McKinsey: The next normal arrives – Trends that will define 2021 and beyond

McKinsey & Co logoThe following article is an abridged version of the full article on the Next Normal to be found here (4th Jan 2021)  I am not the author of this article. The authors are Kevin Sneader, Global Managing Partner, New York Shubham Singhal, Healthcare Global Leader, Senior Partner, Detroit. I would like to thank them for their excellent original post.

2021 will be the year of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. The next normal is going to be different. It will not mean going back to the conditions that prevailed in 2019. Indeed, just as the terms “prewar” and “postwar” are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras.

How the COVID-19 crisis and the recovery are shaping the global economy

The return of confidence unleashes a consumer rebound

As consumer confidence returns, so will spending, with “revenge shopping” sweeping through sectors as pent-up demand is unleashed. That has been the experience of all previous economic downturns. One difference, however, is that services have been particularly hard hit this time. The bounce back will therefore likely emphasize those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues.

However, spending will only recover as fast as the rate at which people feel confident about becoming mobile again – and those attitudes differ markedly by country.

Leisure travel bounces back but business travel lags

History shows that, after a recession, business travel takes longer than leisure travel to bounce back. After the 2008-09 financial crisis, for example, international business travel took five years to recover, compared with two years for international leisure travel. While business travel will return at scale, and global economic growth will generate new demand, executives in the field think that it may never recover to the 2019 level.

The crisis sparks a wave of innovation and launches a generation of entrepreneurs

Disruption creates space for entrepreneurs – and that’s what is happening in the United States, in particular, but also in other major economies. We admit that we didn’t see this coming. After all, during the 2008-09 financial crisis, small-business formation declined, and it rose only slightly during the recessions of 2001 and 1990-91. This time, though, there is a veritable flood of new small businesses. In the third quarter of 2020 alone, there were more than 1.5 million new-business applications in the United States – almost double the figure for the same period in 2019.

The European Union has not seen anything like this response, perhaps because its recovery strategy tended to emphasize protecting jobs (not income, as in the United States). That said, France saw 84,000 new business formations in October, the highest ever recorded, 7 and 20 percent more than in the same month in 2019.

On the whole, the COVID-19 crisis has been devastating small business. In the United States, for example, there were 25.3 percent fewer of them open in December 2020 than at the beginning of the year.

Digitally enabled productivity gains accelerate the Fourth Industrial Revolution

The great acceleration in the use of technology, digitization, and new forms of working is going to be sustained. Many executives reported that they moved 20 to 25 times faster than they thought possible on things like building supply-chain redundancies, improving data security, and increasing the use of advanced technologies in operations. The COVID-19 crisis has created an imperative for companies to reconfigure their operations – and an opportunity to transform them. To the extent that they do so, greater productivity will follow in the ‘next normal’.

How businesses are adjusting to the changes prompted by the COVID-19 crisis

Pandemic-induced changes in shopping behavior forever alter consumer businesses

In nine of 13 major countries surveyed by McKinsey, at least two-thirds of consumers say they have tried new kinds of shopping. And in all 13, 65 percent or more say they intend to continue to do so. The implication is that brands that haven’t figured out how to reach consumers in new ways had better catch up, or they will be left behind.

Supply chains rebalance and shift – three lessons from the pandemic

First, disruptions aren’t unusual. Any given company can expect a shutdown lasting a month or so every 3.7 years. Such shocks, then, are far from shocking: they are predictable features of doing business that need to be managed like any other.

Second, cost differences among developed and many developing countries are narrowing. In manufacturing, companies that adopt Industry 4.0 principles (meaning the application of data, analytics, human–machine interaction, advanced robotics, and 3-D printing) can offset half of the labor-cost differential between China and the United States.

Most businesses do not have a good idea of what is going on lower down in their supply chains, where subtiers and sub-subtiers may play small but critical roles. That is also where most disruptions originate, but two-thirds of companies say they can’t confirm the business-continuity arrangements with their non-tier-one suppliers. With the development of AI and data analytics, companies can learn more about, audit, and connect with their entire value chains.

The above does not mean that multinationals are going to ship all or most of their production back to their home markets in this ‘next normal’. But questions on security and resiliency mean that those companies are likely to be more thoughtful about the business cases for doing so.

The future of work

The twin challenges of returning to the office

Firstly, the McKinsey Global Institute (MGI) estimates that more than 20 percent of the global workforce (most of them in high-skilled jobs in sectors such as finance, insurance, and IT) could work the majority of its time away from the office – and be just as effective. Returning to the office shouldn’t be a matter of simply opening the door. Instead, it needs to be part of a systematic reconsideration of what exactly the office brings to the organization.

The other challenge has to do with adapting the workforce to the requirements of automation, digitization, and other technologies. This isn’t just the case for sectors such as banking and telecom; instead it’s a challenge across the board. Evidence shows that the benefits of re-skilling current staff, rather than letting them go and then finding new people, typically costs less and brings benefits that outweigh the costs. Investing in employees can also foster loyalty, customer satisfaction, and positive brand perception.

The biopharma revolution

Just as businesses have sped up their operations in response to the COVID-19 crisis, the pandemic could be the launching point for a massive acceleration in the pace of medical innovation, with biology meeting technology in new ways.

The potential of the Bio Revolution goes well beyond health; as much as 60 percent of the physical inputs to the global economy, according to MGI, could theoretically be produced biologically. Examples include agriculture (genetic modification to create heat- or drought-resistant crops or to address conditions such as vitamin-A deficiency), energy (genetically engineered microbes to create biofuels), and materials (artificial spider silk and self-repairing fabrics).

Portfolio restructuring accelerates

There is a resiliency premium on recovery. Top performing companies won’t sit on their strengths; instead, as in previous downturns, they will seek out ways to build them – for example, through M&A. That’s why we expect to see substantial portfolio adjustment as companies with healthy balance sheets seek opportunities in a context of discounted assets and lower valuations.

The other factor favouring restructuring is Private Equity. The PE industry has a reputation of zigging when others are zagging, making deals in difficult times. And it has history on its side: returns on PE investments made during global downturns tend to be higher than in the good times. Put it all together, and we don’t think the PE industry is going to keep its powder dry for much longer; there are simply going to be too many new investment opportunities.

Climate change

It’s possible, albeit speculative, that the COVID-19 crisis foreshadows what a climate crisis could look like: systemic, fast moving, wide ranging, and global. There is a case, then, for businesses to take action to limit their climate risks – for example, by making their capital investments more climate resilient or by diversifying their supply chains.

How the COVID-19 crisis could change society

Healthcare systems take stock – and make changes

No doubt, governments all over the world will set up task forces, inquiries, and commissions to examine their actions related to the COVID-19 crisis. The key is to go beyond the temptation simply to assign blame (or credit). Instead, the efforts need to be forward thinking, with an emphasis on turning the painful lessons of COVID-19 into effective action.

The hangovers begin as governments tackle rising debt

The scale of the fiscal response to the COVID-19 crisis was unprecedented – and three times bigger than seen for the 2008-09 financial crisis. In the G-20 alone, fiscal packages are estimated at more than $10 trillion.

As the pandemic recedes, governments will have to figure out how to address their fiscal difficulties. Although interest rates are generally low, that could mean raising taxes or cutting spending – or both. Doing so could risk slowing the recovery and stimulating political backlash. But high levels of public debt carry their own costs, crowding out private debt and limiting the resources available to governments as they service their debt.

While interim measures, such as improving government operations, monetizing assets, and reducing fiscal leakages, can be helpful, the long-term answer is growth and productivity. That’s largely how the United States managed to reduce its national debt from 118 percent of GDP in 1946 to a low of 31 percent in 1981.

Stakeholder capitalism comes of age

There is widespread distrust for business as usual, as a number of surveys and elections have shown. That’s where stakeholder capitalism comes in – as a bridge between businesses and the communities of which they are a part. The COVID-19 crisis has highlighted the inter-connectedness of business and society.

We do not believe there is a conflict between the pursuit of profit, and a sense of purpose. In a study that looked at 615 large- and midcap US publicly-listed companies from 2001 to 2015, MGI found that those with a long-term view – something that’s a core of stakeholder capitalism – outperformed the rest in earnings, revenue, investment, and job growth.

Stakeholder capitalism is about building the trust – call it the “social capital” – that businesses need to keep doing business. And it’s about recognizing that creating long-term shareholder value requires more than just focusing on shareholders.

Edited by Richard Fullerton

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