How to reshape your business now to build a resilient future

The year 2020 also reshaped how companies build competitive advantage. The idea that a company is only as strong as its weakest supply chain link isn’t new. But COVID-19 and Brexit have brought this risk as well as the benefits of collaborating across industry ecosystems into a much sharper focus. 

Natural disasters and geopolitical shocks have tested supply chain resilience in the past but not on this scale. In response to unparalleled disruption to production and supply lines, major companies have rapidly stepped up existing schemes to monitor and support stressed suppliers with an increasing focus on faster payments and even direct intervention to promote consolidation. These extraordinary stresses have also inspired new sector-wide or international initiatives. For example, the “Safe Harbour” program from the Society of Motor Manufacturers and Traders (SMMT) in the UK brings together suppliers with customers and stakeholders to address challenges and find solutions. Equally, regions are taking a collaborative approach to support the industry with initiatives, such as the Supply Chain Resilience Initiative (SCRI) between Australia, Japan and India, which in light of the COVID-19 pandemic aims to address supply chain vulnerabilities and build resilience in the Indo-Pacific region.

2020 also brought unparalleled collaboration within industry ecosystems. According to the 2020 global EY Global Strategy survey within the 2020 EY Realizing Strategy survey (pdf) 97% of executives indicated that they are likely to partner with competitors. Competitors have put differences aside to overcome shortages, fix supply chain disruptions, issue mutual messages of support and develop vaccines in record time frames while offering doses at cost price. Some of these responses are pragmatic measures that will expire when the pandemic ends for competitive and regulatory reasons. But an increasing openness to collaboration should continue because it taps into a need that predates the virus and will outlive it.

In a world where end products are growing more complicated and markets increasingly volatile, resource-sharing models have the potential to improve enterprise resilience and reduce risk. Market dislocation has exposed the limitations of rigid, linear supply chains and the resilience of agile, networked ecosystems in which all parties work collaboratively. COVID-19, Brexit, US-China tensions, a global reliance on Chinese medical imports, in addition to wider geopolitical tensions, have exposed the vulnerabilities of cross border supply chains, encouraging greater consolidation and localization. Companies need to build deeper knowledge and relationships throughout their supply chain and take a proactive approach to find and address vulnerabilities and weaknesses. 

2020 reshaped how we connect. From meeting in person to meeting online. From working in the office to working from home. From nights out to every night in. The way that we relate to each other, to companies and to government has changed. The transformation that might have happened over many years occurred in a matter of weeks, with profound impacts that will last beyond the return to normal day-to-day contact.

The challenge of transforming a workforce from office-based to home-based didn’t end with the physical movement of people and equipment. Supporting employees and sustaining a sense of belonging has arguably been a bigger test. Workforce engagement takes more deliberate design, practice and measurement when we are not physically together. It calls for more deliberate action and for a mindset that keeps people and culture front and center. Employers are becoming more engaged and taking more responsibility for the safety and the mental and physical health of their employees.

Equally, the change in mindset needed to engage with customers online goes beyond technological infrastructure. Deploying enough capacity to continue serving consumers online was an immense challenge for retailers, but the ability to deliver was just one part of the equation. Retailers also needed to rapidly understand the impact of the pandemicon consumers’ lifestyles and reassess how often and how they engaged.

The EY Global Future Consumer Index has shown that not only are 49% of consumers visiting physical stores less, but 39% of global consumers are shopping more online for products that they previously bought in stores. Nevertheless, the trend toward online has not removed the desire of consumers to engage with the products. Companies that can replicate the in-store benefits of physical engagement with both products and staff and use the insight from increased digital interaction will have a considerable advantage.

We will return to the office and the high street, but not in the same frequency. We would not have planned it this way, but we can take many positives from the adaptations we made during lockdown. Finding new pathways to connect, new ways of working and new ways to increased understanding can help us build a better working world.

The year 2020 reshaped companies’ strengths and weaknesses. Rapid changes in government policy and consumer behavior changed industry dynamics almost overnight. City center locations were suddenly less active than local high streets. Big wasn’t better when assets were in lockdown.

There is a clear link between fit and fast. Companies with lean cost structures, such as low-cost airlines, were able to recover quicker because their break-even cost per flight is lower. The ability to transform at pace and respond to rapid change in their markets, from repurposing production lines to switching to delivery models, created a significant competitive advantage and market share gains that companies will carry into the recovery.

Many companies need to take more radical action to reshape its business to a fundamentally changed market. It can be difficult for a board to change their mindset and take radical action, but executives recognize the dangers of not doing so. The EY Global Strategy survey within the 2020 EY Realizing Strategy survey (pdf) found that 40% of executives indicated that they planned to implement agile practices, build a culture of innovation and engage in more inorganic transactions within the next three years. 

The pandemic was an exceptional event, but it’s not an isolated challenge. The outbreak has served as a reminder that agile businesses will be in the best position to survive short-term shocks and thrive during extended periods of uncertainty. Agility isn’t just strength — it’s a necessity. There has never been a greater urgency for companies to build resilience to shocks to meet the growing challenges of uncertainty and rapid change.

To do this, they need the information and ability to take and enact decisions at speed. More than 86% of executives surveyed in the 23rd edition of the EY Global Capital Confidence Barometer (CCB) conducted a comprehensive strategy and portfolio review in 2020. Many companies will need to rethink their operating models and cost bases, and take tough decisions around where and how to redeploy their capital. The increase in mergers and acquisitions (M&A) activity in the second half of 2020 underlines how many companies are adapting their business to new realities.

Governments around the world have acted decisively to protect their businesses and people from the economic disruptions caused by COVID-19. Measures include tax cuts, investment incentives, expanded social safety net benefits, direct payments to households and loans to businesses. The International Monetary Fund (IMF) estimates that governments spent almost US$14 trillion in 2020 to support their economies – and more fiscal stimulus is expected in 2021, most notably in the US. 

In 2020, government support was the difference between survival and failure for many companies. As a result, the pandemic has reshaped the role of the government. A shift from a laissez-faire approach to a greater role for state intervention had already begun in many economies. But COVID-19 has dramatically accelerated this trend, driving many countries to scale up industrial policies, tighten foreign direct investment (FDI) regulations and impose export restrictions on critical medical supplies.

As vaccines are rolled out, the virus recedes and economies reopen, this direct government influence will start to wane.  But government policies will continue to affect the economic structure of many key markets around the world. COVID-19 has motivated governments to seek greater self-reliance in strategic sectors, causing many countries to launch efforts to reshore manufacturing or diversify supply chains. And increasing geopolitical competition, especially in digital technologies, is also driving a shift toward more state interventionism in many countries. Finally, governments will use the COVID-19 crisis as an opportunity to push their economies toward more renewable energy and environmental sustainability. 

Companies should be aware that greater state intervention in economies means the playing field is likely to tilt in favor of domestic firms. Greater trade and FDI barriers could also increase the cost of cross border operations for businesses. And climate policies as part of recovery packages are likely to accelerate the shift of business models toward being based on long-term value. With such high levels of government spending, companies should also anticipate tax increases in the medium term.