We cannot more agree with McKinsey (04.2020) that say, ‘Now more than ever, you can’t get rid of uncertainty; you have to confront it. A good way of doing this is to build scenarios.’
This is the reason why we @PrEXCELerator Bulgaria initiated a series of articles on Scenario Planning for lockdown businesspeople.
Otherwise obsessed with perfection, now we release these articles with the clear view that things change at an ever-growing rate. Despite we might not cover everything, we cover the most essential in order to support your decision-making as a leader. McKinsey (04.2020): ‘Speed is of the essence, and waiting for perfect answers can be counterproductive: you need to deal with uncertainty, not let it bottleneck your decision making.’
Why Scenario Planning now?
Alike you, we try to figure out what the new normal will look like. At the same time, we see organizations that are over-occupied with the here and now and their short-termism blinds them to see beyond the temporal horizon. McKinsey (03.2020): “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.”
Curiously enough, these words are not written by Ian Davis on occasion of the on-going crisis, but 11 years ago, amid the last global financial crisis. Strangely, how true they sound today.
So, are there similarities between the Corona crisis and the Financial crisis (2008-2009)?
Let’s first outline that paradoxically, the corona crisis brought another crisis to a halt – the refugees one, as stated by Dnevnik (20.03). ‘Fiscal discipline is not an economic mantra even in Berlin, and there is not a single European government that advocates at the moment for opening borders for refugees.’
Forbes (23.03) says, “It’s just like other downturns, where you never really know. 2008 started happening but you weren’t really sure how bad it was going to be. Once everyone realized how bad it was getting, it slows down a lot. Investors go inward (I have my own portfolio to tend to). But you also have opportunities to get involved in companies you’ve always wanted to be involved in financially… In this case, I believe VCs are waiting for market volatility to drop before jumping in. Everyone has a ton of dry powder and is waiting for some certainty before getting back to normal.’
This is why more and more analysts recommend company leaders to consult with people who have passed through a number of crises. Interestingly, when observing the behaviour of people in the early weeks of the coronavirus pandemics, people in their thirties and below exhibited much more anxiety as compared to people in their forties plus. Evidently, the former were too young when the Financial crisis in 2008-2009 stroke, and have no resilience built as part of their psychological immune system. While the latter were old enough to undergo the full pressure of the Financial crisis and cope with it, thus building resilience.
Hence, when taking decisions for your business, surround yourself with people who have overcome several diverse crises. The more crises, the better.
A specifics of the C-crises is its dual nature. McKinsey (03.2020): ‘The coronavirus is not only a health crisis of immense proportion—it’s also an imminent restructuring of the global economic order.’
McKinsey (03.2020): ‘The pandemic has metastasized into a burgeoning crisis for the economy and financial system. The acute pullback in economic activity, necessary to protect public health, is simultaneously jeopardizing the economic well-being of citizens and institutions. The rapid succession of liquidity and solvency challenges hitting multiple industries is proving resistant to the efforts of central banks and governments to keep the financial system functioning. A health crisis is turning into a financial crisis as uncertainty about the size, duration, and shape of the decline in GDP and employment undermines what remains of business confidence.’
Consequently, the current crisis is not only a psychological shock. It is not even limited to a shock to the demand for your company’s service(s). It is a shock to your business model, because prospective consequences might or will lead to the restructuring of whole industry verticals and all industries therein.
In order to determine the level of resilience of your business model, you have to undertake a number of steps:
- Define (to the extent possible) what has permanently changed. Review and change your analysis regularly, e.g. every one or two weeks.
- Make a sound PESTLE analysis of your company external environment. We will help you with our C-crisis PESTLE which we publish shortly. However, do your version of it depending on what rings true for you.
- Based on Steps 1 and 2, craft a sound SWOT analysis for your business, taking into account all your current advantages, your cash buffer and trusted partnerships.
- Next, define and assess different type initiatives, and create as many reasonable options. These will act as your safety nets.
McKinsey (04.2020): ‘Some initiatives will make sense in all scenarios; those are no-regret moves with which you can proceed with confidence. Others will pay off big in some scenarios but may hurt in others; those are big bets, and the key here is to gather as much information as possible before making a go/no-go decision. If possible, you should try to break them down into smaller parts, investing in phases to reduce the risk associated with a large, one-off investment under high uncertainty.’
This should build a sound ground for future-proving your business model and amending it accordingly.
Harvard Business Review (10.03): ‘While the crisis in China impacted all sectors to some extent, at a more granular level, demand increased in many specific areas. These include B2C e-commerce (especially door-to-door models), B2B e-commerce, remote meeting services, social media, hygiene products, health insurance, and other product groups. Some Chinese players mobilized rapidly to address these needs.
For example, Kuaishou, a social video platform valued at $28 billion, promoted online education offerings to compensate for school and university closures. The company and other video platforms partnered with the Ministry of Education to open a national online cloud classroom to serve students. And a major restaurant chain leveraged down-time to plan a new offering of semi-finished dishes, capturing the increased need and occasion for home cooking during the crisis.’
Now we start with Step 1:
What has permanently changed?
McKinsey (04.2020): In a disruption of the magnitude of the COVID-19 pandemic, a point of view on what has changed permanently is essential. It helps you avoid a hedging approach to the future in which you spread your resources like peanut butter across a range of opportunities without really taking a clear stance.
You need to analyse changes per different balance layers.
► Government <- Market Balance Layer
According to Dnevnik (20.03) the first lesson to learn is there’s one major difference between the Financial crisis in 2008-2009 and the corona crisis, namely, the coronavirus will impose the return of the big government.
Dnevnik (20.03) goes on, ‘A paradoxical feature of the 2008-2009 crisis is that the lack of trust in the market did not open the door for a more profound governmental interference. Now the coronavirus will decisively revert the government. People rely on the governmental authorities to organize collective protection actions against the pandemics; they rely on the government to keep the economics afloat. The governmental efficiency now is measured by its ability to alter every day the behaviour of masses… ‘Don’t panic is a wrong message for COVID-19. In order to control the pandemics, people must panic, hence changing their whole lifestyle.’
According to Capital Weekly (27.03) the economic measures undertaken as a result from the pandemics will increase the mountains of state debts all over the world.
We may anticipate that governments will exhibit control over certain industries (like Pharma) and supply-chains. Hopefully, any government will partner with private sector, rather than favouring the shift of power from the market to its sole authority, thus leading to authoritarian regimes.
► Within industry structures: both along whole industry verticals, and within your industry
As part of this layer you need to consider the following:
- Different recession type
- Different speed of recovery across industries and geographies
- Your partners might change their business model too, and this may lead to ceased or restructured partnerships
Expect different recovery speeds for different sectors.
Unsurprisingly, sectors and product groups recover at different speeds, thus requiring distinct approaches. Stock prices fell across all sectors in the first two weeks that China’s epidemic accelerated, but leading sectors, such as software and services, and healthcare equipment and services, recovered within a few days and have since increased by an average of 12%. The bulk of sectors recovered more slowly but reached prior levels within a few weeks. And the hardest-hit sectors — such as transportation, retail and energy, representing 28% of market capitalization for China’s largest stocks — are still down by at least 5% and showing only minimal signs of recovery.
This means companies need to calibrate their approach by business — and large companies need to calibrate their approach by division. For example, a large global food & beverage conglomerate used the crisis to accelerate the long-term shifts in its product mix in China (the company’s second largest market worldwide), including increasing its focus on health-relevant products, imported products, and on online sales channels.
McKinsey (04.2020): The best response to navigating through the COVID-19 crisis and the subsequent recovery will differ based on a company’s circumstances. For some, simply staying calm and carrying on will be the optimal approach. Others may need to undertake radical restructuring of their cost bases and business models immediately.
Which recession type?
As Capital Weekly (27.03) states, ‘Even if the most optimistic scenario of V-curve recovery happens, both the EU, and the USA must urgently look for a new growth model, one that differs from cheap debt and balloons.’
McKinsey (04.2020) recommends the creation of different scenarios based namely on this factor.
What is necessary to do immediately?
>> few possible versions of the next normal based on different recovery types
>> consider the clear shift from global to local-to-local supply chains
>> check out not only your suppliers but their suppliers too, i.e. 2nd and 3rd – tier suppliers.
>> determine the in-person point of sales & digitize
>> follow how the product mix (at least the 4Ps) will be affected on a monthly basis and adjust promotions accordingly
In ‘Race against Time, or What to do right now as soon as possible?’ we will sketch out a number of mandatory steps that will save your business and put you on the fast-track trajectory. But before that we have to pay close attention to the C-crisis PESTLE.
McKinsey (04.2020): In an environment as uncertain as the one with COVID-19, the passing of time will make a rigid plan rapidly outdated. The world is going to evolve fast. You don’t yet know which scenario we are approaching. But you need to try to be the best learner (the first to know where the world is going) and the best adapter (the one making the best decisions and iterating the plan). It isn’t about starting with the perfect plan: it’s about being on the fastest improvement trajectory. In a fast-moving world, that will matter most, as even a great plan will become obsolete.
We help you be the best learner. It is your turn now to be the best adapter.
Scenario Planning for lockdown business people, or What to do till the dust in the air settles
The Corona Crisis PESTLE, or Trends we see now that will affect us in the future (in 2 parts)
Race against Time, or What to do right now as soon as possible?
The RE-gnosis, or How to bridge the gap from the future to the present?
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