Safe steps in uncertain times

The past few years have presented societies, markets, companies and households with a multitude of challenges in quick succession. Geopolitically and geoeconomically, the world is out of joint. And besides, it is not as if the corporate transformation agenda was not already full, anyway – ESG transformation, agility and resilience, new working reality, new consumer habits, digitization, GenAI, only to name a few. And none of that is optional – if companies do not embrace the changes, they will be marginalized sooner rather than later.

The markets have also become more trying – gone are the days of ultra-cheap money and low inflation. We can no longer expect above-average growth in emerging markets to compensate for the lack of momentum in the mature markets. Growth is generally much lower and there are serious trade tensions, that have to be taken into account.

So, what to do?

Mindset 1 – "Wait and see" – Bury your head in the sand. As easy as this seems, it is not really an option. The world is not going back to the 'old normal' in the foreseeable future. When it comes to interest rates, the talk is of 'higher for longer'. However, we could extend the same and also speak of 'higher for longer' in the case of inflation. We could speak of 'greener for longer' in consumption, 'harder for longer' in financing, 'rarer for longer' in talent, unsettled for longer' in geopolitics. The sooner we embrace the changes necessary and implement them in our corporate strategy, the better we are protected and positioned when opportunities arise.

Mindset 2 – "Follow smartly" – If companies are also unwilling and/or unable to lead the way in their industry, but do not want to be surprised or fall behind, this is an option. It is a matter of detect and adapt - notice early, what the market is doing and make the own company agile enough, to adapt fast, in order to not fall behind. This reduces the risk of becoming a transformation loser and preserves opportunities to benefit from new potential. But of course, that's not a recipe for maximum potential, either.

Mindset 3 – "Shape the Industry" – For companies, that want to help shape the future of their industry, that want to make an active contribution to social and environmental change. In this way, they want to be particularly attractive to customers and to talent who enable them to go even further and faster in the pursuit of their vision. This requires clarity about the goal, an agile organization, a culture that is open to change, and the ability to financially cushion short-term earnings lows and delays. However, it may also promise the greatest strategic competitive advantages in the medium-to-long-term.

While companies do not need to know the exact outcome of the various interconnected issues at play, in many respects the direction is enough to derive reliable recommendations for action, which will already position them more robustly:

·???????? Internal Financing – it is clear that financing and refinancing have become, and will continue to be, more expensive and difficult. At the same time, capital requirements are increasing, and any business cases must be particularly robust. This means that internal sources of financing must be fully exploited, and companies cannot afford to sub-optimize as they occasionally did in times of low interest rates and easy money. This applies not only to working capital management, but also to the cost base and asset structure. Low costs, light asset bases, adaptable structures, and skillful working capital management are required more than ever.

·???????? Inspiring Talent – there is a negative demographic trend and talent comes to companies with different expectations. The right talent will be harder to attract and harder to retain. The key is to inspire – for a common goal, with common (not just financial) incentives, with continuous development, transparency and participation, with a winning strategy and welcoming culture, for everyone.

·???????? Embracing Technology – 'If you cannot beat them, join them'. Digitalization, RPA, and GenAI are realities and will soon demand just as much space as software or industrial production before them. These are economic breakthroughs for efficiency and for work enrichment, but also a threat to jobs. Companies need a far-reaching technology agenda, from increasing profitability to developing new potential. At the same time, they need to have solutions for transformation winners – whose jobs are becoming more valuable and varied due to technology – as well as for transformation losers – colleagues whose jobs get threatened.

·???????? Overhauling Supply Chains – Complete de-globalization is most likely a myth. Re-globalization however is a certainty. Supply chains and supply networks are being overhauled according to geopolitical and ESG criteria, while having to be efficient. Security of supply has come to the fore, partnerships for shared progress are taking the place of optimization through arbitrage. Adapting supply chains and ecosystems for this new reality will be critical.

·???????? Expecting the ethical Customer – The past four years have left no customer or consumer unchanged. Less, more conscious consumption is likely – for economic reasons (inflation, interest rate developments, economic growth), but also for ethical reasons (ESG aspects). Products and services are no longer evaluated only according to their characteristics and price, but also according to their eco-social 'conscience'. A consideration of current products and service offerings through these new lenses is paramount.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.