Thursday, June 25, 2009
Companies that Invest in Growth Break Away from the Herd
When companies fall upon tough times it is often the case that executives turn to defensive tactics, and focus their efforts exclusively on cutting costs. Cost reduction is not a bad idea, and can increase margins and lift revenue, but it should be one of several priorities for companies operating in an economic downturn.
McKinsey and Company research of companies operating with decent financial strength in reasonably attractive markets that invest for future growth, rather than cutting Research and Development and other investment spending often experience the best long-term results.
Executives at companies with relatively healthy balance sheets and the courage to go beyond defensive tactics in The Great Recession should consider the following three marketing tactics to drive near-term revenue growth and increase share:
1. Build brand equity by communicating your core brand values. While it is tempting to eliminate advertising spending when times are tough this is not wise. Research has found that consumers have less confidence in companies who don’t promote their products and services in a downturn. "Consumers continue to turn to strong, trusted brands, particularly during periods of uncertainty," said Judy Ricker, division president of brand and communications consulting at Harris Interactive. "Strategic investment in and careful monitoring of your brand is critical in both good and bad times, and will help you navigate the volatile environment." A customer’s willingness to pay for your product or service is a function of their reference price and the differential value they perceive. Your pricing strategy during the downturn will impact your brand health and positioning in the inevitable upturn. Analyze your portfolio of products and services and price elasticity of demand. Ensure that marketing messages reinforce your reference prices and communicate the differential value offered by your brand. Don’t be afraid to raise the prices of goods and services that have a high differential value relative to the competition.
2. Leverage analytic insights from company data. Central marketing organizations have access to customer-relationship-management (CRM) and transaction databases and should find opportunities to more effectively use this data to better predict demand. According to McKinsey a specialty retailer that developed an analytic tool to determine which items to promote online and in circulars experienced comparable store sales increases between two and four percent in test markets employing the tool to increase promotion effectiveness.
3. Improve offline conversion by investing in online advertising. Companies that follow their natural instincts may slash their ad budgets in periods of economic weakness. This makes it an even better time for you to take a long-term view, be aggressive, and increase your share of voice. Procter and Gamble COO, Robert McDonald, calls their approach to thriving in the recession, wejii, a Chinese term that combines crisis and opportunity. The good news is you may be able to accomplish this with fewer ad dollars and some changes to your marketing mix. You can increase offline conversion by investing in online advertising. In 2007 Google and ComScore combined forces to measure the impact of online advertising offline. Their study tracked a behaviorally driven search and display buy and produced a $530,000 sales lift in the new deodorant product, 96% of it from new buyers who weren't swayed by offline, demographic-targeted buys. Kevin Kells, CPG Industry Director at Google believes that "it's not that demographics don't matter, but the reality for most mass brands is that there's not a type of person. There are types of groups, types of communities within them that drive their volume, and they aren't homogeneous."
Companies with strong balance sheets in growth markets can gain strategic advantages through increased investment. Here are three suggestions:
1. Don’t abandon research and development. McKinsey research found that high-performing companies are twice as likely to increase research and development spending in a downturn. Procter and Gamble is an example and is increasing its fiscal 2009 research budget by 4.5% to $2.3 billion according to Wall Street research firm Sanford C. Bernstein. I recommend using social media channels to facilitate customer collaboration and increase research and development spend efficiency. Dell has done this with its site http://www.ideastorm.com/ Here is how Dell explains it, “The name is a take-off on the word “brainstorm” and it is our way of building an online community that brings all of us closer to the creative side of technology by allowing you to share ideas and collaborate with one another. The goal is for you, the customer, to tell Dell what new products or services you’d like to see Dell develop to inform their investment strategies.” Dominique Hind provides a thoughtful overview of the evolution of Dell’s Ideastorm and Starbucks' idea model in this slideshow http://bit.ly/5c3QB.
2. Consider capex expansion in future growth areas. Procter and Gamble executives have a positive long-term outlook on consumer spending and are launching the biggest capital spending plan in their 171-year history: 19 new factories worldwide over the next five years. Wal-Mart is also investing in new regions including Chicago where they are evaluating the potential of a supercenter on the South Side.
3. Grow through acquisition. A study of deals conducted from 1985-2000 by the Boston Consulting Group found that the average merger in a downturn created an 8.5% rise in shareholder value after two years, compared to the average deal in good times that resulted in a 6.2% drop in the acquirer’s share. McKinsey recommends identifying low cost acquisition opportunities in a downturn. In the current recession consumers may not be going on a shopping spree but smart retailers like Toys ‘R’ Us are snapping up their rivals for undisclosed bargain prices. In the past four months it has acquired both eToys and FAO Schwarz. No company today is immune from the pressure to maintain profitability, but those who avoid the temptation to go on the defensive and retrench will be better positioned to participate in the inevitable upturn.
Source: Kevin Kells, CPG Industry Director, Google, SearchRev.com, April 2008; McKinsey and Company, November 2008; Gaebler.com, June 2009; Business Week, June 2009.