Strategic Management and Myopia

Challenges and Implications

Wojciech Czakon

• Editore: Routledge
• Anno: 2022
• ISBN:
  9781000582642
• Edizione: 1
• Argomento: Betriebswirtschaft
• Categoria: Unternehmensstrategie

This book investigates the phenomenon of strategic myopia, which refers to important cognitive distortions that managers systematically display. It captures narrow views and preferences, which are likely to hurt firms' long-term prospects. Instead of accusing managers of imperfections, opportunism, or blindness, this book explains how strategic myopia stems from individual dispositions, how it is shaped by team contingencies, and encouraged by organizations' design.

The reader will learn how a metaphor introduced to explain business failure evolved over decades to become a concept useful in understanding intertemporal choices, technology substitution, competitive advantage erosion, competitive blindspots, and missed opportunities. In addition to explaining the mechanisms that encourage myopic behaviors, readers are offered a set of effective ways to address strategic myopia. A key benefit of this work is that the structure of the book allows the use of chapters separately. The core message is that eliminating strategic myopia is hardly possible, and may actually hurt the firms' short-term efficiency. However, organizations may develop capabilities, and implement designs that favor balancing the short-term benefits of myopia and alleviate its long-term drawbacks.

This book will be of interest to scholars, researchers, advanced students and experienced managers in the fields of strategic management and organizational behavior.

1 The metaphor of myopia in management

DOI: 10.4324/9781003199151-2

Levitt (1960) introduced the concept of marketing myopia into the management literature when he published his seminal article in the Harvard Business Review, which aimed to explain the failures of large firms and industries. He emphasized that the cause of ‘failure is at the top’ of organizations, which is known from an analogous saying in common parlance as ‘a fish rots from the head down.’ It was in the 1960s that there was a growing conviction that since it is managers who make decisions regarding the shape of the organization, the choice of products, the way processes are carried out, the supply chain, the conditions of employment, etc., it is also them who are responsible for failure. Levitt thus debunked the myth of external causes of failure and decline of firms, which have traditionally been seen in the saturation of the market or in the faltering of demand. Instead, he highlighted the mistakes made by top managers. He concluded that it was not any objective market forces that caused firms to flounder, but managers’ myopia. However, he refrained from defining this concept, and perhaps it is precisely the focus on the cognitive determinants of corporate failure, without a strict delineation of the myopia concept, which has proved so fruitful for research in the management field.

The metaphorical use of the medical concept of myopia provides a vivid example of how effectively a full set of meanings can be introduced into a scientific discipline through the use of a concept grounded in another discipline. Sułkowski (2011) writes that in linguistics, a metaphor constitutes a rhetorical figure transferring the literal meaning of a word to the figurative sense, and metaphorical thinking manifests itself as an effort to understand one fragment of reality through another fragment of reality. Short-sightedness is an eye disorder related to the structure of the organ, which results in blurred vision of distant objects. The degree of the visual impairment is measurable, and its particular ranges correspond to the qualification into one of the following categories: low, moderate, and high myopia. Caused by genetic and environmental factors, this disorder has become so common that everyone must have come across it. Also everyone intuitively knows that myopia causes serious inconvenience. Still, it is easy to diagnose and effective treatment can be applied.

Myopia has been used in management research as a behavioral variable with a range of meanings, narrowly and broadly, unidimensionally or multidimensionally. Few variables have such a long history of diverse applications in management research. The original notion of marketing myopia (Levitt, 1960) was complemented by the technological (Wills, 1969), managerial (Larwood, Whittaker, 1977), capital market (Sahlman, Stevenson, 1985), disaster (Guttentag, Herring, 1986), strategic (Ansoff, 1987), myopia of learning (Levinthal, March, 1993), competitive (Richard et al., 1993), normative (Swanson, 1999), network (Pels, 1999), shareholder (Samuel, 2000), temporal myopia (Miller, 2002), anticipatory (Salmenkaita, Salo, 2002), collective (Chikudate, 2002), digital (Herrington et al., 2005), supply chain (Hertz, 2006), consumer (Gabaix, Laibson, 2006), myopia of selection (Levinthal, Posen, 2007), spatial (Maskell, Malmberg, 2007), myopic marketing management (Mizik, Jacobson, 2007), cognitive (Morroni, 2007), purchasing (Rozemeijer, 2008), service innovation (Möller et al., 2008), goal (Ethiraj, Levinthal, 2009), new marketing (Smith et al., 2010), branding (Lencastre, Côrte-Real, 2010), formational (Naldi, Picard, 2012), cultural (Hasan, 2015), investor (Xu et al., 2015), or corporate myopia (Agarwal et al., 2018). The accumulation of meanings progressed in line with the need to study specific problems, which were seen to originate in the behavioral deficiencies of the decision-maker.

As in medicine, myopia in management was initially considered a pathology. A myopic individual manifests a lack of perspicacity, a reduced capacity to discern and evaluate the context as it actually is; characterized by a lack of clear-sightedness and foresight, such an individual has a restricted and blurred view of things (Hasan, 2015: 76). Negative associations, which are one-sided and thus make it difficult to understand and manage strategic myopia, prevail (Table 1.1). This chapter presents the essence of these negative associations as well as the limitations that stigmatizing managers entails. The second chapter provides a more comprehensive picture of strategic myopia, and the fourth one – its cognitive determinants in organizational settings.

Table 1.1 Associations with myopia in management literature

Inclinations	Associations
Negative inclinations	Harmfulness (Bendig et al., 201.8)
	Sub-optimality (Gao et al., 2017)
	Over-responsiveness (Ben-Oz, Greve, 2015)
	Inadequacies (Miller, 2002)
	Errors (Morroni, 2007)
	Underestimation (Laverty, 2004)
	Bias (Ridge et al, 2014)
	Negative change (Chakravarty, Grewal, 2011)
	Narrowing (Czakon, Kawa, 2018;
Unfavorable characteristics	Narcissism and hubris (Ranft, O’Neil, 2001)
	Lack of far-sightedness (Mizik. jacobson, 2007)
	Obsession (Samuel, 2000)
Detrimental intentions	Sacrifice (Cheng et al., 2005)
	Manipulation (Dallas, 2011)
	Inflating (Mizik, jacobson, 2007)
Positive inclinations	Assistance in performance protection (Ethiraj, Levinthal, 2009)
	Selective learning and developing organizational routines (Levinthal, March, 1993)
Source: author’s own study.

In discussions over myopia, managers are not only attributed with unfavorable characteristics but also with detrimental intentions. This accusatory tone (Wahal, McConnell, 2000) is rarely accompanied by positive connotations of a realistic view on the manager (Sato, 2012) or an indication that positive organizational outcomes can be achieved in relation to myopia (Levinthal, March, 1993), or despite its occurrence (Miller, 2002).

The metaphor of myopia brings to light a range of phenomena that have similar effects, which justifies treating it as a single category or a ‘disease.’ Thanks to recognizing the symptoms, diagnosis becomes possible, and identifying the disease allows for treatment, for example with ‘eyeglasses’ (Huemer, 2017). Research in management conducted over the last few decades, organized by relevance of myopia in explaining various phenomena allows to distinguish the interests of economics, marketing, and management (Table 1.2). This also helps recognizing just how important the concept of strategic myopia is for understanding the diversity of firms’ behaviors and their outcomes.

Table 1.2 Dependent variables in empirical research on myopia

Discipline	Dependent variable	Selected works
Economics	Stock price	(Mizik, Jacobson, 2007)
	Market efficiency	(Edmans, 2009)
	Takeover defense	(Stein, 1988)
	CEO turnover	(Gaoetal, 2017)
	Firm value	(Mizik, 2010)
Marketing	Decline of firms and industries	(Levitt, 1960)
	Profitability	(Mizik, Jacobson, 2007)
	Innovativeness	(Richard el al, 1993)
Management	Change	(Sato, 2015)
	Rigidity, inertia	(Miller, 2002)
	Resource allocation	(Laverty, 2004)
	Innovation.	(Ranft, O’Neil, 2001}
	Learning	(Levinthal, March, 1993)
	Effectiveness of strategy	(Ethiraj, Levinthal, 2009)
	Performance	(Morroni, 2007)
	Growth	(Mazzarol et al, 2009)
	Competitive dynamics	(Nadkarni, Chen, 2014)
	Opportunities	(Nadkarni et al, 2016)
	Threats	(Antoniou, Ansoff, 2004)
Source: author’s own study.

1.1 Short-termism – application in economics

Decisions that simultaneously overestimate the importance of immediate rewards and undervalue their long-term consequences are referred to as short term, and the systematic characteristic of an organization that supports such decisions is called short-termism (Laverty, 2004). The concepts of short-termism, i.e., a preference for the near-term at the expense of the long-term consequences of decisions taken, and managerial myopia, i.e., an inability to estimate long-term consequences, whether suboptimal or not (Marginson, McAulay, 2008), are used interchangeably in the economics literature (Stein, 1988).

A preference for short-term goals results in sub-optimal decisions because it excludes decisions with long-term consequences from the set of possibilities under consideration. Studies reveal a high propensity for short-termism among managers – as many as 78% of surveyed CEOs were willing to sacrifice long-term value to meet short-term earnings targets (Edmans, 2009).

Short-termism is a characteristic of a single decision that may regularly manifest itself either in the behavior of managers, or in the behavior of the firm. A decision can be classified as short term when the following three conditions are met:

1. sacrificing long-term growth or value-creation objectives through discretionary spending reductions on research and development, branding, hiring, and investing in human capital development (Mizik, 2010) as well as investing in fixed assets (Wahal, McConnell, 2000);
2. artificially inflating a firm’s short-term reported accounting numbers (Brochet et al., 2015), reporting earnings in line with previous predictions of profit levels (Cheng et al., 2005), quickly obtaining financial results from actions taken (Mizik, 2010);
3. the negative impact of the previous two conditions on a firm’s potential to generate future cash flows (Bendig et al., 2018), on the firm’s long-term value (Bhojraj et al., 2009), its long-term financial performance (Brochet et al., 2015) and its long-term prospects (Mizik, Jacobson, 2007).

Short-term accrual of a company’s financial results, associated with reductions in marketing and R&D budgets, paves the way for measuring myopia (Chakravarty, Grewal, 2011):

• moderate myopia occurs when either the marketing or R&D budget is cut;
• high myopia characterizes situations when both marketing and R&D budgets are cut.

Such a general characterization has important diagnostic advantages, as the negative effects of reducing each of these budgets become apparent over the long term. Reducing each of them significantly worsens the long-term prospects of the firm, as it interrupts the process of competence development, which requires systematic investment over a longer period of time (Edmans, 2009).

However, defining short-termism may raise concerns since its third condition is impossible to determine ex ante (Guttentag, Herring, 1986). The consequences of decisions that satisfy the first two conditions cannot be predicted, as they depend on external circumstances, such as the life cycle of the industry, or on the behavior of competitors. Short-term decisions may even prove to have a salutary effect upon a firm’s survival in the midst of an economic downturn, when they enable the firm to maintain solvency, or when they cause it to stop making investments in an unpromising technology in an environment of disruptive innovations available on the market (e.g., in optical data carriers for storing music in the wake of widespread use of streaming). It is worth adding that the opposite of short-termism, i.e., long-termism, is not always beneficial either, because – while it fosters incremental innovations in stable industries – it does not necessarily work well in fast-growing ones (Xu et al., 2015).

In fact, the issue of identifying short-term behaviors is even deeper, as decisions to reduce spending on building an organization’s long-term competencies tend not to be visible to investors (Stein, 1988). Managers have the power to shape actual cash flows, for example, by using discounts to achieve short-term sales growth, increasing production to decrease unitary costs (Mizik, 2010), cutting discretionary spending, or focusing on projects with fast payback periods. Managers also have influence on accounting policies and reporting practices. Thus, in addition to shaping actual financial flows, they also have the power to alter how they are presented in financial reports (Dallas, 2011). Hence, identifying short-termism is accompanied by the practical problem of information asymmetry (Mizik, 2010).

Attempts to formally define short-termism in economics have been subordinated to: searching ex post for the causes of sub-optimality on the capital market, as expressed by stock market valuation distortions (Stein, 1988; Mizik, Jacobson, 2007); seeking to improve the efficiency of the capital market to better distinguish firms that take short-term actions from those that abstain from such actions (Mizik, 2010); and building long-term corporate value (Groen-Xu, 2013). Many researchers and managers believe the question of short-termism is of paramount importance.

Short-termism amounts to, for all intents and purposes, an accusation against managers (Wahal, McConnell, 2000), stigmatizing their imperfection. However, this imperfection manifests itself in an explicit preference for the short-time horizon. It is not, therefore, that a manager is imperfect, not fully rational, and thus hardly predictable and often liable to make mistakes. On the contrary, short-termism is a common, well-known, and predictable phenomenon. Short-term decisions are to be expected. Why such predictability? Explanations were sought by looking at the individual characteristics of the manager, then organizational factors, and then market factors (Figure 1.1).

Figure 1.1 Factors and consequences of short-termism

Source: author’s own study based on Laverty (2004), Mizik and Jacobson (2007), and Merchant (1990).

The individual factors of short-termism stem from the cognitive and motivational, i.e., behavioral, characteristics of individuals. Some authors emphasize that short-termism could not be explained at all if the decision-maker were rational and the market efficient, since under such conditions the availability of information, and the ability to analyze it accurately, would have to lead to balancing of current interest with future interest (Guttentag, Herring, 1986). Whereas in behavioral economics: perceptions, i.e., the influence of managerial perceptions on decision-making (Samuel, 2001), decision-making heuristics under uncertainty (Guttentag, Herring, 1986), short-term preferences, and opportunistic self-interest (Laverty, 2004) open up ways of seeking realistic explanations for short-termism. Those explanations still lead to putting the manager, imperfect either by nature or by intention, under the pillory of scathing criticism.

When making decisions that have deferred consequences, managers face the problem of uncertainty, i.e., a situation in which not all possible outcomes of actions, or even the probability of their ...

Indice dei contenuti

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Acknowledgments
• Introduction
• 1 The metaphor of myopia in management
• 2 Dimensions of strategic myopia
• 3 Effectively addressing strategic myopia
• 4 Cognitive underpinnings of strategy
• Conclusions
• References
• Index