Not all industrial sectors respond the same way to changes and shocks

Business cycles are a fact of economic life and they can have a significant impact on new technology sectors where the risks are high and product development takes time. But research funded by the Economic and Social Research Council shows that not all sectors respond in the same way.

The project, conducted by Michael Kitson of the Judge Institute of Management (Cambridge’s Business School) and Dr David Primost of the ESRC Centre for Business Research, revealed a range of competency in handling economic changes and the use of a variety of coping strategies. Researchers worked closely with firms in the biotechnology and aerospace sectors in the UK and observed how they handled economic changes and shocks over three years (2002-2004). This was a period of slow economic growth, but with substantial falls in the valuation of technology-based firms. It also saw major geopolitical developments and events, including the aftermath of 9/11.

“Our aim was to find out how changes in the macroeconomy, and the inevitable shocks that occur, influence managerial behaviour and corporate strategy. We focussed on two high-tech sectors and examined how such behaviours and actions affect competitiveness and long-term growth,” said Michael Kitson. “We believe our findings are relevant to mangers and policy makers as different sectors, responded differently; so generalities need to be avoided.”

Many biotechnology firms believed that the majority of economic changes had only a negligible impact on them and almost never influenced important decisions, particularly about the development and commercialisation of science. However, one economic variable, the decline in the stock market and hence the availability of finance, did have an impact. Only those firms with large cash reserves felt relatively insulated from changing valuations of their businesses.

To generate new finance, many biotechnology firms tried to increase revenues streams, improve efficiency and many altered their business models. Venture capitalists were, however, stymied by a lack of exit routes for their investments so they only continued to finance firms with technologies in the later stages of development – and therefore closer to market. This caused some firms to drop technology in its early stages – technology that could in the longer term have made a significant contribution to economic growth.

In the aerospace sector there were different perceptions and actions. There was a strong awareness of business cycles and macroeconomic changes. To avoid vulnerability, portfolios of activities driven by different business cycles were developed, and risks were reduced by changing sources of revenue from high value equipment, to an emphasis on after market service and sales. Many made a ‘virtue of necessity’ in response to world events and pushed through organisational changes such as, reducing excess capacity post 9/11. In addition, the global crisis in aviation was used as an opportunity to implement process improvements and rationalise supply chains.

“In the biotechnology sector, young firms at critical business junctures may lack the competence to cope with changes in financial markets. For these firms, a failure to acquire finance can prevent commercialisation of technology and stunt growth,” said Michael Kitson. “In contrast, more mature firms in the aerospace sector have learned more effective business coping strategies. It’s important that policy makers take account of these types of differences in their planning.”