The Ghosts (and Lessons) of Recessions Past: 1990-91

The economic notion of "creative destruction" is an interesting and useful one that states the constant change within society and economies creates new opportunities. (example: the Internet is dismantling newspapers, but it is also providing opportunities for people like Matt Drudge, Arianna Huffington and so on.). And with shifts in economies--good or bad--comes hope for innovation and opportunity.

That said, it's still cold comfort when you are wrestling with a nasty recession and trying to make payroll, cover your bills and survive.

The 1991 recession. . . You should see the photo of the current recession.

A 1997 article by John Pearce of Villanova University and Steven Michael of George Mason which published the results of a study of effective marketing strategies from smaller, entrpreneurial firms durring the recession of 1990-91. The study focused on small, entrepreneurial companies' marketing strategies before and during a recession and how they affected the firms' profitability during the downturn.

Alright, since you asked, here is a picture of the current recession.

Besides being recessions, what do the 1991 recession and current recession have in common? Well, the root causes were similar--collateralized debt (read: real estate deals and the secondary market for the debt underwriting those deals going in the toilet). And, the projections for the recovery from this recession are similar in nature to the 1991 recession. That is, a slow recovery with little-to-no job growth for the first year or two of the recovery. Ahhhhhhhh, good times.

Otherwise, the '91 recession was a gentle kiss on the cheek compared to the repeated-crotch-kick-with-steel-toed-boots that this recession has been and continues to be. Without further ado, here's what the research found:

Why They Did It: There is surprisingly little research in recession strategies in business, but what there is typically focusses on "retrenchment" and "turnaround strategies"--two terms that mean slashing & burning overhead wherever possible, particularly in marketing. This survey was designed to test those theories as well as provide a specific focus on smaller, more entreprenurial companies which typically have the hardest time surviving downturns.

What They Did & How They Did It: They issued surveys to senior executives from 451 public companies (primarily in manufacturing) with sales of $10-100 Million and accounted for less that 0.5% of their respective markets. They ended up using 114 of the surveys that came back to them. The survey focused on recession strategies including:

1. Marketing Efficiency: Attempting to consolidate functions of product development under a smaller team.
2. Streamlining Value Chain: Dropping distributors
3. Retrench into Core Business: Dropping underperforming products and geographic markets to get "more bang for the buck"
4. Expand Into New Markets: the opposite of "Retrenching"

 The Results

"Sur-veyyyyy SAID..."

The key findings of the study were:

• Marketing related to core business is "the major determinant of profitability in good times and bad."
• Expansion in good times offers no assurances for durability during recessions
• Expansions that do pay off? Sales force and advertising increases pay dividends in any economic cycle.
• Retrenchment is generally a mistake. Most executive reported that the cost cuts in marketing hurt them.

So, when your boss or client starts to sing the "we have to cut back, beginning with marketing", please point them to this study as well as others covered on this blog.

Have a great weekend everybody!