Photo credit: Felix Zeiffer

Insights into Crisis Management

Two studies from Mannheim provide guidance for managers

The Corona pandemic is hitting companies around the world with unexpected severity. Markets slid into a severe crisis in a matter of weeks and now managers have to get their organizations back on track as fast as possible.

In two research projects, researchers at the University of Mannheim analyzed the behavior of companies and their managers in times of crisis. The findings of the study can help practitioners make the right decisions in the Corona crisis.

For the first study, the Mannheim researchers teamed up with colleagues from the Technical University of Munich and the University of Hong Kong. In a multi-year research project, they investigated the influence of managers' overconfidence on their actions in times of crisis. Overconfidence is a classic case of actors overestimating their own abilities and underestimating uncertainties regarding the effects of their actions. While such a tendency can, for example, have a positive influence on the innovative strength of companies, the results of the study show that overconfident CEOs are particularly ill-suited to get their company back on track in times of crisis.

Crisis situations by default represent a fundamental contrast to high performance requirements. CEOs who tend to overestimate their personal abilities try to shift the blame to adverse influences or play down the gravity of the situation. Both of these factors lead to this type of manager remaining convinced about the success of their previous strategy and therefore seeing less need for restructuring. Ultimately, this makes them less likely to achieve a successful turnaround of the company, i.e. to save the organization from insolvency or even bankruptcy.

On the other hand, the study also shows that overestimating oneself in times of crisis can have positive effects on the success of restructuring: If, during a crisis, a company hires a new manager who is characterized by overconfidence, they will have no reason to ignore the causes of the crisis and instead pursue restructuring with particular determination. This may enable companies to achieve a turnaround after all.

Given the current situation, the findings of this study seem to be relevant beyond the business world: Some state leaders also seem to feature a tendency to overestimate their own abilities. Their hesitation and the downplaying of the emerging coronavirus could be due to their pronounced self-perception.

In a second study, Mannheim researchers worked together with colleagues from the Technical University of Munich and INSEAD to investigate how family firms (e.g. Ford), entrepreneurial companies (e.g. Tesla) and professional, widely-held corporations (e.g. GE, Daimler, etc.) deal with sudden, existential crises and how the behavior of corporate leaders affects the measures taken and ultimately the company's performance during the crisis.

The study as a whole provides several important findings. The key finding is that the respective (social) identity of the corporate leader has a decisive influence on the reaction of companies to the crisis and that the social context of the company in turn determines how this reaction is perceived by the environment.

On the one hand, it has been shown that founders tend to take particularly far-reaching countermeasures in crises compared to professionally run companies. They often go too far in their measures and tend to do more harm than good to their company. The researchers attribute this behavior to the special importance the company has for the founder. Being the creators of the company, founders seem to use all possible methods to save their company. The cost-efficiency of the measures taken seems to be less important than the essential preservation of the company. This crisis reaction becomes particularly harmful with increasing company age. The authors attribute this to the fact that employees, suppliers, etc. develop a particular set of expectations towards the founder over time. It appears that founders find it difficult to live up to those expectations if, during the crisis, they are primarily concerned with maintaining the company (and thus, for example, less with preserving jobs).

In contrast, the study also shows that family businesses in times of crisis place particular importance on preserving jobs, while their restructuring measures otherwise do not differ from those of widely-held companies. Especially in severe crises and at an advanced age of the company, such a reaction to the crisis particularly pays off. The researchers attribute this in particular to the special degree of cohesion within family businesses (social capital). When family companies react particularly responsibly to a crisis, employees, suppliers and co. are more willing to do their part to save the company.