The post-COVID economy brings game-changing opportunities for companies prepared to make big moves.
New Zealand entered full lock-down on 25th March, closing non-essential businesses and changing the nation’s economy forever. A new economic order was already emerging before COVID-19 – led by companies that have broken the cost-value trade-off with new technology and business models.
The pandemic had accelerated the shift towards this new economy and highlighted the ugly truth about most businesses: 80% will barely (or never) return their cost of capital. More than 80% of profit in most industries will accrue to just 20% of companies in the industry, and in normal conditions, 50% of new capital is allocated to those same companies. While the pathway out of lockdown is unknown, one thing can be predicted with a high level of certainty – there are going to be big winners and big losers in the post-COVID-19 economy.
Surviving lock-down will be largely determined by the company’s endowments. Survival through lockdown and beyond will come to companies with higher sales, lower debt levels and labour rather than capital intensive, are more likely to navigate their way through lock-down on the back of the governments wage subsidies, and the goodwill of employees who agreed to temporary reductions in salaries.
Companies who have historically nurtured authentic relationships with their investors, staff, customers and suppliers are in a strong position to call in favours by offering trust as security. Companies who have in the past leveraged their position over these stakeholders for their own gain won’t be able to rely on the same stakeholder concessions.
Making it through lock-down however, does not guarantee post-COVID survival. The lock-down has irreversibly changed how we manage, power and move economic life. It would be an error of judgement to assume your market share, industry consumer trends or economic conditions are unchanged or likely to recover in the short to medium term. None will be true. So, what should businesses be doing right now?
Businesses should be analysing, understanding and planning the combination of strategic moves they will execute as they exit lock-down and in the year that follows. These moves fall into five key categories:
Mergers and acquisitions: There will be unprecedented merger and acquisition opportunities in most sectors. Businesses who organise now to execute a sequence of targeted acquisitions over the coming 12 to 36 months should be able to substantially improve their relative competitive position. Beginners beware. Businesses without a methodically structured and executed M&A program run the risk of making costly mistakes.
Resource reallocation: Most businesses will need to undertake aggressive resource reallocation programs, shifting human and financial resources from unprofitable product lines or channels to more profitable, or new markets. There will be a temptation to persevere with underperforming assets/products/channels in the post-COVID-19 economy, but economies and consumer behaviour have changed. Businesses who reallocate resources with vigour and commitment will be rewarded.
Capital expenditure: Though it may seem counter-intuitive, for some businesses, now is the time to substantially lift capital expenditure. Research shows upper quintile companies spend 1.7X their industry norm on capital expenditure. Interest rates remain low, suppliers will be offering attractive payment terms and competitors may be in the unenviable position of not being able to respond.
Productivity improvement: The post-COVID-19 recession will require all businesses to do more with less. To be a top quintile performer, companies need to improve their productivity by 30% more than 80% of other businesses in their industry. Tinkering at the edges is not going to be enough for most businesses post-COVID-19. They will need to pull this lever harder than they expect to remain competitive.
Differentiation: The economic fall-out from the pandemic will be punitive for incumbent businesses plugged into old business models. It will favour those plugged into the new economic infrastructure and business models. If there is a business model innovation that can create price or margin advantage, now is the time for companies to expedite execution.
Research shows companies must execute a combination of two or three of these moves above to dramatically improve performance. The post-COVID-19 economy won’t be for the faint hearted. Companies will need to orchestrate and execute moves with precision and confidence to increases their probability of survival and success through what is set to be a difficult economic period.
The challenge for most boards, owners and management teams as they consider which combination of moves will position them best for the future, is information. Small and mid-market businesses often rely heavily on internal data and opinions which leads to bias. These are unprecedented events. It is critical businesses now inform their views with external data and leverage the views of experts to understand and solve their business problems. It is critical management know as much as they can know about the situation as it evolves, so they can anticipate the results of their actions.
Companies with strong endowments who make a combination of strong moves, informed by external data and views will be laying the foundations for upper quintile performance as we emerge from this economic event.
For more information contact
Craig Richardson, Director
Email craig@faraday.company
Phone +64 2199 1873
Henry Lynch, Director
Email henry@faraday.company
Phone +64 274 974 993
About Faraday & Company
Faraday & Company specialise in establishing and managing professional advisory boards small and mid-market companies in Australia and New Zealand. Visit www.faraday.company