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COMMUNITY UPDATE

Criticaleye's Community Updates are read each week by Members, registered users, and subscribers globally. Click on any of the topics below to see the corresponding newsletter. If you would like to comment further on any of these topics, write to us via info@criticaleye.com.






As we edge past the halfway point of 2018, business leaders continue to grapple with changing customer behaviour, technology disruption, as well as political and economic uncertainty. For boards and senior executives, the only way to navigate this volatility is to build organisations that can respond rapidly as new situations – both good and bad – arise, while also keeping a keen eye on strategy. 

In research conducted at Criticaleye’s Private Equity Retreat earlier in the year, only 21 percent said they were ‘reasonably confident’ of growth in the UK economy in the next 12 months. By contrast, much greater faith was placed in the global economy as one-fifth were ‘extremely confident’ and 48 percent ‘reasonably confident’ of growth over the next 12 months.

Matthew Blagg, CEO of Criticaleye, comments that the biggest challenge he sees executive teams facing is one of perspective. “CEOs today must remember where they need to stay focussed as it’s very easy to get distracted. Fundamentally, the priority at present is around people – retaining your best talent, understanding where to bring in new skills, and looking at leadership capability.

“This is borne out across the research we’ve conduct with NEDs, HRDs, CFOs and CEOs. They know that without the right mix of individuals and teams in their organisations, they will not be able to perform at the level they need to. In some ways, this has always been the case for businesses, however, the difference is the speed at which they now need to move and adapt to situations.” 

Here, members of the Criticaleye Community offer their predictions for the next 12 months: 
 

Trade Wars

Tim Drayson, Head of Economics, Legal & General Investment Management 
 
The global economy is growing quite rapidly now, which means the probability of recession is low for the next 6 – 12 months. 
 
However, the main threat is the recent escalation of global trade wars. President Trump is threatening another $200 billion-worth of goods being hit by a 10 percent tariff. This is on top of the 25 percent tariff on $34 billion-worth of Chinese exports to the US that he’s recently gone ahead with. So far, the macro-economic implications of tariffs on steel and aluminium, washing machines, solar and lumber have been negligible – outside those individual industries – but if he goes ahead with the $200 billion then it would start to have a more significant direct impact on GDP; somewhere in the region of a quarter to half a percent. However, the biggest uncertainty is the indirect effect; financial conditions and business sentiment could be shaken by changes to the global trade order.
 
The market can absorb limited tariffs in one or two industries, but a wider escalation would have a negative impact on financial markets and business confidence. The $200 billion would start to impact consumer goods and couldn’t be entirely absorbed by producers and businesses’ supply chains. 
 
In the UK, one proposed benefit of Brexit was the ability to strike trade deals with the rest of the world. Given the current tensions, the chance of securing such arrangements is diminishing, especially with the US. 
 

Supply Chain Risk  
 
Till Vestring, Board Mentor, Criticaleye, and NED, Keppel Corporation and Inchcape 
 
The big question for businesses in Asia is: will there be a need to fundamentally review supply chains? They have evolved as trade has grown massively from the liberalisation of the past 20-30 years. Parts get shipped from Taiwan to China to Japan and then to the US and on to the final consumer in Europe. 
 
These intercontinental supply chains exist in many businesses, and Asia has been the prime beneficiary of these. Now, businesses will need to consider scenarios where, because of higher tariffs, trade wars and more nationalistic agendas, supply chains will need to be shortened. You need to start looking for suppliers closer to your market – within the same trading zone. 
 
Businesses need to ask: do we need to reconfigure our plant and our suppliers? Do we need to find new customers? There will be significant implications on investment and allocation of resources. This is mostly bad news for many countries in Asia. At a minimum, multinationals will be holding off on the decision to open a manufacturing plant in, say, Thailand right now, while they see how these things may play out over the next 6 – 12 months. If global trade were to decline over the longer term, multinationals will reduce investment in Asia and growth would suffer.
 
On the positive side, many companies are sitting on lots of cash and would like to make acquisitions, but prices have been high. Uncertainty means that growth may slow, share prices fall and some companies will struggle, increasing the opportunity to make attractive acquisitions. 
 
Smart companies are writing a shopping list and working out what prices they’d be willing to pay.  
 

Keep Innovating 
 
Andy Gibbs, CFO, Graze
 
Stock markets are strong, but there’s a nagging uncertainty for businesses over the longer-term trajectory. We will be assessing the impact of Brexit and starting to plan, but this is hard to do because of the lack of clarity on where things are heading. We are identifying the areas where we think our business will be affected – such as labour availability, tariffs and regulatory frameworks – assessing the impact and starting to address them. 

Technology is continuing to change how businesses operate. Because we have direct relationships with our customers, we have an enormous amount of data about consumer trends, and it’s about using this data to bring innovation to market. Graze has now become one of the bestsellers in the cereal bar aisle, enabled by insights from its online business, such as the growing popularity of plant protein. 

Data can enable your business to be more efficient, or to innovate more quickly. We are starting to apply agile to our innovation process; we want to see finished products rapidly, using a team drawn from functions across the business. With our online operations we can get that innovation in front of our customers quickly and get their feedback in days. 

Businesses have to keep innovating and stay ahead as technology evolves. 
 

Finding Talent 

Dylan Minto, CFO, Shawbrook Bank

Increased competition and pressure on margins, in light of cheap central bank funding, is a key challenge within the UK banking market, and it comes from both inside and outside the banking sector. There are non-regulated players now operating within markets that traditionally only banks serviced. 

At the same time, there is around £125 billion of central bank money from the Term Funding Scheme that matures across 2021, and bank boards are analysing carefully how this will be refinanced. We, and other banks in our sector, are planning prudently how we will repay this and where the funding will come from. 
 
Human capital is a further constraint within the banking sector; we’re all fishing in the same employment pond and it is a very small pool of talent that we are trying to access. Employment is at a record low of 4 percent and even lower in the City – finding new employees is difficult and comes at a cost. The skills needed are varied, but there are pockets in high demand, including: compliance, governance – particularly around risk modelling – and treasury. 
 

New Business Models  

Mona Bitar, Partner, EY Advisory
 
We are going through a period of disruption. Everyone is focusing on the implications of technology, but it’s also important to reassess what you want to be to your end user and to communicate this. Businesses need to ask the “why” question. For example, as a B2C business, why will customers still want to buy your goods and services? What is it that will differentiate you? 
 
Almost every business is currently facing the challenge of pivoting to new ways of working and a lot of this is driven by tech disruption. As a result most businesses I see have around 200 significant initiatives around this pivot, and each of these is taking a share of the investment pot. This means they aren’t moving quickly or scaling enough. Organisations must decide what they will do to maintain their traditional business and which focused initiatives will support their pivot. Crucially, they have to decide what they will stop doing. 
 
The allocation of resource needs to be much tighter if they are going to succeed in the future. 
 

Emma Riddell, Senior Editor, Criticaleye

Next week’s Community Update will consider What Makes a Great Leadership Team.