FINANCE TODAY | ISSUE NO.20
“Respond with urgency now, prepare for what is next, then think beyond” is what is at the top of most C-Suite’s minds right now. The C-Suite refers to the executive-level managers within a company. COVID-19 has revealed unforeseen vulnerabilities and given rise to new challenges within the business world and general economy. The sudden changes brought on by the pandemic are forcing company executives to reconsider their operating strategies, with over 52% of business leaders opting to reconfigure their global supply chains (Krouskos, 2020). The speed of automation, adoption of technologies, and effective workforce management are all business aspects that have been affected by the pandemic. Additionally, C-suite executives are dealing with reduced cash flows and profitability, with 95% saying they are experiencing pressures on profit margins (Krouskos, 2020). According to an EY report that surveyed executive-level managers, the focus right now is managing the impact and planning for recovery. Most recessions have resulted in a V-shaped recovery, where activity picked up rapidly after the initial drop. If this recovery becomes a reality for the COVID-19 pandemic, activity could be accelerating in early 2021. However, 54% of respondents of the survey expect to see a U-shaped recovery, which would lead to an extended r period of slow economic recovery into late 2021. Regardless of the actual recovery shape of the economy, the fact that businesses are undergoing unprecedented transformation is inevitable.
TRIGGERS FOR TRANSFORMATION
Agility, flexibility, and resilience today are the foundations of success tomorrow when it comes to business transformation. One of the main drivers of transformation as a result of the pandemic has been pressure on revenue targets and profitability goals. Increasing pressure from shareholders and investors, difficulty in attracting or retaining customers, and not keeping up with competitors’ technology are other triggers for business transformation (Krouskos, 2020). Accelerating the strategic and portfolio review process itself will also underpin the journey into the next stage of business transformation. 64% of executives have already adopted a different strategy review process compared with three years ago, which indicates this trend is only being accelerated by the pandemic.
A portfolio review will be one of the major business functions transformed as a result of the pandemic. Portfolio reviews should identify assets that are at risk of disruption or face future growth challenges and are guided by the overall business strategy. This business strategy is set by the CEO and the board, however, this top-down view can sometimes conflict with the bottom-up review process, leading to bias. By implementing a more holistic approach to portfolio reviews that takes all employees into consideration, businesses are becoming more competitive and identifying alternative opportunities. The goal of a portfolio review is to identify new opportunities and to decide which assets should be let go in order to benefit the firm. COVID-19 has increased the pace of change in the market, which is leading to more frequent strategic reviews. 75% of C-suites surveyed agreed with the use of an “always-on” strategic and portfolio review process (Krouskos, 2020). This will allow companies to identify areas of growth at the earliest opportunity, and areas of underperformance will surface sooner. Having strong data to analyze portfolios will also become increasingly essential as companies use this information to focus on current and potential disruptors. Spotting emerging trends earlier will allow companies to protect current operations through investment in their portfolio. Increased use of technology to gather data and create scenario-based models is also something 53% of executives believe to be an upcoming trend.
TRANSFORMATION THROUGH M&A
Mergers and acquisitions (M&A) are transactions in which the ownership of businesses is transferred or consolidated into other existing businesses. The purpose of this action is to create synergy which increases the value of growth for the purchasing business. 61% of C-suites agreed that they expected the M&A market to increase in 2021 (Krouskos, 2020). A major driving factor behind the expected increase in transactions is the rare opportunity to make acquisitions with suppressed valuations of high-quality assets that would then fuel growth in a recovering market. M&A also provides an opportunity for long-term growth, which is of paramount significance for a business, regardless of current pressures. Bolt-on acquisitions are the strategic acquisitions of smaller companies, usually in the same line of business, that presents strategic value. This acquisition strategy will provide a gateway to new markets according to the majority of executives surveyed, and will be a critical element of their businesses’ strategy post-pandemic. Among the main strategic drivers for pursuing such acquisitions are; acquiring technology, new production capabilities, or innovative start-ups, providing the gateway to new markets, sector convergence, and growth into adjacent business activity. The use of technology in deal-making for M&A will also be a hot topic as businesses go through transformations. Companies that leverage technology during the M&A process will be in a better place to understand the risks, target the right assets, and act more quickly than those who do not. Currently, 26% of C-suites are using a minimal amount of technology for deal-making, but plan to leverage technology more effectively (Krouskos, 2020).
CHANGE IS IMMINENT
COVID-19 has been both a blessing and a curse. While business revenue streams have suffered, the pandemic has drastically increased the rate of business transformation. Business leaders have recognized their businesses’ weakest link and are striving to increase efficiency and optimize their strategy. The way a portfolio review will be conducted will change drastically; focusing on continuous review and ensuring that data is constantly gathered to make informed decisions and forecasts. Depressed asset prices and company values will drive an increase in M&A, which will help businesses expand into new areas. While focusing on the immediate implications of COVID-19 now is the number one priority, executives also have to plan for the next steps and think beyond.
Krouskos, S. (2020, March 30). How do you find clarity in the midst of the COVID-19 crisis? Retrieved November 16, 2020, from https://www.ey.com/en_ca/ccb/how-do-you-find-clarity-in-the-midst-of-covid-19-crisis