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Adapt Your Business to the New Reality

Even in severe economic crises, some companies are able to gain an advantage.

By Michael G. Jacobides, Martin Reeves*© 2020 Harvard Business School Publishing Corp.
From HBR.org Distributed by The New York Times Syndicate /Photos: Shutterstock

 

It will be quite some time before we understand the full impact of the COVID-19 pandemic. But the history of such shocks tells us two things. First, even in severe economic downturns, some companies are able to gain an advantage. Among large firms doing business during the past four downturns, 14% increased both sales-growth rate and earnings before interest and taxes margin.

Second, crises produce not just temporary changes (mainly short-term shifts in demand), but also some lasting ones. For example, the 2003 SARS outbreak in China is often credited with accelerating a structural shift to e-commerce, paving the way for the rise of Alibaba and other digital giants.

In this article we’ll discuss how companies can reassess their growth opportunities in the new normal, reconfigure their business models to better realize those opportunities, and reallocate their capital more effectively.

Reassess Growth Opportunities

he COVID-19 pandemic has severely disrupted global consumption, forcing people to unlearn old habits and adopt new ones. A study on habit formation suggests that the average time for a new habit to form is 66 days. As of this writing, the lockdown has already lasted long enough in many countries to change habits that had been the foundation of demand and supply.

Companies seeking to emerge from the crisis in a stronger position must develop a systematic understanding of changing habits. For many firms, that will require a new process for detecting shifts before they become obvious to all.

The first step is to map the potential ramifications of behavioral trends to identify specific products or business opportunities that will most likely grow or contract as a result. Consider how the pandemic has caused people to stay at home more. Implications include an increase in home office refurbishment, driving greater demand for products ranging from paint to printers.

The next step is to categorize demand shifts using a 2×2 matrix, on the basis of whether they are likely to be short-term or long-term and whether they were existing trends before the crisis or have emerged since it began. The four quadrants distinguish among boosts (temporary departures from existing trends), displacements (temporary new trends), catalysts (accelerations of existing trends), and innovations (new lasting trends). Consider again the behavioral shift to “staying at home more,” which has had a serious impact on retail shopping. The question is, will the shift away from retail stores to online shopping be temporary or structural?

We would place shopping in the catalyst quadrant. The pandemic has accelerated an existing trend rather than creating a new one; people were shifting to e-shopping before the lockdown. But the shift is structural rather than temporary, because the scale and duration of the enforced switch, coupled with the generally positive performance of the channel, suggests that in many shopping categories customers will see no need to switch back. So retailers must shape their strategies to the new normal.

This framework can therefore be used to highlight which trends to follow and which to shape more aggressively. Companies cannot pursue all possibilities and should not try to. To get an idea of which ones to back, ask yourself whether any shift in demand is temporary or permanent. You’ll also need to take a fresh, careful look at the data. This requires that you seek out anomalies and surprises.

Dive deeply into the data

Anomalies usually emerge from data that is both granular (revealing patterns hidden by top-line averages) and high-frequency (allowing emerging patterns to be identified rapidly). As behavior changed with the outbreak of COVID-19, for example, rich sources included data on foot traffic and credit card spending. An analysis showed that the recent drop-off in cinema attendance occurred before theaters were shut down in the United States. This, combined with an existing trend of declining attendance, suggested that the shift was consumer-driven and perhaps likely to persist in the absence of innovation.

Take multiple perspectives

A technique for discovering what you don’t know is to illuminate potential blind spots and alternative perspectives. When it comes to industry competitors, ask yourself: Who is doing well? What market segments are your rivals focused on? The same principle can be extended to customers: Which ones are exhibiting new behaviors? Which have stayed loyal?

Armed with an understanding of where your opportunities lie, you can now move to the next step: shaping your business model to capture them.

Reconfigure Your Business Model

Your new business model will be shaped by the demand and supply shifts relevant to your industry. To figure out what model the new normal requires, you need to ask basic questions about how you create and deliver value, who you’ll partner with, and who your customers will be. As an example, let’s look at how retail shopping businesses should be adjusting to the demand shift to digital.

Can you take the value you offer online?

The value that many retailers provide to customers traditionally has come from the quality of their in-store service. Consider the Chinese cosmetics company Lin Qingxuan. It suffered a 90% collapse in store sales after the outbreak, when many locations were forced to close. In response, the company developed a strategy for digital engagement with customers that would replace the store experience: It turned the company’s in-store beauty advisers into online influencers.

Which platforms should you work with?

The pandemic-induced shift to digital shopping has made customers and firms more dependent on big digital platforms, including Amazon.com and Apple in the West and Alibaba and Tencent in Asia. Increasingly, a firm’s competitive space will be determined by the platform it works with to shape its value proposition. For example, Lin Qingxuan’s conversion of shop assistants into online influencers involved working in close partnership with Alibaba.

Can you expand your customer niche?

Digitization provides scope for niche businesses to expand their markets, perhaps across borders or into adjacencies not currently well-served. Take the case of VIPKid in China, which links teachers in English-speaking countries with Chinese children who want to learn English. With teaching switching from physical to online, the company has seen an opportunity to expand and deepen its links with both students in China and teachers in the United States, Canada, and the U.K.

Reallocate Your Capital

It may be hard to do when cash flows are stressed, but now is the time to take a few well-considered risks. Research shows that the most successful companies invest more than their peers in new opportunities. Unfortunately, many companies are still defaulting to traditional habits of “peanut-buttering” new funding across the business and, when necessary, making horizontal cuts rather than targeted ones.

To avoid that trap, evaluate your capital investment projects along two dimensions: 1) their estimated value tomorrow, after taking into account the impact of demand shifts, and 2) the amount of money needed to keep them alive today in light of often constrained operational cash flows. You can do this at the business unit level, but ideally you should dive deeper to examine specific operations or initiatives.

In times of crisis, it’s easy for organizations to default to old habits — but those are often the times in which new approaches are most valuable.

*Michael G. Jacobides is the Sir Donald Gordon chair of entrepreneurship & innovation and a professor of strategy at London Business School. He is the author of “In the Ecosystem Economy, What’s your Strategy?” Martin Reeves is the chairman of the BCG Henderson Institute in San Francisco and a co-author of “The Imagination Machine.”