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Crucial investments to stay relevant

2021 දෙසැම්බර් 19

Crucial investments to stay relevant
00:00 / 01:04

It is an undeniable fact that in times when the pandemic kept mounting pressure, businesses that survived were those that made some crucial investments to yield healthy operating cashflows escaping the need to encounter longer...

COVID-19 wiped off a number of previously existent businesses as it sparked a wave of new trends and created a unique set of business opportunities. It transformed the business landscape drastically in almost every aspect – from consumer demand to supply chain operations to manufacturing practices and employee work methods.

While changing environments are not a new phenomenon to corporates and entrepreneurs, the trends of COVID-19 were unique in that they changed consumer behaviour indefinitely and redefined the business world perpetually. Its trends were here to stay!

As businesses reeled for cash during the pandemic, temporary tactics such as working capital management and cost and capital restructuring helped them get through cash crunches in the short term. However, as the pandemic kept mounting pressure for much longer periods, businesses that survived were those that made some crucial investments to yield healthy operating cashflows, escaping the need to encounter longer term cash deficits. Our series of articles in 2021 explored a number of such investment areas that are crucial for survival and success, and as the year comes to a close, we sum up the key areas of investments for our readers in this article.

Invest in the creation of a self-sufficient eco-system

Why: So that global supply chain disruptions cannot easily impact your continuity

Globalisation has led to businesses relying on one another for the completion of any business activity.  The risk of global inter-dependence is that if a single activity along the value chain is compromised, an entire value chain may be disrupted through job losses, capacity constraints, shortage of critical goods as well as the cost of re-building supply chains. In short, the emergence of the pandemic has taught us that while inter-dependence enables to get things done by the most specialized set of skills in the most economical way, it can disrupt a number of businesses should one link be impacted.

While it may be ideal to have control over every aspect of the value chain to mitigate this risk of disruption, it may not be pragmatic for certain activities from an economic sense of availability and cost. For example, locally manufacturing sparsely available raw materials such as API (Active Pharmaceutical Ingredients) for Pharmaceuticals or high-density interconnect circuit boards for electronics will be unviable.

Therefore, it is important for businesses to map high priority and vulnerable points along the value chain and bring viable, crucial processes under its control to construct a nearly self-sufficient and resilient eco-system.

Provided a firm has the financial ability, it should certainly look to bring at least some elements of supply chain activity within its control. Crucial activities such as raw material supply, production and distribution can be brought within one’s control by making part or full investments on:

  1. Setting up manufacturing facilities – This could enable firms to plan production based on demand especially in volatile environments where one is uncertain of consumer purchasing behaviour. This option gives firms the ability to halt and resume production based on demand rather than be held with inventory and incur holding costs, wastage, stock outs or sales losses.  Alternatively, businesses could invest on pre-fabricated production facilities, although this may be more costly and less tailor-made to suit the firm’s production methods. Spreading investments across multiple plants as opposed to having all state of the art technologies concentrated in one site can further minimize impacts of external shocks.

  2. Forward and Backward Integration – Acquiring key distributors and B2B customers (Forward Integration) and/or key suppliers (Backward Integration) would offer visibility and control over value chain activities. One could even look to purchase land that grows/develop the raw materials used in production. This could prove to be part of a strategy that enables firms to invest in adjacent industries, branching out of their core to diversify risk of over-reliance on a single industry.

  3. Re-shoring production – Several companies have explored the potential to re-shore operations, and create a local supply network, to provide greater security of supply. However, reshoring also means greater reliance on own production, which limits the scope for cushioning shocks, particularly those that may originate domestically.

  4. Diversifying sources of reliance – Creating the ability to flex procurement to alternate sources if one link breaks through a diversified base of suppliers, including those from different regions can help build resilience, although it does not bring the overall eco-system within ones control.

Process Automation and Technology

Why? Seamless Connectivity and Speed are crucial aspects

The technologies of the fourth industrial revolution are drastically changing the world we live in, evolving at a rate and scale beyond any historical trend. The impact and influence it is having on day-to-day business is making it impossible for firms to ignore.

Hence, firms should look to invest on:

  1. Process automation – Digital transformation along supply chains and shop floors can help generate speed, efficiencies and be disease-resistant (using technology to minimize the amount of hands-on contact involved). Some already prevalent technologies that support with speed include laser technology for product finishing (Levis) and 3-D printers for prototyping (Spuni).

  2. Supply chain integration – Setting up smart factories where almost every component of the production line is embedded with sensors, software, and other technologies that are connected via the internet to exchange data with other devices and systems. Investing on smart logistics including smart warehouses and distribution centers with smart sensors on stock to enable real time data collection and exchange across other value chain partners. Collecting and communicating stock data to supply chain partners in real time can assist them in more effectively coordinating their own procurement and inventory activities. Integrating consumer sales e-commerce portals to the manufacturer’s warehouse and distribution portals, would reveal stock outages or demand drops early on. Businesses can then immediately shift focus to stay on top of demand, clear bottlenecks, reduce waste and improve profit margins.

  3. Contactless Delivery – Due to the highly infectious nature of the COVID-19 virus, most delivery services have gone contactless. From leaving parcels on doorsteps, to even in some cases sending robots out to fulfil the deliveries, no-contact deliveries have become the standard practice of many major companies such as UberEats, Deliveroo, and Amazon. Automatic delivery services like drones and autonomous vehicles are likely to become a global norm. Since contactless delivery encourages digital payment modes, it also eliminates misuse of money, and lowers the cost of converting physical cash into digital currencies.

  4. Work from home – One of the most significant changes that COVID-19 instigated was the widespread shift from working in physical office spaces to working remotely. Remote working has proven to offer greater flexibility and control over employee schedules, and in turn, lowered company costs and improved productivity. Due to the persistence of the virus, and the advantages of working from home, it’s unlikely that the remote working model will fade anytime soon. In fact, most experts believe that a hybrid model, with a combination of work from home and physical office to be the norm. According to a survey of a network of tech professionals Blind, 80% of respondents believe the future of work is likely to be hybrid.

Investing in online marketing channels

Why? This is where consumers are truly indulging and spending.

1.  E-commerce and online platforms: The coronavirus pandemic has acutely changed the way people shop. Throughout the first lockdown, 58% of consumers chose to purchase online, which was up 12% compared to pre-pandemic levels – Forrester. Survey data reveals that 55% of digital buyers in the UK said they would continue to shop online in the future even after the crisis is over – ChannelAdvisor.

Platforms that connect buyers with sellers such as Amazon and Uber are ideal for startups as they can increase visibility and overcome barriers to entry increasing touch points with the customer. For those SMEs that find platform sales commissions too costly, they can use such platforms simply as a marketing mechanism, and not as a primary mode of sale. Educational institutions can explore advanced systems for learning, including virtual and augmented reality, as well as streamlined ways to stay connected to the customer. The healthcare sector may deploy 5G technology to support telehealth systems that improve patient care, even across great distances.

2.  Social Media – The coronavirus has also exponentially increased the amount of energy and time spent on social media and will continue in the future. In the US, social media ad spend was expected to increase by 15% in 2021 year-on-year, nearly doubling spend compared to 2017 levels – Finaria

There has also been a recent growth in influencer marketing on Social-Media. Similar to celebrity endorsements, influencer marketing requires individuals with large social media platforms to bring awareness to specific brands or products. Since so many high-profile industry leaders in the fields of sport, wellness, and fashion have large social media followings, influencer marketing is an incredibly effective way to tap into potential consumers. Even micro-influencers who are individuals with anywhere from 1,000-100,000 followers are also significantly improving a brand’s visibility. Since these types of influencers typically have very active channels and higher levels of engagement compared to users with larger followings, the influencer’s message is more likely to resonate with their followers.

Invest in data and data analytics

Why: Data analytics will help you know and target your customer accurately

As lockdowns increased time spent at home, in addition to making purchases, people have been generally spending more time online. Time spent online in the last 5 years have increased drastically from 134 minutes to 192 minutes per capita per day worldwide. This has created increased data volumes on consumer behaviour and purchase patterns to corporates. Businesses that are future proofing themselves are harnessing this data to their advantage by deploying it for improved predictability, to run simulations of demand patterns, target their marketing campaigns more effectively, and figure out better ways to execute their internal processes. Frontline workers and executives can better understand how to shift operations when needed, by honing in on the ability to detect changes in demand and issues before they arise.

Businesses are also leveraging such data and analytics throughout the value eco-system for real-time connectivity as tech systems enable the free flow of information between value chain partners enabling them to simultaneously access relevant information. This allows for optimized decision-making and execution. Given the numerous advantages data is generating to such firms, the trend is unlikely to fade. Utilising data has proven to improve profits, with a BARC research report revealing that businesses who used big data saw a profit increase of 8%, as well as a cost reduction of 10%.

Hence, firms should look to invest on:

  1. Hardware technology such as micro-chips and IT architecture for data collection – This includes cloud solutions, social media accounts, RFID chips, and GPS devices to access and collate data from anywhere as well as devices to store and organise data effectively.

  2. Software systems to generate useful insights – Firms should invest on software systems that carry out analytics and run simulations for useful insights on trends and behavour. Corporate giants are closely monitoring customer behaviour and collecting data on their preferences using data algorithms and machine learning. This is then used to help with real time predictive analytics, tailoring suggestions based on past searches and preferences to offer a personalized experience, and even going well beyond that to influence key business decisions such as which disruptive products, businesses or business models to invest on.

  3. Cyber security systems to protect data from malware and hackers.

Invest in the development of soft skills

Why? Tech is permanently erasing some of the previous job roles off the board.

 As automation, AI, and robotics take hold of the workplace, the need for manual and physical skills, as well as basic cognitive ones are declining and soft skills are growing in importance,  because they are:

-Unique – Soft skills are unique because they vary based on a person’s own experiences and views. How one person leads an organization or solves a problem may be very different to another’s approach.

-Cannot be replaced by tech – As automation and AI take over a set of skills that man once performed, it’s time to nurture skills that technology cannot easily replace or master.

-Transferable between jobs – Soft skills are transferable between jobs and across industries as they are more people oriented and not technical or job specific.

-Optimize the hard skills one possesses – While education degrees and hard skills can help drive performance of employees, project execution can still fail if employees do not possess the right soft skills. Understanding what a customer clearly wants and delivering better are more an influence of soft skills than hard skills.

“87% of companies are experiencing skill gaps or expect them within a few years, and this tumultuous job market has birthed a new desire from employers to replace traditional skill sets with “soft” skills” – McKinsey

So, firms should be investing on hiring or training employees to develop skillsets that are:

  1. Higher cognitive skills –such as critical thinking, complex problem-solving, mental flexibility, resilience, creativity, originality and emotional intelligence. Global giants such as Google and Amazon have been among companies that have recognised this.

  2. Interpersonal skills – This includes social and emotional skills such as empathy, inspiring trust, developing relationships, teamwork effectiveness as well as time management.

  3. Self-Leadership Skills – This incudes self-awareness, self-management, ingenuity, entrepreneurship and goals achievement. Truly agile firms have more leaders committed to change at all levels of their organisation. In a constantly volatile environment, folks that have the skill to influence a crowd and gear them in one direction will be of high demand. This is because, in this ever-changing world of work, leaders will need to keep reimagining the future, pivot workforce to new growth targets and either upskill/reskill their people.

Investments in the creation of intangible assets

Investments in innovation, brand capital, technology and software, data and intellectual capital are turning out to be the secret ingredients underpinning speedier growth of companies and countries. Although categorized as intangible assets, they are impacting performance in a tangible manner.

Investment in intangibles delivers a comparative advantage for business longevity and growth: It is increasingly evident that firms that have a longer business life and are recording higher growth are those that have secured a comparative advantage – one that gives them an edge over competitors. Intangible assets such as copyrights, goodwill, non-compete agreements, patents are invisible differentiators that enable longer business life, securing a firm’s product, service, idea, any form of creation or design beyond a time period that it takes a competitor to reverse engineer or recreate the same product. This enables revenue optimization for the product created over a period long enough to create economies of scale, lower costs and higher margins. Similarly, companies that invest on intangibles such as innovation, research and development and closely monitor the impact of such investments through rigorous processes are more likely to record faster growth as opposed to companies that do not spend on such innovation or the creation of new products.

For example, Apple and Samsung have grown faster and stayed in the ever-changing mobile phone industry longer than peers as they have continuously invested in smart phone innovation. A McKinsey survey proves that firms that master the deployment of investment in intangibles will be well positioned to develop a comparative advantage, grow faster and outperform peers.

Investment in intangibles also generates a higher market value: 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value, or intangible assets. A study of the market value of the 5 largest global companies (by Market Cap – S&P 500- Apple, Alphabet, Microsoft, Amazon and Facebook) reveals that as much as 84% of the total enterprise value is being generated from intangible assets.

This shows that in companies that have made it to the top, intangibles account for a majority of the value, in turn revealing that, higher the value of intangibles, higher the potential growth of the company. 43 years ago, the top 5 leading companies in the world had only 17% of their value being generated by intangibles. The rise to 84% today is confirming how intangibles are playing a crucial role in value generation and business success today.

Hence, firms should look to invest on:

1. The creation of brand capital (patents, trademarks, reputation and goodwill) – Pharma and healthcare companies are seeing a large portion of their revenues being driven by intangible assets such as brand capital. 4 of the top leading 20 firms on S&P 500 belong to the pharmaceutical and healthcare industry, with patents, trademarks and goodwill through mergers and acquisitions being the secret behind their success. Consumers want to buy their medicines or products simply for the brands reputation, while competitors do not have access to their APIs as they are secured by patents.

This reveals that despite the high consumption of time and resources on efforts to invest on innovation, research and development for the creation of brand capital, its value generation potential is much higher and significantly worthwhile. Firms should hire experts, rent labs and creative spaces, develop new features and carry out product testing frequently to ensure products are in sync with market needs.

Moreover, areas of investment discussed above such as investments in software and technology, data and IP as well as human capital also are lead creators on intangible assets, which is why they are proving to be crucial investments.

2. Software and technology – As the world has shifted from a purely physical to a dominantly virtual world, KPIs determining user experience has almost entirely shifted from physical experiences to virtual experiences that a firm can offer and is determined by the speed of software, user friendly interaction and hiccup free experience online.

3. Content, Data and IP – Proprietary data is a unique resource creating a differentiating edge for many leading firms across the globe. This is because data-backed innovation helps identify new growth areas and timely opportunities even before the realisation of that need by consumers.

4. Human capital– The growing knowledge economy is increasing the importance of human capital. Human capital, loosely defined, includes knowledge, skills, and the abilities of employees. All intangible assets including, patents, copyrights, software, intellectual property, research & development rely on human capital in one way or another. A company’s intangible assets, including human capital and culture, are estimated to comprise more than half of a company’s market value on average.

On top of other investments discussed above, companies should also look to focus on becoming more conscious of their activities as external trends are changing the basis of competition. Growing conscious consumerism, impact investors increasingly factoring in ESG – Environmental, Social, Governance – principles into investment decisions, attractive talent seeking conscious employers, instantaneous reporting exposing business activities in almost real time as well as regulatory pressure from governments and international organisations that monitor the wider implications of business operations, are compelling firms to be more socially responsible.

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