Back in December I wrote a post about maintaining the status quo in a down economy. In that post I reference the auto industry and how some companies, like Hyundai had an incredible opportunity to increase share of voice and ultimately sales as a result of their competitors reducing ad spending. Without doing so much as maintain status quo, there was tremendous opportunity to take market share away from the competition. Apparently The New Yorker thinks the status quo is not even enough and goes as far as saying that ratcheting up spending during a downturn may be the best way for a company to make it through the recession. While that might sound counterintuitive, it’s the theme of several pieces of research that James Surowiecki highlights in this week’s column in The New Yorker.
“Taken together, the studies seem to show that increased spending on items such as advertising, research and development and, yes, acquisitions, can help companies emerge from a downturn stronger than their peers. Last week, Frank Aquila, an M.&A. partner at Sullivan and Cromwell, wrote an opinion piece in BusinessWeek highlighting what he considered to be successful acquisitions that were made during tough economic times.
The New Yorker article doesn’t focus on deals, although they are included in the broader category of corporate spending. As a main example, the article describes how Kellogg rose to the top of the cereal pile by increasing its advertising spending during the Great Depression, helping it surpass the its rival Post, which decided to cut ad spending. In the 1930s, Chrysler surpassed Ford to become the second-largest automaker in the United States by creating a cheaper car for the masses, the Plymouth.
Other companies took gambles on new products that paid include: Kraft introducing the widely popular Miracle Whip dressing in 1933; Texas Instruments introducing the transistor radio in the recession of 1954, following the Korean War; and Apple launching the iPod in 2001, following the dot com bubble.
While a company may improve its return on capital by cutting during recession in the short term, the research suggests that the long-term viability of a company improves by taking advantage of the weak market and grabbing market share, The New Yorker writes.”
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