By Carlos Martin-Rios
Many nations, companies and individuals were still reeling from the negative effects of the financial crash that began in 2007, when Covid-19 struck affecting many economies, especially those related to the service industries. Tourism and hospitality are often among the first and hardest hit by turmoil. Families refrain from making superficial expenses. Corporations slash travel expenses. Long-haul tourism shrinks and gives way to short-haul destinations, if any. Most consumers become savvier spenders and turn away from high-end services (upscale hotels, cruises, personal shoppers, club memberships and other positional goods).
While the negative consequences of the crisis are clear, times of extreme uncertainty can also be windows of opportunity, if coupled with innovation and doubled down on long-term, sustainable growth strategies. Still, for many in leadership positions, the central question remains: which is the best overall strategy in a downturn like this one – expansion or retrenchment?
Defensive strategies versus a more forward-looking approach
Research on strategic renewal assumes that companies have competitive advantages that allow them to thrive in times of munificence, but in times of environmental scarcity only firms with even better competitive advantages will outcompete firms that rely on defensive strategies, specifically organizational downsizing. Our study of the most innovative European service organizations found substantial differences in the outcomes of the two strategic renewal pathways in terms of net sales and operating profits over the years after the 2008-2011 period. (Martin-Rios & Pasamar, 2018).
“We found that firms that took a forward-looking strategic approach during the downturn, increasing innovation budgets (e.g. R&D) and retaining their staff, obtained better long-term financial, operational and market success than those cost-oriented firms that reduced expenditure on innovation and cut headcount as a reaction to the recession.”
Our further research on strategic renewal and innovation strategies developed by businesses in the creative industries (Martin-Rios & Parga, 2016a) and cultural heritage (Martin-Rios & Parga, 2016b) during the years of the Great Recession are also illustrative of the post-coronavirus scenario. To gauge the nature of these firms’ responses during the 2008-2012 study period, we examined accounts of the firms’ innovative activities as a composite of technological and non-technological innovation practices.
“We found that the firms that responded to the crisis by means of investment on long-term innovative transformations were able to reinvent their service offering and, as a result, to out-perform those firms with short-sight, unplanned initiatives.”
In fact, innovation strategy and management plays a decisive role in the way service businesses cope with crisis. Our sectoral taxonomy of service innovation strategies shows big differences across the distinct service sectors (Martin-Rios & Ciobanu, 2019). Airlines, retailers, hotels and restaurants, in this sense, seek short-term strategies which cannot create proper business opportunities to circumvent recession. Firms in these activities find themselves deeply affected by managerial challenges in terms of anticipating and reacting to changes in the environment.
The pandemic has triggered a shift in priorities. We can anticipate that most discussions among business owners, senior managers and professionals in hotels and restaurants are now shifting to short-term strategic adaptation in alignment with the impact of COVID-19 on their operations. However, our research shows there is another way.
Sustainable renewal
“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else — if you run very fast for a long time, as we’ve been doing.”
“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”
The Red Queen in Lewis Carroll’s Through the Looking Glass reminds us of the importance of long-term strategic adaptation activities. Compared to short-term external threats, global crisis brings together environmental uncertainty, increased complexity, ambiguity and unpredictability. To recover, hotels and tourism firms face the unique opportunity of developing sustainable organizational responses aiming to increase their tolerance of uncertainty and to nurture sustainable sources of organic growth.
Yet, the transition toward sustainable business is not without obstacles. Many businesses are quite simply reluctant to embrace sustainable management. For others, sustainability relates to long-term goals to address the greatest global challenges related to inequality, poverty, environmental degradation and climate change. In their eyes these purposes have little to do with business transactions and decisions, where the problems are more pressing.
In fact, it is quite the opposite. Adopting sustainable business models and practices represents an effective strategic and operational response to address these challenges. The current pandemic creates the scenario for new processes of sustainable strategic adaptation and renewal – to disrupt inertia by modifying or replacing the business´s core competencies and capabilities to ensure long-term performance and survival. Our recent articles on sustainable innovation suggest those hospitality companies actively integrating sustainability innovations into their service offering in return achieve planned growth and forge a strong attachment to their local communities and lasting relationships with stakeholders all along the value chain.
This is the time to run at least twice as fast to rewire current systems and practices, foster sustainable business models and incorporate sustainable practices, processes and SOPs. The shift requires profound changes in the way we do ‘business as usual’. The future of service firms depends on it.
