- Saturday, 31st Oct, 2020
The coronavirus crisis is a world-changing event. Dealing with the coronavirus crisis and its aftermath could be the imperative of our times. Indeed, we have argued that it augurs the “imminent restructuring of the global economic order.”
“For some organizations, near-term survival is the only agenda item. Others are peering through the fog of uncertainty, thinking about how to position themselves once the crisis has passed and things return to normal. The question is, ‘What will normal look like?’ While no one can say how long the crisis will last, what we find on the other side will not look like the normal of recent years.”
It is impossible to know what will happen. But it is possible to consider the lessons of the past, both distant and recent, and on that basis, to think constructively about the future. We believe the following elements will be important in the shaping of the next normal—and that business leaders will need to come to terms with them.
In the mid-1990s, the idea of the “death of distance” gained currency. The thinking was that new web-based and telecom technologies had made it possible to communicate and work in new ways that dramatically reduced the value of physical proximity. As the flow of information became cheap and seamless, global supply chains of bewildering complexity were able to deliver just-in-time products as a matter of routine. Cross-border trade reached new peaks. And the world’s burgeoning middle class took to travel and tourism with something like abandon.
Even before COVID-19 hit, there were signs of unease, expressed in calls for protectionism and more restrictive immigration and visa policies. In these ways, people sought, in effect, to create more distance from those unlike themselves.
Such attitudes were far from universal, of course. But to deal with the pandemic, governments around the world have imposed restrictions on people and goods of a severity not seen for decades. According to one study, more than three billion people live in countries whose borders are now totally closed to nonresidents; 93 percent live in countries that have imposed
new limits on entry, because of the coronavirus. If a modern-day Hannibal wanted to cross the Alps peacefully, his elephants would be turned away. Eventually, the tourists will come back and the borders will reopen, but it is certainly possible that the previous status quo will not return.
Indeed, for businesses, the prospect of more border restrictions; a greater preference for local over global products and services; the need for resilience across supply chains driving a move to bring sourcing closer to end markets and perhaps renewed resistance to globalization, are all possible second-order consequences of the actions being taken now to cope with the coronavirus. Technology continues to shrink physical distance, but in other ways, it could be set for a return.
Even when lockdown restrictions begin to ease, businesses will need to figure out how to operate in new ways. In short, resiliency, the ability to absorb a shock, and to come out of it better than the competition will be the key to survival and long-term prosperity.
Again, the past can be a prelude. The 2008 financial crisis found that a small group of companies in each sector outperformed their peers. They did get hurt, with revenues falling about the industry average, but they recovered much faster. By 2009, the earnings of the resilient companies had risen 10 percent, while that of the non -resilient had gone down almost 15 percent. What characterized the resilient companies was preparation before the crisis,they typically had stronger balance sheets and effective action during it specifically, their ability to cut operating costs.
This advice is still sound but insufficient. COVID-19 could end up dwarfing the financial crisis in economic damage. In that case, it will not be enough for many companies to tweak their business model; instead, they will need to rethink it.
One implication of this has to do with how supply chains operate; companies are finding themselves vulnerable because they cannot get the parts they need. Supply chains built on just-in-time inventory and distributed component sourcing may well have to be reconsidered, given the way many have been disrupted. Instead, companies will want to build backup and safety plans.
Other key elements of business structure will also be revisited. For example, the crisis has revealed weaknesses in succession plans as leaders get sick and deputies quickly need to be found across all aspects of operations. Companies are learning the hard way that succession planning has to go much deeper than the C-suite, and much broader, responding to possible short-term disruptions as well.
Investors are likely to take note, and to devise ways to incorporate resiliency more systematically into their valuations. Indeed, in the wake of recent natural disasters, the impact of climate change was increasingly being recognized by business leaders and investors, with consequent effects on decision making and valuations. This pressure to include environmental,
social, and governance factors in valuing a business is likely to expand to incorporate resilience to outside shocks, such as pandemics. In sum, many companies will rebalance their priorities, so that resiliency in all its manifestations becomes just as important to their strategic thinking as cost and efficiency.