TITLE

The Impact of Economic Contractions on the Effectiveness of R&D and Advertising: Evidence from U.S. Companies Spanning Three Decades

AUTHOR(S)
Steenkamp, Jan-Benedict E. M.; Fang, Eric
PUB. DATE
July 2011
SOURCE
Marketing Science;Jul/Aug2011, Vol. 30 Issue 4, p628
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The critical role of research and development (R&D) and advertising in the marketing strategy of the firm is T well established. This paper conceptually and empirically examines why and how much the effectiveness of these two marketing instruments differs between times of economic expansions versus periods of economic contractions-and whether these results depend on the cyclicality of the industry in question. We consider a key marketing metric (market share) and a key financial metric (firm profit). Our empirical setting is 1,175 U.S. firms across a time period spanning over three decades. We find that R&D and advertising contribute to firm performance but that their effectiveness is not constant across the business cycle. Increasing advertising share in contractions has a stronger effect on profit and market share than increasing advertising share in expansions. Likewise, investments in R&D in contractions lead to higher gains in market share and profit than R&D investments in expansions, albeit only in subsequent years. If in contractions the firm faces tight budget constraints and has to choose between either maintaining R&D or advertising, our simulation results show that maintaining R&D is associated with better company performance. We find that advertising effectiveness, in general, and in contractions, in particular, is systematically moderated by the degree of cyclicality of the industry in which the firm operates. In relatively stable industries, advertising effects are small or even nonsignificant, and they do not go beyond the year the firm advertises. However, in highly cyclical industries, advertising effects are long-lasting, its total effect being 50% larger (market share) and 200% larger (profits) than in industries of average cyclicality. The effect of industry cyclicality on advertising effectiveness is especially pronounced in contractions. Collectively, these findings provide valuable and actionable insights into how firms should respond to contractions in order to grow profits and market share.
ACCESSION #
65097002

 

Related Articles

  • Stage of the Product Life Cycle, Business Strategy, and Business Performance. Anderson, Carl R.; Zeithaml, Carl P. // Academy of Management Journal;Mar1984, Vol. 27 Issue 1, p5 

    This study empirically examines differences in strategic variables between stages of the product life cycle (PLC), as well as differences among the determinants of high performance across stages of the PLC. The results support the use of the PLC as a contingency variable during strategy...

  • Foreign Market Entry Timing Revisited: Trade-Off Between Market Share Performance and Firm Survival. Murray, Janet Y; Ju, Min; Gao, Gerald Yong // Journal of International Marketing;Sep2012, Vol. 20 Issue 3, p50 

    This study revisits the impact of entry timing on the performance of foreign-invested firms. The authors posit that balancing between market share performance and firm survival is critical for foreign firms to capitalize on early-mover advantages. Using a longitudinal data set of 25,513 foreign...

  • Strategic Marketing Planning by Product Managers-Room for Improvement? Cossé, Thomas J.; Swan, John E. // Journal of Marketing;Summer83, Vol. 47 Issue 3, p92 

    Product managers have a unique position in the organizational hierarchy. Neither line nor staff executives, they are responsible for planning and managing the activities of the firm's revenue generating product-market entries and are key executives in the firm's strategic planning and...

  • THE INFLUENCE OF CUSTOMIZED OFFERS ON PURCHASE LIKELIHOOD. Zeren, Deniz; Guler, Ebru Ozgur // Far East Journal of Psychology & Business;May2013, Vol. 11 Issue 2, p1 

    For decades, marketers have been faced with the challenge of satisfying the needs and wants of all their customers using a single marketing strategy. There has recently been a shift in the marketing field from mass marketing to segmentation strategies where people with similar needs can be...

  • Advertising and Entry Deterrence: How the Size of the Market Matters. Bennour, Khaled // International Journal of Business & Economics;2007, Vol. 6 Issue 3, p199 

    We analyze the relationship between market size and entry when an incumbent and a potential entrant compete to gain market share and advertising is the only strategic variable. Entry occurs when the relative effectiveness of incumbent's advertising is smaller than a threshold level that depends...

  • Foreign Markets Entry Mode Decision for Italian Small and Medium-Sized Enterprises. Musso, Fabio; Francioni, Barbara // International Journal of Business & Management;Jan2012, Vol. 7 Issue 2, p3 

    Using a resource-based view model, this paper examines the main factors influencing Small and Medium-Sized Enterprise (SME) international entry mode selection. In addition, a possible relationship between firms belonging to industrial districts and the entry mode choice has been verified. Data...

  • Choice of Foreign Market Entry Modes by Service Firms: Role of Market Knowledge. Erramilli, M. Krishna; Rao, C. P. // Management International Review (MIR);1990, Vol. 30 Issue 2, p135 

    • This paper attempts to explain the variation of foreign market entry mode choice in the service sector, by taking into account the unique characteristics of service firms. • Using "market knowledge" as a determinant of entry mode choice, the paper develops some hypotheses...

  • New entrants must bring fresh ideas. Cleary, Alan // Mortgage Strategy;8/28/2006, p30 

    The article focuses on the need for new lenders entering the market to bring innovative ideas. Many of the entrants may not be innovative but their arrival will have caused problems for existing lenders. Lenders are using a variety of tactics in their desperation to become one-stop shops. The...

  • Balancing Risk and Return in a Customer Portfolio. Tarasi, Crina O; Bolton, Ruth N; Hutt, Michael D; Walker, Beth A // Journal of Marketing;May2011, Vol. 75 Issue 3, p1 

    Marketing managers can increase shareholder value by structuring a customer portfolio to reduce the vulnerability and volatility of cash flows. This article demonstrates how financial portfolio theory provides an organizing framework for (1) diagnosing the variability in a customer portfolio,...

Share

Read the Article

Courtesy of THE LIBRARY OF VIRGINIA

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics