We don’t know exactly how COVID-19 will play out, but we still need to plan for the future. Here’s how to develop a strategy for extreme uncertainty.
All we know for sure about the fallout from COVID-19 is that we will experience the deepest global recession since World War Two coupled with a seismic shift in the way we live and work.
Writing for McKinsey Insights, Martin Hirt, Sven Smit, Chris Bradley, Robert Uhlaner, Mihir Mysore, Yuval Atsmon and Nicholas Northcote explain that, even as you deal with the current crisis, it’s essential to develop an agile strategy to help your firm survive an intensely uncertain future.
This, their five-point plan, is designed to help you do that.
THE PROBLEM
“Most companies will be very vulnerable to the economic fallout of extended public-and-employee isolation measures.” This isn’t just an economic challenge – it’s also “a shock to customer behaviours and business models too”.
You can’t duck this one. If you’re to survive and thrive, you need to be the first to know where the world is headed, and be the best at adapting to the situation as it develops.
THE SOLUTION
Speed and reasonable accuracy are the goals here – you don’t have time to perfect your plans – good enough is good enough. To tackle the challenge, appoint a multidisciplinary “planning ahead team” whose task is to plan for future scenarios. It must be distinct from your usual strategy team and separate from but feeding into day-to-day crisis management. The planning-ahead team reports to the CEO and his or her executives.
THE FIVE-POINT PLAN
The planning-ahead team operates as a single entity made up of flexible working parties which collaborate to flesh out a five point framework:
1) Understand your baseline position
2) Create multiple future scenarios
3) Consider your firm’s “broad direction of travel”
4) Identify “actions and strategic moves that are robust across scenarios”
5) Define “trigger points” that give you the green light to act at the right time
Remember: this plan is only as good as the information going into it – continuous feedback and review is essential.
UNDERSTAND YOUR BASELINE
Referring to your three-year-plan, build a picture of where you were at the beginning of January 2020. Look at your financial position, ongoing projects and major upcoming strategic decisions. This gives you an understanding of where you were when the pandemic struck – it’s your baseline position.
Your task now is to allocate what you learn to one of three categories: still relevant, now wrong, and don’t know. You’re not after perfect accuracy here, but a snapshot which you’ll use as your starting point for the next stage of the plan.
BUILD SCENARIOS
Build scenarios for the future course of COVID-19, the health-related response to it, and the various macro-economic repercussions based on the best information you can get quickly. Consider three main scenarios taking into account possible variations within each:
1) That the virus is contained and that the recovery is slow, fast, or somewhere in between;
2) That the virus recurs, suppressing growth and recovery to a larger or lesser degree; or
3) That the pandemic escalates, recovery is delayed and, that when it comes, it’s partial, full, or somewhere in between.
Model the impact of each scenario on your baseline financial position, operations, and strategic goals. Look for the biggest threats and opportunities you could face and “estimate your capital ‘headroom’ in the worst-case scenario”.
Scenario planning helps to contain some of the confusion about what the future might hold. It also helps to identify your priorities, pinpoint the decisions that are a “no brainer” in any given scenario, and give you an idea of events that indicate a particular scenario is coming to pass.
Make sure your team communicates its planning assumptions to both the rest of the team and the C-suite: “If the plan-ahead team believes that the company needs to operate under an assumption of an 8% drop in GDP, then the team that is constructing the financial portfolio can’t make an assumption that’s different than that.”
CHART A STRATEGIC DIRECTION
Your scenario planning will have established a variety of “new normals” arising from COVID-19, but what will be your broad strategic direction in response? Will it be to:
- Sustain and rebuild core operations along similar pre-crisis lines – e.g. consumer telephony and utilities.
- Restructure your business to account for leaner times – e.g. airlines and cruise lines.
- Change your business model to adapt to changes in the way we live and work – e.g. “remote learning, working, services and consumption”.
- Develop an entirely new business model because changes in the way we live and work have rendered your current one obsolete.
This exercise is a hard look at what your focus must be as the crisis dissipates. It’s invaluable in terms of providing a foundation upon which to build concrete plans – based on a realistic understanding of the kind of company you will be in this changed business landscape.
MAKE AN ACTION PLAN
Your goal is to build “a portfolio of strategic moves that will perform relatively well… across all likely scenarios”.
Work though each of your scenarios, identifying in each case the decisions you will make as they unfold. How do these scenarios affect your pre-crisis financials, current projects, and upcoming strategic decisions? What might the opportunities and threats be; which projects would you cancel; what would you do instead?
There will be some “no-regret moves with which you can proceed with confidence”; others are more risky with bigger rewards or consequences. Still others will involve taking out options rather than making all-in commitments.
It’s vital to know what your moves will be and in what circumstances you’d make them. Try to break your scenarios into smaller stages so that you can stagger your responses and protect the firm against the risk of making big commitments during a time of such uncertainty.
You’ll end up with “several dozen strategic moves” of varying importance. Make sure you share this information with all stakeholders inside and outside the company, and get them to run their own planning process for putting your plans into action.
SET THE TRIGGERS
You need to figure out how to make sure you make the right decisions at the right time. The only way to achieve this in a swiftly evolving situation like this one, is to set trigger points – markers which will tell you that the time has come to move to the execution stages of your planned moves:
“Your job isn’t to know the unknowable but to be the first to know and the fastest to act. This requires a sentinel that can see the signals first, combined with a plan that is flexible and ready to act on the trigger points.”
A planning-ahead team is your way to make sure you have eyes on the future as well as on dealing with today’s crisis. Whatever the future holds, make sure you’re prepared for it.