Creating a successful Corona strategy and what will happen next
Companies and investors around the world are currently ferociously discussing and analyzing what the Corona virus will mean for them. Although there is a lot of uncertainty, decisions still need to be made and strategies created. How to make the best decisions and implement the best strategy under such uncertain circumstances?
When starting to plan your strategy to come out of this crisis a winner, it is important to first realize that all strategy work is done within a certain strategy framework or paradigm. For example, if you are currently analyzing your market competition then you are working within a positioning framework; if you are figuring out alternative ways to use your personnel then you are creating a resource-based strategy. Other strategic approaches you might be – deliberately or not – using are learning strategies, approaches based on network theory, or several other approaches.
Since now the future is even more uncertain than usually, your job is not to create one strategy, but to come up with several alternative strategies. Therefore, the go-to-choice strategy tool in the Corona context is strategic scenario planning. The scenario planning strategy tool is widely used and has its origins in military operations.
How does scenario planning work?
- The first step of any successful scenario planning is to define the drivers of the scenarios. Common drivers used in strategic scenarios are market (such as consumer or regulator) behavior and financial performance. In scenario planning, you are trying to paint several different pictures of how these drivers could behave in the future. After the initial brainstorming, it is common to disregard the least likely and continue working with the 2-3 main assumptions.
- The second step is describing these main scenarios and how they will affect your company.
- The third step is to identify the actions you need to take in those scenarios and the triggers for those actions.
Here is an example of scenario planning: A decade ago, certain mobile manufacturers may have used a scenario such as “Consumers will start to increasingly buy touch screen smart phones.” The description of that scenario may have included that this would be a major threat for a legacy phone producer. The action might have been to invest into the creation and production of a touch screen smart phone. And the trigger for this action would have been, for example, a combination of the profits and market share dropping below a certain threshold level.
The recommendation Excedea gave to its portfolio companies already in early March was to use time (i.e. the duration of the current crisis) as the main scenario driver. The recommendation we made was to describe how the business in question would look if the severe Corona crisis would last alternatively 3, 6, or 12 months. For each scenario, our portfolio companies were then encouraged to make financial projections and concrete action plans. The obvious trigger for these scenarios is then time and the prolongation of the crisis. This is a very simple but powerful analysis tool we believe all companies will benefit from using, whether they are in a hard-hit industry like travel or a still seemingly high-demand sector like grocery retail.
The marginal customer
In the moment of writing (08.04.2020) we are still seeing Corona death rates rising in most of the Western World, while some Asian countries are slowly opening up. Also, the first European countries, such as Austria and Denmark are starting to discuss reducing the Corona restrictions. While there is much uncertainty, we believe the three most important drivers for the economy and business in near future are the following:
1) Complete lock-downs will end in May-June in Europe and the US. This is not because the virus would have disappeared or defeated, but rather because the economies cannot handle longer lock-downs than 2-3 months. Each month of lock-down is estimated (OECD) to reduce GDP by at least 2%. Extending beyond this could mean the cure becoming worse than the disease.
2) The virus will not go away, but we will live with it still at least 12 to 24 months. The virus will be likely to weaken in the Northern hemisphere during the warm summer months, only to come back in the autumn/winter. By then we might have the first vaccines, but even in the best case, vaccines typically have an efficacy of about 40% in similar flu-like viruses. Experts (WHO, CDC) are also saying that having an optimally efficient vaccine available in large scale, is more likely 12-18 months away. In the meantime, scientist and doctors will get better at treating the virus and its symptoms. There are several drugs/treatments that are likely to be available in the autumn (such as antibody therapy, Remdesivir and Chloroquine. For a more exhaustive list see e.g. Clinical Trials Arena). Testing rates will also increase fast and the size of the population who has gained immunity will grow. However, this will not take away the fact that virus will be here for the foreseeable future. Not as severe, not as deadly and not causing large lock-downs, but still there, and it will affect almost all businesses.
3) For many businesses autumn 2020 will mean mostly business as usual. Social distancing can be reduced, deals can be made, and products manufactured mostly normally. Yes, the economy has slowed down, unemployment is still somewhat higher, face masks in public will still be recommended to many, there will be the occasional outbreak and some schools/factories/universities may be closed, but mostly things will get on the path of recovery. But even so, things will not be the same in all sectors. People will not cram into movie theaters, packed lunch restaurants or holiday flights as before. Many bigger events will be canceled or reduced in size. Companies in these sectors and suppliers serving these industries will need to wait a considerable time before volumes return to normal. And hope for an efficient vaccine. For these industries it will be all about the marginal customers and how many there are of them. Naturally critical business meeting travel and related flight volumes will get back to almost normal soon. But the marginal business traveler may choose to still have a video conference instead. The young couples, who have already been tested positive for Corona antibodies may go to their planned holidays, but the marginal elderly couples may not want to risk it and instead stay at home. Same principle applies to cruise lines, events, holiday destinations etc. It is not a question that these sectors wouldn’t recover, but how they can cope with the marginal customers staying away for the foreseeable future. This will vary a lot between industry and company. For instance, Lufthansa has already made their scenarios and analyzed the volumes of their marginal customers. The conclusion is they believe it will take years to return to pre-crisis volumes. A similar analysis and action plan will have to be made everywhere. Some lunch restaurants may not have any problems scaling down smartly to profitably serve 80% of the volume they used to, but a cruise ship operator might not be able to operate with an average passenger rate of 65% of normal.
Regardless of your industry, Excedea strongly recommend engaging in scenario analysis. It requires relatively little effort and the scenarios can (and should) be updated often. For some sectors, which cannot survive without their marginal customers, such an approach can prove to be vital. And when realizing this early enough, it might still be possible to change the business model to be viable one even with reduced volumes.
P.S. Excedea has for years been using its online-tool Growth Auditor for scenario work and strategy analysis. It doesn’t require any physical meetings, automatically benchmarks the company’s situation to peers and can be completed within a couple of weeks from kickoff.
If you have any questions in regards to how your strategy could be improved, feel free to contact us.