Find the PDF version of this White Paper below.
Mariangella Cordella
Kanuj Chaudhary
Florian Kausch
David Sigant-Boatman
Inchara Vasudev
Table of content
1. Introduction 2. Impact and Analysis 3. Post Covid-19 Scenario Planning
4. Framework 5. Conclusion 6. References
1. Introduction
1.1 Broad overview of Covid-19 and its impact worldwide
When Chinese officials in Wuhan City reported the first case of SARS-CoV-2 in December 2019, little did the world know to what dramatic extent the life of everyone would change in the subsequent months. What started as a seemingly epidemic has quickly evolved into a worldwide pandemic with its long-term severity still unknown. So for 50 million cases of Covid- 19 have been reported with approximately 1.3 million deaths.
As a reaction to worldwide shutdowns, global supply-chains have broken up, economic activity has haltered and has been reduced to a significant level. This led to mass unemployment waves, especially in the United States where the unemployment rate spiked to 15%. Moreover, financial markets were shaken by the pandemic. In the second quarter, economic output has decreased in all Western countries by double-digit percentages compared to the previous year. The USA faced a GDP reduction of nearly 35%. Dramatic falls in the stock market, like the 3,000 points loss of the Dow Jones on April 16, brought back memories of the Great Depression and led to serious uncertainty for financial institutions and the global economy. Therefore, governments needed to intervene in order to maintain economic activity and support businesses with liquidity problems. In the United States alone, government assistance has reached a total of $4 trillion, including $2.3 trillion to businesses, $651 billion in tax breaks and $670 billion in a Paycheck Protection Program. However, as the pandemic is still spreading and second waves in Europe arrived recently, it is clear that the economic impact is far from predictable.
1.2 Problems in decision-making, operations, supply chains
Following the Covid-19 pandemic, the operating environment for firms has been challenging to navigate through. As countries have to revert to social distancing measures, closure of business operations, and adopted prolongation of telework; the assessment of a long-term strategy is difficult. Regardless of sector and grade of effect by the pandemic, businesses need to adopt an agile approach with structured processes for different scenarios in the operating environment to mitigate risk.
Looking at the internal and external decision-making processes of firms, quick shifts on the market, rapid government secrets, slow administrative procedures, and a reduced rate of demand are all factors making decisions difficult. Another factor is the lack of efficient decisions that are based on intuitions rather than insights. As the market is uncertain, the need for an insight-based approach in each decision is required to maximize opportunities and reduce high opportunity costs. The need for a data-driven foundation in the decision-making strategy is pivotal to ensure that no scenarios are foregone and that no scenarios are unknown. Being prepared for uncertainty is an important element in a current business strategy. Responding to it with well-anchored decisions is even more pivotal.
As the pandemic continues, global supply chains and access to goods and services may be limited. During the second phase of pandemic intensity, the fiscal and quantitative risk of supply chain disruptions has a likelihood to increase. Businesses exposed to many tier-1 suppliers (direct suppliers) need to examine the continuity of supply and contractual compliance aspects in case of failure to honour agreements. As many businesses are unprepared for such disruptions, there is a need for both a direct and long-term strategy to address volatile issues and to diversify risk exposure.
2. Impact and Analysis
2.1 Gainers
Depending on how victory is measured, gainers are classified differently according to the weighting criteria. From a sector perspective, companies operating in digital services have both seen soaring share prices [should they be publicly traded] and successfully responded to an urgent demand. Teleworking service providers, communication services platforms, health-tech providers, big-tech companies, and FMCG-companies are all successful in keeping their demand pre-covid and increasing their revenue. Given their means to quickly create services or allocate resources to meet customer demand, these sectors thrive in the current business environment. For these companies, a scale-up strategy is pivotal to keep momentum, to structure internal operations in an expansion, maximize service operations production, and how to successfully maintain market share in a post-covid scenario.
As the current pandemic is returning to many countries, demand within these sectors is expected to be constant over the next 6 to 12-month period. This situation leads to the importance of leveraging current success in future investments to ensure that opportunities are fulfilled. On the other hand, the need to mitigate contractual and legal risk is crucial in deal- making processes in case of an unsuccessful expansion plan and surges in consumer demand due to volatile shifts among supply or demand.
2.2 Losers
In general, companies involved in sectors related to physical mobility have suffered the most. Due to the imposed lockdowns and travel restrictions by the majority of governments, demand for these industries fell the most. Most notably, airlines and travel agencies have suffered heavy losses and without government support, face bankruptcy in many cases. When it comes to Business related travel, it is estimated that global revenue is reduced by 810Bn USD. Moreover, car manufacturers forecast that automotive sales will decrease 14-22% among China, US and European Markets in 2020. Relying on the demand for travel activities as well, oil and gas companies have seen their profits shrink significantly with prices touching 30-year lows. Combined with existing societal pressure, executives sense that a fundamental change in their sector is inevitable. Last but not least, the considerable decrease in consumption has hit the retail industry. While buying behaviour has continuously been shifting towards the e- commerce sector, Covid-19 has accelerated this development and retail companies react by cutting down labour or declaring bankruptcy. Furthermore, it is the small to mid-sized companies that suffer the most from the pandemic. Recent studies show that more than half of the surveyed small and medium-sized enterprises worry that they might not be in business in 12 months. Those enterprises that are in the accommodation & food services and arts, recreation & entertainment industry suffer the most. They are unable to quickly digitise and adjust their business model to the exogenous demand shock. In fact, about 1 in 10 small and medium-size enterprises in Europe could be expected to file for bankruptcy within six-months. Large companies on the other hand have higher liquidity reserves and can therefore better overcome periods of low turnover. Additionally, they have larger funds to invest in measures like a technological infrastructure in order to appropriately adapt to the current situation.
2.3 Financial outlook
Overall, public equities have had volatile trends with significant gains and losses. Monetary policies across governmental and intergovernmental central banks have reduced interest rates to, quite unsuccessfully, stimulate consumption and institutional lending. Crediting divisions of full-service financial institutions have due to credit losses increased their reluctance to issue credit towards distressed businesses, making the match between already indebted businesses and risk-mitigating banks insufficient. Furthermore, the financial opportunities offered by the federal and local governments may carry a complex administrative process, leading to a higher exposure to direct cash-flow implications as fewer businesses can access liquidity boosts. The current sanitary situation and the global reach of the pandemic are unpredicted and unprecedented. Many nations and its governments have approached national lockdowns, closed businesses, and limited domestic and international networking to limit the spread. The global economic activity has henceforth been subject to significant effects. Accounting for the indications of the second wave in EMEA and Asia, the predictability is difficult to assess, leading to the need for a concise yet agile assessment of the company’s financial strategy.
The need for businesses to mitigate risk by continuous risk, volatility, and vulnerability assessment is required to ensure a tailored and planned approach regardless of the outlook on the operational business environment. On a short-run basis, addressing opportunities and risks in regard to liquidity, supply chain, and volatile shifts in demand is pivotal to optimize the overall strategy. Overlooking the long-term performance, stable financial revenue models, diversification of third-party risk, and recovery models to support financial longevity aims to protect long term operations. In symbiosis, businesses also need to consider possible re- financing, overseeing the current portfolio of services, and optimizing its business model to align it with its financial plan.
In terms for restructuring processes for distressed companies, there are four main factors impacting business continuity. 1. Reduced Business Operations, 2. Liquidity, 3. Covenant Breach Risk 4. Refinancing needs. Depending on the financial state of the organization, different measures may be taken to strengthen the company's financial position.
From a management perspective, internal control measures, data analysis, market assessment, and potential insolvency declarations all allow the company to react. Recognizing the externalities leading to the company underperforming, the assessment of financial restructuring is pivotal to see if cash flow, expenditures, and solidity can be either stabilized or financed. Refinancing, distressed M&A, debt for equity conversion among shareholders, and liquidations are all potential solutions.
2.4 Macro-trends and Business Operations Environment
Across the business environment, we can observe that elastic goods and services have
suffered the most significant impact by COVID-19. Ranging from travel services to non-
essential consumer goods and leisure activities, countries across the world are on the brink of recession. The intersection of employment demanded and supplied has taken a drastic shift to the lower, placing unemployment on high levels and straining social security systems. Because of this, many businesses struggle with their balance sheet and to cover operating and fixed debt. Henceforth, companies need to adapt their operating business strategy to capture value on a market with less consumer surplus and fiscal instability. This includes but is not limited to digital transformation, shift in production measures, down-sizing current operations, and expanding portfolio of services. Shifting a specific focus on SMEs, these companies have fewer streams of revenue opportunities and are, quite often, closer to the margin. In a weighted data collection from OECD, a third of SMEs count by ceasing operations within one month, and 50% in three
months should no further support be provided. Already adopted measures include reducing the workforce by 40% on average, and 43% of businesses have already ceased operations. 75% of surveyed respondents have two months or less in liquid reserves. Because of their SME status, opportunities on the public capital market and corporate finance restructuring opportunities are less feasible opportunities. An SME financial strategy, therefore, has to focus on creating stable revenue streams to independently and feasibly support business longevity.
3. Post Covid-19 Scenario Planning
COVID-19 virus is sweeping across the world, leaving a trail of economic and social damage in its wake. The world has simply never faced a crisis like this one before. And yet, while it may not be possible to predict the post COVID-19 landscape, it is still possible to plan for it. Scenario planning is a tool designed to help organizations plan for uncertain futures. It has been used extensively by organizations whose performance is vulnerable to major economic, social, political, and environmental shifts, such as the oil and gas industry. COVID-19 has placed all sectors within this context of uncertainty, requiring them to think and plan in new ways.
Scenarios do not attempt to predict the future, but rather identify a set of possible future states. They focus on the external driving forces over which individual organizations have little or no control. Scenarios are both plausible and challenging. Organizations benefit from scenario planning by imagining how they might compete in each scenario. This process helps them widen their thinking around possible responses and outcomes. For example, some responses may not have been considered if the scenario planning process hadn’t been followed. Other responses become clearer and more obvious as they are identified across multiple scenarios.
3.1 Relevant Factors
1. Virus Longevity - How long before viral infections and deaths slow down to the point
where isolation policies can be lifted?
Short-term Impact:
The spread of COVID-19 follows a similar pattern to China, Japan, and South Korea where the virus reaches its peak quickly, but also dissipates quickly. While the virus does not disappear, the massive scale of infections and deaths fades away in a few months.
Long-term Impact:
COVID-19 lingers across the world for at least a year. The attempt by many countries to ‘flatten the curve’ fails, and infections and deaths continue to grow and spread unabated. While the developed world struggles to maintain control of the virus, the developing world is overrun with infections and deaths. Borders and non-essential businesses remain closed across most of the world. In this outcome, the global lockdown remains until at least the first quarter of 2021.
2. Global Mindset - How will people’s views of social, economic, and political boundaries be impacted by the virus?
Global Acceptance: The Globalization of trade and travel picks up unabated once the immediate effects of the virus subside. The COVID-19 coordination challenges between nations and regions point to a need for closer global alignment. New trade deals between countries and regions are quickly negotiated and ratified. With barriers being lowered and border controls weakened, people feel free to travel and live in other parts of the world. Travel is customary, and even though virus breakouts occur, there is enough medical capacity to identify and contain episodes, and to enable individuals to recover quickly no matter where they travel to.
Global Rejection:
The fragmented response to COVID-19 and the failure to stop the virus’ spread lead to a deep distrust among different parts of the world. When borders do reopen, they are less free than before. Nationalism grows across the world as countries realize that globalization has made them defenceless against a global pandemic like COVID-19.
3. Digital Adoption - How will consumers react to digital tools and technologies that have emerged because of the virus?
Digital Acceleration:
COVID-19 initiates a surge in the development and usage of new digital technologies. The requirement to work and socialize via technology pulls technology sceptics and luddites into the information age. Video conferencing solutions become mainstream for work and pleasure. Software vendors make sure that all programs and apps work at any time, from anywhere.
Digital Scepticism: There is deep scepticism of surveillance, control, and ultimately a fundamental mistrust of the most productive digital tools by consumers and civic society at large. There is considerable activism to lobby for less intrusion, but it’s unclear how the hold of the monopolistic companies that control key digital technologies can be reduced. Surveillance measures implemented by governments and large corporations to keep track of the virus lead to a deep mistrust of technology.
3.2 Possible Scenarios based on these factors:
4. Framework
4.1 Gartner post pandemic planning framework summary
The asymmetrical nature of the crisis will complicate pandemic recovery efforts. The impacts on enterprises will be positive, negative or both and vary by region, industry, product and service. There will be 3 phases of recovery: respond, recover, renew.
4.2 Analysis
Enterprises across a range of industries have been forced to drastically reduce their operations or even close. For some, business has expanded, ex: Amazon, P&G, FedEx, etc
Some companies which were struggling earlier are thriving now. Ex: Confrere
Leaders should consider a range of possible outcomes: positive, negative or completely new. They should plan for each of these to reduce costs, reassign resources and increase responsiveness.
4.3 Phases that enterprises will go through
Lockdown leads to the “respond” phase - In this phase, leaders assess impacts of the lockdown and respond with short term decisions about current business and operating model. Immediate negative impacts require responses like shutdown or major reconfiguration. Immediate positive impacts will be seen by enterprises which see growth in demand.
Reopening of society leads to the “recover” phase - Some of the things that should be taken into account are:
Reopening will not be a single occurrence event.
Reopening for individual enterprises may also take place as a series of events: ex - gradual relaxation of limited capacities in stores, etc.
Reopening may be followed by more lockdowns - therefore responsiveness is the key.
The recovery phase will be as chaotic as the lockdown phase due to overwhelming the supply chain.
The recovery phase may challenge enterprises both operationally and financially since it is not uniform.
The recovery phase will be stuck in a constantly changing landscape which involves government subsidies, mergers and acquisitions, trade protectionism, etc.
A more stable environment or the new normal leads to the “renew” phase - During this phase, recommencement of strategic planning takes place due to a less chaotic environment, which is less driven by political and social forces, lower fluctuation on supply & demand curves, and easier consumption patterns of digital capabilities.
4.4 Five main paths to help enterprises commence planning (Framework)
Return (to pre-pandemic levels): Assuming that the impacts are temporary, this is the default path chosen by enterprises. The key challenge is how to gradually return to regular operations after a lockdown has been lifted. There may be a need to increase operations due to pent up demand or in opposite scenarios, build up demand slowly. Enterprises should also consider whether consumers want to return to the pre-pandemic “normal”.
Reduce (lower than pre-pandemic level): When demand does not revert to a pre- pandemic level or supply cannot fulfil demand, or the enterprise reduces operations to transition to different operations, it follows this path. For the first two cases, the planning teams should be proactive (ex: use demand generation techniques or remove supply roadblocks).
Retire (if business cannot be sustained): I f the enterprise was already struggling before the pandemic, or it wants to close some part of the business to reinvent or sell, this path should be followed. Retirement is not always a negative sign since it may mean that the company is moving on to a better product or service.
Reinvent (for better repositioning): If the enterprise chooses to come out stronger than pre-pandemic levels or there is a need/ opportunity to change the business model, this is the path it follows. This aggressive path is mainly associated with going digital and may lead to addition of new channels, automation or remote work, seeking new revenue sources, etc. Other drivers are M&As, and industry consolidation. Reinventions can also lead to a more permanent trend.
Rescale (accelerate new growth): This path is followed by enterprises that benefited from the pandemic. There is a requirement to deal with increased operational volume, so that they can turn the short- term increase in demand/operations to long term sustainable growth. Ex: new infrastructure, increased staffing and optimisation, marketing / promotional strategies.
The above-mentioned approaches and paths can be applied at any level (from company level to individual products/ services or business units).
Executives must modify and adapt the planning framework to create company specific scenarios. It may also be useful to predict the duration of the phases and specify which outcomes are to be assessed. Planners may also want to monitor early indicators of change/ consumer preferences.
Enterprises should plan actions based on the predicted paths. Each path requires foresight, planning and investment.
5. Conclusion
The advent of the Covid-19 pandemic has brought the world to its knees, starting from major challenges faced by countries’ health system, to the collapse of economies driven by inevitable shutdowns of economic activities. Even though governments’ have tried to mitigate the consequences through financial aids, the high level of uncertainty brough by the second wave and the fear of following ones make it more and more difficult for companies to react, trying to be agile to mitigate the risks of major disruptions.
In this unprecedented time, scenario planning tool can be considered crucial to face and contrast the uncertain future, which Covid-19 brings with its ups and downs. Companies may take into consideration several scenarios so to build the proper strategy to be successful in the future. global marketplace, digital reset, back to basics and walled gardens.
Return to pre-pandemic levels
Reduce to adjust to the new, post-pandemic situation
Retire, in case the business model is not sustainable
Reinvest for better repositioning
Rescale for the gainers of the pandemic may lead to growth acceleration
Having the possible scenario clear will enable companies to formulate a strategy to face the economic channel. This can be done by using Gartner post pandemic planning framework, which suggests, after having in mind the three phases- respond, recover and renew- of the pandemic, 5 main paths:
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