During the COVID-19 crisis, companies could at least assume that, despite heavy impacts in some cases, their existing markets and supply chains would mostly continue to function. Many spent 2020 and 2021 turning the challenges into an opportunity to reconstruct their businesses and accelerate transformation.
The upheavals triggered by the war in Ukraine – which come on top of post-COVID supply-chain pressures and inflation – are different. Immediate impacts include soaring commodity prices, which are increasing costs for companies and the public, while inflation will impact wages and companies’ profits. Customer sentiment has been shaken and could result in a deterioration of economic conditions or even a recession. Forecasts for global GDP growth have been falling – from 6.2% in 2021 to 3.3% in 2022 and 3.5% in 2023, according to one May 18 estimate.
Longer term, the crisis has upset past beliefs about the geopolitical order, and the future will be different in ways that are still unknown. Combined with COVID and the growing environmental crisis, the war shows that the world is dominated by VUCA – volatility, uncertainty, complexity, and ambiguity.
To thrive in these circumstances, companies must take steps to remain profitable and build more resilience and variability into their organizations, supply chains, and business portfolios. Cost management will not be enough, however, and short-sighted action could cause long-term harm. We think businesses should combine immediate reaction and structural transformation in three ways:
1. Build A 360° Vision Of Exposure
The impact on an industry will depend partly on its reliance on certain types of energy and materials, especially if companies have sourced these in Russia and Ukraine up to now.
Supply: Assess the impacts of the surge in energy and commodity prices on the company’s total cost structure – and be sure to understand these before changing supply strategies. The average price of natural gas in Europe is expected to double in 2022 from 2021 and to remain high over the next few years. The scarcity of industrial gas will also affect production chains: For instance, the shutdown of neon gas production in Ukraine will reduce the production and availability of semiconductors worldwide. Disruption to the supply of base metals from Russia – platinum, titanium, and vanadium, for example – could complicate renewable- energy solutions such as fuel cells and hydrogen technologies. The price of raw materials, including nickel, aluminum, and copper, has also jumped, by more than 25% in the first quarter of 2022. Supply chains for energy, raw materials, and components have been interrupted, and base products such as wheat and oil have become scarce. And trade routes have been disturbed, in particular the overland ones from China to Europe through Russia, Ukraine, and Belarus.
Demand: Beyond exposure to falls in demand from Russia and Ukraine, consumers worldwide will suffer. High energy and wheat prices will reduce the amount they can spend on other products. And a distressed financial instruments market will hurt private savings and investments, damaging sentiment and reducing people’s willingness to spend.
2. Prepare For Different Futures
To rethink their strategic priorities and competitive positioning for the future, companies can address a series of questions: How is consumer demand shifting in different regions – North America, Europe, and Asia? Which geographies are stable enough for supply chain development? Which trade routes will be most sustainable? And what impact will inflation have on their businesses’ financial and real estate strategies?
Structural changes in the value chain: Understand which changes will last and their impacts on the company’s operating model and organization. Even if energy prices retreat from their current highs, they are unlikely to return to 2020 levels. Taxation might rise in some countries due to expanded military commitments and the need to support consumers in hard times, and a higher cost of running a country will make it more expensive to run a company there too. Assessment of these factors will inform decisions over the business portfolio, such as which activities to divest and the development of alternative energy sources. An examination of peers and stakeholders might lead to the discovery of opportunities for M&A and for building new capabilities that outpace the competition.
Scenarios: To manage the current uncertainty, develop scenarios. For example, tensions between China and the United States could also raise questions about which markets companies can serve with their current supply chains. These will help integrate into the company strategy the future implications of the war for the business, its operations, and its people.
The company can then develop new trade routes, adjust its supply networks, and procure on a more local or regional basis. Additional sources of energy and raw materials may need to be identified. The supply chain’s end-to-end resilience to cyber threats will also need to be improved to reduce the risks to vital segments. Strategic simulations can dynamically test how updated strategies will cope with the next VUCA event.
3. Act Decisively But Selectively
Short-term disruptions require immediate action. Long-term changes need careful consideration.
Rapid action: Decide where to act, how far, and how fast. Companies can secure short-term supplies by revising sales and operations plans to align their internal capabilities with new requirements. No-regret moves should be implemented decisively, such as short-term cost and performance levers that are valid in any scenario. These might include shifting spending on marketing and on selling, general, and administrative (SG&A) costs.
Transformational action: Plan this carefully and be selective about strategic bets, such as portfolio divestment and the scaling up of production capacity in new regions. Lasting changes could include the localization of supply, a revised energy policy, and reinforced environmental, social and governance (ESG) commitments – in particular related to Scope 2 emissions (those generated mainly in the production of electricity the company uses).
Conclusion: Time To Reconsider Fundamental Values
The crisis unleashed by the war in Ukraine makes it essential for companies to realign their operating models, organizations, and resources in ways that develop capabilities for the future. It is a good time to mobilize staff and foster new kinds of behavior, because employees reassess their ways of working during times of disruption, so they are often willing to make changes. The crisis also calls for the reinforcement of a business’s role in society, based on a stronger vision and sense of purpose. Organizations should communicate their values and set out a vision for the future in which they will be more resilient.