Business leaders know they should "never let a good crisis go to waste," but very few of them actually live this maxim. In a study of companies' performance during and after the past several recessions, one of us found that 17% didn't survive (because they filed for bankruptcy, were acquired or went private), and of those that did, the vast majority — 80 per cent — were still struggling three years later to match their pre recession growth. Only 9 per cent of surviving companies posted results exceeding that of both their peers and their pre recession performance. These firms managed a delicate dance, playing both offense (investing in growth opportunities, including new businesses) and defence (cutting costs and finding operational efficiencies) in response to external shifts. Even while reducing overall spending, they were able to carve out resources for new endeavours.
Aware of the need to respond more adroitly to sudden shocks, leaders have since pushed to make their companies flatter, more "agile" and more "disruption-proof." Yet even firms that have adopted these approaches struggle to respond quickly and proactively enough when crises arise. In our research (Ranjay) and personal experience (Mark), we've found that the problem is ultimately a systemic one. Your strategic posture depends on how you deploy your resources, so to leverage a crisis to your advantage, you must change basic processes of resource allocation in your organization.
Even in the best of times, many companies fail to fund and staff new opportunities, and not for lack of good ideas. Some leaders at public companies blame investor pressures — the "capitalising versus expensing" dilemma. In their view, markets favor companies that take a hit on their balance sheet for acquisitions (capitalising) over companies that present poor income statements thanks to increased spending on internal innovation projects (expensing). In practice, it's often easier to make a US$1 billion acquisition than to find US$10 million to internally respond to or prepare for market shifts.
This seemingly reasonable explanation fails under scrutiny. Leaders could seize new opportunities not by increasing expenses overall but by shifting existing funds, leaving their income statements untouched. And yet, most of the time, they refuse to make even mild changes in existing budgets. This, many leaders like to argue, has to do with concrete budget calculations and processes. These decisions hinge, after all, on quantified analysis of projected internal rates of return. New opportunities, exciting as they might be, simply fail to meet existing thresholds for risk. When leaders run the numbers, adapting to change seems like a bad bet.
But this explanation also falls flat, for it assumes that organizations are perfectly rational places where Excel spreadsheets and ROIs rule the day. Quantification of risk or return isn't as easy or reliable as it might seem nor does it truly drive decision making. Rather, leaders often make choices based on impressions and enthusiasms — gut feeling, intuition. Much of the time, projected numbers are simply used to justify and socialise their preferences.
