Growth vs. stagnation vs. risk vs. uncertainty: How to win by marketing aggressively in a recession
An article by James Surowiecki in the New Yorker makes an argument that all of us in the advertising industry desperately want to be true–namely that the smart thing for companies to do in tough economic times is to double down on the their marketing budgets. He provides supporting examples that go all the way from the great depression to the 1990s. Despite what seems like clear empirical evidence about how companies should respond to tough economic times, he does note that budget cutting is not entirely irrational:
“Why, then, are companies so quick to cut back when trouble hits? The answer has something to do with a famous distinction that the economist Frank Knight made between risk and uncertainty. Risk describes a situation where you have a sense of the range and likelihood of possible outcomes. Uncertainty describes a situation where it’s not even clear what might happen, let alone how likely the possible outcomes are. Uncertainty is always a part of business, but in a recession it dominates everything else: no one’s sure how long the downturn will last, how shoppers will react, whether we’ll go back to the way things were before or see permanent changes in consumer behavior. So it’s natural to focus on what you can control: minimizing losses and improving short-term results. And cutting spending is a good way of doing this; a major study, by the Strategic Planning Institute, of corporate behavior during the past thirty years found that reducing ad spending during recessions did improve companies’ return on capital. It also meant, though, that they grew less quickly in the years following recessions than more free-spending competitors did. But for many companies recessions are a time when short-term considerations trump long-term potential.”
This raises one of the most frustrating questions in business. When it takes years or even decades to build a great company, why are companies managed almost exclusively to meet quarterly goals? Managers are doing what they’re rewarded to do. Unfortunately, in most cases the markets are rewarding them for doing the wrong things–short-term thinking, strategic nearsightedness, and penny-wise and pound-foolish marketing plans. I suppose it’s possible that this period of economic upheaval will cause investors to reconsider the type of management philosophies they choose to reward, but I doubt it.