Managers get regularly confronted with crises in their environment. Whether it’s a global financial crisis, a pandemic, or an economic downturn, firms of all sizes must navigate these turbulent times to ensure their survival. Should managers adopt a conservative stance, protecting existing resources at all costs, or do they take an aggressive approach, seizing new opportunities in the midst of turbulence? Our research, published in The Journal of Management Studies, sheds light on this critical question. By doing so, it offers valuable insights into how small and medium-sized enterprises (SMEs), which are often overlooked in crisis research, weathered the storm during the 2008-09 financial crisis.

Understanding Crisis Response

In the face of a crisis, firms typically adopt one of the two strategies: a conservative approach or an aggressive one. A conservative approach prioritizes resource protection, involving measures such as reducing investments and accumulating cash reserves to safeguard the core business. In contrast, an aggressive approach focuses on resource investment, aiming to increase resource stocks and pursue growth opportunities, even in the midst of uncertainty.

The Crisis and Its Impact on SMEs

The 2008-09 financial crisis was a severe test for businesses, with SMEs facing greater threats than their larger counterparts. Unlike public firms, which could often tap into capital markets for relief, private SMEs had to rely on their own resources, creativity, and strategies to survive. Moreover, managers in public firms and private SMEs faced different pressures and time horizons. Managers in public firms were pressured to consider how their responses will impact next quarter earnings, analyst ratings, and investor expectations. Therefore, they often have shorter time horizons. Conversely, managers in private firms are not beholden to the same pressures from the capital markets. However, a significant portion of their personal wealth is often tied up in their firms, leading them to adopt longer-term outlooks. These differences in circumstances and objectives could lead to varying crisis responses.

Reevaluating Crisis Responses and their Long-Term Implications

Traditional research on crisis responses has primarily focused on public or established firms with ample resources and access to financial markets. This research often suggests that conservative approaches, aiming at protecting existing resources, are common during crises. In contrast, aggressive approaches have been viewed as risky, potentially increasing short-term failure rates. However, this study published in the Journal of Management Studies focuses on private firms, which are often viewed as being at a disadvantage in terms of resources but benefit from owner-managers who prioritize long-term objectives. While we find that SMEs take a range of actions, from being more aggressive to being more conservative, our results challenge the notion that conservative approaches are the safest bet, especially when it comes to long-term survival.

Our study extends our understanding of crisis responses by examining their longer-term implications. While many managers initially prioritize short-term survival during crises, they must also consider strategies for long-term success. Our study highlights the difficulty of reversing crisis-driven decisions once the business environment stabilizes. Importantly, it suggests that aggressive approaches taken during the financial crisis significantly reduce SMEs’ post-crisis failure rates in the long term.

One of the most intriguing findings of our study is the surprising resilience of younger SMEs. These firms are often depicted as being burdened with “liabilities of newness,” and therefore more vulnerable to crises. However, our study reveals that younger SMEs exhibit remarkable proactiveness during crises. They are more likely to maintain or even increase investments in fixed assets and workforce during the height of the financial crisis, actions that ultimately benefit their long-term survival.

Managerial Takeaways

As we move forward in an ever-changing business landscape, the insights from this research can provide guidance for SMEs, helping them navigate crises and emerge stronger afterwards. Crisis management is not just about ensuring short-term survival; it’s about thriving in the face of adversity and embracing change as an opportunity for growth. Managers in SMEs should reconsider their crisis response strategies. While it’s natural to prioritize short-term survival during a crisis, our study suggests that a more aggressive approach focused on resource investment can lead to better long-term survival outcomes. Accordingly, managers should empower their teams to identify and (creatively) act on growth opportunities, even when the business landscape is uncertain.

Managers of younger SMEs can take advantage of their inherent resilience. Contrary to common assumptions, younger SMEs can be surprisingly agile and proactive during crises. Embrace this entrepreneurial spirit and leverage it as a competitive advantage. Further, understand that the aggressiveness of crises responses may vary depending on the industry. In sectors with high growth opportunities, SMEs may be more inclined to pursue an aggressive approach. Consider the unique dynamics of your industry when crafting crisis response strategies.

We encourage managers to foster a culture of flexibility and adaptability within the organization. Crises are unpredictable, and the ability to adjust strategies and pivot quickly can be a critical survival skill. Ensure that your management team is open to change and willing to explore new directions when necessary. Encourage a culture of continuous learning and adaptation. Use the lessons from past crises, including the insights from this study, to refine your crisis response strategies (but always recognize that would worked in the past is no guarantee that it will work in the future). Regularly review and update your crisis management plans to incorporate new knowledge and experiences.

When making resource allocation decisions, balance short-term needs with long-term objectives.  While it’s important to manage immediate cash flow and liquidity during a crisis, don’t lose sight of the resources needed to position the firm for success in the years following the crisis. If you are an owner-manager of an SME, leverage your long-term perspectives to the advantage of the firm. Unlike public firms with short-term pressures, you can focus on the broader, longer-term interests of your firm. Use this flexibility to make strategic decisions that align with the firm’s long-term survival and growth. Even when you are tight on resources, there are a range of more or less creative techniques available that might even allow you to act and be aggressive with limited resources at hand (see, for example, the financial bootstrapping literature in entrepreneurship).

In summary, the managerial implications of this study emphasize the importance of a balanced, forward-looking approach to crisis management. By embracing proactiveness, recognizing the resilience of younger SMEs, and maintaining a long-term perspective, SME managers can better position their organizations to not only survive but thrive long after adversity.