Opportunities to restart. rebuild with new, mixed models
Auckland, April 25, 2020
The post Covid-19 landscape is a daunting one for Kiwi businesses.
Here are some observations and predictions on their future, and an action-plan to progress in the vastly changed environment that lies ahead.
People and countries are naturally concerned about what has happened during the Covid-19 pandemic. It has affected almost every aspect of life and living, and it will take some time for people to regain confidence.
The macro environment has become more dynamic than ever.
It is tempting to speak in terms of pre- and post-Covid-19, but the reality is that that there will not be a clear moment when the world is liberated from either the direct effects of COVID 19 or the precautions considered necessary and desirable to take to avoid, or be prepared for, a similar event.
The actions taken to prevent the spread of Covid-19 are likely to endure for the next two to three years, at least.
Changing perspectives, focus
Government participation and policy setting focus will change.
Businesses may need to alter current business models and arrangements as accepted principles. Definitions will change. Post-Covid-19 we are likely to see different indicators being used to measure progress. These are likely to be focused on health, wellness and the fulfilment of essential requirements.
While change is often painful, in the long term, we can achieve a greater balance and harmony in the world, along with less reliance on our scarce natural resources.
Covid-19 will inevitably create opportunities to pause, reconsider and realign at many levels.
Progression post Covid-19 will require a considered, cooperative and compassionate approach which is balanced and beneficial to the larger community.
For businesses it offers an opportunity to pause and reset.
The macro environment
Countries have enforced strict border controls. These are likely to continue for some time as they appear necessary to protect the wellbeing of their citizens.
As a result, the movement of people will be restricted for some time.
Industries such as travel, airlines and international tourism have already been adversely affected and these effects appear likely to continue for commercially and economically relevant periods. They are not short shocks, but long-term tremors.
In New Zealand’s regional economies like Rotorua and Queenstown, which are dependent on travel and tourism, will continue to be adversely impacted by the lack of people movement.
While global trade will continue, countries will view cross-border investments and exchanges differently. We are already seeing Japan and the United States encouraging and even funding companies to withdraw from international investments which they have set up and explore alternative geographic areas to relocate and invest anew.
Public Policy emphasis
For some time, countries will emphasise social and governmental safety nets.
Health and welfare are likely to be the basis of any economic policy settings with the latter being secondary. As economies reset, we should see low or near-zero interest rates (often resulting in negative long-term real rates). We are also likely to see a convergence of health and economic policy, and increased fiscal interventions by governments.
A key issue may be market and personal liquidity.
Quantitative easing of money assisted the reinstatement of market liquidity following the 2008 financial crisis. We have also seen substantial growth in asset values (often debt induced).
Quantitative easing encouraged confidence and consumption.
This time, while massive quantitative easing programmes have been established, the lack of demand may limit the effects of stimulus creation.
Financial support
In these conditions, we are likely to see mixed ownership companies which need government financial support, associated governmental ownership, and economies scaled with government funding for start-ups and more direct debt and equity funding for larger companies.
My prediction is that we will see substantial changes in taxation following government intervention. Possible changes could include flat taxation, and/or reduced indirect taxation on essential items such as food and utilities (especially as the focus will be on wellbeing with an emphasis on healthy living).
We could also see resource rental arrangements developing, with governments owning assets and charging asset operators an economic rental for the right to use the assets and derive private benefits from operating efficiencies.
Therefore, governments and related institutions will move to directly owning assets as well.
A possible consequence is that companies could be encouraged to ‘aggregate’ to achieve scale and enable effective capital allocation and minimise risk. Such aggregation may be caused by the companies themselves, enforced or created through legislative changes.
Companies could find business aggregation a cost-effective method for scaling. This would also be necessary in the context of changed demand drivers.
Market demands and trade
Post Covid-19 economies and businesses will become domestically focused in the absence of overseas visitors, overseas students and near nil migration.
New Zealand will be no exception.
Consumer demand is likely to alter and could be based on essentials for consumers themselves and their families. Consumer demand will be influenced by where people spend money; the reasons why they buy; how they access products and services; the quantities they buy; and the way they live, interact and work.
Demand is likely to be strong for necessities and essentials such as food, horticulture, water, fish, housing, medicines, health services, education, data products, safe retirement living, home-based entertainment, fitness and utilities.
Demand for supply and delivery chains and associated sectors, such as logistics and associated technologies (such as medical technology and devices, agricultural, food and biotechnology), could also benefit from this emphasis.
We are also likely to see changes in the type of products needed – for example, the type of housing as affordability changes, more people work from home, and people alter their level of commuting.
Despite financial stimulus, people are not likely to invest in discretionary products in the next few years (especially white and brown goods, and leisure travel), and make risk-based investments, at least for some time.
Savings and Investment
A likely consequence could be higher personal savings and an increased interest in perceived ‘safe investments.’ Low interest rates may restrict the availability of such investments to retail investors.
This has implications for international trade and tariff arrangements.
An increased focus on becoming self-sustaining would change the requirements for what is traded and how trade is conducted. Trade is likely to become more focused on the above sectors and more cooperative and collaborative. A strong driver of this is likely to be – ‘we are in this together and we can all win’.
Given recent experience, companies are likely to shift focus from penetrating Gorilla economies, such as China and the United States alone.
Instead, they can be expected to seek participation in more diverse markets and countries.
Collaboration and joint venturing would assist this. We could see a move to a regional focus (such as ASEAN) instead of a specific large country focus.
Interestingly, New Zealand should be well positioned to meet domestic needs and fulfil international demand in these areas.
As a country we practice these values, have the international credentials, the resources to develop these sectors, and service overseas markets geographically close to us.
Business models
Post COVID-19, businesses could be required to address changes in business and operating models; growth and scale; value propositions; performance and value measures; pricing; and leadership styles. All these aspects are interrelated.
We are likely to see smaller firms emerging and collaborating.
Technology will enable and encourage this.
These firms will not focus on creating extensive firm boundaries and resource ownership.
They will cooperate with other companies which have similar ethics, human and leadership values and with whom an integrated value chain can be developed.
Companies and firms are likely to change and operate as ability and service business clusters, and communities
Business clusters will focus on specialised abilities, complementing skills, trust, cooperation, common values and economies of scale.
With an associated reduction in transaction costs, in the long run, the cost of doing business should reduce. These clusters would also focus on sharing resources for procurement, imports, and services. This contrasts with the current model of having and developing many of these capabilities in-house.
Increasing work at home
An associated likely consequence is that people will change the way they work, meet and communicate.
Working from Home (WFH) may well become the new norm and businesses will need to seamlessly move to this altered environment of working.
Growth and scale have been emphasised in recent times.
Technology has altered resource requirements, reduced production costs and enabled businesses to scale and grow by focusing on customer acquisitions.
Continuing this trend, exchanges in the future will be increasingly digitised (as evidenced) with physical exchanges being based around products and basic products.
Digital technology-based scaling and growth will therefore be emphasised post Covid-19.
In turn, this could create demands for technologies such as additive manufacturing, artificial intelligence and big data.
Refreshing perspectives
Growth will be driven by connections and market presence, not by scale. Dollar values will be a consequence.
Post Covid-19, we are also likely to see a reduction in the cost of doing business as governments become active participants and supporters of businesses.
We may need to refresh our perspectives on market power as cooperative clusters grow with government participation.
To grow, businesses will need to focus on different resources: relationships, values and reputation, adaptive abilities, leadership, connections and with a reduced emphasis on capital asset ownership (as happened with start-ups post GFC which are now global enterprises).
This could cause the second wave of tech-enabled global enterprises.
With changes on the way businesses operate, they will need to develop different abilities, focus on shaping markets and create value for people in the ‘essentials area,’ using value based collaborative approaches.
The way forward
Post Covid-19, business managers must reset and focus on core values; basic needs being met; security of supply; responsible pricing; developing learning and adaptive businesses; developing connections and developing strong institutional leadership with demonstrated behaviours.
This will call for a change in leadership styles. Leadership post COVID-19 will need to be open, sharing, optimistic, compassionate and cooperative rather than adversarial. It will need to move from a limited resource focus to an open system focus.
To move forward, businesses will benefit by undertaking a current state diagnostic.
This would involve an honest assessment of the values which drive the business; the larger needs they meet or are capable of fulfilling; the markets in which they operate; costing and pricing; abilities; digital capabilities; connections; financial and economic resources (such as cashflows); contractual commitments; likely opportunities; service capacity; and leadership.
Progression and action plan
Make a plan which specifies actions to be taken, where resources should be allocated, as well as timelines and responsibilities.
The Progression Plan should also identify the way the existing business could be melded with future directions.
It is likely that this would dovetail into an assessment of business values at different stages.
Business restructuring and reallocation of resources, if needed, should be preceded by a revised approach to business and business models.
Resources and time should be allocated to developing abilities, values and connections using digital technologies.
These are challenging times. Change is inevitable. A crisis creates opportunities.
Covid-19 has the potential to create many phoenixes, transformed businesses and start-ups.
This is an opportunity to redesign, realign, restructure and refocus.
Systematic approaches are warranted, while knee jerk reactions should be avoided.
Businesses in the future will need trust, cooperation, optimism and courage as basic human needs, and core values get emphasised and a new balance emerges.
Jai Basrur is Founder-Director, CGB Consulting based in Auckland. He provides strategic and corporate finance advice to New Zealand and overseas companies in diverse sectors. He specialises in Change Adaptation and Value Creation. Email: jai@cgb.co.nz
The above article, which appeared in ‘New Zealand Business’ on April 24, 2020 has been reproduced here with the permission of the author.
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