GO WHERE THE BUSINESS IS: The economic impact of COVID-19 is here to stay, but that’s not a terrible thing, for many businesses the outcome may not have been avoided anyway. And a crisis always shines a torch on the future of commercial opportunity
In this article, we outline the long-term impacts of COVID-19 that organizations can expect to see based largely on the fact that history tends to repeat itself.
In Times of Crisis, you Need to Rethink Strategy
Strategy is an over-used word in business today. Executives describe virtually any lose plan as a ‘strategy’ to increase the ‘curb appeal’ of their latest plan. Overused it may be, but it’s the only word we have to describe a thoughtful and cohesive response to a challenge. There’s nothing like a crisis to focus the mind on the need for ‘a strategy’.
This isn’t the first time society has been impacted by over-biting on spending and its ‘trust’ in banking systems to find the world as it knows it comes crashing down around its feet. There’s even a name for it coined by experts in econometrics – a ‘structural break’ – the moment in time-series data when trends and the patterns of associations among variables change. Put another way, it’s the point the behavioral norms of economies turn on a dime because of an external event.
Examples of Structural Breaks
What became known as the first US depression happened just after the Napoleonic Wars and was triggered by real-estate debt, not too dissimilar to the subprime mortgage debacle that led to the financial crisis of 2007-08. Over-extended banks started calling in heavily mortgaged farms and business properties they’d financed. It caused a financial panic, then a collapse. It led to the creation of a central banking system and for the first time, debt-relief came into the social consciousness. This panic led to the formation of giants in the fields of manufacturing, food processing, publishing, and energy including Consolidated Edison, Fairbanks Morse, and HarperCollins.
Another credit crunch, this one triggered by the failure of traded railroad notes, led to the 1893–97 ‘Long Depression.’ Bluntly, there wasn’t enough gold to underwrite all of the primary notes (Bonds). In the United States, five hundred banks closed, thousands of businesses failed, and one-fourth of all rail mileage in the U.S. went into receivership. And yet, the depression did not keep innovators down. In the twilight of this crisis, companies like IBM and The Hershey Company were born.
The Great Depression that took place in the early 1930s that started with a major fall in stock prices happened in the United States on or around September 4, 1929. Between 1929 and 1932, worldwide gross domestic product (GDP) fell by something close to 15%. The Great Depression led to a resurgence in bartering, a re-think in household consumption, with many housewives returning to old recipes handed down from mother to daughter to make food go further by recycling Sunday roasts into sandwiches and soups. Meanwhile, fathers would sell space in spare rooms, offer to do repair work, and sought out cash loans. Structural breaks change attitudes and behaviors for a generation.
Japan’s ‘lost decade’ from 1995 to 2004 followed a period of high leverage and inflated land values. It was brought to an end eventually by another financial crash
The financial crisis of 2007-09 was driven by over-extended trust in the subprime mortgage market. Those countries with lower bank lending like Poland and Slovakia actually benefitted during the recovery period, as (over time) did emerging markets like China and India.
The Consequential Impact of Structural Breaks
What we know from history is that these structural breaks render old ways and business models obsolete while almost always pointing towards the new kind of future. Therefore, when responding to a structural break, cutting costs alone is never enough. Change in markets and demands requires a root and branch change in approaches and ‘systems.’ Unfortunately, the other learning lesson from history is that any such a break creates large amounts of social unrest and human suffering, sometimes for extended periods of time.
Like humans, Companies and Industries will Prematurely Die as the Consequence of COVID-I9
It’s no coincidence that organizations, like humans, appear to have a shelf-life. Markets change and, at their core, most organizations generally don’t. They gravitate around one way of making wealth, and when that economic engine fails, it’s proven by history to be almost impossible for any enterprise to re-invent itself. Okay, some business models (like water and food production) enjoy a much longer lease of life, but there are few scant examples of companies that have managed to re-invent and survive.
According to the British theoretical physicist Geoffrey B. West, in his presentation to the Santa Fe Institute on the 24th September 2015, ‘Why Cities Keep on Growing, Corporations Always Die, and Life Gets Faster’ (you can see on YouTube), there is strong statistical evidence to suggest that companies with strong business models enjoy strong growth for their first few years of life, then get fat and flabby in their middling years (becoming ever more unhealthy), decline in financial health in their later years, and then encounter an unprecedented event which, owing largely to other underlying health conditions, results in their death
COVID-19 seems to be indiscriminate in its selection of victims when examining the carnage it brings on societies and compare by age, color, or creed. But what healthcare professionals keep pointing out is that many of its victims had underlying health conditions. I am sure, when the dust settles and we look at the economic impact of COVID-19, we’ll get a familiar account from economists. Businesses, industries, and economies of countries will suffer a similar epitaph to account for their loss of life.
The High-street and Public Houses you Frequented in your Younger Years were Dying Anyway
There is no place for nostalgia in business. The HOVIS bread trundling down cobbled streets along the quaint streets of a Yorkshire town to the subtle tones of Dvorak’s New World Symphony didn’t exist, but that’s how most English people like to think about their morning bread delivery. Similarly, the audience glued to their TV screens to watch an old man in a leather-bound chair hand his beloved grandchild a Werther’s Original didn’t worry too much that the recipe sweet had just been invented. Of course, there are REAL THINGS about our society that are much more true to life. People in England still aspire to walk down the high-street of their Town and not be faced with empty shop fronts. Likewise, they still like the ‘idea’ of crowding around a fierce open fire in their local Pub (Public House) to meet with neighbors and discuss the day that’s gone before.
Unfortunately, this is a false reality in the digital world. As humans, we enjoy the nostalgic notions of one ideal, then serve ourselves in a way that results in something else:
We want a high-street to be there when we want it for the pleasure of a nice afternoon stroll and some window shopping but when it comes to ACTUAL SHOPPING we’d rather enjoy the choice and convenience of buying online. </li><li>We like the idea of going to the Pub but we generally only visit on high days and holidays, not enough to support the income needed by a Publican. We like to think there will always be a Taxi when you need one, but we still prefer to use Uber because it’s cheaper and more convenient. We like the idea of a healthy planet and oceans but we want plastic packaging around our fruit purchase to keep it fresh.
There are many companies, industries, and economies that were already failing before COVID-19. Some retailers were on their last throw of the dice and calling in administrators when the first chimes of COVID-19 rang out around the world. Nothing was going to save these companies, not a bung of extra cash from hard-pressed shareholders, not a government bail-out… nothing. They were living on borrowed time anyway. All that the pandemic of 2020 has done is to hammer down and tap the final nail in the coffin.
Some Companies ARE Innovating their way Out of Difficult Times
It did surprise me how slow some local businesses in my area were to react to this new reality, and how few have seen it as an opportunity to re-invent themselves. Many came into this crisis without a website that worked. Four weeks in, and still nothing. Others had no means of arranging door-to-door deliveries. Few tried to correct that situation, all presumably expecting things to go back to ‘normal’ after a few weeks of lock-down.
Then came the early shoots of innovation. Like many old supermarket customers, my family went elsewhere for our produce. We bought pies delivered to the door by the local pie maker. We found a local supplier of eggs, also a local farm shop that agreed to deliver fresh veg. Then, we hit on using a local ‘egg man’ and started buying fruit and veg from the local Friday market-stall guy who offered to do his own version of ‘click and collect’ on Facebook.
I shouldn’t be surprised by the intransigence, unwillingness and the general heel-dragging of leadership teams to change their business models. Nobody likes change. During my career, I’ve encountered leaders of many large and small companies who wanted to bury their heads in the sand when the economic engine of their business was disrupted by competitors or a change in market conditions. Normally, the writing is on the walls and a new future has shown itself, but incumbent players and old rivals in a market (that’s still making hay on an aging business model) are often reluctant to adapt. Notable examples include:
- Kodak, the analog camera company that started making digital cameras but didn’t throw their future behind them.
- Analog line printer companies – like Mannesmann Tally, Genicom and Printronix – rivals that eventually became (TallyGenicom By Printronix!) that failed to move into non-impact printing when it was obviously ‘the future’
- Analog photocopier companies – like Konica, Minolta, Ricoh, Canon, Toshiba, and Xerox – that were slow to move to high-volume digital inkjet technology.
“A corporate crisis is often a sign that the company’s business model has petered out—that the industry’s underlying structure has changed dramatically, so old ways of doing business no longer work.”
Richard P. Rumelt, McKinsey & Co. – The McKinsey Quarterly 2009
It’s Time to Let Go and Say Goodbye to Old Norms
One of the hardest things to cope with after weeks of lock-down is to forget ‘how it used to be’ before this all happened. How we suddenly crave to step into a hardware store, go for a beer, or walk in a park without having to check our course because someone else is on the same path. The mental challenge is far greater than the physical one (it’s not too painful for humans to sprawl on a couch). What makes the mental challenge so difficult is the nostalgia of ‘the way it used to be.’
One of the methods I’ve always used to implement improvements to organizations is to change lots of things at the same time. That way, people know they can never go back to ‘how things were’ because it’s pretty obvious that old view of their world is gone. Unfortunately, with the lock-down today, only one thing has changed. We can’t go out. For that reason, we crave for ‘it to be over.’ But whilst the confinement may relax, the problem hasn’t gone away. Nor has the long-term impact of COVID-19 on human outlook and job security, on human behavior, and the economy.
We’ve Changed, Not Just the World Around Us
After weeks of confinement, new ways become the new normal, and it’s very difficult to turn back the clock. I was speaking to one business leader who told me he’d never considered having his people work from home before. He didn’t like the idea of people working alone, and he wasn’t sure he trusted them. But now, after the great experiment of social distancing and lock-down, he’s a convert. He’s also paid for laptops and other IT to make sure they have what they need. After the crisis, he won’t get any money back for returning all of that kit. Neither will his landlord agree to reduce rates on his office when the car park is half empty upon the great ‘return to work’ set before us
Which Businesses, Industries, and Economies are Likely to Die?
Any part of our fragile consumer economy that is framed around a weak economic engine – and therefore does not create enough profit to weather the storms of the next year or so – probably won’t be here by 2025. Business leaders and consumers alike have to let go of old ideals and nostalgia. Things won’t be as they were. Things have changed.
The digital economy has been given a massive stimulus, with clear consequences for any enterprise based on an analog economic engine:
The last embers of an analog, off-line world are fading fast. We are moving to a time where the market-place for everything is the Internet. Things that were ‘social and behavioral possibilities and ideas’ have now been proven to work, or not work (e.g. working remotely, shopping online for food). For a generation of peoples, attitudes towards personal income and company risk have been influenced, probably leading to a change in what people spend and how much they save. The opportunity and desire to window shop in a high-street, or to walk into a retail store, is ebbing away as a distant vision of the past, just as social commentators of the 19th century, that saw roads and railways cut up the landscape, wrote forlornly on the loss of their privileges to walk across open fields
A New Normal
You can look upon COVID-19 as a global forced experiment on a generation of individuals. From this transformation in attitudes and behaviors we can expect to see grow a new normal: Think about how the Baby Boomer generation reacted to the lean economy they experienced as they were growing up, and how Millennials reacted to being placed on a pedestal during a time of plenty. It’s as if, social conditioning happens without us noticing but businesses DO NOTICE when the cash registers are impacted by the choices young people make when they divert their spending to good causes.
There are always winners in a crisis
We can see examples of companies that will do well in this crisis. Netflix has added 16 million subscriptions to its service. Amazon has proved to be as vital to economies as social welfare systems. While Zoom has become a household name. I’m sure the list of notables will grow over time.
“Every failed idea from the Dotcom bubble would work now.”
What will the new normal look like?
I think from the social cues we’ve seen, we can draw some conclusions:
Consumers will want to save more if they can, and as employees, they will be looking for careers with more safeguards and income guarantees. More consumers will get accustomed to buying EVERYTHING online now they know it works and businesses that offer a to-the-door service will thrive. Businesses will operate more remotely than ever before and we will get accustomed to collaborating remotely on projects and systems. Humans will be ever-more (and willingly) tracked by governments and businesses creating a death-nail for those passionate about personal privacy. Walk-in services will go online, such as gym classes, GP visits, and medical treatments. Technologists will put all of their energies into creating the digital ecosystems; the social operating systems that will connect remote workers to their work, designing the places where the human race spends its time online in the future
There is always hope – but don’t try holding back the tide of change and expect it to work
I started this article speaking of the Great Depression. Sometimes, we forget that circumstances are different between now and the period when the money ran out in the last century. There is STILL MONEY in the economy. Most people continue to have money in their pockets. The difference is they’re not stepping out of their homes to spend it. Companies need to recognize business models that work in a new digitally-enabled era of social distancing. They need to go where the customers are.
I leave the rest of my summary to a commentary by the technologist Benedict Evans. You can read the full article here. As Ben put it:
“Every time we get a new kind of tool, we start by making the new thing fit the existing ways that we work, but then, over time, we change the work to fit the new tool. We’re all online now, and, just as importantly, we’re all willing to use this for any part of our lives, if you can work out the right experience and business model. Today, anyone will do anything online. A lot of companies will be born in nine months, and more of them will be the next Slack or Dropbox than the next Zoom.”