The CEO agenda in 2022: Harnessing the potential of growth jolts

Despite uncertainties, the US economy is robust. The year ahead could jolt further growth.

The COVID-19 pandemic maintains a grip on the world with severe human and economic consequences; and as variants bring new uncertainties, society’s efforts to save lives and safeguard livelihoods should continue unabated. But innate to any crisis is the potential to fundamentally reshape a person, an economy, and possibly an entire society.

In the case of the pandemic, businesses have tried to cushion their employees, customers, and operations from the worst blows of the economic shocks and responded to COVID-19’s massive productivity accelerants and the disruptions under way.

The resulting innovation and behavioral changes have initiated a three-phase ripple effect in the economy, each with the potential to deliver a jolt of growth and prosperity—if business leaders respond strategically.

This may be the moment to commit to growth

As society stands at the dawn of 2022, business leaders may want to consider a stance of clear-eyed optimism about growth—and reflect it in their business agendas. Despite the vicissitudes of the past two years, could there be a postpandemic boom on the horizon?

This will likely depend on business leaders’ ability to respond to the productivity and growth “jolts” born from the pandemic.

The onset of COVID-19 brought a set of discontinuities that drove the first jolt to growth and productivity. Now, near-term uncertainties pose risks to growth; however, responding effectively could translate to a second jolt. The potential third and final jolt may be the largest as companies reshape their long-term strategies to reflect—and define—the next normal.

While uncertainties prevail, a growth mindset could be a force for good. Growth sets the trajectory for a future in which millions more people could prosper and attain greater economic security, material comfort, and well-being than ever before. Growth is the foundational enabler of progress toward inclusion and sustainability, helping to create well-paid jobs for more people and generate sufficient funding for the climate transition.

The pandemic triggered the first jolt of growth

The upheaval driven by the pandemic, along with enabling government policies, prompted significant productivity accelerants that impacted many aspects of modern life. The collective impact could increase annual productivity growth by about one percentage point in the period to 2024.

E-commerce expanded, compressing ten years of growth into mere months. As a matter of necessity, digitization and automation grew across arenas from employee collaboration to customer channels to supply chains. The rapid shift to remote and hybrid work for some occupations opened the door to long-term workforce optimization, with more than half of executives reporting higher individual and team productivity through remote and hybrid models.

Wide-ranging government interventions spurred new business models, such as virtual healthcare.

Higher savings, home values, and equity prices drove the net worth of US households up more than 25 percent. And, in aggregate, corporate balance sheets grew stronger as assets and equity growth outstripped the rise in debt (Exhibit 1). 1

Corporate equity, assets, and profits since Q1 2020 grew faster than corporate debt.
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That strength is not universal: the gap in economic profit between the highest performers and the rest of the playing field widened during the pandemic.

Increased innovation also made 2021 the year of entrepreneurship, seeing 400 new unicorns and record-high fundraising levels among venture capitalists. 2

The second jolt could come from careful navigation of potential COVID-19-exit disruptions

The coming months will likely present risks ranging from the economic to the geopolitical, and these should not be underestimated. However, those who successfully navigate the headwinds could unlock potential for a second boost to growth. (Exhibit 2).

  • Inflation. The consumer price index is skyrocketing faster than it has in two generations—a trend the Federal Reserve has stated it will work to stabilize. 3 Whether inflation in a given industry is driven by nascent demand or supply constraints, companies that navigate this inflationary back-and-forth—whether by leveraging procurement, pricing, or balance sheet strategies—could gain market share.
  • The labor mismatch. A record number of employees have or plan to quit. In the United States, voluntary attrition increased by almost 800,000 in the past year, while involuntary attrition decreased by almost 400,000 during the same period. Businesses may want to consider ways to balance investment in both developing talent and finding tools to increase productivity.
  • Supply chain shortages. The sudden surge in demand has provoked a traffic jam of historic proportions in the global supply chain. 4 While significant blockages are linked in part to the labor shortage, the use of digital tools could help give companies an edge. Research shows that companies successfully solving the supply chain riddle were 2.5 times more likely to have used preexisting advanced analytics tools.
  • Omicron impacts. As the Omicron variant of COVID-19 spreads, there are more questions than answers about its infectiousness, immune evasion, and severity. This next phase of the pandemic will likely remain a revealing test of leadership. Leaders may want to consider continued action on three imperatives: clarifying purpose, supporting stakeholders, and bolstering emotional and organizational resilience.
  • Geopolitical uncertainties. Geopolitical tension is escalating in many parts of the world. Businesses may want to anticipate and respond to potential government action in strategic sectors, while also identifying areas for global cooperation on trade, climate, and technology.
  • Energy market volatility. The past year has seen significant growth in energy prices, with natural gas prices growing by 50 percent in the United States 5 and even greater volatility expected in the year ahead. 6 While managing current market volatility, leaders must also prepare for the energy transition, which brings forth additional risks: growth investments might get crowded out, consumers may not be able to foot the bill, and the grid infrastructure could be vulnerable. Leading businesses will deliver on their net-zero commitments while managing those risks.
A second jolt could come from careful navigation of potential  COVID-19-exit disruptions.
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These interconnected disruptions are substantial, but disruption creates the potential for change. While navigating them will not be easy, we see leading companies that have already begun to execute savvy strategies in response.

The third jolt could come as leaders create long-term, postpandemic strategies

Even amid some of the biggest disruptions of our lifetime, this could be a moment of immense potential to chart the course for the next decade and beyond. From the advancement of medicines, to the reskilling revolution, to the spread and intensification of digital and analytics—if business leaders respond skillfully, the world could be on the cusp of a new age of prosperity marked by sustainable and inclusive growth.

For CEOs, now may be the time to examine your strategy and consider seven tests that can help gauge whether you are ready for the next growth jolt. (Exhibit 3).

  1. Are you adopting a strong growth mindset in your medium-term strategy as the pandemic evolves? This may be the time for CEOs to make bold decisions, reshaping the direction of their organizations and realigning capital and talent accordingly. Companies could remain responsive and flexible in resource allocation, whether that is capital expenditure, operating expenditure, R&D, or employees, to meet changing market opportunities. McKinsey research shows that, across industries, businesses that do reallocate capital earn higher returns: in one study of 1,600 US companies between 1990 and 2005, companies in the top third of the sample shifted an average of 56 percent of capital across business units over a 15-year period and earned 30 percent higher total returns to shareholders than those in the bottom third.
  2. Are you spending as much time creating new businesses as you are improving your business? Building new businesses has emerged as the top priority for organic growth, and the pace of this activity is quickening. In a recent McKinsey study, 74 percent of companies surveyed that chose business building as their main strategy grew at rates above the average of their industries. These companies allocated, on average, one-third of their organic-growth capital to business building—more than twice as much as the laggards.
  3. Is your organization ready for the energy transition—and the immense economic impact it could carry? One of the most crucial aspects of the climate transition is the transformation of energy and land-use systems. These may come with disruptions to energy markets, potentially raising costs and volatility for producers and consumers. Recent McKinsey research found that average annual investment in these systems will need to increase by 60 percent ($3.5 trillion) to meet a net-zero emissions goal by 2050, requiring innovative forms of financing. In this context, companies may want to consider measures to ramp down their high-carbon businesses and grow new low-carbon ones, while managing changes to their cost structure and supply chains. At the same time, they could build capabilities to regularly assess exposure to risks and potential for opportunity on a granular level, especially as the underlying physical, cost, and policy assumptions continue to change. Finally, leading businesses should learn, adapt, and engage continually with their top teams and boards to set their energy and sustainability agendas.
  4. Are you embracing new technology as quickly and holistically as you did new ways of working at the start of the pandemic? The impact of new technology on the bottom line is growing; AI gives us a powerful example. Twenty-seven percent of business leaders now report that at least 5 percent of earnings before interest and taxes are attributable to AI. This may be especially true of companies following best practices, relying on cloud, and making incisive investments. For example, a consumer goods giant has a centralized control tower that integrates company-wide, real-time data and runs scenarios to identify the best solution when problems arise.
  5. Are you investing in human capital with the same discipline and intensity as your capital expenditures? Leading companies are getting creative to build the workforce they need. This includes hiring based on skills rather than educational degrees and partnering with universities and ed-tech platforms to train their employees in skills that complement automation. Some companies are using remote work as a way to broaden recruiting efforts, while others are using the “return to work” as a cultural reset button.
  6. Are you remapping your global footprint in response to outside stressors? Supply chain resiliency has assumed new prominence in the wake of the pandemic, physical climate risks, and geopolitical shifts. As governments undertake a thorough review of critical supply chains, business leaders could take stock too and consider dual sourcing, holding more inventory, moving operations closer to consumers, diversifying supply chains across countries, and shifting focus from vertical integration to securing control points. In a recent McKinsey survey, just under half of companies surveyed said they understand the location and key risks of their tier-one suppliers; and only 2 percent could make the same claim about suppliers in the third tier and beyond. Many of today’s most pressing supply chain shortages—such as semiconductors—happen in those deeper tiers.
  7. Are you jump-starting a strong growth orientation in your leadership team and board? During the pandemic, the most adaptive boards increased their focus on external risks and corporate purpose. At the same time, collaboration between boards and management teams increased significantly, with new and improved ways of working that may outlast the health crisis. Now, companies can build on this momentum by aligning leadership teams and boards on their organization’s medium-term stance on growth, new-business building, and capital reallocation and investment in talent to deliver holistic impact.
Are you ready for the next growth jolt? Try these seven tests.
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Over the past two years the world has been through a crucible of change because of the pandemic; but there is reason for optimism. If leaders can drive growth, we may see benefits to society on a broad scale.

There has already been a period of immense profit growth driven by the first economic jolt. Business leaders have the chance to enter the new year with eyes wide open to the risks ahead and manage them closely, while utilizing the bold experimentation undertaken so far and forging it into potentially long-term sustainable and inclusive growth.

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