It is said that the story of corporate India would, most likely, be divided into pre-COVID and post-COVID scenarios. Interestingly, the business environment is expected to change drastically in the coming months.The corporates that will survive and thrive in the new dispensation will be the ones best prepared. In an insightful analysis, the McKinsey Global Institute (MGI) has captured 5 key agendas for Indian corporates for the future.
Create resilient balance sheets and cash flows
One thing that the COVID-19 crisis has highlighted is the huge risk of leveraged balance sheets. It ishardly surprising that mega businesses like Reliance Industries and even Tata Motors are putting so much emphasis on reducing debt. Low levels of debt give corporates more flexibility and less commitment pressures in tough times. COVID crisis is likely to trigger an aversion for debt among Indian corporates and we seeurgency in debt reduction.
If flexible balance sheet with low debt is one side of the story, sticky cash flows is another. Too much of fixed costs, contractual rental payments are not conducive to flexible cash flows. Apart from the cash flow impact of deleveraging, we could see a greater shift to shorter term lock-ins, better sharing of risks and more use of flexible labour. The companies that have held their profits in the June quarter were the companies that had the flexibility to cut costs in tandem with the lower revenues.
Focus business more on value creation
When capital is easily available, companies don’t bother about efficient allocation. MGI has done an interesting study on capital allocation in India in the last one decade. According to MGI, out of the $1.1 trillion capital invested in the last decade, 84% of the investments were concentrated in 3 sectors that destroyed value viz. energy, materials and financial services. Only 16% went to the value creating sectors like IT, healthcare and consumer goods. This dichotomy cannot sustain in the post-COVID scenario.
Successful companies will try and move more of their capital allocation towards the value creating sectors. So if you find the biggest industrial groups foraying into digital space or healthcare verticals or giving their business a consumption tilt; don’t be surprised. That should be the way ahead, post COVID. The return on invested capital (ROIC) of top 2500 Indian companies fell from 12% in 2008 to 8% in 2018. COVID makes it imperative to reverse the trend.
Transform businesses with digital / analytics
The shift is visible even at the most basic levels from online education to online commerce. MGI estimates that such digital technologies could create value to the tune of $1 trillion in Indian alone. In the post-COVID scenario, digital transformation could happen on 3 fronts.
We could see a major shift towards digitization of sales on the B2C and B2B front. This will allow customer enlargement and the explosion of new markets in an efficient and economical way. The second aspect will be the digitization of supply chains. This will lead to lower inventory levels, less working capital and trigger greater collaboration among competitors. When market is growing exponentially, competition can afford to collaborate.
We have seen the collaboration of legacy banks and start-up Fintechs.That kind of collaboration between companies in different aspects of the value chain could expand considerably. Executives admit that their own future would depend on how they adapt to new technologies.
Safety, flexibility and productivity in operations
Work from home or WFH is one big trend that is catching on. Thanks to the cloud and superior broadband connectivity, it is feasible to run a distributed infrastructure company. Big guns like TCS and Infosys are planning to allow 30% of their workforce to operate from home and that could be the flexible norm going ahead.
The second big challenge will be bridging the productivity gap. With the average productivity of Chinese workers at 4X of India and South Korea at 16X of India, it is hardly a sustainable scenario. Unless Indian companies enhance productivity standards, the post COVID scenario may be tough to contend with.
Systems thinking in decision making
What exactly does this mean? For a long time decision making in Indian companies was into a clear straitjacket where performance was to be rewarded. If the first four shifts have to be effective, then the way the company evaluates and rewards employees has to change drastically. Otherwise, the first four shifts are unlikely to materialize.
MGI underlines that COVID-19 may have accelerated changes by the unexpected shock. Strengthening balance sheets and allocating capital to the highest ROIC project are known caveats. It is just that COVID-19 impels Indian companies to align their thinking. To quote Charles Darwin, “It is not the strongest or the most powerful that survives. It is the species that is most adaptable to change”. The onus is on corporate India to adapt to the new order.