Geopolitical discord, trade tensions, the fast pace of change driven by technological and digital disruption, and our position in a late-stage economic cycle have all contributed to heightened uncertainty. Amidst that uncertainty, however, one thing is evident: a clear and growing gap has opened up between best-in-class companies and the rest.
According to an EY analysis of more than 500 companies, investors are rewarding companies that build resilience through strong leadership, maintaining margins, and strengthening cash flows. On the other side of the divide, underperformance is being punished more quickly and severely. Activist capital is also becoming more powerful, with 83 percent of recent EY poll participants saying they anticipate pressure from activists in the next 12 months.
As fears of a recession mount, now is the time for CEOs to ready their organizations to thrive in any environment. To create sustainable businesses, leaders can take a three-pronged approach: 1) build an adaptive and resilient mindset; 2) create a platform to reshape the organization; and 3) reshape with agility, building in optionality.
In short, leaders must think, plan and act.
1) THINK: Build an Adaptive and Resilient Mindset
Successful CEOs proactively develop their company’s capacity to overcome shocks and disruptions by preparing for multiple scenarios. Disruptions can be as large as global trade disputes or as small as a problematic tweet that goes viral. With the wealth of data and information at their fingertips, CEOs can continuously model and stress test scenarios.
Top executives should also regularly review their portfolio to identify assets that are vulnerable to unexpected competitors, such as a consumer electronics company entering the medical devices field. Depending on the circumstances, they can then reallocate capital to shore up core areas, divest underperforming assets or reexamine supply chains, among other options.
To be adaptive and agile, people across different functions of a company need to be empowered to make the decisions to quickly execute change to meet any situation. This starts with inclusive leadership at the top and making sure business units are sharing data, rather than keeping it in silos, in order to make sure all decision-makers can act based on complete information.
Equally important to building an agile organization is to continuously evaluate leadership. Among the companies that have successfully reshaped, 66 percent have made leadership changes in the C-suite or at the business unit level, EY research found.
2) PLAN: Create a Platform to Reshape Your Organization
To give companies the time, space and capital capacity to plan and reshape the organization, leaders need to develop an effective platform before a crisis occurs. The platform should include both operational and communications components.
On the operational side, it’s worth noting that half of the companies that reshaped successfully reset their strategy for growth through new alliances, agreements, partnerships or joint ventures. They also reevaluated how capital is allocated. EY research shows that 84 percent of companies that have successfully reshaped have optimized their capital allocation strategies.
In addition to operational considerations, the platform must include a comprehensive communications program geared to all stakeholders. CEOs should share the long-term strategy, take the time to empathize with stakeholders’ issues, and listen closely to their views.
3) ACT: Reshape with Agility, Building in Optionality
When it comes time to reshape their companies, CEOs must make data-driven decisions and take action quickly. Data related to finance, operations, cost, market strategy, innovation, cash flow and transactions are all useful. CEOs might ask: Does the company have financial flexibility for the unexpected? Should we consider new products or geographic markets? Is management using acquisitions and divestment in a strategic way?
In fact, M&A has emerged as a popular choice. EY’s most recent Capital Confidence Barometer, from April 2019, found that 59 percent of respondents intend to actively pursue M&A in the next 12 months. Nearly a quarter say acquiring technology, talent, new production capabilities or innovative startups are their main strategic drivers.
CEOs should develop different long- and short-term options simultaneously in case one or more do not work out as expected. Big changes may be needed. EY analysis shows 59 percent of companies have successfully reshaped by introducing new products and services, while 64 percent optimized their financial and operational performance.