Preparedness shapes tomorrow: crisis preparedness and strategies among SMEs amid external crises

ABSTRACT

Prior research on crisis management focuses on crisis strategies used by small- and medium-sized enterprises (SMEs), predominately without considering their initial state of preparedness – how these SMEs stepped into the crisis in the first place. This study examines the effects of financial, organizational and cultural crisis preparedness on the strategic choices SMEs make during crises, specifically whether they retrench, persevere, or innovate. Utilizing a unique longitudinal representative dataset of SMEs spanning from 2015 to 2020, we test hypotheses related to the first COVID-19-related lockdown in Denmark. Our findings contribute significantly to the literature by showing that crisis preparedness is critical to SME’s strategic choices during crises. We demonstrate that the nature of SME’s pre-crisis preparedness – across financial, organizational, and cultural dimensions – distinctly shape their during-crisis strategic approach.

KEYWORDS:

• SMEs
• crisis preparedness
• crisis strategy
• crisis impact
• external crisis
• COVID-19

Introduction

Crises wear many faces; they vary across dimensions, such as macro – micro, dynamism, degree of uncertainty and magnitude (Miklian and Hoelscher 2021; Rauch and Hulsink 2021). Some crises – the 2008 financial crisis, the COVID-19 pandemic, the war in Ukraine and natural disasters such as the Haiti earthquake and Hurricane Katrina – are extraordinary and high-impact shock events. They force small- and medium-sized enterprises (SMEs) to react (Ahlstrom and Wang 2021; Ogawa and Tanaka 2013). However, such crises caused by external shocks can seriously threaten the survival and future profits of SMEs that lack resources (Antonioli and Montresor 2019; Peric and Vitezic 2016; Rahman et al. 2022). This situation emphasizes the crucial significance of understanding how SMEs manage crises; especially as external crises seem to unfold more frequent than previously (Miklian and Hoelscher 2021). The literature discussing SMEs’ crisis management divides their management challenges into three stages: their pre-crisis preparation, during-crisis activities, and post-crisis recovery (Giones et al. 2020; Lettieri, Masella, and Radaelli 2009; Williams et al. 2017).

However, as Williams et al. (2017) recognized, the crisis management literature has inadequately interconnected the pre-crisis, during-crisis, and post-crisis stages. Researchers slip into studying separate crisis management sequences (before, during or after) and look less at across-crisis sequences (Doern, Williams, and Vorley 2019) resulting from the complex relationship between sudden and severe crises and entrepreneurial actions (Bullough, Renko, and Myatt 2014; Jiang et al. 2021; Shepherd, Saade, and Wincent 2020). For instance, prior research indicates that firm-specific strategy choices during a crisis matter to SMEs’ performance looking forward (Kraus et al. 2020; Kuckertz et al. 2020; Thorgren and Williams 2020; Wenzel, Stanske, and Lieberman 2020). Some strategic choices simply seem wiser than others (Klyver and Nielsen 2021; Osiyevskyy, Shirokova, and Ritala 2020). However, those studies did not examine how prepared the SMEs were.

With some exceptions (e.g. Cowling, Brown, and Rocha 2020), surprisingly few studies have investigated crisis strategies in conjunction with the SMEs’ preparedness adequacy when stepping into the crisis in the first place. Thus, the link between pre-crisis preparedness and strategic responses during a crisis has not received sufficient attention (Doern, Williams, and Vorley 2019; Williams et al. 2017). Consequently, most of the existing literature incorrectly assumes that SMEs are equally and sufficiently prepared to pursue any preferred strategy, ignoring heterogeneity among these firms’ crisis preparedness. This assumption is incorrect. First, SMEs are not hit equally by an external crisis (Klyver and Nielsen 2021). While an external crisis by nature and definition hits the broader economy negatively, there are often both firms positively influenced by the crisis (i.e. crisis exploiters), negatively influenced (i.e. crisis victims), or unaffected (i.e. crisis immune). Second, and in additional to the crisis impact, crisis preparedness varies among SMEs (Greening, A, and Johnson 1996; Mitroff et al. 1989). Crisis preparedness functions as a crucial precondition shaping the range of strategic responses they can enact – and those they cannot – should the need for crisis reaction arise.

To solve this empirical and theoretical gap related to crisis preparedness, we investigate how SMEs’ crisis preparedness before a crisis shapes their crisis strategy decisions during the crisis, taking into account how the SMEs were individually impacted by the crisis. Following calls from Doern, Williams, and Vorley (2019), Miklian and Hoelscher (2021) and Williams et al. (2017), we aim to further integrate perspectives on SMEs’ strategic reactions post-crisis with perspectives on pre-crisis preparedness. By linking these two previously isolated perspectives, we strengthen insights into SMEs’ crisis management as it links strategic choices across the stages of a crisis.

Empirically, we took advantage of an ongoing data collection before the unforeseen COVID-19 pandemic. Although unplanned, the survey data we collected from a representative sample of Danish SMEs in 2015 before the pandemic hit involved appropriate proxies of various crisis preparedness types. With follow-up surveys during the 2020 pandemic and administrative financial data, we created a unique dataset of a representative sample of young Danish SMEs. These data points in 2015 on organizational and cultural preparedness (survey data), in 2019 on financial preparedness (administrative data), and in 2020 on crisis strategies (survey data) allowed us to investigate how SMEs’ crisis preparedness is associated with the strategies SMEs’ pursued during-crisis. We looked specifically into three crisis strategy types: retrenchment, persevering and innovation (Wenzel, Stanske, and Lieberman 2020).

Our study contributes to crisis management literature (e.g. Doern, Williams, and Vorley 2019; Williams et al. 2017) by integrating crisis management research on pre-crisis preparedness (e.g. Bundy et al. 2017; Carmeli and Schaubroeck 2008; Loosemore and Teo 2000; Pearson and Mitroff 1993) with crisis management research on crisis-response management (i.e. crisis strategies) (e.g. Klyver and Nielsen 2021; Wenzel, Stanske, and Lieberman 2020). Particularly, it demonstrates the critical role of SMEs’ crisis preparedness for their choices of crisis strategies, showing that different components of crisis preparedness shape SMEs’ choice of different crisis strategies. Overall, our findings suggest that crisis management should be studied more as a process in which the various phases are interconnected. Studying pre-crisis or during-crisis phases in a standalone fashion is insufficient as important aspects from the past that shapes strategic crisis actions during crisis will be overlooked.

Theoretical background: SME crisis management

The crisis management literature increasingly explores the intricate connections between crisis and entrepreneurial and small business activities (see Entrepreneurship and Regional Development special issue; Doern, Williams, and Vorley 2019; Miklian and Hoelscher 2021; Wenzel, Stanske, and Lieberman 2020). This awareness focuses on contextual shifts, such as crises, functioning as constraints and opportunities for SMEs (Bartik et al. 2020; Chesbrough 2020; Sedlácek and Sterk 2020). For instance, the 2008 financial crisis posed both danger and new opportunities (Sine and David 2003; Tracey, Phillips, and Jarvis 2011), leading to some companies’ shutdowns but also fostering growth (Strangler 2009).

Because SMEs face greater risks than large corporations during crises (Juergensen, Guimón, and Narula 2020), the research highlighted significant factors that enable SMEs to transform negative crisis situations into manageable or positive ones. These factors include their temporary decision-making, balancing their determination to persevere with their need to pivot while considering their obligations to stakeholders, the timing of their actions (Berends, van Burg, and Garud 2021) and other factors such as slack resources (Tognazzo, Gubitta, and Favaron 2016), emotional leadership strategies (Ramli et al. 2023), temporal mindsets of decision-makers (Pérez‐Nordtvedt, Shin, and Lee 2023), and dynamic capabilities through resource accretion (Macpherson, Herbane, and Jones 2015). Whereas the crisis management literature generally categorizes SME crisis management into three stages – before, during and after – our focus lies in understanding the connection between the before and during stages.

Crisis preparedness

We define crisis preparedness broadly as a firm-level characteristic involving an explicit or implicit ex-ante preparedness: capacities to adjust and convert crises into new opportunities (Carmeli and Schaubroeck 2008; Kovoor-Misara 1996; Loosemore and Teo 2000; Pearson and Mitroff 1993). While crisis management has theoretical overlaps with firm resilience, Doern (2021) argues they ‘work together in practice’ (p9). That said, for theoretical distinctiveness we rely on the crisis management literature as our theoretical base because it explicitly divides crisis management into stages: before, during, and after. This enables us to entangle crisis preparedness before the crisis from crisis strategies during the crisis. In contrast, the resilience literature embraces a more dynamic, holistic perspective, considering both the proactive and reactive aspects of crisis management simultaneously (Anwar, Coviello, and Rouziou 2023; Iborra, Safón, and Dolz 2020), which is less fitted with our aim to look at effects across crisis stages. Crisis preparedness involves (1) reducing the chance of a crisis negatively impacting the firm, (2) minimizing its impact and (3) preparing to ‘stand by’ through it and potentially capitalize on it (Bundy et al. 2017). Crisis preparedness encapsulates the resource slack or stock necessary to work against disruptions (Mount et al. 2024) as well as readying organizations in terms of flexibility and culture in order to ‘bounce back’ from and absorb any unforeseen crisis events (Smits and Ally 2003).

Several conditions influence crisis preparedness. The dominant crisis management planning literature prescribes that companies can build and formalize preparedness through planning (Herbane 2013), as also emphasized in the business continuity management literature (Watters 2014). Yet, this approach is mostly applicable for larger firms. In SMEs, preparedness typically features a low degree of formal planning, tailored to their unique ‘smallness’ characteristics (Herbane 2013). Here, Bundy et al. (2017, 1667) highlighted ‘the roles of organizational culture and structure in how an organization can prepare for a crisis’. We argue that building an organizational structure that decreases the crisis vulnerability over a longer time involves organizational flexibility, helping firms adapt to changes (Englehardt and Simmons 2002). Accordingly, organizational flexibility is an important preparedness component that relies on organizational structure (Jansen, Van Den Bosch, and Volberda 2006). Further, we argue that the organizational culture – particularly the culture’s degree of orientation towards new entrepreneurial opportunities (Eggers 2020) – is essential to SME crisis preparedness (Branicki, Sullivan-Taylor, and Livschitz 2018; Laskovaia et al. 2019).

Bundy et al. (2017) suggested that organizational structure and culture shape the choices of crisis strategies during a crisis. However, we argue that structure and culture preparedness not alone shape choice of crisis strategies. Financial preparedness, in terms of resources and slack, constitutes another condition that defines the choice of crisis strategies being pursued. Prior research clearly showed how financial resources available when the crisis hits shape and define the scope of strategic options SMEs can pursue (D’Amato 2020; Wenzel, Stanske, and Lieberman 2020). Accordingly, we investigate three preparedness conditions that explain how SMEs can prepare for unforeseen crisis events: financial, organizational and cultural crisis preparedness.

Crisis strategies

The crisis preparedness literature primarily emphasizes how SMEs circumvent future unknown crisis events (Carmeli and Schaubroeck 2008; Kovoor-Misara 1996; Pearson and Mitroff 1993). In contrast, the crisis response management literature focuses on strategies during and after the crisis to bring the organization back to normal or ‘build back better’ (Klyver and Nielsen 2021; Wenzel, Stanske, and Lieberman 2020). Here, the focus has been on specific crises, such as the 11 September 2001 attacks (Li and Tallman 2011) or an economic recession (Beaver and Ross 2000).

When a severe crisis hits, SMEs enact crisis strategies, as reflected in the expanding COVID-19 literature (Giones et al. 2020; Klyver and Nielsen 2021; Kraus et al. 2020; Puthusserry et al. 2022) and the literature on crisis management (Antonioli and Montresor 2019, Ahlstrom and Wang 2021; Wenzel, Stanske, and Lieberman 2020). For instance, Williams and Shepherd (2016) studied the Black Saturday bushfires in Australia. They identified two key strategic pathways ventures used to mitigate the crisis impact and facilitate recovery. One path emphasized short-term survival; the other focused on long-term transformation. In one of the earliest published studies on COVID-19 and SMEs, Kraus et al. (2020) showed the rapid adaption of business models across industries and sizes, fostering a more collective corporate culture and tentative digitalization.

However, with a weak link between crisis preparedness and crisis responses (Williams et al. 2017), existing research falls short of comprehending the fundamental dynamics of crisis management among SMEs. This deficiency has hindered the provision of necessary insights into the interplay between SMEs’ preparedness and response – and has practical and theoretical implications.

Hypothesis development

The literature suggests different but, to some extent, overlapping ways to categorize crisis reactions (Kraus et al. 2020; Kwong et al. 2019; Puthusserry et al. 2022; Wenzel, Stanske, and Lieberman 2020). Wenzel, Stanske, and Lieberman’s (2020) leading, well-grounded, four-branch categorization reflects the richness of the crisis strategy debate in the field. Following Kraus et al. (2020), our categorization excludes the exit strategy because we are interested only in continuing firms. We focus on retrenchment strategies, in which SMEs reduce costs; preserving strategies to preserve ongoing activities and maintain the status quo; and innovation strategies, engaging in innovative strategic renewal and exploring opportunities that emerge because of the crisis. All strategies are complementary and occasionally overlapping; each has different advantages and disadvantages, but all somehow serve the same goal – to cope with the wicked and uncertain crisis. The retrenchment strategy focuses on reducing activity to prevent harm. Although the persevering strategy may indirectly involve some activity reduction, it focuses primarily on maintaining and preserving the current business activities. The innovation strategy involves adapting the firm and its business model to the new emerging environment in order to exploit the crisis conditions.

Prior results suggested that some strategies are better than others during crises. Wenzel et al. (2020) raised doubts about the effectiveness of retrenchment in the long run and suggested perseverance or innovation as potentially more effective over time. They admitted that such strategies require slack resources; thus, many firms’ only possible short-run solution would be retrenchment. Osiyevskyy et al. (2020) confirmed this approach in their study of 500 SMEs. In crises, exploratory strategies seem more effective for firm performance. Retrenchment is often a forced choice for firms without slack resources rather than a real choice among several crisis strategy options. In the COVID-19 context, Klyver and Nielsen (2021) found distinct differences in the effectiveness of crisis strategies for turnover expectations. Persevering and innovation strategies were (expectedly) better than retrenchment, even in the short run. Thus, based on prior research, it must be assumed that SMEs must aim advantageously for either a persevering or innovation strategy and avoid retrenchment (Klyver and Nielsen 2021; Wenzel, Stanske, and Lieberman 2020). Accordingly, crisis strategies represent a crucial foundation for grasping strategic adjustment and the ability to preserve and strengthen SMEs during crises. However, without preparedness, SMEs too easily become crisis victims.

We argue that young SMEs’ financial, organizational and cultural preparedness shape which crisis strategies they could pursue during a crisis. Table 1 provides an overview of the predicted impact of the three crisis preparedness components (financial, organizational and cultural preparedness) on crisis strategies, elaborated in the following sections.

Table 1. Overview of hypotheses.

	Crisis Strategies
Preparedness	Retrenchment	Preserving	Innovation
Financial(high liquidity ratio)	Negative (H1a)	Positive (H1b)	Positive (H1c)
Organizational(low formalization)	Negative (H2a)	Negative (H2b)	Positive (H2c)
Cultural(high ent’rial orientation)			Positive (H3c)

Financial preparedness

Financial preparedness is understood as the available financial resources (Mount et al. 2024) when a crisis hits, and most importantly, affects the firm’s freedom to choose among crisis reaction options (D’Amato 2020). We propose that many strategic actions require financial resources that, in this way, constitute a necessary condition for many strategic actions. Cash ‘is surprisingly valuable as a strategic asset’ (Kim and Bettis 2014, 2053); it offers the liquidity needed to conduct strategic change in hostile contexts (Deb, David, and J O’Brien 2017), including buying the necessary time to reconfigure, recombine, and better utilize other resources, which can also facilitate the opening of new strategic options (Hu et al. 2022). As Wenzel et al. (2020) acknowledged, when a crisis hits a firm, that firm’s economic situation determines what options are realistic to pursue. Cowling et al. (2020) showed that leading up to the COVID-19 crisis, only 39% of UK SMEs bolstered cash balances that would enable them to stay resilient during the crisis. They argued, ‘Precautionary saving for SMEs is critical to enhance resilience when Black Swan events occur’ (2020, 2).

When a global crisis hits, it most often has an instant, severe effect on financial markets. The resulting reduced credit and higher finance costs especially affect SMEs (Cowling and Matthews 2018). Even if healthy and profitable, SMEs risk running out of cash and being challenged by higher conditions in assessing credit (Piette and Zachary 2015).

We suggest financial preparedness is critical to the crisis strategy choice. It allows SMEs to pursue presumably effective, long-term, transformative – but cash-requiring – strategies (i.e. persevering and innovation) (Wenzel, Stanske, and Lieberman 2020). The persevering strategy requires financial resources in terms of cash to continue and maintain the current business model despite falling turnover. Retaining the firm’s core capacities and relations during a crisis, especially when they go unused (e.g. keeping employees during lockdown), is expensive. The innovation strategy may require even more cash because innovations often necessitate investments. The required available financial resources during a crisis reflects that ‘one of the first costs that firms cut are the expenses for innovation’ (Cefis, Bartoloni, and Bonati 2020, 63).

On the other hand, SMEs with few available financial resources, and accordingly low financial preparedness, may be forced to follow a short-term, reactive retrenchment strategy to reduce crisis damage. For instance, Thorgren and Williams (2020, 1) noted that many ‘SMEs acted immediately by deferring investments, reducing labour costs, reducing expenses and negotiating contracts and terms’. We suggest a financial preparedness in terms of available financial resources is needed to pursue many presumably effective strategies, such as persevering and innovation. In contrast, low financial preparedness pushes SMEs towards a retrenchment strategy.

Hypotheses 1abc:

Financial preparedness will negatively affect (a) retrenchment strategies and positively affect (b) persevering strategies and (c) innovation strategies.

Organizational preparedness

Organizational preparedness affects the firm’s ability to adapt during a crisis and its strategic behaviour in future crises. In the business continuity management literature, aimed predominately at larger firms (Watters 2014), organizational preparedness is primarily achieved through scenario planning, standardization, and formal organizational structuring (Elliott, Swartz, and Herbane 2010). A similar planning and formalization approach related to crisis management is also prevalent for SMEs (e.Coates et al. 2016; Runyan 2006). For instance, Herbane (2019) identified different approaches to formalize crisis preparedness depending on managers’ crisis prevention attitude.

However, for young SMEs with liabilities of newness (Stinchcombe 1965) and smallness (Aldrich and Auster 1986), we argue such a planning approach can be too resource intensive both in terms of time and financial resources. Accordingly, we suggest that young SMEs often take another approach focusing on flexibility rather than formalization (Eggers, 2020). Thereby organizational preparedness involves SMEs’ strategic agility and ability to react flexibly and quickly when environmental changes happen (Clauss et al. 2019) achieved through low degree of formalization.

Mutual adjustment is typically the dominating coordination mechanism among newly established businesses and SMEs (Mintzberg 1980) that provide them strategic agility and ability to react flexible and quickly. It is characterized by the ongoing adoption of decisions and behaviours that generate rapid adaptability and agility as competitive advantages. However, mutual adjustment as coordination mechanism varies in dominance among SMEs. As SMEs mature and professionalize their business some start professionalizing their operations that involves an increasing degree of formalization (Herbane 2015) – standardizing procedures, establishing a hierarchy, and specializing and coordinating tasks (Greiner 1998). Under normal circumstances, these features improve effectiveness (Terziovski 2010); however, under radical changes and crises, they may restrict the flexibility and agility necessary to adapt, and thereby reduce the organizational crisis preparedness. Jansen, Van Den Bosch, and Volberda (2006, 1663) argued that formalization ‘hampers experimentation and ad hoc problem-solving efforts (March and Simon 1958) and reduces the likelihood of individuals deviating from structured behaviour (Weick 1979)’. Formalization is also known to restricts SMEs’ ability to engage in outbound innovation (Gentile-Lüdecke, de Oliveira, and Paul 2020).

Perceiving organizational crisis preparedness as strategic agility and ability to react to new environmental circumstances, including external crises, we expect that SMEs with high organizational preparedness is more likely to engage in innovation strategies during a crisis. With the organizational flexibility and agility, they are able to pursue new ways of doing things or exploit new market opportunities. In contrast, if they have prioritized professionalizing their operations through formalization to be efficient during ‘normal times’, on the expense of organizational crisis preparedness, they are more likely to implement retrenchment and persevering strategies during crisis periods as these strategies allow them to continue similar governance logic. That is, the standardized systems and procedures associated with professionalization and formalization make retrenchment and persevering strategies easy to implement and follow.

Hypotheses 2abc:

Organizational preparedness negatively affects (a) retrenchment strategies and (b) persevering strategies and positively affects (c) innovation strategies.

Cultural preparedness

We also suggest that cultural preparedness affects the firm’s ability to adapt. Cultural preparedness is the organizational mindset and orientation that define how firms approach obstacles and challenges, often dominated by the owners of smaller businesses (Schein 2010). It is generally acknowledged that any crisis contains both threats and opportunities (Jackson and Dutton 1988). However, even in analogous situations, some mindsets and orientations focus on troubles and problems, and others on opportunities (Barr, Stimpert, and Huff 1992; Shepherd, McMullen, and Ocasio 2017). The mindset and orientation of SMEs distinctively allocate attention towards either threats or opportunities (Brielmaier and Friesl M 2023). SMEs with an entrepreneurial mindset actively seek novel solutions. They embrace environmental changes, explore new markets, and experiment with unconventional approaches. When faced with obstacles, they pivot swiftly, leveraging creativity to find adaptive solutions. SMEs also vary in their risk appetite. Some embrace calculated risks, while others tread cautiously (Brettel, Chomik, and Flatten 2015). Their orientation shapes their risk assessment and willingness to explore uncharted territories.

We argue that SMEs with cultural preparedness allocate their attention towards value creation through entrepreneurial decisions, methods and actions (Dess and Lumpkin 2005; Wales et al. 2020). They continuously refine their business models, processes, and technologies when exposed to crises. Such firms engage ‘in product-market innovation, undertakes somewhat risky ventures, and is first to come up with “proactive innovations, beating competitors to the punch’ (Miller 1983, 771).

Prior research suggested that such organizational mindset and orientation enhance firms’ performance (Lomberg et al. 2017), not least in hostile environments (Covin and Slevin 1989; Laskovaia et al. 2019; Lee et al. 2019). In hostile environments, SMEs benefit from cultural preparedness as their orientation enable them to strive to improve or retain their competitive advantages. For instance, Soinninen et al. (2012) found that SMEs with crisis preparedness in term of an entrepreneurial mindset more likely survive an external crisis because they can manoeuvre away from challenges and exploit opportunities. Thus, we expect cultural preparedness – that makes firms allocate their attention towards value creation through entrepreneurial decisions, methods and actions – to increase their tendency to engage in an innovative crisis strategy.

Hypothesis 3:

Cultural preparedness positively affects innovation strategies.

While we expect cultural preparedness to impact the tendency to implement innovation strategies, we do not expect cultural preparedness to impact retrenchment or preserving strategies. Those two strategies are on a lower strategic level (i.e. tactical level) with a short time horizon, while the cultural preparedness is more strategic long-term. Thus, while it might be necessary, or tactical reasonable to either retrench or preserve, this is expected to be independent of the more long-term strategic orientation characterizing SMEs with high cultural preparedness.

Method

The COVID-19 pandemic took most researchers by surprise. Before then, few (if any) researchers had planned to collect data on predicting crisis behaviour during crises. Thus, COVID-19 completely complicated research designs following a before, during and after design logic. Instead, many researchers collected data only after the crisis hit (e.g. Kraus et al. 2020; Kuckertz et al. 2020; Thorgren and Williams 2020), eliminating the possibility of understanding how SMEs step into the crisis and its links to crisis response.

In a crisis, researchers must react with the best possible solutions. We did not pre-plan data collection for a pandemic but capitalized on an ongoing collection conducted before the unforeseen pandemic. That data provided suitable proxies for various crisis preparedness types. Supplementing this with follow-up data on crisis strategies during the pandemic presented a unique opportunity to understand crisis management both before and during the crisis and thus link pre-crisis preparedness with during-crisis strategies.

Context

COVID-19 pandemic

First reported in December 2019, the COVID-19 outbreak rapidly spread to a pandemic, as the World Health Organization declared in March 2020 (Giones et al. 2020). Around the world, countries implemented COVID-19 measures with varying stringency (Hale et al. 2021). Other measures were necessary without effective vaccines or treatments for the virus. The most common were lockdowns and social-distancing restrictions. Despite hopes that fighting the virus would save the economy, gross national product (GNP) decreased (Born et al. 2021), and many firms suffered (Bartik et al. 2020). The decreased GNP varied extensively among countries. Significant variations in the crisis impact were identified within countries – some firms benefitted from the crisis, some were unaffected, and others suffered (Klyver and Nielsen 2021).

The Danish context

On 11 March 2020, 13 days after the first person was infected in Denmark, the Danish government implemented a lockdown. Substantial governmental support followed this early lockdown (Sebhatu et al. 2020) but eased by 20 April, when retail and elementary schools re-opened. The unemployment rate increased from 4.2% in March to 5.6% in May (Statistics Denmark 2020) but has since partly recovered. In the second quarter of 2020, Denmark’s GDP dropped approximately 7% (Organisation for Economic Co-Operation and Development 2020). Although by global comparisons, Denmark did fairly well economically, the mass media discourse showed a substantial increase in uncertainty. The Danish National Bank’s analysis based on the newspaper ‘Børsen’, Denmark’s leading daily business newspaper (Bess et al. 2020), exemplified the discourse.

Data

To test our hypotheses, we pooled a unique longitudinal dataset of a representative sample of young (started between 2003 and 2013) Danish firms. The dataset included data collected before the Danish coronavirus lockdown (11 March 2020) and after the first lockdown was cancelled but before the second wave kicked in. Specifically, we updated and supplemented a 2015 survey (Schlichter, Klyver, and Haug 2021) with administrative financial data from 2019 and a second-wave survey in October 2020.

In 2015, we identified all SMEs aged 2 to 12 years with 1 to 250 employees (together, 5,582 young firms). We randomly selected and contacted 1,255 for telephone-based interviews completed by one of the largest Danish survey companies. We interviewed CEOs or key management teams members in the few situations when the CEO was unavailable. Of those contacted, 604 agreed to participate (48% response rate), covering 10.3% of the young SME population. Of those 604 SMEs, 501 were still active in 2020.

We contacted those 501 SMEs in a second survey wave and received 371 answers (74% response rate). In the second wave, we completed 1 to 28 calls to each SME, averaging 6.3 calls. The three most frequent reasons for dropouts were ‘no response’ (n = 72), ‘denied by principle’ (n = 30) and voicemail (n = 13). After cleaning the data and eliminating missing values, we completed our analysis on a sample of 343.

Our results are generalizable to the cohort of SMEs between 2 and 12 years old in 2015. We compared those included in the 2020 and 2015 samples to control for survival and attrition bias and found no significant differences in entrepreneurial orientation 2015 (p = 0.14), formalization 2015 (p = 0.60) or liquidity ratio (p = 0.88).

The 5-year measuring gap between the independent and dependent variables represents a unique empirical advantage. The temporal separation enabled us to investigate the long-term effects of crisis preparedness (e.g. Gimmon and Levie 2021). Moreover, this setup constituted a tough empirical test. When our empirical findings confirm the relationships, we theoretically expected over such an extended time, the likelihood that randomness fundamentally explains the results diminishes significantly.

Measures

Dependent variables

Crisis strategies have been categorized in different ways (e.g. Wenzel, Stanske, and Lieberman 2020; Williams and Shepherd 2016). Often categorization and operationalization of crisis strategies are context specific related to the crisis being studied; such as the 11 September 2001 attacks (Li and Tallman 2011) or an economic recession (Beaver and Ross 2000). Inspired by Kraus et al’.s (2020) conceptualizations of crisis strategies during the COVID-19 pandemic our operationalization included three strategies: retrenchment, persevering and innovation. Using the similar dataset as Klyver and Nielsen (2021), we followed the operationalization of crisis strategies developed in that paper. We created formative measures for each strategy with representative items (measured in 2020) on a frequency-of-use scale from 1 (not at all) to 5 (as much as possible). For each construct, we calculated the average score across items.

Retrenchment was measured with five items describing the extent to which firms used dismissals, reduced hours, reduced expenses, used temporary employment or streamlined the firm. Persevering was measured with six items on how much firms completed employees’ vacations, established home workplaces, reorganized (e.g. shifted teams, refurnished space, instituted new hygiene procedures), obtained loans, negotiated contracts and terms with suppliers and stakeholders and offered training and competence-development courses. Innovation was measured with five items describing how much SMEs changed sales strategies (e.g. sales channel or method) or business models (e.g. pricing), developed new products or services for existing or new customers or obtained new customers for existing products or services as a consequence of COVID-19.

Independent variables

We operationalized and measured financial preparedness as the SMEs’ liquidity ratio (in percentages) because liquidity ratio is a precise indication of the available financial resources when a crisis hits (Cowling, Brown, and Rocha 2020). The liquidity ratio was extracted from the Danish Register data, specifically ‘Navne & Numre’. We used data for 2019, the most recent measure before the crisis hit. We operationalized organizational preparedness, understood as SMEs’ strategic agility and ability to react flexibly and quickly when environmental changes happen (Clauss et al. 2019), as low degree of formalization. In young SMEs the agility and ability to react flexibly and quickly is foremost enhanced with coordination being dominated by mutual adjustment rather than formal organizational structuring. Accordingly, SMEs with low formalization more likely possess the agility and ability to react in changing environments. We used Burton, Obel, and Håkonsson’s (2020) five items for organizational formalization to measure organizational preparedness in the 2015 survey. Sample items included, ‘To what extent does the SME rely on rules and policies for organizing work?’ and ‘To what extent are employees monitored and controlled?’ Organizational preparedness equals low formalization. We achieved a Cronbach’s alpha of 0.70.

Finally, we operationalized cultural preparedness – that is, the organizational mindset and orientation that define how firms approach obstacles and challenges – as entrepreneurial orientation (Dess and Lumpkin 2005; Wales et al. 2020). SMEs that are entrepreneurial oriented are more likely to allocate their attention towards value creation through entrepreneurial decisions, methods and actions when exposed to external crisis, and accordingly will be more culturally prepared. We used Hughes and Morgan’s (2007), 18 items and a unidimensional construct of entrepreneurial orientation to measure cultural preparedness. It was measured in the 2015 survey. Sample items included, ‘People in our business are encouraged to take calculated risks with new ideas’ and ‘We actively introduce improvements and innovations in our business’. The construct yielded a Cronbach’s alpha of 0.89, above the generally accepted threshold of 0.70 (Gliem and Gliem 2003). All independent variables were standardized with a mean of 0 and standard deviation of 1 before conducting regression analyses.

Control variables

We controlled for different firm characteristics. Firm age was captured in 2020 and measured as the years since the firm’s formal registration. Firm size was also captured in 2020 and measured as the total number of employees, and return on investment (ROI) was measured in 2019. All three measures were standardized. We also controlled for industry using the Danish Industrial Classification and Standard Industrial Groupings’ 10 categories. Because some categories had few observations, we pooled the financial and insurance, real estate and other business services categories. Each industry was a dummy.

To account for firms impacted differently by the crisis, we controlled for crisis impact. We categorized the extent to which firms experienced a decrease, increase or no effect on their turnover during the lockdown (11 March to 1 September 2020). We created dummies for crisis victim (decrease), crisis immune (no effect), and crisis exploiter (increase). Finally, we controlled for the perceived crisis length in months with the question, ‘When do you expect the COVID-19 crisis related to the societal economy will be over?’

Results

Descriptive statistics

Table 2 shows sample means, standard deviations and correlations. The highest correlation (0.52), supported by value inflation factors below 1, indicated no multicollinearity risk (Knoke, Bohrnstedt, and Mee 2002). An important observation from the correlations was that using one strategy increased the use of others.

Table 2. Means, standard deviations and Pearson correlations (n = 343).

	M	SD	1.	2.	3.	4.	5.	6.	7.	8.	9.	10.	11.	12.	13.	14.	15.	16.	17.	18.	19.
1. Innovation	1.76	0.93	1.00
2. Persevering	1.84	0.65	0.33	1.00
3. Retrenchment	1.71	0.73	0.51	0.42	1.00
4. Financial preparedness	1153	17451	0.01	0.12	−0.03	1.00
5. Organizational preparedness	16.59	4.04	0.15	0.01	−0.01	0.02	1.00
6. Cultural preparedness	64.30	12.00	0.14	0.06	0.03	0.06	−0.03	1.00
7. Firm age	12.69	2.25	0.02	−0.12	0.04	0.00	−0.02	0.01	1.00
8. Firm size (# employees)	2.78	1.23	−0.02	0.19	0.05	−0.04	−0.00	0.03	−0.03	1.00
9. Return on investment	7.71	23.00	−0.11	−0.15	−0.08	−0.02	0.02	0.05	0.07	.10	1.00
10. Agriculture, forestry and fishing	0.03	0.18	−0.12	−0.07	−0.09	−0.01	−0.02	−0.07	0.03	0.02	0.01	1.00
11. Manufacturing, mining, quarrying	0.15	0.35	0.05	0.08	0.09	−0.02	0.10	−0.03	−0.04	0.12	−0.05	−0.08	1.00
12. Construction	0.14	0.34	−0.25	−0.26	−0.19	−0.02	−0.07	−0.10	0.10	−0.05	0.08	−0.08	−0.17	1.00
13. Trade and transport etc.	0.36	0.48	0.13	−0.05	0.18	−0.04	−0.01	0.10	−0.04	−0.08	0.02	−0.14	−0.31	−0.30	1.00
14. Information and communication	0.10	0.29	0.05	0.05	−0.04	−0.02	0.08	0.06	0.01	−0.06	−0.05	−0.06	−0.14	−0.13	−0.25	1.00
15. Business services	0.18	0.38	0.04	0.15	−0.05	0.12	0.01	0.01	0.03	0.08	−0.03	−0.08	−0.19	−0.18	−0.35	−0.15	1.00
16. Public admin., education, health	0.05	0.22	−0.03	0.10	−0.04	−0.01	−0.02	−0.06	−0.11	−0.04	0.03	−0.04	−0.10	−0.09	−0.17	−0.07	−0.11	1
17. Crisis victim	0.39	0.48	0.22	0.21	0.35	−0.05	0.02	−0.08	0.04	0.05	−0.11	−0.08	0.04	−.0.13	0.11	0.00	−0.03	0.01	1
18. Crisis immune	0.30	0.46	−0.14	−0.13	−0.26	0.08	0.00	−0.04	−0.08	0.03	0.00	0.06	0.07	0.15	−0.16	−0.02	−0.02	0.03	−0.52	1
19. Crisis exploiter	0.31	0.46	−0.09	−0.09	−0.11	−0.03	−0.02	0.05	0.05	−0.08	0.11	0.02	−0.11	−0.02	0.05	0.01	0.05	−0.04	−0.54	−0.44	1
20. Crisis length perception	23.61	19.28	0.01	−0.01	0.03	−0.01	−0.06	0.03	−0.00	−0.04	0.07	−0.03	−0.02	0.17	0.02	−0.06	−0.10	0.02	0.09	−0.04	−0.06

Correlations above .11 are significant on a .05 level; correlations above .14 are significant on a .01 level (two-tailed).

Unstandardized values are reported for mean (M) and standard deviation (SD).

Multivariate statistics

We evaluated the impact of crisis preparedness and crisis strategies, considering all independent and control variables together, to account for potential confounding effects. We completed an ordinary least squares regression predicting the use of crisis strategy (Table 3). In Models 1a, 1b and 1c, we added the control variables and included the remaining crisis strategies not being predicted. Although our hypotheses are directional, we took a conservative approach and reported two-tailed tests.

Table 3. Ordinary least squares regression predicting use of crisis strategy.

	Retrenchment		Persevering		Innovation
	Model 1a	Model 2a	Model 1b	Model 2b	Model 1c	Model 2c
Firm age	0.04 (0.03)	0.04 (0.03)	−0.07* (0.03)	−0.07* (0.03)	0.03 (0.04)	0.02 (0.04)
Firm size	−0.00 (0.03)	−0.01 (0.03)	0.11*** (0.03)	0.12*** (0.03)	−0.06 (0.04)	−0.05 (0.04)
Return on investment	0.01 (0.03)	0.02 (0.03)	−0.07* (0.03)
Industry (reference = trade & transport)
Agriculture, forestry and fishing	−0.15 (0.18)	−0.17 (0.18)	0.05 (0.17)	0.07 (0.17)	−0.46 ^ϯ (0.25)	−0.00 (0.25)
Manufacturing, mining, quarrying	−0.03 (0.10)	−0.02 (0.10)	0.14 (0.09)	0.14 (0.09)	−0.07 (0.13)	−0.08 (0.13)
Construction	−0.13 (0.11)	−0.14 (0.11)	−0.11 (0.10)	−0.09 (0.10)	−0.40** (0.14)	−0.34* (0.14)
Information and communication	−0.28* (0.11)	−0.27* (0.11)	0.24* (0.11)	0.25* (0.11)	0.09 (0.16)	0.05 (0.15)
Business services	−0.28** (0.09)	−0.29** (0.09)	0.30*** (0.09)	0.32*** (0.09)	0.02 (0.13)	0.04 (0.13)
Public admin, education, health	−0.30* (0.15)	−0.36* (0.15)	0.44** (0.14)	0.47** (0.14)	−0.17 (0.21)	−0.03 (0.21)
Crisis context
Crisis immune	−0.35*** (0.08)	−0.34*** (0.08)	−0.09 (0.08)	−0.09 (0.08)	0.01 (0.11)	0.01 (0.11)
Crisis exploiter	−0.24** (0.08)	−0.22** (0.08)	−0.04 (0.07)	−0.06 (0.07)	−0.07 (0.11)	−0.09 (0.10)
Crisis length perception	0.00 (0.00)	0.00 (0.00)	0.00 (0.00)	0.00 (0.00)	0.00 (0.00)	0.00 (0.00)
Crisis strategy
Retrenchment			0.29*** (0.05)	0.30*** (0.05)	0.18* (0.08)	0.16* (0.08)
Persevering	0.33*** (0.06)	0.34*** (0.06)			0.53*** (0.07)	0.54*** (0.07)
Innovation	0.29*** (0.04	0.30*** (0.04)	0.09* (0.04)	0.08* (0.04)
Crisis preparedness
Financial preparedness (High liquidity ratio 2019)		−0.05^ϯ (0.03)		0.07* (0.03)		0.01 (0.04)
Organizational preparedness (low formalization 2015)		−0.07^ϯ (0.04)		0.00 (0.03)		0.15** (0.05)
Cultural preparedness (High ent’rial orientation 2015)		−0.03 (0.04)		0.03 (0.04)		0.12* (0.05)
Constant	0.90*** (0.13)	0.87*** (0.14)	1.10*** (0.12)	1.09*** (0.12)	0.60*** (0.19)	0.61*** (0.19)
Adjusted R square	0.39	0.39	0.30	0.30	0.29	0.31
Adjusted R square chance		0.00		0.00		0.03
F chance		2.227ϯ		2.100ϯ		5.017**

Β coefficients are reported; standard errors in parentheses.

ϯp < .1; *p < .05; **p < .01; ***p < .001(two-tailed).

Regarding financial preparedness, Table 3 shows that the liquidity ratio had a marginally significant negative impact on the use of retrenchment strategy (β = −0.05, SE = 0.03; p = .091), significant positive impact on using persevering strategy (β = 0.07, SE = 0.03; p = .020) and insignificant impact on using innovation strategy (β = 0.01, SE = 0.04; p = .786). This supports Hypotheses 1a and 1b and rejects 1c.

Regarding organizational preparedness, Table 3 shows a marginally significant negative impact of low formalization on using the retrenchment strategy (β = −0.07, SE  = 0.04; p = .058), supporting Hypothesis 2a. It insignificantly affected the use of the persevering strategy (β = 0.00, SE = 0.04; p = .963), rejecting Hypothesis 2b, and significantly positively affected using the innovation strategy (β = 0.15, SE = 0.05; p = .002), supporting Hypothesis 2c. Finally, in support of Hypothesis 4 concerning cultural preparedness, Table 3 shows that entrepreneurial orientation significantly positively affected the use of the innovation strategy (β = 0.12, SE = 0.05; p = .020).

Although not hypothesized, a significant observation emerged from the analysis: Whereas preserving and innovation strategies were insignificantly associated with crisis impact, crisis immunes (β = −0.35, SE = 0.08; p = .000) and crisis exploiters (β = −0.24, SE = 0.08; p = .001) used the retrenchment strategy less intensively than crisis victims.

Our effect sizes were not trivial. One standard deviation from average scores decreases or increase a strategy’s use by 3% to 9%. For instance, on average, SMEs scored 1.76 (on a 0–5 scale) on innovation strategy use. The SMEs with one standard deviation above average organizational preparedness scored 0.15 higher on innovation strategy use, a 9% increase.

Robustness tests

We ran two robustness tests to verify our results’ validity across different embeddedness in the COVID-19 situation. First, we ran robustness analyses with split samples of crisis impact to check whether our results varied among crisis victims, immunes and exploiters and found almost no inconsistency. All robustness tests provided coefficients in the same direction as the supported hypotheses, except Hypothesis 2a, with crisis immune firms showing a negative impact of organizational formalization. Thus, overall, the results are robust across crisis-impact conditions.

Second, we added a control variable. Specifically, we controlled for how much the SMEs used the three most popular government-funded support programmes (wage, sales and fixed-cost compensations). Because the three measures were highly correlated, we created an index from 0 to 3 depending on the number of programmes used. This eliminated the risk of multicollinearity. Our results were robust with the additional control variable.

Discussion

We investigated the extent to which SMEs’ financial, organizational and cultural pre-crisis preparedness affected the SMEs’ pursuit of specific crisis strategies (i.e. retrenchment, persevering or innovation) when an unforeseen, high-impact crisis hits. In addressing our aim, we considered how each firm was initially impacted by the crisis (i.e. crisis exploiter, crisis victim, or crisis immune).

Our results show differences in how intensively SMEs used crisis strategies. Notably, we find that crisis strategies are not mutually exclusive; SMEs use different strategies in parallel. Most importantly, we find that crisis preparedness matters to which strategies SMEs pursue. Financial preparedness (in terms of high liquidity ratio) enables SMEs to escape the retrenchment strategy; being an important escape as this strategy is potentially damaging in the long run (Klyver and Nielsen 2021; Wenzel, Stanske, and Lieberman 2020). This despite the fact that this strategy is common, often immediate, and inevitable, particularly used by challenged firms to ‘stop the bleeding’ (Bruton, Ahlstrom, and Wan 2003), which our results also support.

Financial preparedness allows SMEs to select alternatives to the retrenchment strategy, such as the more promising preservation strategy focused on maintaining relational commitments, key competences etc. that have been built in the past. Albers and Rundshagen (2020) along with Wenzel and colleagues argue that the preservation strategy is effective for longevity, though they note also that if the crisis lasts too long, it may be difficult to maintain this strategy. Slack resources might be diluted.

Regarding organizational preparedness, we find that the less formalized SMEs, and thereby more organizational prepared, engage less in retrenchment strategies and more in innovative strategies. Although formalization over time assists firms to grow and improve effectiveness under ‘normal’ market conditions (Greiner 1998), it has a potentially dark and constraining side. Formalization has a negative effect on explorative innovation in dynamic environments (Jansen, Van Den Bosch, and Volberda 2006). With formalization comes rigidity, restricting the new learning and flexibility associated with organizational preparedness that likely facilitate firms to perform and survive crises (Barnett and Pratt 2000). Finally, being culturally crisis-prepared (in terms of entrepreneurial orientation) seems productive during hostile crises (Lee et al. 2019). It at least drives SMEs to pursue a more intensive innovation strategy perceived as effective (Klyver and Nielsen 2021; Wenzel, Stanske, and Lieberman 2020).

Although not hypothesized, we find intriguing results regarding the role of crisis impact – how firms’ turnover was immediately affected after the lockdown (Osiyevskyy, Shirokova, and Ritala 2020). Crisis impact matters for crisis retrenchment strategy. Negatively influenced SMEs reduce costs by using a retrenchment strategy. Thus, for crisis victims, retrenchment seems to be a survival strategy. However, for crisis immunes or exploiters, the retrenchment strategy potentially has a different role – creating space for strategic flexibility and, thus, other more costly strategies. It may also function as a contingent or even necessary condition for pursuing strategies that point to the future: persevering and innovation strategies. Figure 1 is our attempt to provide a visual overview of our results.

Figure 1. Visual overview of findings.

Contributions

Our study contributes to improving SMEs’ future crisis preparedness and crisis strategies. We contribute to the burgeoning literature on SMEs and extraordinary external crises (see Miklian and Hoelscher’s 2021 review). Our research answers repeated calls to focus not only on separate, fragmented aspects of the SME crisis management process (Doern, Williams, and Vorley 2019; Williams et al. 2017): ‘Most researchers focus on a “slice” of the timeline’ (Buchanan and Denyer 2013, 209). That is, we explore the intricate interplay of various dimensions within SMEs’ crisis management processes, offering novel longitudinal insights. The very essence of our findings offers novel longitudinal insights integrating various parts of the SMEs’ crisis management processes. By bridging research about being prepared (i.e. pre-crisis preparedness) with research on strategic responses during a crisis, we show how different crisis preparedness dimensions (i.e. financial, organizational and cultural preparedness) matter to how SMEs react. With this, we offer new explanations for why SMEs are not using the same crisis strategies. Crisis preparedness is an important precondition defining SMEs’ possible crisis reactions and ability to react to shocks.

Notably, our findings challenge the prevailing assumption that all SMEs are equally and sufficiently prepared to pursue any crisis strategy. One intriguing insight of our study is the identification of a counterintuitive phenomenon: certain SMEs opt for a crisis strategy – retrenchment – that typically proves ineffective (Klyver and Nielsen 2021; Wenzel, Stanske, and Lieberman 2020) which is caused by low financial preparedness and high organizational preparedness in form of low organizational formalization. In this way, our study uncovers significant heterogeneity in crisis preparedness across firms and how this matters for their chosen crisis strategies.

Another intriguing result relates to organizational preparedness. Our results point in the direction of the agility and flexibility perspective (Clauss et al. 2019; Gentile-Lüdecke, de Oliveira, and Paul 2020; Jansen, Van Den Bosch, and Volberda 2006) rather than business continuity management perspective (Elliott, Swartz, and Herbane 2010; Herbane 2019; Watters 2014). As young SMEs often are constrained by liabilities of newness (Stinchcombe 1965) and smallness (Aldrich and Auster 1986), our results suggest they are benefit and are enabled to pursue an innovation strategy during external crises from being agile and flexible achieved and prepared through low formalization.

In extension, by highlighting the COVID-19 contextual setting, we specifically extend and contribute to the SMEs and COVID-19 crossroads literature with new empirical insights. Among the extensive conceptual (Giones et al. 2020; Morgan et al. 2020; Ritter and Pedersen 2020) and empirical contributions (Bergenholtz, Klyver, and Vuculescu 2023; Björklund et al. 2020; Groenewegen, Hardeman, and Stam 2021; Kraus et al. 2020; Tang, Zhang, and Lin 2021; Thorgren and Williams 2020), we provide a pre-COVID-19 explanation to strategic reactions. This study thereby extends the primary focus in COVID-19 studies on reactions during the crisis using a ‘during crisis’ design (Björklund et al. 2020; Klyver and Nielsen 2021; Kraus et al. 2020) by using a ‘before-during crisis’ design. This involves not only a theoretical contribution integrating the research on pre-crisis preparedness with research on strategic responses during a crisis. It also involves a methodological advancement with longitudinal data collected both before and during the crisis that enabled us to thoroughly connect the literatures. Thus, due to the unique before-during research design we accommodate how SMEs entered the crisis with different preparation levels in the first place and how that related to their later choices of crisis strategies.

Future research implications

Our study has implications for future research. The importance of crisis preparedness and crisis strategies is not straightforward. Future research needs to more deeply investigate how preparedness-component combinations shape crisis strategies and how preparedness and crisis strategies together influence SMEs’ crisis outcomes (e.g. competitiveness and profitability). Additionally, more dynamic and longitudinal understandings of how preparedness and crisis strategies evolve together during a crisis are needed.

Generally, our understanding of the temporal crisis preparedness and crisis strategies dimensions needs more consideration. Future studies could, for instance, investigate how different crisis preparedness types affect the crisis strategy combinations during a crisis and the sequence of pursuing various strategies. When looking into a crisis’s temporal dimensions, a possible research question could be how much a short-term retrenchment strategy early during a crisis – followed by investments in preserving or innovation – could buffer or substitute for financial preparedness. Another question might be whether certain crisis strategies are generically ineffective or conditioned upon crisis preparedness. Would SMEs engaging in innovative crisis strategies benefit more (or only) from such a strategy if they were simultaneously organizationally and culturally prepared?

Analogical transfer of lessons from one crisis context to another must be done cautiously, considering similarities and differences between contexts (Gavetti and Rivkin 2005). However, although crises differ across many dimensions (Miklian and Hoelscher 2021; Rauch and Hulsink 2021), they also have universal attributes, making analogical transfer meaningful. For instance, the end or reduced severity of the worldwide COVID-19 crisis reminds us of the ongoing climate crisis. Although different on many dimensions (e.g. suddenness and duration), analogical transfer of learnings from the COVID-19 crisis to the climate crisis has significant potential (von Hagke et al. 2022). Presumably, preparedness and strategic reaction have universal elements we can bring from one to another.

Practical implications

Crises are becoming increasingly frequent, a phenomenon often labelled a poly-crisis (Tooze 2022) or a perma-crisis (Zuleeg, Emmanouilidis, and Borgesde de Castro 2021) in which crisis conditions are not the exceptions from the normal but rather the ‘new normal’ (Miklian and Hoelscher 2021). This implies that SMEs crisis management is becoming a more important and permanent management tasks that should be included in the everyday tactical and strategic decisions. Our research offers insights that facilitate managers in understanding crucial links between preparedness and strategy, being essential for effectively handling this task.

It is well known also that SMEs have lower formal crisis preparedness levels than larger firms (Herbane 2013). However, that does not mean they do not need to deal with preparedness. On the contrary, SME managers must consider crisis preparedness as involving a broader spectrum of awareness than just crisis preparedness planning, all contributing factors to protect SMEs in short and long term, making them less vulnerable and more capable of acting during crisis.

Financial preparedness is about ensuring SMEs withstand a reasonably high liquidity ratio to enable responses and reactions when a crisis hits. It requires SMEs to save some liquidity, not reinvest it all in development or new growth. Alternatively, SMEs can improve their financial preparedness through financial bootstrapping (Winborg and Landström 2001), such as accelerating invoicing, charging interest on overdue payments, delaying payments to suppliers and leasing rather than buying equipment. To advance organizational preparedness, SME managers should focus on developing an agile, flexible organization that can easily adapt to new circumstances (Gentile-Lüdecke, de Oliveira, and Paul 2020). For instance, it should not formalize more procedures than necessary and eliminate dependencies on a few specific employees, suppliers, or customers. Finally, SME managers can build crisis preparedness by developing an entrepreneurial-oriented culture (Wales et al. 2020). This might involve creating a culture that allows risk willingness, embraces mistakes and formally and informally promotes proactiveness and innovativeness among employees.

Unfortunately, nothing about crisis preparedness is simple: What works under normal conditions may not work in crisis periods. Rather than simply preparing ‘as much as possible’, it requires a balance. Crisis preparedness has a built-in dilemma of prioritizing crisis periods over normal times. In the longer run, preparedness can cannibalize the SMEs’ success during normal times. For instance, being financially prepared with a high liquidity ratio implies the business will not reinvest as much profit into developing and growing the business. This approach could slow growth; these firms might even be penalized with lost competitiveness compared to firms that invest more (but are less crisis-prepared). Similarly, organizational formalization, which can make business procedures and routines smoother and more effective under normal conditions, might become hurdles during a crisis. Thus, preparedness is a matter of balance – a matter of preference for risk willingness and prioritizations.

Limitations

Although our results are based on a representative sample of SMEs (in Denmark 2015) and data points over time from different sources, this study has limitations. First, it might be biased by the Danish context. The COVID-19 crisis hit various parts of the world differently in timing and intensity. Governments reacted by implementing different measures to manage the virus and the economy (Born et al. 2021; Sebhatu et al. 2020). These regional differences matter (Chetty et al. 2020); they influence how SMEs are affected and should react strategically. We studied SMEs in Denmark, an economically healthy and reasonably successful country. Our results may not generalize to different regions or contexts, such as countries less economically healthy before the pandemic or unsuccessful in weathering the crisis.

That said, because our hypotheses were generically developed based on crisis management theory and not specifically considering the Danish context, we only expect effect sizes to vary; the different directions of the preparedness – crisis reaction links are unlikely to change. Thus, our results are rather robust related to COVID-19 government lockdowns or future pandemic-related government lockdowns. They are less robust when considering completely different external crises (e.g. natural disasters).

Second, although we have reached the end of the pandemic, no one yet knows the full consequences of COVID-19. We cannot know what SMEs ‘should have done’ – to prepare and cope – until we reach far beyond the other side of the crisis. More longitudinal data, including the period after the crisis, are needed.

Conclusion

External crises are becoming increasingly frequent and challenges SMEs’ survival and performance, and thereby making crisis management both before and during a crisis increasingly critical. Our study demonstrates that SMEs react strategically differently during a crisis depending on their financial, organizational and cultural preparedness before the crisis hit. Crisis management is something SMEs should think of and initiative already before a crisis hits to be prepared and to enable them to pursue the crisis strategies they prefer.

Acknowledgments

We are grateful to the comments and feedback received the Nordic Conference on Small Business (NCSB) at University of Southern Denmark, the DRUID conference at Copenhagen Business School, and the IDEC conference at INSEAD, all in 2022. We acknowledge the funding from Danish Industry Foundation (grant number: 2020-0163) and collaboration with SMEdanmark, Business Kolding, and Erhvervshus Sydjylland.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The work was supported by the Danish Industrial Foundation (Industriens Fond) [2020-0163].