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Don't Go with the Flow?

1Aug

It has long been suggested that recessions are the perfect time for companies to up their spending rather than curtail it. Layoffs and bankruptcies release huge amounts of valuable assets into the marketplace at bargain prices, while the specter of shrinking revenues keeps rivals on the sidelines. Yet, as the current protracted clampdown on corporate spending shows, not everyone buys into such thinking.


Now, there's documented evidence to support the claim that selectively boosting spending during a downturn can pay off in spades. An analysis of nearly 20 years of data for more than 1,000 U.S. companies by consulting firm McKinsey & Co. recently found that those that emerged from the 1990­91 recession ahead of their competitors in relative stock rating and financial performance had typically spent more in areas like SG&A and M&A during the downturn, but less than rivals during the boom. "When other companies simply battened down the hatches, the more successful competitors found opportunity and pressed their advantages," says lead author Richard Dobbs, a partner in McKinsey's London office.


Dell Computer Corp. is one company that used the last recession to grow. After upping its invested capital by 60 percent per year during the slowdown, by 1992 Dell had quadrupled its prerecession market share and outperformed the S&P index for its industry. Other savvy countercyclical spenders include Intel, Duke Energy, and Southwest Airlines.


"You can't use current economic conditions as an excuse for not growing," says Borland Software Corp. CFO Fred Ball, who put contrarian spending into practice at the $221 million software development tools provider. Despite the worldwide slowdown in IT expenditures, Borland upped spending on sales and marketing by 13 percent in 2001. The company also ramped up its M&A team to complete three all-cash acquisitions in the past 18 months. Meanwhile, Borland's stock price has more than doubled since mid-2000.


Of course, spending alone doesn't guarantee success. According to the study, the optimal strategy for a company is dependent on its position prior to the recession. For example, although leaders that stayed leaders boosted spending in areas like R&D and advertising, low-ranked companies that moved up actually cut back on such costs during the recession.

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