This article was co-written by PwC partners Aaron Gilcreast, Global Valuations leader, Partner, PwC US; Helen Mallovy Hicks, Partner, PwC Canada; Hein Marais, Global Value Creation Leader, Partner, PwC UK; and Chris Manning, Partner, Strategy&, PwC Australia.
In the blink of an eye, COVID-19 disrupted the business environment and illuminated a profound, sometimes overlooked truth: that to create, protect and sustain enterprise value, executives must consider a set of stakeholders much wider and more diverse than just shareholders.
Disruption and the breadth of the value creation ecosystem are, in fact, connected. In recent months, it’s become clear that the pursuit of financial productivity and profitable growth, long the core of traditional value creation models, is inadequate on its own. Those looking to create enterprise value must also cultivate resilience and contribute to the well-being of society.
For businesses looking to forge a new path coming out of the pandemic, it’s no longer enough to focus on financial productivity. The increasing importance of ESG attributes and their interplay with Value Creation shows why companies need to be looking at intangible assets, such as an organisation's resilience and adaptability, as well as tangible.
Even before the pandemic, the Business Roundtable’s August 2019 “Statement on the Purpose of a Corporation” — signed by almost 200 CEOs to express their commitment to not just corporate shareholders but all stakeholders — reflected an evolution in the way leaders were thinking about how to run their companies. What has changed recently, though, is that the COVID-19 pandemic has highlighted the fragility of relationships throughout the ecosystem and the dynamism of change within it. It’s also amplified and accelerated the connections among financial productivity, resilience and society. And it’s accentuated the danger of ignoring any of these parts of the value creation ecosystem.
In all these ways, COVID-19’s impact has been acute. But other long-brewing disruptions — including the quickening pace of technological development and growing concerns among investors and consumers about issues such as climate change, racial inequality, income disparities and political polarisation — have the same implications. As these forces escalate, some will have a substantial and rapid effect on enterprise value.
Turn disruption into an offensive weapon by reinventing planning processes, reframing strategies and revising ways of working.
Now is the time for leaders to analyse these varying impacts and turn disruption into an offensive weapon by reinventing their planning processes, reframing their strategies and revising their ways of working. And in taking these steps, organisations need to recognise that disruption and value creation are inextricably linked, and although disruption is continually posing risks to corporate value, it’s also presenting new opportunities. Here are five actions you can take to create long-term enterprise value in today’s value creation ecosystem.
If a strategy is disruptive, it can be difficult or even impossible to measure its value creation potential with any certainty prior to execution. In fact, any attempt could end up blocking innovation and, ultimately, value. Instead, leaders should look to achieve a “visionary valuation” by clarifying the forms of value they’re trying to create, understanding how commitment to those types of value will drive enterprise value, and developing a set of key performance indicators (KPIs) to track value creation across this broader ecosystem. Then, while executing the strategy, the business should measure the outcomes continually, using the results to recalibrate, course-correct or even replace the strategy, and to report, listen and respond to stakeholders in a feedback loop.
To rethink strategy in the face of disruption, businesses in any industry can ask: If we were coming into this marketplace today as a new entrant, unburdened by legacy infrastructure and assets, what strategy would we adopt? This blank-slate mindset enables leaders to anticipate new competitive threats and opportunities and potentially formulate, evaluate and fine-tune a strategy that could turn them into actual, not hypothetical, disruptors. We’d suggest, in fact, that the gathering force of the environmental, social, and governance (ESG) imperative will create enormous opportunities for disruption and self-disruption, just as the digital revolution did.
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 organisation’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 prioritise, and to identify and act on the most effective value drivers in the value creation ecosystem.
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.
It’s 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 behaviour 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.
The broad value creation ecosystem has profound implications for the creation or destruction of enterprise value. But these five actions will help organisations understand and manage all their value levers in a responsive and coordinated way.
The drivers of enterprise value extend beyond financial productivity — and as disruption intensifies, businesses must adapt to avoid value destruction. Find out how disruption and the breadth of the value creation ecosystem are connected.
As a business leader, you know that today’s decisions define tomorrow’s value. From improving your market positioning to maximising shareholder return, value creation is your way to a more resilient tomorrow.