COVID continues to accelerate changes in business models

COVID continues to accelerate changes in business models

As I have said repeatedly, COVID is accelerating change for all businesses, whether or not they recognize it.  A recent survey by the IBM Institute of Business Value concluded that “executives must accept that pandemic-induced changes in strategy, management, operations, and budgetary priorities are here to stay.” I see three significant shifts taking place.

  1. How CEOs Lead
  2. Changes in priorities
  3. Changes in business models.

How CEOs Lead

  1. Unlocking bolder (“10x”) aspirations. COVID caused most CEOs to question their assumptions about the pace and magnitude change attainable. The realization that a change in mindset can dramatically affect goal setting and the operating model, many CEOs are effecting changes in a few months that companies previously assumed would take years. The speed for many of these changes is down to employees working longer and harder; however, many CEOs also recognize that many employees have more time available with the stop in travel.
  2. Elevating their “to be” list to the same level as “to do” in their operating models. With COVID, leadership has to change. CEOs’ priorities were setting up strategy, culture, and making people decisions at regular times. However, now it about maintaining morale and ensuring employees are prepared for whatever may come in the face of uncertainty. Thus, leaders are changing how they and their senior management team show up. Leaders now need to be empathetic and offer words of encouragement.  According to Lance Fritz, CEO of Union Pacific, “[Employees] need to see that their leadership is vulnerable, empathetic, and making decisions in accordance with our values, which I’d better be the living proof of.”
  3. Fully embracing stakeholder capitalism. While I have also previously discussed embracing stakeholder capitalism; however, COVID has accelerated this trend as it has emphatically affirmed the interconnection and interdependence of businesses with their full range of stakeholders. CEOs are confronting tough decisions with profound human consequences every day. CEOs have realized that their choices are affecting their employees, communities, and suppliers. How they behave will have a long term effect on their business, especially as 87 percent of customers say that they will purchase from companies that support what they care about.
  4. Harnessing the full power of their CEO peer networks. As a result of COVID, CEOs talk to one another much more and at a much greater rate. The belief is, “Let’s learn from each other. Let’s hold hands. Let’s commiserate.” They are achieving this through informal networks and groups like Vistage. The power of a Peer group where you can be vulnerable and get input into these hard decisions is immense. CEOs don’t have to feel like they are carrying all the weight themselves. During the Great Recession, Vistage member companies outperformed non-Vistage member companies [. ]

Changes in Priorities

Not only are CEOs changing the way they lead, but companies are finding that their priorities have changed dramatically! According to the recent IBM survey, companies will focus more inwardly over the next two years. Their top priorities now are:

87% Cost Management
87% Enterprise Agility
86% Cash Flow and Liquidity Management
84% Customer Experience Management
76% Cybersecurity
75% I.T. Resiliency
65% IoT, Cloud and Mobility
58% New Product Development
52% New Market Entry

 

As companies move away from just-in-time delivery, 40% of those surveyed identified the need for space capacity in their supply chains. However, about 60% said they were accelerating their organizations’ digital transformation, and three-quarters plan on building more robust I.T. capabilities.

Changes in Business Models

Finally, many companies have also changed their business models to address market changes resulting from COVID, including some clients. Some of the creative pivots are:

  • Mandarin Oriental. As mentioned last week, many high-end hotel chains are supplying alternative residences for the wealthy. MO has not only done that; it seeks to deliver the luxury experience where you are rather than at a destination. The company promotes “Staycations at M.O.” at its properties if there is one in your city. These staycations offer early check-in, late check-out, a free bottle of wine, and credits for other purchases. However, if you don’t want to leave you home, MO says, “Just call room service.” They will deliver food, items from the cake shop, supplies from the spa, or other merchandise to your house.
  • JD.com. For producers of alcoholic beverages, COVID was a considerable blow. During the Chinese shutdown, its e-commerce giant, JD.com, go D.J.s and performers to stage three hour live show online. During these shows, viewers could purchase alcoholic beverages from Rémy Martin to Budweiser and have it delivered to their doors with a single click. As a result, whiskey sales from “a single partner brand” increased eightfold during a day with the show. As a result, JD.com plans to continue its live music events but to expand the products it offers.
  • David Dodge. As auto sales plunged nationwide, according to the Washington Post reports David Dodge in Glen Mills, Pa., the auto dealership sold more cars in July than in any previous month in its 15-year existence. David Kelleher, David Dodge’s owner, pivoted to meet the changing market. The company created a business development center to consolidate online leads and located it prominently just inside the front door. Salespeople now work phones, email, texts, and Zoom. They are using FaceTime to accompany customers on test drives. For those customers who want to stay socially distant, David Dodge allows the whole process online, and they deliver the vehicle to the customer’s home. Kelleher and his top salesperson, Mike McVeigh, doesn’t expect to return to the old ways once COVID is behind them.
  • Chipotle Mexican Grill. For a company that had been struggling with several crises over the last few years, when COVID hit, Chipotle new it had to change its business model to survive. The model was for pickup orders to be its lifeline. The company added “digital kitchens,” which handle online orders for pickup, at those restaurants that didn’t already have them, to enable this pivot. In May, Chipotle announced it would add 8,000 new workers to meet the growing demand. In July, it needed to hire 10,000 more. The company has aggressively added “Chipotlanes,” drive-thru lanes exclusively for picking up digital orders. That business model requires more employees than traditional stores—hence all that hiring is much more profitable.

Cause for Concern

All these changes are requiring more from employees in terms of working longer and harder. As I have noted on numerous occasions, empathy is needed, and burnout is a huge issue. What is worrying is that IBM’s research, drawing from other surveys that included employees, found a disturbing wide gap between “employers significantly overestimating the effectiveness of their support and training efforts” and how employees feel about these measures.

Source: IBM Institute of Business Value

As CEOs and leaders, it is critical that as you face COVID and plan for changes in leadership style, changes in priorities, and pivots in your business model, you need to do more for your employees. They are scared, uncertain, working from with kids doing school virtually, potentially overwhelming debt (see below), and they need management to support them. Those leaders who don’t rise to this challenge will see the good employees leave and create a reputation stain that could last a generation.

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The stimulus has ended; what does that mean for the economy?

The stimulus has ended; what does that mean for the economy?

The stimulus from the CARES Act has ended, and so far, Congress cannot find a way to replace it. Democrats in the House have passed a bill, but Senate Republicans, lacking a unified approach, have waited until the end of the summer to propose a plan. Currently, Secretary Steven Mnuchin is negotiating with House Speaker Nancy Pelosi to find a compromise. So, what?

Well, without the stimulus, unemployment is expected to rise. Last week’s Bureau of Labor’s jobs report showed that the job gains from April slowed dramatically, adding just 661,000 jobs. The unemployment rate now stands at 7.9%, down from 14.7% in April. Currently, approximately 25 million people rely on jobless benefits to get by, and the outlook is worse. Last week, the Walt Disney Co. said it would lay off 28,000 people, and American Airlines Group Inc. and United Airlines Holdings Inc. announced 32,000 job cuts. These are just the massive layoffs; however, lots of smaller companies are laying off workers.

So far, most of the damage has been to low-income workers, but the pain is moving up the wage scale. A recent Wall Street Journal article pointed to a couple in New York who earned about $175,000, enough to cover the mortgage, two car leases, student loans, credit cards, and assorted costs of raising two daughters in the New York City suburbs. However, since COVID hit shutting down the courts, one of them, a lawyer, is unable to work, and the family is running low on savings. They can’t keep up with $9,000 in monthly debt payments, including mortgage installments.

In the U.S., consumer spending accounts for about two-thirds of gross domestic product, and as more people are unemployed, many will deplete their saving and stop spending. A fall in consumer spending affects everyone as we are all linked in this economy. If consumer spending falls, B2C companies suffer and lay off more people and stop buying from B2B companies, so the cycle continues. No one is immune.

While many have pointed to fall credit card debt levels during COVID, more worrying is the number of people behind on their mortgages, rent, and utilities. As we head into winter, with many facing evictions, no heat or water, the prospects are even worse. As some might recall from their economics class, the marginal propensity to consume is greater for those in lower-income brackets. Therefore, to boost the economy, middle- and lower-income Americans need to be able to consume. While the wealthy will spend some of the benefits they receive, they will spend far less, so the positive impact on the economy is limited.

Many fiscal conservatives have said that they are now concerned about the deficit and deterring people from working. It is nice to see they have finally found some courage; however, it seems more that they object to anyone they believe doesn’t deserve a benefit getting one. There was a deafening silence from this crowd with the passage of The Tax Cuts and Jobs Act (TCJA) in December 2017, which provided benefits to companies and the wealthy. Many in the Administration and other conservatives claimed that the TCJA would pay for itself. Unfortunately, not! The deficit increased since its passing, and Bloomberg’s analysis showed that most corporate tax cuts went for buy back shares. In my opinion, this spending on buyback is the leading cause of the stock market’s continued rise.

While some will claim that increases income for everyone, only about 10% of the population owns shares outside of a retirement plan. So, the impact of the rising market does little for overall consumption and the economy.

During the Great Recession, Congress failed to provide enough stimulus for a full recovery. It is in danger of doing the same again, and this time I fear the consequences will be far worse. I would advise all CEOs to what cash levels and liquidity, but at the same time, we need people spending to grow out of this hole.

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The stock market has corrected some, but things are still frothy in the financial world. Unfortunately, when things are frothy, the economic forces of gravity come into play at some point, and the pain ensures. Why do I think things are at the top?

I believe t is several things. First, the Fed has flooded the economy with funds through the CARES Act, the Main Street Lending Program, to name a few. The money has to go somewhere, and there is FOMO – Fear of Missing Out – so everyone is piling into the leading tech stocks. Further evidence is:

1. Junk bond debt issues, as shown above. The demand for yield is high as government debt, and AAA debt is offering such low yields. Thus record amounts of questionable paper have been issued to meet this demand.

2. SPACs. Look no further. Everyone and their dog is jumping into the SPAC space. These blank-check companies have raised about $41 billion, year to date, which is more than the last ten years combined, and Since July 1, about $29 billion. Currently, I understand that over 40 SPACs are looking for merger partners. As I have mentioned before, SPACs tend to overpay, reducing the returns for investors. Given that there are so many buyers right now, we can expect the prices of merger partners to rise and the quality to fall. Of course, the people who make the real money buy the founders’ shares and get the “promote.” Take the case of Alec Gores, who put just $25,000 into his SPAC when went public in January. Once their acquisition is closed, their 0.6% stake will be worth $96 million. Not bad work if you can get it. However, if the founders are doing so well, my advice is to stay away. The SEC is concerned that investors don’t understand how the incentives relate to pay in a $PAC compared to a traditional IPO. There may be regulation.

3. Is Palantir the latest WeWork? According to the Wall Street Journal, bankers have told investors that shares may start trading at $10, valuing Palantir at almost $22 billion when it goes public through a direct listing on September 30. Valued at $20 billion in 2015, Palantir has seen some increase in value. However, in the private markets, it is trading below $20 billion, and this month PitchBook valued Palantir at just $8.8 billion. As I mentioned last week, Scott Galloway in PalanThiel: The Uncola pointed out that “But at 17 years of age, and after raising $3 billion, the ‘start-up’ has never made money. In 2019, Palantir lost $580 million on approximately $740 million in revenues. The idiot client they serve (U.S. government) lost 25 cents on the dollar ($1 trillion deficit vs. $3.5 trillion in revenues) in 2019 vs. 78 cents at Palantir. The firm spent $911 million in marketing over the last 24 months, roughly half of what Tide detergent spent over the same period. The firm has 125 clients, 3 of them accounting for 28% of revenues. Palantir feels more like a services firm, with tech at its core (e.g., Accenture), but one that, unlike a services firm, is massively unprofitable.” Driving all that success if CEO Alexandar Karp, who paid himself $12 million. If the market is valuing this at $20 billion, we must be close to the top!

 

The Housing Market

For those that haven’t noticed, the housing market is booming. Many of us stuck inside have realized that we don’t like our homes are moving. In August, new-home sales increased at the fastest rate since 2006. All this demand is causing a supply and demand problem driving up prices.

However, not for long. As I predicted in April, many people are straining to pay their mortgages. Industry analyst Keith Jurow expects “several million” people will have gone nine months without making a payment when the Federal Housing Finance Agency’s foreclosure and eviction moratorium expires at the end of the year. In July, 17% of FHA-insured mortgages were delinquent, according to the Department of Housing and Urban Development. In NYC, 27.2% of mortgages were delinquent in July.

With so much new supply coming online soon, prices may drop, and those that bought now may find they purchased at the top.

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Need to Escape, Flights to Nowhere!

Need to Escape, Flights to Nowhere!

As I have discussed several times, we are struggling in the COVID world of working more hours, with more conference calls, little time to turn off and recharge. However, breaks are more critical as we need downtime from deadlines and stress and to recharge. Burnout is becoming a large factor and causing falling productivity among all of us. We work longer but are less effective. Thus while overall productivity may be ahead, the cost is enormous.

Furthermore, with Zoom, Skype, Teams, Hangout, etc., there is a belief that since you are at home, you are always available. One executive I know has been in the Azores for a couple of weeks with his wife as she is from there. A board he is on just rescheduled its board meeting, and he is facing a board meeting from 12 am to 3 am, which in my opinion, is ridiculous. We all need to understand that many of us are no longer where we were during regular times. Some are at vacation homes, some are with elderly parents, some are stuck in other countries, and some are homeschooling kindergarteners first thing in the morning. Thus, we need to adopt a much efficient approach and ask if times are convenient for all the call’s potential members.

The assumption that everyone is available at all times so we can put meetings on their schedule at any time is causing even more chaos and exhaustion. Further, while the new time might suit the most senior member of the call, if they need input from the others who cannot provide it due to the time, then the meeting is a waste of time, and burnout increases.

I took a week’s vacation about three weeks ago and failed miserably. The best I managed was one day with only one call and four hours of work. Looking at my falling productivity, burnout, and listlessness, my wife and I agreed on a do-over. This week we took another vacation, and I have done much better with little work and meetings. I can already feel my energy levels and thinking improve. We all need a break, and like on airplanes, when the oxygen mask comes down, take care of yourself first, so you can then take care of others.

Thus, finding time to create that quiet space where you can reflect and recharge your batteries is a battle that many of us now face.  Many executives say the most significant thing they miss in our new world is that time on aircraft when they were effectively out of reach and had that quiet time.

Naturally, markets responded, and some airlines, none in the U.S., are offering “Flights to Nowhere.” Thousands of people have booked flights in Brunei, Taiwan, Japan, and Australia that finish where they started and are called either “scenic flights” or “flights to nowhere.”

  • Royal Brunei, since mid-August, has flown five of these flights. As Brunei has had very few coronavirus cases, passengers are not required to wear masks, but staff members are.
  • EVA, the Taiwanese airline, sold all 309 seats on its Hello Kitty-themed A330 Dream jet for Father’s Day.
  • Japan’s All Nippon Airways had a Hawaiian-resort-themed, 90-minute-flight with 300 people on board.
  • Qantas sold out its flight to nowhere over Australia in 10 minutes last Thursday. Tickets ranged in price from $575 to $2,765. The flight will go around Australia, flying over the Northern Territory, Queensland, and New South Wales.
  • Qantas has also brought back its popular sightseeing flights to Antarctica that don’t land in Antarctica but allow passengers to walk around the aircraft and have different Antarctica views.
  • Starlux, the Taiwanese airline, is working to make the flight-to-nowhere experience a luxurious one by allowing people to buy packages for the flight and a hotel stay. Since August, the airline has run six flights to nowhere and has about a dozen more scheduled through October, and most of them have sold out within 10 minutes of being announced. The airline requires masks and social distancing on all fights.

For those that see flying more than as a method of getting from A to B, these flights provide either the exciting flying experience or the quiet time they have missed due to COVID. For those who need to escape being online always. I can appreciate the quiet time flying provided. I loved long-haul flights with no WiFi and considered them a great time to read and get “thought” work done. But the idea of a “flight to nowhere” has little appeal. I have my first cross country flight since March next month, and while I may change my view, I doubt it.

However, for those executives who cannot manage to find a quiet time without getting on a plane, I would suggest revisiting your priorities and finding that peaceful time once a week of at least two hours. Make sure that:

  • You have blocked out the time on your calendar, so you cannot be disturbed;
  • You have turned off your phone;
  • If using your computer, you have turned off your email; and
  • You are somewhere where you will not be disturbed by a spouse, partner, kids, or pets.

Furthermore, start considering all the others on your multitude of video calls to ensure that the times suit them and that they will be in a position to provide the most significant input. Otherwise, you are just increasing stress and burnout and doing nothing productive.

I believe quite times to be of great value, and if you can create that habit and space now, it should serve you well after COVID has ended without a need to fight your way through airports, security, and eat lousy food. I think we all would benefit from more of this time, especially as we are “busier” than ever but are questionably productive.

 

Copyright (c) 2020, Marc A. Borrelli

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Do You Understand Your Costs to Ensure Profitability?

Do You Understand Your Costs to Ensure Profitability?

You can only determine profitability when you know your costs. I’ve discussed before that you should price according to value, not hours. However, you still need to know your costs to understand the minimum pricing and how it is performing. Do you consider each jobs’ profitability when you price new jobs? Do you know what you should be charging to ensure you hit your profit targets? These discussions about a company’s profitability, and what measure drives profit, are critical for your organization.

Sunk Costs Are Just That, Sunk!

Sunk Costs Are Just That, Sunk!

If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.

Do You REALLY Know Your Business Model?

Do You REALLY Know Your Business Model?

Bringing clarity to your organization is a common theme on The Disruption! blog. Defining your business model is a worthwhile exercise for any leadership team. But how do you even begin to bring clarity into your operations? If you’re looking for a place to start, Josh Kaufman’s “Five Parts of Every Business” offers an excellent framework. Kaufman defines five parts of every business model that all flow into the next, breaking it down into Value Creation, Marketing, Sales, Value Delivery, and Finance.

A Different Mindset

A Different Mindset

As someone who didn’t grow up in the U.S., I have a different view of time and certainty. When I arrived, I was always amazed at how people planned for longer and longer events that were way out into the future, but with a certainty that everything would go to plan, e.g., in estate planning, using generation-skipping trusts.

For me, the U.S.’s long-term view reminded me of Issac Asimov’s trilogy, the Foundation, when the Mule appears, unforeseen, and topples the Foundation contrary to expectations. In the U.S. I see the overwhelming belief that everything will fine in the long term, and while there are outlining events, everything reverts to the mean. However, there are always unforeseen events that can disrupt the trend and cause it never to return to the prior norm.

I grew up in South Africa, and many of my parent friends had done the long constant migration south. They lived in the Republic of the Congo, today the Democratic Republic of the Congo. With independence in 1960, the military revolt, the succession of Kantaga, and the influx of mercenaries and paramilitary troops to protect mining interests, they fled, many moving to Zambia where their mining skills were in demand. Zambian independence in 1964 and the fears over privatization starting in 1968, they moved onto Rhodesia, now Zimbabwe. With Rhodesia’s Unilateral Declaration of Independence “UDI” from the United Kingdom in 1965, the civil war began, which lasted until 1980 with free elections.

Many decided to move further south to South Africa, a country bound to be stable and prosperous. These moves were often made in a rush, as power structures changed, and in most cases, they lost everything they had during each relocation. Unfortunately, in South Africa, the 1976 Soweto uprising was the beginning of the end for the minority white government; it would take nearly twenty years for that to occur. My parents knew many of these people were too old to move once more and stayed on, seeing wealth evaporate with a declining economy, currency, and sanctions.

I know of a family in Zimbabwe where the patriarch was a multi-millionaire. On his death, he left everything in trust for seven beneficiaries – each receiving over a million, with the trustee’s stipulation to invest the funds in Zimbabwe. As Zimbabwe’s economy collapsed in the 2000s, with hyperinflation hitting its peak of at an estimated 79.6 billion percent month-on-month in November 2008, the value of the trust’s assets declined. The trustee, a corporation, could not move the funds overseas due to currency restrictions and would not disburse the funds to the beneficiaries because of the terms of the trust. Today each beneficiary’s interest will buy them less than a tank of gas for their car.

Finally, I attended boarding school in Switzerland in 1973. A Lebanese friend of mine’s father had interests in Lebanon and started a new business in Iran because he thought diversification was a good idea. In 1975 the Lebanese Civil war started, which was to continue to 1990, but the troubles continue. That war cost them nearly everything they had in Lebanon; however, the Iranian business did well. Having seen what had happened, he bought properties in New York, London, and Cayman as further diversification and protection. January 1979, his father was in New York watching the Shah leave and the riots and saw the bank, which held his accounts, burn. They never returned to Iran, but thankfully the portfolio of properties kept them financially afloat.

Why these stories, well, we have seen in the six months with COVID, how the world has changed. What we took for granted is no longer sure. When will return to “normality,” who knows, but according to Dr. Fauci, sometime in late 2021? As I have said in this newsletter many times, your old business plans, strategy, and financial models need to go out the window, and new ones prepared in light of what is happening.

I would add to that, as you consider the long-term outlook and your business and investment portfolio, I would look for hedges to protect for large unforeseen events. Following Nassim Taleb’s barbell strategy – you avoid the middle in favor of a linear combination of extremes across all domains from politics to economics to one’s personal life.

There is talk of the dollar falling in value and possibly losing its reserve country status. How long it takes the U.S. to recover from COVID is another uncertainty as we have yet to find a strategy. Will the U.S. and China go to war over Taiwan? What will these events do to your business? Thus, I would consider other parts of the country, other countries in supply chain protection, concerning investments, international assets as a hedge.

As for looking outside the U.S., I would not claim the authority to recommend any particular country. I definitely would not follow the Englishman’s steps in 1980; deciding the world was unsafe, moved to the Faulkland Islands as he determined the safest place to be. Less than two years later, the Argentine invaded, and the Falklands War got going.

However, realize nothing is certain! Trends don’t last forever, and while things revert to the mean, there will be a new mean after massive disruptions. Take the lesson from COVID to reexamine everything and do it regularly. Complacency has enormous costs. As David Mitchell put it so well in Cloud Atlas, when two people are discussing revolutions,
“Fantasy. Lunacy.”
“All revolutions are until they happen, then they are historical inevitabilities.”

I am not saying revolution is coming, but large, unpredictable things are, and like revolutions, most will all be historical inevitabilities, as COVID was!

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If you were starting your business today, what would you do differently? This thought-provoking question is a valuable exercise, especially when it brings up the idea of “sunk costs” and how they limit us. A sunk cost is a payment or investment that has already been made. Since it is unrecoverable no matter what, a sunk cost shouldn’t be factored into any future decisions. However, we’re all familiar with the sunk cost fallacy: behavior driven by a past expenditure that isn’t recoupable, regardless of future actions.

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