Related Expertise: Business Strategy, Business Transformation, Social Impact
Companies often look to the decade ahead to ground their strategies in long-term shifts. After the COVID-19 crisis forced leaders to shift their attention to navigating critical short-term issues, many are now refocusing on the longer-term agenda for their businesses. In contrast to the global financial crisis, which seemingly slowed the long-term change agenda, COVID-19 has done exactly the opposite: long-term imperatives have been accelerated by the pandemic.
Two years ago, we laid out an agenda for business leaders to win the ’20s, which examined the ongoing forces reshaping business and identified five broad imperatives for companies across regions and industries. COVID-19 and the surrounding events have sharpened and heightened this agenda, making it even more critical for success in the remainder of this decade. In this article, we revisit these imperatives and discuss how they have been underlined and accelerated by the crisis.
In the classical model of strategy, businesses compete within well-defined industries, provide a stable set of offerings, and pursue static forms of advantage such as scale and differentiation. However, the business context has become more complex and dynamic in recent decades. Economic, political, and competitive uncertainty has increased; industry boundaries are blurring; and technology is commoditizing or making existing offerings and business models obsolete more quickly.
To reinvent their strategies for the new context, we argued that companies must master new dimensions of competition. Companies need to compete on the rate of organizational learning—rapidly discovering changes in the context, assessing the implications, and adapting offerings and business models accordingly. They also need to build resilience to unexpected shocks, and harness imagination to create new offerings or business models that could drive future growth.
The rapid changes experienced throughout the COVID-19 crisis underlined the need for learning and adaptation. Consumer demand shifted unpredictably as a result of health concerns, activity restrictions, and economic challenges, and companies that were better positioned to navigate this dynamic environment gained advantage. For example, demand for hand and power tools dropped dramatically in the early stages of the pandemic as consumers cut discretionary spending and distancing measures impeded sales; but within several weeks it rebounded beyond prior levels, driven by increased home improvement activity. By mobilizing swiftly and investing when the rebound was still nascent, Stanley Black & Decker expanded market share.
The crisis caused a significant dispersion in corporate performance—for example, in China (where the shock and recovery came earliest), the spread in total shareholder return between leading and lagging companies nearly doubled compared with the prior year. But the resilience imperative will not go away as the crisis abates; resilience has a disproportionate impact on long-term success, and the need to thrive amid potential shocks is greater than ever. Similarly, many businesses reimagined themselves to deal with new needs brought about by the pandemic—even in traditionally slow-moving sectors like health care and education—and more will be needed to address the multifaceted challenges that the rest of the decade will pose.
Looking forward, leaders will need to redouble their efforts on three fronts to reinvent their strategies for a more dynamic context:
The changing business context is revealing the limitations of traditional organizational models, which were generally designed for executing fixed tasks efficiently, not for optimizing learning and adaptation. At the same time, the rise of artificial intelligence offers tremendous potential to transform businesses, but achieving that potential—and unlocking human capabilities accordingly—will require new ways of working and organizing.
We argued that leaders need to reconceive the company as a hybrid learning organization. This involves reinventing organizational structures and processes to combine technological and human capabilities: integrating algorithms and decision engines to learn at the speed of data, refocusing humans on higher-level problems that algorithms cannot yet solve, and creating new interfaces for humans to effectively collaborate with machines. It also involves tapping into capabilities beyond the organization, such as by using digital platforms to coordinate activity.
The pandemic has only accelerated the need to reinvent ways of working. Most companies rapidly changed their operating models in the past year, expanding remote work and digital collaboration amid social distancing guidelines. This shift has been positive in some ways, revealing that many aspects of work that had been taken for granted (such as daily commuting and traditional meetings) can be improved. However, some downsides have also become evident: for example, data on collaboration patterns from millions of workers shows that communication networks are shrinking—the average information worker collaborates with 43% fewer people on a weekly basis than they did before the pandemic. As restrictions fade, leaders will have a critical role to play in developing new working models that address the downsides of remote collaboration without fully reverting to pre-COVID norms.
By forcing more companies to digitize rapidly, the crisis also strengthened the imperative to combine humans and machines optimally. It laid bare the potential power of AI—algorithmic decision engines helped coordinate activity on online marketplaces at unprecedented scale, leading to a massive increase in e-commerce in many countries—but it also showed the need for capabilities that AI doesn’t have, such as interpreting prescient anomalies, understanding the dynamics of sui generis events, and reimagining business models. Creating synergies between people and AI systems will become an even more important leadership challenge as digitization continues across industries.
Finally, as collaboration and sales channels migrated online, many businesses built or enhanced external partnerships—which are likely to persist beyond the crisis. This has increased the potential value of harnessing digital ecosystems: the seven largest ecosystem players alone accounted for more than one-third of the market capitalization gains in the S&P Global 1200 in 2020.
Looking forward, leaders will need to create organizations that can learn and adapt on all timescales, by doing the following:
Because companies need to reinvent themselves more frequently amid a more dynamic environment, organizational change will be a critical capacity. Change management has traditionally been guided by a monolithic approach and plausible rules of thumb, but such efforts often fail. Our research shows that only about one in four such programs succeeds in both the short and long run.
We argued that leaders need to adopt a new approach to organizational change. Though change initiatives often aim at applying new technologies or analytics tools within the organization, such tools are rarely applied to the design of the change program itself. Leaders should leverage empirical evidence and new technology to make their transformation initiatives more likely to succeed. They should also de-average their approach to change and transformation, recognizing that different types of challenges require different approaches and interventions.
Not only was the pandemic a major catalyst for transformation, it also produced or revealed capabilities that can enhance change programs going forward. The shift to remote digital collaboration has tremendously accelerated the ability to quantify employee behavior at an aggregate level. This data can be used to improve detection of the early warning signals that change is needed, as well as to improve how change programs are designed and implemented.
The past year has also revealed that organizational inertia is not necessarily the limiting factor we imagined it to be. Though large organizations often move slowly, the early stages of the pandemic forced many incumbents to implement major changes in a matter of weeks. Industrial leaders started producing new health products, consumer goods sellers adopted new distribution channels, and essential services companies made massive changes to safety protocols. This demonstrated that change need not happen through slow, deliberate planning processes—with sufficient urgency, it can be significantly accelerated.
Looking forward, leaders should enhance their change toolkit, in ways such as the following:
Diversity is not only a moral imperative; it is a business necessity. Organizations with a wider variety of backgrounds and perspectives are more innovative, and this advantage increases as they embody more distinct dimensions of diversity. Additionally, diversity strengthens resilience; when a company can deploy different perspectives and ideas, it is better able to hedge against unexpected outcomes.
Yet the evidence shows that progress has been lackluster. For example, the share of female managers at large global companies has increased by only one percentage point over a decade. We argued that companies need to unlock the potential of diversity by building an inclusive workplace and increasing progress on building diverse teams.
In the past year, the urgency of accelerating diversity along multiple axes has grown substantially. The disparate economic and health impacts of the pandemic, as well as major social and political events, have heightened the need to address inequities between groups. Accordingly, businesses and other organizations are increasingly judged on what they are doing to increase diversity and inclusion.
At the same time, the greater need for innovation and resilience has increased the business value of diversity. For example, the required strategic approach has changed through the crisis—companies that were primarily optimizing operations in stable environments before the pandemic needed to adapt to short-term uncertainties when it began, and then to envision the post-crisis future as the pandemic receded. Cognitively diverse organizations were more likely to have the different strategy skills required in each stage and be able to pivot from one frame to another.
Looking forward, leaders need to accelerate progress on building diverse organizations, in ways such as the following:
Long-run trends have brought corporate capitalism to a tipping point: social and environmental externalities are increasingly visible; automation is raising questions about the future of work and employment; and inequality and polarization have risen within many countries. As a result, companies and investors are increasingly expected to go beyond financial returns and consider their broader societal impact. If businesses don’t play a role in addressing larger social challenges, they could undermine the systems in which they operate.
We argued that businesses need to create both societal value and economic value to thrive in the long run. This involves embedding social impact into corporate strategy, rather than treating it as an add-on, and reinventing business models and metrics accordingly. It also involves articulating a positive purpose at the intersection of each company’s aspirations, capabilities, and impacts, and practicing corporate statesmanship to proactively shape collective action on critical societal issues.
As the focus shifts back from COVID-19 to longer-term issues, climate change will return to the top of social and business agendas with even more urgency than before. The pandemic has foregrounded the importance of taking proactive action against social and environmental risks, as well as the breadth of the potential impact if action is not taken. Diminished economic activity temporarily reversed emissions growth in 2020, but if unchecked, it will surely bounce back as many economies recover.
Additionally, public scrutiny of technology intensified as digital platforms became not just a luxury but a necessity for working and consumption. One recent study found that trust in technology has fallen to all-time lows in many countries.
Such societal challenges present risks for companies that do not figure out how to address them effectively—but also opportunities for those that do. The pandemic has already shown that businesses have great capacity to mobilize against major issues. Companies made invaluable contributions through innovations in health and safety protocols, communications and tracking technology, and vaccines and therapeutics. Businesses that create societal value in addressing climate change and other issues will be advantaged in the long run, through the durability of their business models and as a result of their ability to attract consumers, employees, and investors.
Most business leaders now express intentions to play a role in addressing societal challenges, but too often it does not move beyond pronouncements and reporting to sufficient action. Leaders will need to take actions to merge sustainability and sustainable competitive advantage, such as the following:
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