All companies faced extreme disruptions from COVID-19, but a subset faced an even bigger challenge: they had been struggling before the pandemic and were in the middle of a transformation to improve performance. For many of these organizations, the pandemic could have been the death blow, yet we identified some that managed not only to survive but to thrive.
These companies didn’t scrap their transformation plans when COVID hit but rather adjusted them. They redoubled their efforts and saw the pandemic as an opportunity to accelerate the transformation, building digital capabilities and introducing new ways of working. Now that the crisis is beginning to ease, their efforts are paying off, helping them compete more effectively and boosting their resilience to any future crisis. These companies were all were in major trouble, and all have significantly rebounded.
We believe that transformations can help virtually every company, from market leaders seeking to reinforce their lead to organizations in need of a structural turnaround. The companies we studied put that thesis to the test. Their stories—including a home goods company, a fleet manager, and a jewelry retailer—show that with strong leadership and a solid transformation plan, a company may be down but it will never be out.
PERFORMANCE IS IN THE HANDS OF MANAGEMENT
We looked at the performance of about 8,000 companies representing 17 sectors around the world over the past three years across a variety of KPIs: margin, revenue, cost of goods sold, sales, general and administrative expenses, and capex. The data told an interesting story about how companies responded to COVID-19.
The pandemic hit some industries much harder than others. For example, the automotive and fashion and luxury sectors saw revenue declines of 10% to 15% in 2020 compared with the previous year. Oil and gas companies saw bigger drops of more than 20%, and travel and tourism companies saw their revenue fall by nearly 50%. In contrast, biopharma and technology companies actually experienced an increase of 7% and 6%, respectively.
Similarly, geographic regions experienced varying levels of fallout. Companies based in Spain, Portugal, France, and India were the hardest hit, experiencing average revenue declines of 7% to 8% from 2019 to 2020. Faring slightly better were companies based in the UK, Germany, Austria, and Japan, which saw revenue declines of 3% to 5%. At the same time, some countries, like Brazil and Greater China, saw their overall revenue rise in 2020 by approximately 6%.
Yet even within the most hard-hit industries and regions, some companies managed to outperform the competition. Even more surprising, some went into the crisis facing their own internal challenges and had launched transformations that were underway in early 2020. Despite that, they still emerged from the pandemic ahead of their peers.
When entire industries are in crisis, some management teams may be tempted to use that as an excuse for subpar performance. But the key takeaway from our research is that even when an entire industry or region is struggling, companies can still take action to improve performance relative to their peers. They can also invest to position themselves for the coming recovery.
FIVE MEASURES TO BOOST RESILIENCE IN A CRISIS
There is no single way for organizations to transform during a crisis. The right approach depends on a company’s starting position and specific challenges. But based on BCG’s experience supporting hundreds of transformations across industries and geographic markets, we have identified several measures that can help make companies more resilient in the face of a major crisis. When implemented together, these measures reinforce one another to generate stronger results.
Take a holistic approach to performance.Understandably, most companies undergoing a transformation seek to cut costs. Facing a liquidity crunch, they reduce spending on nonessential and employee-related items, R&D, and capex in an effort to conserve cash. However, most successful organizations think beyond cost cutting, simultaneously launching quick-hit measures to boost revenue in areas such as pricing, focusing resources on top-selling products and services, and activating the sales force. In doing so, these companies craft a more promising future, generating buy-in from employees and investors. Costs are important, but they can’t be the sole focus. It’s critical to pull multiple value creation levers at the same time and to adjust the focus on each one as the situation changes.
Put employees first.The pandemic and its impact on the workforce have reminded management teams that employees are not a cost item that can be optimized during a crisis. Instead, they are a major—if not the major—asset of an organization. Companies that prioritized employee well-being and engagement during the pandemic sent a clear message and built loyalty. Not every company took this approach, but it was a clear theme among the winning organizations that we looked at.
Focus relentlessly on digital.Virtually every company has invested in digital to some degree over the past decade, yet many still have further to go. During the pandemic, when many organizations had to close their manufacturing facilities and retail locations, and when travel restrictions altered buying patterns and global supply chains were disrupted, winning companies prioritized the switch to e-commerce, digital platforms, and process automation as a matter of survival. They built the requisite infrastructure and expanded their digital capabilities. We believe that these investments will pay off by giving companies a competitive advantage in both calm and turbulent markets. Organizations that are struggling to make progress can start with smaller, more focused initiatives to build institutional capabilities and momentum.
Stay agile. The ever-changing conditions of a crisis challenge leadership teams to quickly identify emerging trends, make rapid decisions amid uncertainty, and—crucially—determine when to stick to a decision and when to adapt. Strong leaders make bold bets and do what is needed to bring their organization along.
Create dedicated response teams. Because the situation can change rapidly, few plans developed in advance of a crisis will remain 100% applicable. Successful companies put teams in place that can react quickly to evolving conditions and challenges. In response to COVID-19, such companies introduced new infrastructure, tools, processes, strategies, and behaviors and then gauged the results and adjusted on the fly. Response teams are not meant to be permanent—the crisis called for a sense of urgency and focus not likely to be sustainable over the long term. But organizations should maintain the ability to mobilize a large response team with the right mix of business and functional capabilities and with appropriate governance and accountability.
CASE STUDIES OF TRANSFORMATION IN A CRISIS
Following are three case studies of companies that faced steep challenges before the pandemic but turned their fortunes around by applying the principles described above.
Retail: Bed Bath & Beyond
A leading home retailer in North America, Bed Bath & Beyond has over 1,000 stores and a strong market position across several segments in the home category. But the company experienced a precipitous decline in momentum starting in 2015, with a stock price decline from $78 early that year to $8 in late 2019. Moreover, gross margins deteriorated more than 4.8 percentage points, and in 2019, the company faced an operating margin and net income loss, with revenue and market share declining rapidly.
In late 2019, a new CEO, Mark Tritton, took over. He came with previous experience leading brand- and product-driven growth and omnichannel turnarounds. In his first few weeks, he removed most of the senior leadership team, and within 100 days launched a three-year growth transformation addressing both revenue and costs.
The pandemic altered those plans. Most of the company’s products (outside of infant health and personal-care products) were deemed nonessential, stores had to be temporarily closed, and the new leadership team was not yet in place. Despite the uncertainty, Tritton saw the pandemic as a chance to accelerate and adapt some elements of the transformation. He managed to build a world-class executive team that focused on a number of specific goals:
- Preserving liquidity and fortifying financial flexibility by strengthening the balance sheet and reducing debt
- Selling off five underperforming businesses and investing that capital in the business and in critical capabilities, while also returning significant capital to shareholders
- Shrinking the company’s physical footprint by permanently closing 200 stores
- Accelerating the move from multichannel to omnichannel distribution
- Preparing to launch a series of differentiated private-label brands as part of the most significant transformation of the company’s product assortment in a generation
- Unveiling the value creation plan as part of an investor day for the first time in the company’s 50-year history (within a year after the new CEO took over)
As a result of the transformation, the company has established a healthier and growing revenue base, and as of June 2021, its streak of several consecutive quarters of comparable revenue growth was continuing. Adjusted gross margins and higher EBITDA have increased, and earnings per share have grown threefold.