How to Adapt to Thrive in the New Normal

February 8, 2022 ERM Initiative Staff 5-min. read

Article Summary

Crises usually create both temporary and long-lasting changes, with some companies coming away having gained a competitive advantage. The Covid-19 pandemic is the most recent reminder that winning companies are those prepared to reassess their risks and opportunities, adapt their business models, and reallocate investments amid a crisis. In a 2020 Harvard Business Review article, “Adapt Your Business to the New Reality,” authors Michael G. Jacobides and Martin Reeves provide step-by-step guidance to help businesses not only survive, but thrive in the new normal created by shocks ranging from economic recessions to global pandemics.

The full Harvard Business Review article outlines a three-step approach:

First, understand how habits have changed.
Next, adjust your business to reflect the changes.
Finally, trust your analysis and engage in aggressive capital investments.

Step 1: Understand how habits have changed.

In the full article, “Adapt Your Business to the New Reality,” Jacobides and Reeves use the Covid-19 pandemic as an example to demonstrate a systematic approach for reassessing growth opportunities.

Map out changes in habit.

Drill down from a big behavioral shift to identify business opportunities that are likely to grow or contract as a result of the shock.

Covid-19 example:

The Covid-19 pandemic caused people to be at home more. This one behavioral change has led to a whole host of new habits that may be lasting. For example, it has created potential growth opportunities for home office equipment. Taken a step further, you could identify a potential increase in home office spaces themselves, as well as bandwidth and connectivity services. Remote working from home is likely to be long-lasting. What are the resulting opportunities?

Identify type and duration of trends.

A 2×2 matrix as shown in the original article enables you to categorize demand shifts into short-term (temporary) or long-term (structural), and existing prior to the crisis or emergent (new) from the crises. This practice helps determine which trends to follow by distinguishing types of growth opportunities:

“Boosts” are temporary departures from existing trends
“Displacements” are temporary new trends
“Catalysts” are lasting accelerations of existing trends
“Innovations” are lasting new trends

Covid-19 example:

As a result of staying at home more, the authors point out that retail shopping has been negatively impacted. But, will this be a lasting behavioral change? Using the 2×2 matrix, “retail shopping” would be placed in the “Catalyst” category, because people had already begun to shift from retail to online shopping prior to the pandemic, and the shift is anticipated to be long-lasting.

Dive deep into the data.

It’s important to challenge your traditional ideas and actively seek out anomalies; data is helpful in revealing patterns of behavior.

Covid-19 example:

Foot traffic and credit card spending data reinforced that movie theater attendance began to significantly decline prior to the crises, for instance. In contrast, live sporting event traffic only declined once events were officially cancelled. Given the data, the latter is much more likely to rebound following the crises.

Take multiple viewpoints.

Pay attention to industry leaders, mavericks and competitors: Who is doing well? What are your rivals focused on doing? Also pay attention to your customers: Which customers are behaving differently? Do they have new needs? In your own business, ask: What new needs are employees responding to? Should they be developed more fully?

Step 2: Adjust your business to reflect the changes.

You’ve assessed your potential growth opportunities in the new normal environment. The next step: reconfigure your business model to adapt to the opportunities. In the full article, “Adapt Your Business to the New Reality,” Jacobides and Reeves pose the example of how retail shopping businesses digitized amid the Covid-19 pandemic to walk through key questions to ask during the process.

Question 1: Can you take the value you offer online?

One competitive advantage of retail shopping is in-store service. When a Chinese cosmetics company, Lin Qingxuan, lost 90 percent in store sales during the Covid-19 pandemic, the business created a digital engagement strategy that relied on turning the in-store beauty advisors into online influencers. The result more than made up for lost store sales.

Question 2: Which platforms should you work with?

The move from in-person retail to digital shopping increased consumers’ and companies’ reliance on digital platforms (e.g. Amazon, Google, and growing global players like Singapore’s Grab)—and influenced competitive advantage. Chinese cosmetics company Lin Qingxuan’s decision to partner with Alibaba when converting the in-person shopping experience online was a key strategic decision.

Question 3: Can you expand your customer niche?

Businesses moving their operations online have the opportunity to expand their markets—geographically, as well as an alternative to Big Tech. For instance, the distribution platform Bookshop.org links up independent bookstores and increasingly serves consumers wary of Big Tech providers like Amazon.

Step 3: Trust your analysis and engage in aggressive capital investments.

As counterintuitive as it may seem, a crisis is the perfect time to aggressively invest capital in carving out a new competitive position. And, the reality is that larger, more stable companies with relatively strong cash flows are best positioned to take advantage of current market opportunities.

But don’t fall into the trap of “peanut-buttering” your investments, as Jacobides and Reeves suggest. Research and history tell us that the most successful companies devote 90 percent of their new net spending to segments with higher growth and returns. In short, they put their “eggs in fewer baskets.”

To guide reallocation, evaluate your capital investment projects on these two dimensions:

Estimated value tomorrow, after taking into account demand shifts
Amount of money needed today in light of constrained cash flow

In particular, you should:

Be aggressive with capital investment
Take an experimental approach, diversifying their portfolio
Frequently update your portfolio, reallocating funding to reflect strategic priorities

In the full article, “Adapt Your Business to the New Reality,” Jacobides and Reeves hold up American Express as a benchmark for this practice based on its response to the 2008 global financial crisis. In the midst of severe operational threats, Amex cut cash-draining operating expenses but continued to aggressively fund major growth investments like technology and partnerships. The result: a much stronger market capitalization of 10-fold after the crisis.

Conclusion

Amid shocks like financial crises or global pandemics, companies must fight the urge to “batten down the hatches.” Organizations that survive and thrive will reassess growth opportunities, reconfigure their business models to leverage those opportunities and aggressively invest capital in light of their analysis.

Original Article Source: “Adapt Your Business to the New Reality”, Michael G. Jacobides and Martin Reeves, Harvard Business Review, Sept-Oct 2020