Are you ready for the futures?
Stress-testing today's capital agenda with tomorrow's scenarios
Getting from there to here
Stress-testing today’s capital agenda with tomorrow’s scenarios
“This is about imagining the future. What are your hypotheses about the future? And given those hypotheses, what are the opportunities you can create?” - Vijay Govindarajan, Coxe Distinguished Professor at Dartmouth College's Tuck School of Business and Marvin Bower Fellow at Harvard Business School.
No matter how much they try, corporate executives can’t help but remain all too aware of how vulnerable their companies have become. Brand-name disruptors ranging from Airbnb to Netflix to Uber are constant reminders of how digitally-enabled upstarts can win over users, deftly dethroning industry leaders and leaving them foraging for market share.
Constraints that formerly served as barriers to entry have diminished or disappeared altogether. Increasing global connectivity, fragmenting demographics, hyper-fast financial flows and the accelerating pace of disruptive innovation mean that disturbances shaking one part of the economy—consider, for example, broadband’s entry into the music industry—set off rumbles in others almost immediately. And the rise of activist shareholders means companies need to be ever more mindful of shareholder scrutiny.
In this volatile environment, where the price of a barrel of oil can plummet by 70% in less than a year, or a new competitor can reshape a market seemingly overnight, companies need to stress-test their strategic options rigorously and continually—especially as they relate to deploying capital.
Managers need to build in the flexibility to pivot as necessary to meet sudden unexpected changes. In effect, they need to prepare not just for one future, but for many.
The question is: how?
To prepare for multiple futures, companies should do the following:
- 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
- Don’t overlook behavioral biases
- Integrate scenario planning into their decision-making
Supporting corporate strategy via the Capital Agenda
Effective capital allocation as part of an informed capital strategy enables companies to seize advantages and mobilize against challenges. As Govindarajan says, when it comes to strategic planning “resource allocation is where the rubber meets the road.”
EY’s Capital Agenda framework, based around four key dimensions of raising, investing, optimizing and preserving capital, encourages decision-makers to ask themselves questions such as:
- 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?
To prepare for a future marked by rapid business model innovation, bold thinking and new alliances, organizations need to ask themselves all of these questions and more in the context of many giant “what ifs.” It’s not enough to rely on a single strategic plan; executives should anticipate more than one future and pivot as necessary to adapt and thrive.
Addressing today’s needs and preparing for tomorrow’s futures
In an environment characterized by uncertainty and rapid change, companies need to make stress-testing of their capital agenda a routine part of strategic planning. They must continually analyze where and how to invest and redeploy their capital in order to sustain growth and enhance value. They need to view capital allocation holistically, and to weigh the benefits of efficiency against the need to preserve their options.
For executives, this means constantly testing their own assumptions and guarding against their own biases. New technologies and competitors have always had the power to reshape industries, but with the pace of change today, most companies do not have the luxury of taking time to adjust to the idea of, for example, letting go of a legacy business.
The stakes are now much higher and the timeframe for decision-making more compressed. Optimizing the capital agenda while stress-testing against multiple possible futures offers a way to address today’s needs while preparing for tomorrow’s futures—but only if companies are prepared to imagine them.
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