Founder: Turnaround Talk
Last week, the Mystery Practitioner began the conversation about looking beyond financials to add value to companies.
He left us with some important reflection points, but he didn’t finish the discussion. In this article we will continue to look at the PwC article and discuss the last three points that companies can do to add value outside of their financials.
Companies must prioritize ruthlessly
The article points out that strategic shifts don’t become real until a business reallocates the capital, talent, and other resources needed to put them into effect. A variety of forces, sometimes including the personal interests of an organization’s leaders, conspire to create inertia. Yet amid today’s relentless disruption and evolving perceptions of value, it’s vital to be prepared to act radically and quickly in allocating resources where they’re most needed — or the strategy will fail. Although the shock of COVID-19 has triggered an acceleration of change that makes more actions possible, it has also broadened the range of potential priorities that leaders must consider when deciding where to focus. The effect is that it’s more important than ever to be able to prioritize, and to identify and act on the most effective value drivers in the value creation ecosystem. Companies need to prioritize this.
Aerospace and defence company links ESG to enterprise and shareholder value. Across all industries, ESG initiatives have become essential in building engagement and trust with stakeholders and in boosting enterprise value. An aerospace and defence client we work with has long recognized the need to place a higher priority on ESG considerations and associated value drivers. But to make a compelling case for investing in programs related to ESG and to build buy-in among a broad set of stakeholders — including its own board, the investor community, and its suppliers — it needed to tie ESG initiatives back to measurable effects on corporate value.
The article adds that, to do this, the client identified and tracked the value impact of its ESG programs all the way through to intrinsic enterprise value and ultimately value for shareholders. The resulting long-term view of intrinsic value looks well beyond earnings per share. The company started by developing “impact pathways,” identifying the ways in which business issues intersected with ESG issues. It then broke down the value chain to pinpoint where those intersections drove the greatest value or risk. The next step was to ensure that the company had a sufficiently robust definition of value to support decision-making. Ongoing actions in the program include selecting key ESG initiatives, quantifying their effect on value across the impact pathways, and communicating the results to various stakeholder groups.
Major energy company optimizes resource allocation through a unified value metric. When a company is looking to reframe its existing strategy and resource allocation process to address the broad value ecosystem, the ideal approach to prioritization might be to take it to the next stage: optimization. At root, prioritization involves ranking different metrics — such as cost, revenue, and environmental impacts — and deciding to fund activities that surpass a particular line. Optimization is more sophisticated, involving assessment of a dynamic combination of projects or investments using a comprehensive set of considerations, constraints, and resource levels. Recently, we worked with a major energy company as it optimized its approach in this way.
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The PwC article pointed out that this work began with a deep consideration of the company’s values, business model, and strategy. The next task was to develop a new value framework — one that supplemented traditional financial measures with ESG levers, including impacts on the environment, communities, customers, regulators, employees’ health and safety, innovation, and operational and supply chain resilience. All these elements were combined into a single value metric that enabled the company to make resource allocation choices and assess trade-offs at the business portfolio level based on a broad view of value.
The company used a technique called multi-attribute utility analysis to achieve this outcome. Operating like a foreign currency translation, this technique involves taking each value driver and developing relevant KPIs for it. The KPIs are then scaled up, calibrated, and consolidated into a single value metric, enabling all potential investments or projects to be valued on an equal footing. Once all the company’s projects have been evaluated, leaders decide on the right trade-offs to make in the portfolio. This can be accomplished through an optimization model that assesses different levels of budget — together with dependencies and other resource constraints — over a multiyear horizon. Today, our client is applying the unified value framework across its business units and key functional areas, enabling it to prioritize using a broad view of value.
Companies can learn a lesson from this execution.
Execute at higher pace
The article points out that, faced with multiple fast-moving disruptions, intensifying real-time scrutiny, and shifts among the various drivers of enterprise value, leaders no longer have the luxury of rolling out a strategy gradually. Executing at anything less than the highest possible speed brings the risk that events will overtake the rationale for the strategy. Faster businesses could also leapfrog slower-moving ones. In these cases, being first might be more important than having the perfect strategy from Day One, especially given opportunities for iteration and fine-tuning later, and buying capabilities might be preferable to taking time to build them. The need for speed is even greater in situations in which unforeseen disruption suddenly puts existing business models and revenues, and therefore enterprise value, under pressure, as has happened to many companies during the COVID-19 crisis.
Coty transforms at record speed to complete a sale amid the pandemic. In October 2019, Coty, one of the world’s leading perfume and cosmetics businesses, announced plans to divest its professional beauty division, which supplied premium shampoos and colorants to hair salons and polish to nail bars. In January 2020, Coty launched the sales process for that division, and the private equity firm KKR & Co. and a German cosmetics company were seen as the front-runners. But the week before the presentations to the potential bidders, much of the world went into lockdown. Overnight, sales to hair salons and nail bars fell by 80 to 90 percent.
The article adds that recognizing that speed and agility would be key, Coty sprang into action. The initial question was how long the lockdowns would last. But the focus soon turned to a longer-term issue: How would the business continue to thrive in a world where sustained social distancing meant salons would operate at only 50 to 60 percent of their previous capacity? Also, the division’s sales model had salespeople taking orders during salon visits — but many hairdressers and nail techs were no longer in a central location because many salons were shut down.
This sales channel, now highly fragmented, would have to be serviced in a different way, requiring a radical reconfiguration of the business. Within days, Coty developed an entirely new digital business and operating model — one under which the products would be promoted online, ordered by customers mostly via mobile, and delivered directly via a fast, optimized fulfillment process. Coty also quickly quantified the implications for profitability. Its rapid action minimized the pandemic’s impact on the valuation of the business.
The PwC article points out that, in June 2020, KKR signed a purchase agreement for Coty’s professional beauty division, and the deal was completed in November. Coty sold a 60 percent stake in the Wella business in a deal putting Wella’s enterprise value at $4.3 billion. Since the sale, Coty has continued to gain strength: That same month, Coty announced improved first-quarter financial results, which CEO Sue Nabi said were “testament that a stronger, more focused, and more flexible Coty is emerging in the middle of the COVID-19 pandemic, and better prepared to face any future market disruptions.” This ability to rapidly overhaul value creation approaches is likely to be critically important in the decade ahead, as climate change and social inequalities challenge the status quo.
Companies must be more attuned to their ecosystem
The PwC article adds that it is vital to have the flexibility to adjust if conditions change, if the strategy isn’t delivering, or if current actions are destroying value. This means moving away from executing on fixed rails as in the old days, and accepting that the business’s strategy, plans, or behavior will have to change as new disruptions, risks, opportunities, and KPIs emerge. In the era of social media, this agility needs to be underpinned by the use of real-time monitoring tools, such as social listening, for continuously scanning and tracking consumer sentiment.
Consumer sports brand responds in an agile way to a social media firestorm. During the first months of the pandemic, a leading sports fashion brand decided to withhold rent payments on its shuttered retail premises. However, the company had considered only financial productivity levers rather than the whole value creation ecosystem. The announcement sparked an immediate and expanding firestorm on social media. Fortunately, the company’s leaders were alert to the damage to the company’s brand value and announced within a matter of days that it would pay its rents after all. The social media storm subsided, and consumers returned to holding a positive view of the business.
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The article points out that this sequence of events underlines several lessons for organizations navigating the value ecosystem. The clearest is that simply setting up a presence on social media and treating it as a one-way messaging channel is doomed to failure. Social media is a two-way medium; it’s crucial to listen to consumer sentiment in real time and respond just as fast. The episode also highlights the importance of considering value levers in a holistic and coordinated way. And it shows that consumers will turn against a brand if they feel it’s behaving contrary to its own societal purpose — but they are ready to forgive if they feel the brand has listened to their concerns and responded by doing the right thing. Companies that aren’t agile in managing and building seemingly intangible assets such as brand and reputation will face rising risks to value in the years to come. This will only benefit companies.
Today, it’s vital for all leaders to be cognizant of the broad value creation ecosystem, given its profound implications for the creation or destruction of enterprise value. The opportunities for organizations that understand and manage all their value levers in a responsive and coordinated way are mirrored by deep pitfalls for those that fail to do so. The question we hope to have answered for you isn’t whether to set and execute your strategy to align with resiliency and societal value as well as financial productivity, but how. As we advance into the post-pandemic world, this will be perhaps the single biggest business challenge facing every CEO.
