Myopic management/marketing is the tendency to focus on short term gains at the expense of long term profits. There are a number of reasons for this but at its heart, for public companies, scholars point to pressure from Wall Street. Views differ on how strong the pressure is but, if one is willing to assume any sort of market inefficiency, then it might make sense to cut long term investments (marketing, R&D) to boost the short term bottom line. (This is the concern at the heart of worries that marketing isn’t well accounted for).
Anindita Chakravarty and Raj Grewal looked at how such pressure impacts marketing and R&D budgets. “..we investigate whether concerns for shareholder returns drive marketing budgets” (Chakravarty & Grewal, 2011, 1595). They argue that managers react to past stock performance in setting current budgets.
They focus on past performance through Stock Returns (how well the stock did) and Stock Volatility (how much the return varied). Generally people dislike surprises so the argument is that we will see the adoption of “strategies that can help managers avoid unpredictable earnings shortfalls in the short term” (Chakravarty & Grewal, 2011, 1597). How to do this? “The most direct way to ensure that short-term earnings meet or exceed the expectations developed in prior periods is to make unanticipated reductions in R&D and marketing budgets simultaneously.” (Chakravarty & Grewal, 2011, 1597).
Contrary to full blown (“high level”) marketing myopia the authors suggest that managers might cut R&D but invest in some marketing – basically invest in the sort of marketing expected to show a short-term return. This might be advertising or short-term promotions.
Such research into how managerial marketing budgeting is done seems vital to me. It is hard, the authors have to use advertising spend as a proxy for all marketing spend. This is imperfect, but probably as good as can be achieved. (The authors do a content analysis of managerial reports which gives some evidence to support that value appropriating marketing, e.g., short-term promotions, is increased.)
Overall, they find “high frequencies of unanticipated decreases in R&D but increased marketing budgets [this] implies moderate levels of managerial myopia, because direct cuts affect only one important value-creating function. Among the marketing activities that increase, promotions tend to be short-term oriented.” (Chakravarty & Grewal, 2011, 1606). It perhaps isn’t the dramatic cutting of value creation budgets that some may have expected but, given the suggestion that it is short term marketing that is increased, does suggest the possibility of a notable drag on long-term profits from mis-prioritizing budgets due to stock market pressure.
Given this it is hard to disagree with their suggestion that “[c]orporate governance regulations also might mandate that managers disclose their R&D and marketing budget allocation strategies in detail…” (Chakravarty & Grewal, 2011, 1607). It would be great to have an even better understanding of this important topic.
Read: Anindita Chakravarty and Rajdeep Grewal (2011) The Stock Market in the Driver’s Seat! Implications for R&D and Marketing, Management Science 57(9), pp. 1594–1609