Opportunity or Threat?

A number of people have been remarking that recessions/depressions are times of great innovation. Presumably when things get bad, taking a risk seems less risky. Or perhaps if you are unemployed, you might as well employ yourself by becoming entrepreneurial or getting serious about developing some idea you have.

Here is an interesting article by James Surowiecki in The New Yorker magazine:

In the late nineteen-twenties, two companies—Kellogg and Post—dominated the market for packaged cereal. It was still a relatively new market: ready-to-eat cereal had been around for decades, but Americans didn’t see it as a real alternative to oatmeal or cream of wheat until the twenties. So, when the Depression hit, no one knew what would happen to consumer demand. Post did the predictable thing: it reined in expenses and cut back on advertising. But Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop first appeared in the thirties.) By 1933, even as the economy cratered, Kellogg’s profits had risen almost thirty per cent and it had become what it remains today: the industry’s dominant player.

You’d think that everyone would want to emulate Kellogg’s success, but, when hard times hit, most companies end up behaving more like Post. They hunker down, cut spending, and wait for good times to return. They make fewer acquisitions, even though prices are cheaper. They cut advertising budgets. And often they invest less in research and development. They do all this to preserve what they have. But there’s a trade-off: numerous studies have shown that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts.

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The academics Peter Dickson and Joseph Giglierano have argued that companies have to worry about two kinds of failure: “sinking the boat” (wrecking the company by making a bad bet) or “missing the boat” (letting a great opportunity pass). Today, most companies are far more worried about sinking the boat than about missing it. That’s why the opportunity to do what Kellogg did exists. That’s also why it’s so nerve-racking to try it.