COVID-19 Disruption and Service Firms’ Adaptation Strategies: Institutional Theory Perspectives

Abstract

The unprecedented global COVID-19 crisis has jolted service businesses whose raison d’être is delivering satisfaction through human interaction. Faced with this existential threat, services must suddenly become resilient and pivot towards futuristic strategies. This paper draws upon institutional theory to develop a conceptual model that explains how service firms can transition to effective crisis management, grapple with pandemic disruption, and engender resilient strategies. In particular, institutional theory advocates tinkering and theorizing approaches for recovery and future growth. While tinkering provides a baseline layer of social acceptance and stimulates innovation via marginal changes such as adherence to norms (e.g., social distancing), theorizing creates legitimacy through new institutional logics (e.g., frames of references) and radical innovations as customers learn new meanings about service firms. Using examples from past pandemics such as the Spanish Flu of 1918 that killed more than 20 million people worldwide, and natural disasters like Hurricane Katrina, this paper articulates how firms have historically created theorizing by framing the cause of pandemics and disasters as unique attributions that engender social connectedness and resilience. For example, during past pandemics, institutional theory research shows that service firms which created social connections gained rapid legitimacy and success in the post pandemic era. In fact, social bonds forged through local charities magnified embeddedness and provided firms with long lasting loyalty and reputation outcomes. The paper concludes by providing several managerial applications of tinkering and theorizing strategies in the COVID-19 era. In particular, it highlights how service firms can tackle the new normal of social distancing, sheltering at home, and demand decrement through tinkering and theorizing. Finally, the study discusses how the COVID-19 situation can spur theorizing and innovation via machine learning (ML) and artificial (AI) applications in the areas of customer service and new product development.

Author’s Insight

The COVID-19 pandemic has caused severe disruptions to the global economy. However, people intensive service businesses have been hurt the most. The virus has not discriminated between firms, and has decimated businesses both big and small. While millions of small businesses have been wiped away, iconic brands like JC Penney, Hertz, Cirque du Soleil, J. Crew, Latam Airlines, Neiman Marcus, Pier 1, Virgin Australia, Chesapeake Energy, and others have filed for bankruptcy. In this business graveyard, many firms are currently on life support, fervently hoping for survival through cash bailouts. As successive waves of infection roil society, everyone is waiting with bated breath for a vaccine to emerge. However, despite the doom and gloom in society, there are signs of innovation in a number of areas that academics and practitioners should take note of. In particular, some firms are using commonsense and logic to grapple with the COVID-19 challenge, while others are ushering in much desired innovation to embellish their business models and plan for the future.

To cope with the pandemic, firms are using creative strategies by minimally modifying their business models, or tinkering to survive, grow, and gain legitimacy in the eyes of society. At a time when most people are suffering in one way or the other, firms are substituting the pursuit of economic gains with the desire to attain social legitimacy. For example, by pro-actively embracing social distancing even if it is not explicitly mandated by law, many businesses are putting their profit imperative on the backburner. Others are resorting to bold and ambitious strategies for socially connecting customers and building goodwill. Thus, it is refreshing to see physical gymnasiums diversifying into e-services and building online fitness communities. Likewise, financial firms are using online classes to educate laypeople about investing, and aggressively marketing robo investing services.

The pandemic has also accelerated the move toward automation, machine learning, and artificial intelligence solutions for customer service. While the results will unfold in the future, the efficiency gains from these endeavors cannot be ignored. Thus, firms are using robots and automating their internal production tasks at a much rapid pace compared to the pre-pandemic era. In addition, chatboxes developed from humongous databases and finessed through ML and AI algorithms are being deployed to deal with customer service needs at a time when demand for cancellations, rebooking requests, refunds, and payment deferrals have skyrocketed in industries like travel, tourism, and banking.

A lingering question for many of us is whether the world will just snap back to the old way of doing things once an effective vaccine is developed and deployed. I take the position that we may not fully revert to the old way because technological advances will displace many jobs and affect our shopping behaviors. For example, I see a fundamental altering of the service landscape with firms like Uber transforming themselves into fully automated driverless systems, and robots taking and fulfilling orders at McDonalds’ drive through outlets. This robotic transformation will happen not because the coronavirus will remain a threat, but due to huge technological advances in the areas of ML and AI that are currently underway.