Mgrs shouldn't focus on current stock value because it leads to an over-emphasis on short-term profits at the expense of longtermprofits.
Please evalutate this statement.
This is a finance question. I feel that its a yes/no question. Yes because the need to maximise shareholder wealth and no because manager should focus on long term potential for profit (R&D iNVESTMENTS ETC). Can someone enlighten me?
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It is true that it is possible to increase the short term profit of a company at the cost of long-term performance and profit if the company. Further, because of the nature of stock markets, the short-term variations in performance can cause disproportionately high variations in market prices of the stock of the company.
Because of these two reasons it is far more easier for managers to increase stock prices of the company in short-term, than improve the real worth of company's stocks, and with that consistently high stock value, in the long-term.
Many managers are tempted to adopt this easier approach, because either they are not able to visualize the long-term impact of their short-term thinking, or deliberately to achieve their personal objectives of personal advancement by appearing capable managers in eyes of others. A practice like this may or may not benefit the manager, but most certainly it is not in the interest of the company, or its long-term shareholders.
There are several ways in which company a company can show higher profit in short-term at the cost of long-term performance. Some of these are described below.
- Cutting down expenditure for R & D in areas like product development and process improvement.
- Cutting down on new investments designed to increase productive capacity and improve production efficiency.
- Cutting down expenditure in activities such as Business Process Engineering and Industrial Engineering, designed to improve organizational efficiency and effectiveness.
- Cutting down manpower to the minimum required so that, managers are too busy with day to day activities, and too concerned with immediate performance to take care of long term interests of the company. This also hampers the ability of the company to absorb the shocks of fluctuating workloads and employee turnover.
- Cutting down on employee development and training activities.
- Cutting down on advertisement and other activities for developing brand value, and improving market share.
- Cutting down on plant and equipment maintenance activities. This reduces the maintenance cost in the short-run, but leads to equipment damage and higher maintenance cost in the long-run.
- Forcing supplies to reduce prices of the raw material and components supplied by them. Suppliers , frequently accept such forced price cuts as they have no immediate alternative, but in the long-term it reduces their level of commitment and support towards such customers.
- Reducing margins and and other costs of distribution channel partners. Effect of this is similar to that of reducing supplier price.
- Increasing price of products under condition of short-term market shortage.
- Reducing production cost by reducing the quality of the product supplied. Frequently, customers take some time to take note of the poor quality and change the suppliers or brands.
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