Short termism is destroying shareholder value says Brian H Meredith. Business success is born out of one thing and one thing only – the marketing concept. And that concept tells us, in crystal clear terms, that a business will survive and thrive only by identifying and/or creating needs and wants of chosen target markets and fulfilling them, at a profit, time after time.
Short termism not only undermines that concept – it displays a clear contempt for it. And, the long term outcome of short termism is always grim.
After the bursting of the stock market bubble and the failure of Enron at the start of the 2000s, much like during the 1980s, accusations of short-termism were made against the stock market-focused capitalism of the United States and the UK. During the bubble, it was claimed, investors had become too focused on short-term profits and changes in share prices and had failed to probe deeply enough into long-term performance.
As a result, managers did things that made their profits look as good as possible in the short run, often to the detriment of their company's long-term health. Indeed, many businesses engaged in misleading (and even fraudulent) accounting practices to inflate short-term profits.
Short termism is one of the most compelling indicators that some (many?) of those in charge of running our businesses (the only place in our economy that money comes from) are lacking in understanding of and insight into what makes business work, into what constitutes business success and what drives customer behaviours (who, in themselves, are the only place the money in business comes from). Either that or they are cynically ignoring it.
In 1990, a brand manager was struggling to maintain the profitability of his brand and was under considerable pressure from his superiors. His R&D team devised a product formulation which was inferior to his current one but cheaper. The brand manager comparatively tested the current and new formulations amongst existing loyal users.
Ninety-five per cent of them couldn't tell the difference.
He went ahead with the revised formulation. Sales grew and so did the brand's profit. He repeated the formula the next year, sales continued to grow (albeit more slowly) and the brand manager himself moved on.
His two successors in the next four years continued with the same formula, reducing quality by 5 per cent each time, continuing comparative testing among existing loyal users and getting the same 95 per cent result.
In 1996, it became apparent to the marketing team that the market had grown substantially (if only they had been watching more closely). However their brand had been largely stagnant and, whilst profits remained good, market share had been lost.
And when their product was compared with the competitor (who in the intervening six years had consistently invested in quality), it was seen as definitely inferior. And the competitor's large-scale sampling exercise was droving loyal consumers to convert.
This gradual erosion of brand share and, ultimately, sales and profit is being replicated throughout the developed world and is a direct and inevitable result of short termism.
Results are wanted now. And in this environment, the urgent pushes out the important.
A factory manager recently had this to say:
"I'm abusing my facilities. We need maintenance and repair if we're in this for the long haul. But to do that, we need some shutdown. And if I shut anything down I can't make my immediate quotas. If I produce, I get promoted out of here. So I guess I'll just have to leave the problems to the next guy."
The ultimate measure of success of a business organisation, as strategy guru Michael Porter says, is "to deliver superior long-term return on invested capital (ROIC)."
Porter continues "Shareholder value is the result of real economic value, not a goal in itself."
It is enlightening to consider the results of a study comparing corporate objectives of American and Japanese businesses which revealed a stark difference in priorities. For the Americans, the top three objectives were: ROI, maintain stock prices, and market share.
For the Japanese, it was market share, ROI and introduction of new products.
American business concentrating on today – Japanese corporates, by contrast, being driven by tomorrow.
The implications for marketing are clear. The end of brand building (often cynically referred to as "returns in heaven") and the entry of tactical advertising – a euphemism for price cutting, cost cutting, endless sales promotion or “buying sales”.
That future is with us already.
Marketing is at the centre of the business universe and to ignore it in favour of succumbing to the scourge of short termism is to negligently place the future of a business and every single person on whom it relies and/or who rely on it, at significant risk.
Brian H Meredith
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