Turning adversity into advantage: Does proactive marketing during a recession pay off?
Introduction
Business cycles, in general, and recessions in particular, can severely affect the performance of individual firms, industries and entire economic sectors (Domowitz et al., 1988, Gabisch & Lorenz, 1987, Zarnowitz, 1985). However, not all firms perform poorly or fail during recessions—some firms prosper and even grow.1 Some firms view recessions as opportunities to strengthen their businesses, invest aggressively and overtake their weaker competitors. For example, brands, such as Camel cigarettes and Chevrolet, seized top market positions from their competitors through aggressive marketing campaigns during the Great Depression in the US in the 1930s. Procter and Gamble, a company noted for consistent spending during periods of recession, heavily promoted some of its best-known brands (e.g., Camay, Ivory, and Crisco) at that time. Other firms (e.g., GM's Saturn Division, and Intel Corporation) invested during the 1990–1991 recession to improve their competitive position, with Intel launching its “Intel Inside” brand-building program, aggressively promoting the brand when there was little advertising competition. Likewise, DeBeers aggressively launched its “Shadows” campaign globally during the recession of 1989–1990. Renault aggressively introduced its Clio brand with the second highest price point in the category and Barclaycard initiated an aggressive brand re-launch, aimed at increasing market share through customer acquisition (along with a new fee) during the depths of the same recession. We observe a similar response by firms in the most recent recession, where some firms (e.g., BMW, Cisco, Dell, and, Wal-Mart) view the recession as an opportunity, and invest aggressively, hoping to capture market position from their weaker competitors. As a senior Intel executive put it recently “the belief at the company is that you don't save your way through a recession.”2 We address two central questions in this paper: First, why do some firms view a recession as an opportunity, and develop an aggressive marketing response to it? Second, what are the effects of such a marketing response on the performance of the firm?
These questions are important for both managerial practice and theory. Business cycles are a common occurrence in the world's major economies: there have been eleven recessions in the U.S. in the 58 years since World War II, indicating that, in the US alone, recessions occur once every six years or so (http://www.nber.org). Even though a recession may be triggered by events in a single sector (e.g., the dot-com bust is purported to have started the most recent recession in the US), firms across industries, sectors, and countries feel its effects. Despite the severe effects of recessions on firms' performance, we know little about what constitutes an appropriate marketing response during those challenging times. Several observers, (e.g., American Business Press, 2002, McGraw-Hill Research, 2002, Strategic Planning Institute, 2002), suggest that firms that invest during recessions see significant benefits. In a similar vein, Barwise (1999) notes that some firms either maintain or increase their marketing spending during difficult economic times. However, most firms cut back drastically on marketing expenditures during such times (Barwise & Styler, 2002, Picard, 2001), as evidenced by the deepest cutback in spending in 75 years in the US advertising industry associated with the most recent recession (http://www.adage.com).
Academic research in this area offers weak and equivocal insights. A review of the leading marketing journals identified three articles (Coulson, 1979, Cundiff, 1975, Yang, 1964) addressing issues related to recessions, none of which were published in the last 20 years. More recent reports (Goodell & Martin, 1992, Shama, 1993) provide limited insights (“build a recession marketing plan based on the firm's strategic capabilities” and “response to the recession varies by geography, sector and firm size.”) with limited theoretical support or generalizability. Based on the PIMS database, Hillier (1999) finds that strong firms generally benefit from investments in marketing but suffer from cost reduction initiatives. He cautions, however, that there is no panacea, indicating that for some firms with certain business characteristics, the best strategy would be to cut back on marketing spending during a recession, but he provides no generalizable results. We need studies to bridge the gaps in our understanding of the appropriate choice and relative effectiveness of marketing response in recessions, and to generate insights that can guide firms in their decision making during recessions.
The environment plays a major role in shaping firms' business strategies (Lane & Lubatkin, 1998, Miller, 1988, Teece et al., 1997, Weick, 1979). Extending this theoretical viewpoint, we propose that some firms engage in proactive marketing, viewing the recession as an opportunity and develop marketing strategies to capitalize on the perceived opportunity. The operational unit of analysis for proactive marketing is the strategic business unit (SBU); in the rest of the paper, we use the terms organization, firm and business interchangeably to refer to the SBU.
Organizational and environmental characteristics are major determinants of a firm's strategic behavior, its resource deployment, and its performance (e.g., Conant et al., 1990, Menon et al., 1999). Accordingly, we hypothesize that organizational and environmental traits will influence the extent to which a firm will pursue proactive marketing in a recession. In addition, we hypothesize that proactive marketing will positively influence the firm's performance using the recession.
Using the most recent recession as the context, we develop and test a formal model of the antecedents of proactive marketing in a recession and its effects on business performance. We collected data during the second and third quarters of 2002 from a sample of 154 executives in US business-to-business (B2B) SBUs to assess our model and test a series of hypotheses. We find that organizations with a strategic emphasis on marketing, an entrepreneurial culture, and slack resources engage in proactive marketing during a recession. In addition, we find that organizational and environmental characteristics moderate how a strategic emphasis on marketing impacts the firm's proactive marketing response in a recession. We also find that proactive firms achieve superior business performance in a recession. Thus, for the firms in our sample, it pays to deploy a proactive marketing strategy during a recession if they have the supporting resources and capabilities.
We proceed as follows. In the next section, we define proactive marketing and then present our conceptual framework, hypotheses, and model for the antecedents of proactive marketing and its effects on the firm's performance. In subsequent sections, we describe the method we use to calibrate and test our model, and present the results of our analyses. We conclude by discussing the implications of our findings for theory and practice, summarizing the limitations of the study, and identifying directions for future research.
Section snippets
Theory
We developed the construct of proactive marketing based on several theoretical developments in the strategy literature. Past research (e.g., Miller, 1987, Miller & Friesen, 1983, Weick, 1979) has conceptualized and empirically demonstrated that the environment plays a significant role in inducing firms to adapt, with attendant consequences for firm performance. Others (e.g., Bourgeois, 1984, Child, 1972) go further, suggesting that organizations proactively manipulate their environments or
Hypotheses
Firms' traits are major determinants of their strategic behavior, resource deployment and performance. Organizational traits of firms including strategic type (Conant et al., 1990, Gatignon & Xuereb, 1997), organizational culture (Deshpandé, Farley, & Webster, 1993), innovativeness (Menon et al., 1999), and strategic flexibility (Grewal & Tansuhaj, 2001) influence their strategic behaviors with significant implications for firm performance. For example, Menon et al. (1999) find that certain
Field interviews, sample and procedure
We conducted field interviews with 20 senior marketing executives in twelve organizations in eight industries to help understand the domain of proactive marketing and develop the items for our measures. We acquired a mailing list of firms from Corptech for the formal surveys. With a view to increasing the generalizability of our findings, we surveyed a cross-industry sample of executives in firms covering four primary industry groups: engineering, computers, telecommunications and light
General theory testing approach
Before testing our hypotheses, we established the discriminant validity of the constructs in our antecedent model by estimating a confirmatory factor analysis model. All factor loadings are positive and significant. The model fit is good (NNFI = 0.94 CFI = 0.94, RMSEA = 0.08, and SRMR = 0.08). The NNFI and the CFI indices are above the desirable level of 0.90, RMSEA and SRMR are less than 0.10, indicating a good fit of data to the model. Next, we examined the convergent and discriminant validity of
Discussion
In this research, we have tried to expand the limited knowledge of the role of marketing in a recession. Our results support business press accounts of companies such as Dell, Microsoft, DeBeers and BMW that view recessions as opportunities and exploit that perceived opportunity with aggressive marketing programs. Although most accounts (e.g., Hillier, 1999) stress advantages that accrue during the post-recession recovery, our findings suggest that there are immediate returns as well.
Acknowledgements
The authors acknowledge the financial support of the Institute for the Study of Business Markets, The Pennsylvania State University.
The authors thank Reuben Raj, Sridhar Balasubramanian, Hans Baumgartner, Rajdeep Grewal, Ajay Kohli, Maria Merino, Christine Moorman, Robert A. Peterson, Raj Srivastava, Christophe Van den Bulte and Rajan Varadarajan, for their comments on previous versions of the manuscript. The authors also thank the Editor, Hubert Gatignon and two anonymous reviewers for their
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