We are living in unprecedented times. Covid-19 and its economic consequences are shaking the ground under almost every business. Unless you were alive in 1920 during the Spanish Flu pandemic, none of us has any experience of something similar. However, there is learning from past economic crises which still may be possible to apply to the present situation. It is easy to get into survival mode, cut costs and wait until the pandemic is over. History shows us that those companies who do that are at risk of losing the game while those who are proactive and use the time to change and adapt are more likely to emerge as the winners.
We have analysed the trends since Covid-19 triggered the present economic situation. In this article, we share some learnings and ideas on how to succeed in these unprecedented times.
The Covid-19 pandemic
People are dying, and we are probably experiencing one of the worst economic crises over the last 100 years. Countries have locked-down to reduce deaths, waiting for better solutions and so that the health-care system could manage the load and thus reduce the number of deaths. There is significantly reduced demand, and the world supply chain is severely disrupted. Governments are giving out subsidies to try to help, but the value lost is much higher than the amount offered. Businesses will fail, and a lot of jobs will go.
The present extreme uncertainty is paralysing the economy, and nobody knows if and when life and economics will come back to any “normalcy”. Even after countries open up partially, the impact will remain for a long time to go.
Learning from the past
According to a study based on recessions from 1980, 1990 and 2000, it was found that 17% of the studied companies fared particularly poorly. They went bankrupt, left the stock exchange or were acquired. 9% not only survived but flourished, and they outperformed their competitors by at least 10% in sales & profit growth.
A more recent study of the 2008 recession, showed that the top 10 % of companies not only grew during the recession but continued to thrive afterwards. What were the reasons behind these successes and failures?
From the research, successful companies:
- had a lower debt/equity ratio than those who failed
- did not go into survival mode but used the time proactively
- were more decentralised in their decision making
- avoided layoffs but used more innovative ways to reduce their expenses
- used the slowdown to invest in IT, automation and productivity
Debt/Equity ratio
Those Companies who stagnated had no contingency plans and a high debt/equity ratio. In contrast, those who survived and gained often had reduced their debt/equity ratio ahead of the recession. As a result of poor debt/equity ratio, the companies with high debt had to pay interest. They laid off more people when the cash-flow was reduced, compared to their better-prepared competitors with better debt/equity ratio.
Proactivity better than survival mode
Successful companies did not just get into survival mode. They did not wait until the recession was over but used the time to change, learn, invest, and improve. Recessions offer opportunities for change!
Tough times never last, but tough people do!
Decentralised decision making
Decentralised companies were better at adapting to change than more centralised hierarchal firms. Since recessions often imply a lot of uncertainty and turbulence, companies who were more decentralised were better at adapting to changing conditions. Less hierarchical firms adjusted their product offerings in response to changes in demand while more centralised firms tended to be less flexible and did not adjust as much. Hierarchical firms experimented less. The learning for more centralised firms may be that they need to create ways of collecting feedback from their staff on all levels.
Creative cost savings
Successful companies focused on innovative cost reduction strategies which did not harm their businesses; they avoided layoffs and concentrated instead on operational improvements. Layoffs are not just harmful to employees, but they are costly for companies. Hiring and training are expensive, and once the economy picks up, those who have managed not to layoff are way ahead of those who need to do the same.
Successful firms used other ways to cut labour costs; hour reduction, furloughs, unpaid or partially compensated leaves and introduced performance pay. These methods gave companies discretion on which workers were affected. Across the board pay cuts or hiring freezes that fail to consider productivity can backfire, damage morale and drive the most productive employees away.
Investments in technology and productivity
Recessions are not a time to simply play it safe. Those who do will more often fail. Down-times are excellent times to adopt new technologies and in particular automate and invest in increased productivity. During downtime, the opportunity cost is lower than during good times. When the economy is excellent investing in internal productivity and IT, it diverts resources from increasing revenue. When there is less demand, there are more resources available for spending time on internal development and improvements without it hurting revenue. Adopting new technology would cost less during down-time than during good times. Digital technology can help cut costs; successful companies prioritise automation and data-driven decision making. IT investments make companies more agile and better to handle uncertainty and rapid change after a recession.
How will the world change due to Covid-19?
After a long economic growth, there were indications of a downturn. However, the present situation with the Covid-19 pandemic and the impact of lock-down and supply chain disruptions is not an ordinary “recession”. The specific requirements/ needs based on the Covid-19 pandemic such as social distance, less travel, more remote working are changing behaviour for good and accelerating the digital revolution.
Here is our analysis of some likely trends:
- The social distance/work from home policies will accelerate and drive digital adaption in almost any possible way.
- There will be a reduced need for business travel, and it will likely remain lower even if things return to normal. However, personal travel and tourism will likely return to “normal” much faster.
- The present drive towards virtual presence, such as remote meetings, courses, video conferencing will continue. While some meetings (especially larger conferences) may return to “real life” faster, smaller ones may never become the norm again.
- There will be a significant move towards more online purchases, especially rare-purchase goods such as fridges, washing machines, air conditioners and anything else which you don’t need to see/try/feel. Will also increase distribution and centralisation. Malls and showrooms may become history.
- It will also drive a change for restaurants towards more take-away and home delivery of food rather than eating at the restaurant.
- Any digitalisation trend will likely accelerate, including analytics, machine learning, and artificial intelligence in general.
How should companies apply this knowledge during the Covid-19 pandemic?
Here are some suggestions:
- Need to reduce unnecessary expenses, especially those which are not adding value
- Avoid layoffs
- Spend time on technology adoption, improve internal solutions, look for improvement opportunities in regards to productivity, upgrade competence, and anything else that is forward-looking
- Focus on innovations or change of business model to get an edge compared to competitors both immediately and in particular when the economy improves
- Consider which of your costs/expenses/focus areas align with the present trends and if they don’t cut them.
Conclusions on how to thrive in and after Covid-19
Most sectors and companies are going to be affected in short/medium time. But some things may never return to “normal”.
You need to do your best to ensure that you don’t lose the customers you have. It is not the time to get into survival mode, but a time to be proactive and use the situation to change and experiment. Of course, you should reduce any unnecessary expenses but be careful not to cut what you spend on preparing for the future.
Retain all good staff members through this time. You would need them when the economy recovers. Use the time to get your act in order; adopt new technologies, become more productive, invest in automation and IT solutions which will make you more productive in the future. Identify proactive ways of reinventing your business model to be a different company after the down-turn so that you will take market shares where others will fail. Adapt digitalisation of any part of your business which will give you an edge for the future. Doing so will help you to take market share during the recession and prepare you to be ready for the future once the economy improves again.
Sources
HBR May-June 2019 “How to Survive a Recession and Thrive Afterward” by Walter Frick
HBR May 2010 “Roaring Out of Recession” by Ranjay Gulati, Nitin Nohria and Franz Wohlgezonen