- July 21, 2020
- Posted by: Ramkumar
- Category: Strategy
A Paradigm Shift in Business Models Post-COVID-19
The disconnect in industries and business models that we assumed intellectually before the COVID-19 crisis has grown into giant fissures; thus, it has further exacerbated the gap between winners and losers of the power curve of economic profit. We have seen a paradigm shift in business models post-COVID-19.
Along with the expedited pace of change, nonetheless, arises a unique opportunity to unlock significant strategic moves. Through every phase of the economic cycle, companies that pursued big strategic moves persistently improved their odds of bettering their peers. Much of the organizational inertia that generally holds in the way of unfastening these big moves no longer exists, as the crisis has rendered obsolete the budgets and personal targets that make such moves so challenging to accomplish.
Recall the gap
To appreciate how the COVID-19 crisis is turning profit pools, let us analyze market capitalization changes to estimate long-term economic profit for the largest companies globally. While the issue of whether share prices are a reasonable representation of our new fact is subject to deliberation, we aren’t interested in the overall market-capitalization levels as in the patterns developing among firms and industries. And those models are significant, logical across measurement periods, and very distinct from what we observed during the global financial crisis of 2008–09.
The gap in economic profit within the top corporate players and everyone else has increased dramatically. In December 2018 and May 2020, the top quintile of companies increased its economic profit by $335 billion, while firms in the bottom quintile lost a monstrous $303 billion. Presently, the COVID-19 pandemic is driving it to wholly different levels.
What’s pushing this widening gap? So far, we don’t observe a significant reshuffling of industries and companies along the power curve, as was the situation during the global financial crisis, when firms in the electronics, energy, and financial-services sectors slipped off their historical peaks. Firms that began at the top of the curve before this disaster are resilient, while those at the bottom face significant losses.
This increased distribution can be seen both over and in industries. Sectors at the top of the curve – pharmaceuticals, and semiconductors, appear to be leaning forward from the less profitable sectors that began at the bottom, such as banks and utilities. The six most-profitable industries have tallied $275 billion a year to their expected economic-profit pool, while the bottom six have suffered $373 billion.
The diffusion of performance within businesses is growing too. It would be straightforward to consider that the widening gap between those at the top and the bottom is only because of the nature of this pandemic and the resulting demand changes. However, it isn’t a complete narrative. What we are witnessing is a significant acceleration of drifts that existed before the crisis. For instance, online delivery’s capacity rose by the equivalent amount in eight weeks as it had over the entire past decade. Telemedicine underwent a tenfold growth in subscribers in just 15 days. Similar acceleration patterns get recognized in online education, nearshoring, and remote working. To a striking extent, industries that were undergoing declining economic profit before the crisis have suffered even more notable declines because of it. In contrast, those that were expanding their gains have witnessed outsize benefits.
Firms with resilient, future-ready business models placed to drive these trends have drawn considerably apart from their industry rivals. In contrast, those with legacy business models have, for the most part, fallen farther behind. For instance, media companies with streaming services have defeated their traditional satellite-based rivals.
A novel window of possibility
In moments of crisis, leaders are usually in military-command mode, and pre-crisis budgets have become archaic. Resources are more simple to reallocate when no one needs to get persuaded of the necessity for a speedy response, and the personal targets set before the crisis no longer apply. Consider it as a vast “unfreeze.”
The crisis is transforming sectors and companies in very diverse ways. Some companies deliver the best outcomes in their corporate histories, and others are tottering on the brink of bankruptcy. Most are around within.
- Top quintile. Firms in the topmost quintile of economic profit and those blossoming on the megatrends quickened by the crisis could be the event of a lifetime—and many are embracing it. Manufacturers of health products are aggressively extending production capacity for the following year. Pharmaceutical businesses are reinventing their production systems to sustain rising demand. High-tech players are acquiring missing components of their expected ecosystems. E-commerce leaders are spending on infrastructure, capacity, and brand-portfolio development to cater to the rising demand.
- Middle. For businesses with mediocre performance, this is a signal to act. We recognize companies in this situation aggressively reallocating resources to new growth markets. For instance, some provide the full go-ahead for the giant digital- and analytics-transformation plans they had been more reluctant to engage to under pre-pandemic circumstances.
- Bottom quintile. For businesses that see themselves in the bottom quintile by economic profit or in industries confronting secular headwinds, it’s crucial to evade squandering further ground and start restoring momentum. Your starting point should help you to be healthy. Underlying portfolio or industry restructuring may be required to empower you to plug the widening gap to top performers. Even with market values declining, this might be the best time to divest non-strategic parts of the business. Buyers excited on an excellent transaction are there. If freed-up funds get employed to reposition a firm toward growth opportunities, the results of such strategic moves could surpass the lower yields of a divestiture.
Your decision making and performance are prone to be hindered by the extraordinary levels of uncertainty still existing around the virus status, but expecting clarity may occur at a high cost. Companies that drive first in a crisis to get a start on competitors usually has that edge for times to come. As was the situation in understanding the virus break under control, time is of the essence, demanding corporate leaders to prefer action immediately to get ahead of the high acceleration of trends already begun.
Devising a plan-ahead team can benefit. Build option-rich programs that are stress-tested on various scenarios. It will assure you to understand which moves are absolute “no regret” and a knowledge of where you want to have your alternatives open. Once you have generated a strong portfolio of steps, you can dynamically develop your strategy as you discover more.
In various ways, we are just beginning the economic fallout from the COVID-19 pandemic. Some firms may discover themselves in a situation of strength, while others will endure challenging moments. Despite the circumstances, given the speed at which this crisis has been loosening and the high speedup of trends following it, companies will require to be more agile, more fearless, and more resilient than ever before.