shalom
Navarro CMR fa05
10/21/05
7:06 PM
Page 1
The Well-Timed Strategy:
MANAGING THE BUSINESS CYCLE
Peter Navarro
S
ome companies appear to exhibit considerable skill in managing the business cycle. For example, during the 2001 recession, Lowe’s employed an aggressive countercyclical capital expansion strategy to significantly outperform a cost-cutting and retrenching Home Depot.
Dell countercyclically increased its advertising budget and gained market share from key rivals such as Gateway and Hewlett-Packard. Still other companies such as Isis, Progressive, and Avon in industry sectors as disparate as biotech, insurance, and cosmetics engaged in countercyclical hiring strategies during the recession to increase both the size and quality of their work forces at relatively lower wage levels.
In contrast to this seemingly skillful management, Kmart drastically and ill-advisedly reduced its advertising during the 2001 recession, saw its sales plummet relative to rivals Target and Wal-Mart, and wound up in Chapter 11 bankruptcy. Cisco continued on a procyclical hiring binge at premium wages during the late stages of the expansion and then was forced to lay off over 8,000 people once the recession ensued. The merchant electricity generator Calpine debt-financed a dramatic increase in capital expenditures on new power plant construction in the late stages of the expansion and then suffered severe liquidity problems as the recession cut demand and squeezed cash flow.
The interesting question these observations raise is whether there really is any “skill” that legitimately and systematically separates the business cycle’s
“winners” from its “losers.” For the last five years, and with the help of a large army of MBA “conscripts,” I have sought to answer that question as part of the
Master Cyclist Project conducted at the Merage School of Business at the University of California, Irvine (see Appendix for companies analyzed).1
CALIFORNIA
10/21/05
7:06 PM
Page 1
The Well-Timed Strategy:
MANAGING THE BUSINESS CYCLE
Peter Navarro
S
ome companies appear to exhibit considerable skill in managing the business cycle. For example, during the 2001 recession, Lowe’s employed an aggressive countercyclical capital expansion strategy to significantly outperform a cost-cutting and retrenching Home Depot.
Dell countercyclically increased its advertising budget and gained market share from key rivals such as Gateway and Hewlett-Packard. Still other companies such as Isis, Progressive, and Avon in industry sectors as disparate as biotech, insurance, and cosmetics engaged in countercyclical hiring strategies during the recession to increase both the size and quality of their work forces at relatively lower wage levels.
In contrast to this seemingly skillful management, Kmart drastically and ill-advisedly reduced its advertising during the 2001 recession, saw its sales plummet relative to rivals Target and Wal-Mart, and wound up in Chapter 11 bankruptcy. Cisco continued on a procyclical hiring binge at premium wages during the late stages of the expansion and then was forced to lay off over 8,000 people once the recession ensued. The merchant electricity generator Calpine debt-financed a dramatic increase in capital expenditures on new power plant construction in the late stages of the expansion and then suffered severe liquidity problems as the recession cut demand and squeezed cash flow.
The interesting question these observations raise is whether there really is any “skill” that legitimately and systematically separates the business cycle’s
“winners” from its “losers.” For the last five years, and with the help of a large army of MBA “conscripts,” I have sought to answer that question as part of the
Master Cyclist Project conducted at the Merage School of Business at the University of California, Irvine (see Appendix for companies analyzed).1
CALIFORNIA