By Jacques Bughin and Francis Hintermann
The global pandemic, in addition to generating massive harm to people’s health and communities, split the business world in two. Many companies soared to new heights; others struggled against forces well out of their control.
A superficial reading of markets might suggest that it was often a matter of being in the right place at the right time. Of course, such reasoning goes, if you were in health or life sciences, or digital products and services, you were on the right path to higher growth and profitability.
It’s not that simple. True, some companies charged into the opening created by the new environment, providing home delivery of food and other goods; enabling people to work from home and find new entertainment choices; or, yes, developing a vaccine that would take down Covid. When we tried to figure out with our own research ( see end of text, “about the research”), those businesses were a small subset: in our sample of 4,100 companies of the largest companies around the world, they represented just above 5% of the total.
Big pandemic hit, big consequence
What does the data tell us about the rest? This is a rather critical question as great companies are not only those which can boost shareholder value; they are also those which have learned to last and rebound forward from major turbulences.
When we examined the other 3,755 companies, we saw that for many, the road to recovery from such a big pandemic hit is not an easy or quick one: 78%, as of the end of 2020, said they did not foresee a return to their pre-crisis profitability before April of this year (or one year after covid-19 hit), and 70% believed that this would still be true in September 2021, even if vaccinations provide more room for recovery.
Looking at the mirror, predictions may have been overly cautious. After all, managers were surprised at the extent of the shock induced by the pandemic. GDP activity dropped more than in other previous crises; US bankruptcy filing increased by 200% for large corporations, and especially it affected virtually all firms worldwide in contrast to other recent pandemics like H1N1 that were more regional, and died out faster than covid. But when we match those predictions with the S&P 500 earnings evolution, expectations were actually in the right blue-park. US S&P earning for instance just delivered same level as pre-covid by June 2021, in line with the surveyed US firm executives who were anticipating recovery just a few months later by sept 2021. Also, this prediction is not at odds with other major economic crises, -such as the 2000 internet bubble burst, or the 2008 financial sub-prime collapse-, which have revealed that matching the same profitability takes time- around 18-24 months.
What those crises have also taught us, is that the most complex challenge is recovering from the missed growth opportunities during the collapse; in effect, the financial crisis has only closed the activity gap after 10 years. In the covid case, while many firms—almost half—were performing solidly before the pandemic, generating on average close to $1 billion of operating profit a year, the pandemic wiped out the same amount of profit in only a matter of six months into the pandemic. And the key issue is how covid-19 has built a profit bifurcation between the 30% recovered and the other 70% of firms.
For those performing firms, going back to the same level of profit, (as the S&P 500 earnings have shown), has taken about 1,5 years. Those companies,- typically of smaller size, pinpointing to size reducing agility and resilience- expressed confidence that, absent a third wave of the pandemic, they would surpass pre-Covid levels of profit by end 2021, -catching up on the same long-term trajectory growth of the path, with profit growing at about 10% a year.
But contrast this with the other 70%. The typical company stated that it will be barely reaching the bottom after 1,5 years—in the most optimistic case that the rebound has just been shifted, the company might be back on the same pre-covid trajectory by the last months of 2022; in a more probable case that the full recovery cycle will be delayed, the pre-covid trajectory may only be back by end of 2023. The worst case is that it may take up to after 2025, if one extrapolates the recovery based on the glimpse of expectations for the end of 2021.
Uncovering the ingredients of resilience
Evidently, the distribution of recovery is likely to span over the three scenarios, and the main message is the likely important bifurcation between the have (rebounded) and the have not. How can then one firm avoid to be on the wrong side of the bifurcation?
A common theme of those able to reboot and boost operating profit is that they are not necessarily laggards in terms of “twin transformation,” that is the ability to engage in both digital transformation and sustainability practices (Accenture research). Another commonality is one of organizational (i.e. their ability to reshuffle resources) and technical (i.e, faster speed to actions) agility. Otherwise stated: a fast metabolic rate of shifting course is paramount to resilience.
Besides these two common themes, we also found two other factors that play a significant role, although with different weights for each company. The first theme is the perennial theme of innovativeness—firms that have the ability to be innovative, preferably in a disruptive way, and activate the capabilities to develop new products and markets, often have been the long-term winners out of crisis. The same seems to play out for this pandemic. The second but new theme, is the ability to compete through ecosystem plays. From the Amazon e-commerce marketplace to the Lego Ideas platform, ecosystems are loose networks of multiple companies that complement each other to provide a new form of offering- while not new, ecosystems have come out of age, especially with the development of digital technologies, that make ecosystems more easy to scale. A fortiori, ecosystem makes a more agile way to evolve when major turbulence such as a pandemic occurs.
Four Corporate Paths
Given the four ingredients (innovation, ecosystem play, twin transformation, and agility), they might also be different ways to combine and manage for resilience. Our research has found four statistically distinct clusters of resilient companies.
- First, “right time, right place” does explain just above 13% of companies on the profitable side of this equation. This includes a large part of companies that often operate in consumer and health-life science services—and managed to benefit from the right tailwind out of the pandemic. Another type of companies appears to be pushing more than luck – they are leveraging ecosystem partnerships for their acceleration. A company like BioNTech, building on its investments in technology and mRNA expertise over the previous decade, partnered with Pfizer to create the first mRNA Covid vaccine, and then rapidly retooled its production process and retrained staff at its facilities to produce millions of vaccines.
- Second, another 36% in our analysis focused on generating disruptive innovations. Remarkably, more than half of this group of companies suffered from performance below peers pre-covid. Rather than “let the crisis go to waste,” they significantly invested while others were retrenching and plan to further continue their investment to support their pivot to possibly non-incremental growth areas. Industrial company Honeywell is one example: at the outset, it worked quickly to produce tens of millions of N95 masks for frontline workers. Later, it introduced an ultraviolet treatment system so that airlines could quickly and effectively disinfect air cabins. It also has developed products aimed at creating healthy buildings, using technology to measure and improve indoor air quality and filtration.
- Third, 21% of companies in our sample, often found in the tech sector and manufacturing, aggressively boosted their ecosystem play as a way to increase their profit. Those companies often use their role as orchestrator platforms to shape their momentum. A classic example at the intersection of tech and automotive is the mobility platform. Companies such as GoTo Global or GreenCar have seen major increases in users and trips and have significantly beaten their goals of revenue growth and profitability. Most of those mobility platforms reconfigured their trip offerings for grocery delivery and will now expand this opportunity.
- A fourth group of 30% of companies is possibly the most interesting of all. They are fully loaded: rather than pick a path, this group is not choosing between ecosystem and innovation: it does both. Such companies are not laggards in twin transformation and in agility, but rather, they push the frontier to excel at both. And our data also show that those companies have found many synergies in the combination of agility, innovation, ecosystem, and twin transformation. Schneider Electric’s ecosystem activities related to twin transformation are telling. The company has set up and is coordinating multiple digital business ecosystems with the joint aim of better business performance and positive environmental impact. The Schneider Electric Exchange, launched less than two years ago (at Hannover Messe 2019), is core to its overall business strategy. It aims to deliver benefits to all stakeholders driving worldwide economies of scale for IoT solutions. Schneider is using published datasets and SaaS from the Schneider Electric Exchange partner Senseye, a technology company in predictive maintenance (UK), in one of its Smart Factory manufacturing plants, Le Vaudreuil. Likewise, Schneider is co-innovating a digital energy forecasting service offer for retail with the company Predictive Layer. It has also joined forces with Danfoss, and Somfy to create the Connectivity Ecosystem that will boost the adoption of connectivity technologies in the home for better and more sustainable living and working experiences for people.
What’s Right for Your Company?
Clearly, the first thing a manager must recognize is that the effect of sudden crises can be such that every company may have to develop enough organizational ability to ensure they can quickly reallocate resources. The game is more and more about agility, or multiple usage of sunk resources. Likewise, twin transformation has become table stakes, and corporate can’t afford to lag behind.
Second, regarding the other mix of ingredients, it is important to realize that each ingredient carries a different premium according to industry and market context. In automotive, for example, an emerging dominant play is the development of a mobility ecosystem around sustainability, for both people and goods; in utilities, the major play is more about twin transformation, as utilities have been lagging digitization and are now on the hot spot to pivot to much stronger sustainability practices.
Third, the “fully loaded” strategy observed by 30% of resilient companies suggests and indeed brings, a higher payoff than the others, in the range by end of 2021 of 5 extra more points of profit rate, or a few hundreds million added to the bottom-line. Yet, one word of caution: this is, by design, a complex play and require that capabilities to succeed have long been established as routines. Indeed, this play is done 50% more often by companies that had acquired those capabilities before the crisis. Hence, each company must take the step to understand where it stands in relation to the four capability ingredients. Where are its strengths, and where are gaps? This diagnosis will help a company prioritize its cluster play.
More than that, the execution must be done superbly, if companies are to emerge from the pandemic stronger than before. While not exhaustive, here are a few key questions. If the company should decide to be leading with “twin transformation,” ask: Are we increasingly investing to scale frontier technology? To what extent do we deploy technology to enable and scale our sustainability agenda? If the focus is innovation, ask: Are we increasing investment in innovation to create new disruptive growth opportunities (as opposed to realizing incremental improvements)? When ecosystem is the critical area, ask: To what extent to can we position ourselves as major players or orchestrators of ecosystems in our key markets?
Finally, in general, the synergies among all those ingredients are the little secret for outsized success: digitization has facilitated the emergence of platform-based ecosystem; innovative products have made sustainability a profitable path, and agility has been boosted by digital protocols such as DevOps and others. The play is as much about excellence in capabilities as in excellence in the best capability portfolio play.
About the research
The research is based on questions launched online towards top management of large global companies worldwide (revenue above $5 billion) by the end of 2020, including the two main waves of the covid-19 pandemic. The sample was stratified to be representative of industry mix in core countries such as US, UK, France, Germany or China. The final sample includes 4100 respondents (one per firm), of which 1/3 is located in Europe, as well as in the US.
A special care was made to secure a representative non-biased sample. For this aim, tests of common variance have not shown any common answers bias, and survey responses were tested against aggregate key statistics. For example, about 40% of companies are not returning profit in our sample in line with World Bank that less than half of companies should be profit making from the impact of covid-19 in 2020. The S&P 500 aggregate earning just fell short of reaching the same level as made pre-covid by June 2021, while average profit recovery happens one quarter later for our global sample. By the mid-year of 2021, The sample reveals that managers from industries such as utilities and natural resources, or automotive and transport were not expecting to be in full recovery mode, as opposed to respondents from industries with favourable tail-winds include food retail, software, and pharmaceuticals. This picture follows the same industry pattern as in other industry research. For additional test of sample representativeness, see Bughin et al. (2021).
The analysis from which this research is based on is also unique in scope, and uses some of the most sophisticated data techniques available to date. The model on how corporate capabilities affect corporate revenue and profit dynamics, either directly or through amplification responses by firms during the pandemic has been identified thanks to a meta-analysis of the academic and management literature. The resilience drivers as well as the segmentation of resilient firms in the text comes from applying advanced machine learning techniques such as Random Forest and statistical clustering. Random Forest resilience prediction accuracy was more than 80%, and higher than prediction based on traditional regression techniques. Using parametric technique, each resilient driver and each factor within a cluster is statistically significant, with more than a 99/100 chance of being accurate. Finally, the base line model was tested for robustness on multiple dimensions, -industry versus all sample, profit recovery distribution shifted by +/-10%, removal of top 5% outliers, etc. Results remain qualitatively the same.
About the Authors
Jacques Bughin is Professor, Chaire Gillet of Management Practice, at the Solvay Business School at the Université libre de Bruxelles (ULB). He is also the CEO of MachaonAdvisory, a top management strategy consultancy. He serves as the Senior Advisor for Fortino Capital and Antler, Knowledge Board Member at Portulans Institute, and Accenture Research, and STOA European Parliament. He retired from McKinsey & Company as senior partner and director of the McKinsey Global institute.
Francis Hintermann is Global Managing Director of Accenture Research. Accenture Research is an Accenture’s entity which identifies and anticipates game changing business, market and technology trends through thought leadership & Strategic Research.
