Scenario planning for portfolio reorganisation and business restructuring in the post-COVID-19 era

Medium-and long-term actions

2. Re-examining assumptions for each business and reconsidering winning strategies based on the results

After you have taken short-term action to ensure business continuity, it then becomes necessary to restructure your businesses from a medium- to long-term perspective to achieve further growth in the new environment. When considering business restructuring under the new normal, the first step is to re-examine assumptions for each business and then reconsider winning strategies for your company based on the results.

The first task here is to predict how changes in the macro environment caused by the COVID-19 pandemic will change the market environment and competitive environment surrounding your company. Then, you will need to revise your business models and strategies and create new assumptions about the business environment.

At this point, it is crucial to identify whether these environmental changes and business impacts are irreversible. One example of a change in the macro environment brought about by the pandemic is the fact that many people are currently avoiding face-to-face communication due to a heightened awareness of hygiene. This trend could lose momentum when COVID-19 infections subside. However, the question arises as to whether businesspeople who have become accustomed to the convenience of remote meetings will create time in their busy schedules to travel for business as frequently as they did before. This will affect business demand for airlines and railways. If, at the same time, people’s desire to travel returns to the same level as before the pandemic, the travel industry may begin to view personal leisure-related demand to be more important than business demand. This will likely have a serious effect on the marketing strategies of hotels in regional cities, for example. Companies that are able to perceive ‘irreversible changes’ in this way will be more able to respond quickly to future changes in their environment.

At the same time, changes in the market environment will redefine key success factors (KSFs) and competitive advantages in the market. For example, if remote communication becomes the norm, companies’ sales tactics will change dramatically. It is possible that the number and location of sales offices will become unimportant, and that sales staff will be viewed in terms of ‘quality above quantity’. Similarly, in the education industry, having one charismatic instructor may become more important than securing a large faculty of instructors.

In this way, companies must identify KSFs for future markets, think about how to build their own competitive advantages in the competitive environment of the future, and derive winning strategies from these considerations.

It is also important to note that the markets a particular company should focus on going forward may not necessarily be growth markets in the new environment. For example, even if a market is expected to shrink in the future, a company possessing rich management resources that satisfy the market’s KSFs can build a niche position that brings ‘survivor’s benefits’ and thereby continue to do business. The key to devising a winning strategy is to identify the KSFs in the new market, as well as the company’s competitive advantages with respect to these KSFs.

3. Re-examining the business portfolio.

When examining your business portfolio, it is first necessary to reconsider your company-wide strategy within the new environment. Re-examining a business portfolio usually involves assessing each business on the two axes of strategic suitability and profitability, and then making an initial judgment on whether to continue or expand the business or to downscale or withdraw from it. When a business is highly profitable, companies tend to quickly decide to continue or expand it. However, consideration must also be given to whether or not the business aligns with the company-wide strategy. Here, too, the new business environment must be taken into account.

• Strategic suitability
  The objective here is to reconsider the company-wide strategy based on the aforementioned winning strategy for each business. The company’s previous vision may become impractical as the assumptions regarding each business change. However, a new corporate vision can be devised based on the ‘new normal’ business environment. Here, the goal is to develop a corporate vision and a strategy to achieve that vision for the company as a whole, rather than as simply a collection of individual businesses.
  When re-examining your company-wide strategy, you will also need to reassess the strategic suitability of each business. This may bring to light the need to invest in different fields from those you invested in in the past, such as telemedicine or smart logistics.
• Profitability
  The objective here is to consider the degree of future profitability that can be expected based on each business’s winning strategy. While we can anticipate that the impact of COVID-19 will lead to sagging profits in many businesses for the foreseeable future, it is important to estimate future profit while predicting the scale and duration of the impact.
  When a company prepares a portfolio of several businesses, it ordinarily does so with expectations for inter-business synergy. Consequently, it is important to assess the profitability of each business while also identifying risks that may prevent the business from benefitting from synergy with other businesses as the environment changes.

When downsizing your portfolio, the first decision to make is whether to continue or withdraw from each business, based on its position along the two axes above. But which decision is appropriate for a business that falls in the upper left quadrant, with low strategic suitability but high profitability? The concept of ‘sell in principle’ normally applies to such businesses. The thinking here is to sell a business that has high profitability—or high business value—and to reinvest the funds you obtain through the sale into businesses that have both high strategic suitability and profitability.

However, many Japanese companies see withdrawal as ‘giving up’, and therefore might choose not to make the strategic decision to sell a particular business. Particularly when downsizing their portfolios, companies tend to see businesses that produce cash flow as valuable. However, if companies are able to also recognize these businesses as having a high sale value, they may make different decisions.

Finally, it is necessary to take an overall view of your entire company-wide portfolio and consider whether the portfolio will allow you to achieve your company-wide strategy. During an economic downturn, many companies’ inclination may be to concentrate on their core businesses to maintain cash flow. However, in doing so, they must be careful not to concentrate solely on mature, low-growth core businesses and fail to invest in medium- and long-term growth areas. The key is to construct a portfolio by considering the best possible balance based on your company-wide strategy, therefore securing the investment capability you need for growth and ensuring that future growth is not sacrificed to maintain profits.

4. Improving business profitability

For businesses that you decide to continue because they have high strategic suitability but which require improvements for future profitability, the goal is to quickly plan an attack and then execute it.

If a business is unprofitable, the standard approach is to first take emergency cash-flow improvement measures—namely, shrinking the balance sheet by selling off unneeded assets and improving the cost structure by controlling operating leverage. At the same time, however, steps must be taken to rebuild the business model and business strategy in line with the winning strategy for the new business environment.

PwC has helped many companies facing tough predicaments. In our experience, such predicaments are often caused by a failure to respond to a change in the environment rather than a failure in any major management decision. Many companies undergoing corporate revitalisation strive to maintain their earnings by withdrawing from businesses, products and services with poor profitability and by downsizing their businesses. Sometimes, however, these companies lose even more of their competitive advantage in the process, are unable to maintain balance in their downscaling, and continue to decline. You could even argue that business revitalisation is impossible without fundamentally re-examining the business and adapting its business model to environmental changes.

When rebuilding your business model, the first step is to identify changes in your customers’ values and then redefine your target customers and provided value based on those changes. From there, the next step is to redesign your business structure (operating model) to create a structure suited to providing that value. During this process, the way you design your business structure determines the cost structure. Therefore, your goal is to simultaneously optimise costs and solidify your earnings structure.

The next step is to prepare a business strategy that keeps competition with other companies in mind. As we mentioned above, a winning strategy for a business can be derived by identifying the KSFs for the new market and the company’s competitive advantages with respect to those KSFs. However, your business strategy is more about focusing on building permanent advantages rather than temporary competitive advantage. It is easy to build a competitive advantage based on strategic positioning, which you can acquire by re-examining business areas (specifically, your target customers and the value you provide to them), but this kind of competitive advantage is also easy for your competitors to imitate. Therefore, for the medium and long term, you will need to build competitive advantages based on organizational capability, which is gained by enhancing your business structure (operating model).

One trend we see in the current changing environment is accelerating digitalisation arising from greater use of remote communication. Building competitiveness by applying digital technologies is therefore likely to be a powerful option when designing a business structure (operating model).

Note that when considering future investment strategies, including M&As, it is also important to identify the capabilities and management resources that you need to acquire in order to build this kind of competitive advantage.

After rebuilding your business model and business strategy, the next thing to do is develop and execute a business plan to achieve them. You will need to prepare and execute a business plan consisting of: a concrete action plan; a resource allocation plan for the human resources and investments that are needed to execute the action plan; and an income and expenditure plan that can be expected as a result of executing the action plan and the resource allocation plan.

Because the action plan is constrained by the resource allocation plan, you will need to be careful to ensure consistency between them. The formulation and steady execution of an action plan that is backed up by management resources and an income and expenditure plan that properly reflects the results of that plan are essential to improving profitability.

Finally

The dawn of a ‘new normal’ is both a threat and an opportunity for companies. When faced with an emergency, companies tend to focus on eliminating the threat. However, a change in the environment can also be a turning point that generates new demand, and this can provide all companies with an equal opportunity to stand at the starting line. To seize this opportunity, however, you will need to anticipate new budding markets and take action quickly. Today, as our environment undergoes great change, companies must have the ability to correct the course of their management with a bird’s-eye perspective.