How COVID 19 can be a healing Shock

The current COVID-19 crisis we’re all going through was not caused by economic factors, but by a massive health threat. It has led to a health crisis and a human tragedy in many countries. It was in the realm of possible scenarios, but not in the realm of the highly probable ones. It has caused misery and suffering for thousands and might continue to do so until suitable medication or a vaccine is found. What the COVID-19 outbreak has led to is also a massive economic crisis, that needs to be tackled. We, therefore, need to distance ourselves and start to focus on the economic implications, which for many are the glue that holds societies together.

Currently, it is difficult to predict the medical and macroeconomic outcomes, as things are developing fast and the realm of probable scenarios is narrowing down slowly. A few hypotheses seem robust, though:

• The current situation is shocking and tragical, but it will not go on forever.
• People cannot be kept locked down for long periods as it may lead to unrest and additional challenges; for example mental health issues.
• Governments and central banks cannot sustain paused economies indefinitely.
• There will have to be a differentiated return to life and work, while continuing to be careful and protecting risk groups.
• We must assume, however, that we will go through a longer period of recovery with repeating ups and downs of infection dynamics and resulting lockdowns.
• During this period, testing will play a very important role, for both initial infections and antibody testing in order to understand the resilience of the population.
• As we  progress through different phases of the calendar year, fluctuating temperatures may affect the speed at which the virus can spread. This will vary around the world, reinforcing.   the need to invest in testing.
• True recovery will only happen along with positive news on the treatment and vaccine front, while financial markets may pre-empt that.
• This crisis has affected the most fundamental feelings and beliefs; so a return to normal will take time. And what we return to may be a new normal, rather than the old one.
• We will come out of the immediate crisis, but it will not make society and companies more resilient, yet.
• There may be interesting learnings we can take away from the COVID-19 crisis.
• Capturing those learnings may be more of an opportunity than a challenge for societies, markets and companies.

How are companies currently reacting to the situation, and what needs to happen?

Everybody is still in shock. COVID-19 has forced many countries to stall daily and business lives and suspend the economic world as we knew it. Slowly, companies are starting to realize what they must do. In order to better understand this, let us use a simplified example.

Let us imagine a company that has proper crisis management and standard operating procedures in place to ensure employee care. It is conservatively financed, has low debt levels, does not rent or lease excessively and operates in a value network to share utilization risk. It has a geographically diversified supply chain, strong digital access to its customers and operates all “standardizeable” administrative processes through robotic process automation. It has a cost base that can respond to sudden upward or downward demand swings. Contracts with employees, suppliers, customers and business partners have been designed to offer flexibility and account for “force majeure.” This company is on good terms with its competitors, and shares knowledge to identify and manage risk. It also pools and exchanges resources where applicable. It has part of its productive resources nearshore, and covers fast-lane and basic-need production locally. Would this company be in a good shape to withstand the current COVID-19 crisis, with some help from the state? Probably, yes.

This simplified example outlines the vectors/parameters along which companies will have to adapt to the new normal. It also projects lines along which they will overcome the existential trauma that COVID-19 has caused for them. Finally, it preempts questions that may come from financing parties, employees, consumers and business partners, who may have all drawn their own conclusions from this crisis.

Delving into more detail, companies need to focus on the immediate areas for action first:

• Taking care of employees
• Ensuring financial survival, including state aid

Soon thereafter, operational fixes will need to be tackled:

• Ensuring supply
• Ensuring access to customers (physical within limits, digital where possible
• Adapting cost structures to lower activity levels

However, both of the above clusters of actions will not be a sufficient response to COVID-19. This crisis is likely to affect companies more fundamentally. Increasing resilience was on decision makers’ agenda before, but it is a MUST now. Resilience fundamentals include:

• Flexible cost structures, organization and workforce, having a light asset footprint
• Increased use of technology in administration and production areas, backed by cybersecurity
• Enhanced digital customer access
• Partly “reshored” and more resilient supply chains

That said, the crisis is not affecting all sectors in the same way. There are business models, which depend on physical interaction with customers (e.g., tourism, retail, hospitality), that are getting hit beyond any expectation. Sectors with optimized international supply chains are also suffering. Other sectors like life sciences; health care; parts of the food industry; food retail; technology, media and telecommunications are likely to be less affected. The situation may also offer opportunities for courageous investors, consolidators and company builders. So, while managing the crisis and the potentially slow and volatile recovery to a new normal, companies need to keep an eye on opportunities to develop and shape their industry segments/categories.

How will companies interact with customers and business partners?

Companies do not act in isolation. Increasing resilience within the limits of one firm may not suffice if the surrounding structures stay inflexible. How companies act will have an impact on their interaction with customers, suppliers, business partners and competitors.

Going beyond products and services: Strong digital access to customers must be established, with exchanges that go beyond goods or services for money. Only if there is a basis for dialogue beyond product or service offerings can loyalty be called upon in difficult times. Besides, it is dialogue that forms the basis of improved understanding of customer needs, which may be critical as consumer preferences change.

The shift from value chains to value networks: There may be a trend toward value networks rather than value chains as companies will have a tendency to reduce their depth in the value chain and value networks can cope more easily with demand swings than value chains. Supplier interaction may make way for supplier involvement. This may be harsh for those that cannot be sustained, but brings greater planning stability and transparency for those remaining. Geographical footprints are likely to be affected and nearshoring may see a renaissance. Extreme optimization and reduction of working capital, and just-in-time concepts may be past their peak as both offer little buffers for the unexpected.

Sharing information and joint monitoring will become even more important. Organizing joint capacity pools in order to share utilization risk will also be relevant.

How may markets change?

No return to the normal we know: The COVID-19 crisis is affecting the most basic levels in Maslow’s hierarchy of needs[1] – physiological needs and safety. It is therefore fundamental and highly likely that there will not be a return to “normal” – as we know it today. We were used to growth as the underlying paradigm in most developing and developed economies.

COVID-19 is a massive setback for growth and wealth, and we must assume fundamental changes for the society as we know it. This does not have to be a bad thing.

Reduced consumption: Consumption is likely to recover, albeit slowly as consumers will stay unsettled for some time even after the crisis ends and because they are also currently learning that less can be more. However, we must assume that consumer conscience will become more important and that more people will care about the environmental and social footprint of products and services.

Technology to build resilience: Technology can help make companies and societies more resilient. And that is a learning consumers will most likely draw from the current situation as well. This can:

• Foster the acceptance of technological and digital business models
• Drive channel shift further
• Help employees better accept the increasing implementation of technology in companies.

A setback for globalization: COVID-19 could be a major setback for globalization because globalization may be blamed for having helped to spread the virus, made our supply chains vulnerable, and unmasked our local supply shortages and our macroeconomic risk of contagion.

Reduced travel: Travel will have a hard time recovering. People may continue to prefer less exotic locations for leisure and virtual solutions for business. Virtual work in general is likely to become more important as people have been forced to learn its advantages.

Better work-life balance: Being forced to work less and be less social on one hand, while having to make necessary commercial concessions after COVID-19 on the other, may create a fertile ground for a new deal by which the work-life balance is a form of reward that compensates for material reductions.

From growth economy to sustainable economy

COVID-19 is a massive disruptive event that has a catalyst effect. It is bringing out all the transformative pressure that was already under the surface and adding exclamation marks to all the items on the managerial and societal to-do lists. For those who were in a bad shape, this has become existential. For the ones that were doing alright, it is now serious. For the ones that were (and remain to be) successful, those items will have to be tackled quickly too.

Finally, the environment may well be the big winner of COVID-19. It certainly is now, thanks to reduced travel, social life and consumption but there may also well be longer-term effects. If we assume that overall wealth will go down due to COVID-19 and that there has to be a compensation for that, environmental and societal sustainability combined with greater work-life balance can well be this compensation.

The importance of governmental support

Economies and functioning markets play a vital role for societies to operate coherently. Companies have enjoyed a large amount of freedom to develop their business models to the best of their ability, and rightfully so. In the past, however, many companies have concentrated the balance of their focus on their “micro” set of values (e.g., profit and KPI) and considered adhering to the regulations set by governments as sufficient corporate social behavior. This equation may no longer work and the pendulum may have swung the other way so that there is a stronger emphasis on the other side of corporate freedom, which is corporate responsibility.

The transformation that will likely lie ahead will see a number of companies falling by the wayside, certainly in the short term, and that is something only governmental intervention can help avoid or mitigate. Therefore, governmental support will not only be necessary in the short term, until economies can be let off the hook again; it may also be necessary for a slightly longer period in order to balance the hardship caused by a transformation to a new normal.

To sum up, the COVID-crisis is first and foremost a human tragedy. One that has exposed all the fragilities and capital allocation paradoxes of our unsustainable economic system. However, in this tragedy we might also find our chance to build a more sustainable future, a better working world.  In a way, COVID-19 could be the healing shock that helps societies to better cope with some of their most pressing problems and move from growth economies to sustainable economies.

EY has experience of helping businesses address difficult issues in challenging and volatile times. For more information about how we can help please get in touch or visit ey.com

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

[1] Motivation and Personality by Abraham Maslow