By Alissa Chen and Koen Pauwels
The U.S. economy has officially been in a recession since early June as a direct result of the global COVID-19 pandemic. Unemployment rate reached 13% back in May and still stands at 8% in October. The world has not experienced an economic shock of such magnitude since at least the 2008 Great Recession. For companies, the first priority has been the safety of its employees and customers, then adapting the supply chain and demand generation tactics. Now the time has come to address more strategic questions that can help create or destroy long-term competitive advantage. For one, companies must answer a Shakespearean question about their innovation and new product introduction plans – to launch or not to launch?
We addressed this question in our research “To Launch or not to Launch in Recessions? Evidence from over 60 Years of the Automobile Industry.” We choose to focus on the U.S. automobile industry because it is highly competitive and new products greatly increase long-term firm financial performance and firm value while price promotions and rebates do not. However, product innovation is expensive and many new products don’t stay on the market long enough to even break even:
Recessions pose a particular challenge to new product success, because consumers are likely to postpone or cancel purchase of expensive durable goods, such as cars. Therefore, the car market provides an ‘acid test’ for new product launch: if they work in recession for such market, they should also for launches in other industries. And indeed, we successfully replicated our analysis and findings for fast moving consumer goods in the U.K.
Figure 2 shows the relation between a car model’s age and its ‘hazard rate’; the chance of getting eliminated in a given year. The graph is U-shaped: after an initially high hazard right after product launch (10% chance of elimination), the hazard rate declines until 22 years into the future.
How does this hazard rate depend on when the product is launched? Figure 3 shows that new models launched during a recession (red line) have the lowest hazard rate, and thus the highest chance of survival. In contrast, models launched during boom times experience a higher hazard rate, especially when they are launched near the end of those boom times.
Why do recession-launched products do better despite a drop in customers demand? We propose two reasons and find evidence for both. First, competitors cut back a lot on new product introductions, so your new product launch stands out more and gives customers something exciting to talk about, buy and enjoy in these tough times. Second, recession-launched products are on average of higher quality (as shown in Consumer Reports evaluations), likely due to the company’s higher care to optimize the product and the launch.
Want some examples? Cars launched during the 2008 Great Recession include the BMW X6, the Honda Accord in Japan and Europe or the Acura TSX in the U.S., and the Volvo XC60. Some cars launched during in the past 6 months include the BMW X3, the Toyota Corolla Cross, and the Ford F-Series.
TLDR; we find that products launched during times of moderate recessions are more likely to survive in the long-term in comparison to products launched in boom times. Moreover, products launched directly following a recession are more likely to be successful than product launched in the mid or end of boom times.
These findings have direct implications for entrepreneurs and for research and development departments. As many other companies cut back on their budgeted spending on new product launches, decision-makers must take advantage of the reduction in competition and the potential first-mover advantages. During times of economic struggle, firms must persevere by intensifying their R&D activities, preparing a new product pipeline, and updating their product mix prior to the beginning of an economic recovery.