Win the Future
The unfolding, global COVID-19 pandemic is a human crisis of historic scale and complexity. It is straining health care systems, government fiscal capacity, and the ability of many organizations to cope with the changes wrought by the virus and the response to it. The level of uncertainty for most leaders is unprecedented, and most of our frameworks for planning and problem solving are unable to manage the geographic variability, uncertainty, and the exponential change brought by the COVID-19 crisis.
In our work to confront this challenge with public and private sector clients worldwide, we have found that many leaders are asking the same set of questions: How should I forecast my revenues? How should I adjust my budget? When will this be over, and when will we return to “normal”?
These are good questions, but the reality is, we shouldn’t be asking them at this point. In the wake of so much uncertainty, we should instead focus on framing potential scenarios and use them to develop a robust plan of action.
Three months into the COVID-19 crisis, we are starting to see patterns in its impact on countries and cities, as well as in these areas’ responses. We see three distinct phases. First, there is the “Flatten” phase, in which countries or cities lock down to flatten the virus’s exponential growth curve. Second comes the “Fight” phase, during which a geography “Restarts” its economy while maintaining a low rate of infection, while still running the risk of having to implement further lockdowns. Finally, we are anticipating a “Future” phase, which begins only after a vaccine or highly effective treatment has been developed and deployed.
We have applied this framework on a localized and sector basis and have created different scenarios for each phase to account for the shifting dynamics and complex elements that are part of the COVID-19 landscape.
Three critical insights have emerged from our scenario work:
- Get ready to Restart. The transition from Flatten to Fight, or what we refer to as a “Restart,” is an intentional policy decision that is made when a set of necessary pre-conditions are met in a given geography. Business leaders cannot control that decision or timing, but they can make sure they are ready to Restart.
- The Fight will be protracted. The Fight phase is going to be longer than most leaders we have talked to anticipate. We expect that it will be between 12 to 36 months before a vaccine or highly effective treatment can be developed and deployed.
- The Fight will be expensive. The Fight phase will be more economically challenging than most leaders seem to expect. Because the situation is volatile, consumer and worker confidence has been shaken, and because of the risk of further outbreaks and localized lockdowns, or perhaps even national ones, we envision an ongoing impact to the global economy. Our US-focused scenarios show a potential range of a relatively severe 5% to 20% impact on microeconomic outcomes such as revenues or employment, before accounting for policy interventions and responses, which will strongly influence the end result.
Part of the strategic challenge is that the effects of COVID-19 will vary significantly by geography and sector. Individual companies will see even greater variation amongst their outcomes during each of the Flatten, Fight, and Future phases. Such variation has been observed in every prior economic crisis, and the uncertainty and multi-phase nature of this crisis may lead to greater disparity than usual, creating even more winners and losers than is typical. Accordingly, we think it is imperative for business leaders to use scenarios with a range of outcomes to develop a plan for their companies to: a) Be ready to Restart; b) Win the Fight; and c) Win the Future. Particularly, we think that winning the Fight phase is crucial because it creates the opportunity to win the Future.
To help companies and societies respond to COVID-19, and recover from it, we offer an approach for framing and developing scenarios, and suggest what they can expect in trying to accomplish these goals.
THE PANDEMIC WILL PLAY OUT OVER THREE PHASES, EACH REQUIRING ITS OWN SCENARIOS
We believe it is possible to generalize and draw conclusions from these outcomes. While each nation is on its own journey—with differences based on the wide range of geographic, demographic, societal, political, and economic factors that result in variation—the basic shape of the journey is the same everywhere.
Three distinct phases emerge:
- Flatten. The initial stage of response takes place when a nation or area is locked down in order to reduce the peak caseload in an effort to “flatten the curve,” and to avoid overwhelming the health care system. Strict physical distancing, bans on gatherings, and the cancellation of all but essential activity are hallmarks. The US, most of Europe, and an increasing number of locations around the world are currently in this phase. Some have been able to keep the Flatten phase more localized, especially China, South Korea, and Taiwan. Unfortunately, flattening the virus is also flattening the economy—a problem that is compounded by the relative impotence of economic policy, which is limited in its ability to offset the shock’s intensity.
- Fight. Once a sizable, sustainable decline in new cases and new infections is reached, and elected and public health officials feel that the situation is under control, we enter the Fight phase. In the second phase, the curve has been flattened (or crushed) and the rate of new infections is moving toward zero, giving the health care system time to prepare, expand capacity, and manage the caseload. At this point it is possible to consider reducing some restrictions and, while maintaining physical distancing, to restore a moderate level of economic activity. Close monitoring for upticks in infections and new cases is still a hallmark, as a vaccine is not yet available. Economic policy will play a critical role in keeping the crisis from doing structural damage to economic actors, even as activity remains depressed. The adequacy of policy will determine if the economy is able to return to its pre-crisis growth path, or if it will settle into a lower-potential growth path. Avoiding further lockdowns during the Fight phase will be critical because of the limitations of policy interventions in such a context.
- Future. The ultimate goal is to reach the Future phase, at which point a vaccine is approved, available, and widely administered, or at least a highly effective treatment is developed. A vaccine must be 80% to 90% effective to likely provide herd immunity. In this phase, economic activity can be fully restored. Whether or not this restored level is weaker than before will be heavily influenced by the ability of the economic policy launched in the Fight phase to avoid structural damage to firms and households.
How do we simultaneously fight for public, economic, and social health in a pandemic that is only partly under control?
CONSTRUCTING SCENARIOS
The three phases are broadly descriptive and are not meant to describe the specifics of any one country or region. They instead provide a framework for scenario planning and analysis for businesses and society at large. To answer the big question, we need to consider several interconnected elements in each phase:
- Disease Progression
- Health Care System Capacity and Response
- Government Policies and Stimulus
- Business Engagement, Response, and Degree of Reopening
- Public Engagement and Response
We must develop and evaluate scenarios across these elements for each of the three phases, recognizing that dynamics and outcomes will differ by phase. Exhibit 3 illustrates our belief that each potential scenario will be characterized by five outcome measures:
- How long is the Flatten phase?
- How deep does the Flatten phase go?
- How long is the Fight phase?
- How deep does the Fight phase go?
- What level will the economy achieve during the Future phase?
WINNING THE FIGHT STARTS NOW
The post-COVID world will not look like the one we’ve left behind. It will come with its own unique set of obstacles and opportunities.
The road ahead will be challenging, but we know that companies can gain the greatest advantage and market share during adversity. To get ahead, leaders need to be clear-eyed about their organization’s situation, and act accordingly. By accepting and preparing for this reality, business leaders can stay on top of the unpredictable situation and lay the groundwork for survival and eventual success in the Future phase. Business leaders should do scenario planning for their sectors, geographies, and organizations:
- Be ready to restart. Most companies have transitioned from ensuring their employees’ safety to thinking about the Restart. They are waiting for some policy guidelines in most countries, but they can take cues from those countries already in the process. Restart is a known and coming inflection point, and preparations should start now. How can you begin the preparations to safeguard your workers, your customers, and your workplaces? How can you start working on the long-lead-time items such as PPE, cleaning supplies and equipment, updating employee policies around sick leave, and potentially protecting at-risk populations? How can you implement the corporate version of the 4T Virus-Monitoring System, including needed equipment, such as IR thermometers? Reimagine your operations entirely to COVID-proof them during the Fight, whether on the production line, or in the retail storefront.
- Start to win the fight now. The COVID-19 crisis is special, and it is different from previous crises. It starts on Main Street and entails consumers changing behaviors first in the Flatten phase, due to government-mandated lockdowns, and later in the Fight phase, when they are hesitant to go to congested areas. The amount of change and variation across geographies and over time during the Fight phase is likely to be the largest any of us has ever witnessed.
We’ve studied what the best of the global S&P Global 1200 companies did to come out of the Great Recession (2007 to 2009) and found that five factors that stood out, and that we think are relevant today:
- Act proactively. Get cash and costs out quickly to protect and create a strong foundation for your organization. Act quickly and gain advantage to start investing, engaging in M&A, and growing faster than the competition.
- Stick to a clear vision. Even as they looked for new sources of growth, top performers pursued the clear vision that they had before the crisis—a vision that was based on a small number of long-term themes.
- Increase demand vitality. Create demand-focused capability and adapt your commercial efforts and your offering to what the customer needs now—and where they currently are at. Step change your online presence and ability to market, sell, and service online.
- Create supply agility. Given variability and uncertainty, build agility and adaptation into your supply base and supply chain.
- Build enterprise resilience. The top performers knew that they couldn’t avoid future disruptions, so they built organizations not only to withstand future shocks but also to anticipate them, including streamlining core operations and redesigning processes to capitalize on digital capabilities.
START THINKING ABOUT THE FUTURE NOW
While we believe there is substantial time until the final phase arrives, it is not too early to begin thinking about potential sources of advantage we can build during the Fight that will help us in the Future. Consider your company’s position. Is it stressed, impacted, or among the lucky few that have been accelerated? Are there assets to buy, contracts to execute, or supplies to secure that are priced attractively now and can render advantage later? What are the product and service innovations that you can pursue and perfect? Ensure that what you are doing today will bring about the end of the crisis tomorrow. How must you transform your business to win the Fight—and win the Future?