Business strategy: Now is the time to review the business model
November 5, 2021
How business has changed
Owners and managers were well used to reacting to occasional shifts in their markets before Coronavirus re-set the entire business world. It was an essential part of their job, not just as they considered their results each year or set their annual budgets, but as and when significant events occurred in between.
Nothing can have prepared them for the whirlwind of the past twenty months of relentless disruption from lockdowns, ever-changing restrictions, and evolving biosecurity issues. The government has thrown billions at preventing businesses from succumbing, in the process bloating their balance sheets with borrowings from loan schemes and legacy debts for the likes of deferred payroll taxes and rent and cash flows distorted by neutering normal creditor enforcement action.
Covid has not been the only factor that has been moving commercial reference points. The Office for Budget Responsibility finally admitted last month that Brexit would have a greater negative effect on the UK economy (a 4% hit) than the pandemic, which is now expected only to reduce GDP by 2% in the long term. Supply chain chaos looks set to continue in both the short and medium term, to the extent that even the mighty Amazon is facing poor Christmas trading and its first quarterly loss since 2015.
What do business owners need to think about?
So, what now as it seems that some element of normality may be returning and the worst of this particular pandemic could perhaps be over? What are the main issues facing businesses? How best do they switch from surviving to thriving and from being reactive to proactive?
It has never been more important for owners and managers to stand back from the day-to-day and decide what the future should be for their businesses.
The relevance of the business model
There has been some remarkable flexibility during the pandemic, such as restaurants which pivoted from in-house only dining to an eat-at-home delivery offering and then to a more al fresco outdoor eating approach. Pubs created drive-through bulk beer collection points. Many bricks and mortar retailers switched with extraordinary speed and effectiveness to selling online. The question for these and other sectors is what will the new normal be for them and what permanent changes should they make to their business model. Below are 8 factors to consider when reviewing your business model.
1. Supply chain issues
With major motor manufacturers slashing new car production and predicting chip shortages continuing into 2023 and possibly beyond and even Apple missing sales targets for the iPhone 13 for similar reasons as well as because of shipping disruption, nobody should think that their particular supply chains will return to pre-crisis performance any time soon. Here the challenge is to what extent supply chain risk can be lessened by onshoring or near-shoring procurement arrangements and by widening the supplier base.
2. Buyer behaviour
Changes in customer or client preferences extend well beyond the debate about the durability of the WFH/hybrid working arrangements that have developed during the pandemic. Retailers are struggling to predict what consumers will want in future. Will their physical stores be no more than showrooms or a vital cog in a multi-channel experience? Equally challenging for wholesalers and manufacturers will be the potential ending of the global just-in-time supply chain phenomenon, which had dominated trade for several decades until Coronavirus struck.
After months of denial, the Bank of England, the Treasury and the government’s disciplinary shadow, The Office for Budget Responsibility have been in denial about the inflation demon haunting the UK and the global economy. At last, there is now a grudging acceptance that inflation is not just happening, but also that it is here to stay and at uncomfortably high levels.
Whatever the headline figures might be for the Consumer Prices Index, some sectors are facing far higher cost increases. Hospitality chiefs are reporting 14-18% inflation on input costs, construction has seen 70% rises in materials such as timber and bricks and the latest inflation numbers from The Office for National Statistics confirmed that across the manufacturing sector, input prices soared by 11.4% in September 2021 compared to a year earlier. The inevitable outcome for businesses is margin pressures and potentially lower profitability.
4. Debt levels
Government support for businesses during the pandemic has been well-meant and was vital in preventing the failure of huge numbers of viable businesses. The legacy has been a huge increase in borrowings, especially through the Bounce Back Loan Scheme, and a build up of legacy debt owed to HMRC and landlords. Owners and managers need to face up to the reality of paying this back and its impact on future trading prospects.
With so much debt already on board and the ongoing uncertainty about business trends, it will be vital to look at all existing sources of finance with a view to easing cash flow pressures perhaps by consolidating existing arrangements or negotiating revised terms and interest rates.
6. Counter-party failure risk
No business is an island, it exists as part of an eco-system along with its customers and its suppliers. The failure of the former will cause bad debts and the latter will threaten business interruption. The financial strength of all major customers and supply chain elements needs to be reviewed and steps taken to mitigate any risks.
7. Profitability and growth
Business thinking has long been dominated by top line obsession and an unhealthy focus on growth, best illustrated by the determination of major enterprises and their managers to be judged on this strange and misleading measure of EBITDA, pretending that somehow bottom-line profits are less relevant. The commercial world has facilitated and rewarded the busy fool syndrome.
The twin perils of high debt levels and inflationary margin pressures means that many businesses will have to look at shrinking their activity levels and focussing on higher returns from fewer customers, rather than chasing volume at the expense of profits. They should be mindful of the historic truth that uncontrolled and under-funded growth in the aftermath of economic shocks kills more companies than the recessions themselves.
8. Acquisition opportunities
Covid may have savaged the prospects of many UK businesses, but it has also created a host of opportunities for those with the ambition and the resources (both managerial and financial) to take advantage of them. Asset values have fallen and some owners are ready to exit after almost two years of the toughest times of their careers. Is this the right time to expand by acquisition or merger?
Gaining a comprehensive picture
The factors outlined above are only some of the major issues potentially facing businesses, many others also need consideration and there will be specific challenges unique to individual sectors. Some larger enterprises may have the resources and spare management capacity to undertake the wide-ranging review necessary right now, but this will be mission impossible for most without outside assistance.
Equally, it is remarkably hard for owners and managers to be sufficiently objective about their businesses to take the tough decisions the reviews will inevitably prompt, or to ask themselves the difficult questions inherent in such reviews. Using independent specialists is a positive step and is likely to produce a more comprehensive picture of the challenges faced and the options available to address them.
What cannot be in doubt is the urgent need for businesses to carry out a comprehensive post-pandemic strategic review. Not doing so is likely to be dangerous complacency at such a pivotal time.
If you believe your business could be impacted by these issues and you would like to arrange an initial meeting to discuss the best way forward, contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners. Our ethos has always been to engage with those facing difficulties with a constructive and positive attitude.