business resilience in times of uncertainty · 4/13/2020 · furniture distribution centers are...

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13 April 2020

Planning for Recovery

Business Resilience in Times of Uncertainty

McKinsey & Company 2

COVID-19 is, first and foremost, a major humanitarian challenge. COVID-19 has deeply affected Wuhan and Hubei province at first and is now spreading globally, with with 35,000+ deaths out of 770,000+ reported cases as of March 30th. Thousands of health professionals are battling the virus, putting their own lives at risk. Overstretched health systems mean the world will need time and help to return to a semblance of normalcy.

Solving the humanitarian challenge is, of course, priority #1. Much remains to be done globally to respond and recover, from counting the humanitarian costs of the virus, to supporting the victims and families, to finding a vaccine.

In addition to the humanitarian challenge, there are extreme implications for the wider economy, businesses and employment and this perspective tries to help identify different options businesses can take to mitigate these implications. These perspectives are preliminary and will need to be updated in the coming weeks and months

This material is for information only and does not take into account the specific objectives, financial situation or particular needs of a specific person who may receive the material. The information and opinions expressed herein are current as of the date stated and are subject to change. The information in this material is derived from proprietary and non-proprietary sources deemed by McKinsey to be reliable and is not guaranteed as to accuracy or completeness. McKinsey makes no representation or warranty, including with respect to the inclusion or omission of any fact or information, or the suitability, sufficiency or appropriateness for any purpose of the information and opinions herein. Reliance on this material is at the reader’s discretion and sole risk. No part of this material may be quoted or reproduced for distribution without McKinsey’s prior consent in writing.


There are two imperatives for our Time

Safeguard our lives1a. Suppress the virus as fast as possible1b. Expand treatment and testing capacity1c. Find “cures”; treatment, drugs, vaccines

2Safeguard our livelihoods2a. Support people and businesses affected by lockdowns2b. Prepare to get back to work safely when the virus abates2c. Prepare to scale the recovery away from a deep trough

1 “Timeboxing” the Virus and the Economic Shock

Source: McKinsey analysis, in partnership with Oxford Economics

1a1b

1c

2a

2b

2c

Economic Shock

Current as of April 3, 2020

Imperatives


There are potentially 9 scenarios on how the crisis will unfoldGDP Impact of COVID-19 Spread, Public Health Response, and Economic Policies

Virus contained, but sector damage; lower long-term trend growth

Virus resurgence; slow long-term growth

Pandemic escalation; prolonged downturn without economic recovery

Pandemic escalation; slow progression towards economic recovery

Virus contained; strong growth rebound

Virus resurgence; return to trend growthStrong World Rebound

Pandemic escalation; delayed but full economic recovery

Virus Spread & Public Health ResponseEffectiveness of the public health responsein controlling the spread and human impactof COVID-19

Effective Response, but (regional) Virus ResurgencePublic health response initially succeeds but measures are not sufficient to prevent viral resurgence so social distancing continues (regionally) for several months

Broad Failure of Public Health Interventions

Rapid and Effective Control of Virus SpreadStrong public health response succeeds in controlling spread in each country within 2-3 months

Public health response failsto control the spread of the virusfor an extended period of time(e.g., until vaccines are available)

Knock-on Effects & Economic Policy ResponseSpeed and strength of recovery depends on whether policy moves can mitigate self-reinforcing recessionary dynamics (e.g., corporate defaults, credit crunch)

Ineffective Interventions Partially Effective InterventionsPolicy responses partially offset economic damage; banking crisisis avoided; recovery levels muted

Self-reinforcing recession dynamics kick-in; widespread bankruptcies and credit defaults; potential banking crisis

Strong policy responses prevent structural damage; recovery to pre-crisis fundamentals and momentum

Highly Effective Interventions

Virus contained, slow recovery

Virus resurgence; slow long-term growthMuted World Recovery

A3

A1 A2

A4B1

B2

B3 B4 B5

Virus contained, slow recovery

Virus resurgence; slow long-term growthMuted World Recovery

A3

A1



Scenario A1: Virus resurgence; slow long-term growthMuted World Recovery

Real GDP growth—COVID-19 crisisLocal currency units indexed, 2019 Q4=100


1. Seasonally adjusted by Oxford Economics

105

100

90

85

115

95

110

Q4Q3Q1 Q3Q2Q2 Q3 Q4Q4 Q1 Q2Q1

WorldUnited statesEurozoneChina1


Time to return to pre-crisis

Quarter

2020 GDP growth

% change

Eurozone 2024 Q4-10.6%-13.2%

World 2022 Q4-5.7%-7.2%

USA 2024 Q2-8.7%-11.1%

China 2021 Q2-2.3%-4.2%

Real GDP drop 2019

Q4–2020 Q2 % change

2019 2020 2021


Scenario A3:Virus contained, slow recovery

Real GDP growth—COVID-19 crisisLocal currency units indexed, 2019 Q4=100

2019 2020 2021


1. Seasonally adjusted by Oxford Economics

Time to return to pre-crisis

Quarter

2020 GDP growth

% change

Eurozone 2021 Q2-4.7%-10.1%

World 2021 Q1-1.8%-5.3%

USA 2020 Q4-2.4%-8.0%

China 2020 Q4-0.5%-3.5%

Real GDP drop 2019

Q4–2020 Q2 % change

90

85

95

100

105

115

110

Q3Q4Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q4

WorldUnited statesEurozoneChina1



All sectors are potentially impacted, with varying severity

1 2 3 4 5 6 7 8

Impact Highest

Travel & tourism

Consumer & retail

Real estate Energy & materials

Automotive Electronics & semi-

conductors

Pharma-ceuticals

Financial institutions

Supply and logistics disruption

High High High High Moderate High Moderate Low

Demand disruption Moderate Moderate Moderate Moderate Moderate-Low LowHigh Moderate-Low

Top sector issues

Travel bans massively reducing demand for airlines and hotels

Cash crunch due to large lease and labor fixed cost base

Physical retailers and restaurant operators facing 70-50% demand collapse

E-tailers and online delivery (e.g., grocery) platforms scrambling to rapidly increase delivery labor force

Construction stopped and sales offices closed during typical peak sales season for developers

Mall operators closing for weeks (online taking traffic)

Oil & gas and refineries hit by significant drop in fuel demand

Largest challenge for materials, chemicals players is getting workers back to plant and logistics resumed

Large networks of parts suppliers unable to resume production and shipments

Dealers needing OEM support as customers are not coming in to show rooms

Mfgs. largely serve global demand but facing up to 80% labor shortages

Complex global supply chains facing delivery bottlenecks with up to 60% of materials already at risk of out-of-stock

Sales reps not able to visit doctors at hospitals to promote products face-to-face

Some patients (e.g., rare diseases, chronic conditions) not able to reach hospitals for Rx refills

Contained Impact despite many branch closures since most products offered digitally

Short-term drop in businesses that require F2F validation (e.g., corp, lending, account opening)

Non exhaustive, directional view derived from china experience



We see four phases of COVID-19 response – requiring planning across horizons

Plan for multiple scenarios – the shape of your demand curve will be driven by the depth and length of your demand disruption and your landing point (the “new normal”)

Build a portfolio of strategic moves that is robust across all possible scenarios (curve shapes) and multiple time horizons

Rapidly iterate and update the portfolio to reflect new information and reallocate resources

2Lockdown

1First shock

3Ramp-up

4 New Normal

Operating capacity returned to 100%

T0 Time

Volume

Depth of demand disruption

Length of demand disruption

Extent of business model disruption (new normal)

Demand profile


Address the immediate challenges that COVID-19 represents to the institution’s workforce, customers, and business partners

Address near-term cash management challenges, and broader resiliency issues during virus-related shutdowns and economic knock-on effects

Create a detailed plan to return the business back to scale quickly, as the virus evolves and knock on effects become clearer

Re-imagine the “next normal” – what a discontinuous shift looks like, and implications for how the institution should reinvent

Be clear about how the regulatory and competitive environment in your industry may shiftResolve

Resilience

Return

Reimagine

Reform

In times of crisis, leaders need to think and act across 5 horizons – this document is a “how to” guide to Reimagine and ReformIn times of crisis, leaders can to think and act across 5 horizons


Resolve: Making hard decisions on immediate challengesResolve employee, customer, supply chain, immediate liquidity, and technology concerns

Resolve

Employees CustomersSupply chain

Example actions

Continuous re-evaluation of financial models:stress-testing financial forecasts based on latest developments (e.g., longer than 2 week closures) and adjusting policies accordingly

Monitoring productivity: Comprehensive set of KPIs being tracked via dashboards (e.g., focus on productivity vs. utilization)

Tracking incidence: Clear reporting mechanism for suspected / confirmed covid-19 infections and database that tracks cases

Redeploying undeployed talent against areas of the business experiencing demand surges:Making short term adjustments to workforce deployment to maximize productivity and minimize service disruption

Partnering with other companies to redeploy talent externally for the good of the broader community

Ensure safety at all times

Demonstrate flexibility to customers during times of hardship Airlines: Major airlines are offering change/cancel flexibility. Most

are also allowing passengers to reseat themselves on the plane in accordance with physical distancing,

Going out of their way to keep customers and employees safe regardless of impact to balance sheet Hotels in Europe and Asia are providing “quarantine” service (e.g.,

room reservation with nobody next door) Hotels are live streaming hotel room housekeeping to show how

thorough they are cleaning their rooms between guests.

Demonstrate commitment to healthcare Car rentals are offering free rental cars to NYC healthcare workers Furniture distribution centers are being repurposed as testing

centers for NHS workers

Other examples of companies being ‘agile’ in attracting customers Hotels are offering point compensation for guests who purchased

pre-paid non-refundable reservations. Rideshare companies are pivoting to delivery

Conduct scenario planning to understand how inventory buffer changes in various disease scenarios

Task S&OP team to build 3-6 plans under a range of demand scenarios month to determine required supply

Work with tier 1 suppliers to understand supply chain risks throughout all tiers; complement with outside-in analytics where tier 1s do not have transparency

Account for all inventory (e.g., in transit, in warehouses, in spares stock) and calculate inventory buffer

Run supply chain “stress tests” vs. supplier balance sheets to understand when supply issues will start to stress financial or liquidity issues

Emerging concerns

Are my policies working (e.g., safety, productivity)? How well? How do I adapt to new developments (e.g., longer closures of business)?

How do I stay in touch with customers and remain relevant to them when they don’t desire or need my services? How do I inspire loyalty in my customers?

How do I revise demand planning based on the evolving outbreak?

Private sector focus


To get ahead of the crisis, Board could encourage the creation of Plan Ahead Team (PAT)

What it looks likeAgent of the CEOPlans for multiple scenariosSenior executive to lead the team that will, together with the CEO, interface with other executives and the board

Build a credible view of possible future worlds, based on potential disruption to your business model (the “new normal”) disruption and the timing and depth of the demand disruption

PAT What it does

Builds a portfolio of moves Dedicated top talentBuild a coherent series of moves that are tuned to the distinct possibility of each scenario appearing

Small, modular (scalable) team of your best people with a view across all key business areas

A marriage of strategy and financeInstils dynamic adaptionBuild a dynamic roadmap with clear trigger points which gives the flexibility to adapt to changing conditions, supported by the governance to drive execution

Standalone, but closely interfaced with the crisis management and finance team, creating a firm link between strategy and the budget


The Five Frames provided a playbook for the PAT

Take stock of capacity, financial drivers, ongoing strategic initiatives and the implicit assumptions underlying your strategic choices

Build and explore potential scenariosStress test your business and strategy against these scenarios

Define the overarching theme around which you will define a set of strategic moves

Build a set of moves that work together as a portfolio across scenarios

Manage a dynamic pipeline of initiatives with clear trigger points, near-term goals and actionsCreate a watchtower with clear leading indicators so that you can adapt accordingly

Build a day one answer and rapidly cycle and adapt

Iterate fast

4. Determineactions andmoves

2. Developscenarios

3. Establishdirectionof travel

5. Set triggerpoints

1. Get a viewon startingposition


PAT should build a view across multiple time horizons for each Frame Illustrative example

1. Get a view on starting position

2. Develop scenarios

3. Establish direction of travel

4. Determine actions and moves

5. Set trigger Points

2 / 4 Weeks Capacity running out Supply chain instability

Access/ Non-Access Claims on productions You can collaborate across

players

Lean into government crisis response to get access

Push for ICU device production funding

Work to reopen exports safely to get supply

Support clients and suppliers in critical areas

Tier 3+ supplier analysis reveals exposure to critical supplier with extended plant shutdown due to COVID-19

1 / 2 Quarters Liquidity position

Nationalisation M&A wave Market rebound ahead of

fundamentals Price controls

Through cycle, but good balance sheet

Mothballing

Tested tourism to get back to work

Massive testing 50/50 workforce quarantine

13 week cash workout shows liquidity challenges in Scenarios A1 and A3

1 / 2 Years Growth likely to return

Still not recovered in scenario 3

Quarantine still need Surveillance government

Back to business as normal or reset

Keep research project x but kill y

50% of geographic market regions facing demand drawdowns below Q4 2019

Next Normal My business is challenged

post crisis (cruise ships) Demand for my business is

greater post-crisis (home delivery)

Hotels can be normal again, because we have testing

FDA approvals much faster Expectation on delivery for

anything is at Corona pace

This time we will be the 21st century cooperation,

Resilience over profit, more working capital

Prioritise investments now, for what will be needed then

Market segment shift in new normal reveals opportunity for new project significantly lower


This is not “strategy as usual”

Iterate fast

Flexible Decisions will need to change, work will be lost. Ignore sunk energy costs

Fast Cycle times are shorter under extreme uncertainty. Being faster than others is key

Almost right

Perfection is the enemy of good, and fast. Bias towards action. Almost right not exactly wrong.

Iterative Accept that the first pass will not be 100% right. Keep iterating on short cycles

Cycle through this playbook fortnightly

Set-up a thorough process, not a rigid answer

Remain flexible in resource allocation

business resilience in times of uncertainty · 4/13/2020 · furniture distribution centers are...

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