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Enduring Recession: Three McCombs Professors Share Strategies and Perspectives on the Downturn
Taking Advantage of Adversity: Marketing Strategy in Recessions
By Raji Srinivasan Associate Professor of Marketing

There are only two things in a business that make money: innovation and marketing. Everything else is cost. Peter Drucker (1954)
Recessions, which are recurring events in major world economies, entail a significant contraction in market demand for goods and services. Consumers delay purchasing durable goods and think in terms of value when buying goods and services preferring store brands to national brands, making frequent small-size purchases rather than occasional large-size purchases, or patronizing value-retailers over full-service retailers. As a result, recessions bring about lower sales, cash flows and profits across diverse sectors and cause tectonic shifts in market structure. For example, during the 2001 recession more than 20 percent of the firms in the bottom quartile of performance in their industries jumped to the top quartile, and more than 20 percent of firms in the top quartile fell to the bottom quartile. Whats more, these movements persisted into the recovery: 70 percent of firms that

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increased profits during the 2001 recession sustained these gains, while fewer than 30 percent of the firms who lost ground regained their positions in the subsequent economic expansion. Despite the wisdom of Peter Druckers quote above, in a recessionary environment, most firms instinctive response is to cut back franchise-building investments to conserve scarce cash resources. Because firms are under pressure to maintain liquidity, research and new product development which normally have little short-term cashgenerating abilitysee close scrutiny in recessions. Many firms also view advertising as a dispensable luxury or something that can be postponed. However, the inevitable effect of such cutbacks is a vicious downward cycle in sales and profits.

Although the outlook may seem bleak in recessions, firms can survive and thrive during economic downturns. Here are some considerations: It is critical to invest in market research during recessions. People dont stop buying, they just buy more smartly. Yesterdays must-have features are todays live-withouts. Your consumers are changing, so you must understand them. Dramatic shifts during a recession may lead you to reprioritize consumers and markets. For instance, you may find new opportunities if you explore emerging markets, micromarket in new markets or focus on new vs. existing customers. Recessions present opportunities to differentiate the firm and stand out from the crowd. Evidence suggests that proactive
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marketing in recessions pays offat least for some firms. Proctor & Gamble promoted Ivory Soap during the Great Depression, Intel launched Intel Inside during the 1990-91 recession and Wal-Mart smothered competitors with Everyday Low Prices during the 2001 and 2008 post-bubble slowdowns. Caveat: only those with a marketing emphasis before the recessionand the resources to invest in marketing during a downturncan benefit from marketing investments in recessions. This may be the time to make internal changes that would be unthinkable in better economic conditions. Dispassionately audit the firms current product and marketing strategyincluding harvesting and divesting products or businessesand you may uncover new targets of opportunity (customers, channel members, acquisition targets) to expand the firms portfolio. Finally, a word of caution. Dont misinterpret a cyclical change as a structural change. As demand falls, companies may become fearful that the bases of competition are changing permanently and misinterpret current market conditions as reflecting new, changed realities. The challenge is to look forward to the next upturn and position accordingly. John Deere, for example, did not cut back marketing programs or close plants during the 1990-91 recession. Instead, it poured money into marketing programs and new product developmenta move that resulted in huge profits in the subsequent upturn of the mid-1990s. While recessions present opportunities for firms to consolidate their positions, the truth is that many firms fail during recessions. Not surprisingly, few firms possess the steely nerves to take advantage of adversity. But those that do stand to reap substantial rewards. To watch video of Srinivasan discussing opportunities in a recession, visit www.mccombs.utexas.edu/magazine be even more problematic in recessions. Much unethical decision-making is not the result of a conscious choice to violate the law or social norms. Rather, it stems from various decisional shortcuts (heuristics) and judgment biases to which most of us are prone. The danger of poor decisionmaking leading to unethical actions may be particularly great in economic downturns because of loss aversion.

Loss Aversion and the Endowment Effect

People detest losses more than they enjoy gainsabout twice as much, in fact. This tendency can skew our decision-making substantially. Experiments show that when people face essentially the same decision, they will tend to take more risks if the situation is presented as avoiding a loss than if the choice is framed as garnering a gain. Consider Nick Leeson, the infamous British trader who brought down the Barings Bank in 1995. Instead of admitting that his trading judgments had run up huge losses, he just kept doubling down on his gambles until $1.4 billion had disappeared. Loss aversion can be aggravated by the endowment effect, the fact that we easily attach ourselves to things and then value

Decision-Making Gets More Complicated in Down Economy

By Robert Prentice Ed & Molly Smith Professor of Business Law The economy is inevitably cyclical. Boom follows bust follows boom. Unethical decisions, however, are a constant. They happen in even the best of times, but they may

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