While the legacy of the COVID-19 pandemic continues for many, it’s also become a driver for positive adjustments for businesses both internally and in the marketplace. Necessity was behind some of the change, evident last year as businesses looked to streamline and bring forward digitisation plans.
This year we can see that 90% of businesses surveyed have already digitised, or are currently undergoing a digital transformation. This is a positive change, as New Zealand businesses previously lagged behind the rest of the world, with only 23% considering digitisation a top priority in 2019, compared to 44% of global businesses.
This is in contrast to our 2021 Global Family Business Survey, where only 39% of global organisations said their digital capabilities were strong, demonstrating the importance of digital enablement in the modern business environment and its greater prioritisation by New Zealand businesses. Of those businesses with strong digital capabilities, 57% remain focussed on continuing to improve them.
There was also sentiment among the businesses surveyed that the pandemic experience would allow them to return stronger and better equipped to navigate ongoing change. Now in the middle of 2022, it’s clear those who made adjustments to their organisation will be in the best position to face new challenges presented by dynamic global markets, inflation, growing supply costs and access to talent. While those challenges are current, there’s evidence that businesses are in tune with the rapidly changing outlook and have adjusted growth and development plans accordingly.
Global economic drivers are changing continually, with factors not considered before the pandemic. This is influencing what businesses assess as their biggest challenges ahead. While the issues are largely the same as in previous years, their significance has increased.
While these top business challenges are to be expected given the current economic environment, what we’re not seeing is a significant focus on Environmental, Social and Governance (ESG) concerns. This is similar to what we’ve observed in other global surveys, including PwC’s Global Family Business Survey and the New Zealand results of the CEO Global Survey, with businesses generally under-prioritising ESG. Where small and medium sized businesses in New Zealand differ from their global counterparts is in their desire to take a leadership role to address ESG challenges, with only 25% expecting to lead in this space.
What’s clear globally is the increasing demand for companies to demonstrate their sustainability and climate credentials, which can have a significant impact on how investors, customers and potential employees view and respond to an organisation. While it might not yet be seen as a priority by many New Zealand businesses, the global market is rapidly changing and ESG is one of the areas where small and medium sized companies have the opportunity to lead. As the most trusted form of business, potentially more agile and relatively free from short-term market pressures, small and medium sized businesses can make a substantial impact by embracing the ESG agenda.
The top three challenges that respondents identified in the latest Engine Room survey indicate a significant level of concern about those issues. 78% identified sales growth as the biggest challenge, followed by availability of key skills at 49% and supply chain at 33%.
Combined with the continued impact of COVID-19 and, importantly, how both New Zealand and our trading partners react to it, the survey respondents are cautious about their growth ambitions in the near-term, with the majority of businesses preferring steady growth.
Over the next two years, 40% of respondents identified a focus on growing sales as their priority, while nearly a quarter are keeping a careful eye on the regulation and tax environment.
In part, we can see a response to this uncertainty is already underway. While many export markets have recovered to pre-COVID activity levels, there has been a shift in focus away from China to markets closer to home, such as Australia, and to domestic growth.
Given the working conditions imposed on businesses by COVID-19, it’s clear that those who needed to digitally transform the way they work and the tools they use have done so, clearing the path somewhat towards tackling the challenges that directly relate to growth and revenue.
Strikingly, we can see similarities in how businesses responded about digital preparedness prior to COVID-19 as we now see in the responses about ESG. Only 3% see the impact of sustainability targets being a challenge over the next two years, with the same percentage concerned about changing workforce demographics and diversity. While there is an acknowledgement that protecting our environment and fulfilling our social responsibility is important, New Zealand businesses have yet to embrace an ESG transformation with any sign of urgency or action.
The lingering impact of the COVID-19 pandemic, while ever moving, has become a business-as-usual problem for many of the businesses surveyed. There are still plenty of variables within the pandemic mix to ensure a need to be nimble and avoid complacency.
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For exporters, predicting how the world stage will continue to evolve over the next year and beyond is difficult, particularly with the introduction of additional factors into the geopolitical environment. Earlier this year, for example, Russia’s initial threats and then invasion of Ukraine led to an immediate spike in fuel prices which impacted not just supply chain costs but contributed further to delays and other logistical challenges.
Further compounding the impact of the Ukraine invasion is the developing geopolitical unrest that could potentially threaten critical trade relationships, with regional Pacific powers including China, the United States, Japan and Australia all sabre-rattling.
Another virus – monkeypox – has also started a slow march into other countries from its West African source, creating a new watching brief to ensure preparedness.
Rising physical costs are a backdrop to global inflation and interest rate rises, putting pressure on potential market growth and shifting expectations about where that growth could be. This unstable economic environment has tempered near-term growth ambition, moving it from global markets like the United States and China to markets closer to home, like Australia.
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Respondents agree that the short-term prognosis includes many variables, with 67.5% of all respondents indicating concern about the uncertain economic environment. Also at the top of the concern list are access to talent (65%) and the price of energy and raw materials (45%). These challenges exceed other trending concerns by a large margin, with cybersecurity & privacy, and changing consumer behaviour both at 20%.
Regardless of your current business challenges, whether it be growing sales, availability of key skills, supply chain or managing your cost base, looking at your ESG strategy is a good place to start. ESG principles and company purpose are now a key area of focus for customers, staff, suppliers and investors. A strong ESG strategy will result in better business outcomes, drive long-term company value and might even be the solution to your challenges you may not have considered.
Once again, ESG issues did not feature prominently in the responses, with challenges such as social equity (7.5%) and climate change and the environment (15%) selected by a relatively small number of business leaders. The benefit and impact of sustainability targets were not seen as a priority for any respondents. This might be due to a lack of guidance and clear signals from the government on climate regulation, or the absence of a strong push for private businesses to report their climate impact.
We see that a focus on ESG is a clear opportunity for businesses to capitalise on a growing trend for better action and visibility in this space. Customers and consumers are becoming more curious about the background of the products and services they buy and are beginning to favour companies that demonstrate their ESG credentials.
It’s also important to consider that, globally, talent is becoming hyper-aware of the climate performance of the companies looking to employ them, factoring both the direct efforts for social credibility and the future plans of a business into their decision making.
Partner, Sustainability, Climate & Nature, PwC New Zealand
Tel: +64 21 711 641