From Lockdown to a New Reality
From Lockdown to a New Reality
Restarting the economy is complex and difficult. Managing in the new reality may be even harder.
The greatest direct impacts of COVID-19 may be passing, but CEOs still face a risky, unknowable future. With the right toolkit, however, leaders can commit to big decisions amid uncertainty, manage ongoing risks, and accelerate digitization to compete in the new reality.
When COVID-19 struck, most companies responded admirably, taking quick and effective action to keep their employees safe, manage liquidity, and mitigate disruptions. That, however, may turn out to be the easy part.
The initial triage required numerous difficult decisions and trade-offs, but companies were still responding to a known (if unprecedented) threat, which could be handled using their standard processes and managerial toolkits. They mobilized emergency response teams to speed up decision-making, set up the infrastructure to enable their employees to work remotely, and found ways to manage cash flow, distribution, and supply chain issues.
Now comes the longer, harder struggle.
Now comes the longer, harder struggle. As companies try to "restart," they face far more daunting challenges: a long and deep recession sparked by an unprecedented plunge in demand and employment as well as a new post COVID-19 reality that we don’t yet fully understand. The recovery may be V-shaped, U-shaped, W-shaped, or even sawtooth-shaped. At this point, nobody knows. As we noted in our earlier paper, CEO mission: lean into the unknown, whatever form the recession takes, companies that move forward and invest in the future do better than those that "hunker down."
In this environment, figuring out how to move ahead is extremely challenging because the depth and speed of the downturn are unprecedented and because there is so much uncertainty. The process of restarting itself will be fraught. For the next 12 to 18 months—until an effective vaccine or treatment has been developed and widely administered—society and business will remain trapped in an impossible trade-off between human and economic health. Businesses will need to be ready for a whack-a-mole game of continual disruptions, as new outbreaks of SARS-CoV2, the virus that causes COVID-19, flare up across geographies and markets.
But the greatest challenge for many companies will be learning to manage in the post COVID-19 environment. The lockdown not only accelerated trends that had already been gathering force—such as the shift to e-commerce and the digitization of the economy—but also revealed glaring weaknesses in the super-lean, just-in-time, operating models that companies have been perfecting for the last two decades. Rising nationalism and geopolitical strife threaten the liberalized trading system that has spawned global supply chains. And, in the post COVID-19 world, it will be prudent to assume the likelihood of more potentially catastrophic risks—another pandemic, severe weather event or geopolitical crisis and, of course, in the long term, the potentially far greater impact of global climate change.
To manage through all of this complexity and uncertainty—and still find opportunities—business leaders will have to up their game. They will also need to employ a far more sophisticated managerial toolkit that will allow them to plan and execute their strategies under exceptional degrees of decision-making uncertainty, build resilience against continual business disruptions and make high-commitment strategic bets while still remaining agile and nimble—ready to respond to the next surprise.
The post Covid-19 reality
Many aspects of the post COVID-19 reality are still unknown and, for many businesses even unknowable.
Business leaders need to start thinking now about what, for many, could be a very different post COVID-19 reality. At this point, a relatively lengthy and unusually deep recession appears likely—one that may not resemble other recessions that business leaders have faced in the past. For example, in contrast to the 2008 "global" financial crisis—which, in reality, was confined mostly to the U.S. and Europe—the coronavirus is a truly all- encompassing crisis that simultaneously affects both the demand and supply sides of virtually all economies and industry sectors around the world.
The sudden and massive pullback from normal economic activity is truly unprecedented and has had a severe impact across numerous industries, including air travel, hospitality and retail. In 10 weeks ending on May 28, more than 40 million Americans filed for unemployment because they had been laid off or furloughed. A recent University of Chicago study estimates that as many as 42 percent of these jobs may never come back.1
The longer the recession lasts, the higher the likelihood of profound structural changes. While some industry sectors, such as telecom and high-tech, benefitted from the COVID-19 lockdown, others remain vulnerable. Many businesses may go bankrupt and some will never reopen; critical suppliers could disappear, leaving gaps in the value chain and making recovery harder for the survivors. Distribution systems may be truncated, limiting access to end customers. KPMG recently estimated that retail store closures could double in 2020, which could hurt apparel makers and suppliers of other consumer goods.2 Some sectors, such as live concerts, public transportation, restaurants, ride hailing, sports, and theme parks, may have to permanently rethink how to deliver their services without compromising the safety of customers.
It may be years, if ever, before consumer behavior reverts to pre-recession norms. The lockdown has already accelerated shifts in consumer preferences (such as shopping online and avoiding trips to the mall), and it could take years to restore healthy employment levels and consumer demand in hard-hit countries, such as Italy and the U.S.3 Early indications from China suggest that "revenge buying"—or catch-up shopping from the lockdown—may be muted. In a recent survey, Chinese consumers were evenly split: 42 percent expected to go back to pre-COVID spending while 41 percent planned to reduce spending.4
The post COVID-19 reality is also being shaped by long-term social and political forces, including rising inequality and a retreat from the post-World War II system of multilateral security and economic agreements, as well as the continual removal of barriers to the free flow of goods and services, capital and people. Increasing tension between the U.S. and China and within the European Union may only be the first symptoms of this trend. Surely, the new reality will be characterized by more disruptive events, too. Hurricanes, droughts, floods and other natural disasters are becoming more severe and frequent, while the impacts of climate change are becoming ever more apparent— destroying infrastructure and contributing to forced migration.
Now, businesses must develop and execute recovery and post- recession strategies when familiar metrics and longstanding assumptions are no longer reliable. Executives have rarely faced such a murky future. In the near term, there is the start- stop nature of recovery, as countries and states deal with fresh outbreaks. More importantly, many aspects of the post COVID-19 reality are still unknown and, for many businesses, even unknowable. And, as the COVID-19 experience has demonstrated, companies need to prepare for a world where the unimaginable can in fact occur (regularly) and where traditional strategies and tools will likely be inadequate.
A toolkit for managing in the post COVID-19 reality
What does it take to manage successfully now? We know that during a "normal" recession, companies that act thoughtfully with strategic foresight tend to do significantly better than those that simply hunker down.5 These companies rethink business models and (opportunistically) invest in growth, including via acquisitions; they move ahead, even when the economy isn’t. And, as many one-time leaders have learned after previous recessions, if you don’t make such pre-emptive strategic moves yourself, one or more of your competitors surely will.
But how do business leaders build sufficient strategic foresight to act when there is so much uncertainty? How do you create forecasts when all the normal metrics seem suddenly irrelevant? How will the ongoing challenges to the global trading system affect the company’s supply chain and footprint? How can you build strategy and operating models that are resilient to disruptive events such as a pandemic? How do you pursue performance improvement when you don’t have a handle on demand? How can companies commit just enough to make a strategy work but retain the flexibility to switch direction when circumstances suddenly change?
The answer is that leaders need to strengthen their organizational capabilities and add a few new skills to their strategy toolkits. First, to navigate an uncertain future, most companies need to get serious about scenario planning and other approaches to decision-making that are used under high levels of uncertainty. Second, many companies need to upgrade their strategic risk management capability, because even the best enterprise risk management (ERM) departments today seldom have the scope, capabilities, and clout to make companies resilient to lowfrequency, high-impact events such as COVID-19. Finally, while many things remain unclear about the post-COVID-19 reality, there is little doubt that the digitization of the economy and society will accelerate. Companies that do not operate effectively online and do not take advantage of all the digital tools to improve their operations, will be at a competitive disadvantage, no matter how smart their strategies are.
1. Decision-making under uncertainty
As business leaders try to rethink their strategies for the post COVID-19 environment, they can start with a few clear trends from which to extrapolate. But there are many new variables and potential outcomes to consider, too. New lifestyle and work style habits formed during the shutdown—shopping online, working remotely, avoiding business travel, and eating restaurant meals at home—may become permanent behaviors, accelerating the digital transformation of the economy. COVID-19 also revealed the weaknesses of the super-lean, just-in-time operating model that corporations have built. That will be an obvious area for strategic focus.
But much remains unclear, even unknowable. Understanding how macro trends that seem obvious now will translate into new opportunities and threats is never a straightforward exercise, even when uncertainty can be reduced to a single forecast. Today, companies need to be able to juggle multiple plausible future worlds as they formulate corporate and business unit strategies. That is far more challenging.
This is why business leaders need to master tools and techniques that go well beyond traditional forecasting. Simply put, most companies need to develop far more sophisticated scenario planning capabilities. Today, relatively few companies regularly use scenario planning at all; even fewer do it well. For example, what many companies call scenario planning consists merely of developing base-case, “best guess,” and worst-case industry and sales forecasts. True scenarios, by contrast, describe plausible alternative end-states under which the company would make materially different strategic, capital investment, and operational decisions (Exhibit 1).
High-commitment decisions and trade-offs within and between different scenarios can then be further analyzed using a range of techniques (Exhibit 2). Game and real options theory help companies understand the competitive landscape and can be used to break all-or-nothing decisions into smaller pieces to better assess the risk/reward trade-offs. War gaming helps decision-makers anticipate how competitors might act (and react) under various scenarios. Table-top games are routinely used by government agencies for emergency planning and can be used by companies to pressure test resilience to outside events, such as another pandemic, geopolitical crises, disruptive technology, and competitive actions such as market entry and new product introductions. Lastly, agent-based modeling can help make sense of complex systems—the impact of autonomous vehicles on the automotive industry, city planning and public transportation, delivery of goods and services, etc.
Scenario planning and game theory in action: U.S.-China relations
Nobody knows what will happen to U.S.-China relations, which have historically oscillated between cooperative and adversarial phases. But knowing what could potentially happen and what to prepare for is of critical importance to multinationals.
A combination of scenario planning and game theory can be especially useful in evaluating how things may play out over the next few years and why. These decision-making techniques allow us to model how two players would make a series of sequential moves that range from accommodative to confrontational, combative and even openly hostile.
Using these tools, we see there are four possible stances for each player (accommodative, confrontational, combative and hostile), with 16 potential outcomes, which can be synthesized into three major scenarios:
■ Long-term strategic rivalry—both nations are confrontational
■ Continual tit-for-tat—both nations are combative
■ Outright hostility—both nations are hostile
Each major scenario, in turn, contains several gradations or sub- scenarios. We are currently in a volatile tit-for-tat situation, which could persist for quite some time (i.e., for the duration of the entire 3-to 5-year business planning cycle of most companies). Eventually, it will either escalate into outright hostility or revert to long-term strategic rivalry. The outcome is, of course, truly unknowable at this time—hence the need for scenario planning, which should take into account factors such as the post COVID-19 economic recovery paths, changes in each country’s leadership, economic and technological development strategies, decisions of other players such as the European Union, and a range of exogenous factors, including perhaps another epidemic.
2. Strategic risk management
Uncertainty and risk are, of course, inextricably linked: as uncertainty rises, so do the risks. To be fair, most companies have competent ERM functions, which have become very good at managing the more frequent discrete risks, such as currency swings or regulatory compliance. But few, if any, ERM departments are equipped to deal with the kind of systemic risks that decision-makers must think about today and which require more sophisticated toolkits (e.g., scenario planning), greater integration with the strategic planning function, and a seat at the executive decision-making table.
The list of such systemic risks is getting longer all the time. As (geo)political tensions rise, the impact of global climate change is becoming more concrete, and new technologies are creating security risks and exacerbating societal tensions. And, as COVID-19 has shown, there is a growing risk that the global trading system that was developed after World War II could unravel, as geopolitical tensions and a general retreat from multilateral agreements may force companies to change where they operate and which markets they serve (Exhibit 3).
An immediate and tangible risk is continuing reliance on just-in- time supply chains and other lean operating models. The supply- chain disruptions that immediately rippled through manufacturing and retail when COVID-19 erupted in China proved how complex and fragile just-in-time supply chains have become. It also demonstrated the downside of relying too much on any single geography. In the future, companies must rethink the location and resilience of their supply chains and operating footprints, including the tax implications, instead of optimizing primarily to achieve lowest costs and efficiency.
To mitigate these risks, companies need to diversify their supplier base and pre-emptively invest in some level of redundancy at critical bottlenecks in their networks. They should also consider investing in war gaming various scenarios and contingency planning to improve their ability to respond quickly when disruptions do occur. This includes, for example, developing alternative product designs in case of key parts and materials shortages.
The challenge, of course, is that all of these measures have a cost. While some investors may pay more attention to how companies manage risk after COVID-19, we expect that they will continue to reward the most profitable competitors, which may limit how much companies in highly competitive markets may be able to invest in de-risking their businesses and supply chains.
3. All things digital
The process of digitizing the economy has been under way for many years. But the COVID-19 response has accelerated digitization, so that to remain competitive, companies will need to understand where they stand today and how much work they still need to do to prepare for tomorrow (Exhibit 4).
Not surprisingly, e-commerce adoption jumped during the lockdown. For example, even consumers who had never bought groceries online began using services such as Instacart.6 Car shoppers who could not visit a showroom bought cars through dealer websites and employees who only a few weeks ago made the daily commute to work have suddenly grown quite accustomed to working remotely by themselves.
These trends appear to be "sticky"—eMarketer estimates the online share of retail sales will grow 18 percent in 2020, while brick-and-mortar retail will fall by more than 10 percent.7 This will force traditional retailers to accelerate store closings and expansion of online shopping. Over three-quarters of likely car buyers say they want an all-digital shopping experience8. Twitter made headlines in May when it announced that employees never have to return to the office after the COVID-19 lockdown and more than half of employers polled by Gallup said they will allow workers to work from home more after COVID-19.9 If remote work becomes the norm for more employees, companies can look forward to some cost savings, but they will also need to upgrade digital capabilities.
Rising use of e-commerce and remote work will drive demand for a range of companies—from broadband services to makers of collaboration software. Cyber security firms are also likely to experience a boom as consumers do more things online, creating new opportunities for hackers and cyber criminals. Employers will also want to make sure that remote employees are not raising cyber risks unnecessarily.
Accelerated digitization will likely be manifested in increasing automation, too. The 2001 and 2008-09 recessions led to "jobless recoveries," in part because companies invested in labor-saving technologies during the downturns. This made it unnecessary to call back all laid off workers when demand returned—it also accelerated profit growth, thanks to higher productivity and lower costs. According to one estimate, 88 percent of "automatable" jobs have been lost permanently during these recessions.10
A recent survey by Forrester Research indicates that this pattern will likely hold after the current recession. The survey finds that companies plan to accelerate investments in "enterprise automation," in part to reduce the risks of having humans performing tasks that could be executed without interruption by machines in the event of another pandemic or major disruption. This time, the range of jobs that could be automated may be far wider, thanks to advances in artificial intelligence, robotic process automation and other technologies.11
Most companies must prepare for an exceptionally difficult 12 to 18 months ahead, and for what may very well be a very different world afterwards. Certainly, the super-efficient supply chains and low-friction global trading systems that companies have counted on are both subject to revision. Similarly, the depth and breadth of the emerging recession could permanently change industry structures, supply-demand patterns, and competitive dynamics. In some industries, companies may need to completely rethink both their strategy and operating models. And, in virtually all industries, companies will need to build resilience against rare— but inevitable and highly disruptive—events. It could be another pandemic. It could be flooding or famine that creates a refugee crisis and political instability. It could be (geo)political crises.
None of this will be easy. All of it will cost money—and lots of it. Companies will have to make high-commitment strategic bets, develop new organizational capabilities, upgrade their strategic and decision-making toolkits, and invest in making their organizations not just more resilient but also more flexible and agile. At the same time, the usual market, financial, regulatory, and competitive pressures won’t go away. Welcome to the new reality.
John is a principal in the Strategy practice. He has more than 25 years of industry and management consulting experience in North America, Europe and China. He specializes in developing growth strategies for clients in the automotive and industrial manufacturing sectors.
Talley has nearly 20 years of consulting experience working with clients across industries, including industrial goods, airlines, medical technology, health care, telecom, and automotive. He has specialized in operational transformation, including cost reduction (reorganization/delayering, headcount rationalization, procurement), sales growth (adjacent growth, pricing, sales force effectiveness, channel management), and talent management. Talley also has extensive experience in corporate growth strategy and business development, M&A (including strategic due diligence and post-merger integration), and business model innovation.
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- Source: Jose Maria Barrero, Nick Bloom, and Steven J. Davis, COVID-19 Is Also a Reallocation Shock, Becker Friedman Institute, University of Chicago, May 5, 2020
- Source: Retail after COVID-19: A challenging new reality, KPMG, May 2020
- Source: Retail after COVID-19: A challenging new reality, KPMG, May 2020.
- Source: COVID-19 in China: The Road of Recovery, Ipsos, April 2020.
- Source: CEO Mission: Lean into the unknown, KPMG, April 2020.
- Source: Retail after COVID-19: A challenging new reality, KPMG, May 2020.
- Source: US Ecommerce 2020 Coronavirus Boosts Ecommerce Forecast and Will Accelerate Channel-Shift, eMarketer.com, June 8, 2020.
- Source: Anticipating the green flag: Accelerating a COVID-19 exit for auto retailers, KPMG, April, 2020.
- Source: Jim Harter, How Coronavirus Will Change the ‘Next Normal’ Workplace, Gallup, May 1, 2020.
- Source: Nir Jaimovic and Henry E. Siu, Job Polarization and Jobless Recoveries, National Bureau of Economic Research, August 2012 (Revised November 2018).
- Source: Robert Wright, “Workplace automation: how AI is coming for your job,” Financial Times, Sept. 29, 2019.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.