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Are You Part of the Solution?

by C.G. Masi, Technology Journalist

Have you ever wondered what causes an economic recession or depression? Most people, even those making important management decisions, don't really understand how the business cycle works and what can go wrong with it. Most importantly, business leaders often fail to grasp the strategy needed to turn tough times into golden opportunities.

That's particularly important now that we're fighting through an extended period of tough times in the high-tech marketing business.

The Winning Strategy

Let's start with Bernard Baruch's famous advice. Baruch was a highly successful business investor who amassed enough wealth through shrewd stock dealings to qualify as one of the richest men in the U.S. during the early 20th Century. Someone (I believe it was an interviewer for a magazine, but that's not important) once asked him the secret of making a fortune in the stock market. Bernard thought for a moment, and then (no doubt behind an engaging smile) said: "Buy low. Sell high."

We all know how this advice relates to investing in stocks. It means: look for turns in the market.

Make sure that you've got plenty of cash around when stocks are generally low because they've been "beaten up," then grab up all the shares you can in "good" companies at prices as close as you can get to their bottoms. "Good" companies are those who can weather the downturn and come out "on top" when business conditions improve. They are poised to reward investors with enormous returns when their stock price rides the business wave up.

After a long run up, those stocks may have temporarily exhausted their growth potential. They'll be poised, not for further growth, but for a downturn. Investors who bought low a few years ago should start selling off quickly before their winnings start to erode.

That action puts a little downward pressure on each stock's price. If the investor was right and a lot of other investors have the same opinion, the prices will start downward. When a significant fraction of the stocks in a sector or in the market as a whole start moving together, we see stock-market cycles.

The problem with Baruch's strategy is twofold. First, you need a crystal ball to divine the peaks and valleys. Historical trends only tell you what happened before. They don't give you a clue as to when things will change. Invariably, any events that trigger the changes that determine the bottom or top are events that you couldn't predict. If you could predict them, then everyone else could, too, and the bottom or top would have come earlier.

Second, at the bottom, you have to know which companies are the "good" ones to buy. That's a little easier to figure out. They're the ones with good financial health, strong market presence, and managers with a history of making good decisions. The ones you want to sell at the top are, of course, the ones that you own. We're not getting involved in the complexities of futures trading here.

Getting and Spending

The business cycle operates similarly. To understand the business cycle, we need to drag in another concept called the "velocity of money."

Money used to be nothing but little green slips of paper. Now, it's not even that. It's mainly electronic notations in a collection of linked databases. Money just sitting there in some account does nothing. You might as well bury it in some landfill somewhere. The only way to put money to work is to spend it.

Somebody pays me a dollar (along with quite a few others, by the way) to write a wonderful article about whatever. I take the dollar down to the gas station and buy a little over a half gallon of gasoline.

The gas station operator takes that dollar and, say, pays it to one of their employees in exchange for a few minutes of work.

The employee takes the dollar two doors down to the grocery store and buys a quart of milk (I've no idea what milk costs, so don't get on my case if the numbers seem wrong. It's the idea that counts.)

The grocery store manager takes the dollar and buys a couple of bananas.

So far, that one dollar has bought a half gallon of gasoline, a few minutes of work, a quart of milk and a couple of bananas, not to mention the piece of the article I wrote in the first place. If you assume everyone made fair trades, that dollar has bought five dollars worth of stuff. The velocity of money expresses how fast that dollar zips through the economy. The same dollars circulate all the time, the economic activity depends on how fast they circulate more than how many of the little critters there are.

When everyone is optimistic and out there busily getting and spending, money's velocity is high, and goods and services get cranked out fast. At other times (like now), folks are pessimistic and, instead of exchanging the little green pieces of paper as fast as they can, they hold onto them a little longer. Maybe, instead of buying that half gallon of gasoline I stick the dollar in my wallet in case I have trouble selling the next article.

That slows money down. When I fold that dollar up and stuff it into my pocket instead of spending it, the gas station employee doesn't get his or her dollar, and doesn't buy the milk, so the store manager doesn't buy the bananas, and so forth. By stuffing one dollar in my pocket I take (in this example) five dollars out of the economy.

Everyone else sees the economy shrinking and gets cautious, too. Like a school of fish that just took a left turn for no apparent reason, U.S. industrial production drops.

Eventually, everyone runs out of caution. My car's getting low on gas. The employee's kids are screaming for milk. The price of bananas has gone so low that the store manager just can't resist. Folks start buying a little more, creating more wealth and expanding the economy. CNN reports a rise in gross domestic product. Everyone sighs with relief and the getting and spending starts all over again.

That's how the business cycle works. It's all psychology coupled with a huge supply of random events.

That's all Economics 101. Trendlines isn't about investments or economics, however. It's about marketing high-technology products. What can Baruch's advice and the business cycle tell us about high-tech marketing?

The most important lesson is that resources invested when business is cold give a better return than those spent when business is hot. Right now, high-tech companies are holding back advertising spending. Magazines are thin. Publishers are running scared.

Why are advertising dollars so scarce? Because general economic conditions are poor and revenues for high-tech companies are down. Managers of those companies are holding back ad dollars to limit the damage to their bottom lines. It's a defensive strategy, and like all defensive strategies it is self-defeating.

The Best Defense

How can marketing managers turn this situation into an opportunity? By remembering another old saying: "The best defense is a good offense."

I've no idea who came up with that one. The Romans under Julius Caesar used it. Xenophon's 10,000 Greeks, who hacked their way home from what is now Iraq, used it. The cave guys who met saber-toothed tigers with sharpened sticks used it. You can use it.

This best defense in a slow market is to ratchet marketing dollars up rather than down.

Think of the market for your product as a commodity and your marketing dollars as what you pay to buy your share of the market. When business is good, everyone is flush with revenue and ad budgets are all at their tops, Getting noticed then is expensive. Magazines are thick with ads, so your measly half-page ad disappears into a sea of spreads and special sections.

When things are tough and publications are thin, that same half-page stands out as a star against the blackness of competitors who didn't advertise at all. In fact, while publishers are scrambling for every ad dollar they can get, you may be able to bump yours up to a full-page and really shine!

"Why spend ad dollars chasing product sales when people aren't buying products," you say?

There are two answers to that. First, your ad dollars are not buying sales per se. They are buying market share. Standing out from the crowd increases your market share, whether times are easy or hard. It's easier and cheaper to stand out in tough times. The increased share will tend to stay with you as the market expands. So, spending a little now will get you a lot more later.

Just as importantly, people are still buying products. Even under the worst conditions, sales almost never go to zero. Even buggy-whip manufacturers have finite sales. In fact, in most downturns total market sales seldom dip 50% below their highs. What really happens is that competition gets stiffer for those remaining sales. In tough times, you have to work harder to maintain your fair share of those sales.

Maintaining your fair share of a diminished market is not winning, though. What we're talking about is fighting harder to grab your un-fair share. If you do that, you'll emerge from the downturn in better shape than when you went in.