Competitive actions that require patience prove the most profitable
The greatest profits are the result of competitive actions, which show positive bottom-line effects only in the long-term, claims a new study by a team of researchers from Aalto University, VTT and the University of Virginia.
However, companies tend to avoid these types of investments. The study demonstrates how the time delay between investments in competitive moves and their positive profit impacts is directly linked to the willingness of companies to invest.
'Investments in product development and marketing tie up an organisation's resources and ramp up expenses. However, results are only evident after a certain amount of time. We noted that this delay leads to systematic underinvestment,' explains Jukka Luoma, Assistant Professor at the Aalto University School of Business.
Home runs and misses
According to researchers, it can be difficult to achieve high profits with competitive moves that have an immediate impact on the company's top- and bottom-line performance.
'Price cuts and ad campaigns that aim at increasing sales are attractive decisions to make, as their profit impacts materialise in a reasonably short period of time. However, the same also applies to competitors. This is why the profit impact of such short-term competitive measures is easily smaller than anticipated,' Mr Luoma explains.
Researchers urge corporate heads to search for ways of competing, which are not self-evidently useful and do not have a visible impact on profits immediately. Methods of competing that require patience are less utilised and, for this reason, more profitable.
'There are without a doubt risks involved in this approach. It can result in misses but also home runs,' Mr Luoma reflects.
The research group applied computational modelling methods to study the significance of time delays in competition between companies. Computational modelling facilitates the study of complex cause and effect chains, such as competitive dynamics between companies.
'These types of methods have been applied extensively in different branches of science, and they have a great deal of potential in the examination of the complex phenomena involved in corporate management,' states Research Scientist Sampsa Ruutu from VTT.
The study was published online this week in the Strategic Management Journal. The same study has previously (2014) been awarded at the European Academy of Management Annual Meeting as the best paper in the area of strategic management.
The research group included Jukka Luoma, Research Scientist Sampsa Ruutu (VTT), Professor Adelaide Wilcox King (University of Virginia) and Professor Henrikki Tikkanen (Aalto University School of Business and Stockholm University Business School).
Link to article (onlinelibrary.wiley.com)
Assistant Professor, Marketing
Aalto University School of Business
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