Business owners longing for things to return quickly to what they were in pre-COVID-19 days may be on the wrong side of history.
One of the key tasks in developing a business strategy is to identify and separate what is relatively predictable from the fundamentally uncertain. Future scenarios are built by varying the uncertain while keeping the predictable constant. Of course, if there is nothing which can be predicted then there is not much use for strategy or any sort of planning.
In this ongoing heated debate between various stakeholders on lockdowns-versus-opening the economy since COVID-19 appeared as a major disruption in our lives, we seem to be dealing mostly with the unpredictable, with some exceptions.
For those whose livelihoods depend on business, it is natural to want the economy opened as soon as possible to prevent financial destruction, which is already imminent for many.
However, conducting business requires both supply and demand to exist at the same time. You have a product or service to sell. Someone else needs or wants to buy it. In the current circumstances, when businesses want to open the economy, they want the supply side to be opened, for their factories, offices and shops to be allowed to operate.
But the current situation is not and has never been a supply-side issue, it is a demand problem. The fear of this virus has, for all intents and purposes, killed the demand for most products and services. From crude oil to schooling, to eating out to travel, and to shopping and so on. Demand is dead, hence the unpredictable situation prevails.
In fact, this is probably the first time the world has collectively seen such a drastic collapse in demand. With the exception of essential food and healthcare, it is difficult to find a sector where demand has not been disrupted. In order to open up the economy, the demand has to return.
But how does demand reappear and assume its pre-COVID-19 levels? That can only happen when everyone feels safe from the disease. When we can return safely to schools and offices, take public transport or eat at restaurants, go shopping or travel. That is when demand will return. Can that actually happen without a vaccine being developed? Even if a vaccine becomes available tomorrow, it will take a while before all countries in the world acquire it.
One often hears in the media, “We will not decide the timing. It is the virus that will decide.”
What is clear is that a decisive and predictable economic recovery depends on a medical solution — when medical science has successfully identified and contained the virus, treated illness and created immunity throughout the world. Until then, we will remain in these cycles of hard and soft lockdowns, opening up, seeing surge in infection numbers and locking down again.
This is a pattern we are all likely to become familiar with. In fact, if this pattern continues for a year, will it not have created a new normal, and in doing so, fundamentally changing life? Perhaps, but let us not get that far ahead.
What science is making amply clear is that COVID-19 is not “an event”. It is unlike other disruptions we have seen in the past, that have defined generations — 9/11 or the 2004 tsunami or the 2005 Kashmir earthquake or 2005 Hurricane Katrina in the USA. The coronavirus pandemic we are seeing today is more like a ubiquitous phenomenon — like the advent of the internet which has changed life over the last 30 years in more ways than we could have imagined.
And just like everything else, the world of business must also accept the multitude of uncertain elements in this situation. But what do businesses do then? Unfortunately, the predictable yet bitter pattern is that a lot of current businesses will suffer badly and may not survive — at least not with the business model they were operating before COVID-19.
Governments are trying to mitigate the situation by providing loans, tax reductions, employment grants etc. But how long can this continue?
In the business world, hoping for a miracle is a bad strategy. Hence, we will see many closures and accompanying layoffs. These moves will be much more visible in the small and medium enterprise sector. In the corporate sector, those who have been successful over the years — mostly big companies — have built up enough cash reserves. They would be well advised to conserve as much of this reserve as possible. However, this should not mean automatically laying off employees because it will plummet demand for sure, consequently reducing their revenues drastically.
In fact, the strongest predictor of future success for these companies is to retain employees and contribute in this way to the fight against the virus. If they can emerge from this crisis with solid reputations, that will be a big achievement.
But that will not happen if they are perceived as lobbying with governments to try and obtain benefits for their industries while laying off employees as a first line of defense. Even if they do influence governments successfully, they need to remember that governments don’t create demand — at least not under the economic system that currently operates in most of the world.
It’s not that change like this, in demand patterns, does not come with its own set of opportunities. The entrepreneurial-minded who are willing to consider that the new normal is already here, might evaluate investment in sectors where demand has stayed inelastic and will continue to grow, hence be more predictable. No, I do not mean we should all start producing masks and sanitizers, although some have already embarked on that path.
In general, healthcare as an industrial sector should see massive public and private investment. Pharmaceutical companies, hospitals, laboratories and other related sectors should see strong demand right now and well into the future. Similarly, governments would do well to give renewed focus on agriculture and the food value chain and provide this sector with plenty of support and opportunities.
Education and online models of education were already seeing fast growth pre-COVID-19, but this sector will now grow even faster. And speaking of online, anything online and virtual is ready to take off at warp speed now. If we thought online interactions and products were growing fast before, just wait and see what happens in the next couple of years. Particularly in sectors like education, retail, banking and alike.
Ultimately, a resolution of the medical problem is necessary to revive demand. Even when it does return, demand will be slow and gradual with many changes in how businesses are used to operating.
Instead of wishful thinking and expecting or hoping for the future to be a return to the past, it would be worthwhile for business owners to take the time to reflect on what sort of change their respective industries will undergo. This is not a bad time to start afresh, perhaps in new, emerging sectors or possibly even with new business models.
This piece was first published in Profit, Pakistan Today. https://profit.