It
will be quite some time before we
understand the full impact of the Covid-19 pandemic. But the history of such
shocks tells us two things. First, even in severe economic downturns and
recessions, some companies are able to gain advantage. Among large firms doing
business during the past four downturns, 14% increased both sales growth rate
and EBIT margin.
Second, crises produce
not just a plethora of temporary changes (mainly short-term shifts in demand)
but also some lasting ones. For example, the 9/11 terrorist attacks caused only
a temporary decline in air travel, but they brought about a lasting shift in
societal attitudes about the trade-off between privacy and security, resulting
in permanently higher levels of screening and surveillance. Similarly, the 2003
SARS outbreak in China is often credited with accelerating a structural shift
to e-commerce, paving the way for the rise of Alibaba and other digital giants.
In the following we’ll
discuss how companies can reassess their growth opportunities in the new
normal, reconfigure their business models to better realize those
opportunities, and reallocate their capital more effectively.
Strategic
Positioning :Reassess Growth Opportunities
The Covid-19 pandemic has
severely disrupted global consumption, forcing (and permitting) people to
unlearn old habits and adopt new ones. A study on habit formation suggests that
the average time for a new habit to form is 66 days, with a minimum of 21 days.
As of this writing, the lockdown has already lasted long enough in many
countries to significantly change habits that had been the foundation of demand
and supply.
Companies seeking to
emerge from the crisis in a stronger position must develop a systematic
understanding of changing habits. For many firms, that will require a new
process for detecting and assessing shifts before they become obvious to all.
The first step is to map the potential ramifications of behavioral trends to
identify specific products or business opportunities that will most likely grow
or contract as a result. Consider how the pandemic has caused people to
stay at home more. Implications include an increase in home office
refurbishment, driving greater demand for products ranging from paint to
printers. Unless we sensitize ourselves to new habits and their cascading
indirect effects, we will fail to spot weak signals and miss opportunities to
shape markets.
Reconfigure
Your Business Model
new business model will
be shaped by the demand and supply shifts relevant to your industry. Many
manufacturing companies, for example, will be profoundly affected by the
structural and likely permanent shocks to globalization brought on by the
pandemic. With big markets such as the United States raising trade barriers,
for example, many companies will need to reshore critical components in their
supply chains—from R&D down to assembly.
To figure out what
business model the new normal requires, you need to ask basic questions about
how you create and deliver value, who you’ll partner with, and who your
customers will be.
Change
Management: Reallocate Your Capital
It may be psychologically
hard to do during a crisis, when cash flows are stressed, but now is precisely
the time to take a few well-considered risks. Research shows that the most
successful companies not only invest more than their peers in new opportunities
but also put their eggs in fewer baskets, devoting more than 90% of net
spending to segments with higher growth and returns. These companies recognize
that a crisis offers an opportunity to carve out a new competitive position.
Unfortunately, many
companies are still defaulting to traditional habits of “peanut-buttering” new
funding across the business and, when necessary, making horizontal cuts rather
than targeted ones. According to BCG’s survey of leading firms, as of May 2020
only 39% of companies had modified their investment and capital allocation
plans to target new growth drivers, and of that minority, only half had made
investments in new business models.
CONCLUSION
In times of crisis, it’s
easy for organizations to default to old habits—but those are often the times
in which new approaches are most valuable. As companies position themselves for
the new normal, they cannot afford to be constrained by traditional information
sources, business models, and capital allocation behaviors. Instead they must
highlight anomalies and challenge mental models, revamp their business models,
and invest their capital dynamically to not only survive the crisis but also
thrive in the post-crisis world.