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Why It’s So Easy to Rationalize a SplurgePivoting in a Time of Crisis
Why now is the right time for small companies to take a hard look at their business models
- By
- May 20, 2020
- CBR - Marketing
On April 8, 2020, two companies facing very different kinds of pressures changed their business models. First, following US president Donald Trump’s invocation of the Defense Production Act of 1950, General Motors signed an agreement to supply 30,000 ventilators to the US federal stockpile, in partnership with ventilator manufacturer Ventec. Secondly, LVMH, the luxury-goods manufacturer, announced it would be converting five of its workshops to produce face masks to supply hospitals in Paris.
GM and LVHM are hardly alone. A number of companies have pivoted or expanded their business models, either to survive the pandemic-driven economic collapse or to give back to their communities—or even to capitalize on the crisis. Pivoting is so in vogue that mentions of the word pivot on Twitter over the March–April period were about 50 percent higher than February’s average.
Popular term amid the pandemic
An analysis of language used on Twitter finds a surge in “pivot” references during March and April.
Chintagunta, Kansal, and Pachigolla, 2020
Pivots to new business models in times of crisis are nothing new. For example, in World War II, Ford built jeeps for the armed forces, which led to the sport utility vehicle; Forrest Mars Sr., who manufactured Mars candy bars, was inspired by British volunteers in the Spanish Civil War who ate small chocolate beads encased in a hard sugar shell (to ensure they did not melt in hot weather), and teamed up with Bruce Murrie to create M&M’s; and Johnson & Johnson pivoted its bandage production to manufacture duct tape.
Not all such crisis-time innovations go on to become category-defining household names. While Ford also pivoted aggressively in another way, to building the famous B-24 bomber at its Willow Run factory, it exited that line of work immediately after the war.
Given this history, it is unclear which of today’s pivots are likely to be lasting. But for small and midsize companies suffering from the current recession, pivoting may be an imperative if the downturn drags on. Governments and banks are stepping in and trying to provide small-business loans to help these companies survive for longer. However, this might be the time for the businesses to take a hard look at themselves and assess potential ways forward after the crisis. In many cases, pivoting might be the answer.
From a marketing perspective, pivoting—defined by entrepreneur Eric Ries in his 2011 book The Lean Startupas a “structured course correction” of a business model—essentially entails a deliberate shift in the main strategic components of the business model: the customer, the company, and the competition (the “3Cs”). Most businesses, however, are likely to approach adaptation to the postcrisis environment with smaller tactical changes to what are known in marketing as the “4Ps”: product, price, place (where the product is marketed), and promotion.
Pivots should come about only by carefully studying the current situation and assessing the potential consequences of the change.
To understand this difference, consider two cases. In that of GM and its ventilator production, the company is selling a product that is entirely new to it to a customer segment that is also entirely new to it, and using very different skills than it employs when producing automobiles. We would classify this as a pivot. Contrast this with the case of the videoconferencing company Zoom, which has also had to make changes, but changes in aspects of its product. Specifically, it has had to add more privacy features after a series of “zoombombing” incidents (involving unauthorized users interrupting meetings or classes, often with offensive material) and numerous other breaches and troubling reports. We would not classify this as a pivot.
The lesson is that small enterprises should use this lockdown as an opportunity to perform a strategic assessment of their businesses by asking questions such as:
- Are we focusing on the right sets of customers?
- Are we truly using our skills in the right ways?
- How should we be approaching the competitive landscape (as it might unfold) in the aftermath of the crisis?
Research using randomized control trials with small businesses in Uganda suggests that pivoting can lead to substantial improvements in performance two years after the pivot. In a study I conducted with Stanford’s Stephen J. Anderson and London School of Economics’ Naufel Vilcassim, 530 Ugandan entrepreneurs were paired with business coaches for six months of regular consultation. We then compared the performance of those businesses with a control group of 400 entrepreneurs who didn’t receive coaching. The business coaches encouraged their entrepreneurs to consider questions like those above and reconsider fundamental aspects of their business plans. The result was that businesses with owners who received coaching were 63 percent more likely to pivot, and ended up growing monthly sales by an average of more than 27 percent.
Naturally, this does not mean that any type of business-model change will yield positive outcomes. Research also suggests that these course corrections need to be deliberate—entailing the stopping of certain activities, the starting of other ones, and the spending of resources to facilitate the transition—as well as deliberative: the changes should come about only by carefully studying the current situation and assessing the potential consequences of the change. This will not be easy, especially when entrepreneurs and their employees are focused on short-term survival. Nevertheless, to the extent that such an exercise might be possible, this would be the right time for it.
Pradeep K. Chintagunta is the Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing at Chicago Booth.
Yogesh Kansal is a consultant at Boston Consulting Group and a recent graduate of Chicago Booth’s MBA Program.
Pradeep Pachigolla is a research assistant at Chicago Booth and an incoming PhD student at Cornell.
Stephen J. Anderson, Pradeep K. Chintagunta, and Naufel Vilcassim, “Stimulating Marketing Strategy Innovation with Entrepreneurs in Uganda: Examining the Impact of Skype-Aided Business Coaching on Firm Sales,” Working paper, April 2019.
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