Product adaptation during pandemics: When does it pay off?
New research examines the complex interplay of factors determining whether crisis-driven production shifts helped or hurt company stock prices during COVID-19
When COVID-19 struck in early 2020, some of the world’s largest manufacturers swiftly pivoted their production lines to meet urgent pandemic needs. Auto giant Ford Motor Company was among the first to answer the call. On March 19, 2020, Ford announced it would partner with 3M and GE Healthcare to produce respirators, ventilators, and face shields. The company rapidly repurposed its factories, leveraging its automotive expertise to design and manufacture these critical medical supplies. By April, Ford was producing 100,000 plastic face shields per week. The company didn’t stop there – it went on to manufacture reusable gowns from airbag materials and produce over 50,000 ventilators by July.
Meanwhile, tech leader Apple demonstrated its own agility in responding to the crisis. In April 2020, CEO Tim Cook announced that Apple would design, produce, and ship face shields for medical workers. The company leveraged its global supply chain expertise and product design capabilities to create a shield that could be packed flat, with 100 assembling in a box. Apple aimed to ship over 1 million shields per week, sourcing materials and manufacturing capacity from both the US and China.
These initiatives showcase how even companies not typically involved in medical supply production could rapidly adapt their capabilities to meet urgent needs. Known as pandemic-relieving product adaptation (PRPA), they aim to address critical supply shortages while keeping factories operational. But did such radical shifts pay off financially for the companies involved?
A new study by researchers from UNSW Business School, City University of Hong Kong, and Jinan University examined the stock market reaction to PRPA announcements by US-listed manufacturing firms during the first three quarters of 2020 to answer this question. The research paper, Resilient product and production adaptation in a large-scale disaster: Does it pay off? was co-authored by UNSW Business School of Marketing Professors Maggie Dong and Jack Cadeaux, together with Wei Sun at the City University of Hong Kong’s Department of Marketing and Bin Yang at Jinan University.
The researchers analysed 114 PRPA announcements from 57 unique companies, matching them with a control group of similar firms that did not pursue PRPA. This comprehensive analysis provided insights into the financial impacts of PRPA and the factors that influenced its success. “Inspired by the news on PRPA initiatives during the pandemic and the ensuing social media debates – whether these companies were true heroes or merely seeking fame – this research set out to explore the tangible benefits of such actions for the firms themselves,” said Prof. Dong. “Ultimately, businesses must demonstrate to their investors that PRPA not only serves society but also delivers a return on investment.”
Understanding pandemic-relieving product adaptation
PRPA involves reconfiguring production resources to manufacture emergency supplies needed during a pandemic. The researchers framed PRPA as a dual strategy that combines operational resilience with corporate social responsibility (CSR). From a business perspective, PRPA aims to build resilience by realigning resources with shifting demand. From a community perspective, it demonstrates social responsibility by addressing urgent societal needs.
“PRPA synthesises efforts to cope with supply chain disruptions and promote corporate social responsibility,” the study noted. This makes it distinct from typical responses to more localised disasters studied previously.
From the firm-centric perspective, PRPA represents an attempt to build resilience in the face of severe supply chain disruptions. It allows companies to reallocate resources adaptively and recover from pandemic-induced challenges. This aspect of PRPA aligns with established strategies for maintaining business continuity during crises.
From the community-centric perspective, PRPA serves as a legitimacy-seeking action. By producing essential supplies during a pandemic, companies demonstrate their commitment to social responsibility and align their activities with stakeholder expectations. This can potentially enhance a firm’s reputation and stakeholder relationships.
Read more: How did COVID-19 impact global stock market liquidity?
As mentioned by the senior managers of the manufacturing firms interviewed, from the standpoint of business continuity, many businesses closed their doors during the pandemic. Sales took a hit, but PRPA provided a “nice short-term boost”, according to senior managers in the research paper.
Another senior marketing manager’s comment emphasised PRPA’s CSR nature: “We look at the bigger picture and act with society’s interest in mind,” they reported. “We believe we have shown our commitment to our stakeholders (by initiating PRPA) … Personal protective equipment is the need of the hour. We have the ability to help, and we do (help).”
Financial impact depends on circumstances
Analysing 114 PRPA announcements between January and September 2020, the researchers found the overall stock market reaction was positive but not statistically significant. This suggests investors saw both potential benefits and risks in PRPA strategies. The study found that on average, investors and firm decision-makers should not expect a simple positive return on engaging in PRPA. Instead, PRPA is likely to help under specific circumstances.
The study identified four key factors that influenced whether PRPA announcements boosted stock returns.
1. Pandemic severity. PRPA announcements led to higher stock returns when local pandemic conditions were more severe. Under mild conditions, PRPA was associated with negative returns. “PRPA had a significant benefit for the stock return under severe pandemic circumstances,” the researchers found. “Under mild circumstances, however, PRPA led to negative returns, likely reflecting a perception among investors that PRPA would confer immediate costs without yielding comparable financial benefits.” This suggests timing is critical, and managers should closely monitor local pandemic progression when considering PRPA.
Read more: How to manage supply shortages in the face of unexpected events
2. Political connectedness. Companies with low political connectedness saw more positive stock reactions to PRPA announcements. Highly connected firms experienced negative reactions. The authors explained that firms with high political connectedness tend to be satisfied with their achievements and can expect relatively little incremental legitimacy gain from PRPA. They argued that the net effect of PRPA on stock returns is determined by the financial consequences of PRPA as a resilience-building strategy and the legitimacy benefits of PRPA as a CSR initiative. When there is little opportunity for increased legitimacy benefits, investors’ valuation of PRPA should be determined solely by the ambiguous financial consequences, so PRPA should be less likely to have a positive effect on stock returns.
3. Media coverage. PRPA announcements boosted returns more for companies with low pre-pandemic media coverage. Firms with high coverage saw negative reactions. “Firms with low media coverage typically find it hard to get public attention and have relatively little established legitimacy, so they are more likely to derive legitimacy benefits from PRPA efforts,” the researchers noted.
4. Unique production technology. Companies with more unique production technologies compared to industry peers benefited more from PRPA announcements. The study stated: “A firm with extensive unique production technology often develops into unfamiliar domains, so PRPA is not too far from the firm’s core activities, and a firm’s pandemic response should generate more financial benefits if it is related to the firm’s core business competence.”
Managers should weigh these factors when deciding whether to pursue PRPA. The strategy is most likely to pay off for companies with low political connections, low media coverage and unique production capabilities – particularly when local pandemic conditions are severe. “That is, such a strategy will pay off financially when implemented as a mechanism to both compensate for relatively low external resource capabilities but capitalise on distinct internal capabilities yet match strong market demand,” said Prof. Cadeaux, who explained that the results demonstrate that short-term financial performance depends on investors’ perceptions about whether a strategy adds value to a firm’s social responsibility profile, and exploits distinctive firm capabilities and local market conditions.
“Thus, firms with already strong perceived responsibility profiles may have little to gain, even more so when the required production redeployment leads them too far from their distinctive expertise and when demand is relatively weak,” he said. ”Corporate managers should be extremely cautious about pursuing such strategies reactively and mistakenly as risk-averse actions that merely follow the actions of other firms without carefully thinking about how they fit or do not fit their unique circumstances.”
Balancing costs and benefits: Five key insights for business leaders
While PRPA can potentially boost resilience and legitimacy, it also carries risks. Retooling production lines is resource-intensive and may divert focus from core operations. Demand for emergency supplies can be unpredictable.
“PRPA is difficult to implement successfully for several reasons, including the urgency of the situation, uncertainty in the demand forecast, and specific requirements for manufacturing emergency supplies,” the authors cautioned. “These challenges tend to make PRPA more expensive and resource-intensive than less drastic adaptations to a supply chain disruption.”
Managers must carefully weigh these costs against potential benefits, and the study presented five important findings that can help predict likely investor reactions based on company and pandemic characteristics.
1. Contextual awareness is crucial. The study emphasises the importance of understanding the local context when considering PRPA. Business leaders should stay informed about the severity of the pandemic in their operational areas. This awareness can help in timing PRPA initiatives for maximum benefit.
2. Assess your company’s profile. Before pursuing PRPA, managers should evaluate their company’s political connectedness, media coverage, and unique production technology. These factors significantly influence the potential financial benefits of PRPA.
3. Consider long-term legitimacy benefits. While the immediate financial impact of PRPA may be uncertain, the strategy can potentially enhance a company’s legitimacy and stakeholder relationships in the long-term. This could lead to future benefits that are not immediately reflected in stock prices.
4. Balance resilience and social responsibility. PRPA represents a unique opportunity to address both business continuity and social responsibility simultaneously. Leaders should consider how this dual-purpose strategy aligns with their overall corporate strategy and values.
5. Prepare for future crises. This study's insights can help companies develop more robust crisis response strategies. By understanding the factors that influence PRPA success, businesses can better prepare for future pandemics or similar large-scale disruptions.
Read more: Four ways COVID-19 affects CSR reporting (and what to do about it)
Rethinking supply chain strategies
The COVID-19 pandemic has prompted many businesses to reassess their supply chain strategies. PRPA represents one potential approach to building resilience and adaptability into manufacturing operations. However, it’s not the only strategy companies should consider.
Other approaches might include:
- Diversifying supplier networks to reduce dependence on single sources or regions
- Investing in digital technologies to enhance supply chain visibility and agility
- Building buffer inventory for critical components or products
- Developing modular production capabilities that can be quickly adapted to changing demands
PRPA should be viewed as part of a broader toolkit for managing supply chain risks and responding to large-scale disruptions. The optimal strategy will depend on each company’s unique circumstances, capabilities, and risk profile. Prof. Dong explained that PRPA offers distinct advantages over traditional internal-focused strategies like supply chain integration and big data analytics. “By contrast, PRPA holds the potential to deliver benefits not only to firms but also to society at large,” she said.
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Implications for future crises
As pandemics and other large-scale disruptions become more frequent, manufacturers may face increasing pressure to assist in emergency response efforts. This research provides a framework for evaluating when product adaptation strategies are likely to benefit both society and shareholders. The authors concluded: “Given the increasing rate and severity of pandemics and epidemics, managers must become competent at making decisions about the most effective resilient responses, including whether to follow a PRPA strategy.”
By considering factors like local crisis severity, political connections, media coverage and production capabilities, managers can make more informed choices about pivoting operations during future emergencies. While PRPA carries risks, it may offer significant rewards for some companies under the right circumstances.