whats next 400

As Covid-19 restrictions start to lift and UK businesses begin their recovery, digitization and new technologies will be key drivers for a post-pandemic economy which will look very different from before, according to analysis by McKinsey.

The consultancy says its assessment of the trends at play in the US - an advanced economy that is now largely open - can to some degree be seen as a bellwether of what is to come, and cautions that “the next normal won’t be a return to the norms of 2019”.

Changed loyalties

Personal savings in the United States spiked in April 2020 to 33.7%, the highest rate ever recorded, while household savings more than doubled, to $3 trillion, since 2019. A spending splurge is on the way, with the younger generation in particular ready to splash the cash. McKinsey highlights how the pandemic has disrupted consumer loyalty. About three-quarters of Americans changed their shopping habits in 2020, and 40% of these changed brands—twice the rate in 2019. Younger people were more likely than older ones to switch. The research says this suggests that, more than ever, companies cannot take their customers for granted. Loyalty must be earned time and again.

Travel plans

In 2020, US spending on travel fell more than 40% and on business travel around 70%. McKinsey says that while the pace of future recovery is unclear, a recovery in domestic travel is certainly under way. Its predictions suggest that by 2024, domestic travel will probably return to prepandemic strength, but business travel will be at only 80% and may never recover beyond that. US business travel fell by more than two-thirds in 2020, and in the meantime, companies have found new ways to connect, via videoconferencing and webinars.

Innovation accelerates

The Fourth Industrial Revolution—the application of AI, analytics, digitization, and other technologies to all phases of economic activity, from design to production— has gathered pace during the pandemic. McKinsey points out that from now on, digitization will be everywhere, and it will be critical to both national productivity and the success of individual companies and sectors. The Covid crisis sped up digitization by three to seven years; what was considered best in class in 2018 is now below average.

In a survey conducted earlier in 2021, only 11% of respondents believed that their current business models would be economically viable through 2023, and almost two-thirds said their companies needed to invest in digital technologies to adapt. Funding of digital and tech initiatives has risen over the course of the pandemic, even as businesses made cuts elsewhere

One concern, however, is that many such changes appear to be concentrated in large leading companies—the strong are getting stronger. For innovation to translate into enduring productivity improvements, it needs to go deeper. McKinsey also notes that 60% of the productivity potential comes from organizations seeking to reduce costs, and that could mean cutting jobs.

Consumer behaviour

The big change in consumer behaviour during the pandemic has been the shift to e-commerce and remote options. In the US, e-commerce grew more than three times as quickly from 2019 to 2020 as it had during the previous five years, and McKinsey noted “many Americans even proved willing to buy cars without literally kicking the tires”.

The consultancy says businesses will need to develop whole new capabilities (including data-driven marketing, distribution management, and sustainability) to create long-term value. E-commerce can drive rather than dilute profitability if companies consider their marketing investments, revenue-growth management, and warehousing and supply-chain costs. They also need to ensure they consider the omnichannel implications.

Supply chain shift

The sight of a 200,000-ton container ship blocking the Suez Canal in March 2021, holding up almost $10 billion in goods, illustrated how supply chains are only as strong as their weakest link. The US federal government has taken note, conducting a supply-chain review to strengthen resilience and prevent disruptions, such as the semiconductor shortage that hobbled major automakers. The US Senate recently approved a bill that would, among other things, create a supply-chain crisis-response program and boost domestic semiconductor manufacturing.

McKinsey’s analysis stated: “Efforts to strengthen and diversify supply chains have generally been hit or miss rather than systematic. The pandemic revealed the limits of that approach.”

In the recent past, supply chains have been optimized according to cost and efficiency; now, resilience and agility—for example, identifying additional suppliers for critical parts, developing backup capacity to reduce reliance on a single facility, and rethinking inventory management—are bigger parts of the equation.

The future of work

If the rise in remote work was the defining feature of the economy associated with the pandemic, then that of the postpandemic economy is likely to be hybrid work.

In May 2021, a McKinsey survey of employers found that most of them believed that the office would again become the primary place for work; some are insisting on a full-time return to the office because they see the remote work of the pandemic period as an extraordinary shift forced by an extraordinary event, not as a new routine. As for employees, in a survey conducted in the spring of 2021, 63% said they preferred either fully remote or hybrid work; before the pandemic, almost exactly the same percentage preferred to be fully on site. Parents are the most enthusiastic of all employees about hybrid-work models, suggesting that their effective implementation could be an important component of efforts to recruit and retain women in particular. Companies need to figure out their vision of the postpandemic future, both immediately and beyond. If remote workers are doing their jobs effectively, what does that imply for where and how these tasks are done?

Another leadership priority is to accelerate the shift toward getting work done using small teams focused on outcomes and characterized by a high degree of trust, collegiality, and apprenticeship. Rather than regularly evaluating progress, postpandemic leadership is becoming about clarifying goals and strategy, as well as coaching and motivating such teams. Companies that made systematic efforts along these lines report much higher productivity than do those that did not.