The COVID-19 crisis has intensified existing trends, widening the gap between those at the top and bottom of the power curve of economic profit. Will your strategy keep you ahead of the accelerated pace of change? The fault lines between industries and business models that we understood intellectually before the COVID-19 crisis have now become giant fissures, separating the old reality from the new one. Just as an earthquake produces a sudden release of pent-up force, the economic shock set off by the pandemic has accelerated and intensified trends that were already underway. The result is a dramatic widening of the gap between those at the top and the bottom of the power curve of economic profit1 —the winners and losers in the global corporate-performance race.
Along with the accelerated pace of change, however, comes a unique opportunity to unlock big strategic moves. Our research found that companies that pursued big strategic moves persistently, through every phase of the economic cycle, increased their odds of outperforming their peers. Much of the organizational inertia that usually stands in the way of unlocking these big moves is now gone, as the crisis has rendered obsolete the budgets and personal targets that make such moves so hard to achieve.
Mind the gap
To understand how the COVID-19 crisis is shifting profit pools, we have used changes in market capitalization to calculate market-implied longterm economic profit for the largest companies globally.2 While the question of whether share prices are a fair reflection of our new reality is open to debate, we aren’t as interested in the overall market-capitalization levels as in the patterns emerging among companies and industries. And those patterns are meaningful, consistent across measurement periods and with our clients’ experience, and very different from what we saw during the global financial crisis of 2008–09.
Our analysis reveals that the gap in economic profit between the top corporate performers and everyone else has widened dramatically. In effect, the crisis has accelerated a trend that was already present (Exhibit 1). Between December 2018 and May 2020, the top quintile of companies grew its total market-implied annual economic profit by $335 billion, while companies in the bottom quintile lost a staggering $303 billion. And while the specific numbers can fluctuate from day to day, the larger trend is unmistakable: a gap is opening up, and it’s rapidly expanding. That’s a pattern that has been evident since 2010. Now, the COVID-19 pandemic is pushing it to entirely new levels.
What’s driving this widening chasm? So far, we aren’t seeing a great reshuffling of industries and companies along the power curve as was the case during the global financial crisis, when companies in the electronics, energy, and financial-services sectors fell off their historical peaks. Rather, industries and companies that started at the top of the curve before this crisis are proving to be resilient, while those that were at the bottom are accruing the biggest losses.
This increased dispersion can be seen both across and within industries. Sectors that were at the top of the curve before the crisis, such as pharmaceuticals and semiconductors, seem to be pulling ahead from the less profitable industries that started at the bottom, such as banks and utilities (Exhibit 2). In fact, the six most-profitable industries have added $275 billion a year to their expected economic-profit pool, while the bottom six have lost $373 billion.
The dispersion of performance within industries is widening too. In fact, in 18 of the 23 industries we studied, companies that were in the top quintiles of their industries before the crisis are outperforming their peers that were in the bottom quintiles to an even greater extent than they had before.
It would be easy to assume that the widening gap between those at the top and the bottom is simply because of the nature of this pandemic and the resulting demand shifts. While that has indeed played a role, it isn’t the full story. What we are seeing is a great acceleration of trends that existed before the crisis. For example, online delivery’s volume increased by the same amount in eight weeks as it had over the entire previous decade. Telemedicine experienced a tenfold growth in subscribers in just 15 days. Similar acceleration patterns can be seen in online education, nearshoring, and remote working, to name but a few areas. All these trends were clear before the crisis and have been amplified by it.
The industry data support this view (Exhibit 3). To a remarkable degree, industries that were experiencing declining economic profit before the crisis have suffered even greater declines because of it, while those that were growing their profit have seen outsize gains.
Companies with resilient, future-ready business models positioned to ride these trends have pulled further away from their industry peers, while those with legacy business models have, for the most part, fallen further behind. For example, media companies with streaming services have outperformed their traditional satellite-based peers, and meal-kit providers have benefited from an accelerated trend toward healthy at-home cooking. Examples can be found in many other industries. During a recent quarterly earnings call, Microsoft CEO Satya Nadella said, “We’ve seen two years’ worth of digital transformation in two months.” The quarter is the new year, and the fastest will win.
A unique window of opportunity
In many strategy rooms, the social side of strategy—misaligned interests, egos, and cognitive biases—creates inertia that gets in the way of organizations committing to big moves. In times of crisis, however, the burning platform is clear, leaders are often in military-command mode, and precrisis budgets have become obsolete. Resources are easier to reallocate when no one needs to be convinced of the need for a rapid response and the individual targets set before the crisis no longer apply. Think of it as a big “unfreeze.” As one CFO told us about shifting resources in recent months, “What I thought would never be possible, I can now do in two weeks.”
Clearly, the crisis is affecting sectors and companies in very different ways. Some companies are achieving the best results in their corporate histories, and others are teetering on the verge of bankruptcy. Most are somewhere in between. What’s the unique window of opportunity this great acceleration presents for your particular business?
What’s the unique window of opportunity this great acceleration presents for your particular business?
Your decision making and execution are likely to be hampered by the high levels of uncertainty still present around the virus situation, but waiting for clarity may come at a high cost: our earlier research on corporate resilience clearly demonstrates that companies that move early in a crisis to get a jump on competitors often maintain that lead for years to come. As was the case in getting the virus outbreak under control, time is of the essence, requiring corporate leaders to take action now to get ahead of the great acceleration of trends already underway.
Creating a plan-ahead team can help. Task this small group of high performers with shaping option-rich plans that are stress-tested against multiple scenarios. This will give you the confidence to know which moves are genuinely “no regret” and an understanding of where you need to keep your options open. Then, once you have developed a robust portfolio of moves, you can dynamically evolve your strategy as you learn more.
In many ways, we are only in the early stages of the economic fallout from the COVID-19 pandemic. Some companies may find themselves in a position of strength, while others will face challenging times. Regardless of your context, given the speed at which this crisis has been unfolding and the great acceleration of trends accompanying it, you will need to be faster, bolder, and more agile than ever before to succeed.
ABOUT THE AUTHOR(S)
Chris Bradley is a senior partner in McKinsey’s Sydney office, Martin Hirt is a senior partner in the Taipei office, Sara Hudson is a partner in the London office, Nicholas Northcote is a director of strategy and corporate finance in the Brussels office, and Sven Smit is a senior partner in the Amsterdam office.
The authors wish to thank Nikolaus Müller-Mezin and Peter Stumpner for their contributions to this article.
13th November 2020
13th January 2021