Tailwinds

How Do Tailwinds Work in Business?

Tailwinds in business are defined as positive trends and developments that have the potential to support a company’s progress toward growth and profitability.

In the context of aviation, the term “tailwind” implies that the wind is blowing in the same direction as the aircraft, thereby reducing resistance and supporting its initiatives (i.e. positive momentum).

Therefore, a tailwind in business carries a positive connotation and describes an opportunity that can facilitate growth and market expansion, assuming the management team can play its cards right.

Tailwinds are inherently positive in business as they represent favorable conditions that can enhance a company’s growth and profitability.

From the perspective of a company’s management team, navigating the competitive environment is akin to flying an aircraft, where tailwinds represent the positive forces that help propel the company forward.

Generally speaking, a tailwind is deemed to be a beneficial factor with the potential to enhance a company’s revenue growth trajectory and margin profile, thereby enabling management to capitalize on favorable market conditions.

For example, a robust economic environment coupled with low interest rates usually coincides with increased consumer spending (and an uptick in economic activity), which benefits businesses ranging from small to mid-sized businesses (SMBs) to large enterprises across a broad range of sectors.

Tailwinds in Business: Common Examples

The following list contains examples of tailwinds that companies often encounter in real life:

• Economic Growth ➝ Positive economic sentiment can lead to increased consumer spending, benefiting companies across various sectors. For instance, a growing gross domestic product (GDP) often correlates with a higher level of disposable income, which can improve sales for consumer goods companies.
• Technological Advancements: Innovations that improve efficiency or create new market opportunities can serve as significant tailwinds. For example, the recent advancements in Gen AI tools have provided a tailwind for companies in the clean energy sector.
• Regulatory Changes: Favorable regulatory changes, such as tax cuts or deregulation, can be advantageous to certain businesses.
• Market Expansion: Entering new markets or expanding product lines can create additional revenue streams and growth opportunities.

Tailwinds vs. Headwinds in Business: What is the Difference?

While tailwinds are positive force multipliers with the potential to propel a company forward, headwinds are negative obstacles that a company encounters that present a risk to its growth and profitability, hindering its progress to date.

Tailwinds improve a company’s odds of attaining near-term growth and profitability, whereas headwinds can impede its growth trajectory and force management to alter its business model. Just as headwinds slow down the front end of a plane, in business terms, headwinds refer to situations that may cause a decline in profits, revenue, and growth.

The Fed—the central government in the United States (US)—raising interest rates in response to concerns of rising inflation can increase borrowing costs, which can act as a headwind for practically all industries (i.e. higher cost of debt).

However, a decline in oil prices can serve as a tailwind for the airline industry by reducing fuel costs, yet the reduction in prices can be perceived as a headwind for the oil and gas (O&G) industry.

The point here is that the classification of an emerging trend or new development in the market as a “headwind” or “tailwind” is a matter of perspective.

That said, understanding the flow of tailwinds to capitalize on—including the headwinds to mitigate risk against—is a critical skill set needed by a company’s management team to navigate the changing competitive landscape effectively.

Are Tailwinds Positive or Negative in Business?

Tailwinds are inherently positive in business as they represent favorable conditions that can improve a company’s growth trajectory and profitability, either on a near-term or long-term basis.

Simply put, a tailwind is a favorable condition or development in the market that can serve as growth catalysts that propel a business forward, akin to a wind pushing the tail of an aircraft, thereby reducing resistance and aiding its progress (i.e. flight trajectory).

• Tailwind ➝ Positive Trend or Development in the Market (“Force Multiplier)
• Headwind ➝ Negative Trend or Development in the Market (“Hurdle”)

However, companies must recognize and strategically leverage a tailwind to maximize the benefits retrieved.

The decision to neglect or fail to capitalize on a given tailwind represents a missed opportunity, which, if it is a continuous occurrence, will result in suboptimal performance.

The potential upside derived from a tailwind is ultimately determined by the company’s strategic initiatives.

However, companies must recognize and strategically leverage the tools available to benefit from tailwinds to maximize their odds of attaining a favorable outcome.

The careless decision to neglect or an ineffective strategy to capitalize on tailwinds can cause a company’s operating performance to be sub-par from the missed opportunity.

Why? Business is a competition, after all, and missed opportunities for one company can be an inflection point for a competitor (e.g. an opportunity to steal market share from an incumbent and establish itself as a market leader).

On that note, companies must continuously adapt and modify their business model to ensure the long-term sustainability of their operating performance.

In fact, even companies with an economic moat must constantly adapt to changing market conditions and consumer preferences.

If a company becomes complacent with its current standing in relation to the competitive landscape, that is likely the beginning of the end.

The complacent company will not only constantly miss out on opportunities to achieve significant growth and expansion but also risk falling behind secular trends, akin to the downfall of Blockbuster.

^{Downfall of Blockbuster Case Study (Source: Business Insider)}

Tailwinds in Business: What are the Benefits for Growth?

The benefits of tailwinds to a business are as follows:

• Enhanced Growth and Profitability ➝ Tailwinds can significantly improve a company’s growth and profitability. For instance, a robust economic environment can lead to increased consumer spending, which benefits companies across various sectors, especially for discretionary goods. Likewise, technological advancements can create new market opportunities and improve operational efficiencies, which can contribute toward more revenue and higher profit margins.
• Market Expansion ➝ Favorable market conditions, such as regulatory changes or economic booms, can open up new markets for businesses. For example, deregulation in certain industries can reduce barriers to entry that historically impeded the growth of a specific company. In effect, companies can expand their operations and reach new customers — so market expansion can coincide with obtaining more revenue streams (and growth opportunities).
• Investor Sentiment Improvement ➝ Positive tailwinds can enhance the overall market sentiment among investors and other market participants. If investors are optimistic about the current market conditions and long-term outlook, more capital will flow into the equities market, while borrowing debt from lenders will become more readily accessible (and the borrowing terms will be more favorable).
• Competitive Advantage (“Moat”) ➝ Companies that effectively leverage tailwinds can gain a competitive edge over their peers that operate in the same (or an adjacent) market. Companies can capitalize on favorable conditions and outperform their competitors by remaining attuned to market trends and staying agile in their business strategies. For instance, companies that quickly adapt to technological advancements can stay ahead of the curve and capture a larger market share, which improves the odds of establishing a durable economic moat that protects their long-term profitability and existing market share.

Business Strategy: How to Leverage Tailwinds

Once a tailwind is identified, a business must adopt certain strategic measures to capitalize on the opportunity and reap the benefits soon after.

• Market Research ➝ Companies must continuously monitor market trends to identify emerging tailwinds. Conducting market research is necessary for a management team to anticipate and capitalize on favorable conditions, ensuring the company is well-positioned to take full advantage of growth opportunities that arise.
• Innovation ➝ Companies that actively allocate capital toward research and development (R&D) are usually the ones that capitalize on technological advancements (and are “ahead of the curve”). While there are many moving pieces, a head start relative to competitors offers a company access to new market opportunities, which can improve growth and profitability.
• Strategic Partnerships ➝ Companies that form strategic partnerships (or alliances) with other companies can enhance their market reach and capabilities. Forming partnerships can open the door to access to new technologies, markets, and end markets (i.e. customer base) further down the line, which provides companies with more options to capitalize on tailwinds more effectively.
• Agility ➝ Companies must retain some degree of flexibility in their operations to quickly adapt to changing market conditions. In short, agile companies are better positioned to pivot their strategies to align with emerging tailwinds, ensuring sustained growth and profitability.

Tailwinds: What are the Potential Pitfalls?

While tailwinds are generally positive, there are potential pitfalls if not managed properly:

• Complacency ➝ Companies can easily become complacent amid periods of favorable conditions, reducing the urgency to innovate and plan out new strategic initiatives. Instead, businesses must remain attentive at all times and continue to reinvest in growth (i.e. Capex, R&D), even when the market conditions are favorable and operating performance is positive.
• Overreliance on M&A ➝ The reliance on strategic M&A as a defensive tactic to fend off the risk of new market entrants can be a risky move. Management must ensure its company’s operations have robust internal capabilities and strategies in place to sustain growth and innovate, even if external conditions change. The strategy of acquiring any startup and new entrant that poses a material risk to the business can easily backfire via overpaying for the acquired asset (or the target could reject the acquisition offer).
• Neglecting Headwinds ➝ Focusing solely on identifying the next tailwind while ignoring the potential risk of headwinds can be detrimental to a business’s longevity. Companies must continuously analyze the market environment for external risks and be prepared to address challenges that arise directly because changes usually occur at random.

Tailwind Example: Telehealth Sector and COVID-19 Pandemic

COVID-19 acted as a significant tailwind for Teladoc Health, Inc. (TDOC), a virtual healthcare platform and provider of telemedicine services.

The onset of the pandemic in early 2020 and the subsequent lockdown period were unprecedented events that transformed the entire healthcare sector because patients sought reliable alternatives to in-person visits with regulatory approval.

The favorable changes in regulatory policies, combined with increased consumer and provider acceptance, contributed to the normalization and increased adoption of telehealth services.

^{Teledoc Tailwind Example — Revenue Growth (Source: TDOC 10-K)}

The COVID-19 pandemic led to many regulations becoming less stringent, which facilitated the rapid adoption and expansion of telehealth since the barriers that had historically hindered the telemedicine sector were removed.

According to the SEC filings of Teladoc, the platform saw its total visits rise substantially, with a 139% year-over-year (YoY) increase in Q4 2020 to 3+ million visits and a 156% increase for the full year to 10.6 million visits. By 2021, Teladoc’s virtual visits reached 14.7 million.

Given the sudden uptick in market demand and surge in virtual visits, Teladoc’s revenue expanded substantially.

In 2020, the company’s revenue grew by 98% year-over-year to $1.1 billion. The outsized growth trajectory continued into 2021, with a further 86% increase, exceeding $2 billion.

^{Teledoc Tailwind Example — Revenue Growth (Source: TDOC 10-K)}

The necessity of remote consultations during the pandemic led to a shift in perception, with many patients and providers recognizing the benefits of telemedicine.

• New Product and Service Offerings ➝ The pandemic prompted Teladoc to expand its services and capabilities. Teladoc introduced comprehensive virtual care, including chronic, primary, acute, and specialty care, which helped meet a broader range of healthcare needs and solidified its position as a leader in the telehealth industry. In particular, mental health services saw significant demand via its BetterHelp platform (and MyStrength Complete approach), integrating mental health care into Teledoc’s portfolio of service offerings.
• Strategic Acquisition ➝ Teladoc engaged in strategic acquisitions to enhance its service offerings and expand its market reach. The acquisition of InTouch Health was a pathway for Teladoc to grow its hospital-based telemedicine division significantly.
• Corporate Partnerships ➝ Teladoc formed partnerships with major healthcare organizations, employers, and insurance companies, broadening its customer base and integrating its services more deeply into the healthcare system.
• Infrastructure Improvements ➝ Teledoc improved its technology and infrastructure to handle the increased volume of virtual visits to ensure high-quality treatment and timely care.
• Human Capital ➝ Teladoc onboarded thousands of additional board-certified, licensed physicians—more than doubling the number of doctors available for consultations—to meet the sudden uptick in patient demand.

Before the pandemic, Teladoc and other telehealth providers faced significant regulatory hurdles that limited the widespread adoption of telemedicine.

• Geographic Restrictions ➝ Medicare telehealth services were restricted to patients in rural areas and specific healthcare facilities. The COVID-19 public health emergency removed these restrictions, allowing patients to receive telehealth services from their homes, regardless of location. One challenge was the requirement for doctors to be licensed in the state where the patient was located, which created barriers for patients seeking care from out-of-state specialists.
• Licensing Requirements ➝ State licensure requirements traditionally mandated that healthcare providers be licensed in the state where the patient was located. However, many states issued emergency waivers allowing out-of-state providers to offer telehealth services without the need for additional state licenses. Waivers were issued to allow out-of-state doctors to provide care across state lines, and reimbursement rates for telehealth services were increased to match those of in-person visits.
• HIPAA and Privacy Regulations ➝ The Health Insurance Portability and Accountability Act (HIPAA) imposes strict requirements on the use of technology for telehealth to protect patient privacy. During the pandemic, the Department of Health and Human Services (HHS) allowed healthcare providers to use non-HIPAA-compliant platforms like FaceTime and Skype for telehealth visits.
• Reimbursement Rate (and Coverage) ➝ Prior to COVID-19, the reimbursement rate for telehealth services was limited and varied significantly across payers, if not outright rejected. The pandemic prompted the Centers for Medicare & Medicaid Services (CMS) and private insurers to expand coverage and ensure payment parity between telehealth and in-person services. The reimbursement rates for telehealth services were often lower than those for in-person visits, which discouraged providers from offering telehealth services. Many states required insurers to cover telehealth but did not mandate payment parity, leading to financial disincentives for clinicians. The lack of payment parity meant that providers were often uncompensated for their telehealth services, making the decision to offer services at scale to be financially unsustainable.

Telehealth platforms are obligated to comply with strict security and privacy standards, which is an inherent characteristic of the healthcare industry and requires significant spending on technology and infrastructure.

Therefore, smaller-sized private practices and clinics with fewer resources often found the requirements challenging to comply with, reducing their capacity to offer telehealth services to patients — which illustrates the concept from earlier that stated the necessity to remain agile to adapt to changing market conditions. Otherwise, a tailwind for an industry (or sector) could serve as a headwind for a company incapable of adapting to changes in the competitive landscape.

The aforementioned regulatory changes and normalization of telemedicine—combined with the urgent need for access to remote healthcare amid the pandemic—presented Teladoc and other telemedicine providers with the opportunity to achieve substantial scale and meet the growing demand for virtual healthcare services.

But to reiterate from earlier, tailwinds present opportunities that can be either near-term or long-term benefits, as illustrated by Teladoc’s free fall in stock price post-COVID.

^{Teladoc Historical Stock Price Chart (Source: Google Finance)}