Warren Buffet advises investors to "be fearful when others are greedy and be greedy when others are fearful". In the same way, business owners that launch products and chase market share in a recession can steal a march on fretting rivals.
Apple launched its wildly successful iPod digital music player amid the wreckage of the dotcom bust in 2001. Four years earlier, another US company, network-equipment maker Cisco Systems, pushed deeper into Asia during its financial crisis and has led that market ever since.
Between 1990 and 2003, the correlation in a given year between the growth of the US economy and the number of companies formed or innovative products launched was a weak 0.17 (where one equals a perfect correlation), consulting firm Innosight reports.
What accounts for this apparent paradox?
First, recessions cull weaker players and their competing wares from the market, so advertising a new product becomes cheaper and more likely to reach consumers.
Lifting advertising spending during a recession increases earnings and company value more than additional advertising in good times, a Marketing Science Institute study involving 2662 companies confirms. Cash-strapped businesses can take heart from a further finding that decreasing advertising in a recession erodes financial performance temporarily but only for firms selling industrial products.
New business models
Luxottica Asia Pacific chief executive, Chris Beer, is betting the same logic applies to new business models too. The Italian eyewear maker and retailer is pushing on with a plan to launch 100 to 200 franchised stores locally next year, on top of an existing 970 company-owned outlets.
The booming economy attracted plenty of ‘cottage people’ to the industry, Beer says. "I think there will be a consolidation of those models that are shallowly built."
Second, talented staff released from failed—and flailing—firms in a recession can be snapped up for less than they would have commanded during the years of plenty. For instance, the calamity in the financial sector is sending tens of thousands of former banking employees onto the employment market.
Of course, companies may be reluctant to hire these and other cast-offs on a permanent basis in the current environment so human resources practitioners advise putting them through their paces on a short-term contract until the economic outlook becomes clearer.
Third, consumers reconsider many of their purchasing decisions to get more bang for the fewer bucks coming in. During the 2001 downturn, for example, people switched from professional teeth-whitening treatments costing hundreds of dollars to the newly launched Crest WhiteStrips costing just tens of dollars.
Look out for savings
Business customers will be on the lookout for savings too, says entrepreneur Joe Cincotta, who recently established SaaS Mentor to help small businesses move business software online.
Cincotta says the timing for software-as-a-service is ideal. "People want to have the opportunity to continue to do business and find efficiencies in their business, but capital investments are out of the question."
He adds: "This whole approach is being able to deliver enterprise-class software via the internet. And the key piece of this puzzle is that it is 'as a service', which means it is based on small, ongoing fees as opposed to big, upfront capital investments and licensing fees."
Finally, recessions force companies to do more with less, making innovation almost a matter of survival. As the founder of the world's biggest online retailer, Amazon.com, Jeff Bezos, explains: "Frugality drives innovation, just like other constraints do. One of the only ways to get out of a tight box is to invent your way out."
Indeed, far from a paradox, this is the way capitalism is supposed to work, the chief economist at Deutsche Bank, Tony Meer, says.
The rising economy that lifted even poorly run firms and indifferent products is ebbing, he notes. These face imminent extinction "because that's what recessions do".
"The survivors [will be] good businesses ... that actually make things or provide services that people want to use and will pay for," Meer says. "They will do very well over the next five years."
