Picture: 123RF/FRANZ 12
Picture: 123RF/FRANZ 12

There has been a wide array of perspectives on the financial and social consequences of Covid-19. Many governments are rightly focusing on implementing strong measures to save people’s lives. At the same time, the coronavirus pandemic is threatening the survival of businesses across all sectors and industries at a global scale.

Some commentators have noted that about one in 10 businesses is less than a month away from shutting down completely and, despite government spending, some businesses will not be able to come back from their current deficit. Others have been even more pessimistic and predict that the devastating societal and economic outcomes of Covid-19 will cost more lives than the actual coronavirus claims in terms of fatalities.

Alarmist or not, such sentiments require key strategic responses from business leaders to effectively navigate this crisis.

There are several key lessons to be learnt from how firms have responded in the past to the shock of adverse events and which responses have enabled them to survive a crisis. According to established management literature there are four general strategic responses to crisis: retrenchment, persevering, innovating, and exit.

Retrenchment is a cost-cutting measure that potentially reduces the scope of a firm’s business activities, with analysts predicting divestment of businesses, closure of establishments, reductions in employment, and expenditure cuts on a wide range of activities.

All these measures are being implemented around the world to some degree by many firms, with job-loss predictions running very high. Persevering relates to the preservation of the status quo of a firm’s business activities in times of crisis. This can take place in terms of debt financing and/or the utilisation of available slack resources. This approach favours medium to large firms, as smaller businesses often do not have such luxuries.

Exit refers to the deliberate discontinuation of a firm’s business activities and may manifest as bankruptcy and closure.

However, the most interesting response strategy to crisis is innovating, which refers to conducting strategic renewal in response to crisis and involves the adoption of a new strategy and/or domain redefinition; in essence, the creation of new or existing product categories or market space. Innovating at times of crisis may also involve the business model reconstruction route, which encompasses the design of a new, or redesign of an existing, business model. 

A firm adopting the ambidextrous approach combines cost efficiency drives with significant innovation and exploration activity

In navigating an economic shock, such as in Asia in 1997, some firms have deliberately attempted to reconfigure their strategy to minimise the adverse effect of the shock. Additionally, lessons based on the 2007-2009 financial crisis suggest that reconfiguring or refocusing imposes meaningful, yet transitory, adjustment costs on firms, but eventually destroys synergies when related businesses are closed, which then creates more continuing costs.

Indeed, the process of strategic change in response to crisis by many firms is incremental and reactive; they fail to anticipate or to be forward-looking. Some studies find that a crisis can lead to a concentration of innovative activities within a small group of fast-growing new firms, particularly those firms already highly innovative before the crisis. In other words, firms that pursue innovative strategies are those able to cope better with the crisis. Under these circumstances the importance of building capabilities to enable a firm to innovate during difficult times is imperative.

Dynamic capabilities enable firms to create new products and processes and respond to changing market conditions, with several empirical investigations of dynamic capabilities emphasising the role of complementary knowhow and other assets in the context of changing or adverse conditions. However, it must be noted that such strategies are risky and many firms are likely to be too preoccupied with shortterm survival to think about innovation and growth.

Strategic adaptation by businesses is no guarantee of success. The increased degree of uncertainty that Covid-19 has introduced into the marketplace increases the difficulty of selecting the “right” strategic response and increases the likelihood that the wrong strategy will be targeted. Rather, the appropriate response to “unknown unknowns”, such as the pandemic, may be to use different crisis response strategies simultaneously. A firm adopting the ambidextrous approach combines cost efficiency drives with significant innovation and exploration activity.

These firms are more likely to create, leverage, or exploit existing competencies in new product or market arenas and try to extract further value from existing resources. For example, in SA, some firms may be forced to perform a radical reconfiguration of their supply chain, moving away from international supply to domestic supply, thus also paying attention to the enterprise development sustainability agenda.

Therefore, while firms’ strategic responses to deal with the effects of Covid-19 will be varied, they all need to engage in short-term, “firefighting” strategies, as well as longer-term innovative ones. Indeed, based on lessons learnt in the past, firms are advised to follow an ambidextrous, balanced approach between appropriate short-term cost-cutting and long-term resource commitments in response to the Covid-19 pandemic.

• Urban is a professor at the Wits Business School.

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