ARTICLE | March 2, 2023 | 5 min read
Companies that lean in during downturns tend to prosper in the long run
By Evan Ramzipoor, Workflow contributor
It feels like a no-brainer: When macro conditions are unsettled, a company’s appetite for risk should wane. If you don’t know what the future holds, slash spending and wait for the pressures of inflation, rising interest rates, extreme weather, political instability, and a lingering pandemic to recede.
While macro uncertainty is nothing new, this round feels especially severe to Dave Wright, chief innovation officer at ServiceNow. “It feels like the first change we’ve gone through where there isn’t an expectation it’ll go back to the way it was,” says Wright, an enterprise tech veteran whose career started in the early 1990s. “There’s now an expectation that things are going to shift permanently.”
Global uncertainty is on the rise after receding from historic highs during the early days of the Covid-19 pandemic. That’s according to the World Uncertainty Index, created by researchers at Stanford University and the International Monetary Fund. They update the index quarterly by text-mining Economist Intelligence Unit country reports for words related to uncertainty.
“Measuring uncertainty helps firms make decisions,” says Stanford economics professor Nicholas Bloom, one of the creators of the uncertainty index. “In periods of high uncertainty, it is very valuable to pay for flexibility,” he adds. “For example, renting rather than buying property or hiring contractors rather than full-time employees. It is also a period where contingency planning is extremely valuable.”
Periods of uncertainty also present excellent opportunities for upstarts looking to leapfrog market leaders. Macro disruption can change consumer behavior, as when COVID-19 forced millions of employees to start working from home overnight. At such times, consumers are likely to reward firms that offer innovative solutions to their most pressing needs. In this light, it makes sense that some of the world’s most successful companies—think General Motors, Microsoft, Google, and IBM—were all founded during downturns.
Many companies around the world see today’s macro environment as a business opportunity, according to a recent global survey of C-suite leaders from ServiceNow and ThoughtLab. As you might expect, smaller firms are more likely to embrace riskier strategies. Among companies with fewer than 5,000 employees, 37% of respondents say they’re planning to take advantage of the next two years to improve their competitive position, versus 26% of companies with more than 10,000 employees.
In economics, the connection between uncertainty and risk-avoidance is known as prospect theory, introduced in a seminal 1979 paper by Daniel Kahneman and Amos Tversky. The idea is intuitive: people are risk-seeking in the face of perceived potential gains and risk-avoidant in the face of potential losses. This is as true for firms as it is for individuals, says J. P. Eggers, professor of management and organizations at New York University’s Stern School of Business. “It’s hard to zig when everybody else is zagging,” he says. “It requires the strength of your convictions.”
When economic conditions worsen, the market’s appetite for risk goes down and leading firms get conservative. Since they’re already performing well, there’s no reason for them to risk falling behind by investing in unproven new products.
At the same time, stragglers can use downturns as opportunities to leap ahead, according to a 2020 paper by Columbia Business School assistant professor Daniel Keum. Although executives at such companies may believe they have more to gain from a wait-and-see approach, that is a mistake. If the straggler can find an innovative product or service that the leader isn’t investing in, it can pull ahead.
Korean automaker Hyundai is a great example of a straggler that used a business downturn to improve its competitive position. While many of its competitors retrenched during the Great Recession, Hyundai improved the quality of its vehicles and offered a novel buyback program for customers who lost their jobs. The gambit paid off. While most car companies saw sales decline precipitously during the period, Hyundai’s global unit sales rose 2% and revenues increased 5%. “Originally, they thought maybe they should be very conservative and reduce their market share,” Keum tells Workflow. Ultimately, Hyundai decided to take risks, innovate, and reap the rewards.
The intuition behind this move is the same as running a race. It’s hard for laggards to catch up to the front of the pack in the early part of a race when everyone is running at full speed. The job often gets easier later in the race, when everyone slows down. “Uncertainty is good for those who are behind, and it can be detrimental to those who are ahead,” Keum says. “The leader may want to rest on its laurels but doing so gives the competition the time and space to catch up.”
In times of change and tumult, companies that double down on innovation can hope to experience greater returns and better outcomes. However, executives should take care not to overcorrect. In Keum’s words: “Uncertainty is not a time to try crazy, different things. It’s a time to catch up on the existing technological trajectory.”
Many business leaders in the ServiceNow/ThoughtLab study seem to agree. Despite fears for the future, about half plan to increase their digital transformation investments over the next two years. Slightly less than half report plans to significantly increase their investment in digital innovation.
“If you’re in a time of uncertainty, you want your innovation to be additive,” says ServiceNow’s Wright. “You want to maintain existing revenue streams and look at how to enhance those by building something that’s adjacent to that technology.”
Even if executives lean in during times of trouble, successful adoption and deployment of digital tools requires buy-in from across the enterprise. That gets harder during periods of economic uncertainty, when employees are worried about losing their jobs.
Insecure workers tend to be less engaged and less open-minded about change. Over the past year, employee engagement—the degree to which U.S. employees feel connected to their workplaces and the job they do—hit an all-time low of 33%, according to a Gallup poll of U.S. workers. When organizations want to innovate and transform to address uncertainty, low morale can complicate that goal.
To motivate employees during a time of crisis, executives should adopt a forward-thinking strategy. Wright’s advice: “Show your employees empirical evidence of how customers used your products to make life easier for them. And paint a picture of what your future will look like in five years.”
Wright recommends innovation tempered by pragmatism. “There’s that whole concept of ‘run fast and break things,’” he says. “In a time of uncertainty, that becomes, ‘run fast and break things—but not in this room.’”