The Covid-19 pandemic has already dealt a catastrophic blow to the global economy; worse, its toll in lives lost will not be known for some time. Economic activity in some sectors has abruptly stopped. Unemployment in many regions is increasing at an unprecedented rate. In response, many businesses have taken a defensive posture, shutting or slowing operations, laying off staff, canceling projects, delaying spending decisions, and other cash-conserving measures. For many, these actions are appropriate and unavoidable (for example, in the hospitality industry).
For other companies, the imperative is the opposite: to ramp up production or services to meet new needs that didn’t exist a few weeks ago (for example, Amazon’s stated intent to hire 100,000 workers to keep up with warehouse demand; mask and other personal protection equipment suppliers; specialized cleaning services). For these firms, one challenge is to meet this opportunity sensibly without incurring structural costs that become difficult to shed when the crisis passes. Another is how to price or sell their products or services to meet the new demand.
Still, most firms fall into the middle ground: how to take defensive steps, invest to meet new demand, and overhaul their strategy to account for the changed environment. This brief article attempts to address firms in this unhappy middle and to provide some principles to help them.
Assumptions
To start, let’s agree to some baseline assumptions that will underpin the follow-on discussion.
- History is punctuated with pandemics and similar crises; some were severe enough to cause tens of millions of deaths and even to bring down empires. With Covid-19, we are not faced with such an apocalyptical event, at least for the developed world.
- Some secular trends will gain greater momentum. Still others may be arrested or changed.
- Opportunities will emerge that well-prepared and bold businesses can exploit.
- Weaker companies or those unable to adapt will continue to decline, possibly in an accelerated creative-destruction cycle.
- While global in nature, sparing no major region, there will be substantial regional differences in Covid-19’s impact. These differences could be the influenced by policy, preparation, bad luck, cultural factors, economic resources, political leadership and others.
- While Covid-19 is the greatest pandemic since the 1918 Spanish Flu, these outbreaks are not uncommon and even if they don’t ultimately cause many fatalities, are still highly disruptive to civil life in many regions.¹ Organizations must assume a posture that these disruptions will continue to occur regularly yet unpredictably.
Secular Trends
Several secular trends have already revolutionized and disrupted traditional business models. They tend to begin slowly, almost imperceptibly, then gain momentum, challenging traditional businesses and presenting new opportunities; among many of the most important secular trends are:
- Online
- Global supply chains
- Automation
- Self-service
Some of these trends will be strengthened; others may be weakened or reversed.
Online
Online services and products have been steadily disrupting traditional business models or altering them so that they are hardly recognizable. The leaders in online services will move from strength to strength, as their competition is weakened and swept away. Amazon is a case in point as brick-and-mortar competitors literally have to shutter their stores and furlough their staffs. This article will not explore the well-documented secular shift to online, other than to note that it in turn catalyzes other changes, such as self-service or automation. Overall, the steady move to online will be accelerated by the current Covid-19 pandemic.
Global Supply Chains in Products and Services
In the past 20 years, business has grown its supply chains globally, in an ever increasing search of greater cost arbitrage, access to expertise, regulatory arbitrage and other efficiencies. Sometimes, this has inadvertently led to a gradual increase in risk. For example, the excessive dependence of some industries on manufacturers in Japan, was a rude shock in the aftermath of Typhoon Hagibis in 2019, causing supply constrictions. More recently, owing to Covid-19, supply chains dependent on Chinese production have also been interdicted, because factories were closed, workers could not get to factories, or remaining production was diverted for domestic needs. Yet no one intentionally designed supply chains with single points of failure.
However, managers were forewarned. The 2011 earthquake and tsunami in Japan was a harbinger. Similarly, the escalating trade tensions between the US and China were an indication that China-dependent supply chains were a risk to businesses. It’s become clear that companies should strive to avoid an over-dependence on any one geographic region. This is especially so with suppliers where similar services can be had globally.
Overall, the global pandemic will accelerate a trend away from single sourcing or even regional sourcing and increase the development of independent supply chains and suppliers which can sustain business continuity in the event of unexpected disruptions.
Automation
Automation has steadily transformed the nature of work and business over the past century. Indeed the rise of technologies like AI and extremely cheap, convenient computing eliminates routine work, skilled labor, and even high cognition jobs. Automation is well suited for learning and eliminating work done by humans where there are copious amounts of data to train a program and reasonably well-defined inputs and outputs. The pandemic may not affect the pace of automation in the short run, and the long run trend continues unabated. In some supply chains and businesses processes, the removal of humans who can get sick or incapacitated will be further motivation for increased automation.
Self-service
Arguably the greatest innovation of the 20th century was self-service, initially in retail operations and gradually expanding to encompass more scenarios. Gas stations are a case in point: in the 1950’s and 1960’s, full service stations were the norm, with attendants checking tire pressure, coolant, washing windows, and so on, as part of a fill up. By the 1990’s this was rare in the US, aside from a few remaining states, such as New Jersey and Oregon. Significantly, owing to Covid-19, consumers are now permitted to self-serve gasoline in Oregon. While Oregonians may return to “mini-serve” stations after the pandemic passes, this sudden pivot illustrates that self-service has benefits beyond convenience and cost savings: maintaining safe distances.
In the immediate aftermath of the pandemic, we may see people preferring self-service for certain consumables because they can better control sanitary conditions. The rise of online services has increased the momentum of self-service. Consumers, for example, are increasingly comfortable with conducting their own research, making purchases, booking appointments, and other activities that were often assisted by sales staff. Overall, the long trend towards self-service will continue, possibly accelerated in some sectors.
Designing for Resiliency
Covid-19 and other threats to business continuity (such as natural disasters) are ever present; one best practice is to avoid single points of failure. Indeed, businesses need to invest in a diverse supply chain, in both products and services. Often finding mutually independent goods supply chains is difficult, since they often depend on a complex web of supporting suppliers, service providers and, sometimes, the availability of natural resources. But such investments are warranted in the long run for most on-going businesses.
Services are also difficult to diversify; certain regions may have competitive advantages that other locales are hard pressed to fully duplicate, in cost, proximity, expertise or other advantages. Inevitably, tradeoffs are required and a blend of attributes can be managed to optimize a firm’s risk profile. In short, firms should look to maximize utility across a range of relevant factors.
For example, service organizations should strive for a loosely-coupled, distributed workforce, with cross-trained resources and as many generalist skills as practicable. Resources in the Americas, Europe and Asia can support each other in the event local conditions degrade operations in one or more of the locales. Building and managing such an organization will likely be more expensive and complex than outsourcing to the lowest cost supplier, but that is precisely the challenge managers must tackle. Often, a scorecard that includes costs and other non-financial objectives can help managers make the case.
Positioning for Opportunity and Growth
After building a well-balanced, diverse and risk tolerant organization, businesses need to invest in capabilities for identifying and acting on opportunities. Often the sweeping changes wrought by a global event like Covid-19, open new markets or weaken existing competitors. Just as likely, they could increase or accelerate the threat to a business. One’s own weakness is often an opportunity for others.
To determine a business’ strategic position, an analysis of threats and opportunities in light of secular trends and overall business assumptions should be conducted. Organizations should determine if secular trends offer opportunities for the business, or, on the other hand, may enable its competitors to attack it with a different value proposition. For example, a high-touch, high cost service provider, may find a reinvigorated consumer preference for more online and self-service undermines its current business model, intensifying its difficulties.
On the other hand, the pressure on an industry to cut costs might offer a service provider to the industry an opportunity to rollup or consolidate across that industry, offering economies of scale to companies eager to shed costs.
There can be many possibilities and only a careful examination of the particular details of an organization and its industry can lead to clearer answers.
Nimble Exploration
Diverse, cross-trained teams can experiment with new business models, products, markets, and other initiatives. The framework of the Darwinian evolutionary theory is helpful. Here, the key traits that allow organizations to evolve in the face of challenges are diversity, selection, and retention.
Diversity
Organizations need to foster diverse capabilities; these are the foundations of their ability to provide new products and services. In practice, they may not be able to develop these capabilities with their own resources, but they can augment internal efforts through acquisition, partnership, and outsourcing. Starting in the early 1990’s, a period of remarkable economic stability and predictability, it was generally considered sound management practice to focus on one or two “core competencies”.² But, now in periods of great upheaval, what was operationally optimal will limit an organization’s ability to adapt because operational streamlining associated with winnowing down a firm’s capabilities, often reduces an organization’s diversity.
Selection
Given a set of diverse capabilities, organizations must then select a combination of them to forge into products or services that open new markets or address new needs of their existing customers. Driven by the imperative learned in good times to specialize, organizations tend to focus on what they know best and to seek comfortable, familiar paradigms. Adaptation requires a commitment to become comfortable with uncomfortable paradigms and to try new things. The selection process often entails a period of intense experimentation, with a fair share of failures, which would not often be tolerated in periods of stasis.
Retention
In biological evolution, retention is the trait of an organism to pass its successful adaptations to its offspring. In an organization, retention has a similar purpose: it must be able to expand its experimentation into the organization’s other parts so that it can move forward aligned around new products or new markets and the new capabilities required to exploit those opportunities.
In a crisis-driven environment like Covid-19, the imperative around nimble exploration leading to rapid adaptation is paramount. Often there will be little time to adjust; ponderous approaches well honed in time of relative stability may fail. Indeed, it is in times of greatest environmental stress that successful organisms and organizations evolve the fastest, with only a comparative few ultimately thriving.
A well-considered strategy must drive an organization’s nimble exploration of new opportunities. The strategy in turn is shaped by an understanding of its vision, its culture, and its aspiration as a business. Then, the strategy must be carefully analyzed in light of the secular trends so that the output of the strategy drafts off these trends rather than conflicts with them. Finally, the strategy then drives an organization’s preparations for businesses resiliency, positioning for opportunity and growth, and capabilities to identify the appropriate path forward.
The only predictable aspect of unpredictable events like a global pandemic is that they will occur. Organizations must prepare for them with a strategy that takes into account its vision, culture, and aspirations, tempered by a clear understanding of the larger historical, industry shaping secular trends. By doing so, it can invest in the appropriate capabilities, address weaknesses while building resiliency, and position itself for survival.
Footnotes
- It’s conceivable that pathogenic outbreaks will rise as humans encroach on and compress the habitat of other species, increasing concentration and possibly accelerating their evolution.
- Prahalad, C K and Hamel, Gary. The Core Competence of the Corporation. 1990