6 minute read 19 Jun 2020
An investor reacts as he monitors the share index in a stock market gallery

How German executives can reshape results in a post-pandemic future

By

Milan Knarse

EY GSA Strategy and Transactions Partner

Steady in mission-critical situations, especially when facing earnings and profitability challenges.

6 minute read 19 Jun 2020

Strategic and portfolio reviews, capital allocation and M&A will help German companies improve agility and enterprise resiliency. 

The pandemic has created an air of profound uncertainty in today’s business environment. As restrictions ease and Germany emerges from its hibernation, there is more clarity than there was three or four weeks ago — at least in the short term. However, with an ongoing threat of the COVID-19 pandemic, it is hard to predict how the post-pandemic world will unfold longer-term. Many German organizations are refusing to give an outlook on their fiscal year because of the uncertainty, how deep the impact will be or how long it will last. These are the conditions under which German companies must manage.

Given the situation, German organizations need to consider how the crisis is affecting their products and services. How, for example, are supply disruptions impacting production capabilities? In the recent EY Global Capital Confidence Barometer, which surveyed approximately 2,900 global respondents, executives say they are re-evaluating their operating models. More than half say they are taking steps to change their supply chain; more than one-third say they will be accelerating their speed to automation and looking at different ways of managing their workforce. Slightly less than one-third will be looking to change their digital transformation journeys. Success in the future will largely depend on making the right product portfolio decisions now.

Further, 64% of global survey respondents say that there is a difference in their current portfolio review strategy process compared with three years ago. Executives say one of the biggest differences lies in the increasing pace of change, which 72% say is propelling more frequent strategic reviews; 75% say they are engaging in a more continual rebalancing of their business portfolios. 

Rebalancing business portfolios

75%

of global respondents say they are engaging in a more continual rebalancing of their business portfolios.

These reviews become even more important in a crisis as they help companies to allocate their resources. Companies need to be able to allocate capital to the right products in the right markets both for the short term and the long term. In this climate, this may mean radical decision-making for some German companies.

Data is also impacting portfolio and strategic review processes, with 81% using more customer data and 72% using more and better market data to anticipate future trends. Many companies have been finding that yesterday’s competitors are no longer the primary threat to their future growth plans. Obviously, nobody foresaw the pandemic, but understanding evolving industry ecosystems, and spotting emerging challenges earlier, will enable companies to protect current operations.

Of course, the data will be more valuable if companies have a level of digital maturity. In our survey, 72% of executives say that they are undertaking a significant business and digital transformation. During the pandemic, some put these programs on hold. However, many realized they were ill-prepared for the crisis and saw an imperative to accelerate their transformation journeys as they prepare for recovery. Where digitalization may have been a “can” before the pandemic, it is now a “must.”

Now is the time to review portfolios and business operations

With the full force of the crisis beginning to subside — for now — and with the basic foundations laid to secure the health and safety of their people and shore up liquidity, companies are beginning to turn their attention to what a post-pandemic environment may look like. They will have to decide whether strategies and programs that were postponed should be restarted, accelerated or discarded.

For some companies, it may mean divesting of underperforming assets to free up capital. For others, it may mean seizing the opportunities that can emerge from a crisis. More than one-quarter (26%) of German executives say they have plans to expand their market share through M&A, while 40% are expecting that shrinking valuations will make potential acquisition targets more attractive. Further, 76% say they expect an increase in cross-border dealmaking in the next 12 months.

M&A strategy

40%

of German respondents say they expect shrinking valuations will make potential acquisition targets more attractive.

Meanwhile, 39% of executives say they will be taking steps to better manage their workforce. More than ever, they are pressured to accelerate digital transformation and adopt a more agile working model and flexible employment.  Some companies may also consider reducing the size of their workforce to be able to better respond to accelerated market change — decisions that they found too hard to make in a positive-growth economy. Others may engage e-learning and other technologies to upskill their workforce and help them in the transition to a new normal, or develop new strategies and incentives to attract talent with the right skills for what comes next.

Next, focus on building resilience in the supply chain and expect a new kind of customer

One of the biggest shocks for companies was the level of supply chain disruption during the crisis. German companies will be taking steps to build resilience into their supply chains. For some, this may mean establishing or strengthening a local or regional supplier base. For others, it may mean moving from a linear to a networked supply chain ecosystem. For all, there will be a much greater emphasis on conducting thorough risk assessments and finding suppliers that are resilient enough to withstand the next crisis.

A reimagined supply chain will be imperative in creating and delivering engaging customer experiences. Companies will also need to increase their digital customer access and optimize data analytics across data sources in preparation for a new kind of customer with higher expectations, particularly of their e-commerce and online experiences. Incompatible legacy systems that don’t talk to each other will be costly weaknesses, which the resilient organization cannot afford. Analyzing customer behavior will provide opportunities for rethinking product and service portfolios.

Looking beyond, German companies are well-positioned to reshape results

During the crisis, the German government provided a robust stimulus program to re-engage the economy. As government support measures taper off, companies will need to monitor capital needs conservatively as the uncertain environment continues.

Despite these interventions, looking beyond we expect there will be winners and losers from this crisis. We believe that many German companies will be well-positioned to navigate out of this economic crisis. German companies were better prepared, are fairly well capitalized and have strong product offerings and robust operating models.

That said, the road for some companies in the beyond will be a long one, particularly for those in hard-hit sectors such as automotive, airlines and other travel- and hospitality-related industries. Moreover, all companies need to be prepared for the possibility of a second or third wave of the pandemic virus or similar events in the future.

The future may be unknown, but companies that have confidence in their ability to strengthen their agility and enterprise resiliency will be able to reshape results for long-term value creation and stimulate local and global economic growth.

3 practical conclusions German companies should consider when developing a recovery road map

  1. Operate in a business-as-unusual environment. Companies need to expect future crises or unpredictable events and plan accordingly. Scenario-planning that incorporates lessons learned from the COVID-19 crisis and previous crises will help German companies build business resilience.
  2. Know your portfolio’s weakest link. For many businesses, profit margins and revenue-generating capabilities were stressed before the pandemic crisis. To withstand shocks and create optionality, German executives need to examine their portfolios for liquidity vulnerabilities.
  3. Look beyond the immediate crisis to see the next steps. German executives need to be bold in their strategic decision-making to take advantage of new market dynamics. More frequent strategy and portfolio reviews are a mindset as much as an event. 

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By

Milan Knarse

EY GSA Strategy and Transactions Partner

Steady in mission-critical situations, especially when facing earnings and profitability challenges.