Covid-19 has delivered a combined health and financial crisis with an unprecedented global reach. Businesses need to recognise that their efforts today will have an impact far beyond the current pandemic.
Through the analysis of more than 5,000 companies, Boston Consulting Group (BCG) has explored the opportunities and challenges which have gone hand-in-hand during previous volatile periods. Our research shows that, in previous crises, 14% of companies were not only able to accelerate growth but also increase profitability as they emerged post-crisis. How to gain advantage in adversity is an important lesson for businesses across Southeast Asia.
Investors are equally focused on this opportunity. In our June 2020 Investor Survey, 90% of investors indicated that companies that are on strong footing should prioritise building business capabilities at the expense of earnings per share (EPS) in 2020. Money talks, and its voice is calling for success through resilience in 2021.
BCG has a long history of supporting companies through large-scale transformation programs. Our experience shows that companies which outperform at a time of crisis tend to follow common actions.
The 2007–2009 downturn offers a snapshot of our current challenges. During this period, most companies prioritised short-term actions over long-term initiatives. They tended to act reactively, rather than proactively planning for the future, exhibiting a reluctance to take bold steps towards an eventual recovery.
Those companies that thrived following 2007–2009 were largely united by a willingness to convert downturns into opportunities. This required companies to master both transitory and transformational responses to crises.
Transitory responses require rapid actions that are critical for survival, such as cash management, rapid cost-takeout, and continual scenario planning. But building new advantages requires going beyond the now, to adopt transformational changes that embrace opportunity for the future.
At a time of crisis, these transformational moves are undoubtedly more challenging. Yet they also provide the opportunity for long-term success.
Transitory – short-term response
Focus on cash preservation is the first short-term step. Businesses need to act proactively, establishing a cash office to ensure liquidity; get cash and costs out quickly to build a strong foundation. In a recent CFO survey, we discovered 80% of respondents had taken short-term measures to boost liquidity, but only 25% had established a cash office.
Continual scenario planning should inform your crisis response. Crisis inevitably means uncertainty, creating a volatile and shifting landscape that requires adaptive strategies. In China, for example, instant noodle and beverage brand Master Kong undertook daily scenario planning to target its efforts. It anticipated the now-infamous instant noodle hoarding, shifting focus from offline to large online-to-offline retail channels, e-commerce, and small stores. Combined with detailed tracking of reopening plans, its supply chain was at 50% capacity rapidly after lockdown, supplying 60% of open stores. That was a three-time higher penetration than some competitors.
Rapid cost-takeout is an important way to lighten the immediate pressures by resetting an established cost base across key dimensions of people cost, direct materials, and indirect cost. Rapidly cutting costs while launching quick wins is a positive way to react to this new reality post-Covid-19. BCG has seen some companies reduce costs by up to 20%–30% without reducing productivity by taking a forward-looking approach.
Transform – fit for the future
As we enter the next stage of the Covid-19 crisis, companies need to transform to unlock new opportunities. Zero-based budgeting can be a powerful tool to support this transformation, providing comprehensive and detailed transparency of costs while encouraging a smart, systematic view of costing to uncover value and reinvest for growth.
Companies cannot afford to rely on traditional, obsolete processes. The new reality is marked by new ways of doing business, fundamentally transforming the value chain of an organisation. Zero-based budgeting allows companies to react now, while building resilience for the future.
Leading Filipino geothermal energy company Energy Development Corp (EDC) successfully adopted zero-based budgeting as part of a two-year transformation. By applying it after the targeted cost-out, addressing the long tail of direct and indirect costs, it delivered an additional 20% cost reduction across the addressable budget.
Ultimately, growth is the key driver for business success, and fundamental to total shareholder return (TSR). Companies should pursue acquisitions of adjacent or new frontier opportunities, particularly at a time when many assets have their value suppressed. Analysis of more than 51,600 deals made over the past 40 years reveals that two years after the transaction, deals made in a weak economy outperform strong economy deals by 10 TSR points.
Boldness pays off. The outperformance was largely driven by acquisitions outside buyers’ core business segments. The current crisis offers an opportunity to buy attractively-priced assets or accelerate a strategic push into adjacent or emerging frontiers.
ERG offers another great example — using the 2008 crisis as a catalyst to transform from a legacy oil and gas organisation to emerging renewable energies. The company delivered a 42% increase in Ebitda over this period, with TSR outperforming its peer group of companies by 70%. This is a sample of the success that forward-looking transformation can bring.
Now is also the time to double down on digital. There has been a huge ecosystem shift to work-from-home operations, at the same time consumers are exhibiting a rapid transition to on-demand and online services. Covid-19 has greatly accelerated the digital agenda, with these models set to persist beyond the current crisis.
Companies had been embracing digital capabilities as a competitive advantage prior to this crisis. What was once a discretionary transformation is now a burning imperative of any business. Both companies and consumers have had a massive enforced opportunity to experience a digital-first world. This enforced transition, and superior economics of digital channels, will only amplify the penetration of digital business models.
Chinese cosmetics brand Lin Qingxuan closed 40% of its stores during the crisis, including in hard-hit Wuhan, redeploying 100+ beauty advisers to virtual channels. The company trained its staff to become online influencers who leveraged digital tools to engage customers and drive online sales. As a result, brand sales in Wuhan achieved 200% growth compared to the previous year.
Now is the time
Nobody could have predicted Covid-19, nor its global impact. But businesses must react. Taking short-term actions to preserve core operations are crucial. But as we emerge into the next stage of this new reality, companies need to recognise the importance of acting for the future. Those companies willing to take bold steps to transform could find true advantage in this period of adversity.
Jaime Ruiz-Cabrero is the managing partner of Boston Consulting Group (BCG), South East Asia, and a member of BCG TURN leadership team