How boards can reframe post-pandemic business strategies

Three defining features of the new normal

Before the pandemic, the business landscape was already evolving as a result of various disruptive forces, such as globalization, digitalization and workforce transitions. The pandemic has further accelerated such shifts.

While many things seem different now, companies need to distinguish between enduring changes and temporary behavioral shifts. Deeper fundamental drivers of change must be at the heart of a company’s long-term strategy, regardless of how intense the urgent pressures are.

In the new normal, three key features will prevail. First, digital transformation will be needed to underpin business strategy to enable cost efficiency, create value and drive growth in a post-pandemic world. Second, there will be an increased focus on collaboration within ecosystems, including partnerships with like-minded businesses — or even competitors — to foster both enterprise and industry resilience. Third, consumer and employee relationships are already evolving, and businesses will have to adapt.

In seizing the upsides of these trends, companies will need to transform their operations and financials as they reshape their strategy.

Building financial resilience now, next and beyond

To maintain financial resilience, businesses need to increase liquidity in the short term, use virtual scenario planning to cope with downturns and upturns in the medium term, and lower the cost base over the long term.

Even without a crisis, many management teams struggle to sustain sound control over short-term cash flow and the working capital that drives it. The COVID-19 crisis, with its unique combination of challenges, makes mitigation more complex.

While government aid may help with cash management, boards should ensure that the management evaluates short-term liquidity by instilling short-term cash flow monitoring discipline that allows the prediction of pressures and intervention in a timely manner. The management should also maintain strict discipline on working capital, particularly on collecting receivables and managing inventory buildup.

At the same time, boards should assess if there are mechanisms in place to assess financial and operational risks and respond quickly. Companies will need to monitor direct cost escalations and their impact on overall product margins, as well as intervene and renegotiate where necessary. They will also need to keep an eye on pressures that may be impacting some customers, suppliers, contractors or alliance partners, which could affect their ability to pay.

It is also important to be aware of covenant breaches with banking facilities and other financial institutions relating to impairment risks in asset values, which may impact the health of the overall balance sheet. Companies should consider debt and loan covenant modifications. They may need to obtain additional financing, amend the terms of existing debt agreements or obtain waivers if they no longer satisfy debt covenants.

To secure the company’s financial position now and in the short term, boards should assess if the management is focusing on the following areas:

• Generating cash
• Preserving cash and optimizing working capital
• Stabilizing and assessing critical operations
• Renegotiating supplier contracts and credit terms
• Improving communications to gain stakeholder confidence and support credit and contract renegotiation
• Activating tax refunds and carry-forwards

Looking at the next six to 12 months and beyond, boards should determine how the COVID-19 crisis will continue to affect budgets and business plans. They can request the management to stress test financial plans for multiple scenarios and increase the frequency of budget reviews to understand the potential impact on financial performance and assess how long the impact may last.

To build competitive advantage and agility to drive growth beyond the crisis, the board and management will also need to be open to capital agenda decisions. While preserving cash is important for business continuity, it is an opportune time to consider strategic and portfolio reviews to stay “lean and mean” — and that means looking at asset disposals and divestitures or acquisitions as part of capital reallocation.

An always-on strategic and portfolio review process allows companies to identify growth and underperformance areas sooner rather than later, and better prepare to divest and reinvest should the need arise. However, the board needs to be mindful of how such capital reallocation intentions may not always be congruent with bottom-up reviews. For instance, when assessing synergies and the value of business units as stand-alone entities or potential divestitures, business unit management bias may hamper a holistic view of where divestment value can be created.

With evolving industry ecosystems, companies may also find traditional competitors or emerging players presenting themselves as suitable acquisition targets, particularly with the current environment affecting valuations that could be favorable to buyers. Such acquisitions could be the fast track to gaining new capabilities such as digital talent that might be instrumental in helping to hasten business transformation.

To support growth plans in the next six to 12 months and beyond, boards should focus on the following when assessing the organization’s financial position:

• Cost reduction opportunity assessment
• Updated risk assessment
• Tax cost recovery strategies
• Revised sourcing strategies and agreements
• Asset disposals where necessary
• Potential acquisitions to take advantage of asset prices and valuations
• New talent currently available in the market
• Long-term value cost reduction strategies, such as managed services and outsourcing

Prior to the pandemic, companies have been reimagining their ecosystems, looking at more innovative business models and collaborations to access new markets and customers — and this should remain key to their business strategy. While inorganic approaches are useful in accelerating pathways to growth, these should be considered together with other means of organic growth and new investments in digital.

Finally, clear, transparent and timely communications are necessary when reshaping the business and securing continuing support from customers, employees, suppliers, creditors and investors. As the management develops corporate strategies and plans, boards should ensure that the forecasts or ambitions are communicated to stakeholders, no matter how difficult.

Boards should consider the following questions:

• How frequently does the board oversee and challenge how the organization allocates its capital and other resources to protect corporate assets, optimize operations and deliver on long-term strategies for growth?
• What is the corporate portfolio’s weakest link in terms of liquidity vulnerabilities?
• How is the board using this crisis period to set the company up for future success? What steps can it take to redefine its strategy and business model?
• How is time allocated within strategy discussions to plan for different economic scenarios and outcomes in a range of time frames? How often are these scenarios tested?
• How is the management incorporating lessons learned from the COVID-19 crisis into scenario planning to bolster enterprise resilience?

Parts of this article first appeared in the Q1 2021 issue of the SID Directors Bulletin published by the Singapore Institute of Directors.

The author of this article is former Singapore and Brunei Managing Partner, Max Loh.