UK Firms and COVID-19: survival, management and strategy

Spotlight on the UK economy: A Wheeler Institute webinar series

Julian Birkinshaw, Professor of Strategy and Entrepreneurship at London Business School and John Van Reenen, Professor of Management and Economics at MIT Sloan and the London School of Economics, were hosted by  Rajesh Chandy, Co-Academic Director of the Wheeler Institute for Business and Development, to discuss the implications of COVID-19 on firms in the UK, how to survive during the crisis, the actions required by management and how a company’s strategy might evolve as a result of the pandemic.

Key Takeaways – UK economy ‘macro view’

  • Coronavirus will accelerate many of the trends we have already been seeing; such as changes to face-to-face services, offline retail and the hospitality industry which will face disruption and changes to the way they are conducted. These changes will happen more quickly and more drastically than we anticipated in the past, especially speeding up the trend towards automation.
  • Pre-crisis the UK’s productivity growth was shockingly slow; since the financial crisis Britain’s productivity is 24% lower than we would have expected and unsurprisingly, wages have followed that trend. The Coronavirus crisis hits the UK particularly hard because the country is a light service sector which relies on face-to-face interaction.
  • The fall in UK GDP for April was over 20%, the biggest decline on record. The sharp GDP decline is a direct consequence of blanket policy decisions that covered the entire country, which was taken with public health as the priority rather than the economy. As we emerge from the lockdown, there are going to have to be different policies for different locations and industries.
  • There are tough times ahead for the UK. The poor health response to the pandemic, such as prevaricating about shutdown measures and slow increasing about testing, and a loss of trust due to political events have contributed to both the poor economic performance and the relatively high cumulative death rate.
  • Brexit is going to cause the UK economic damage because of tariff barriers and low FDI; the idea that these costs are low because of the pandemic is not correct and the implication is no deal is to be avoided at all costs because it will ‘kick the economy while it’s down’. Realistically there should be a delay to the withdrawal period.
  • There is a huge amount of variability across businesses in terms of performance, productivity and profits. Half of all aggregate productivity growth comes from firms having output and employment reallocated across heterogeneous firms, with markets allocating more towards more productive and efficient firms. Much of the variability comes from the capacity and quality of human capital.
  • As a result of the COVID-19 recession, there will be a lot of reallocation across firms. However, in the short term, this results in pain, through unemployment and loss of human capital as skills become obsolete. Minimising this pain will be a key policy challenge.
  • During times of crisis, it is important not to centralise all power at the top. While there is uncertainty, management needs to give autonomy to local managers and local units as it allows local innovation because it gives power to those close to the ground.
  • In the short run, firms should save money and consider organisational changes that enable them to invest in human capital; the opportunity cost of taking people away from frontline production is low, so it’s a good time to invest in training where you could make long-run improvements to productivity.

Key Takeaways – UK firms and company-specific observations

  • Typically, firms put together projections for the year that show upward trends of revenue or profits. The truth is the world never looks like this; especially right now. There is often a series of bumps, or southern death threats, as well as upside opportunities. Companies need to prepare for these realities and change their point of view on how strategy is developed.
  • Companies need to use different methods to be prepared for various scenarios; they have to think about developing options, building our resources and giving the flexibility to move in different directions. Recently, strategy development has been focussed on agility and being intuitive enough to move fast in order to meet customers’ needs; today businesses need to focus on resilience. Agility may provide upside opportunity; resilience is about managing downside risk. It is about building the capacity to absorb disturbance.
  • When a company is facing an existential threat, such as during the crisis we are experiencing, there is a hierarchy of needs. Survival is at the bottom, which is about liquidity: keeping operations afloat. Operational resilience, keeping the business going, accessing the supply of products needed and getting services or products to customers is next, with strategic resilience at the top. This mind-set is about admitting that the world is changing in ways we cannot predict and our customers are changing; strategic resilience means companies change their business model as customers’ needs change.
  • Looking at the sectors that are the biggest employers in the UK we can predict some of the impact; large numbers of people work in a service role, such as health and social workers, which tends to be very local and face-to-face work, so we can expect a significant impact from lockdown measures. There will be variations by sector, but retail, wholesale, construction, accommodation and food service will all be badly hit by COVID-19.
  • However, some industries are doing well; the UK has a decent digital sector and technology industry. Similarly, London continues to be a magnet for venture capital investments within Europe and the world, especially the fintech industry.
  • For the most part, there is not a significant ‘double whammy’ effect coming from COVID-19 and Brexit. When looking at the extent to which these companies are reliant on demand from the EU, there is less damage caused by the pandemic, while the sectors that will be most affected by bad Brexit effects have not been hit as badly by COVID-19. For example, local services, such as hairdressers and dentists can’t open now, but they will be largely unaffected by Brexit.

Conclusion:

Companies will need to consider strategies that look at resilience. There has been a precipitous drop in demand and therefore the story is one of basic survival, with government support where necessary. Companies that have done well from the crisis, digital technology firms, need to seize the opportunity and continue to innovate. There will be a need for strategic and operational resilience some firms will need to hunker down; cut costs, find productivity improvements and efficiency gains. Some firms will have to dramatically resize, rethink and reinvent everything, looking at their basic reason for existing in the first place. Across the board, there needs to be experimentation and companies need to look at new and better ways of working.

While the Government wants to support the economy and has done so through fiscal measures, this will slow down the efficient reallocation of resources. There is a difficult balance between providing protection and facilitating the transition of the economy through innovation. Policymakers need to avoid the destruction of people’s skills because their firm has gone under and they do not want the waste of resources that comes from mass unemployment, but they need to ensure the economy is fluid and efficient.


If you’re interested in following the Wheeler Institute COVID-19 series, check out our COVID-19 series.

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