For many companies, recessions are a time when short-term considerations trump long-term potential.
This has something to do with a famous distinction that the economist Frank Knight made between risk and uncertainty. Risk describes a situation where you have a sense of the range and likelihood of possible outcomes. Uncertainty describes a situation where it's not even clear what might happen, let alone how likely the possible outcomes are. Uncertainty is always a part of business, but in a recession it dominates everything else: no one's sure how long the downturn will last, how shoppers will react, whether we'll go back to the way things were before or see permanent changes in consumer behavior. So it's natural to focus on what you can control: minimizing losses and improving short-term results.
Yet, the uncertainty of recessions creates an opportunity for serious profits, and the historical record is full of companies that made successful gambles in hard times: Kraft introduced Miracle Whip in 1933 and saw it become America's best-selling dressing in six months; Texas Instruments brought out the transistor radio in the 1954 recession; Apple launched the iPod in 2001.
In the Great Depression, Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. By 1933, even as the economy cratered, Kellogg's profits had risen almost thirty percent and it had become what it remains today: the industry's dominant player.
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. Hyundai has made huge gains in market share this year, thanks to a hefty advertising budget and a guarantee to take back cars from owners who have lost their jobs. Those gains may turn out to be temporary, but in fact the benefits from recession investment are often surprisingly long-lived, with companies maintaining their gains in market share and sales well into economic recovery.
Source: James Surowiecki, THE NEW YORKER, April 20, 2009