Neatorama has an article on business blunders, which is pretty much a different take on a list from Forbes I posted a few weeks ago. The bad decisions are all examples of short-term thinking. Take, for example, the story of Schlitz, formerly the number one beer in the U.S.

[Schlitz President Robert] Uihlein cut the amount of time it took to brew Schlitz from 40 days to 15, and replaced much of the barley malt in the beer with corn syrup – which was cheaper. He also switched from one type of foam stabilizer to another to get around new labeling laws that would have required the original stabilizer to be disclosed on the label.

The results were predictable – the new beer tasted terrible and people quickly stopped drinking it. By the time the issue had been remedied, Schlitz had started its slide to obscurity.

Joel Spolsky of Joel on Software recently posted an article about the Five Whys philosophy. Afterwards, there has been a spattering of posts on the subject by a variety of bloggers. Joel is far from the first person to advance the idea of Five Whys, but he is one of the most recent writers to spread the meme. He is also now one of the highest results on google for the keywords “Five Whys”.

This blog is ostensibly about long term thinking, and the Five Whys philosophy is central enough that I named the blog after it (( for the record, I had encountered the idea of Five Whys far before I had encountered Spolsky’s article. )) . The essence of the philosophy says that you should try to get to the root of your problem by asking why five times, in order to find the root of the problem.

Many people responding to Spolsky’s article seem to have been overly caught up in is the actual number of whys in the saying. Five might work in a some cases, but not all. The specifics here are less important than the concept – which is to drill down as much as possible to find the root cause. It could take a single step, it could take five, or it could take fifty. The point should be that you should really keep asking why until you can’t anymore.

While Five Whys is a snappy and easy encapsulation of the idea, the real root of it is to keep asking questions all the time. In a sense, I think it is more productive in the long run to put more of our effort in making sure we’re asking the right questions rather than trying to find the answers to the questions we already have. If we’re patient enough, pretty much any question we have will eventually be answered.

As Richard Saul Wurman, founder of the TED conference and coiner of the term Information Architect, put it:

When the emphasis is placed on finding answers, we stop thinking about the innocent questions and start pretending we know the answers.

A good book or blog post will give answers to questions that you already had, but a truly great one will leave you questioning everything.

ComputerWorld has an interview a business analyst on the long-term nature of Google’s business. The company’s stated goal is “to organize the world’s information and make it universally accessible and useful”, a goal which CEO Eric Schmidt was recently quoted as saying would take 300 years. In addition to talking long term, they have implemented some things which are encouragingly far-sighted.

A good example is their declining to split their stock, which is currently trading just slightly better than $475 per share. Splitting the stock 2 to 1, for example, would create twice as many shares each worth half as much. This is usually done to make the stock easier to buy. It’s hard to speculate why Google doesn’t do this, but it seems that the high price is intended to stop or discourage short-term investors – a play straight out of Warren Buffet’s playbook, the stock in whose company is currently hovering around $130,000 per share. In addition, they do not provide any guidance to investors regarding their expected quarterly performance, a small but important step to help investors look further than 3 months ahead.

The last long-term strategy I’ll mention is Google’s famous allotment of time for personal projects. This has lead directly to GMail, AdSense, Google News and several others. The company allows their engineers to spend 20% of their time working on whatever they want. This can let even the lowest level employee contribute to the company, and perhaps more importantly gives the employees an allotted time to daydream about the future of the company.

When something goes catastrophically wrong, it can be easy to blame the people immediately involved. They get lazy, tired, bored, distracted, jealous, or into any number of other possible mental states which can cloud judgement and lead to mistakes. When inevitable disasters occur, the short-term approach is to blame human error, but in many cases the longer-term approach is to blame the system and correct it instead. That isn’t to say that humans are never at fault – they are often grossly incompetent, but sometimes they receive blame which should rightly be aimed higher, at the system they work within.

David Sanborn Scott, explained the title of his book, Smelling Land (( Smelling Land is about the topic of replacing fossil fuels with Hydrogen, a strategy I am partially gung-ho for and partially skeptical of. I have not read the book, but I have listened to interviews with the author of substantial length )) , with this classic legend of a fleet of ships in a fog:

It is told that when the fleet was still some distance off the islands, a cabin boy came to the admiralâ??s stateroom to say, â??Sir, I smell land. I think we should heave-to until the fog clears.â?? Advice from a cabin boy to an admiral of the Royal Navy was neither expected nor welcome-especially not in 1707, and especially not to Admiral Cloudesley Shovell. The boy was reprimanded and sent away. Yet he must have gone on deck for another whiff, because soon he was back at the admiralâ??s door, no doubt apprehensive, but not enough to stop him repeating his warning: â??Sir, I smell land. I think we should put about.â?? And that is why he was swinging from the yardarm when the fleet crunched ashore on the land he had been smelling.

The easy response to the story is to blame the Admiral – blame he deserves – but it is also important to call into question the overly hierarchical navy structure of the time. While the truth of the story can’t be verified, as the fleet was largely lost (and roughly 1400 men with it) the story is a good parable for many organizations. Had the culture been a little more bottom-up, rather than top-down, maybe it wouldn’t have happened.

(( Image of Chernobyl taken from Wikipedia )) James Reason, in his article for the British Medical Journal, asserts that the role of culture in an organization plays a large role in how reliable, safe, and mistake-prone they are. Open, bottom-up, and “just” organizations are more likely to be less mistake-prone. He uses the example of the Chernobyl disaster, a disaster in which bad policies, faulty design, and lack of education turned a test of operations into a literal meltdown. The lack of a reporting culture in the USSR was the underlying cause, which itself was caused by a lack of trust between the top and bottom of the hierarchy. Nobody was willing to speak up about their lack of education on what they were doing, or on the faulty design of the control mechanisms in place. They didn’t want to be the cabin boy who smelled land.

Fixing cultures and other such larger systems is much more difficult than blaming whoever was at the instrument panel when things took a turn for the worst. As James Reason puts it “Blaming individuals is emotionally more satisfying than targeting institutions.”

As I was reading through Suburban Nation, an excellent book on Urban Planning (( I would actually say that Suburban Nation is a great companion to Jane Jacobs’ Life and Death of Great American Cities. The more practical aspects of Nation compliment the more general observations of Jacobs’ work. )) , I stumbled on a very well written footnote which quickly and simply explains how the cost of capital affects long term thinking in corporations. I’m going to quote liberally, because, as I said, I feel they nailed it pretty well, and admittedly my business knowledge is pretty limited.

Cost of capital, narrowly defined, is the interest rate at which money is borrowed, but it could be more accurately described as the income that could be earned on a given amount of money were it invested elsewhere. For most successful companies, this cost of capital is well over 10 percent, and in the high-risk field of real estate, it is often 20 percent. When contemplating an investment, businesses create cost-and-income spreadsheets in which all future earnings are discounted at this rate. A dollar earned next year is worth about ninety cents this year, since it could have been invested elsewhere at 10 percent.

With this logic, the cost of dollars made or saved in the future begins to sharply decline. In ten years a dollar is worth only thirty-five cents, and in twenty it’s worth only twelve. Start to go much further beyond that and it gets virtually worthless.

When looking at an environmentally sustainable investment like geothermal heating or solar panels, which need large up-front costs but can provide an overall savings when calculated over the long term, it becomes clear how cost of capital could make an otherwise sensible long-term project much less viable. (( Photo taken from TW Collins on Flickr ))

Warren Buffet is a man who got rich the hard way, by doing huge amounts of research and making investments that were looking relatively far ahead. He was, in a sense, the antithesis of the image many of us have of investors – buying and selling all the time, taking risks and getting rich quick. Buffet has been descried as a decades trader, rather than a day trader. He buys stocks and keeps them for as long as he can (( How Buffet Does it by James Pardoe, McGraw Hill, 2005 )) .

It was with some interest that I stumbled across an article Buffet wrote in 2003 about the state of the economy in the U.S., and the rising trade deficit in particular. Buffet brings a much-needed long-term perspective, and a straightforward writing style:

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce — that’s the trade deficit — we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.

It seems these days that you can find a study to back up almost literally any point of view. So it shouldn’t be too surprising to see a study in the IHT trying to suggest that a company’s given stock price more often decreases when they announce green initiatives.

Two professors at the Amos Tuck School of Business Administration at Dartmouth College have tracked the movement of stocks immediately after companies proclaimed their commitment to sustainability. And they found that share prices dropped much more often than they rose.

The numbers they proceed to throw around are huge – $16 Billion losses in market capitalization. The problem with the study is that they only looked at changes in stock prices over 3 days. They were only really looking at the immediate, gut reactions of investors, and not whether going green made sense in the long run.

Seen Today: Someone spreading salt on the snow on their lawn. The only explanation I can possibly think of was that they wanted the snow to melt faster so the grass would show through sooner. The mind boggles.

Society often seems obsessed with progress and growth. In this simplified view, technology is seen as constantly moving forward, discarding the old in favor of the newer and better. Oftentimes, though, it can also be fruitful to look backwards, in this case to the days of wind-powered sailing ships.

Sky Sails uses immense kites to help increase the efficiency of ocean-going ships. The sails are able to save as much as 20% of the fuel that would normally be used, and bigger sails could produce bigger results in the future. The first trial run of the Sky Sail was recently conducted, and the results look promising.

Another technology coming along is the use of air bubbles to reduce friction, and therefore possibly save another %20 or so in fuel. Ships are already extremely efficient, per pound of goods moved, when compared to trucks or trains (( The best source for this I could find was here, though similar figures are available elsewhere )) . However, the sheer volume of ocean traffic alone makes these coming technologies indispensable for reducing our use of fuels (and costs). They also serve as a reminder that older ideas, like powering ships with the wind, are not necessarily worth throwing away.

(( Photo of a nap pod on the google campus, photo from Reuters ))

I just ran across news of this study, which suggests that investing in employee happiness is a sound business strategy in the long term.

Another, more subtle implication of the research, says Edmans, goes to the nature of short-term thinking among corporate managers. Even if managers believe employee satisfaction enhances long-term corporate performance, they may not act on their beliefs because investing in employees often reduces earnings in the short term.

It goes on:

That concern, he adds, is driven by managers who argue it is not possible to credibly communicate to investors that profits might be lower in one period in order to invest in employee satisfaction that may pay off in the future.

Jon Stewart of the daily show put it quite well in his casual observation that “It seems to me that we favor investment, but we don’t favor work.” (( Taken from his interview with Alan Greenspan )) This is something we have to change.