As the dust settles from the shock of the COVID-19 pandemic, it has become clear that the effects of the crisis are deeper and more wide-ranging than initially thought. Over a year on from the start of the crisis, countries are still battling to contain the spread of the virus and businesses are seeking ways to deal with the disruption.
The EY Global Capital Confidence Barometer released in February 2021 saw 92% of global respondents reporting that the pandemic had a negative impact on their profitability. To thrive in this changing landscape, companies must look beyond the immediate challenges and make strategic decisions on their long-term positioning. Such choices will determine the winners in today’s dislocated economy.
The pandemic has accelerated several key trends that were shaping up before 2020. To formulate a winning strategy, businesses need to filter out the noise generated by the chaos and focus on key trends that will have a significant impact on how business is conducted. In short, companies should seek to distinguish between enduring changes and temporary shifts in behavior.
To survive and thrive, firms will have to win against the twin disruptions of digital and ESG (environmental, social and governance). Tackling these requires large investments and a change in operating models. It will take time for financial rewards to be realized and the journey is not easy to calibrate. These trends will shift society toward completely new ways of functioning and provide companies with opportunities to reframe their future. To identify the right path to follow, the management must challenge current assumptions about customer and workforce strategies, where competition will come from and what will drive growth.
Foremost among the trends is the increasing dominance of digitalization and sustainability. Companies need to nimbly respond to these dual trends at the same time to build sustainable businesses amid the current economic dislocation.
Geopolitics, the uneven economic recovery, sector convergence and changing consumer attitudes will also affect the way businesses operate. While these trends have been playing out for a while, people tend to underestimate the pace and impact of such seismic shifts.
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Read moreThe pervasiveness of digitalization across all aspects of business shows no signs of slowing down. In particular, emerging technologies, such as artificial intelligence, data analytics and robotics, are having a transformative effect on companies of all sizes. Instead of adopting digital in silos, companies must fully embrace digital by incorporating it into the corporate strategy and culture as well as allocating ample resources to digitalize their businesses.
The EY-Parthenon Digital Investment Index in 2020 found that digital leaders — or companies that have achieved higher returns on their digital investments — have clearer strategies and better technical execution. They also reported stronger revenue growth in the past two years — almost half reported revenue growth above 6% over this period — and expect strong growth in the future.
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Read moreThe intensifying focus on ESG is another trend. Due to the pandemic, organizations now face stronger pressure from stakeholders to review their efforts to address issues like climate change, the supply chain and sustainable growth. There is now an impetus for businesses to deal with such global challenges by rebuilding better post-crisis: a process that must be underpinned by ESG principles.
Companies benefit from both doing the right thing and driving improved financial returns by prioritizing the ESG agenda. Moreover, research has shown that ESG is positively correlated with a company’s performance, financial value and attractiveness to investors.
According to a study by the University of Oxford, 88% of reviewed sources found that companies with robust ESG practices demonstrate better operational performance.1 EY analysis also found a 153% increase in global ESG fund flows in 2020 compared with the previous year.
However, selecting the right ESG area to focus on can be challenging. Companies will need to choose their ESG priorities wisely and focus on material sustainability issues.
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Read moreThe fast-evolving geopolitical landscape is also reshaping how business is done. Many countries have become more inward-looking in recent years, a trend exacerbated by the pandemic. This has impacted policymaking as governments work to protect their citizens, create jobs and address falling revenue.
Within Southeast Asia, however, the opposite trend appears to be the case, with countries like Indonesia and Vietnam actively liberalizing their laws to attract more foreign investment. At the same time, global leadership is becoming increasingly multipolar as China, the US and the European Union emerge as competing nodes of power. Against this backdrop, smaller countries will have to align their activities to deal with the changing global dynamics, while corporates should focus on building resilience into their supply chains to address the disruption caused by geopolitical shifts.
As the world adjusts for a new post-COVID-19 reality, some sectors have fared better than others in recovering from the impact of the pandemic. This uneven K-shaped recovery is pushing sectors to converge as they seek to survive the uncertainty.
The lines between sectors like telecommunications, media and health care were already blurring before the pandemic, driven by technological advancements and changing consumer behaviors. For instance, smart health solutions were created by technology and health care players to offer patients ease of care. New digital ecosystems are connecting very different stakeholders, where governments, insurers, care providers, consumers and life sciences companies are now inextricably linked.
Corporates in affected industries will need to determine the impact of sector convergence on their operating environment, find ways to overcome challenges that emerge, and position themselves to capitalize on new opportunities.
While it is imperative for corporates to consider the aforementioned key trends when developing a blueprint for growth, the right strategies will vary across industries: one size does not fit all.
However, companies from all sectors can reposition for growth amid the current economic dislocation. To do so, they need to transform existing businesses or transact through a divestment or acquisition. These proactive strategies — which are based on smart scenario-planning and a strong understanding of sector dynamics — as well as the changing market landscape will help these companies gain competitive strength and drive long-term success.
History has shown that making early and bold choices — particularly through acquisitions and divestments — can prove to be a successful strategy. Companies that moved with conviction to acquire or divest during crises had a significantly higher total shareholder return.
These firms’ cash flow may have taken an initial hit, but it greatly improved later. Adopting bold strategies during the current pandemic can result in the creation of competitive strength and long-term value that endures into the future.
The impact of the COVID-19 crisis on businesses has been greater than initially thought. To survive and achieve long-term success, companies need to address the key trends of digitalization, ESG, geopolitical shifts and sector convergence and integrate these into the growth strategy.
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