14 minute read 18 Dec 2020
Ariel view of plowing fields

How to reshape your business now to build a resilient future

Authors
Jon Morris

EY-Parthenon UK&I Reshaping Results Leader and EMEIA Working Capital Advisory Services Leader

Global liquidity improvement leader with a focus on organization and behavioral change. Passionate coach and speaker. Provocative and creative. Father and explorer.

Kirsten Tompkins

UK&I Market Analyst and Commentator, Turnaround and Restructuring Strategy, Ernst & Young LLP

Market analyst and blogger for Turnaround and Restructuring. Passionate about the role of sport to break down barriers and improve lives. Helps to run a local cricket club.

14 minute read 18 Dec 2020

As businesses look beyond the COVID-19 crisis and reflect on its impact, they need to act now to reshape for the future. 

There isn’t an easy way to sum up 2020. The impact of the pandemic is so profound, but also so varied, with consequences that will last through 2021 and beyond.

We could sum up 2020 by saying that we were in the same storm, but not the same boat. Some companies started the year well-equipped to sail through turbulent seas or operated in markets that offered them safer harbour. Others went into the storm in weaker vessels or faced the worst of the headwinds.

But, while companies haven’t shared a universal experience, many share the need to reshape their business to meet fundamental changes in society, in the economy, and in government policy that we saw accelerate or emerge for the first time in 2020. Global changes played out at a national and regional level, as borders closed, and UK companies faced localised disruption to supply and demand.

We start 2021 with hopes of a return to ‘normal’, but this won’t be the same as the ‘normal’ we left behind at the start of 2020. Our world has been reshaped by COVID-19 and its interaction with prevailing forces that were already propelling companies towards re-imagining their businesses.

This process is ongoing, but we have picked the five most compelling forces that we think companies need to respond to today. Forces that companies cannot afford to ignore if they want their business to thrive in 2021 and beyond. 

Kid painting rainbow during COVID-19 pandemic
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1

Chapter

Purpose

Doing well by doing good

2020 reshaped our priorities. A global humanitarian crisis with such a vast impact has inevitably given us all cause to rethink what is important in our own lives and in society.

This reassessment has shone a much brighter spotlight on company values and behaviour. Focus on corporate purpose was increasing before the pandemic, but COVID-19 has created higher expectations of social responsibility with businesses rising to the challenge. It has put companies on the front line of protecting public health, from the protection of their workforce and customers, to repurposing production lines and vaccine development.

This renewed focus on corporate purpose will not dim when the pandemic ends. COVID-19 has solidified companies’ sense of purpose and underlined the importance of trust between society and corporations. Customers and employees — and therefore capital and value — are flowing towards organisations that can build on that trust and prove their long-term value to society. Surveys consistently show asset managers pivoting towards Environmental, Social, and Corporate Governance (ESG) strategies and ESG funds outperforming the wider market.

‘Doing well by doing good’ has been a consistent theme in our EY UK Leaders’ Perspective series, where CEOs have discussed the importance of taking a balanced, stakeholder-led approach. They recognise the absolute and immediate necessity of having a comprehensive, company-wide commitment to purpose and long-term goals that is based on a solid foundation of stakeholder engagement and dialogue. They understand the urgency of acting now to build long-term value. Rethinking values also requires companies to rethink how they measure and talk about success. EY, through the Embankment Project for Inclusive Capitalism (EPIC) is developing frameworks that address the challenge of measuring and articulating long-term value for stakeholders and society. 

91% of investors said that non-financial performance played a pivotal role in investment decision-making.
CCaSS survey
Man flying drone over field
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2

Chapter

Collaboration

Better together

2020 reshaped how companies build competitive advantage. The idea that a company is only as strong as its weakest supply chain link isn’t new. But COVID-19 and Brexit have brought this risk, and the benefits of collaborating across industry ecosystems, into much sharper focus. 

Natural disasters and geopolitical shocks have tested supply chain resilience in the past, but not on this scale. In response to unparalleled disruption to production and supply lines, major companies have rapidly stepped up existing schemes to monitor and support stressed suppliers, with increasing focus on faster payments and even direct intervention to promote consolidation. These extraordinary stresses have also inspired new sector-wide initiatives, such as the ‘Safe Harbour’ program from The SMMT (The Society of Motor Manufacturers and Traders), which brings together suppliers with customers and stakeholders to address challenges and find solutions.

2020 also brought unparalleled collaboration within industry ecosystems. Competitors have put differences aside to overcome shortages, fix supply chain disruptions, issue mutual messages of support, and develop vaccines in record time frames, while offering doses at cost price. Some of these responses are pragmatic measures that will expire when the pandemic ends for competitive and regulatory reasons. But an increasing openness to collaboration should continue because it taps into a need that pre-dates and will outlive the virus.

In a world where end-products are growing more complicated and markets increasingly volatile, resource-sharing models have the potential to improve enterprise resilience and reduce risk. Market dislocation has exposed the limitations of rigid, linear supply chains  and the resilience of agile, networked ecosystems in which all parties work collaboratively. COVID-19, Brexit and wider geopolitical tensions have exposed to the vulnerabilities of cross-border supply chains, encouraging greater consolidation and localisation. Companies need to build deeper knowledge and relationships throughout their supply chain, and take a proactive approach to find and address vulnerabilities and weakness. 

98% of UK manufacturers plan to remodel their supply chains.
EY Attractiveness Survey, November 2020
Woman sitting at her desk on a video call
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3

Chapter

Engagement

I can’t hear you, are you on mute?

2020 reshaped how we connect. From meeting in person, to meeting online. From working in the office, to working from home. From nights out to every night in. The way that we relate to each other, companies and government has changed. Transformation that might have happened over years occurred in a matter of weeks, with profound impacts that will last beyond the return to normal day-to-day contact.

The challenge of transforming a workforce from office to home-based didn’t end with the physical movement of people and equipment. Supporting employees and sustaining a sense of belonging has arguably been a bigger test.  Workforce engagement takes more deliberate design, practice, and measurement when we are not physically together. It calls for more deliberate action and for a mindset that keeps people and culture front and centre, with employers becoming more engaged and taking more responsibility for the safety and the mental and physical health of their employees.

Equally the change in mindset needed to engage with customers online goes beyond technological infrastructure. Deploying enough capacity to continue serving consumers online was an immense challenge for retailers; but the ability to deliver was just one part of the equation. Retailers also needed to rapidly understand the impact of the pandemic on consumers lifestyles and reassess how often and how they engaged.

UK consumers were amongst the most comfortable in the world shopping online before the pandemic. Nevertheless, EY’s Future Consumer Index shows that most UK consumers shop online in categories where they have the highest service expectations and the greatest desire to engage with the products. Companies that can replicate the in-store benefits of physical engagement with both products and staff - and use the insight from increased digital interaction - will have a considerable advantage.

We will return to the office and the high street, but not in the same frequency. We wouldn’t have planned it this way, but we can take many positives from the adaptations we made during lockdown. Finding new pathways to connect, new ways of working and new ways to increased understanding can help us build a better working world.

Delivery man hands over bag from grocery shop
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4

Chapter

Adaptability

Survival of the fastest, not just the fittest

2020 reshaped companies’ strengths and weaknesses. Rapid changes in government policy and consumer behaviour changed industry dynamics almost overnight. City centre locations were suddenly less active than local high streets.  Big wasn’t better when assets were in lockdown.

There is a clear link between fit and fast. Companies with lean cost structures, like low-cost airlines, were able to recover quicker because their break-even cost per flight is lower. The ability to transform at pace and respond to rapid change in their markets, from repurposing production lines to switching to delivery models, created a significant competitive advantage and market share gains that companies will carry into the recovery.

Many companies need to take more radical action to reshape their business to a reshaped market. It can be hard for a board to change their mindset and take radical action. But the dangers of not doing so are clear in EY’s Profit Warning analysis. Our data shows that a fifth of UK companies who issue three or more profit warnings within 12 months will either undergo a debt restructuring, a distressed sale, or an insolvency process within a year of their third warning. A worrying figure when over 10% of UK quoted companies – and one in six UK-based FTSE 350 companies – warned twice or more in 2020.

The pandemic was an exceptional event, but it’s not an isolated challenge. The outbreak has served as a reminder that agile businesses will be in the best position to survive short-term shocks and thrive during extended periods of uncertainty. Agility isn’t just a strength – it’s a necessity. There has never been a greater urgency for companies to build resilience to shocks to meet the growing challenges of uncertainty and rapid change.

To do this, they need the information and ability to take and enact decisions at speed. Many companies will need to rethink their operating models and cost bases and take tough decisions around where and how to redeploy their capital. The increase in UK M&A activity in the second half of 2020 underlines how many companies are adapting their business to new realities.

50% of the UK C-Suite believe they will need to adjust their medium and long-term strategies substantially or drastically.
EY C-suite survey
Man working on his laptop late at night
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5

Chapter

Intervention

What's next for the policy driven economy

2020 reshaped the role of government. The UK economy was increasingly policy driven before the pandemic, but COVID-19 radically changed our expectations of government intervention.

The UK government has delivered an extraordinary level of fiscal support and policy intervention to mitigate the impact of the pandemic. This exceptional action significantly amplified government influence on growth and corporate outlooks, particularly in the context of lockdowns and a sharp economic slowdown. In 2020, Government support was the difference between survival and failure for many companies.

As the economy opens and grows, this direct influence will start to wane in some areas, but the UK will remain a policy-driven economy.  The inherent tensions between the need to stimulate growth and protect jobs and the government’s stated priority to balance the deficit will create a series of policy cliff edges and increasingly differentiated levels of sector support, as the government prioritises spending. A broader policy agenda will drive these priorities, including Brexit as part of a broader shift in trade policy; the ‘levelling up’ of regional disparities; decarbonisation.  Meanwhile, geopolitical tensions are challenging to long-standing relationships and the integration of global markets. An EY survey shows that the top three geopolitical issues for global executives are the changing role of the US in the international system, European Union stability, and US-China relations.

Boards need to urgently map how these policy drivers feed into live decisions – be they strategic, commercial, or operational – and take pre-emptive action where possible to protect and create value. They need an agile cost base to accommodate a ‘stop-start’ and regional approach to social restrictions, that will exist until we see a significant vaccine roll-out. They need to consider the potential impact on their own companies of upcoming cliff-edges in government support, including the impact on employment and consumer demand and understand which companies, sectors and regions governments will prioritise for support.

As economies and societies reshape, so must business whilst keeping a clear understanding of their core purpose and their value to society. We are living through a transformative age where we can take little for granted and companies need to be agile and resilient enough to deal with what’s in front of them right now and adapt to whatever comes next.

The UK government has delivered £65.5b to businesses through the government’s Covid-19 support schemes.

Summary

Our world has been reshaped by COVID-19 and its interaction with prevailing forces that were already propelling companies towards re-imagining their businesses.

As we start 2021 with hopes of a return to ‘normal’ we have picked the five most compelling forces that we think companies need to respond to today for a more resilient future.

About this article

Authors
Jon Morris

EY-Parthenon UK&I Reshaping Results Leader and EMEIA Working Capital Advisory Services Leader

Global liquidity improvement leader with a focus on organization and behavioral change. Passionate coach and speaker. Provocative and creative. Father and explorer.

Kirsten Tompkins

UK&I Market Analyst and Commentator, Turnaround and Restructuring Strategy, Ernst & Young LLP

Market analyst and blogger for Turnaround and Restructuring. Passionate about the role of sport to break down barriers and improve lives. Helps to run a local cricket club.