6 minute read 2 Jun 2020
EY RYF parthenon

Should you be reframing your future by reframing your strategy?

Authors

Vikram Chakravarty

EY Global Strategy Connected Capital Solutions Leader; EY Asean Strategy and Transactions Leader

Experienced strategy advisor. Thought leader in Asia business. Wine connoisseur, avid squash player, ardent cricket fan and doting father.

Jim Hsu

Global EY-Parthenon Strategy Leader

Strategy advisor providing insights and clarity into complex challenges. I believe in the power of market forces and data-driven analyses that challenge conventional thinking. Overly proud parent.

Mitch Berlin

Americas EY-Parthenon Leader

Dedicated to finding and capturing the most value from every transaction. Passionate advocate for diversity and inclusiveness as the cornerstones of successful teams and businesses.

Falco Weidemeyer

EMEIA EY-Parthenon Leader; EMEIA Reshaping Results Leader and Member of the Global Turnaround and Restructuring Strategy Leadership Team

Seasoned, internationally trained performance professional. CRO and turnaround manager. Experienced in consulting and industry functions. Passionate for outdoors.

Ignatius Tong

EY-Parthenon Asia-Pacific Strategy Leader

Leader dedicated to strategy and operations. Believes delivering more valuable execution will create more potential. Good father, good friend.

Barry Perkins

EY Global Strategy and Transactions Lead Analyst

Dedicated corporate finance researcher. Interested in all areas of modern life, including government, capital markets, business, social affairs, arts, sciences and sport. History buff.

Byron Pirola

Partner, EY Port Jackson Partners, Strategy and Transactions, Ernst & Young LLP

Experienced strategy consultant. Served boards and chief executives across a range of industries globally. Committed husband and father of five.

Local contact

EY MENA Strategy and Transactions Leader

Focus areas: helping clients with their capital agenda, transaction diligence, data analytics, private equity. Passionate about triathlons.

6 minute read 2 Jun 2020

Evidence suggests that sitting tight in the eye of the COVID-19 economic storm may not be the best route out.

Understandably, many companies are focused on what’s happening now and the immediate next — pressing critical concerns such as workforce welfare, crisis management, business process continuity and cash preservation.

We at EY recommend that companies not only address those pressing concerns, but also make crucial decisions regarding their positioning beyond the crisis. Those strategic choices will determine who emerges stronger from a period in which we can expect significant churn in company positioning.

Learning from the past to reshape your future — transactions

Early and bold choices on portfolio-transforming investments, particularly acquisitions and divestments, proved decisive in the wake of the Global Financial Crisis (GFC).

Those were brave choices in 2008–2010 given they often lowered near-term cash flows at a time when preserving capital was high on boardroom agendas. However, there is compelling evidence that these proactive strategies paid off. Similar bold strategies employed in the midst of COVID-19 could result in the creation of competitive strength and long-term value.1

Transactors (acquirers and divestors) had a 25% increase in total shareholder return (TSR) over non-transactors.


Learning from the past to reshape your future — transformation

Similarly, transformational investment strategies in the same period — driving capital formation and embracing digital technology — proved decisive.

Across sectors, those who made the highest investments (top quartile) had returns in the multiples (2–3x) over the lowest quartile. In the industrials sector, companies in the top quartile of capital expenditure as a percentage of sale between 2008 and 2012 more than doubled the return to shareholders compared with companies in the bottom quartile.

One global industrial company made significant investments in its production infrastructure and IT capabilities to build a leading edge “as-a-service” post-production offering for customers. This created a new and far more stable source of revenue in an industry that had historically been reliant on significant one-off sales, such as turbines or generators.


In the technology sector, top quartile investors in research and development delivered four times the return to shareholders than companies in the bottom quintile during the same period.

The tech industry reaped the benefits of increased R&D. Many of the investments made in that early recovery period enabled technology companies to increasingly move across traditional sector boundaries, most prominently in the retail and entertainment sectors.


In short, actions you take today to address what comes beyond the pandemic could reframe the future of your whole organization. The vital first step on this transformation is clearly understanding the recovery dynamics of your sector and your company’s competitive position.

Reshaping your future portfolio — before the future reshapes it for you

When it comes to COVID-19, we are all in the same storm, but we’re not all in the same boat. All sectors are affected, but the impact varies considerably by industry — and optimal strategies vary according to the sector and the company’s position within the industry.

For the stronger sectors we at EY are seeing an investment push to expand while in the weakest sectors we expect significant capacity to be taken out and only a few players to survive. In some cases, the crisis has accelerated existing megatrends and companies will need to further embrace digital transformation to future-proof their business models.

Industry position Industry Examples of strategies
Strong — industry was strong/gaining going into the COVID-19 outbreak and may emerge unchanged/stronger Consumer tech
Pharma
Need for further investment both to cope with increased demand during the crisis, and to strengthen position post-crisis
Transformed — industry affected by demand drop and will come out with a greater need for a changed business/operating model Automotive
Commercial real estate
FMCG food
Last mile logistics
Need for business transformation, e.g., automotive companies are exploring robotics and real estate developers are looking into transformative acquisitions and digitization initiatives
Reshaped — already facing structural challenges exacerbated by the crisis Oil and gas
Physical retail
Need for divestitures and repositioning, e.g., oil and gas players diversifying their risk with new revenue streams; traditional retailers need to strongly leverage online channels
Unknown — industry’s future is uncertain and the demand recovery is long-term Travel
Hospitality
Need for longer-term resilience, e.g., hospitality and travel players need to focus on shoring up and strengthening financials

Repositioning is possible: sector and company rotation

1. Best placed
  • Resilient sector and strong balance sheet
  • Able to invest through the crisis
  • High chance of coming out stronger
2. Unique opportunity
  • Strong balance sheet — allows for unique opportunity to leap ahead of competitors by making timely investments and acquisitions
  • Bold strategy could be enabled by strong management
3. Fallen angels
  • Strong player but financially exposed
  • Could be short-term blip, to be determined by length of downturn
  • Could fall prey to competitor or other acquirer
4. Last chance saloon
  • Weakened sector and balance sheets will hasten decline
  • Valuable IP or talent could be available to acquire 

Transformation realized? Strategies to reshape, reimagine and reinvent a better future

As a result of this crisis we know some companies will fail, others will merge or be acquired. Some of these shifts were inevitable but have been hastened by the pandemic. This rapidly changing environment offers what could be once-in-a-lifetime opportunities for CEOs — and smart, well-informed strategic choices will likely determine whether their companies will shape the future or be shaped by it.

Active steps now can secure strong positions beyond the crisis:

  1. Deploy dynamic scenario planning. Take a top-down approach, modeling the pandemic, assessing its economic impact, and creating working scenarios specific to the industry and current market position. While rigorous and exacting, this process should be flexible enough for changing conditions and will help companies understand the range of potential outcomes. To emerge stronger in the future, organizations must learn to navigate the dilemma of balancing today’s imperative actions while planning for an uncertain tomorrow. 
  2. Build operational resilience. In this crisis, strategic and operational agility is a fundamental capability that companies need to build — and quickly. There is a possibility of a second or third wave of the pandemic. For a company’s strategy to be realized it needs to be flexible enough to pivot at speed.
  3. Understand the megatrends. While everything seems dislocated and different now, companies should distinguish between enduring changes versus temporary shifts in behavior. These deeper fundamental drivers of change always remain. Planning around those needs to be at the heart of a company’s long-term value strategy regardless how fierce the urgent pressures are.
  4. Be open to capital agenda decisions. While preserving cash is important for business continuity, for some it’s an opportune time to make critical investments or take decisive action to buy or sell assets. Any or all may accelerate their transformation journey.

Positioning for now, next and beyond

Major companies with whom we at EY are working are considering a two-pronged path of transformation and transactions — for example, M&A and divestments are in the strategic toolbox of many executives. These proactive strategies based on smart scenario planning and strong understanding of sector dynamics and the changing market landscape should enable future competitive strength.

From sector to sector, leaders should ask how they will better position their companies to emerge stronger beyond the crisis. Would an acquisition future-proof growth? Can I transform my portfolio through divestments? Where do I allocate my investment capital?

Securing long-term value means finding the right answers to tough questions. Realizing strategies will vary across industries — one size doesn’t fit all when dealing with this heightened uncertainty.

But one thing is certain – waiting it out is not the best option.

  • Show article references#Hide article references

    1. 354 companies with a market capitalization greater than US$1b located in Europe and North America from the life sciences, consumer and industrials sectors. Sources: Tze-Liang Chiam et al., “How portfolio rebalancing in a downturn helps companies recover stronger,” EY 2020 Global Corporate Divestment Study, https://www.ey.com/en_gl/divestment-study/how-portfolio-rebalancing-in-a-downturn-helps-companies-recover-stronger, 12 May 2020; EY analysis of S&P Capital IQ.
    2. Companies headquartered in North America, Europe and Oceania with a market capitalization of more than US$1b at the end of year 2007, excluding those who did not report CAPEX/R&D separately in their financial statements during 2008-2012. Ranking based on the CAPEX/R&D as a percentage of sales from 2008-2012. Company TSR adjusted for currency and benchmarked against global sector indices to calculate excess returns for 2009-2018.

Summary

We’re in the same storm, but are we all in the same boat? In any crisis the natural reaction is to batten down the hatches and wait it out. But evidence suggests sitting tight in the eye of an economic COVID-19 storm might not be the best route out of it.

About this article

Authors

Vikram Chakravarty

EY Global Strategy Connected Capital Solutions Leader; EY Asean Strategy and Transactions Leader

Experienced strategy advisor. Thought leader in Asia business. Wine connoisseur, avid squash player, ardent cricket fan and doting father.

Jim Hsu

Global EY-Parthenon Strategy Leader

Strategy advisor providing insights and clarity into complex challenges. I believe in the power of market forces and data-driven analyses that challenge conventional thinking. Overly proud parent.

Mitch Berlin

Americas EY-Parthenon Leader

Dedicated to finding and capturing the most value from every transaction. Passionate advocate for diversity and inclusiveness as the cornerstones of successful teams and businesses.

Falco Weidemeyer

EMEIA EY-Parthenon Leader; EMEIA Reshaping Results Leader and Member of the Global Turnaround and Restructuring Strategy Leadership Team

Seasoned, internationally trained performance professional. CRO and turnaround manager. Experienced in consulting and industry functions. Passionate for outdoors.

Ignatius Tong

EY-Parthenon Asia-Pacific Strategy Leader

Leader dedicated to strategy and operations. Believes delivering more valuable execution will create more potential. Good father, good friend.

Barry Perkins

EY Global Strategy and Transactions Lead Analyst

Dedicated corporate finance researcher. Interested in all areas of modern life, including government, capital markets, business, social affairs, arts, sciences and sport. History buff.

Byron Pirola

Partner, EY Port Jackson Partners, Strategy and Transactions, Ernst & Young LLP

Experienced strategy consultant. Served boards and chief executives across a range of industries globally. Committed husband and father of five.

Local contact

EY MENA Strategy and Transactions Leader

Focus areas: helping clients with their capital agenda, transaction diligence, data analytics, private equity. Passionate about triathlons.