During a crisis, the immediate reaction is often to default to old habits. That may work for a while – as it did in the financial crash of 2008, where, although there were some spectacular corporate collapses, the eventual outcome looks surprisingly like business as usual.
But if the crisis creates not just temporary blips but lasting shifts in patterns of demand, as the current pandemic threatens to do, those habits can be a dangerous trap.
This time round, we can already see a number of losers. The entry of “WFH”, “Zoom” and “delivery slots” into everyday parlance underlines that home working is here to stay at the expense of offices, virtual business travel is supplanting physical, and e-commerce has permanently increased its share of retail, for example.
Yet, for those smart enough to perceive it, such shifts signal opportunity, too. As the record over previous downturns shows, they create conditions for potential winners, as well as losers. Of course, companies should be cautious with cash and spending priorities. But, to pull lasting success from today’s wreckage, they need to keep their nerve and carry out a rigorous three-part strategy to realign their business with the harsh, post-Covid reality.
Recalibrate growth opportunities
Some overarching trends are clear. But it is not enough to say that the world is going digital, that globalisation is in retreat, or that resilience is now an important component of efficiency. We need to go beyond broad strokes to systematically map the implications of changing work and domestic habits for the growth or decline of different segments of demand – including their cumulative indirect effects.
Take the fact that more people are spending more time at home. Drilling down, you might expect that increased demand for domestic office space would lead in turn to opportunities in refurbish and redecorating, office equipment, and in the bandwidth and collaboration platforms that enable remote working. (Less positively, recent reports indicate growing company demand for surveillance software that remotely tracks employees’ computer keystrokes, website visits and other behaviours.) Growth could also be predicted in dining in (takeaway, home delivery) and in-home entertainment, digital and traditional. The map would also identify obvious areas to de-emphasise – those connected with conventional office spaces, business travel and commuting, dining out and live entertainment.
But you also need to know if these shifts are temporary or structural (ie, permanent) and if they are new or part of an existing trend. Is the move to online shopping structural? Probably. And, amplifying as it does a strong pre-existing trend as consumers become habituated to new digital business models, it’s likely to have lasting knock-on effects on other areas, such as commercial property.
In a world of Big Data, you should leverage granular, high-frequency evidence to build educated guesses. As the pandemic was taking hold in the US, for instance, footfall in cinemas fell drastically nearly three weeks before the federal advisory on the pandemic, whereas in spectator sports, it took two more weeks to produce an impact. What does this mean? It shows that people were prepared to abandon cinema screens but not live sports, so expect a very different post-Covid adjustment.
In trying to recalibrate demand trends, learn vicariously. See how sectors have adjusted in economies such as China, which was first in and early out of crisis mode. Learn from other sectors to see how customers adjust. And learn from companies at the cutting edge – trailblazers that can give you an insight into the future, such as the Silicon Valley giants who, back in May, confirmed that WFH would become a permanent feature, while Walmart, far from losing out, took on 500,000 extra workers to cope with booming demand for its click-and-collect service. Or look at where smart money goes. What is getting funded? VCs report opportunities in B2B, biotech and cloud-based office systems.
Reconfigure the business model
The next step is to realise the growth opportunities identified by rethinking the business model. This involves a number of fundamental considerations, not always comfortable ones. As globalisation goes into reverse, or at least abeyance (blip or structural change?), we are already seeing moves to shorten manufacturing supply chains. More broadly, the boundaries between supply chains are being eroded as wider cross-industry ecosystems evolve to meet emerging customer needs. As this suggests, the choice of how and where to add value, and which partners you choose to do it with, will be critical.
As connectivity becomes ubiquitous, for firms wanting to take their offer digital, deciding which platform to piggyback will be one of the most important decisions they make. Increasingly, it seems, firms’ competitive space will be determined by the platforms they choose to work with, and carving out a defendable niche will involve learning to innovate and shape their value propositions with them.
In a striking retail example, when the pandemic struck, traditional Chinese cosmetic firm Lin Qingxuan, based in Wuhan, lost 90% of store sales. Working closely with Tencent’s WeChat, it devised a strategy for converting its shop assistants into online beauty influencers. The conversion was so successful that online sales grew twofold and more than wiped out the deficit from in-store collapse. This digital reality allows you not only to build ecosystems, but also to recalibrate and focus on your niches.
In US healthcare, firms use digital connections, sped up by the pandemic, to transcend the traditional boundaries which kept care access, payment and delivery separate, and offer all-in-one solutions that enable them to target particular groups, with Omada Health focusing on chronic disease, Devoted Health on senior care and Tia on women’s health.
Also consider how to use this calamity to your advantage. Chinese unicorn VIPKid, which offers a platform connecting English teachers outside China to pupils wanting to learn Chinese at home, took advantage of the surplus demand for instruction and supply of teachers to add value. Bookshop.org, a platform providing independent bookstores fulfilment, helped stores access customers wary of shopping through Amazon; MyLocalToken, bridging profit and mission, proposes a localised cryptocurrency that can help small businesses lower costs and reinvigorate local communities as they try to readjust.
As these cases show, many success stories involve at least a measure of digital transformation. But, a warning: digitisation is an end, not a means. Just digitising existing processes will likely miss the point, which is to maximise growth opportunities and rethink customer value add.
While this might sound trivial, unfortunately it’s not. Firms are lousy at rationally allocating capital, even in the best of times. They suffer biases, just like individuals do (trying to equidistribute funds across divisions), and they want to replicate the past, despite solid evidence that firms that resist such historical patterns grow and become more profitable. It’s hard to overcome such organisational pathologies, but it makes adjusting to a changing world very difficult.
Many firms today are focused on cash flow and survival. That’s understandable. But, counterintuitively, they need to recognise that, when everyone else is defaulting to across-the-board cost cuts, using the crisis to lay the foundation for a new competitive position and a significant post-Covid rebound with a few bold and well-targeted investments offers an attractive risk-return ratio.
To this end, you need to rigorously re-evaluate your capital spend in a way that balances short-term viability against longer-term prosperity. Think of the classic growth-share matrix with multiple time horizons. One dimension will be the estimated future value of investment projects in light of the anticipated demand shifts; the second the cost of sustaining them within current cash-flow constraints.
To make it more concrete yet, estimate the current cash-flow needs and the future profit potential of each business, so you have a solid and simple diagnostic tool, as shown in the graph below.