Companies that move quickly and focus on the future will rebound faster and emerge stronger than before.
The coronavirus pandemic pits all of humanity against the virus. The damage to health, wealth, and well-being has already been enormous. As a consequence, force and speed of the global downturn have sent most companies reeling, and many senior managers have not yet figured out exactly how to respond. There is a significant lack of confidence in senior leadership’s strategies, and in their ability to carry out those strategies—including doubts among C-suite executives themselves.
The economic aftermath of the 2008 financial crisis was so tepid it was referred to as the “Great Recession.” In the wake of the coronavirus catastrophe, leaders need to brace for the “Great Repression,” which may be even uglier than the downturn of a decade ago.
The services sector, including travel, tourism and entertainment, has been hit hardest. Non-essential construction work is also adversely affected by the lockdown, reductions in investment or lack of funding. Manufacturing, such automobiles and aerospace, is beset by a lack of sales and difficulties in obtaining necessary products from suppliers in other countries. Ultimately, movement restrictions, diversion of resources to fight the coronavirus and demand constrained by falling income will affect even sectors now considered insulated, such as supermarkets, consumer staples, utilities, technology, telecommunications, online media and the health sector.
But unlike in the Great Recession in 2008, the world economy is affected directly by the measures aimed at containing the spread of the coronavirus. As a result, businesses now are experiencing precipitous declines in revenue, earnings and cash flows. Global business slowdown feeds unemployment, the loss of household income sets off a dire feedback loop as reduced consumption drives business revenues lower, forcing companies to downsize or shutdown creating more unemployment.
Given that the world’s advanced economies are structured around consumption, which frequently makes up around 50%-70% of activity, output declines of 50%-100% translate into an economic contraction. For every week the lockdown continues, global GDP may be decreasing by between 0.25 and 0.50%. Prices must adjust accordingly to lower corporate earnings, reduced rental income from properties, and reductions in dividends and buybacks, driven by falling earnings and regulatory prohibitions.
Companies need timely, forward-looking measures of economic uncertainty. With these requirements in mind, leadres can assess five types of uncertainty measures.
Stock Market Volatility: http://www.cboe.com/vix This forwardlooking measure starts in 1990 and is available daily in real time. Realized volatility can be calculated on short look-back windows to quickly reflect abrupt changes in economic circumstances. The realized volatility of daily returns stretches back to the late 19th century.
Newspaper-Based Measures: www.policyuncertainty.com The daily version of this index reflects the frequency of newspaper articles with one or more terms about “economics,” “policy” and “uncertainty” in roughly 2,000 U.S. newspapers. It is normalized to 100 from 1985 to 2010, so values above 100 reflect higher-than-average uncertainty. Newspaper-based measures of uncertainty are forward looking in that they reflect the realtime uncertainty perceived and expressed by journalists. They stretch back to 1900 for the United States and are now available for dozens of countries at www.policyuncertainty.com.
Business Expectation Surveys: At www.frbatlanta.org/research/surveys/business-uncertainty and http://decisionmakerpanel.com/ These surveys elicit five-point probability distributions (mass points and associated probabilities) over each firm’s own future sales growth rates at a one-year look-ahead horizon. By calculating each firm’s subjective standard deviation about its own future growth rate forecast in a given month, and aggregating over firms in that month, we obtain an aggregate measure of subjective uncertainty about future sales growth rates. These business expectation surveys are valuable for measuring what firms actually perceive in real time.
Forecaster Disagreement: www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecastersThe typical disagreement measure is the standard deviation of point forecasts across the 50 odd forecasters that provide regular forecasts. There is a long history of using such disagreement measures to proxy for uncertainty, and also a long history of disagreement about their suitability for that purpose
Statistical Forecast Uncertainty: https://www.sydneyludvigson.com/data-and-appendixes These approaches can be used to generate time-varying measures of realized volatility and forecast uncertainty for GDP growth, industrial production, employment, trade, and other standard measures. These statistical measures of uncertainty capture recurring relationships in the time-series data – for example, the strong propensity for the volatility of many economic time series to rise in recessions – but their backward-looking character makes them less useful in the wake of abrupt shifts and once-in-acentury shocks. Long lags in the availability of key data inputs into statistical models of this type are another serious limitation for real-time uncertainty measurement, especially in the wake of sudden and unusual shocks. These lags amount to 90 days or so for many key economic series.
Some companies gain advantage in economic downturns.
HBR studied all U.S. public companies with greater than $50 million in annual sales during the last four downturns—including not only recessions but also periods of substantially slowing growth (we define downturns to include recessions (periods of negative GDP growth) as well as periods of cumulative decline in annual GDP growth of at least 1 percentage point over two years) —and found that nearly three-quarters of those companies experienced a decline in revenue growth. However, 14% of companies were able to not only accelerate growth but also increase profitability. Succesfull companies respond differently on a few key dimensions:
They acted early. Leaders may understandably be reluctant to take major actions until they see clear evidence that they are affected by economic headwinds. However, companies that proactively recognized the threat—by discussing the possibility of a downturn in their earnings calls before the economic recession officially began in Dec. 2007—achieved 6 percentage points better Total Shareholder Return (defined as total returns to investors including capital gains and dividends) in the downturn than companies that did not address the challenge early.
They took a long-term perspective. Leaders have to attend to short-term issues during a downturn to make sure their business remains solvent. But substantial competitive opportunities await the leaders who can also keep one eye on the long-run picture. By natural language processing algorithms to assess companies’ long-term orientation from SEC filings, showed that companies with a longer-term perspective achieved 4 percentage points higher annual growth during the downturn as well as 2 percentage points higher total shareholder return.
They focused on growth, not just cost-cutting. To go beyond survival and gain a sustainable advantage, companies need a balanced approach to performance. The small minority of companies that achieved double-digit annualized Total Shareholder Return in downturns pursued efficiencies, improving their profit margins. But the most important driver was revenue growth, which accounted for nearly 50% of their shareholder return—twice as large as the impact of cost reductions. (The remainder was driven by investor expectations.)
In rapidly changing enviromet, companies ability to establish and maintain a competitive advantage, critically depends on continously reconfiguring and adjusting its strategic resources to the new or evolving circumstances.
Today companies face major strategic trade-offs that are very hard to address :
- Tight financial budgets may lead to cuts in investments to maintain necessary liquidity.
- Disruption in stakeholder relationships (e.g. customers, suppliers) increases overall uncertainty, and may thus increase the risk of existing investments.
- Therefore, companies often switch to short-run survival mode, and do not really consider a longer-term time horizon when taking decisions .
- A key trade-off may arise between Purpose/Mission vs. Profitability
Companies, on average, responded to the crisis by following a “two pronged” approach of “saving their way out of the crisis” by reducing their workforce and CAPEX, and “investing their way out of the crisis” by sustaining their investments in R&D and Stakeholder Relationships.
During crisis, intangible resources and capabilities become practiculary valuable.
Efficiency and Innovativeness may enable firms to find novel ways to become leaner and more efficient, both experiment and explore new collaborative practices, thus improving their technological and innovative capability.Superior stakeholder relations help spark innovation and may improve overall firm efficiency through, for example, improved employee motivation and decreased risk of supplier disruptions, relative to firms that do not maintain such investments.
Adaptation to Shifting Needs, Demands & Expectations may enable firms to more rapidly understand changing stakeholder needs, demands and expectations.May better position a firm to undertake necessary internal adaptive changes and to tolerate more risky experimentation precisely because they enjoy superior trust by their stakeholders and thus, a wider margin for strategic maneuvering.
Organizational Resilience may send a strong signal about the centrality of purpose, stakeholder management and innovation capability for the firm’s competitive adva ntage and a credible signa l of commitment towards maintaining it.By showing commitment to their stakeholders ejuring rough times, companies may improve their reputation, brand, legitimacy and trustworthiness. Strong stakeholder relationships may result in better informed and superior decisionmaking in turbulent times. They can provide access to and facilitate the integration of diverse sources of information (e.g.,from suppliers, customers, or local communities).Thus, companies are able to better assess the situation, undertake the necessary strategic adjustments, and manoeuvre through the crisis.
In summary
The COVID-19 crisis is leading to massive cuts in business expenditures on innovation, training and general management improvements, which resulting lower productivity into 2021 and beyond. The irreversible nature of these investments in intangible forms of capital makes them particularly sensitive to uncertainty. Finally, widespread school closures and an enormous shift to work-at-home practices in reaction to the pandemic seem likely to retard productivity in the near and long term.
The pandemic has created an enormous uncertainty shock – larger than the one associated with the Great Recession in 2008 and more similar in magnitude to the rise in uncertainty during the Great Depression of 1929-1933. We can track and characterize this massive increase in uncertainty in near real time using stock market volatility measures, newspaper-based measures of economic uncertainty, and by aggregating over responses to survey questions about perceived business-level uncertainty.
The COVID-19 pandemic will challenge many companies, but a few will emerge stronger, competitively and financially. Those, that move quickly and focus on the future will rebound faster and emerge stronger than before. Leaders who leverage lessons from the winners in previous downturns, as well as attending to the unique features of today’s environment will be in the best position to succeed.
Credit:
https://hbr.orgMartin Reeves , Kevin Whitaker and Christian Ketels
https://www.nber.orgNATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138
THE DOG THAT DIDN’T BARK: LONG-TERM STRATEGIES IN TIMES OF RECESSION CAROLINE FLAMMER Ivey Business School University of Western Ontario 1255 Western Road, Office 3351 London, ON N6G 0N1, Canada +1 (519) 661 3144cflammer@ivey.uwo.ca IOANNIS IOANNOU Strategy and Entrepreneurship Area London Business School Sussex Place, Regent’s Park London, NW1 4SA, United Kingdom + 44 (0) 20 7000 8748 iioannou@london.edu
TO SAVE OR TO INVEST? STRATEGIC MANAGEMENT DURING THE FINANCIAL CRISISCAROLINE FLAMMER Questrom School of Business Boston UniversityBoston, Massachusetts, U.S.A. cflammer@bu.eduIOANNIS IOANNOU Strategy and Entrepreneurship Area London Business School London, United Kingdom iioannou@london.edu
COVID-INDUCED ECONOMIC UNCERTAINTY Scott R. Baker Kellogg School of Management Northwestern University2211 Campus DriveEvanston, IL 60208 and NBER s-baker@kellogg.northwestern.edu, Nicholas Bloom Stanford University Department of Economics 579 Serra Mall Stanford, CA 94305-6072 and NBER nbloom@stanford.edu, Steven J. Davis Booth School of Business The University of Chicago 5807 South Woodlawn Avenue Chicago, IL 60637 and NBER Steven.Davis@ChicagoBooth.edu, Stephen J. Terry Department of Economics Boston University Boston, MA 02215 stephenjamesterry@gmail.com
PAOLO SURICO, Professor of Economics London Business School, Academic Director, Leadership Programmes, Research Fellow, Centre for Economic and Policy Research Contacts: Regent’s Park, London NW1 4SA Phone: +44 (0)20 7000 8429 Fax: +44 (0)20 7000 8401 Email: psurico@london.edu Profile: GOOGLE SCHOLAR | IDEAS Web: https://sites.google.com/site/paolosurico/home