Commentary: Some firms died, others thrived - COVID-19 forced radical changes on businesses

SWITZERLAND: COVID-19 is forcing corporations into radical transformation.

Throughout the pandemic, it felt impossible to make predictions. Travel plans were roiled because of rising infection rates and new variants. Critical parts for manufacturing were suddenly in short supply.

It may seem like a fool’s errand to predict what’s going to happen across industries. But there are ways to prepare for the unexpected.

The winners of tomorrow will be the organisations that master new capabilities ahead of time. And as we head into 2022, the readiest will capitalise on new growth opportunities.

At IMD Business School’s Center for Future Readiness, we rank publicly listed companies based on their preparedness for the future and compare the top-ranking companies against the industry average. We call this the Future Readiness Indicator.

WHICH COMPANIES AND SECTORS ARE STANDING OUT IN THIS PANDEMIC?

The indicator offers a set of important lessons that company executives can apply in their attempts to chart a course through increasingly choppy waters. It can also help us see who’s standing out to win.

Take the automotive sector for instance. Every auto executive knows cars are becoming supercomputers on wheels with infotainment, navigation, and driver assistance systems. But the semiconductors that power these systems are now in short supply due to greater demand for consumer electronics during lockdown.

Automakers miscalculated demand, and with problems in the supply chain, carmakers are now halting their production lines.

But not all of them are. Toyota stockpiled chips, so it avoided the worst of the disruption. It did this though a system called “Rescue” that stores supply chain information for around 6,800 parts.

Toyota communicates with thousands of suppliers, so it can see where the shortages and challenges are, and stockpile accordingly. This is the company reclaimed the title of the world’s largest automaker from Volkswagen.

But the real star is Tesla. What distinguishes Tesla is that its cars receive over-the-air updates that add new features and functionality. With that, Tesla was able to source different chips with greater supply and rewrite the software code. It then integrated the chips with its cars to maintain production. 

As rivals faced billions of dollars in lost earnings from the chips shortage, Tesla delivered a record 241,300 vehicles in the third quarter, with the company’s net profit soaring 389 per cent from the previous year, topping US$1.6 billion, its highest ever.

“We were able to substitute alternative chips, and then write the firmware in a matter of weeks,” Musk said. “It’s not just a matter of swapping out a chip; you also have to rewrite the software.”

Tesla won not because it was able to forecast, but because it had invested in new capabilities in electronics and software. When the semiconductor crisis hit, Tesla’s readiness became a source of resilience that fueled its future growth.

RADICAL CHANGES AFOOT

Many executives must now consider radical changes to their operating and business models. The pandemic is speeding up seismic shifts that might have taken decades to play out but are now happening in a matter of months.

Many companies are finding that consumer behavior has radically changed, with a move to digital platforms, or that their products and services have lost relevance.

Consider the world of finance. The digital future of banking is becoming increasingly clear, with the rise of electronic payments, use of automation and blockchain technology. To prepare for such a future, financial service companies must aggressively invest in technology and automation.

But when companies do not have the capabilities, talent or technology they need, they must partner with a company that does. This enables incumbents to scale innovations with speed. But it requires executives to let go of controls and be curious enough to learn from their competitors.

In the financial industry, incumbents like Mastercard and Visa topped the Future Readiness ranking. They realised early on that they couldn’t outrun fintech challengers.

Tech giants are also creeping into their core market. So instead of fighting against them, Mastercard and Visa joined forces with them, becoming “frenemies”.

For example, they invested in easy-to-adopt application programming interfaces (APIs), software that allows applications to talk to each other. This allowed the payment companies to make their infrastructure compatible with Apple Pay and Google Wallet.

The payment companies thus became irresistible to fintech upstarts such as Coinbase, a cryptocurrency exchange, which launched its cryptocurrency Visa debit card in the US.

So while one day the plastic credit card may disappear, Mastercard and Visa will continue to move money around the world. This is the sort of business that’s future-proofed.

TAKING BUSINESS TO THE NEXT BOUND

An even bigger part of being future-ready is the ability to draw on different business disciplines and practices from other sectors to create new knowledge about how a product is made, or a service is delivered.

Companies are demanding executives who possess the ability to build varied teams that rigorously challenge assumptions. A diversity of perspectives is proven to boost innovation — an attribute that will prove critical for companies to successfully rebuild from the COVID-19 crisis.

But the most successful leaders broaden their horizons and move into markets in which they see opportunities for growth. They “leap” from their historic areas of expertise to new knowledge.

Carmakers are already moving away from their mechanical engineering heritage to increase their software capabilities as they phase out the internal combustion engine and build electric motors and electronic components.

“Leaping” is a source of resilience. Companies change or they die. Think how Big Oil is exploring a future beyond petroleum and doubling down on renewable energy as the sector comes under mounting pressure to respond more aggressively to climate change.

But it takes much more than that to leap. Our research shows that the most future-ready companies align themselves with a single viewpoint about the future.

This allows them to make a targeted allocation of resources and scale up projects early, instead of making a millimeter of progress in a million directions. Only then will they see a financial return from their investments in innovation.

Consider the challenges faced by a consumer brand. The traditional know-how has been built around manufacturing a standard product at the lowest cost. The brand would seek to push products through retailers at great volume, while advertising at scale.

What’s changed today is the importance of blending online and offline activities. A brand must create personalised offerings and foster a direct-to-consumer relationship. Allbirds and Warby Parker in the US, and Peacebird in China are all fast-growing brands.

These upstarts all have an outsized emphasis on their digital roots. And they build an enormous online following.

So for traditional brands to fight back, a sleek website or even a clean mobile app is only the starting point. Behind the scenes, there are a lot of make-or-break technologies to master. Consumers may want to personalise their sneakers online and have them shipped in weeks.

To make this happen, and to do it profitably at scale, Nike has digitalised its entire supply chain. It has automated all tracking and coordination with external partners.

It also leverages advanced data analytics to gather insights around the clock, so it can make markdown and promotion decisions instantly and move inventory across a country when needed.

Doing so then helps locate and ship specific products to the individual stores that need them most.

Meanwhile, Nike’s own retail stores increasingly resemble an immersive theatre. It’s designed to look like a museum exhibit where every shoe is treated as an art object. But it’s in fact a luxury boutique where every piece is for you to buy.

Only there, or on Nike’s own suite of apps, customers could have access to limited release products. Doing all these is difficult. But that’s a prime example of a future-ready brand in sportwear.

Finally, the most-future-ready companies adopt organisational structures that are flexible and straightforward, rather than rigid and complex, to boost their agility. This requires extreme transparency, so that everyone has access to the data they need, and employees can submit ideas and implement them.

Whether it’s Amazon or Google or Microsoft, they have all turned support functions into self-service providers. That is, businesses don’t ask for permission from gatekeepers.

Approval is made automatically. Checklists are made transparent. Tools are made available. Employees are empowered and bureaucracy reduced.

The annals of history are filled with examples of companies that failed to innovate. Often, they did not see the danger posed by upstart challengers or were unwilling to accept that their supremacy was under threat.

For many companies, this is the moment to leap. If there’s one positive to come out of the pandemic, it’s that the crisis has helped to cast aside institutional inertia.

Howard Yu is the author of the Future Readiness Indicator and LEGO professor of management at IMD Business School.