The New Business Environment of 2020s: Turbulence, Uncertainty, and Change

The negative forces of coronavirus (COVID-19) temporarily disrupted normal business activities and paralyzed the forces of market-the demand and supply that made the market economies freeze. The lockdown stagnated the revenues and profits suddenly turned into losses. COVID-19 has caused heavy economic destruction with rapid change in the business environment, resulting in profound shock to the entire business community. COVID-19 pandemic is the most horrific event of this decade, and it has generated new environmental forces that are reshaping the entire business environment. A business environment can be defined as the aggregate of all external and internal environmental strategic factors that can affect a business’s operations. For example, health and safety regulations established by the Centers for Disease Control and Prevention (CDC) to combat the COVID-19 epidemic have a profound impact on all industries.

A significant percentage of companies on this planet are in uncharted waters because they were not equipped with the tools and frameworks that could be deployed fast enough to mitigate the impact of COVID-19 risk. The purpose of this article is to assess the changes in the business environment caused by the turbulence and uncertainty generated in the 21^st century and what will be its implications for strategic management. To understand and assess how companies are adjusting to the new circumstances and what strategic options are available to them to cope with the unprecedented challenges created by COVID-19, let us examine some of the major characteristics of today’s new business environment.

The New Business Environment

Turbulence

The unprecedented rapid disruption caused by COVID-19 has severely affected all variables of a corporation’s societal and task environments. The few but major black swan events of the 21^st century such as the dot.com stock market bubble, the great recession of 2008, and the COVID-19 disruption have caused market turbulences, uncertainties, unpredictability, and rapid changes in the world’s business environment. According to Nassim Taleb, black swan events are rare, highly unlikely, unpredictable, and have a major negative impact on world economies. The term black swan is derived from a belief that all swans were white until black swans were discovered in Western Australia in the 17^th century. Taleb concluded that-to manage black swan events, it is imperative for companies to build robustness into their system to reduce vulnerability to negative events and responsiveness to exploit positive ones.

Major Environmental Disruption

The COVID-19 pandemic has suddenly changed the external environment of firms at the steepest rate which the industries never experienced before. The unpredictable changes caused by COVID-19 have resulted in massive job losses, economic ruin, and tumbling of the quarterly GDPs of most economies. The disruption due to COVID-19 and its impact on the financial markets was the steepest recorded in S&P history as it took only 16 days to reach the bear market. In contrast, the duration of sell-off (S&P trading days) from the global financial crises of 2008 was much wider spread to 356 days. The major impact of this crisis was felt by the working class, as it took more than a decade to get the unemployment figures to recover.

Currently, the business environment is changing so rapidly that it will be a tough challenge for strategic management to assure that the firm is keeping pace with the changes taking place within its business environment because firms are not capable to respond to the changes as rapidly as their environment changes. In other terms, a firm’s rate of strategic change is much slower than the rate of change that occurs within its environment. This condition is described as “strategic drift.” On top of this, the pandemic has evaporated the customer base of companies and there is no guarantee whether those customers will return. Any number of reactive measures will not bring a firm’s performance back to the desired level soon. Therefore, a fast economic recovery (e.g., V shape) is not warranted, because the size of this COVID-19 recession is going to be much larger and complex and is expected to cost several trillion dollars compared to the 1953 recession which was simply demand-driven, mild, and short in duration, and cost around $54 billion to the US.

Competition

Due to the pandemic, companies across the board will face a wide array of uncertainties in the present condition, including the economic growth which will remain sluggish throughout the short and medium-term future. It is estimated that the COVID-19 pandemic has wiped out 8-10 trillion dollars from the global economy due to lockdowns, slow or phased reopening, re-closing, and other disruptive activities. The aftermath of COVID-19 will result in a slow recovery led by debt-fueled growth that will need deleveraging by governments, companies, and households. The prospects for rapid and robust economic growth look remote. The chances of a “V” shaped economic recovery are not justified based on important macroeconomic indicators such as unemployment rate (jobs growth), GDP, and the firms’ pre-pandemic profitability levels. However, based on the stock market indices, the US economy has seemingly recovered but remains highly unstable due to everyday large stock price fluctuations. Higher stock prices only indicate a narrow-based recovery, because the market indices are dominated by the stocks of a few large companies.

In most parts of the global economy, companies will possess excess capacity, which will fuel price competition, resulting in lower profit margins. Additionally, due to behavioral changes imposed on consumers (or customers) by COVID-19 will result in a company losing its customer base, further adding to the incurred losses.

Technology

COVID-19 is also rapidly changing the external environment of technology-based companies, and at the same time, this will offer newcomers (start-ups) the opportunities to challenge the established firms. The uncertainty, unpredictability, high capacity, and shrunken demand generated by this pandemic will further create the potential to weaken the competitive advantage of technology-based companies. Technology-based companies’ existing product performance attributes will cause disruption—due to demand shifting to lower-cost products, companies will be forced to offer downscale product line extensions to meet the lower-cost consumer demand. This can yield lower margins compared to high-end products and weaken the brand. For example, to deal with the pandemic hit market and to compete with the low-priced rivals, Apple introduced an updated version of its budget-priced iPhone SE, making it a fighting brand.

New Guidelines and Directions in Strategic Thinking

It was readily apparent that in the past two decades, many companies failed due to the negative impact of the external environmental forces. Due to COVID-19, the new business environment of the 2020s will be more challenging, requiring companies to re-evaluate their strategies to become successful.

Strategic Change

After the Great Recession of 2008, companies were evolving through a relatively stable period and suddenly COVID-19 disrupted normal business activities that have resulted in a widespread decline in business performance. According to the punctuated equilibrium theory, any major decline in a firm’s short-term performance or a sustained decline in performance over the long run demands a strategic or transformational change to restore the firm’s performance. However this may not be true, but some form of change will be required by firms that will depend on their pre-pandemic performance situation, the industry they are in, and how COVID-19 has impacted their industry and an individual firm to restore performance to pre-pandemic level. The end results of reactive strategic change fall on a continuum from narrow to wide performance gaps depicting requirements from restructuring (realignment, reconstruction, etc.) to complete transformation, respectively. Restructuring requires a less fundamental change and is undertaken when the performance decline is not severe, and the firm’s performance can be restored by small changes. Change is normally forced and is reactive due to changing competitive environment. Revolutionary transformation involves the reorientation of mission, goals, and strategies to reflect new direction encompassing all aspects of the organization, including structure, culture, and resources. This type of transformation is also reactive and forced but requires heavy investment and more time to achieve the transformation.

Considering Options

After the Great Recession of 2008, the world economy is once again in uncharted waters. To navigate successfully during these turbulent times, real options: growth options, abandonment options, and flexible options can become extremely useful as a source of value creation. Due to COVID-19, most firms’ industry structure has become unstable and forecasting industry profitability will not generate any useful outcome. Therefore, industry attractiveness will largely depend on option value. An attractive industry, in relation to options theory, has many options and therefore creates many opportunities. For example, an industry that produces many different products serves many geographical areas, uses a variety of alternative technologies, and where internal mobility barriers are low. Likewise, spreading your investment into many areas, such as investment banking, packaging, consumer electronics, and semiconductors in terms of options is a better alternative than making an enormous investment in steel, energy, or automobile manufacturing.

Building Multiple Capabilities

The new business environment of the 2020s will become more dynamic, complex, and competitive compared to the post-Great Recession of 2008 period, requiring companies to perform at higher levels with a broader stock of skills and capabilities. This will require rethinking about changing structures and management systems to build multiple capabilities and the ability to integrate them to achieve superior performance. However, building capabilities requires managing dilemmas: such as producing at a lower cost at the same time promoting innovation; the difficulty of ambidexterity- optimizing efficiency and effectiveness for the present while adapting to the future needs, and the challenges of reconciling-mastering the present with preempting the future.

Taking Some Responsibility in Creating Jobs

Creating Company Value by Focusing on Strategic goals

A company creates value for itself (company value) by capturing a portion of the value it creates for its customers. Thus, an offering can create value for the company in three domains: monetary, functional, and psychological. These three types of value mainly focus on two types of company goals: monetary and strategic. Therefore, during economic downturns, companies should concentrate their financial resources more on achieving strategic goals and less on achieving short-term profitability goals. Thus, during downturns, companies should invest a portion of company value in creating functional and psychological value, particularly by creating jobs and societal value that can help in growing the overall economy, build corporate brand and culture, and fulfill strategic goals and objectives. Equivalently, which also means transforming company value to create shared value by creating societal value.

More than fifty million workers lost their jobs first time during the four months ending July 16, 2020. During tough economic times, companies normally downsize to improve short-term performance: profitability, efficiency, and competitiveness. But research indicates that the long-term consequences of downsizing can also be negative. In most restructuring programs as part of the turnaround, many companies further weaken instead of strengthening. Because companies without proper planning cut too deep while pursuing cost-cutting measures, including cutting jobs in the contraction phase of turnaround. The very cost savings that come from aggressive cost-cutting and job cuts act as a barrier to achieve long-term performance. This behavior of eliminating jobs is due to the embedded culture of corporate America, which is based on the narrow view of capitalism. The evolving higher form of capitalism—one that will help the society to advance rapidly at the same time allowing companies to grow even faster. Thus, to achieve this, well-established companies that are less negatively affected by COVID-19 can take this initiative through hiring by lowering their short to medium-term “profit margin” expectations to only cover the losses they would otherwise incur by creating or retaining jobs and therefore not focus on taking short-term profitability measures. Amid COVID-19 crises, many technology-based companies, including Google, Microsoft, and Facebook, have taken this stance by retaining their employees and therefore are withstanding the short to medium-term financial losses to ultimately succeed in the long run. This view of value creation: sacrificing short-term gains to achieve superior long-term performance is a much thoughtful way of doing business that also satisfies the purpose of strategic management.

Loosening Hiring Requirements and Hiring Fast

The economy did not fully recover from the jobs lost during the 2008 Great Recession —as the long-term unemployed were still looking for work before the pandemic began. During the post-Great Recession of 2008 period, companies were not easily hiring—and kept positions open for longer periods. Additionally, companies added stringent job requirements to their job descriptions in finding the right fit candidates, as they were also not willing to train new hires. Lack of trust also prevailed between the employer and employees for a long time. From my work experience during the post-dot.com bubble recession recovery period finding work was difficult for the job seekers as the phrase “select only the right fit candidate for the job” started buzzing more in the job market. This has been the “new normal” for two decades and that is why job recovery was too slow after the 2008 Great Recession. The principle is that projects should start and finish on time. Delays in hiring add up to the total delay to the economic recovery and a loss to every player in the game.

References and Further Reading

1. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapters 8 and 16.
2. Jenna Ross, Black Swan Events: Short-term Crisis, Long-term Opportunity( Visual Capitalist, March 19, 2020).
3. Ashok N., Internal Sources of Strategic Transformation: Competitive Advantage through Innovation, A&N Strategy Consulting (August 7, 2018).
4. Wikipedia, Recession of 1953.
5. Ruchi Gupta, Apple Launches New iPhone SE for Pandemic-Challenged Market(Market Realist, April 2020).
6. E. Romanelli and M. Tushman, Organizational Transformation as Punctuated Equilibrium: An Empirical Test, Academy of Management Journal(October 1994), 37(5), pp. 1141-66.
7. J. Balogun, V. Hope Hailey and S. Gustafsson, Exploring Strategic Change (United Kingdom: Pearson Education Ltd., 2016), Chapter 1 and 2.
8. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice Hall, 2000), Chapters 3 and 6.
9. A. Chernev, Strategic marketing Management (USA: Cerebellum Press, 2014), Chapters 6 and 17.
10. Michael E. Porter and Mark R. Kramer, Creating Shared Value (Boston: Harvard Business Review Press, January-February 2011).