Thursday, July 17, 2008

Strategy and the short term

A version of this piece was published in Marketing in 2008

Last week’s Bellwether report, the IPA’s quarterly survey of marketing budgets, makes pretty depressing reading, with “the rate of decline gathering to a pace not seen since budgets were hit in the immediate aftermath of the 9/11 terrorist attacks”.

As you will have grown used to by now, internet advertising was the only sector to show growth, with search still showing stronger increases than display.

The Bellwether report is so-called because advertising expenditure has been demonstrated to be a leading indicator of economic performance. Because marketing budgets are easy to alter in the short term, unlike other longer term investments (plant, machinery, property) they are vulnerable to being plundered to make up shortfalls in profitability in the wider business.

In some senses this is a logical tactic to adopt – if corporate performance is affected, the share price could slip, and all sorts of unpleasant consequences ensue.

In Jean-Claude Larreche’s book ‘The Momentum Effect’ he divides strategies into two types – momentum and compensatory. Momentum strategies require the organisation to be pulling in one direction. These are powerful and effective, but require a singular determination to align an organisation around the achievement of a single goal.

Compensatory strategy describes a scenario where actions are taken to make up for shortfalls elsewhere in the organisation, rather than to achieve the goals of the business. Sometimes this is legitimate, he argues, because we have to live in the real world. So a manager with a target to make may ‘pull forward’ business from the following year to meet it. He’s going to have to make it up later, but if he doesn’t do this, he may not be in the game later anyway.

The problem occurs when compensatory strategy becomes the dominant type of strategy within an organisation – a company devotes so much energy to maintaining equilibrium that it fails to move forward.

And this is what we see when marketing budgets are cut in tough economic times. It’s of course true that if you see marketing as a cost, you shouldn’t be doing it at all. It should be an investment – and if it pays back, then you should be doing it regardless of the economic climate, both to maintain sales and the health of the brand.

But this is a lot to ask when the share price is already under pressure, so it’s an obvious short-term compensatory strategy to shave marketing budgets even though the negative effects of this might be known, and we’re seeing the impact of this right now on the Bellwether report.

But as we’ve seen, internet advertising – and particularly search – is still making gains.

Internet advertising is often more cost-effective and accountable. This makes it inherently less risky than other forms of media – and in uncertain times it’s not surprising that people are attracted to anything they perceive as more reliable.

And search is (on the face of it) less risky still. Its cost-per-click basis means people regard this as a transfer of business risk away from the advertiser and to the media owner. This risk-transfer has driven the stratospheric growth curve of search, but it is a simplistic model.

Because whilst it’s a hugely valuable marketing tool, search doesn’t create demand. It fulfils it.

So advertisers are right to continue to invest in search during a downturn – after all, it’s more important than ever to be catching every customer. But search depends on other activity to stimulate demand over and above latent levels, and it is this that will be lost as investment slips in other areas.

So if businesses are drawn to spend more on search because of its lower perceived risk, they may find themselves spending still more on this activity to compensate for slower demand.

What might have been a short-term compensation strategy to maintain corporate performance, could become an eroder of efficiency and an inflater of costs – at exactly the time when better performance couldn’t be more important.

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