Value Propositions in a Coronavirus World
4/14/2020
We have witnessed firsthand how clients and businesses across the world are being negatively impacted by the coronavirus pandemic. As our thoughts go out to all those suffering, we thought we would do our part by sharing some of our insights into how businesses can continue to sustain or create shareholder value during these difficult and uncertain times.
- Businesses of all sizes will have to account for geopolitical and macroeconomic (GPME) considerations to a degree previously unseen. We now see the effect that one province in western China can have on the entire world. Supply chains, logistics, and markets can transform from powerhouses to shuttered almost instantaneously. Both small and large businesses will now need to assess the magnitude of GPME risk with a breadth and frequency that many are not used to. What can businesses do now? Large corporations can begin planning development or expansion of GPME risk departments, while smaller businesses can map their value streams to identify potential sources of GPME risk.
- Working capital will be approached differently; there will likely be a move from “just-in-time” inventory to higher inventories. Inventory carrying costs can affect capital charges and thus require changes to financial strategy. Nevertheless, as firms seldom factor in their capital charge in their performance measurement process, inventory will just build up without regard as to what can be considered appropriate inventory levels. As shareholder expectations increase, businesses need to move their performance measurement systems to include the cost of capital and will need to make adjustments to working capital to ensure minimal financial and operational harm.
- Technology will need to be fully exploited in relation to employees, customers, operations, and suppliers. Technology has thankfully allowed the continuation of many business operations that would otherwise have ceased due to the mass lockdowns across the globe. Businesses seeking to succeed in this disruptive environment must exploit all technological avenues available to empower as many employees as possible to continue operations remotely, while at the same time be analytical in which tools work for them. Remote work is here to stay; companies slow to optimize for remote work will have trouble succeeding, yet those companies investing in multiple technologies without a thorough analysis of what is appropriate for them given their business model and financial constraints could face financial and operational distress. Technological interaction with customers also should be optimized, from expanding the range of digital offerings and transactions to improving user interface. Finally, businesses should seek ways to facilitate supplier relations through expanded use of technology where possible and cost-effective.
- Conservative planning and fiscal prudence will be necessary to ensure liquidity and minimize leverage. Cash is king. Far too often businesses plan using assumptions that are overconfident and underestimate underlying risk. This crisis has shown that the most resilient companies are those that are more conservative and realistic with their projections and that have cash buffers to ensure liquidity during unexpected and turbulent times. Companies with these types of cash buffers can mitigate the need for potentially costly leverage, whether from private funding or government-backed initiatives that come with many strings attached.
- There must be re-assessment of consumer and supplier habits to address lower consumer confidence, with more value required for big sales. Consumer and supplier habits that held true prior to coronavirus are likely to change. Both consumers and suppliers will have weakened confidence and likely weakened financial stability, at least in the short-term, leading to more conservative choices on how they spend their money. Identifying these patterns will be critical to ensuring revenue flows. Customers will expect higher value than ever for larger purchases, given the macroeconomic situations.
- Ethical behavior is essential to maintain reputational integrity and demonstrate compassion for clients and protection of employees. During this pandemic, many core business operations have been disrupted and may continue to be disrupted for unknown periods of time. Businesses are under pressure and seeking to balance many competing interests. Everyone is affected both financially and personally by the virus. While it is understandable that during these difficult times difficult decisions will be made that may adversely impact employees and clients, businesses must uphold high ethical standards and do their best to mitigate harm to their employees and clients as much as possible. Reputational damage will be great for businesses that adopt an attitude that these extreme conditions give license to unprofessional behavior. Long-term shareholder value will be eroded. Transparent, early, and frequent communication from leadership is key and will go a long way to keeping employees motivated and clients happy. Once the immediate effects of the virus pass, employees, customers and long-term shareholders will gravitate to companies whose actions were virtuous during difficult times.
- Operational efficiency will determine survival. With margins tightening and revenue potentially stagnating or decreasing, businesses must find ways to make all processes as efficient as possible. No operational process should be left unturned in the quest to find waste, inefficiency, and financial pain points. Cuts and process improvements must be made judiciously, however, to ensure that short-term gains are not offset by inferior quality products or services that could drive customers away. There is a need for a more comprehensive performance measurement metric like EVA that incorporates the Income Statement, Balance Sheet, and also the opportunity cost/risk of the business.
- There must be clear expectations and communications with investors. Times like these require C-suite leadership to forgo strictly quarterly thinking and clearly communicate short- and long-term strategy pivots to investors. How companies handle dicey questions of capital allocation and executive compensation will determine their viability and success in the coronavirus era. Investors will respect and trust executive leadership that is transparent about any problems created by the pandemic. Frequent updates are also important even if little has changed, as this can allay investor fears and perceptions that leadership is unengaged or that the company is in deeper trouble than they let on. Finally, leadership must clearly articulate both financial and operational strategy pivots that they envision taking place in the short and long term.
- Re-evaluate all financial models for underlying assumptions to ensure compatibility with current realities. With so many operational changes happening during this period, it can be easy to overlook some of the “hidden” but key components of modeling: the assumptions. Many modeling assumptions were already overly optimistic prior to the pandemic, but in this environment extra effort must be made to scale them to more conservative estimates. Hidden biases can be reflected in assumptions on macroeconomic recovery once countries emerge from lockdown, consumer habits return to pre-pandemic levels, and country risk premiums go back to their historic averages.
- Embrace uncertainty and calm-headed decision-making; nobody knows exactly how this will play out and emotion should be restrained when making big decisions. Despite many experts claiming to know exactly how this will play out, the reality is that nobody really knows when the pandemic will end, what the cumulative effect on global commerce will be, or what a recovery would look like. Businesses should understand that uncertainty—while certainly not ideal—does not preclude a robust corporate governance system nor strategic pivot. In fact, during uncertain times, dynamism and wise decision-making on the part of a business will determine how and if it survives. Important decisions should not be undertaken quickly but subject to profound debate and made from a place of not just short-term survival, but long-term sustainability.