Second-Level Thinking for Long-Term Success

Howard Marks popularised the concept of first and second level thinking in his book "The Most Important Thing" (currently a healthy 4.5 stars on Amazon). 

The book was aimed at the investment community but has implications for leadership, business and life. 

In a nutshell, I see the concept like this. First-level thinking looks at the obvious short term consequences of a decision. Second-level thinking looks at the consequences of the first decision.

First level thinking

• Focus on immediate, surface-level considerations and immediate solutions.

• Relies on readily available information and apparent trends.

• Measures tangible outcomes driven by short-term goals or Key Performance Indicators (KPIs).

• Reactive. Inward looking

 Second level thinking

• Considers broader consequences and long-term implications.

•  Analyses potential consequences and the interconnectedness of various factors

• anticipates long-term implications.

•  Proactive and forward-looking

The most successful leaders use both first and second level thinking. But the trap is that leaders emphasise KPIs and short term measures of success without considering the consequences of what those measures are encouraging.

Here are a couple of examples:

1. The marketing team looking for MQLs who mail the same audience too frequently. Activity high, real engagement low.

2. Budget reductions to save costs ignoring the long-term impact on employee morale, productivity, and resilience of the organisation

3. Discounting strategies to quickly boost sales that erode the perceived long term brand value.

In the pursuit of quarterly profits and KPIs, leaders may overlook the need for innovation, adaptability, and strategic positioning.

First and Second level thinking is everywhere, from personal (I know I need to save more for retirement, but I really do need that weekend in Porto) to political life. 

Unlike business leaders, who have the option to think longer term, political leaders  arguably have a harder time balancing the two, and an extreme example comes from Jean-Claude Juncker, the former Prime Minister of Luxembourg was reported to have said:

"We know what to do, we just don't know how to get reelected after we've done it".

Business leaders have two jobs. Meeting the demands of today while ensuring long term success. It's not an easy balance, and here are some ways that leaders can balance the two:

• Define and keep communicating clear long-term goals for the organisation. For instance, if Client Centricity is important, that's what should be celebrated. Express long-term goals in quantifiable terms.

• At every level, each leader should protect time, in whatever way works for them, to think about the future of the department, company and projects. This is so important.

• Use data analytics wisely and think through data with a future oriented perspective. For example, what are unsubscribe rates telling you about content quality?

• Seek Diverse Perspectives and consider a range of viewpoints to avoid the pitfalls of narrow thinking and ensure well-rounded decision making. This is a leadership skill, not an activity.

• Over index on Lead indicators. Sure, use a mix of lead and lag indicators to provide a comprehensive view, but lead indicators tell you more. Lead indicators offer insights into future performance, while lag indicators reflect historical outcomes.

It’s the same with People. Measuring the "How" may be more difficult, but it tells you much more about potential and the future than the "What".

In conclusion, leaders would do well to beware of the limitations of first-level thinking driven by short-term KPIs and other measures and ensure that second-level thinking, "what is the next level consequence of this decision", is factored into all decisions, plans and strategies.