The coronavirus outbreak is shaping up to be the biggest economic crisis since World War II. The challenges associated with the virus are much larger than companies are used to dealing with, and firms need to have an adaptable operating model that can withstand an extraordinary level of uncertainty. How can companies adjust their business recovery responses according to the shifting time-frames? An edited transcript of the podcast follows. For more conversations on Future of Asia, subscribe to our podcast here.
Oliver Tonby: You are listening to the Future of Asia Podcasts by McKinsey & Company. I am Oliver Tonby, your host and chairman of McKinsey Asia. In this series we feature leaders from across the region to discuss the forces, the opportunities, and the challenges that are shaping the future of Asia.
Planning ahead of the coronavirus crisis
So, welcome everyone. Welcome to this episode of our Future of Asia Podcast. Today’s topic is how firms can get ahead over the next stage of the coronavirus crisis. We are now three months into the coronavirus crisis. It is, first and foremost, a humanitarian crisis. It is affecting all countries, all governments, and it’s also affecting all companies around the region. Today I am joined by Chris Bradley. He is a senior partner based in Australia. He leads our corporate strategy practice across Asia. I am also joined by Eleanor Bensley, associate partner and part of the leadership of our corporate finance and strategy practice. She is also based in Sydney. So welcome, Chris, and welcome, Eleanor.
Chris Bradley: Thanks, Oliver, great to be here.
Oliver Tonby: Let me get us warmed up and just hear from each of you. When you speak to your clients across the region, what are some of the things that you hear is on top of their minds?
Chris Bradley: I think there are two realities that are colliding into each other for our clients. The first one is they understand that this is an unfreezing or a disequilibrium of epic proportions. This is really, really big, and it’s really profound. We call it a tunnel to a new place, or a next normal. And they kind of know that, in times like this, in times of massive disequilibrium and shock, this is when industry structures are made, this is when many great companies are born, and also when many great companies falter. So, there’s this feeling of destiny or unfreezing about it.
The other reality they’re confronting is that the uncertainty isn’t going away anytime soon, and the tools that they have, what I call autopilot tools, like standard budgeting and the five-year plan, they’re all completely useless now. Their budgets are kaput. The five-year plan might as well be a door stopper. The idea that anyone with any humility could suggest that there’s a clear road map through this kind of once in two lifetimes kind of crisis, you have to throw that out of the window. My clients know it’s a time of very important unfreezing and refreezing, that the world is going to go back to a different place, but the normal tools they have and the normal approaches aren’t going to cut it, so we’ve got a terrific tension at play here.
Oliver Tonby: They’re doing this and thinking about this whilst they’re also trying to keep their people safe, while they’re trying to manage cash, while they’re trying to keep the factories running in whichever shape or form they can. So this is a real conundrum for many leaders, I suspect.
Chris Bradley: On the playing field I think there are a bunch of clients where you start on the first square, which is short-term survival, but as this goes on and people kind of get used to it, they’re moving to another square, which is more about long-term and more about repositioning and not just survival, but how are we going to kind of reimagine ourselves? Most of my clients actually did a really amazing job of that first square. They mobilized quickly, they made leadership responses that anyone would be proud of but the bit they’re struggling with is moving to the next square.
Oliver Tonby: Eleanor, what are you seeing?
Eleanor Bensley: Similar to that, at the same time as having to move to that next square, as Chris has put it, there is so much uncertainty that I think our clients are wanting to recognize the need to think boldly, recognize the need to sort of open the aperture on all of the potential kind of states of the world and how this could unfold, but at the same time recognizing that day-to-day there’s a business to run, and crucially they need to bring real clarity and direction to their teams about where to focus and what the priorities are in the here and now. I think there’s also a tension there between how do you simultaneously keep in your mind that the boulder potentially industry shaping re-imagination but at the same time as ensuring that the day-to-day response, which is ongoing for most companies, continues apace and safely.
Oliver Tonby: And this must be quite different sector by sector. Would you care to comment how different sectors are affected by the coronavirus?
Eleanor Bensley: I think one of the interesting things, certainly in some of the conversations I’ve been having, is around the extent to which COVID-19 causes or requires companies to really rethink and scrutinize some of the core beliefs and assumptions about how and why they are successful, and what they do to make them competitive to appeal to customers, and the extent to which that is going to potentially be completely different in the next normal. And I think sort of sector by sector, you see differences in the extent of potential long-term change and disruption, particularly in customer behavior shifts. And so, how boldly companies really need to think about the future.
Chris Bradley: I’ve been tracking pretty closely, Oliver, the capital market’s reaction. Yes they’re gyrating up and down, but if you look sector by sector, they’re actually sorting in a way that looks quite rational. When you look at the returns by sector, you see three groups. There are the sectors that are where it’s expected to see deep value loss—you’ve got oil and gas, banks, insurance, air and travel, those kind of industries there. And also probably apparel fashion luxuries there as well, as well as real estate. You’ve got another group on the other side of companies in pharma, high tech, healthcare supplies, some consumer services, and more of the everyday needs part of retailing, like supermarkets, who are actually doing well. Their stock prices are up. Then there’s basically the broad middle of people like telecom players, consumer goods that are in the middle because they really are dealing with the broader economic fallout. So we’re seeing that there’s that sorting mechanism happening.
However, I’m having conversations with clients in every single one of those groups, and it doesn’t feel that different because the uncertainty is there, whether or not, exactly as Eleanor said, this is a problem that exists on two axes. The first axis is we’ve got the shock of a lifetime, or the shock of two lifetimes on the economy, and unusually, you have to go back to World War II to see a bigger demand drop in a shorter time, and it’s no fluke, and that’s because World War II is something that happened to the economy, not within the economy. And this is the same thing. So you got to think of it more like the impact of a war than the impact of a normal economic crisis.
So there’s the, “What’s the demand environment I’m going to come back into?” Which is going to be really reshaped. But there’s a second question, and this is a broad question at every sector, which is, “What kind of industry norms, what kind of consumer norms am I actually coming back into?” That’s because this is not just an economic issue, it’s a behavioral change as well. Even in telecom or retail, parts of the economy that are doing so-called ‘better’, they still have to deal with that other axis, which is where they’re going to come back to a world where consumers and regulators might be thinking quite differently than they were before this crisis.
Oliver Tonby: I do guess that one of the differences between your three groups is that some of the companies in the first group will actually be worried about survival. The airlines, are they going to be around? Or an oil and gas company, or an oil-field-service company, will they actually survive? I’ve heard you in the past, Chris, talk about this period as if, and I think I’ll get this quote right, “It’s like we are in the long dark tunnel. We do not know how long this tunnel is, and we actually don’t know what’s on the other side of the tunnel.” I think that kind of describes the situation very well. But if we care to at least start thinking about what could be on the other side, we talk about the next normal. What are some of the things that you would say could happen in that next normal?
There’s a lot of ‘nons’ in this crisis. There’s a nonlinearity, so small changes in the rate of R, for example, make massive difference. There’s also nonfinality, because we’re seeing every time someone tries to draw a line on this thing, it’s not really over.
Chris Bradley: First of all, I always start these conversations with, “We don’t know.” So there’s a lot of ‘nons’ in this crisis. There’s a nonlinearity, so small changes in the rate of R, for example, make massive difference. There’s also nonfinality, because we’re seeing every time someone tries to draw a line on this thing, it’s not really over. This is going to be full of false dawns. And there’s also what I call non-having-a-clue. We’ve just got to be very humble. So certainly we get calls from clients, “Oh, which of your nine scenarios are most likely?” We say, “Well that’s actually the wrong question. The right question is, given that there’s this much uncertainty, “What’s the right set of responses I can have that I’ve got the right players in place that are going to be robust for uncertainty?”
So we’re in a long dark tunnel. There’s going to be twists and turns. We don’t know how long the tunnel is. At some places you’re going to come out and it’s going to feel like there’s a light, but it’s not really. And then we are going to come out to a next normal, Arundhati Roy put it very eloquently in the Financial Times, saying this is a portal to a new place, and I thought that was a great kind of call to action there of let’s try and make that a new place we want to be. And I thought that was really inspiring. So on this other side of the tunnel though, we’re inviting our clients to kind of think through basically four main realities, and they go to what kind of demand environment am I coming back to, and how much is my business model going to be disrupted? And there are some clients for which it’s going to be much more about getting back as quickly as possible. So the demand is going to come back and the business model is going to be roughly similar.
There are others for which hey, the business model is not going to change that much, the core technology or the behaviors, but it’s a radically different demand environment. Maybe airlines have that, and that’s where there’s going to have to be fundamental restructuring of whole industries to accommodate a different demand environment. But there’s other companies too that are going to be well, “Hey, we’re going to come back and our demand is going to be there, but it’s going to be in a different size and shape.” Consumers are going to be acting differently, they’re going to have different risk preferences, they’re going to have different ways of shopping or interacting digitally. And for those, it’s really a game to shift your business model. But then there’s a few industries, and maybe cruise lines is one of them for which it’s not only a complete demand shock, but consumers, regulators, the whole environment is going to change completely around the business model, and that’s where you’ve got to reshape.
Now here’s the problem, I’m not brave enough yet to say any one industry fits exactly in one of those bubbles. So what we’re inviting our clients to do is say, “Hey, given your old plan is kind of ‘kaput’, and let’s try and make a new plan that lasts more than one month.” And for that new plan to last more than one month, it’s going to have to have uncertainty, not as an afterthought. It’s going to have to have uncertainty literally at the very center of your plan. What’s true in all these scenarios mapped, what’s really different, what moves are going to be no-regret moves, and what are the small number of bets to hold, and where to build flexibility and optionality? I think it’s a more sophisticated strategic conversation, but I think the times demand it.
Oliver Tonby: And here, I know that you and our strategy practice globally is doing a number of what I think you called ‘plan-ahead’ type of engagements, workshops, and sessions. Can you explain what is that, Eleanor?
Eleanor Bensley: So the idea of a plan-ahead team is to put uncertainty at the core of strategic decision making, exactly as Chris has just outlined. The idea is to isolate with our clients what are the core uncertainties that they face as an industry and as a company, and think about what are the scenarios for how those uncertainties might unfold into the future. And I think, quite deliberately, to be a bit provocative in describing some of those scenarios to really kind of push the boundaries of how the world might evolve to ensure that the sort of strategies really are resilient to kind of the full bookends of what could happen. And then scenarios are great, but ultimately useful only insofar as they then inform strategic decision making. The idea is then to pivot to understand, okay, well if that’s the world that we might face, what are the set of moves that we need to make?
What are the things that make sense across all scenarios? Those things that are kind of no-regrets, and where do we think we might need to either place some bigger bets in order to be well positioned for the different scenarios, but that might not be optimal in all scenarios? So defining a portfolio of moves that’s resilient to all of the different ways in which the world might unfold. And then I think, crucially, not setting that in stone and walking away, but actually thinking very dynamically about that plan. And so, coming back to it at regular intervals, establishing a set of leading indicators that you’re effectively watching all of the time, because I think the magic is sitting here, nobody has a better crystal ball than somebody else, but at the same time you want to be the first to know, to really understand which world you are seeing and making sure that your strategy is evolving and adapting to new information as it comes to light.
Oliver Tonby: Thank you. And let me go back to you earlier said, Chris, that the old tools, the autopilot tools, I think you called them, are no longer relevant. I think I heard you say budget five-year plans. Can you just expand a little bit on that?
Chris Bradley: In a time of really deep uncertainty, you have to create things that are certain, if that makes any sense. The whole world can’t just go to jello. What we’ve actually been implementing with our clients is actually a very rigid, very by-the-book planning framework, because when the whole world’s crazy, at least we know how to plan, and we’ve outlined that in a five-frame process. It’s actually quite prescriptive. The other thing when the world’s kind of crazy, and as Eleanor was saying, we’ve got to think really big thoughts and we’ve got to push the boundaries of our thinking, but we’ve also got to make sure that people actually have direction every day and know what to do. This is the art of the plan-ahead team.
There’s a whole bunch of things I’m executing, there’s a bunch of things I’m planning for, and as a series of things we’re exploring. Having done this with a few clients now, they initially think these are wacky and wild scenarios. But then you say, “Well hey, let’s go back to a recession that was half this depth, and even wilder and wackier things happened, so maybe it’s not so wild and wacky.” And one of the first things we do is we call a system restorative January. So go back to January and say how did you go into this crisis? What assumptions were you making? What initiatives did you have in the pipeline? What were the strategic beliefs you went in. When you get lost in the jungle, right, go back to your last known point, check you’ve got all your people around you, take stock. And then we ask, “Okay, depending on which scenario happens, what percentage of that’s still right?” And the answer is anywhere between 20 percent and 80 percent.
So you’re either a bit wrong on your strategy or it’s completely wrong. And you go, “Well, how confident are you to choose a scenario?” And they go, “Well, I can’t choose a scenario.” So what we’ve got to do is get back to a set of knowns. That’s the key. And the first set of knowns is what’s no-regret, as Eleanor said. So what are the moves that make sense across all scenarios? Let’s just get clarity on that. Let’s not muck around. Then as another set of things. I know I need to explore this. So for example, if you’re in a consumer business, you need to explore, “If digitization triples in pace, how would that change my business and what decisions would I make differently?” Someone in the company needs to be exploring that question, and you got to make sure they’re doing it. And then there’s some things that very practically would translate into, “Well, how would I create optionality?”
So for example, if you have to close stores because of the coronavirus, which stores should you close and how quickly should you open them? That creates a huge amount of optionality, but it actually translates down to a very mechanical level. That’s why I keep using this analogy of autopilot on the fly, because when I talk to CFOs, they’re making somewhere between 10 and 100 times more decisions than they’re making before, and that’s natural. When you’re flying in emergency conditions you have to have your hand on the dial. What’s your more dynamic model of management going to be, and how are you going to get out of autopilot? And when it comes to purely finances, you go, “Well, one year budget’s crazy.” Well, what’s not crazy? A three-month budget, that’s probably not crazy. Budgeting every line item, holding people, and strangling them on every variance. That doesn’t make much sense.
There are five frames ... understand your
starting position, define and develop
scenarios, set your broad direction of
travel, build your portfolio of moves,
and build a dynamic road map.
But what can you do? Well, you can create a minimum viable survival budget so people at least know the minimum funding pool they’ve got. And then you can have a queue. You can have release gates on other funding. So when it translates down, you can actually have practical measures. The challenge for this, of course, is it’s going to cut across all the traditional lines, and in some ways we’re using more military analogies to help companies think about how they go to manage because the old adage of a general manager—note the military term general in there—of someone integrating forward, and planning, and execution, and bringing it all together under a P&L, that kind of doesn’t work when you got to go at this 100 miles an hour. So you’re going to have to have different people exploring, different people planning, different people executing. So what I don’t want to say, Oliver, is well we’ve got this tick the box, do these five things and everything’s right. This is a very profound change and needs to be handled with a lot of thought.
Oliver Tonby: Thank you Chris. For the listeners, Eleanor, what are the five frames here? Just to outline them.
Eleanor Bensley: So there are five. The first is to understand your starting position. The second is to define and develop scenarios. The third is to set your broad direction of travel. The fourth is to build your portfolio of moves. And then the fifth is to build a dynamic road map.
Oliver Tonby: Got it. And have you found that CEOs and the top teams, do they have mindshare to spend on this in the heat of the moment and keeping people safe? How do you think about that? How do they think about that?
Eleanor Bensley: In my conversations, I would say that CEOs really want to do this and recognize the need to be thinking expansively, but that it’s tough. To Chris’s point around in uncertainty, decisions are being elevated to higher levels in the organization than previously, and so there is a lot more day-to-day decision making going on, I think the encouraging thing that I’ve seen is precisely a bit of trying to separate out who’s thinking about what, and so rather than having everybody trying to be in execution, and planning, and re-imagining, to actually, certainly at this stage, be carving out different people to think about different things.
Oliver Tonby: Got it. Different people thinking about different things. So there’s a team that is thinking about the plan ahead. There is a team that is focused on the crisis, and the resilience, and return. Who is involved in these plan-ahead sessions? I assume that this is not the CEO sitting on his or her own. So who’s involved, Chris?
Chris Bradley: A crisis response of the elevated pace of decision making is more dynamic nature of management. The idea that we can split the company off into lots of little autonomous units—that is gone and we’ve got to think more cross-functionally than ever before. For example, we discovered very quickly, working through this, that the idea of strategy team is kind of thinking thoughts over here while a finance team is thinking thoughts over there. That’s just not going to work anymore. The same goes on the people side too, because there’s going to be profound changes in the ways companies need to organize, how they need to incentivize and motivate their people. For example, one of the big questions a CEO asked me recently was, “I get all that, but in my company incentives really matter, and if people don’t think their incentives are credible because the world has changed so much, what do I do?” These fundamental questions about how we manage the company.
So the plan-ahead response has two parts to it then. It has to be very cross-functional. It has to bring together the right people, the people side, the finance side, the strategy side, but it also has to separate work into different modalities or styles of work, because when the world has gone crazy, you have to create more focused work for people to do so they can achieve and have clarity. And so that’s this difference between hardcore planning, kind of bigger exploration ideas, and then day-to-day execution being kind of much more separate disciplines rather than lots of smaller pockets where all those things are trying to happen together.
Oliver Tonby: Got it. You’ve had a number of these plan-ahead-sessions conversations. What are some of the more counterintuitive things that you have seen or heard coming out of the plan-ahead conversations? I don’t know if any episodes come to mind.
Chris Bradley: So I’ll throw one in, and then Eleanor, you should throw one in too. The one for me is on big bets. So remember, we’ve kind of put our moves into there’s no regret moves, there’s options you want to create, there’s safety nets you have, which is kind of hedges. And then there’s the few big bets you’re going to make where you have a convicted view and you’re going to take something. But at first, when you’re exploring, you’re going to be exploring big bets that are completely antithetical to each other. So in one big bet you go, “Actually, I’m going to keep more stores open because actually there’s going to be a massive opportunity to gain market share.” But in another scenario you go, “Well I’m going to be the first to digitize.” And they have completely different answers, and we’re used to this world of strategy being very one direction or the other, but the idea that you’d be exploring two ideas that actually fundamentally do not logically fit together is very strange to most people, but you have to equally explore those ideas.
Oliver Tonby: So what happens? I assume that is to really start crystallizing the thinking, and from there, what are the trigger points that would lead you in one direction or the other? Is that why you’re kind of approaching these two extremes?
Chris Bradley: That’s right. It finally comes down to what do you need to believe? And what set of early indicators would have me turning left or right? But it’s prepared minds win wars, right. So Eleanor, I think you’ve probably got some good examples to throw in too.
Eleanor Bensley: Well, I mean what I was just reflecting on as you were talking, Chris, is the other thing that feels a bit strange, or that can feel a bit strange is some of the more, I would describe as behavioral elements, because I think when you’re contemplating scenarios that might be sort of very, very different from today, your hard-won strategic decisions of the past may need to be unwound, and that there’s a world in which decisions that you took very confidently six months ago now actually might need to be reopened, or there could be value in reopening them. And I think it’s much more about how you sort of bridge that frankly more social side of strategy around the sort of we feel like we’ve made that decision very recently, we were very confident of that decision when we made it recently, and how do you quickly, I guess, build conviction that that might be something that it’s worth putting some energy around rethinking or replanning in light of how the world might change, and that’s hard. That’s hard to do.
Great leaders need to hold two truths.
First, the world can’t go to jello. We
still have to run companies. We have to
bring clarity. And on the other hand,
too much clarity or too much rigidity
will be very bad for you.
Oliver Tonby: Asia’s standing in the world has changed, and it’s clear that where the focus once was on how quickly the region would rise, the reality is now all about how Asia will lead. Keep listening to the Future of Asia Podcasts.
Can we shift a little bit to talk about what does it mean to lead and to manage during these times? Because these are very different times. As you said earlier on, Chris, the uncertainty is just at a different level than ever before. The number of stakeholders that you have to be thinking about, you have to be keeping your people safe. You will be thinking about how do you help the government to stay the course. There’s many different types of requirements that are placed on a CEO and a senior executive. How do you find that leaders are leading and managers managing during these times? What’s different?
Chris Bradley: I’m sure many listeners will have this experience too, but I’m seeing two quite different responses. There’s one group of leaders that are really energized by this. They see this has a time of unlocking, of being out of question things, and making big moves, and the kind of pace and energy of this is something that they find energizing. But there’s another group of people for which the uncertainty really plays a very heavy toll. And I think for leaders, it’s just important to understand that when we’re talking, there’s multiple audiences we’ve got to talk to, and legitimately so. For lots of different reasons, different people will be seeing it quite differently.
But I kept coming back to great leaders are going to be able to hold two truths. The first one is the world can’t go to jello. We still have to run companies. We have to bring clarity. But on the other hand, too much clarity or too much rigidity will be very bad for you. You won’t be robust and, at worst, you’ll be incredibly vulnerable to bad things happening. Or, at best, you’ll miss out on big things that could have happened. You’ll miss the boat. So how do you do that? Well, I think you’ve got to have a spine. So you can’t be a jellyfish. You got to have a spine, and that is you’ve got to stand for something. So that’s part of the power of this scenario analysis is it allows you to build genuine conviction for the true things that you can hold to no matter what. And they can become a set of failsafe principles and ideas that can drive direction.
The example we always use is a bit of a cheesy one from the ‘80s, but nonetheless useful, is Bill Gates in the early ‘80s when he was driving Windows, but what people don’t remember is how many irons he had in the fire. He had a software deal with Apple, he had a joint venture with IBM, he had a Xenix platform, he was investing in DOS. His strategy was very, very diversified. Of course, he had a central play on Windows, but he knew that he knew that he knew two big things. He knew there was going to be a PC on every desktop, and he knew that there was a winner takes all for the graphical user interface.
And so what that allowed him to do was to make this dynamic response bigger and faster because he stood for something really big and really meaningful, which is this vision of the future of PCs. And then that gave him the kind of guts and the wherewithal to say, “Yeah, you know what? I need to have multiple irons in the fire to do that. I need flexibility.” For me, it’s about how do we hold two truths together, and we bring those together by having a spine of what we’re deeply convicted about? And the road to take conviction actually comes from exploring the wider possibilities and being open to the fact that the world is pretty wacky.
Oliver Tonby: Eleanor, your thoughts.
Eleanor Bensley: And all I would add, I think, is the final sentence to Chris would be and leading with empathy through that, because I think picking up, Oliver, on your very first kind of introduction, I think great leaders now recognize that their teams and their customers are going through a very confronting experience, and sort of have tension and stress in their lives. I think there’s all of the strategic dimensions we’ve spoken about today, but there’s also about how leaders show up for their people, and their customers, and their community that I think is going to be a critical marker of great leadership over the next few months.
Oliver Tonby: Yeah. Thank you. Now plan ahead. It sounds good. If it is that great, what is McKinsey’s plan ahead? Does McKinsey have a plan-ahead team, Chris?
Chris Bradley: Well you tell me, Oliver. We do. We definitely do because just because we’re McKinsey doesn’t mean we don’t have to change as well, as everyone else does. And it ultimately comes down to being deeply client-focused and oriented around well what are our clients going to need in this new reality, and how might that play back for us? And yes, we have a plan-ahead team set up. What we’ve also done, in the spirit of kind of divided duties, at least in our geography, is we’ve got some of our younger partners, who maybe have fresher eyes and maybe aren’t as addicted to some of these old assumptions that we’ve made, to kind of come and really provoke us—maybe we’ve been thinking this way about something, but you know what? We better learn how to think this way about it. So I’m very excited to see what our plan-ahead teams provoke us with.
Oliver Tonby: Thank you. Listen, we’re going to wrap this now. Let me summarize. I’m going to go back and quote Chris. “Leadership now, or today, is about having multiple thoughts, sometimes contradictory thoughts at the same time, but one spine,” and that spine is clear. That is what do we stand for? What does the company stand for? And the middle of this whole crisis, to quote Eleanor, is the importance of leading with empathy. So thank you very much, Chris. Thank you, Eleanor, and thank you everybody for listening to this episode of our podcast on Future of Asia. Thank you so much.
Chris Bradley: Thanks, Oliver.
Eleanor Bensley: Thanks, Oliver.
Oliver Tonby: You have been listening to the Future of Asia Podcasts by McKinsey & Company. To learn more about McKinsey, our people, our latest thinking, visit us at mckinsey.com/futureofasia or find us on LinkedIn, Twitter, and Facebook.