| This week, we look at how retail faces a trial like no other as stores stay mostly shuttered and consumer purchasing patterns shift. Plus, the HBR McKinsey Award for the best Harvard Business Review article of the year goes to a piece that delves into the paradox of innovative cultures. |
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| Store closings, travel bans, record unemployment ... Being in the midst of a global pandemic is nerve wracking, to say the least. Yet even as we worry about friends and family and follow the latest updates, COVID-19 is disrupting the economy in a major way. The McKinsey Global Institute estimates that the economic slowdown caused by virus-suppression efforts may very well lead to the largest quarterly decline in economic activity since the 1930s. |
| How are retailers faring during this time? Not well, as you might imagine. Last week, the US Commerce Department said retail sales plunged more than 8 percent in March, the largest decline in the nearly three decades the government has tracked the data. And April is expected to be worse. |
| As borders have closed, multinational companies and their supply chains have been thrown into disarray. In addition, the economic consequences of lockdowns are serious: people living under stay-at-home ordinances don’t visit restaurants, go see movies, plan vacations, or buy clothes. According to McKinsey estimates, up to 50 percent of discretionary consumer spending may be lost. For the $2.5 trillion global fashion industry, this could mean a 30 percent year-on-year decrease in revenue for 2020. |
| The pandemic is creating dramatic shifts in consumer behavior, including purchasing patterns. During times of crisis, people hold off on buying nonessential items while stocking up on necessities. McKinsey’s consumer research bears that out: survey respondents in Italy, Spain, the US, and the UK all said that, over a two-week period, they would spend more on groceries and household supplies and less on jewelry, clothes, hotel stays, furniture, appliances, and international and domestic travel. In addition, given the widespread practice of physical distancing and self-quarantine, consumers are focusing more of their spending online. |
| With so much uncertainty surrounding how long it may take the economy to recover, retailers will want to start building resilience now. Lessons gleaned from the last recession are helpful. By analyzing the performance of more than 1,000 companies from 2007–11, a period that includes the Great Recession of 2007–08, McKinsey learned what sets top performers apart. |
| These “retail resilients” increased cash reserves and moved into new markets, among other measures. While resiliency is important, it’s likely to be insufficient here. COVID-19 could end up dwarfing the financial crisis in economic damage. In that case, it will not be enough for many companies to tweak their business model; instead, they will need to rethink it. |
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| OFF THE CHARTS |
| Wage stagnation’s long history |
| There is pre-coronavirus data and post-coronavirus data, and never the twain shall meet. But we thought it was worth looking at our report from way back in February, The social contract in the 21st century, that noted how wage stagnation has been a persistent challenge for workers across economies even before the crisis erupted. |
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| MORE ON MCKINSEY.COM |
| War games: Here’s what they’re good for | In our latest edition of “Bias Busters,” we look at why you shouldn’t forget to anticipate competitors’ moves when making your own. |
| Where supply-chain problems are a fact of life | Industrial companies can optimize and increase the flexibility of their supply chains—and improve their bottom line—by using a new approach. |
| A blueprint for M&A success | Programmatic M&A can help companies build resiliency, but this approach to deal making requires a solid game plan—one that will guide proactive deal sourcing and opportunistic deal evaluation. |
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| WHAT WE’RE READING |
| The difference between hard and harsh truths |
| Most people want to work in a company that values innovation. But they may think twice after reading “The hard truth about innovative cultures,” by Gary P. Pisano, which just won the 2019 HBR McKinsey Award for the best Harvard Business Review article of the year. |
| The things that make innovative cultures appealing, the article argues, require certain kinds of discipline. “A tolerance for failure requires an intolerance for incompetence. A willingness to experiment requires rigorous discipline,” Dr. Pisano writes. “Innovative cultures are paradoxical. Unless the tensions created by this paradox are carefully managed, attempts to create an innovative culture will fail.” |
| Dr. Pisano is a researcher, author of
Creative Construction: The DNA of Sustained Innovation, and a professor at Harvard Business School. This is his second time winning the award; the first was in 2009 for “Restoring American competitiveness,” written with Willy C. Shih. He has spent years helping companies, large and small, develop and scale innovation. |
| The inspiration for the article came to him while he was on stage leading an interactive session with a company. “I asked the audience what an innovative culture looks like. They gave very predictable answers: tolerance for failure, entrepreneurial, collaborative, willing to have people speak up,” he remembers. |
| Next he asked: “How many of you want to work at a place like this?” They all raised their hands. “How many of you work in a culture like this now?” Very few hands went up. |
| “I remember thinking, if everyone wants to work in an innovative culture, why is it so hard to create one?” He repeated the dialogue with groups around the world, always getting the same response. “It really bothered me,” he said. |
| About the same time, the first books and news articles began to appear that cast leading innovators and companies as brutal environments for employees. That audience, Dr. Pisano thought, would benefit from some insight into how to make sense of the paradox. |
| In his article, he also highlights the specific leadership challenges of building innovative cultures. Its contradictions can confuse employees, and some of the behaviors these cultures require are tough for certain organizations to embrace. Finally, because innovative cultures rely on interdependent behaviors, Dr. Pisano writes, “piecemeal” adoption plans likely won’t work. |
| “Innovation is valuable precisely because it’s so hard. And by outlining both sides of the equation, I’m hoping to prepare senior leaders for a really tough journey—if they know what to expect, that can make it a little easier,” he explains. |
| But does an innovative culture necessarily have to be so harsh? “There’s a difference between being hard and being harsh. Being hard means I’m going to ask tough questions, be brutally honest, and hold you accountable for painful decisions such as shutting down projects. Candor is uncomfortable. But it doesn’t have to be demeaning. We can create environments where people are counted and treated with respect and dignity. And a number of companies have.” |
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| BACKTALK |
| Have feedback or other ideas? We’d love to hear from you. |
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