For many business leaders and decision-makers grappling with the coronavirus (COVID-19) outbreak, the first priorities are clear: people and cash. They’re ensuring employees are safe, empowered to take care of themselves and their families, and have the support and resources to work remotely for the foreseeable future. They’re also focusing on business continuity.
But what about the longer-term decisions? PwC has been tracking CFO sentiment bi-weekly to assess how companies are responding to COVID-19. As of late-March, eighty-four percent of the survey respondents identified a potential global recession as a top-three concern, indicating a need for clear-eyed planning for a company’s position and investments as the world comes out of this crisis.
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With great pressure to manage costs, leaders will want to keep sight of strategic priorities to help the business emerge stronger. Finding that balance can be extremely challenging, but crisis recovery decisions can be compatible with long-term visions. Four main lines of management thinking can help protect strategic plans:
Expand strategic choices, while weighing risk
Future-proofing your company’s strategy has traditionally been a rigid, deterministic, and linear process of:
Developing and defining a vision of the future
Identifying ways to play, stand out against one’s competitors, and win within that vision
Investing resources to support those ways, and executing relentlessly
Uncertainty makes this process much more difficult. In times of rapid change, increased social anxiety, unexpected disruption, or recession, there are more potential outcomes for competitors’ actions, customer behavior, and even the economy as a whole.
A dynamic and probabilistic form of strategic decision-making is possible—one that is subject to frequent testing and tweaking, and able to quickly adjust to internal and external changes. The mindset is no longer for a manufacturing juggernaut sequentially ramping up design, production, and marketing over months and years to introduce a new consumer product. Instead, it’s a nimble information or services firm running tests and revisions to rapidly iterate on a new offering.
Advances in big data and artificial intelligence now allow strategists to model economic, corporate, and human behavior with more complexity and across a wider range of scenarios than ever before. For example, scenario planning and financial models can be revised to incorporate the economic impacts of previous pandemics, such as SARS and MERS.
Or, instead of considering what may happen if the economy stops growing or contracts for five consecutive quarters, teams now can forecast what may happen if a recession occurs in one region, but not another. If a major business rival introduces a new product at a lower price point, or thousands of other plausible futures, teams can assess the potential outcomes.
Continually planning for how a company can succeed across multiple contingencies builds confidence and resilience. It also generates an array of better options for when the market is volatile—helping leaders understand which paths to pursue, which bets are more or less risky, and which “no-regrets” decisions are most likely to drive value in a multitude of situations.
Be clear on your must-haves and manage costs for that plan
How you think about costs in a period of economic uncertainty or even in times of crisis can lead to a more coherent strategy.
“Costs and strategy are inseparable because every investment, whether good or bad, matters,” says Deniz Caglar, strategy consultant and author of Fit for Growth: A Guide to Strategic Cost Cutting, Restructuring, and Renewal. “You’re never just cutting costs. You’re deciding that some things are more strategically relevant than others.”
Franz Wohlgezogen, a University of Melbourne business professor who’s studied strategy and performance in recessions, makes a similar observation: “If everyone is cutting costs, and you are too, then it’s extremely unlikely that you will somehow pull ahead—because if everyone is doing it, then where is the advantage?”
The advantage comes in the few things your company must do better than everyone else to win with its strategy—the differentiated capabilities you need most.
Cutting in areas that do not create value for customers or employees or build the brand can reorient any business toward its strategy. The idea is to rigorously protect costs that are vital to the future growth of the business, while identifying costs that take away from those goals.
“You’re never just cutting costs. You’re deciding that some things are more strategically relevant than others.”
In the early 1990s, the building technology company Johnson Controls provided an example of how companies can use a crisis to align costs toward future growth. JCI lost a contract that represented 20 percent of its business in motor vehicle batteries. Almost overnight, the company faced huge overcapacity and steep losses.
This required JCI executives to look at their entire business with fresh eyes. Their response was to reconfigure production flows to serve more customers, more flexibly. At the same time, they cut in areas that were not differentiated, such as accounting, human resources, and IT.
Making swift decisions about their way to play, JCI cut 35 percent of operating expenses. By the fourth quarter of 1995, despite the loss of revenues, the company was operating for future growth and profits began to rise.1
Make your strengths harder to copy
When companies digitize businesses, they’re not adding digital capacity indiscriminately, but rather digitizing the things an organization is best at, making existing strengths harder to copy and their business harder to disrupt.
Today, companies are competing on the value they create using artificial intelligence (AI), the Internet of Things (IoT), 5G wireless, and data and analytics. This value creation is so powerful that it has been dubbed the “Fourth Industrial Revolution” (4IR).
A September 2019 PwC survey found that 63 percent of business leaders expect that the value they’re creating with 4IR technologies will protect their company against an economic downturn.
And this, says PwC’s Vice Chairman and Global Advisory Leader, Mohamed Kande, is a big reason to think about these technologies as investments in value creation.
“Growth has slowed at the same time that we’re seeing a major technology disruption,” says Kande. “Simply buying or implementing technology won’t give you an advantage. You have to use technology to find new ways to create value for customers.”
Li & Fung, the Hong Kong-based global supply chain provider lives this principle. Since 2017 Li & Fung has embarked on a digital transformation journey focused on reinventing its operations with advanced technology.
The company’s use of 3D computer-generated imagery (CGI) allows decisions to be made quickly at every stage of the manufacturing cycle. Leveraging its global supply chain platform, Li & Fung uses CGI to link 10,000 factories and their 5 million employees with their end-customers: apparel retailers across the globe.
CGI has been key in helping condense the traditional 40-week design time for apparel down to 30 weeks, 20 weeks, or faster. The company’s next goals are to move upstream by building a trend prediction model and downstream by building a model for the raw materials that feed into 3D printing and design.
CGI was available well before Li & Fung used it. The advantage is in how Li & Fung has used CGI to reinvent its operations, creating value for every stakeholder in the supply chain.
Create value with deals
Conventional wisdom holds that mergers, acquisitions, and other deal activity likely will collapse with a downturn—just as they did during the Great Recession, and during the dot-com bubble burst before that. But compared with previous economic cycles, the amount and diversity of capital available for mergers and acquisitions (M&A) in the US is substantial.
Combined with other factors, this has led to a decoupling of deals from the broader economy, a phenomenon that could produce a higher floor for deal activity.
One successful merger over the last two decades came on the heels of the Great Recession. The hand tool and construction equipment company Stanley Works consummated a long-discussed, $3.5 billion acquisition of the power tool firm Black & Decker. Both companies recognized they could realize significant operating efficiencies while strengthening their core businesses.
Within three years, Stanley Black & Decker exceeded the original target of $350 million in cost synergies by 43 percent and has produced healthy revenue and share price growth since 2010.
To act on prime buying opportunities, firms should have their deal funnel focused on acquiring technologies, operations, and units that bolster desired capabilities and enhance the core business. Smaller acquisitions and deals for key technologies can provide companies with the new capabilities they need during a downturn but with less capital requirements and a shorter integration period than large ones. Divestment strategies should center on selling non-core assets that free up resources for investment.
And in this era of dynamic strategy, successful acquirers and investors can use analytics and modeling to work on integration and other core value creation levers while they’re in due diligence. That way, those plans for value creation can move forward instantly.
These four main lines of thinking don’t provide a full answer for exactly how to steer into economic uncertainty. But the firms that use them can stay focused on creating value, even in difficult cycles.