Coping with the corona crisis requires from companies more than a strong balance sheet and cost-cutting. They also need to rethink their business in many ways to cope in a very different world after the corona crisis. The time spent in isolation already gives us an indication of what companies need to prepare for in the future and what opportunities the future can offer. Our history as Finns, on the other hand, reinforces the belief that facing a difficult situation, we are able to fundamentally change the way we operate and survive the crisis even stronger.
The two lessons of the financial crisis of 2008 are no longer enough
The corona crisis is different from the financial crisis of 2008. The corona crisis caused a faster collapse in the stock market and it also leaves a deeper pit in the real economy than the financial crisis did. The French mathematician and physicist Didier Sornette, considered the world’s leading predictor of financial crises – as well as earthquakes – described the financial crisis on an earthquake scale of magnitude 8.5 and the corona crisis (back then) at magnitude 9.0. Although the difference seems small, the logarithmic scale of magnitude in Sornette’s estimate means that the impact of the corona crisis is more than three times that of the financial crisis.
The financial crisis was largely endogenous, caused by the greed and poor risk management of American banks as well as the value speculation of American consumers in the housing market. The corona crisis, on the other hand, is an exogenous one caused by the realization of a health risk. The financial crisis was reflected in a shortage of funding and a contraction in demand; in the corona crisis, we have both demand and supply stagnation in our hands, even by our own decision.
Post financial crisis studies looked at which companies survived best. The studies highlighted two features common to all successful ones: They already had a strong balance sheet before the crisis, and during the worst of the crisis, they actively cut their costs. After the crisis, the successful ones were able to return to their previous practices again, a permanent change in strategy or operations was not seen with most companies.
In the corona crisis, the doctrines of balance sheet and cost-cutting are still valid for overcoming the crisis, but in post-crisis competition, they alone do not carry far. The corona crisis leaves behind profound functional and structural changes both in the companies’ own operations and in the surrounding society. During the financial crisis companies survived if they received sufficient funding and waited long enough for the market to recover. Companies that successfully survive after the corona crisis will have to thoroughly rethink their own operations. Some proactively leading the development in their field, others forcibly following competitors, some not at all.
The Corona pandemic was not a Black Swan and we can learn from it for the future
The corona pandemic is not a so-called Black Swan, an extremely rare and unpredictable event with dramatic consequences. Events such as the corona epidemic have long been seen to come, and while they are difficult to prevent, it is possible to prepare for them. Despite the warnings of many experts, the WHO, states and companies were not prepared for such a risk, for which we are now paying a substantial bill. Let’s at least try to learn for the future from the experience gained with such a high cost.
The old anecdote that if an investment banker would have created man, man would have only one kidney, is now rising to symbolic value. In the future, we may learn to accept small inefficiencies and extra costs if we can prevent a big catastrophe with them, a catastrophe which will inevitably come at some point. Events like the corona pandemic are rare, but by no means impossible. They belong to the statistical long tail of nasty events, where even more fatal crises than the corona crisis are very possible, even inevitable, in the coming decades.
The corona crisis offers us a rare opportunity to practice in the real-world coping with a sudden global change that is plaguing everyone. Hopefully, in the future, society will become more resistant not only to the corona pandemic but also to many other crises with equally big or even greater impact. The same exercise can also make companies much more sustainable and adaptable.
What changes will corona crisis bring to companies and the surrounding society?
The corona crisis is bringing a lot of new changes to companies and accelerating the development trends that have already been under way. In the following, several corona-related changes identified in various working groups and discussions in the recent weeks have been grouped into broader themes. The list is not intended to be a comprehensive prediction of the future, but rather describes the extent and depth of the expected changes in the playing field and supports the argument for the need to rethink the business models in companies.
All the themes have forces driving in different directions, the combined effect of which can lead to several different outcomes. Some of the changes include difficult confrontations with familiar practices and widely accepted values, which challenge the traditional operating model and value base of the Finnish society. We do not want all this to happen and we can actively influence the direction of development. However, some changes are given, so we just must adapt.
- Risk management is a new mantra
Companies are preparing for discontinuities in all their operations and are willing to pay for their security. Supply chains are being rethought and dependence on remote sources of supply is being reduced. Just-In-Time efficiency gets a new risk-related price tag. Some of the outsourcing will be brought back, and several production activities will return back to Finland, even in traditional sectors. In a world of scarce resources, self-sufficiency becomes a virtue. Organizational structures will be simplified, hierarchies will be dismantled and the flow of information will be made more efficient. Deputy personnel arrangements and succession planning will be taken to all levels of organizations. Companies will accumulate financial buffers for themselves and seek collaborative networks that offer flexibility, cost benefits, and financial security — often through ownership and restructuring arrangements. Scenarios and risk analyze become basic tools for business management.
- Distance is the new normal
Physical distance between people remains a part of everyday life and digitality replaces intimacy. Remote work will become the dominant operating model, and related technology with peripherals as well as management models will evolve rapidly. The number of square meters per employee is increasing, although the absolute square meters are declining in office buildings. In offices and factories, the necessary people are placed far enough apart. Various services will continue to demand safety gaps between customers. Public transport will have to be re-evaluated in terms of implementation.
- Consumer behavior is permanently changing
The structure of consumption is changing, with e-commerce becoming the dominant distribution channel in almost all product categories. A large portion of the population will learn to cut down on non-essential consumption. Sharing, renting and leasing become more common in consumer durables. The importance of hygiene is growing, people are mastering it well and expecting it from others as well. Health related and economic fears will overshadow development for a long time and repeatedly with new small and large crises. Fear must be able to be transformed into sensible precaution and the ability to live in constant uncertainty.
- Utilization of technology and digitalization is accelerating
Investments into technology and digitalization will increase significantly compared to previous forecasts. The pit caused by the corona will be covered by productivity development and new business enabled by technology and digitalization. Industrial automation will accelerate and the number of employees in factories will constantly decrease. Everything which can be digitalized, will be. The sensor revolution and the spread of IoT will accelerate. The narrow special applications of artificial intelligence will rapidly become more common, also accelerating automation. The automation of back office functions will be accelerated by software robotics and artificial intelligence.
- Cash is king
Funding becomes a scarce resource and a growth bottleneck. Exports of capital goods may become more difficult into some markets due to customers’ financing challenges. Financing development and expansion investments will be more difficult. Many competitive companies with limited financial assets will be restructuring targets. Private equity firms have funds for reorganizing different industries, but their small organizations will still be busy piloting their existing portfolio companies through the corona crisis for some time to come. Large and strong international companies will strengthen their role through acquisitions, and many industries will continue to consolidate. Corporate valuation practices will be changing.
- Finland is struggling amid growing borders and walls
Permanent national border formalities will be established, and passenger traffic will be restricted. The importance of geopolitics in the economy is strengthening and the world is moving towards a geo-economy. Protectionism will increase and international trade will slow down. Finland will continue to defend openness and free trade and the united EU that drives them.
- Democracy will be redefined by voting
Anti-democratic trends are strengthening in the world, and democracy is changing its shape at the will of people. Individual freedoms are being curtailed, digital surveillance is being increased, and an increasing proportion of the population will accept this. Security is becoming the number one priority – health, economy, military and cyber security. The functionality of solutions displaces ideology, but dissidents do not remain silent.
- The indebted state is tightening its grip
The role of the state in the economy will grow. The tax base will expand, and taxation will tighten. Public welfare services will be significantly reduced, but the number of remote services will increase in the entire social services sector. The state will also have to take a new forced digital leap to meet the productivity challenges. The dedicated financing institutions of the state will be reorganized.
- Housing will change with society
Remote work and e-commerce will be considered in the housing design phase. Vertical cultivation will be introduced into the living environment. The demand for holiday homes will grow and they will also be designed for remote working.
- Science and education are in the cross wave
The value of science in discussions and decision-making will grow. At the same time, the costs of research and education will have to be cut, and productivity will be sought from digitalization and the web. The online offering of universities will grow. Studying abroad will decline as top international universities offer their services online. Applied cutting-edge research will be increasingly dependent on corporate funding, and Finland’s competitiveness in basic research will weaken due to a lack of funds.
- Healthcare will be rethought
The role of healthcare is growing significantly in national risk management and security of supply. The state takes a firm stance in the direction of private health care and imposes new responsibilities on it. The national social and health care reform will be rethought again. Most of the targeted productivity improvements in the social and health care reform will come from remote services, which are growing rapidly in both the public and private sectors in terms of patient examination, diagnosis, monitoring, follow-up and care.
- New goals and rules of the game for the fight against climate change
The state will not be able to invest in the fight against climate change as planned. Climate change targets and measures need to be reassessed. Emissions reductions for companies must be economically sensible, but low oil prices make development difficult. More and more will rely on technological development.
As the laws of physics change, the wheel can be reinvented
The ball is now in the court of the companies. They need to evaluate their own actions in a changed environment and dare to challenge their old ways of doing things. Companies have to adapt their offerings to the changed demand; many have to search for completely new markets in order to utilize their capabilities and resources. While the laws of physics remain in the corona crisis, companies can still reinvent their own wheel. The post-corona operating environment offers more opportunities to reform the rules of the game in many industries than any previous change.
Companies create scenarios of alternative future developments. Many companies are digging up their Porter’s value chain, embarking on drawing a new kind of network structure in the industry and calculating value added at nodes in alternative structures. For the concept of competitive advantage, new and creative content developed for the post-corona period will be created.
We have good conditions for renewal. When facing challenges, Finns have always been proactive, diligent and used to doing things together. The chosen theme of the 100th anniversary year of the Finnish independence was Together, because mutual assistance and cooperation have been a characteristic feature of us throughout our history. Combined with the genuine interest of the whole nation in digitalization and technology, we can achieve miracles.
The corona crisis also symbolically coincided with the moment of remembrance of another crisis we have faced. 80 years ago, we survived the Winter War together. After the wars, Finland went to the top of the world in almost every field with its innovation policy and well-educated youth. Now we will have to do this again in Finnish companies. The role of the state is to act as an enabler, to make room for the renewal of companies through legislation and regulations, and to provide opportunities for market-based experiments. But companies must now take the initiative.