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Spring/Summer 2009T E X A S

Taking Advantage of

Adversity: MarketingStrategy in Recessions

 By Raji Srinivasan

 Associate Professor of Marketing 

Recessions, which are recurring events

in major world economies, entail a signifi-

cant contraction in market demand for

goods and services. Consumers delay pur-

chasing 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 lowersales, 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.

What’s more, these movements persisted

into the recovery: 70 percent of firms that

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 Drucker’s

quote above, in a recessionary environment,

most firms’ instinctive response is to cut

back franchise-building investments to con-serve scarce cash resources. Because firms

are under pressure to maintain liquidity,

research and new product development—

which normally have little short-term cash-

generating ability—see close scrutiny in

recessions. Many firms also view advertis-

ing 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 don’t

stop buying, they just buy more smartly.

Yesterday’s must-have features are today’s

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 mar-

kets, 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

insideM C C O M B S

“There are only two things

in a business that make money:

innovation and marketing.

Everything else is cost.”

  —Peter Drucker (1954)

Srinivasan

Enduring Recession: ThreeMcCombs Professors Share Strategiesand Perspectives on the Downturn

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14 www.mccombs.utexas.edu

inside

marketing in recessions pays off—at least

for some firms. Proctor & Gamble promot-

ed Ivory Soap during the Great Depression,

Intel launched “Intel Inside” during the

1990-91 recession and Wal-Mart smothered

competitors with Everyday Low Prices dur-

ing the 2001 and 2008 post-bubble slow-downs. Caveat: only those with a market-

ing emphasis before the recession—and the

resources to invest in marketing during a

downturn—can 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 firm’s current product and marketing

strategy—including harvesting and divesting

products or businesses—and you may

uncover new targets of opportunity (cus-

tomers, channel members, acquisition tar-gets) to expand the firm’s portfolio.

Finally, a word of caution. Don’t mis-

interpret a cyclical change as a structural

change. As demand falls, companies may

become fearful that the bases of competi-

tion are changing permanently and misin-

terpret current market conditions as

reflecting new, changed realities. The chal-

lenge is to look forward to the next upturn

and position accordingly. John Deere, for

example, did not cut back marketing pro-

grams or close plants during the 1990-91

recession. Instead, it poured money into

marketing programs and new product

development—a 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 reces-

sions. 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 dis-

cussing opportunities in a recession,

visit www.mccombs.utexas.edu/magazine

Decision-Making GetsMore Complicated inDown Economy By Robert Prentice

 Ed & Molly Smith Professor 

of Business Law

The economy is inevitably cyclical. Boom

follows bust follows boom. Unethical deci-

sions, however, are a constant. They hap-

pen in even the best of times, but they may

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 (heuris-

tics) and judgment biases to which most of 

us are prone. The danger of poor decision-making leading to unethical actions may be

particularly great in economic downturns

because of loss aversion.

Loss Aversion

and the Endowment EffectPeople detest losses more than they enjoy

gains—about 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 situ-

ation 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 trad-

ing 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

Prentice

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