Business in The Time of Covid-19

In response to requests from former and current students I have written a series of short notes on the implications of #Covid19 for business and the #economy. Here is the first one – How should businesses respond?

If interested please sign up for my April 3rd London Business School webinar on the topic. Watch out for tomorrow’s note on what Covid-19 means for GDP.

Companies are reeling from a sudden collapse in the economy. The initial response has invariably been one of shock, anxiety and a focus on immediate short-term goals of how to deal with the unexpected disruptions. As the shock wanes and the disruption is dealt with firms are increasingly asking ‘What now?’

Time may be hanging heavy for those home sheltering but history feels like it is happening at a faster pace than usual. Now is a time when crucial decisions need to be made, experience will be rapidly accumulated and reputations made and lost.

What is clear for us as individuals as well as for firms and governments is that trust and decency are paramount. We will each be judged for years to come by our actions now – critically not just in a narrow commercial sense but viewed from a broader social lens.

In preparing for the future it is natural to look for guidance as to what are the most likely future scenarios. However, there is simply too much uncertainty around to be able to offer meaningful forecasts. Firm’s therefore need to focus on robust rather than optimal policies. Optimal policy is when firms are confident about what the future brings and design policies to maximise those circumstances. Robust policies are those skewed not to exploiting the most likely future scenarios but providing a defense against potentially bad outcomes. However crucially the need is to focus on the ‘most likely’ least likely outcomes.

With so much uncertainty there are a wide range of dystopian future possibilities.

Some worse case events may be so bad there is nothing you can do to survive them. Others may be so unlikely you shouldn’t prepare for them. The skill is in deciding what probability (5%, 10%? 25%?) these less likely outcomes are that you deem worth focusing on. That in turn will require detailed knowledge of your own firm structure as well as the market in which you operate. It is also important to recognise that Covid-19 is itself an extreme event that will create a cascade of other seemingly unlikely occurrences. Stress testing the various areas of vulnerability across all your practices and processes is an important part of this robust approach.

Covid-19 is a truly disruptive force but it is important that firms don’t just tackle that disruption at a process driven level but also at a strategic level. Far too many firms are trying to stick to their existing corporate plans – either by maintaining what they have always done but attempting it remotely or simply pushing back timings of existing plans. 

However, what is most important for firms during these times is to stick with their mission rather than their plan. In other words what ultimately is the purpose of your firm and what is it trying to deliver? Louis Vuitton switching its fragrance divisions to producing hand sanitizers is an extreme and highly public-spirited example of this. 

Focusing on your mission helps concentrate resources on what is key for business continuity. Business continuity doesn’t mean sticking with your plan conceived under different circumstances. Rather business continuity is about focusing on your core strategic objectives and potentially revising your plan to embody this in changed circumstances. Whilst continuing to do what is usually done is at one level reassuring in a time of crisis that doesn’t make it optimal. Just as farmers don’t go out and sow seeds in winter, so some activities should just be curtailed right now.

That doesn’t necessarily mean reducing resources or to hold them in furlough. This is a time to reallocate resources. One economic model of recessions/downturns is they act as a ‘pitstop’. In Formula 1 racing the optimal strategy is for a car to spend some time not racing but off the track undergoing a pitstop. A change of tyres, refuelling and a retune all enable the car to then go out and race faster than ever. The same investment opportunity offers itself to firms now.

At the heart of this argument is an opportunity cost. When times are good then the cost of diverting resources into long term thinking, innovation and efficiency gains are high as it diverts them from immediately revenue generating activities. When output and demand is low, the opportunity cost of these longer term activities is much less. Given in many sectors the current disruption is likely to lead to long term shifts in behaviour (eg as more products and services shift to remote) this suggests it may be better to invest time in developing new products for when the race continues than to peddle existing products in a sub-optimal form for free online.

Part of this future planning will also be about preparing for a flexible response when recovery does happen. Whilst some industries will just see lost output from the shutdown (cancelled holidays won't all be rearranged, gym classes will not be doubled upon resumption) and other industries will see weaker demand (loss of income and uncertainty will adversely affect car purchases) a number of sectors will see marked intertemporal substitution e.g. rather than do the event in March it will be rearranged to later. For instance, rearranged weddings will still happen and will have to happen alongside existing weddings that have been unaffected. There will be pent up demand for visits to hairdressers, dentists, etc. This will require firms having to manage high capacity demand and this will be an important part of recuperating financially from the shutdown. This will mean the usual seasonal pattern of activities will be massively disrupted. For instance, in the case that the economy reopens in June and July the usual European August shutdown is unlikely to occur. Don’t think that when things stop being abnormal things will go back to normal!

To summarise:

·     Given the level of economic uncertainty ahead now is a time for robust not optimal policies

·     Business continuity means focusing on your mission not your current plan – how can you shift your plan to stay mission consistent in changed circumstances?

·     This is a time to reallocate resources – focus on using this downturn as a ‘pitstop’ so that you re-enter the race faster and more efficient than before

·     Be prepared to find ways to recoup lost output intertemporally when things recover - Don’t think that when things stop being abnormal things will go back to normal!

Andrew J Scott is a Professor of Economics at #LondonBusinessSchool, Research Fellow Centre for Economic Policy Research and author of the "100 Year Life" and the forthcoming "The New Long Life". 

Twitter @ProfAndrewScott · LinkedIn @ProfAndrewJScott · Website

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Photo sources:

Black Swans, Sophia Floyd/Audubon Photography Awards 

Pit Stop, Photo by Darren Nunis on Unsplash