In this article, PM+M partner David Gorton discusses his views on the economic situation in light of COVID-19, how senior leadership teams have adapted, the challenges that may arise and how businesses should prepare for uncertainty in the long-term…
After being told that the world in 2019 was Volatile, Uncertain, Complex and Ambiguous, in early 2020, historic shocks affected our businesses, our markets and our relations with the government. Each of these shocks was dramatic and far reaching.
Successful responses to these from businesses have included intense concentration on: management maintaining tight control of business activities; seeking maximum visibility throughout the firm and its stakeholders of key actions and the reassurance they bring; and responding to changing pressures with flexibility.
The pace and scale of change has slowed down, but for many businesses that just means that the “new normal” is now here and it is very difficult. The new challenges that individual sectors of the economy face are much more divergent now than they were in the initial stages of the shocks and the scale.
Many businesses discovered that in the face of a genuine emergency which affected many aspects of life, they were able to achieve operational changes with much greater ease than they had expected – there will be a different scale of challenge in replicating that speed of change for the next phase where the impetus for change is much more specific to the business.
In considering the principles which businesses seem to have successfully adopted in managing the first stage of these shocks, the key one now seems to me to be visibility – with the emphasis on this shifting much more to the market place and within that, particularly to understanding customers (current and potential).
The medium-term prospects of individual market sectors are dramatically different now to how they were seen at the start of the year and the long term (if that can be considered at all) looks different again. To illustrate this, I am going to consider three parts of the economy – aerospace; property and energy.
Aerospace has been an area of huge growth in demand, expenditure and investment for many years with flights (both long and short haul) increasing dramatically. With Covid-19, flights from UK airports are down by over 95% at the moment and the process of this reversing is highly uncertain. There is an understandable nervousness concerning potential infection during a flight – slowing passenger demand alongside regulatory challenges and an expected long-term shift in business demand with the acceptance of video conferencing effectiveness. The effect of the expected reduced end user demand for flights on the aerospace supply chain is likely to be dramatic with new orders plummeting – businesses relying on this sector are likely to need a significant strategic shift to survive.
For property there are much more complex pressures – demand for office accommodation is likely to be significantly reduced, at least in some sectors, by the increased acceptability of working from home while demand for manufacturing and warehouse/distribution space may well hold up as the benefits of resilient supply chains are appreciated.
In residential property, the argument may still be location, location, location but the preferences driving that assessment may be dramatically different with shifts in working practices and transport preferences we are seeing. Whether this does anything to reduce the way the gravitational pull of London distorts the UK economy we will have to see.
Within the energy sector, the impact of the climate crisis hasn’t stopped – despite the enormous reduction in economic activity due to lock downs in various countries, 2020 is still well above the level of CO2 emissions necessary to avoid dramatic climate change. It has however accentuated some factors – negative oil prices for North America at the end of April would have been unimaginable at the start of the year. The demand fall that drove that price collapse was partly due to lock down but also the accelerating cost efficiencies of solar and wind generation and the increasing flexibility and ease of use.
A simple point is that even if oil is free, converting it into a product that you can use and getting that product to the place that you want to use it is often quite expensive and risky. The vast investments in petrochemical extraction are being shown to have volatile returns and that makes that capital even more expensive. We can expect an ongoing shift to direct use of electricity for even more functions than at present. How this long-term trend plays out in the volatility of the current market is very hard to see.
How to respond?
So, having done our best to understand the market environment we operate in (or at least highlight how hard it is to understand!), how should we respond in practice?
All businesses can be divided into three broadly separate functions:
– Value generation of the business (transforming inputs)
– Management of the business
– Contact with the customers
Each of these is being affected at present by Covid and the responses that have been made have been adaptations to distancing through technology and changing locations (and in some cases largely ceasing the value generating element). The challenge for business leaders is of moving to a new way of working given the different pressures on those three business functions and, critically, retaining/building a strong corporate culture through the process. Without a strong corporate culture, the chances of maintaining business success in volatile times are poor!
For PM+M, as for most professional service businesses I deal with, the entirety of all three functions has been shifted in location to the homes of the team and technology has been very effectively utilised to maintain service. Corporate culture is being maintained by heavy commitment of time by leaders at all levels to communication and to replicating some form of social interaction online. Unwinding this situation is not urgent as effectiveness has been largely maintained and there is limited pressure from the team or clients to do so.
For other businesses, the situation is much more complex with no capacity to move the main operations generating value from their existing location and so there is great disruption in maintaining social distancing etc. Management of the business and contact with customers may have shifted to be online, but longer term this may challenge the strength of the corporate culture.
The key issue for businesses today is maintaining the ongoing change and transition to new and uncertain states for all your business activities at differing rates – and through it all, remembering to be obsessed with how your customers are adapting to the situation and make sure you can respond – and keep your team committed to your culture and your business.
I would love to hear your thoughts on this and any/all of the topics I have touched on here – please do get in touch with me using the button below.