The "new normal" makes the bold even stronger--by doing business differently!

By doing what everyone else is not doing offers the best chance of success.

The idea behind what I’ll share with you today simply defies the reality of how most companies behave during a recession.  Yet, as a part of my three-part “new normal” series, what today’s post is about points to an opportunity for competitive advantage for smart managers.  What I’m going to propose goes completely against the conventional practice by companies in terms of cutting advertising expenditures during recessionary times.  First, some background…

What most managers decide to do.

In most recessions, business generally cut back on their marketing and promotional expenditures…to wait for better times to return before they re-commit their sales efforts to being back in the game.  The reason for this is simple:  It is a generally accepted view that marketing expenditures--and those for advertising in particular--exert little appreciable influence on people to spend money they weren’t otherwise “in the market” to spend; the role of marketing activities generally and especially advertising, then, is simply to provide useful information that helps potential buyers on where to best direct their expenditures for maximum value.  Hence, when people are not buying—i.e., during recessions—out-lays for these types of business activities are thought to be wasted and, thus, the expected cut-back in advertising spending. 

What clever managers do.

There an interesting article I ran across not that long ago by the New Yorker’s James Surowiecki [Hanging Tough], however, that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts.  Here are the central points of that one-page article in Mr. Surowiecki’s own words:

In the late nineteen-twenties, two companies—Kellogg and Post—dominated the market for packaged cereal. It was still a relatively new market: ready-to-eat cereal had been around for decades, but Americans didn’t see it as a real alternative to oatmeal or cream of wheat until the twenties. So, when the Depression hit, no one knew what would happen to consumer demand. Post did the predictable thing: it reined in expenses and cut back on advertising. But Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop first appeared in the thirties.) By 1933, even as the economy cratered, Kellogg’s profits had risen almost thirty per cent and it had become what it remains today: the industry’s dominant player.

You’d think that everyone would want to emulate Kellogg’s success, but, when hard times hit, most companies end up behaving more like Post. They hunker down, cut spending, and wait for good times to return. They make fewer acquisitions, even though prices are cheaper. They cut advertising budgets. And often they invest less in research and development. They do all this to preserve what they have. But there’s a trade-off: numerous studies have shown that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts. In 1927, the economist Roland Vaile found that firms that kept ad spending stable or increased it during the recession of 1921-22 saw their sales hold up significantly better than those which didn’t. A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.

One way to read these studies is simply that recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less. When everyone is advertising, for instance, it’s hard to separate yourself from the pack; when ads are scarcer, the returns on investment seem to rise. That may be why during the 1990-91 recession, according to a Bain & Company study, twice as many companies leaped from the bottom of their industries to the top as did so in the years before and after.

It's not too late--it looks like there's still time to gain competitive advantage!

In yesterday's Wall Street Journal there’s an article entitled “Forecasters predict ad stabilization in 2010.”  If you read the story carefully, though, you’ll see that an up-turn is ad spending is forecasted [i.e., might occur but is not for certain] in 2010; however, this is expected to occur globally--not in the U.S!  What this means to me in a “new normal” context is simple:  there’s still plenty of time--according to Mr. James Surowiecki’s argument--for maverick managers to gain strategic advantage!

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