Investing in Growth Through Uncertainty

In early 2020 the pandemic plunged the airline industry into crisis, as passenger traffic on U.S. carriers plummeted 96% on a year-over-year basis. Like many of its peers, Alaska Airlines responded by quickly moving to stabilize its finances. It implemented a hiring freeze, cut senior managers’ salaries, renegotiated payment terms with vendors, suspended stock repurchases and dividend payments, and reduced capital spending. But the company also did something that set it apart. As competitors canceled airplane orders, Alaska Airlines’ leaders spotted an opportunity to update and expand the company’s fleet at attractive prices while streamlining operations by shifting from a mix of Airbus and Boeing aircraft to only Boeing. Confident that its balance sheet was strong, the company announced in December 2020 that it had agreed to buy 68 Boeing planes, with an option to buy 52 more. It was the only major U.S. airline to place a large aircraft order that year. “We wanted to be aggressive to enable our recovery coming out of the huge challenges of the pandemic,” then-president and current CEO Ben Minicucci explains. “We knew supply chain issues would hamper airplane deliveries, but this deal would put us first in line and set us up nicely to expand.” After all, “you can’t grow in this business without airplanes.”

As the industry slowly recovered in 2021 and 2022, Minicucci and his team doubled down, exercising the options on the 52 aircraft and locking in options on an additional 105 to meet its growth needs through 2030. Alaska Airlines also secured its talent pool by completing five labor deals in 2022, including one with its pilots’ union. By early 2023 it was clear that this strategy of playing both offense and defense through the downturn had begun to pay off. The company, which was already one of the most profitable U.S. airlines and highly rated for customer service, sustained its performance on both measures. On a pretax basis, Alaska Airlines logged one of the highest profit margins in the industry in 2022, and Minicucci and his team forecast that its revenues would grow 4% to 8% a year through 2025, matching or exceeding the industry norm. The company also was named the Air Transport World Airline of the Year, won an APEX Passenger Choice Award for best airline, and landed on Newsweek’s America’s Best Customer Service list.

When faced with disruptions and downturns, many leaders and companies instinctively focus on cutting costs to maintain profitability. But some, like Minicucci and Alaska Airlines, use the period of uncertainty to identify opportunities and then take thoughtful action to seize them. They realize that true resilience involves more than recovering from or resisting the effects of adversity. It is the ability to emerge even stronger. This requires both pressure-testing your firm’s operational and financial health (its P&L and balance sheet) in worst-case scenarios and staying alert for measures you might take, even amid chaos, to find a winning edge.

Unfortunately, research that my colleagues and I conducted in the late 2000s suggests that very few leaders manage to foster this more aspirational form of resilience. Studying the strategies employed by nearly 5,000 companies before, during, and after recessions in the 1980s, 1990s, and early 2000s, we found that only 9% used those periods to fuel sales and profit growth through improved operating efficiency (rather than simple budget and workforce cuts) and strategic investments in market development and new assets. (See “Roaring Out of Recession,” HBR, March 2010.) Multiple follow-up studies by consulting firms have reaffirmed the notion that unfavorable market conditions separate winners from losers, giving resilient firms a long-term advantage. But like my own work, this research has been largely limited to strategy and tactics. It doesn’t explore the mindsets that allow leaders to embrace both protective and prospective strategies at once.

True resilience involves more than recovering from or resisting the effects of adversity. It is the ability to emerge even stronger.

Psychologists will tell you that most of us have a natural orientation toward either offense or defense—playing to win or playing not to lose. Our personalities are either bold, striving, and “promotion focused” or conservative, cautious, and “prevention focused.” Still, adversity accompanied by uncertainty typically triggers fear and defensiveness in everyone. As Mark Wiedman, the head of global client business at the investment management firm BlackRock, noted in early 2023, a crisis tends to put corporate executives into “panic mode—and they don’t really feel like leading, leaning into something fresh and new.”

However, more-recent research of mine reveals that organizations can overcome this defensiveness by fostering three key mindsets: sensemaking, a bootstrap ethic, and a commitment to stakeholder balance. While I focused on U.S. companies for this study, the lessons apply worldwide. Leaders who embrace these ways of thinking manage to chart a course for the future even when the outlook is darkest.

Sensemaking in a Crisis

The organizational psychologist Karl Weick tells a famous story, perhaps apocryphal, of a group of soldiers who get lost in the mountains for several days during a blizzard. Eventually, one of them finds a map, which rallies their spirits and helps them make their way back to their base. Only later do they realize that the map depicts an area that’s entirely different from the one they were in. The moral of the story, per Weick: “When you’re lost, any old map will do.”

The map served the soldiers not because it provided them with a reliable path to safety but because it emboldened them to take action. Difficult circumstances can feel paralyzing, but we don’t need to wait until we’ve figured everything out to move forward. Indeed, taking that first step into uncertain conditions is how we begin the process of sensemaking—which helps us understand ambiguous or confusing issues and events. As the soldiers started walking, they oriented themselves in the snowy terrain and adapted their route accordingly. Resilient companies and leaders do the same, favoring action over inaction, especially in times of crisis. They define their ultimate goals and then make thoughtful initial moves, adjusting and pivoting when necessary to ensure that they stay on the right path.

In the mid-2010s, Edward Jones, a leading U.S. financial services firm, saw trouble ahead. Its customer base was aging, and its traditional model—advisers selling investment products to serious, long-term investors—was threatened by digital competitors that offered easier, less-expensive access to financial markets. Surveys showed that industrywide, consumers were underwhelmed by the financial advice they were getting. Most of it provided narrow guidance about products rather than more-comprehensive wealth management.

In 2019, Edward Jones embarked on a radical, multiyear transformation toward “human-centered complete wealth management.” Advisers would develop a more expansive understanding of their clients that extended beyond their financial needs, and the company would invest in systems, processes, talent, and training to offer a wider range of products, services, and experiences. Soon after this initiative began, however, the pandemic hit, making the capital markets more volatile. Still, Edward Jones pressed forward, allowing investments in its transformation to outpace revenue growth.

In late 2022 and early 2023, as the economic outlook seemed to darken, the firm’s leaders again wondered whether they should pause their efforts and reallocate resources to bolstering short-term performance. But while its peers were cutting costs and jobs, Edward Jones stayed committed to increasing its long-term value. CEO Penny Pennington explained that she thought it would be riskier not to invest in the future. The company did so in a more measured way, however, taking a step-by-step approach while continuing to monitor and decipher economic conditions. Without wavering on the end goal, leaders modified their plans to get there. For example, they postponed the hiring of 1,000 associates but ramped up financial planning and analysis capabilities to ensure that there was a good case for all new investments as well as metrics for evaluating their success. They also prioritized projects that offered higher potential value than others did—for instance, choosing to upgrade the IT system of the fixed-income business before the system of the equity business.

Combining a long-term perspective with an action orientation enables leaders to respond to a crisis by adapting, improving on, and adding to investment plans rather than abandoning them. “We invest when times are good, and we invest when times are hard,” says Pennington. Indeed, Edward Jones has proceeded with strategic investments in technology that allowed its more than 50,000 employees to work flexibly and virtually, in a new holistic financial-planning credentialing program, and in the development of a new charitable-giving platform for clients, all of which will help the firm attract talent and serve clients better in the years ahead.

An Ethic of Bootstrapping

The most common form of human stupidity, the philosopher Friedrich Nietzsche observed, is forgetting what one is trying to do. Sadly, adversity often leads panicked executives to do just that. In their quest for lower-cost operations, they destroy their companies’ prospects—falling into what some have called an “efficiency trap” or a “death spiral.”

A better approach when cost cutting is to consider the effectiveness of operations. This is a subtle but important mindset shift. It’s not enough to squeeze out as much as you can with the least amount of waste. You must still create the products, services, and internal processes that will lead you to your desired goals. As Peter Drucker remarked, “Efficiency is concerned with doing things right; effectiveness is doing the right things.”

Resilient organizations pursue efficiency in tandem with effectiveness by adopting the bootstrap mentality often seen at successful early-stage start-ups. On one hand, savvy new ventures obsessively seek to deliver new forms of customer value. On the other, they show a deep frugality born of limited resources. Their intense customer focus actually serves as a lens for leaders’ decision-making. They constantly ask, Does a given program, team, or product line make us more effective at serving our targeted audience? If the answer is yes, they retain and invest in it. If the answer is no, they cut it to realize cost savings.

The U.S. digital media company Firefly, which installs advertising displays on top of cabs and ride-share vehicles, saw its revenues drop to almost zero when the pandemic struck, as orders to stay at home reduced the utility of outdoor marketing. As the firm burned through cash, its cofounder and CEO, Kaan Gunay, decided to take two steps: first, reduce the head count of his sales, marketing, and sales support teams; and second, implement a 20% pay cut across the organization. He also renegotiated contracts with Firefly’s partner cab fleets and drivers and found other ways to reduce back-office costs that wouldn’t compromise the value delivered to customers. One solution was to relocate operations and engineering to Turkey, where the company could find less-expensive but still top-notch talent.

With the money saved, Gunay was able to bring in a highly experienced chief revenue officer who could accelerate growth when the market recovered. He also continued to invest in engineering and product development so that those teams could build out new ad optimization, forecasting, and planning technologies that customers were demanding in 2021 and 2022. Taking advantage of low valuations driven by market pessimism, Firefly also made acquisitions in the United States in 2021 and the United Kingdom in 2022 to expand into new geographies, further positioning the business for success.

Another example of the bootstrap ethic—at a much larger company—comes from Niren Chaudhary, the CEO of the U.S. fast-casual dining chain Panera Bread, which has faced a perfect storm of slowing sales, labor shortages, and rising supply costs in the restaurant industry over the past few years. With employee turnover high, especially among store managers, Chaudhary realized that talent was one place in which he needed to invest, not cut back, to preserve the customer experience. So he made several big moves: dramatically increasing baseline pay, adding learning and development opportunities for managers, and tying more of their compensation to store performance so that the best among them could earn six-figure salaries. To pay for those initiatives, Panera increased menu prices by more than inflation while stimulating demand with new products, such as flatbread pizzas, and promotions for increasingly price-conscious customers, such as a Sip Club offering unlimited drinks for $10.99 a month and low-priced combo deals. As a result last year Panera outpaced industry revenue growth, gained market share, and decreased employee turnover by 10%.

Balancing Stakeholders’ Interests

My late colleague Sumantra Ghoshal, the founding dean of the Indian School of Business in Hyderabad and a professor at London Business School, used to say that the best leaders are like Chinese chefs because they know how to cook sweet and sour—that is, they know how to attend to stakeholders with completely different desires. Achieving such balance is hard in good times, but it can become especially vexing in a crisis. As fears of scarcity intensify, internal and external groups can become tribal, deeply protective of their own interests, and resistant to change, making both cost cutting and investing for growth more difficult.

Left unchecked, this phenomenon can lead to timid, unimaginative, and shortsighted decision-making. But leaders at resilient companies lean into tensions among stakeholders, challenging themselves to serve conflicting interests as best they can with creative trade-offs—an approach I’ve termed practical idealism. It means working with employees, suppliers, partners, investors, and local communities to devise solutions that might extract short-term concessions from some groups but limit the pain they feel while also addressing broader, long-term needs.

This is what leaders at the U.S. clothing company Levi Strauss had to do in 2020 when Covid forced shutdowns of their stores and manufacturing facilities. Sales also slumped because many potential customers, stuck at home, never got out of their sweatpants. The company stabilized its short-term financial position by suspending dividend payments and cutting 15% of its workforce, generating $100 million in savings. But it also offered extended health benefits to departing workers and additional benefits for those who remained. Further, it supplied vendors with nearly $2 million in grants and helped them secure other financing. And it maintained its sustainability programs because, as its CFO, Harmit Singh, explains, “You can’t say, ‘I’m going to do it today and forget about it tomorrow now that a recession or slowdown is coming.’”

Yes, Levi Strauss could have saved more money by reducing employee, supplier, and sustainability expenses, but leaders understood that over time those investments would position the company to improve outcomes for all stakeholders. Even investors, Singh says, “now seem to believe that a diverse organization, a more equitable organization, a more inclusive organization, is better for the long term, which makes it critical to stay true to your causes and your strategy during hard times. There is no right answer, no formula, and I’m sure people can poke holes in what we’ve done. But if I can sleep well at night, then I think we’re in a good spot.”

Pennington at Edward Jones also explicitly focused on “fiscal balance” among three key stakeholder groups: clients, colleagues, and community. This year, even as the firm has tightened spending, it has kept investing in the new tools and services that will help customers, paying advisers bonuses (albeit reduced), and funneling tens of millions of dollars into “financial fitness” programs for high school students.

. . .

Too many leaders allow deep-seated fear to control their companies’ responses to adversity. They huddle in their corners, afraid to make a move beyond slashing costs and forbidding new investments. They focus on increasing the efficiency of their operations without investigating whether doing so will make their organizations more effective at generating customer value. They prioritize certain stakeholders and fixate on short-term results.

Resilient leaders, by contrast, calmly appraise the challenges they face in times of crisis, taking defensive steps while also launching offensive action. They continue toward their goals but pivot quickly as more information becomes available. They operate with a bootstrap ethic—investing where it makes sense but staying ruthlessly frugal everywhere else. And they balance the needs of all their stakeholders, over the short and long terms, for the best results.

As the ancient Stoic philosophers knew, adversity isn’t simply a threat to be contained but a unique opportunity for individual and organizational growth. And that raises a crucial question (borrowed from a popular saying by the writer Vivian Greene): Would you rather hunker down and wait for the storm to run its course or learn to dance in the rain?

Copyright 2023 Harvard Business School Publishing Corporation. Distributed by The New York Times Syndicate.

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