Planning for COVID-19 recovery: what’s next?

By

Steve Krouskos

EY Global Managing Partner – Business Enablement

Enabling EY to create long-term value. University of Florida alumnus. Son, husband and father of four.

6 minute read 17 Apr 2020

Our Global Capital Confidence Barometer survey indicates when executives expect the upturn to begin, and what they’re doing to prepare for it.

Our Capital Confidence Barometer survey forms part of a wider range of insights on the COVID-19 crisis.

The likelihood of a global downturn was, only a short time ago, a lively discussion among economists. It’s no longer up for debate — we’re now in the midst of an economic shock. But while executives are dealing with the immediate impact of the crisis, they still need to consider when and how the economy is likely to recover so that their organizations can be ready to rebound.

Our latest Global Capital Confidence Barometer shows that more than half (54%) of global executives expect a U-shaped recovery — a period of slower economic activity extending into 2021. Most previous pandemics have resulted in a V-shaped recovery, with activity picking up strongly once the initial wave of illness is resolved. That is the current assumption being used by just over a third of respondents in their strategic planning. This would see activity accelerating in late 2020.

Only a small minority currently expect the impact of COVID-19 to last longer, assuming an L-shape recovery. This would result in an extended period of suppressed economic activity. There would be no pick-up until 2022 at the earliest. However, with the majority of companies assuming a V- or U-shaped recovery, it is no surprise that executives are already thinking about what’s next.

Companies will restart their transformation plans after the immediate crisis is over.

Pre-crisis, transformation was high on the corporate agenda. These plans have been paused for many companies. But they will restart, possibly with added energy, once the situation stabilizes. The case for change is never stronger than when adapting to a crisis — and in many ways the unwelcome and unexpected emergence of COVID-19 will further cement transformational strategies in the boardroom.

Managing through the downturn requires operational focus to preserve revenues. Planning for recovery will see greater focus on raising profitability and attracting and retaining customers. Transformation requires a shift in strategy. But that strategy itself should always encompass an ability to transform. Agility, flexibility and resilience today are the foundations of success tomorrow.

Accelerating strategic and portfolio reviews will underpin the journey into “next.”

At some point, executives will move from crisis mode to refocusing on strategic and portfolio reviews to plan for the future. Companies have acclimatized to operate in a world that is changing at a faster pace than ever before. Once some sense of normality resumes, businesses will readdress more conventional challenges: products and services coming to market faster.

Startups challenging business models across all industries; regulatory regimes evolving and changing the rules of the game — the need for companies to reimagine, reshape and reinvent their future business fundamentals will once again be top of the agenda.

Most respondents still recognize the need for more frequent portfolio and strategic reviews.

Portfolio reviews should underpin the capital allocation process. They should also identify assets that are at risk of disruption or that face future growth challenges that may make them better off owned by another company or private equity fund.

Overall business strategy is set by the CEO and the board. This top-down view can sometimes conflict with a bottom-up review process, especially with regard to assessing synergies and the value of business units as stand-alone entities or potential divestitures. The cause is often business unit management bias, which, while understandable, does provide a barrier to the holistic view of the whole business that the review process should yield.

  • An always-on strategic and portfolio review process will allow companies to identify areas of growth at the earliest opportunity and surface areas of underperformance sooner. This will also enable them to prepare to divest and reinvest should the need arise. Divesting stressed/distressed assets is a typical trend during a crisis and recovery that we should also expect post-COVID-19.
  • Many companies have been finding that yesterday’s competitors are no longer the primary threat to their future growth plans. Obviously, nobody foresaw the current international health crisis, but understanding evolving industry ecosystems, and spotting emerging challenges earlier, will enable companies to protect current operations through investment. They will also be able to identify areas of immediate concern and to acquire potential rising champions at their inception.
  • Effective portfolio reviews always require good data. Companies need to combine their own proprietary internal data with the highest-quality external assessments of their market to surface unique insights. And they need the tools and technologies to consider future scenarios for individual business units as well as at the portfolio level.
  • With faster change, predicting the future becomes inherently more difficult. A scenario-based approach can identify potential opportunities so management can start planning for them today. With greater uncertainty about potential evolution of markets, companies need to bring all parts of their workforce into the review process. This will help companies challenge internal assumptions and explore fundamental questions about the future of the business.

Companies will move to reassess, reimagine and reinvent their business.

Looking to the post-crisis future, executives will prioritize both changes in capital allocation and measuring returns and capital efficiency more effectively. How effectively capital is allocated either accelerates or hinders business performance and determines whether companies can readjust to a new environment and free up further capital to reinvest in future growth opportunities.

Companies across sectors will continue to face disruptive factors such as industry convergence, geopolitical uncertainty, evolving regulatory regimes and technology-fueled fundamental changes to customer behavior. These factors are forcing businesses to evolve rapidly. Executives are using better data to more holistically understand all these interconnected drivers for change across their own and adjacent markets. This is enabling them to better model future changes and more quickly anticipate the moves they need to make.

Executives are also looking to recycle capital through divestitures and acquisitions based on the results of their strategic and portfolio reviews. The current market is more challenging than it was only two months ago, but it is not yet clear if markets are closed to raising financing for acquisitions. However, given the changing environment, it is better for companies to be constantly assessing their portfolio and divesting to raise capital.

Once some normality has returned, companies will also prioritize new organic growth opportunities and new investments in digital and technology. Companies have been reimagining their ecosystems for some time — looking at more innovative business models and collaborations to access new markets and customers. They will also be reshaping portfolios and reinventing their future as the world becomes increasingly dependent on virtual transactions. They are transforming to operate in a digitally enabled, hyper-speed world. COVID-19 may have significantly disrupted the journey,  but the end destination remains the same.

Summary

Our survey reveals that more than half of executives believe the downturn will be U-shaped, with a return to economic ‘normality’ in late 2021.  Significantly, though the pandemic has caused widespread disruption on an unprecedented scale, the forces of convergence, digital advances and tech-fuelled changes to consumer behavior remain the fundamental drivers of transformation for the C-suite. As such, long-term strategies and plans for portfolio review remain constant, and may even gain greater focus as the downturn brings acquisition opportunities.

About this article

By

Steve Krouskos

EY Global Managing Partner – Business Enablement

Enabling EY to create long-term value. University of Florida alumnus. Son, husband and father of four.