How companies invest well in times of crisis
How companies can seize the opportunities of a crisis with the right investments
“Never let a good crisis go to waste.” This sentence, addressed by former Chief of Staff Rahm Emanuel to then U.S. President Barack Obama, makes it clear that crises are not only a threat, but also offer special opportunities. Crises can expose weaknesses in companies that were not visible in good times or whose elimination was not important. A sense of urgency is created to address large and small change processes. Changes in markets and customer needs also create new opportunities for growth. Unique opportunities arise to make targeted investments in the future.
Companies often respond in times of crisis with a bundle of standard, short-term-oriented measures. These include cutting costs across the board, reducing spending on marketing, innovation and training, reducing inventories, delaying investments, postponing or canceling new projects, and reducing staff and freezing new hires. Although these measures are widespread, the question is whether focusing on them is the only right way to go in times of crisis. We will experience the negative consequences of the cost reductions from the last two years of the Corona pandemic in the summer of 2022 in air traffic, for example: images of huge piles of suitcases, hours-long queues at airports, cancellation of thousands of flights.
What can we learn from past crises?
Crises are the norm. Crises occur all the time around the world. For example, there have been 469 recessions (Recession vs. Depression) at the country level since 1988 – not counting regional and industry-specific crises. To be sure, the current accumulation of crises may feel special. In fact, however, there is nothing unique, rare, or unpredictable about a crisis . Thus, analyzing past crises provides a good starting point for identifying the best strategies for successful development during and after the crisis.
Gulati, Nohria, and Wohlgezogen, in their study of 4,700 publicly traded companies in the three global recessions of 1980 to 1982, 1990 to 1991, and the dotcom crisis of 2000 to 2002, find that 17% of the companies did not survive the recession. Of the remaining companies, about 40% had not returned to the sales and profit levels they had before the crisis, even three years after the recession ended. Only 9% of the companies recorded better financial ratios after the crisis than before and significantly outperformed their competitors .
What distinguishes these winners? It is not the companies that reduced their costs particularly strongly and quickly. At 21%, these were the least likely to have a particularly successful post-crisis performance. Similarly, the companies that invested particularly boldly were among the post-crisis winners with a probability of 26%. At 37%, the companies that succeeded in striking a balance between cutting costs to survive the crisis and investing for future growth had the highest probability. While they were specifically reducing costs, they were also mobilizing resources for the development and implementation of future growth opportunities.
A study of companies during the 2007 – 2009 financial crisis underscores the importance of making investments for the future during a recession. Govindarajan, Anup, and Iqbal focus on mid-sized companies in industries typically hardest hit by a recession (e.g., aircraft and shipbuilding, automobiles and trucks, restaurants). We distinguish between three categories of investments made: (1) investments in infrastructure (e.g., buildings, machinery), (2) economic skills (e.g., innovation, customer acquisition, training), and (3) number of employees. The results are clear. After the recession, the more successful companies in all three categories were those that had increased rather than decreased their investments during the recession .
The need to take a long-term perspective during a crisis is also underscored by a study conducted by the Boston Consulting Group. Compared to companies that focused on short-term measures to ensure the solvency and survival of the company, long-term oriented companies showed significantly higher growth rates and stock returns. A key driver here is investment in research & development and innovation .
Even if it is not easy for companies in times of crisis to implement short-term measures to reduce costs and at the same time make investments for the future, it remains to be said that crises do not only represent a threat, but also offer opportunities. Based on the lessons learned from past crises, the following four investment principles show how companies can benefit from this critical environment and even initiate growth.
4 principles for investing in times of crisis
1. Develop scenarios for the future
Crises often cause fundamental changes in markets and customer needs. For example, a study conducted by McKinsey at the onset of the Covid pandemic shows that 85% of executives surveyed believe the Covid crisis will have a lasting impact on their customers’ needs and wants over the next five years. In addition, 90% believe that this crisis will fundamentally change the way they do business over the next five years. At the same time, however, few companies feel equipped to meet these challenges due to a lack of expertise and resources to successfully realize growth opportunities, among other factors .
The most important question for decisions about securing the current business model as well as current and future investments is: What might the environment relevant for the company look like in the future? Among other things, scenario planning helps to answer this question. The goal here is not an exact prediction of the future. This is virtually impossible. Rather, the goal is to better prepare for uncertainty, anticipate and deal with change, and proactively manage the business. Or in the words of former Canadian hockey player Wayne Gretzky, “A good hockey player plays where the puck is. A great field hockey player plays where the puck will be.” To do this, the first step is to identify and filter the most important information for possible futures. Based on a prioritization of the crucial changes that will shape tomorrow’s market, strategies and measures must then be initiated to adapt to and benefit from possible scenarios. For a comprehensive picture of possible futures, it is helpful to involve people with a wide range of knowledge and experience in this process .
2. Broaden perspectives
Crises require a shift in thinking and perspectives. For example, cost reductions alone do not limit the risk of a crisis. As the aviation example above illustrates, there is always a risk of trading the risk of overcapacity for the risk of undersizing. Instead of a top-down approach based on a limited set of data such as profit forecasts and benchmarks, a bottom-up approach involving the company’s own employees not only leads to significant cost savings, but also to faster target achievement. The clearer picture of activities and projects running in the organization created by this approach helps in setting strategic priorities. Finally, involving employees also leads to innovative ideas for changing processes and new business opportunities .
A change in perspective is also helpful in assessing the risk of investments during a crisis. Often, the focus is on financial risk. This consists of an investment not achieving the expected return. By contrast, the competitive risk is often neglected if the company’s competitive situation deteriorates as a result of investments not being made. In other words, how great is the risk of not investing ?
For companies, it is important to balance the financial risk and the competitive risk. Based on a systematic reassessment of investment projects, unprofitable opportunities should be stopped. Potentially profitable projects, however, should not be missed and should be promoted instead. A portfolio review of all investment opportunities is helpful here.
3. Prioritize investments with portfolio management.
In times of crisis, companies need to cut costs and preserve capital in order to survive. However, these measures should not be taken indiscriminately for the entire company. Current and future revenue generators and growth engines should be protected or even expanded through increased investment.
Portfolio management is of particular importance here. This thought process originated in the field of financial strategy. Instead of investing all the assets in a single type of investment, they should be spread across different types of investments (e.g., stocks, real estate), thus managing the risk and return of the portfolio . The systematic use of tools to balance return and risk should also be applied to manage investments in times of crisis.
Against the backdrop of changing conditions caused by the crisis, portfolio management helps in selecting, prioritizing and initiating the right investment projects as well as allocating resources to the respective projects. A close examination of return and risk and the balancing of different investment measures is particularly necessary against the background of higher capital costs and lower liquidity. Among other things, it is necessary to achieve a balanced mix between investments in further developments of the existing business (e.g., through digitization measures and the adaptation of sales channels) and the development of new growth areas. In this context, it is also necessary to answer the question of whether all business units in the portfolio continue to make sense for the company or should be sold if necessary. For example, Laczkowski and Mysore point out that companies that successfully emerged from the 2007 – 2009 financial crisis sold businesses and other assets more frequently than the less successful companies .
4. Act early and proactively
Given the overwhelming uncertainty associated with crises, companies often behave in a watch-and-wait manner. This is not helpful in crises. The later one reacts to signs of change, the more a company’s freedom of action is restricted. Or to put it another way: Companies that prepare for changes early and proactively can best meet them and take advantage of the opportunities they present . Opportunities to benefit from a critical environment arise in the following areas, among others.
- It is easier for companies to attract qualified talent, while competitors reduce costs by cutting jobs, reducing salaries and bonuses, and canceling projects .
- Times of crisis offer a good opportunity for corporate acquisitions. Assets may become available for purchase that were previously considered to have little saleability. For example, research during the financial crisis of 2007 to 2009 shows that companies that made significant corporate acquisitions outperformed economically those that did not .
- In many companies, crises are a bad time for innovation. Ongoing projects are frozen or stopped altogether, and new projects are not launched. Research during the Covid pandemic, on the other hand, illustrates that crises can also be a good time for innovation and that innovations are accelerated. Among other things, a crisis creates a higher urgency for innovations and investments are focused on those innovation projects that have the highest prospects of success .
Crises should not only be perceived as a threat to companies. Rather, the opportunities inherent in a crisis should also be recognized and implemented. Companies emerge from crises as winners if they succeed in balancing short-term measures to safeguard their existence on the one hand with taking a long-term perspective and implementing it through targeted investments on the other.
 Nadya Zhexembayeva, The Chief Reinvention Officer Handbook: How to Thrive in Chaos, 2020.
 Ranjay Gulati / Nitin Nohria / Franz Wohlgezogen, Roaring Out of Recession, Harvard Business Review, https://hbr.org/2010/03/roaring-out-of-recession, March 2010.
 Vijay Govindarajan / Anup Srivastava / Aneel Iqbal, Should Midsize Companies Play Offense or Defense in a Downturn?, Harvard Business Review, https://hbr.org/2021/03/should-midsize-companies-play-offense-or-defense-in-a-downturn, March 17, 2021.
 Martin Reeves / David Rhodes / Christian Ketels / Kevin Whitaker, Advantage in Adversity: Winning the Next Downturn, https://www.bcg.com/publications/2019/advantage-in-adversity-winning-next-downturn, February 04, 2019.
 Jordan Bar Am / Laura Furstenthal / Felicitas Jorge / Erik Roth, Innovation in a crisis: Why it is more critical than ever, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/innovation-in-a-crisis-why-it-is-more-critical-than-ever, June 17, 2020.
 Martin Schwirn, Small Data, Big Disruptions: How to Spot Signals of Change and Manage Uncertainty, 2021.
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 Pankaj Ghemawat, The Risk of Not Investing in a Recession, MIT Sloan Management Review, https://sloanreview.mit.edu/article/the-risk-of-not-investing-in-a-recession, January 15, 1993.
 Ron Ashkenas, Manage With a Portfolio Mindset, Harvard Business Review, https://hbr.org/2012/09/manage-with-a-portfolio-mindse, September 04, 2012.
 Kevin Laczkowski / Mihir Mysore, What Companies Should Do to Prepare for a Recession, Harvard Business Review, https://hbr.org/2019/05/what-companies-should-do-to-prepare-for-a-recession?, May 09, 2019.
 Rita McGrath, Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen, 2019.
 Vijay Govindarajan / Anup Srivastava, How Companies Should Invest in a Downturn, Harvard Business Review, https://hbr.org/2022/06/how-companies-should-invest-in-a-downturn, June 17, 2022.
 Brian Salsberg, The Case for M&A in a Downturn, Harvard Business Review, https://hbr.org/2020/05/the-case-for-ma-in-a-downturn, May 17, 2020.
 Elsbeth Johnson / Fiona Murray, What a Crisis Teaches Us About Innovation, MIT Sloan Management Review, https://sloanreview.mit.edu/article/what-a-crisis-teaches-us-about-innovation, November 30, 2020.