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Why capital matters - Five ways to build competitive advantage - EY - Global

“It is not the strongest of the species that survives, nor the most intelligent. It is the one that is the most adaptable to change.”
- Charles Darwin

Whatever your view on the recovery, uncertainty is the only certainty there is. Those who have the organizational flexibility to adapt and respond as the market changes will be able to exploit opportunities — those who don’t will miss them and weaken their competitive position.

The “new normal” of continuing uncertainty, weaker demand, margin erosion, scarcity of capital and increased risk aversion in strategic decision-making has narrowed the margins for error in capital allocation. Many companies feel inclined to hoard cash and be reactive, but winning companies will avoid the temptation for inertia, and use their capital to seize opportunities.

Findings from our inaugural Capital confidence barometer reveal a resounding sense that the business landscape has changed in fundamental ways that create both risk and opportunity. It also reveals an emerging polarization of businesses into those gearing up to capitalize on acquisition growth opportunities and those that feel constrained, stifled and unprepared in their ability to do so.

The barometer indicates that the next 12 months will see the rise of a few winners in each industry — those who adapt their capital agenda to better manage uncertainty and exploit opportunity.

Leading businesses are adopting a range of disciplines in five key areas to build competitive advantage:

  • Preserving capital - Reshaping the operational and capital base to reflect the risks and realities of a prolonged downturn
  • Optimizing capital - Driving cash and working capital, and managing the portfolio of core and non-core assets to accelerate return on capital
  • Raising capital - Assessing future capital requirements and determining how funding sources can be diversified to increase optionality.
  • Investing capital - Strengthening investment appraisal and execution methods so that opportunities can be realized while managing increased risk
  • Enabling the capital agenda - Upgrading planning, forecasting, performance reporting and governance processes to sharpen decision-making speed and effectiveness

We believe those who develop their capabilities to master this agenda will build competitive advantage by:

  • Increasing and maintaining investor confidence
  • Winning the competition for scarce capital
  • Anticipating and adapting to market conditions as they change
  • Seizing acquisition and other growth opportunities that others are unable to

Those who fail to implement a more rigorous approach increase their vulnerability as others in their industry move ahead.

This is not an agenda that can wait.

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