Some Businesses Are Now Stronger Than Ever After The COVID Pandemic

On March 11, 2020, the World Health Organization classified the global COVID-19 outbreak as a pandemic. What can businesses and managers learn from this crisis three years later to prepare themselves better for the next one?

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Now, as more problems develop, it is especially important to provide an answer to this question. Crises present businesses with rare chances to stand out from competitors. Our examination of the results of more than 1,000 huge corporations during the COVID shock reveals that, while the average difference in total financial returns (TSR) between both the 25th and 75th percentile entertainers across industries was 75 percentage points in the 18 months prior to the pandemic, it had grown to 105 percentage points in the 18 months following the shock.

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Business executives can improve their organization's resilience by studying how companies handled the COVID crisis, and investors can use this information to find companies that are resilient and will survive future crises.

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What can we learn about resilience from the COVID pandemic?

Resilience is fundamentally the ability to handle adversity, regain essential functions, and flourish under novel conditions. As a result, innovation and spotting opportunities are also important components of resilience in addition to damage reduction.

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Businesses with greater resilience are better able to foresee and mitigate the immediate effects of an external shock. They have developed an advantage through operational redundancy, portfolio variety, or financial buffers and are better at anticipating breaks.

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Also, resilient businesses adapt to changing conditions better than their counterparts by acting more swiftly in response to possibilities that arise from the crisis and regaining their previous position more quickly.

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Third, organizations that are resilient are more likely to succeed in the post-crisis climate because they may rethink their operations for the "new normal" and influence industry dynamics to their favor.

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According to our historical examination of roughly 1,800 large organizations, outperformance during crises between 1995 and 2020 was mostly fueled by the ability to absorb the instant effect of a shock.

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This pattern changed during COVID: For the 12 months following the COVID shock, 9% of the earnings growth of new victors was caused by reduced shock impact, 27% by a quicker rate of recovery, and 64% by a more thorough rate of recovery.

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For instance, when the COVID pandemic increased this adoption, businesses that had a great awareness of the long-term move to digital and online business models and were already utilizing this trend were far better positioned to prosper. They thereafter left their adversaries in their wake.

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A excellent example is the American retail behemoth Kroger KR, -0.21%, which has recently focused heavily on positioning itself for long-term e-commerce trends. Years well before pandemic, the company's omnichannel efforts allowed it to provide delivery service and pick to more than 95% of US households in 2019.

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When the epidemic first started, people were wary of face-to-face contact. Kroger was prepared to provide a strong digital alternative. In the first quarter of 2020, the company more than doubled its online revenues, reducing the shock from the COVID. Kroger was among the top 10 online retail corporations in the United States in 2022 thanks towards its investments in e-commerce.

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How can businesses develop resilience?

Our analysis shows that resilience is essential to this because crises remove the wheat from the chaff. Developing resilience demands a mindset shift away from a singular focus on increasing short-run efficiency and returns toward long-term competitive advantage. Although they only happen in 10% of quarters, crises contribute for 30% of a company's long-term relative TSR comparable TSR during these periods.

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To put it another way, two-thirds of lengthy top achievers had strong crisis performance, and performance during times of crisis has an effect that is almost three times greater than performance during times of stability.

According to our research, a company's ability to be resilient depends on the following seven factors:

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Prudence: Improving one's capacity to foresee and address disasters, for example, by creating early warning systems and backup plans.

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Redundancy: Increasing absorptive capacity to withstand shocks by adding buffers (like cash) or functionality (like suppliers, manufacturing).

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To avoid correlated reactions across the firm, diversity refers to the development of various types of competencies, income streams, or production methods.

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Organized in loosely connected modules (such as teams, subsidiaries, and factories) helps to isolate the impact of crises and prevent snowball consequences. 

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Embeddedness is the ability to interact with the larger corporate ecosystem, adapt to changing social norms, and collaborate to absorb shocks and meet changing requirements and goals. It's critical to keep in mind that connected systems, not just their component pieces, exhibit resilience.

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Developing your capacity to react swiftly to situational changes and to influence the new competitive situation.

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The ability to methodically harness creativity in order to create the new normal rather than simply adjusting to change is something that goes beyond adaptation.

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Our analysis found that 15% of businesses surpassed their sectors in at least 80% of a crisis quarter they faced, proving that while every crisis is different, some organizations can develop general resilience. For instance, Berkshire Hathaway BRK.A, -0.42% BRK.B, -0.21% has outperformed the diversified financials industry on TSR from 1995 to 2020 by nearly 2 percentage points annually, with this outperformance being attained primarily during periods of financial crisis (TSR outperformance in 15 of the 17 crisis quarters it faced). This is undoubtedly motivated by Warren Buffett, chairman of Berkshire Hathaway, who views problems as opportunities and lives by the maxim "be greedy if other people are afraid."

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What can investors learn from this?

We are currently witnessing multiple crises developing simultaneously, on various timescales, and on various sizes, as opposed to a single shock. These crises range from COVID to Russia's invasion of Ukraine to climate change.

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Resilience will become increasingly important as crisis mode transitions from a passing trend to a permanent feature. Investors must become more adept at spotting businesses that can adapt, bounce back, and thrive in the new climate.

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This requires evaluating whether resilient traits are present in businesses. Are businesses constructing flexible or redundant supply chains, a strong ecosystem, and the capacity to react swiftly to outside changes? Quantifying a company's resilience track record can supplement this. For instance, what was a company's recovery rate in comparison to its rivals during recent crises? How much of its industry's upswing did it manage to capture after a crisis period?

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In order to avoid overvaluing the short-run efficiency-focused indicators that frequently rule financial research, investors can also add forward-looking metrics into their assessments, such as our vitality index, which calculates a company's potential for long-term growth. The investors themselves as well as their investment aims can be seen from the same angles.