Here is an excerpt from an article written by Adam Job, Ulrich Pidun, and Valentín Szekasy for MIT Sloan Management Review. To read the complete article, check out others, sign up for email alerts, and obtain subscription information, please click here.
Illustration Credit:
* * *
Is fear in times of high uncertainty holding your organization back from revenue growth? New research busts three widespread myths about risk-taking and shows how to profit.
In the investment world, taking risks during volatile periods can result in a windfall. During his 60 years at the helm of Berkshire Hathaway, Warren Buffett delivered compounded annual returns of nearly 20% — double what the S&P 500 achieved — guided by the rule “Be fearful when others are greedy and be greedy when others are fearful.”
But company leaders have been more hesitant to embrace this principle when it comes to corporate strategy. We assessed a sample of nearly 6,000 companies over the past 15 years, identifying times when their respective industries faced elevated uncertainty. Only 10% of companies chose to make big bets during such periods; the lion’s share instead decided to cut back on exposure. But our subset of risk-takers were rewarded: They achieved stronger growth and higher shareholder returns and did so without facing a greater chance of negative outcomes. These findings raise a question: What’s holding the majority of companies back from being bold?
The Benefits of Taking Risks Amid Uncertainty
We identified 10 high-uncertainty events that unfolded between 2010 and 2020 — major macroeconomic, geopolitical, technological, or societal disruptions that materially reduced predictability for a given sector. Crucially, we did not limit our analyses to crises and downturns but instead focused on events that heightened uncertainty and reshuffled an established playing field. Examples include the outbreak of COVID-19 and its effects on the travel and hospitality industry, the rollout of the Affordable Care Act and its impact on the health care space, and the emergence of mobile computing as the new consumer platform of choice in the IT sector.
We then assessed how boldly the nearly 6,000 companies in our sample that were affected by those events acted. We used M&A spending as a proxy, classifying companies as bold risk-takers if they at least doubled their deal spending during the high-uncertainty period (compared with their average for the prior five years).
We found that during these high-uncertainty events, 90% of the businesses pulled back, cutting M&A spending by about 25%, on average. However, a still-sizable minority of around 600 companies chose the opposite path: They (literally) doubled down, increasing M&A spending by 100% or more. During the three years following the high-uncertainty event, revenues among this group grew nearly twice as fast (6.9% versus 3.5
Here is a direct link to the complete article.
Adam Job, Ph.D., is a senior director at the BCG Henderson Institute. Ulrich Pidun, Ph.D., is an insights leader at the BCG Henderson Institute and a partner and director at Boston Consulting Group. Valentín Szekasy is an ambassador to the BCG Henderson Institute.