Not only has the Covid-19 pandemic had a serious effect on the lives and livelihoods of people in India, sickening thousands and driving up the nationwide unemployment rate, it has also accentuated some of the long-standing challenges faced by the country’s large businesses. For many executives, the Covid-19 crisis has come as a wake-up call to address these barriers to growth and profitability.
Overcoming these challenges won’t be easy, as we heard in dozens of conversations with senior executives over the past few weeks. Some challenges will have to be met with organisation-wide efforts to change established practices. Others will require tough decisions, such as whether to pivot away from existing businesses and toward those with more value-creation potential.
The moment is too significant to pass up. Companies that act now could emerge stronger from the crisis. Accordingly, corporate directors, CEOs and executives are focused on five priorities for building long-term strength.
First, executives said they recognise they need to gain control over their companies’ balance sheets and cost structures. Before the crisis, the high cost of debt and fierce competition for profits forced companies to spend a predominant share of their earnings on debt service. Covid-19 has lowered some companies’ revenues to where they were three to five years ago, further reducing their financial flexibility.
Rather than take on more debt liabilities, many executives said they plan to seek equity financing, particularly from foreign strategic investors. Executives said they also see a need to shrink their cost bases. The fixed costs of large Indian companies amount to 49 per cent of their cost base on an average across sectors. In service sectors the proportion can be as high as 60 to 70 per cent; in manufacturing, it is around 20-30 per cent.
By downsizing and shifting fixed costs to variable costs, Indian companies can lower their breakeven levels (revenues required to cover fixed costs) by 30 percentage points. That would help them to withstand sudden declines in demand like those caused by the Covid-19.
A second priority is reshaping business portfolios so they create more value. Corporate India, like the rest of Asia, allocates much of its capital to sectors, which lose value. McKinsey research shows that 84 per cent of India’s $1.1 trillion in invested capital is concentrated in sectors, which lose value (at an aggregated sector level), such as energy and materials, domestic services, and financial services. And in every industry, there is a wide and growing gap between the returns of value-creating and value-losing companies.
Indian companies can create more value in part by shifting toward knowledge and innovation-led businesses, which have minimal capital requirements and are positioned to capitalise on changing consumer preferences and new environmental imperatives. Another promising sector is infrastructure, where the government has announced big spending plans. Agriculture and the associated rural economy, too, could grow rapidly because of reforms announced in May.
A third priority is embracing digital and analytics, both to transform legacy businesses and to build new ones. Executives we spoke with say they believe their companies can benefit from digitising a range of activities and offerings: customer experiences, sales processes, supply-chain management, and manufacturing operations among others. Such changes could help them increase customer engagement, lower costs, shrink their physical footprints and — crucially amid Covid-19 —eliminate person-to-person interactions.
The need to prevent exposure to the coronavirus underpins a fourth priority: Building greater safety, flexibility and productivity into operations.
In some workplaces, such as factories, going back to work will mean implementing new safety measures. The protocols of essential businesses point to useful practices for companies in any sector. Such protocols are especially important for manufacturers, which remain less productive than competing businesses in China and South Korea. To boost productivity, they’ll first have to bring more workers into plants.
The fifth priority that executives mentioned is anticipating and managing the effects of their companies’ decisions on a wide range of stakeholders. For example, companies in India have set up systems to reward employees for strong performance. But one result has been that senior management reaps greater and greater rewards, while the gap between executive and worker pay widens each year, creating adverse social consequences.
Chief executive officers said they recognise how responses to the crisis, in India and worldwide, have required various stakeholders to act in unison, sometimes across sector or competitive lines. And they say they are more inclined to broaden their decision-making envelopes and think about their organisations, their communities, and the global environment.
In this way, and many others, the coronavirus pandemic has jolted executives out of their customary ways of thinking. Now their task is to address perennial challenges that the crisis has made more urgent. Companies that do this can become healthier and more resilient, and more likely to persist through the downturn and thrive in the next normal.
The author is a senior partner in McKinsey’s Gurgaon office