Adapting to the New Reality
strategy; strategic understanding 09/11/20 Jeff Bondy

For the majority of companies, responding to demand shifts must involve digital transformation. Microsoft CEO Satya Nadella observed at the end of April, “We have seen two years’ worth of digital transformation in two months” among enterprise customers. Employees at companies across the board have adjusted to working remotely and collaborating via video conferences. Many of those habits and patterns will stick permanently. Together, these factors explain why, in a survey of Fortune 500 CEOs, 63% said the Covid-19 crisis would accelerate their technological investment despite financial pressures. Only 6% said it would slow it down. But to make a difference, those IT investments should focus on specific business-model innovations to address new opportunities, rather than increasing the use of digital technologies in general.

It may be psychologically hard to do during a crisis, when cashflows are stressed, but now is precisely the time to take a few well-considered risks. Research shows that the most successful companies not only invest more than their peers in new opportunities but also put their eggs in fewer baskets devoting more than 90% of net spending to segments with higher growth and returns. These companies recognize that a crisis offers an opportunity to carve out a new competitive position.

Unfortunately, many companies are still defaulting to traditional habits of “peanut-buttering” new funding across the business and, when necessary, making horizontal cuts rather than targeted ones. According to the authors of this article, as of May 2020, only 39% of companies had modified their investment and capital allocation plans to target new growth drivers, and of that minority, only half had made investments in new business models. Rather than hoard cash, the authors state that “CEOs need to engage in more-aggressive capital investment.” To avoid that trap, they go on to state that “you need to evaluate your capital investment projects along two dimensions: their estimated value tomorrow, after taking into account the impact of demand shifts, and the amount of money needed to keep them alive today despite constrained operational cashflows. You can do this at the business unit level, but ideally, you should dive deeper to examine specific operations or initiatives. Once you’ve completed this exercise, you’ll most likely realize that you need to radically reallocate your capital investment.”

In times of crisis, it’s easy for organizations to default to old habits—but those are often the times in which new approaches are most valuable. As companies position themselves for the new normal, they cannot afford to be constrained by traditional information sources, business models, and capital allocation behaviors. Instead, they must highlight anomalies and challenge mental models, revamp their business models, and invest their capital dynamically to not only survive the crisis but to thrive in the post-pandemic world.

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