Economic Pessimism and Strong Company Performance Promote Risk in Growth Strategies

The August 2012 CMO Survey finds that company growth strategies will take on more risk in the coming year. Looking at Table 1, we can see that there two types of risk familiar to marketers—targeting new markets and offering new products or services. Combining these two, there are four general types of strategies that range from market penetration, which is the lowest risk because the company targets current markets with current offerings, to diversification, which is the highest risk because the company targets new markets with new offerings.

Table 1. Types of Growth Strategies

Similar to past CMO Surveys, growth spending over the past twelve months reflects a dominant focus on market penetration with an average of 51.7% of spending focused on this strategy. This is followed by product/service development (22.8%), market development (15.7%), and diversification (9.7%). However, as shown in Table 2, these figures are expected to shift significantly in the next twelve months. Growth spending on market penetration is expected to drop by 11.6% to 45.7% while all three of the other strategies are expected to increase by nearly 10% or more! These changes are consistent with a longer-term trend The CMO Survey has observed during this post-recessionary period.

Table 2. Expected Change in Growth Strategies in Next Year

**% of spending across growth strategies

Of course not all sectors will pursue the same type and level of risk in growth strategies. B2C-Service companies are expected to take on the most risk and to focus their growth spending on market development strategies (+5.8%) as are B2B-Product companies (+3.4%). B2B-Service companies are expected to focus on product/service strategies (+4.2%) and diversification (+2.2%) while B2C-product companies are more evenly balanced across all three growth strategies: market development (+1.7%), product/service development (+2.8%), and diversification (+1.7%).

I also looked at how company sales from the internet relate to expected changes in growth spending. Companies with the highest level of sales from the internet (10% or more) will invest more in market development (+25%) while making no increases in product/service development (0%). This makes sense because these firms can use their internet marketing capabilities to easily target new markets with the current products. Companies with less than 10% of sales from the internet, on the other hand, plan to make nearly equal increases to new products/services (+8.9% to +14.5%) and new markets (+8.5% to +11.5%).

Considering the overall pessimism and uncertainty reported in The August 2012 CMO Survey (see No Rebound in Sight) and the effect on change in growth spending expected over the next year, results indicate that marketer optimism is positively related to company spending on market penetration and market development. Marketer pessimism, on the other hand, is positively related to company spending on new products or services or diversification. In brief, pessimism appears to provoke greater risk in growth spending.

Finally and perhaps most importantly, how does past company performance affect the amount of risk companies entertain in their risk strategies? Examining the correlations between past financial and marketing performance and spending on the growth strategies in the next year, I find that companies tend to use market penetration less and diversification more, on average, when they have strong performance. Therefore, at least in these difficult economic times, success does not breed complacency. Instead, these high-performing companies tend to take on more risk, which may actually explain their high performance. I also find that companies with strong customer retention levels as well as strong brands tend to use more product/service development and less market penetration. These firms are using their strong marketing assets to drive growth into adjacent product/service areas to sell to their existing customers. That’s smart marketing!

Post By Christine Moorman (63 Posts)

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