COVID-19 has clobbered the global economy, which is why – argues James McKenzie – innovation is so vital for business success
The impact of the coronavirus lockdown on the economy has already been profound. According to forecasts from the International Monetary Fund (IMF), the world’s overall gross domestic product (GDP) will be 6.5% smaller by the end of next year than it predicted in January 2020. The IMF reckons the UK, which earlier this month officially went into recession, will borrow more than £400bn in two years as the coronavirus recession decimates public finances. In fact, Britain will suffer the fifth biggest downturn of all G7 nations, with only France and Italy doing worse.
One slice of good news is that those same forecasts say that although UK GDP will fall 10.2% this year, it will grow by 6.3% in 2021, providing a stronger recovery than in eurozone nations. The IMF also notes that the UK government’s response to the crisis has been one of the strongest. It introduced a widely applauded stimulus package, including a “furlough” scheme whereby companies can apply to receive a large part of their salary bill to avoid having to lay off staff.
Nine million people were furloughed in June and the UK’s 2020 budget deficit is expected to be £270bn – a figure that will only halve next year as the economy struggles to recover from lost output. In fact, the IMF has urged all governments to continue with further stimuluses. “Once the pandemic is under control, broad-based fiscal stimulus to support the recovery could focus on public investment, including on physical and digital infrastructure, healthcare systems, and the transition to a low-carbon economy,” it said.
Now that lockdowns are easing, every business leader, owner or manager will have one question on their mind: “How can we make this business work?”.
Businesses are essentially simple. They need sales. They have costs. And they need to generate a profit to survive. They grow when demand is rising and shrink when they fail to innovate or don’t switch to products or services that are more in demand. In reality, business life is complex and any pause in sales can be devastating. Jaguar Land Rover’s closure of its car-assembly lines during lockdown, for example, has cost it about £1bn a month, while its new-car sales plummeted by more than 30% in the three months to the end of March.
But now that lockdowns are easing, every business leader, owner or manager will be working through sales data, cash-flow forecasts and profit-and-loss projections with one question on their mind: “How can we make this business work?”. Unfortunately, all the usual seasonal variations and trends can no longer be relied on; COVID-19 has changed everything.
With so little certainty, the one short-term thing that company directors can do to make a profit is cut costs. So unless they can raise external finances, businesses will have to fire staff, reduce their fixed costs or – more likely – do both. Some firms will be forced into administration and some will try to start again. It’s horrible for all concerned: UK unemployment figures have already doubled to 3 million during the lockdown, with some surveys indicating that a quarter of all those on furlough losing their jobs by the end of the year.
The businesses that survive will be those that adapt, innovate or reinvent themselves. Scottish textile manufacturer Don & Low, for example, has switched production to make up to 1.5 million personal-protective equipment gowns per month. Chemical giant Ineos plans to build new factories to produce a million bottles of hand sanitizer a month, while Scottish independent brewer BrewDog used its distillery in Aberdeen to make hand sanitizer. French luxury-goods maker LVMH is also switching its perfume factories to make hand sanitizer.
Clear and rapid responses like these to changing market conditions are the key to commercial survival. In fact, the ways in which businesses have fought the problems from COVID-19 can and should be part of all corporate thinking. Companies have to challenge their assumptions about what customers want and focus on being competitive. What can be automated or done online? Act, and act fast. Doing nothing will only leave you with bigger debts and problems to manage.
Act, and act fast. Doing nothing will only leave you with bigger debts and problems to manage.
Take the classic British pub, which my friends and I were discussing on a recent Zoom drinks evening. The pub has been the same forever. It’s a room with a bar, with someone on one side selling alcohol and someone on the other wanting to buy it. But how can pubs survive if drinkers have to stay socially distanced? Well, you could just restrict customer numbers, but how about an app where you book a table and order your food and drinks, which someone then brings to you.
As one of our Zoom group quickly pointed out, British pub giant Wetherspoons developed just such an app in 2017 and several other pub chains followed suit. App-less pubs will struggle to catch up. Of course, some companies happen to be in the right place at the right time. The Zoom video-conferencing business, for example, grew its UK user base from 660,000 at the start of the year to over 13 million by April.
The e-bike revolution
Or take one of the firms I work for, which makes sensor systems to check on old and vulnerable people who cannot leave their homes. Before lockdown, everyone liked the idea and there were plenty of trials, which showed you could save a lot of money. But inertia and habit meant there was no urgency in actually installing such systems. Now, though, with many carers unable to visit patients, the question is how fast it can be done.
That’s the essence of business: meeting market demand and solving a customer’s problem. This might seem too simplistic for us physicists, but it’s commercial reality. So if you want your business to survive, innovation is the answer.