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Turbulent times are challenging for decision-makers in business. This pervasive condition scholars call economic policy uncertainty (EPU) can turn a wise move into a costly one virtually overnight and is known to weigh on firm innovation, investments and value.
When confronting EPU, what’s a firm to do? Saurabh Mishra, professor and area chair of marketing at Mason, and co-authors Sachin Modi of Wayne State University and Michael Wiles of Arizona State University have penned a paper (forthcoming in Journal of the Academy of Marketing Science) that explores that question.
Prior research suggests three capabilities that possibly buffer against the adverse effects of EPU. R&D capability refers to a firm’s capacity to convert knowledge into innovative discoveries or ideas, in the form of patents or processes. Operations capability is a catch-all term for principles of supply chain management enabling firms to balance innate tensions between flexibility and efficiency in the production processes. Marketing capability includes familiarity with the consumer base, sophisticated messaging and sales techniques, etc.
This research study was designed to gauge whether, and how much, each of the three capabilities counteracted EPU’s value-destroying impact. The researchers analyzed fluctuations in EPU over the years 1992-2015 alongside financial performance data and capabilities information for 4,316 U.S.-based firms for the same period of time. The results were quite nuanced. Marketing capability countered EPU’s drag on abnormal returns and Tobin’s Q (a measure of firm value outside of its physical assets), but had no perceptible effect on reducing firm-specific risks. Operations capability displayed an opposite effect in interacting with EPU: resulting in value destruction under high EPU but also reducing risk at the same time. Finally, R&D capability was neither here nor there when it came to protecting value, but marginally reduced EPU-derived risks.
Why was marketing capability the only real value-protector of the three? “If you are in a position where you are able to better understand your consumers through a better marketing function, and better meet them where they need to be met in terms of their needs and aspirations, then you might actually end up moving ahead of your competitors,” says Mishra.
To be sure, marketing was the only one of the three without a risk-lessening effect. However, this may not be as much of a drawback as it seems, since the paper finds that EPU reduces risk in general. In other words, managers facing uncertainty already tend to play it safe. Mishra suggests that for firms under EPU, pursuing tighter connections with customers should often be a higher priority than battening down the hatches.
A big, surprising takeaway from Mishra’s research, then, is that EPU’s implications for consumer demand are a key under-explored element of the wider uncertainty story. And because beefing up marketing capability attacks the demand side directly, it should be seriously considered as part of an organizational response to uncertainty.
By contrast, operations isn’t as much of a value-add under EPU because it reflects an efficiency focus, which can make the firm too lean to have a buffer or safeguards against EPU. R&D is more vulnerable to uncertainty, because EPU changes consumer needs as well as market conditions in ways that can’t easily be predicted and preemptively addressed through innovation.
But that doesn’t mean R&D and operations should be taken for granted. Mishra says that the best way for firms to weather uncertainty isn’t only to make smarter decisions about which capability or capabilities to invest in. Perhaps even more importantly, firms should work proactively—in today’s business climate, that means immediately—to build and shore up internal synergies, so that strengthening one capability enhances all three to some degree.
“A very strong message is this complementarity between functions,” Mishra says. “Within an organization, it should not be a zero-sum game, which it tends to be at times. It’s not about getting a bigger piece of the same pie, it’s about working together to make the pie bigger for your organization.”
Marketing and operations were an especially productive combination for combating EPU, for example. The professors found that a one-percent increase in both capabilities was associated with 0.438 percent higher Tobin’s Q and a statistically significant jump in abnormal returns. Together, this one-percent effect completely cancelled out EPU’s damage to financial performance.
However, not all capability combinations were winners. A joint focus on marketing and R&D actually lowered firm value under EPU. Dividing resources between the extreme ends of the product pipeline proved too unfocused a strategy, the professors concluded.
Obviously, deeply siloed firms and those engaged in intense intramural competition for resources will be limited in the types of synergies they can unlock, which puts them at a disadvantage. In times like ours when uncertainty reigns with no sign of stopping, an organization divided against itself will have an even harder time staying upright.