customers so that many customers will prefer new firm's products and services. Also, new firm's brand name can be established in the market by offering qualitative product and services but at lower price initially. Here, the new firm priorizes its short-term gains of attracting customers using low-price strategy in order to achieve its long-term gains of greater market share.