Procter & Gamble tried it and it utterly failed. The CEO at the time, Bob McDonald, was promptly removed from the board. Under his command, P&G became the world’s largest advertiser, with annual advertising expenditures exceeding $10 billion dollars. Bob McDonald never budged. He relentlessly refused to cut advertising costs. Yet by his refusal, he unwittingly signed his own death sentence. Would he have been blessed to read this text earlier, he might have saved himself from this corporate (and personal) tragedy at the helm of one of the world’s foremost companies.
What did Bob McDonald do that went so wrong? He did what marketing science until now had prescribed as the medicine during an economic downturn: crank up your advertising and marketing budget. Get the party going again; consumers suffer from a bipolar disorder and need a pat on the back after too much heartbreaking ‘recession’ headlines in the newspapers. And giving a pat on the back, he did, our dear Mr. McDonald.
While the U.S. economy suffered its longest and worst economic recession since the Great Depression, McDonald brought P&G’s ad budget to dazzling heights. He managed to increase P&G’s ad budget 24% within a two year timeframe, with sales growth equaling just 6% in the same period. At the same time margins were being squeezed. Yet McDonald did exactly what academic studies told him to do. And now here he is, battered and broken after a 33-year stint at P&G. It cost him thirty years to carefully build his reputation, but only three to ruin it. He was tricked into the mantra of ‘countercyclical advertising’ and got stung.
The Myth of Countercyclical Advertising and R&D
Are countercyclical advertising and R&D — that is, increasing expenditures on advertising and R&D during an economic downturn — beneficial to firms? My study What Austrian Business Cycle Theory Teaches Us: The Role of Innovation and Advertising during Recessions shows that this conventional wisdom is largely a statistical artifact. I argue that firm performance (net income) isn’t really a function of ad spending during (and after) a recession, but rather a function of competitive advantage. When a ‘competitive advantage’-variable is included in the model, the positive impact of countercyclical advertising on post-recession earnings disappears.
I compare the idea of countercyclical ad spending with an ‘easy pill’ solution. When company earnings take a nosedive, employees and stakeholders will look upon management to act, rather than not to act: cranking up the marketing budget is highly visible and the conventional wisdom assumes this strategy is justified. Until reality kicks in, as it did with Bob McDonald and P&G.
Innovation and the Business Cycle
If countercyclical marketing doesn’t work, than what did Bob McDonald need to do? What is the role of innovation in managing the business cycle on a strategic level? When should firms invest in incremental innovations and when in radical innovations? What should it do during a downturn or recession, and what should it do during an economic boom?
In my second study, I argue — again with help of the Austrian business cycle theory — that firms should focus on incremental product innovation during the boom and radical product innovation during and after the bust. The Product Launch Analytics database provided data on innovations, whereas the Compustat database provided financial data on the firm level. With n = 33983 innovations of 5810 firms, the results provided support for my predictions.
Steve Jobs versus Bob McDonald
Recessions have tremendous social and economic costs. Companies should not lament that fact, but instead prepare for the inevitable. Our economies have been plagued for centuries with recurrent booms and busts; companies that do not take business cycles into account in their decision making are naive. Yet the marketing field had little to say about recessions so far. They acquiesced in its — for many — ungraspable nature. The few studies that exist, told P&Gs McDonald to increase his marketing budget during the recession of ’08. He did exactly that and failed.
What he had to do was invest in radical product innovation. In case of P&G: build new brands, create entirely new products, and address novel and untested consumer needs. Yet McDonald did the exact opposite. The last time P&G had launched a new brand in the U.S. was five years ago: McDonald hasn’t launched even one. Instead, he pushed for incremental product innovation and advertising.
In short, I show firms not to be a McDonald, but rather a Steve Jobs. It was after all Steve Jobs who introduced the iPhone — a radical product innovation — in the midst of a severe recession, after which his flagship Apple emerged as one of the most successful companies ever. Become a Steve Jobs, not a McDonald.
[First submitted to Future Ideas]