Even during a time of recession and cutbacks, manufacturing firms must continue to invest in marketing and R&D if they want to remain successful, says a new study from Texas A&M University.
Researchers examined manufacturing firms on the Fortune 500 list for a period of 25 years, weighing a variety of firm and industry specific factors to arrive at their conclusion. They found that investing capital in both marketing and research and development have a direct positive effect on a manufacturing firm’s survival as a member of the elite Fortune 500 listâ€”the firms that account for nearly three-fourths of the U.S. GDP.
In fact, they found that if a Fortune 500 manufacturing firm were to incrementally spend one percent of its average sales revenues on marketing and another one percent on R&D for five years, that investment would reduce the firm’s risk of leaving the list by 27.8 percent.
This is significant, says researcher Venkatesh Shankar, Coleman Chair in Marketing at Mays, as “the firms that stay on the Fortune 500 list enjoy a lot of benefits,” such as lower cost of capital and increased reputation and brand equity. Fortune 500 firms also see increases in their share prices specifically associated with their entry into this list.
Alternately, a fall from the list can be a precursor to negative events, like bankruptcy and hostile takeover.
Using this investment strategy can “significantly decrease the hazard of exiting the Fortune 500,” says Shankar. This strategy would also apply to companies that aspire to be on the list.
“These firms pour billions of dollars into R&D and marketing, yet no study has examined this important issue in depth,” say researchers. “The findings are important not just for marketers, but for senior executives in manufacturing, operations, innovation management, and top management as well.”
Not all firms benefit equally by the two areas of investment, however. Firms that are in high growth industries, such as technology, see a greater impact from marketing investment. Firms in slow growing or mature industries, such as cosmetics or packaged food, see greater returns from investment in R&D. Similarly, in any industry during periods of high growth, investing marketing capital is more effective and in times of low growth, investing R&D capital is more effective.
Shankar says that these findings broadcast an important message for managers: view marketing and R&D as expenses, but rather long-term investments that need to be employed strategically in industries and periods of high and low growth. Many firms are cutting back in these areas to boost short-term profitability during a rocky economic period, he says. “And that can be very dangerous, because whileâ€¦they may see immediate results, over the long run it could be detrimental.”
The research was conducted by Shankar and colleagues Gautham Gopal Vadakkepatt ’02, a recent graduate of the Mays PhD program, and Rajan Varadarajan, department head, Distinguished Professor of Marketing, and Ford Chair in Marketing & E-Commerce. The Marketing Science Institute has accepted their paper, “A study of the factors affecting the survival of manufacturing firms in Fortune 500: The asymmetric roles of marketing capital and R&D capital,” for publication.
Categories: Research Notes