marketing strategies that make entrepreneurial firms ...

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M A R K E T I N G STRATEGIES THAT MAKE E N T R E P R E N E U R I A L FIRMS RECESSION-RESISTANT JOHN A. P E A R C E II College of Commerce and Finance, Villanova University STEVEN C. M I C H A E L School of Business Administration, George Mason University

The recession of 1990-1991 adversely affected nearly every industry in the United States, and entrepreneurial manufacturing firms were among those hardest hit by the recession. The failure rate among this group by mid-year 1991 had risen 37% from the previous year. Thus, recessions pose a serious threat to the survival of entrepreneurial firms. Understanding how the business cycle influences performance and what strategies are effective in such turbulent times has practical value for managers of entrepreneurial firms. In this paper we report a large-scale empirical research study involving subjective and financial information from 118 publicly traded U.S. manufacturing.firms. The participating firms are in volved in technologically demanding and highly innovative industry segments: Industrial and Computer Equipment; Electrical Equipment and Components; and Measuring, Analysis, and Control Instruments. None of the firms has achieved a market share of more than one half of one percent (< 0.5%). The goal of the study was to determine the components of a marketing strategy that enabled a.firm in these industries to withstand the negative financial consequences of a recession. We find that, in these industries, a company's marketing strategies preceding a recession strongly impact the extent of economic downturn on the firm, and influence its odds of a timely and complete recovery. Our specific prescriptions follow: First, maintain marketing activities in the core business as assurance against recession. Increasing sales and advertising, increasing breadth of production, and increasing geographic coverage improve perfi?rmance during both the peak and the contraction of the business cycle. Second, during the peak period, cautiously expand with an emphasis on marketing efficiency. Increasing the number of channels of distribution and cutting price have a negative effect unless accompanied by sales-force performance measurement. A simple emphasis on incentives and efficiency alone hurts

EXECUTIVE SUMMARY

Address correspondence to Steven C. Michael, Mail Stop 5F4, George Mason University, School of Business Administration, 136 Enterprise Hall, Fairfax, VA 22030. E-mail: [email protected] The authors wish to thank Gerry Hills, two anonymous referees, the editor, and participants at the UIC/AMA Research Symposium in Marketing and Entrepreneurship 1995 for helpful comments and suggestions. Remaining errors are the authors'. Journal of Business Venturing 12, 301-314 © 1997 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY I{XI10

0883-9026/97/$17.00 Pll S0883-9026(96)(~060-2

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a firm as a recession hits. All of these prescriptions run counter to existing views that suggest that recession simply requires cutbacks and retrenchment. Recessions seem to be different from other threats to firm viability, and marketing activities appear to help pull the firm through a macroeconomic downturn. © 1997 Elsevier Science Inc.

S C O P E OF T H E S T U D Y In recessions, typically the "winds of creative destruction" that are the heart of capitalism blow with their mightiest force, creating both opportunities and threats (Schumpeter 1912). As an example, at the rate of business failures increased dramatically during the recession of 1990-1991 (Duncan 1991; Statistical Abstract 1994: Table 846). The entrepreneurial firm is especially affected, with its relatively smaller size, little or no diversification, and considerable resource constraints. What may be its advantage is its greater flexibility. Little research has been done on how to help firms survive recessions, however, and none on entrepreneurial firms' survival, although the issue was identified as an area of research a decade ago by Fahey and Christiansen (1986). In this paper we consider whether marketing activities can help an entrepreneurial firm survive a recession. We examine marketing strategies employed by entrepreneurial firms in industrial goods businesses before the 1990-1991 recession to examine whether profitability can be associated with expanded marketing activities. We discover an interesting dichotomy: Expanding marketing activities in the core business helps a firm survive, but expansion into new channels and geographies must be done with careful controis in order to prevent overexpansion and decreased profitability during the recession. The paper is organized as follows. The first section reviews the 1990-1991 recession and its effects on the economy broadly. The second section reviews the business press and previous literature for advice regarding recessions. The third combines literature from economics, marketing strategy, and entrepreneurship to identify propositions regarding the ability to marketing to "recession-proof" a business. Next, the data set is described, and results reported. Recommendations for practice follow.

T H E 1990-1991 R E C E S S I O N There have been nine recessions in the United States since World War II, and the most recent one lasted from July 1990 to March 1991. The 1990-1991 recession in the United States followed the country's longest peacetime expansion in history and was different from previous recessions in a number of ways. Compared to other post-WWII recessions, the most unusual features of the 1990-1991 recession were the periods of slow growth both before and after the recession itself. The recession was short, with a duration of eight months versus the average of 11 months, and mild, with real output (GDP) dropping only 2.2% versus the average 2.8% drop. The recovery was also slower than normal, with real output rising 2.9% in the 18 months following the recession, as compared to the average recovery rate of 9.8% growth in the same time frame (Economic Report of the President 1993: 42). Additionally, declines in employment were smaller than any postwar recession. The recession of 1990-1991 adversely affected nearly every industry in the United States. Failures and cutbacks in all the weakened industries had a multiplier effect on other industries. Entrepreneurial firms, presumably smaller and more credit-hungry than other firms, were among those hardest hit.

MARKETING STRATEGIES AND RECESSION RESISTANCE

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Because of the credit squeeze of the late 1980s, small business was left with few sources of working capital. Coupled with the recession, the result of sharply limited credit was an unprecedented number of small businesses having no choice except to shrink or actually close their doors....The sound loans that were not being made, the new jobs that were not being created, and the untold numbers of new businesses that never got started because of these barriers have left a permanent impact on the economy, never to be recovered (Hogan, 1991: 53). Entrepreneurial manufacturing firms were among those hardest hit by the recession. Failures among this group by mid-year 1991 had risen 37% over the previous year (Duncan 1991: 8). Thus, recessions pose a serious threat to the survival of entrepreneurial firms.

L I T E R A T U R E REVIEW Despite the practical importance of recessions to entrepreneurial firms, the management and entrepreneurship literature has not explicitly examined how these firms might survive downturns in the business cycle. Existing work is based on personal observation or case study analysis, and most appear to pertain to large corporate organizations. A review of recent articles in the business press suggests the following prescriptions for survival in recessions:

1. Hold positions in diversified products and markets. Businesses in cyclically sensitive industries often attempt to recession-proof by diversifying into more recession-resistant sectors. For example, the housing industry suffered in the 1990-1991 recession. Banks were hesitant to lend to commercial land-development companies, but considered the home buyers a less risky investment (Jacob and Neumeier 1991). Some builders recognized this trend and switched markets prior to the recession from commercial building to building new homes. Other builders established effective defenses by expanding into the home-repair and remodeling business or property management, which were sectors of the market traditionally considered less volatile (Altany 1991a, 1991b). Diversification is likely to be a less attractive and less possible option for the smaller firm, however. 2. Establish niches. In the clothing industry, specialty stores prospered during the 19901991 recession (Mitchell 1992). The Limited, Donna Karana, and Liz Claiborne profited from differentiation strategies promoted by specialty retail shops that appealed to consumers how desired a particular style of clothes. This "style" was not easily substitutable (Jacob and Neumeier 1991). As a second example, companies that marketed commodity chemicals suffered in the last recession, while companies that marketed specialty chemicals generated profits. Specialty chemical companies serve niches that allow them to pass along cost increases to customers, while commodity chemicals have slowing demand and higher costs (Jacob and Neumeier 1991 ). These prescriptions from the business press have limited application, however, for the entrepreneurial firm. Diversification to smooth out cash flows is likely to take away both managerial and financial resources from the entrepreneurial firms' core business. Financing for such acquisitions may not be easily obtained. And establishing a niche and increasing product differentiation is often good advice independent of macroeconomic conditions.

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Some existing research in management argues that recession requires a turnaround strategy (Hambrick and Schecter 1983; Hofer 1980; Schendel, Patton, and Riggs 1976). Retrenchment is likewise a documented, and frequently recommended, first step in the turnaround process for a company faced with negative effects (Bibeault 1982; Pearce and Robbins 1993; Sloma 1985). The endorsements of retrenchment are not unanimous (Hardy 1987); there is typically organizational resistance to deep cuts. However, firms that achieve greater reductions are better positioned to achieve turnaround (Goldstein 1988; Slatter 1984). In the business press, McLaughlin observed that companies that enacted moderate cost cuts during recessions not only survived but realized more favorable long-run sales and market-share growth than their competitors who made more severe cuts (McLaughlin 1990). Additional strategies implemented to complement cuts focused on the redirection of resources. In combination, these findings from prior research suggest that a cost-reduction orientation in favorable economic times best prepares a firm to face the added negative pressures of a recession. Firms that continuously attempt to reduce costs should experience less disruption than competitors that have allowed underutilized, slack resources to accumulate. But this prescription is primarily grounded in an extension of the turnaround model, not specific theorizing regarding recessions. And the empirical work has not generally used large-scale samples for validation.

THEORY Modern economic theory stresses the role of random events, or shocks, disrupting information transmission in the economic system to create business cycles (Howitt 1991). 1 Within industries, shocks that generate a slowdown in economic activity confuse existing firms as to whether declining prices represent a general weakness in the economy or a breakdown of oligopolistic coordination (Green and Porter 1984). In an oligopoly, firms have quantity constraints that sustain a price above the competitive level. If firms observe price but not quantity, and price is subject to random shocks, then a price decline can occur for two reasons: a recession, or a firm expanding output beyond its appropriate level. Firms that observe price falling assume the collusion has collapsed, so all rush to produce. The expansion in production generates too high a quantity to sustain the oligopolistic price, so price collapses. The testable predictions of this model have been supported by Domowitz, Hubbard, and Petersen (1987). Therefore, information (or the lack of it) creates opportunities in recession. We believe that information plays a crucial role in helping entrepreneurial firms survive recessions. The firm must engage in constant scanning for information about the macroeconomic environment, as well as industry and competitive conditions, in order to detect opportunities and threats. The generation and dissemination of information about customers, competitors, and market conditions is widely understood to be a marketing function (Kohli and Jaworski 1990; Kotler 1991; Narver and Slater 1990; Slater ~We do not propose to review the vast and stormy debates regarding the causes of recession. Macroeconomists are divided whether business cycles represent a failure of markets to clear because of market rigidities (the neo-Keynesian perspective) or because of technological shocks and adjustment lags (real business cycle perspective). Both are broadly in agreement that information transmission affects individual and firm decision-making. A historical overview of the issues is found in Howitt (1991). A review of the neo-Keynesian perspective is given in Mankiw (1990), and a review of real business cycle theory is found in Stadler (1994).


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and Narver 1994). The firm that performs this task well is described in the marketing strategy literature as having a "market orientation" (Day 1990; Kohli and Jaworski 1990; Kotler 1991; Levitt 1960; Narver and Slater 1990; Slater and Narver 1994), which implies that the firm can recognize and respond to changes in the business environment. Specifically, a firm with an emphasis on marketing as opposed to other business functions is more likely to become aware of the recession, to make necessary internal adjustments, and to identify and pursue external opportunities. Following the distinction made by Hills and LaForge (1992) in their call for research, we theorize at least two ways in which an emphasis on marketing activities will improve performance in recessions: providing market opportunities, and increasing the returns to various marketing strategies. First, recessions create opportunities. As the Green-Porter model above implies, and as observed by Stigler (1964), the breakdown of oligopolistic coordination creates opportunities for firms, as customers are dissatisfied and willing to move to other suppliers. The firm with an emphasis on marketing activities is likely to become aware of those opportunities more rapidly than a production- or finance-oriented firm, and respond to them with measures designed to capture more market share. Recessions are also likely to increase the returns to various marketing activities. In order to survive, smaller firms must have some differential advantage that allows them to compete against larger rivals who have economies of scale and scope (Caves and Pugel 1980). One such advantage is flexibility in output volume (Fiegenbaum and Karnani 1991; Mills and Schumann 1984); small firms survive by absorbing more uncertainty. If entrepreneurial firms compete by varying their sales levels, then customers must be identified in expansions through selling efforts and advertising. Through marketing activities, small firms are likely to remain knowledgeable about customer needs, and can adjust production more rapidly than larger competitors. Therefore, small firms are likely to earn a higher return from marketing activities throughout the business cycle. The existing but incomplete literature suggests that for some companies, in some industries, and in some competitive situations there are advantages to entering a recession having previously implemented strategies--independently or interactively--that emphasized marketing activities. Thus, we hypothesize two possible effects suggested from the theory: PI: Emphasis on marketing activities relative to competitors will improve perfor-

mance at the peak of the business cycle for small firms. P2: Emphasis on marketing activities relative to competitors will improve perfor-

mance during the contraction of the business cycle for small firms. The above research suggests a variety of reasons why returns to marketing should be high for entrepreneurial firms. But the theory is coarse-grained; there has been little or no attempt to identify which marketing activities are likely to have higher returns, or to provide help to managers during a recession. Through our analysis below, we attempt to remedy this deficiency.

RESEARCH METHODS This research was designed to measure two distinct but interconnected factors: activities and financial performance of each participating firm during multiple phases of the busi-

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ness cycle. Objective and subjective data were necessary to profile the strategic activities and performance of each company in the sample frame prior to and during the recessionary period.

Sample Eleven four-digit industries in three two-digit Standard Industrial Classification Codes (SIC) manufacturing classifications were selected for the study. The sample consisted of all 451 publicly traded manufacturing firms with annual sales revenue between $10 and $100 million in 1990. The two-digit classifications were Industrial and Commercial Machinery and Computer Equipment (35), Electrical and Non-Computer Electrical Equipment and Components (36), and Measuring, Analysis, and Control Instruments (38). All of these firms operate in a single SIC-defined industry, so diversification does not affect results. The participating firms are classified by Standard & Poor as involved in technologically demanding and highly innovative industry segments, primarily industrial goods industries. None has achieved a market share of more than one half of one percent (< 0.5%). The small size of the firms place them squarely within the traditional domain of entrepreneurial research. More importantly, firms in these industries have in recent years generated considerably more growth in sales and wealth than the economy on average (Rukeyser 1991: 433; Statistical Abstract 1994: Table 869). Thus, these are small firms in wealth-creating industries. A total of 164 questionnaires were returned, with a response rate of 23.9%. Of these, 114 were included in this analysis since only they were from four-digit SIC codes that demonstrated an impact attributable to the 1990-1991 recession, reflecting either a cyclical or countercyclical classification as judged by Standard and Poor. Previous research has identified industrial goods industries as likely to be most strongly affected by the business cycle. Romer (1991) has shown that price movements in industrial goods markets are interrelated through the business cycle. The effects of recession documented by Domowitz, Hubbard, and Peterson (1987) were most pronounced in industrial goods industries. Nonresponse bias could exist if there exists a relationship between the model variables (such as performance) and the probability of response. Clearly one reason for nonresponse is unsuccessful performance. Firms with poor performance may have other issues to address besides questionnaires (such as survival) or may be too embarrassed to respond. We undertook an analysis of the nonrespondents to the survey to determine whether their firms differed in a significant way from those firms whose managers supplied our study's marketing data. We compared the financial performance data of respondent and nonrespondent firms from the Industrial and Commercial Machinery and Computer Equipment, Electrical and Non-Computer Electrical Equipment and Components, and Measuring, Analysis, and Control Instruments classifications. The data was obtained from Standard & Poor's Compustat Financial Data Base on U.S. Companies. The t-test results disclosed no significant differences between respondent and nonrespondent firms on the three performance measures that we investigated: return on equity, return on sales, and return on assets. 2 2A firm m a y have failed before we created the sample frame, and thus be excluded from our sample and our comparison of respondents to nonrespondents. We believe this risk of bias to be low, however, because our sample frame was created in early 1990, before the full effects of the recession were felt. Also, the study does not include private firms. We see no reason that the effects of recession are different for private versus public firms, but we cannot reject the possibility. W e are grateful to a referee for drawing our attention to these sampling issues.


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Survey Data Empirical data for this study were drawn from instruments mailed to the manufacturing firms in the pre-selected SIC codes in late 1990, at the trough of the recession. The sampiing frame was created in early 1990, and covered the entire United States. This comprehensive, non-regionally restricted field setting was selected to minimize any influence of non-industry factors such as local regulation and taxation, regional economic conditions, or local wage rates. Accompanying each questionnaire was a cover letter, individually printed on university stationary and addressed to the company president or chief executive officer. The letter gave a brief overview of the research project and a request for participation. As protection against self-report bias, CEOs were instructed to form a group of three executives to complete the questionnaire. The other participants were to be "two senior executives who were involved in planning and operationalizing activities taken by the business associated with the recent recession." Titles of co-respondents were required but names were optional. Anonymity was guaranteed to all respondents as a step to reduce the potential for response bias or unintended error as proposed by Warwick and Lininger (1975). Additionally, the self-reported measures for each concept were limited to a few clearly defined dimensions, thus facilitating accurate responses. Changes in the firms' emphasis on marketing and business activities were measured through Likert-type scale inquiries. The respondents were asked to indicate the extent to which 11 different marketing activities were emphasized "in the year prior to the recession." The activities appeared in the questionnaire with the numbers 1 through 5 corresponding to a natural progression from "no emphasis" to "great emphasis." Emphasis scales have been used before in the literature (Dess and Robinson 1984: Hatfield and Pearce 1994). The questions broadly covered the key decision variables in marketing (price, promotion, distribution, and product) used in previous research (Carpenter 1987: Kotler 1991; Robinson 1985). Appendix Table A1 contains the full text of the questions and the mean responses. Appendix Table A2 reports additional descriptive statistics on the firms in the sample.

Objective Data Questionnaire information was supplemented with quarterly financial information. Return on equity ( R O E ) performance was measured for each firm quarterly through the business cycle--every three months from Quarter 3 of 1989 through Quarter I of 1991. This information was obtained in 1995 from reports made available by the public companies to Standard & Poor's Compustat Financial Data Base on U.S. Companies. The time frame was chosen because it covered a complete business cycle. The phases were defined by the movement of GNP in the United States. The peak phase was defined as the third quarter of 1989 through the second quarter of 1990. The contraction phase was demarcated by the third quarter of 1990 through the first quarter of 1991. The performance measure for the peak period, Peak ROE, was computed as the average of quarterly R O E over the four quarters of the peak period. Contraction R O E was computed in a similar way.

ANALYSIS

Factor Analysis Factor analysis was employed to reduce the data set from a large number of coded items to a small number of representative factors. Specifically, sel f-reported responses to a list

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TABLE 1 Factor Analysis Results Factor

Item

Loading ~

Communalities

Incentive performance reward systems Multi-functional task force utilized for R&D/operations coordination Use highly skilled, motivated sales staff

0.75 0.69

0.59 0.54

0.67

0.55

2.59

Streamline the value chain

Decrease distribution channels Restructure/focus departments

0.84 0.67

0.74 0.66

1.67

Retrench into core business

Reduce sales staff/advertising Decrease breadth of production Narrow geographic coverage

0.77 0.71 0.61

0.66 0.55 0.48

1.53

Increase distribution channels Broaden geographic coverage Price below competition

0.74 0.69 0.60

0.57 0.61 0.60

1.06

Improve marketing efficiency

Expand into new markets

Eigenvalue

Highest factor loading reported for each item. Note: Full text of items included in Appendix Table A1.

of marketing strategy questions employing a 5-point Likert scale (1 = n o t emphasized; 5=given great emphasis) were factor-analyzed utilizing varimax orthogonal rotation. These questions were designed to garner an understanding of pre-recessionary marketing strategies. Factor analysis was utilized because numerous variables were correlated within the coded list and there was a need to explain the variance in the set of coded questions as a function of a much smaller set of underlying variables. Four factors closely related to the original set of items resulted from the analysis, each comprised of at least two items with an eigenvalue that was greater than one (> 1.00). A summary of the factor analysis is presented in Table 1. The first factor, Improve Marketing Efficiency, stressed the implementation of sales-force motivation tools and the improvement of new product development through use of a multifunctional task force to address R&D and operational coordination. Factor two, Streamline the Value Chain, pertained to pursuing a more efficient marketing effort through decreasing the distribution channels, restructuring departments, and implementing innovative sales and advertising efforts. The third factor. Retrench into Core Business, reflected the concentration of efforts with regard to specific products and narrowing geographic coverage. Note that the negative of this factor represents an expansion of marketing efforts in the core business. Factor four, Expand into New Markets, reflected efforts to pursue a marketing strategy designed to garner a larger share of the market through increased distribution channels, broader geographic coverage, and price competition. Summary statistics for all study variables, including factors, are set forth in Table 2. Inter-item reliability analyses (Cronbach's alpha) were applied to all factor measures to assess the level of agreement among the particular measures within each factor. The inter-item reliability measures ranged from 0.47 to 0.57. In summary, it was found that 11 variables reflected the underlying marketing strategies as represented by the four factors. Table 2 also sets forth correlations for study variables. Some degree of correlation was expected among factors given the overlapping of domains. Factor scores for each factor were constructed using only those variables associated with the most significant loading on relevant factors. Specifically, all loading over 0.60 were utilized.


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TABLE 2 Descriptive Statistics and Intercorrelations of Study Variables Variable R O E : Peak ROE: Contract 1. Marketing efficiency 2. Streamline 3. Retrench to core 4. New market

N

M

SD

1

104 111 98 103 103 102

0.32 -5.92 2.83 1.88 1.48 2.77

59.95 35.45 0.87 0.72 0.61 0.93

0.21 0.10 0.20

2

0.29 0.24

3

0.01

Cronbach Alpha

Eigenvalues

0.57 0.47 0.53 (/.53

2.33 1.60 1.30 1.03

Regression The dependent variable in this study was performance as measured by return on equity. "ROE is generally the most important indication of management's achievement....Since benefiting shareholders is (management's) goal, ROE is, in an accounting sense, the true bottom-line measure of performance" (Ross, Westerfield, and Jordan 1994). ROE thus appeared to be the best measure of performance of the study) In addition, ROE controlled explicitly for capital structure. Alternatively a simultaneous equations model would have to be employed to separate capital structure effects from product market effects on performance. To clearly understand the impact of the recession on firms, performance was compared across two separate time periods: peak and contraction. The peak phase was defined as the third quarter of 1989 through the second quarter of 1990. The contraction phase was demarcated by the third quarter of 1990 through the first quarter of 1991. Performance in each phase was computed as a simple average. To understand the relationship between marketing strategies as defined by the four factors and performance given recessionary pressures, simple multiple regression was employed. The independent variables utilized in the partial model to identify the main effects were the four factors. To garner a more complete understanding, however, the addition of interaction terms to the partial model was necessary. Two equations were estimated: one for the peak period and one for the contraction period. Table 3 sets forth regression results on the full model. The table shows statistically significant findings for the peak and contraction phases. The results in a broad sense support the hypotheses. The single strongest influence on peak performance is negatively associated with retrenchment in the firm's core business, or reducing marketing efforts in the core business. This is shown by the negative coefficient on "Retrench into core business" in Table 3. Therefore, the negative sign emphasizes that marketing efforts in the core business sustain the firm through good times and bad. The second strongest factor--expansion into new markets--has a negative effect unless accompanied by careful controls and incentives, as shown by the positive coefficient on the interaction term of "improving marketing efficiency" and "expansion into new markets." Simply seeking efficiency is not enough, nor is increasing activities into new markets. The two must be combined to improve profitability. Improving marketing efficiency alone has a negative effect on performance, both during the peak and the contraction phase, as shown by the negative coefficient on "Marketing efficiency" in Table 3. Presumably the emphasis on efficiency and incentives re3Existing research has also established that R O E is typically highly correlated with other performance m e a s u r e s (Schmalensee 1989).

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TABLE

3

A N D S.C. M I C H A E L

R e s u l t s o f R e g r e s s i o n A n a l y s i s for B u s i n e s s C y c l e P h a s e s ROE

Peak (U :

Improve marketing efficiency Streamline the value chain Retrench into core business Expand into new markets Marketing efficiency × streamline Marketing effic. × retren, to core Marketing effic. × new markets Streamline × retrench to core Streamline × new markets Retrench to core x new markets F R2

Adjusted R 2

104)

Contraction (U :

111)

-90.88** -48.62 - 159.10"* -91.79'* 7.55 23.67 17.91' 5.97 8.78 18.25

-42.31" -5.45 -78.89** -4.14 11.52 12.93 4.58 - 3.84 -5.66 8.80

2.44'* 0.24 0.14

4.54'* 0.36 0.28

'p < .05. '* p < .01.

duces information flow in the firm. In particular, high emphasis on incentive compensation implies that the sales force bears costs of recession, as commission declines with the general level of macroeconomic activity. This loss may make sales representatives reluctant to share information, and perhaps reduce teamwork and morale as well. During the contraction phase of the business cycle, the coefficients are reduced but the explanatory power remains high. Again, the single highest returns are to increasing marketing activities in core businesses, as shown by the negative sign on the retrenchment variable. The prior expansion into new markets does not have any effect on performance; neither does streamlining the value chain. An emphasis on efficiency alone before entering a recession has a clear negative effect. Viewing the results across equations for improving marketing efficiency suggests that incentives alone do not improve performance. Instead, increasing efficiency is best employed as part of an expansion strategy.

DISCUSSION The results offer qualified support for the propositions. First, marketing activities in the core business are clearly the major determinant of profitability in both good times and bad. So Proposition 1 and Proposition 2 are supported. A "market orientation" aids profitability. The return to marketing activities decreases during a contraction, however, as seen by comparing the coefficients from the two regressions. In addition, the pattern of significance in each of the profitability equations is different with respect to the "Expand into new markets" variable. In a contraction, prior expansion yields no payoff. In a peak phase, expansion can hurt profitability, perhaps through overexpansion, unless accompanied by an emphasis on marketing efficiency. In a downturn, that peak phase expansion offers no protection against recession. The confirmation of Proposition 1 and Proposition 2 suggests that the effectiveness of marketing activities is not moderated by macroeconomic conditions. But more specific conclusions can be drawn. Certain marketing activities, such as expanding the sales


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force and advertising, are effective throughout the business cycle, while others, such as cautious expansion, have effect primarily in the expansion phase. This research has identified why, when, and in which activities marketing has an effect on performance in recession. In addition, the research does not support the generic prescription of the turnaround literature that recession requires a simple application of a turnaround strategy. Indeed, a serious emphasis on retrenchment leads to poorer performance in our sample. In short, recession is different. Some existing turnaround literature has argued for a more contingent approach, however. Firms facing performance problems attributable to external causes are advised to use entrepreneurial strategies, ones focused on growth (Robbins and Pearce 1992). 4 This research can be interpreted to define and amplify that prescription, specifically that entrepreneurial strategies are primarily marketing-oriented. Sustained marketing activities can pull a firm through a recession. It is worth repeating the limitations of the study. First. the sample is composed of firms from technology manufacturing industries. Industry forces may moderate the relationship between marketing strategy and performance during the business cycle discussed here. Second, the firms studied are all publicly traded: recessions may affect private firms differently. Third, other business functions were not explicitly examined. For researchers, this p a p e r represents at best a first step into understanding how firms, especially entrepreneurial firms, survive the business cycle. Our texts in both entrepreneurship and m a n a g e m e n t stress the importance of understanding the external environment, of which the m a c r o e c o n o m y is a major part. Yet we have little understanding about how firms survive recessions and what advice scholars can give to improve survival. More research is needed, both across the business functions and across the distribution of firm sizes, to determine how macroeconomic activity influences firm strategy, structure, and performance. For example, the availability of financing (perhaps through a deep-pocketed angel) or the degree of diversification might very well affect how small firms survive the business cycle. For practitioners, a c o m p a n y ' s marketing strategies preceding a recession strongly impact the extent of economic downturn on the firm. The advice to the entrepreneurial firm is clear. First, maintain marketing activities in the core business as assurance against recession. Second, during the peak period, cautiously expand with an emphasis on marketing efficiency. Both of these propositions are also consistent with the economists' viewpoint of small firms as absorbers of industry and macroeconomic uncertainty, who are vulnerable during downturns. In short, a c o m p a n y ' s pre-recession condition is important because it sets boundaries on m a n a g e m e n t and marketing actions as well as firm performance during the recession, and increases the firm's ability to survive the winds of creative destruction.

REFERENCES Altany, D. 1991a. Jump start the recovery: What 30 CEOs are doing to beat recession, lndustrv Week, June 3, 240 (11):39-44. Altany, D. 1991b. Survival lessons. Industry Week, February 4, 240 (3):57-65. ~That paper and data set did not examine recession explicitly.The cause of performance problems was self-identified as internal or external by the firm. The data did cover the period 1976 to 1985, thus including at least one full business cycle.

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APPENDIX TABLE

A1

I t e m s U s e d in t h e Q u e s t i o n n a i r e

"Indicate the emphasis that your company placed on each of the following activities during the year prior to the recession by making a slash through the appropriate number." Incentive performance reward systems. Using multidisciplinary task forces for effective R&D, marketing, and operations coordination. Adding highly trained, motivated, and dynamic sales personnel. Decreasing the number of channels of distribution. Restructuring departments according to customers or markets. Reducing sales staff and advertising budgets. Decreasing product line breadth from full line to partial line or partial line to single line. Narrowing geographic coverage from international to national or from national to regional. Increasing the number of channels of distribution. Broadening geographic coverage from regional to national or from national to international. Pricing below competition.

Mean

S.D.

3.18

1.24

2.31 2.94 1.40 2.02 1.81

1.13 1.18 0.86 1.10 0.99

1.52

0.91

1.15 2.65

0.56 1.19

3.34 2.26

1.40 1.15

Note: Likert scaling phrased as numbered 1 ("not emphasized at all") to 3 ("given average emphasis") to 5 ("given great emphasis").

TABLE

A2

S a m p l e Profile

Peak R O E Contraction R O E Peak annual sales Contraction annual sales Peak debt-to-assets ratio Contraction debt-to-assets ratio

Mean

Interquartile range

0.3% -5.9% $23 million $26 million 24.1% 23.8%

26.1% 31.3% $29 million $30 million 29.0% 30.2%

Peak is defined as third quarter of 1989 to second quarter of 1990. Contraction is defined as third quarter of 1990 to first quarter of 1991. Interquartile range is defined by subtracting the 75th quartile from the 25th quartile.