For several years, firms had been focussing on business plans for 2020 with great hopes and vision. After all, vision and 2020 were made for each other and too difficult to pass up even for the most restrained professional. Act I, Scene 2: Covid-19.
The Coronavirus pandemic has crippled businesses and economies worldwide and business leaders are hurriedly assembling plans and strategies that range from surviving bankruptcies on one end to, in the best case, resurfacing even with a scant similarity to pre-pandemic normalcy. So much for Vision 2020.
The pandemic will certainly affect the way businesses will think and act now and at least into the near future. The growth strategies designed two years ago may no longer hold true post-pandemic as priorities can change end-to-end, new demands and new categories of consumption can emerge, and some categories, companies, and entire sectors may become obsolete. The supply-side as well as demand-side equilibria are shifting as markets face shortages at one end whereas inventories have stockpiled elsewhere. Even the superpower of supply chain, Amazon, has been brought to its knees.
What’s next? Are all managers expected to hit the panic button? How can firms move past this and emerge standing? We propose that the most important thing a business attempting to outlast Covid-19 must do is apply the correct designation to the impact of Covid-19.
A framework for responding to unprecedented disruptions
Demand for moisturisers rose because repeated washing of hands during the Covid-19 pandemic required additional attention to the skin. Demand for petrol and oil dropped as commute and travel came to a halt. Lipstick sales decreased as lips were now hidden behind a mask. Should managers wait these out or alter the business model or strategy?
We propose that when faced with dramatic and unprecedented events, managers must first step back and examine what is going on by using a proper designation. Instead of directly responding to every change that is underway, managers must focus on the structural nature of the change. It is quite natural to feel extreme pressure to respond in some way or the other when the world around is changing drastically. Yet, in the interest of outlasting a disruption, no matter how severe, a manager must have a framework to inform whether and how anything should be changed in response to the disruption.
We propose the following Order & Intensity Model of Response to Disruption. This 3x3 model represents three orders of change, one in each row, and three levels of impact, one in each column.
The orders of impact
Any disruption or change can be seen as having one of three orders or impact on a firm—first, second, or third. A first-order impact is where the disruption (such as the current pandemic) has a direct effect on the firm, be it on the supply side or the demand side. For example, when some countries declared lockdowns with little advance notice, trucks were stalled midway with inventories or raw material trapped in the supply chain. Firms relying on these supplies would be facing a first-order impact. Similarly, during the recent pandemic, people have started washing hands more often. The rise in demand for sanitisers and soap is also a first-order impact in those industries.
A second-order impact is where the effect of disruption on the firm or industry is indirect. In other words, the firm experiences the ripple effect of the supply- or demand-side implications on other firms or in other industries. When people use more moisturiser because they are washing their hands more often and skin tends to dry upon excessive washing, the change in demand for moisturiser is a second-order change. The fear of Covid-19 is not prompting greater usage of moisturiser. The fear is only prompting increased handwashing. It is the increased handwashing that is resulting in increased use of moisturisers.
Finally, third-order implications for a firm arise from changes that result from changes in lifestyle, habits, or fears that are unwittingly triggered by the first- or second-order changes. For example, if people get into the habit of wearing a mask, they may soon find that it is permissible to occasionally skip makeup or a shave because the mask conceals the face. Firms in those industries would therefore be facing third-order implications of Covid-19.
The intensity of impact
The intensity of the impact, be it first-, second- or third order, should also be classified into three categories—high, medium, and low. High intensity represents instances where the disruption alters the demand or supply in ways that cannot be readily addressed. For example, when travel restrictions were imposed because of the pandemic, demand for air travel dropped by as much as 90%. No amount of creative marketing can increase air travel under such circumstances. Similarly, when personal protective equipment (PPE) was devoted to healthcare workers dealing with Covid-19 patients, the supply of PPE dropped precipitously in all other sectors.
The intensity of an impact can be considered to be medium when the disruption makes it difficult for a firm to hold the same cost or margin in responding to the disruption. For example, if offices now have to sanitise or clean more often than in the past, it is impossible to reopen for business at the same cost. On the flip side, if firms realise that there has not been any loss in productivity when employees work from home and therefore mandate remote working as the norm after the pandemic subsides, the costs have come down. Either way, the impact only alters the cost and margin and therefore the intensity should be considered to be medium. It has not made it impossible to continue the business.
It is critical for firms not to confound the high and medium intensities. There is a danger that the second may feel as severe as the first. Significant changes in cost or margin can appear to the managers to be as deadly as a lethal drop in demand. However, analytically, and strategically, they are distinct and should be dealt with differently.
Finally, low intensity will be instances where the firm can pivot easily and avoid any significant shifts in a business model. For example, a takeout restaurant can continue to operate during a pandemic by merely introducing sealed packaging and curb-side delivery, neither of which will alter the cost or margin significantly.
We propose that a firm’s response should be contingent on which of the nine cells it finds itself in. In responding to any disruption, firms in cell 1 are the worst affected. At the other extreme, firms that find themselves in cell 9 are the least affected and are better off waiting it out. But the key will be for managers to maintain clarity on which cell they are in and select the appropriate response.
Responding to first-order impact
When a disruption results in a first-order precipitous decline in demand (e.g., what Covid-19 did to hotel rooms, dine-in restaurants, and airlines), much of the manager’s conventional toolkit turns ineffectual. Irrespective of the business model, it is unlikely that costs will decline proportionate to the decline in revenue. Therefore, the most important strategy in this case should be to flatten the burn rate (the rate at which cash burns, i.e., costs are incurred, in relation to revenue). This is easier said than done because the manager must also be sensitive about not ceasing operations to the extent that it become prohibitively expensive or structurally uncompetitive to restart after the dust settles. Therefore, managers must be willing to consider several non-conventional strategies.
Managers must examine their products and services in a radically different light and reimagine the purchase process. For example, one assumes that airline passengers pay for tickets with predetermined origin, destination, and date. Why not sell vouchers during the disruption and offer an option to redeem them at a level higher than face value for travel at a later period? They should disaggregate consumption to maintain cash flows. Adversities are also an opportunity to build long-term brand equity. Airlines that offer such superior customer orientation at these times and keep the customer at the centre of business will also benefit from increased loyalty.
Similarly, what stops hotels from selling rooms that can be redeemed at one of multiple (say, four or five) properties at one of multiple periods in the future? This not only arrests the burn of cash, but it also accelerates the restart. Other ways to flatten the burn rate could be industry-wide collaborations. For example, travel vouchers could be sold by airline partners, with a caveat that, if they are redeemed after at least six months, they could be redeemed across multiple airlines. Managers responding to high, first-order impact must stop thinking of their product or service and must think of themselves as architects of flattening the burn rate. Similar strategies apply across B2B and B2C.
On the other hand, if demand were to rise in response to a disruption, it presents a rare, reliable opportunity to a manager to extend the brand with ease. The demand for hand sanitisers or disinfectants increased and may endure. Organisations involved in manufacturing these products must not only work on supply chain efficiencies and manufacturing capabilities but must also consider capitalising to extend across the parent category. Because what will remain after the immediate aftermath of a disruption is an interest in the broader category, not necessarily the product. For example, consumers may remember after Covid-19 that hygiene is important, not necessarily that hand sanitisers are important.
Responding to second-order impact
When a firm experiences second-order impact of a disruption, the approaches available to a manager can be grouped into two categories.
(a) The second-order effect is in response to rising demand experienced by the first-order firm (e.g., Covid-19 has led to more hospital beds being used and a janitorial service company experiences the second-order effect of that increased usage).
(b) The second-order effect is in response to declining demand experienced by the first-order firm (e.g., Covid-19 has led to fewer hotel rooms being booked and a janitorial services company experiences the second-order effect of that fall in usage).
In the first case above, managers must explore ways in which they can inch closer to the first order. For example, due to the increased use of sanitisers and handwashing, usage of moisturiser has risen. Clearly, excessive washing dries up hands. A moisturiser brand should explore innovations and extensions such as sanitising moisturizers.
In the second case above, the second-order firms should explore ways they can partner with the first-order firms in arresting the decline in demand. For example, a brand of disinfectant or bathroom cleaner can partner with a hotel chain to launch a “hygiene promise” together to customers to encourage them to come back.
Therefore, when faced with a second-order impact, the manager must shift their attention from their own product or service and instead focus almost exclusively on the role they can play in a network or constellation. They must explore exhaustively the complementary and supplementary product offerings because new linkages can emerge in response to disruptions. For example, the use of masks has created a dent in demand for lipsticks. Brands must innovate lipsticks that do not stain the face masks and/or carry properties related to moisturising lips rather than shine and glamour.
Responding to third-order impact
In general, a third-order impact may afford only a short-term opportunity for a firm and does not typically represent a substantive change. The manager’s preoccupation in this case should be on making hay while the sun shines. Any temptation to building capability should be initially resisted.
Covid-19 has led to people working and socialising from their homes. This lifestyle led to a sudden splurge in tools such as USB microphones, lighting, and must-display books as backdrops. This increase in demand probably is only valid for the pandemic period and may fade away after that. But this new exposure may lead to higher acceptability for a virtual culture across demographic segments. For example, does the spike in demand for pianos and digital keyboards during the current pandemic signal that the role of a piano has altered in our lives? Most likely not. People are spending time at home and looking for creative ways of being occupied. Families are bonding over cooking and baking together. Does that mean that cooking as a hobby is a new need and should attract investments? On the other hand, as people are at home, the demand for formal wear has shown a decline. Is it a temporary decline or will athleisure make it into the office? Once again, if this is a third-order impact, this too shall pass.
Strategy entails the decision on how to allocate resources across a finite number of options. No strategy can be effective if the manager errs on identifying the appropriate set of options. We argue that even in responding to a disruption such as the current pandemic, managers will succeed only if they are strategic. We present the Order-Intensity Model as a template to aid identification of strategic options available to the firm. Managers much first designate appropriately the effect of a disruption on the firm. Identifying the cell that best reflects the position the firm finds itself in is necessary before appropriate response strategies are considered.
Views are personal. Commuri is a senior associate dean and professor of marketing at University at Albany, State University of New York; Aggarwal is a professor of marketing at Bhavan’s S.P. Jain Institute of Management & Research (SPJIMR).