The current state of the world may make it difficult for executives to see beyond the daily communications about employee safety and closed offices to the next phases of quiet and, eventually, recovery.
Although the world won’t understand the full extent of COVID-19’s impact on the global economy for some time, what’s clear is that the impact will be extensive and far-reaching. But organizations that fail to account for the three phases of a downturn now will emerge behind their competitors.
“COVID-19 will hurt the economy, although the extent of the damage whether brief, regional downturns or a longer, global recession remains unclear,” says Jorge Lopez, Distinguished VP Analyst, Gartner. “Executive leaders should manage the crisis not simply with an eye on the immediate threat to health and safety and the subsequent slowdown in business, but should begin strategizing for the economic recovery that will follow.”
Phase 1: Start the triage
When unexpected major events change how the world operates, phase one for every executive is triage. Many organizations are in this phase right now.
The uncertainty and chaos drive cost cuts — 20% or more are common at this point — and a desire to lower operating costs. As revenue and earnings expectation drops, businesses will adjust to conserve cash and manage cash flow.
How an organization handles this will depend on the individual company, but common actions include headcount reductions, asset sales and structuring, and lower break-even numbers. Organizations responsible for loan payments might begin to experience cash shortages, while organizations that have substantial cash will consider this an acquisition opportunity. Other companies, especially those that are highly leveraged, will fail.
What should executives do?
Now is the time to focus exclusively on strategically necessary projects and on employees. Create contingency plans for extended remote work, including ensuring that cloud vendors and partners can support the increased workload. Pay attention to supply chain trouble areas, and troubleshoot solutions where necessary. Finally, focus on your customers. Be clear about potential delays in shipments, and look for areas to build loyalty for the recovery phase.
Phase 2: Navigate the doldrums
This is the phase between the beginning of a crisis and the turn where things start to recover. It is deceptively quiet, but has its own set of requirements. During this time the initial panic has faded, but confidence has not fully returned.
For COVID-19, this will be when the number of cases levels off. Cash flow will improve, but earnings will lag, and no one will be quite certain when the recovery phase will begin. Further, any economic improvements won’t be consistent. Department heads will need to decide what to do with what’s left of their budgets and how to sustain projects given the resulting limitations.
What should executives do?
It might seem counterintuitive, but now is the time to explore innovation and look for areas to invest to grow the business. Delayed investment might put the organization behind competitors. The business should be stable, but start investing before it’s completely clear that the crisis has passed.
For example, Berkshire Hathaway began major investments during the financial crisis in 2008. Part of this time should be spent keeping an eye on what your competitors are doing to find opportunities to differentiate the business.
Further, the doldrums can be a good phase to take advantage of unique opportunities for transformation. For example, if the entire workforce is already working remotely due to COVID-19, is it possible to keep parts of the business remote during recovery and into the future or to develop creative options for digital delivery of products?
Phase 3: Ramp up during recovery
Just as no one can predict the triage phase, the start of recovery may be just as unpredictable. As cases of COVID-19 fall, and people emerge from shelter-in-place and quarantine mandates, the recovery will begin. Purchases that were put off due to the coronavirus will pick up, and customer demand will increase. Organizations will see a jump-start in demand and capital, and will encourage departments to invest more. But, be wary — it’s likely that new investments will have limited budgets and spending.
What should executives do?
Recovery is where the investments and productivity improvements of the doldrums phase pay off. Organizations that carefully focus on strategic investment and reduce nonstrategic plans will have more bandwidth to focus on profitable investments. Now is the time to use the digital investment organizations were driven to during the outbreak to build business. And, of course, now is the time to look to loyal customers to bring in friends and family.
