Question

Explain the positive and negative aspects of using alternative time horizons when evaluating a firm's performance.

Answer 1

Solution:-

Brand managers frequently use market share data to formulate their marketing activities. In fact, short-term competitive reactions to share gains and losses are often described as excessive and, thus, detrimental to long-term profits.

In this report, authors Keil, Reibstein, and Wittink suggest that the nature of business objectives and the frequency of performance evaluation will affect managers' pricing decisions. Specifically, they argue that a profit-maximization objective and a long time frame for performance evaluation will lead to less intense competitive reactions and to increased pricing experimentation—both leading to more profitable behavior.

Study Findings

The study used a market simulation game with 54 executive program participants from multinational companies. Overall, the researchers found higher prices, lower market shares, and higher cumulative profits for respondents with longer timeframe performance evaluations and profit-maximization business objectives. Specifically:

• Managers who were evaluated on a yearly, rather than quarterly, basis displayed less intensive reactions to competitive moves (thus reducing the likelihood of costly price wars). The intensity of competitive reactions was also reduced if the business objective was profit maximization, rather than "do the best you can," which led to a market share focus.
• Managers who were evaluated yearly, rather than quarterly, were more likely to experiment with prices in order to estimate consumers' price sensitivities. However, a business objective of profit maximization, compared with "do the best you can," did not result in greater pricing experimentation.

Managerial Implications

These findings suggest that firms should reconsider both the time horizon of managers' performance evaluations and the specification of business objectives.

In addition, current feedback systems for managers in many industries focus primarily on changes in market shares and competitive activities, and these systems may encourage managers to be excessively competitor-oriented. The authors suggest that a new information environment—one that starts at the household level and combines information about product choices, satisfaction with the purchase and consumption/use, and unmet needs—would enhance managers' customer focus, and positively affect brand performance.

The uncertainty about the effects of own and competitors' actions on own-brand sales, as well as the nature of competitive reactions, suggests that managers would benefit from simulating various "what if" scenarios before undertaking new marketing initiatives or reactions. With knowledge about the expected impact of a new action, the firm can then contemplate its best approach.