When you think of the future, do you mostly see opportunities or threats for your business? Or do you just envision an unformed horizon — or even multiple futures?
We live in stressful times, in which oil prices can plunge 70% in less than a year or a digitally enabled company like Airbnb or Uber can rapidly seize market share from established players.
You know the risks. Constraints that served as barriers to entry have diminished or disappeared. Increasing global connectivity, fragmenting demographics, hyper-fast financial flows and the accelerating pace of disruptive innovation mean that disturbances in one industry rapidly expand into others. And the rise of activist shareholders means companies need to be ever more mindful of shareholder scrutiny.
Stress-testing your strategic options rigorously and continually helps your company gain the flexibility to pivot as necessary to meet sudden unexpected changes — not just for one future, but for many. And how you deploy capital is a crucial part of those strategies.
Today’s needs and tomorrow’s possibilities
As part of an informed capital strategy, effective capital allocation enables companies to seize advantages and mobilize against challenges as they materialize. EY’s Capital Agenda framework — based around four key dimensions of raising, investing, optimizing and preserving capital — encourages decision-makers to ask themselves:
- Do we have the right capital structure to meet our strategic priorities?
- What is the best way for our company to grow — and is it aligned to our core business?
- What steps can we take to enhance our portfolio’s performance?
- How can we improve the performance of our assets?
Organizations need to ask themselves all of these questions and more in the context of many giant “what ifs.” They must continually analyze where and how to invest and redeploy their capital to sustain growth and enhance value. And they need to view capital allocation holistically, weighing the benefits of efficiency against the need to preserve their options.
Six techniques to help you prepare for multiple futures
For executives, this means constantly testing their own assumptions and guarding against their own biases. The stakes are now much higher, and the timeframe for decision-making more compressed.
What can you do in the present to prepare for these futures? Strive to:
- Balance current returns against future opportunities
- Be proactive about transaction planning and preparation
- Optimize the portfolio by including a capital markets perspective
- Build optionality into the valuation model
- Guard against behavioral biases
- Integrate scenario planning into decision-making