The current global crisis has compelled companies to take a comprehensive audit of their asset strategy. It has exposed the vulnerabilities of asset-heavy business models (such as supply chain disruptions, extreme pressure on the balance sheet, increased risk of obsolescence of fixed assets) leading businesses across industries to reassess their approach towards asset heaviness. Creating agile systems to mitigate risk and reduce operational costs to respond to the changing needs became a mammoth challenge for business leaders across the globe.
Asset-heavy businesses rely on vertically-integrated models that allow superior control over the assets but demand a continuous capital commitment that is unsuitable in the present fast-changing business environment. Vertically-integrated structures follow the traditional approach and focus on owning the production and distribution process as much as possible. The priority under this model is to own the end-to-end process and acquire assets/capabilities.
On the other hand, asset-light businesses function on an access-based model as opposed to a control-based (read ownership) model in asset-heavy businesses. The asset-light approach focuses on acquiring assets and capabilities that are paramount for value creation and customer satisfaction.
As pointed out by Businessworld, emerging businesses like Netflix, Xiaomi, etc. have adopted asset-light strategies (relying on an access-based model) by focusing on striking the right partnerships, and laying down flexible systems (for instance Xiaomi entered the Indian market by striking a strategic partnership with Flipkart to sell its phones online). In contrast, McDonald’s followed asset-intensive strategies to enter global markets decades ago by deploying resources in each one of the target markets. Hence, laborious processes, long gestation cycles, low chance of achieving exponential growth; can primarily be attributed to asset-heavy strategies in emerging market situations.
In addition, the current crisis has depicted the significance of shifting from an asset-heavy approach towards a balanced asset-light approach as the companies that adopted the flexible approach steered well through this crisis. The shift not only opens up new investable opportunities in core-plus areas due to the release of capital but also brings down day-to-day liquidity pressure on the operations side (such as a cut in payroll burden, reduction in the outflow of assets servicing, etc).
Asset-light strategies ensure a better return on capital employed, provide greater flexibility, and increase chances of stable profits. While the asset-light approach does not guarantee 100% success, it is bound to gain relevance now with an increasing focus on resilient supply chains and flexible processes. The asset-light approach is gaining ground due to increasing digital penetration, the shift in consumer demands, supply-side disruptions, and shareholder activism for high shareholder return.
In a webcast poll conducted by EY in February 2021 on asset-light strategy, among more than 1,000 C-suite executives, 31% said digitization and technology shifts have induced them to think about asset-light strategies, 25% said the trigger is imperatives to meet customer demand, and 21% said capital requirements to fuel growth are driving them to consider such strategies.
Key Components of asset-light planning
Understanding customers through knowledge accumulation
Constantly capturing relevant quantitative and qualitative user activity
Comprehend data sets
Determine high-growth areas and generate human-centered insights
Deliver impactful solutions
Value creation, remarkable user experience, and engagement
Steps to adopt an asset-light strategy
Ecosystem assessment (at management level)
Analyzing Product-market maturity
Understanding and defining core capabilities to finalize the elemental model/core capabilities
Establishing strategic partnerships
Achieving Product-market fit for business stabilization
Considerations to interrogate
Is your company struggling to reduce fixed costs? Moving towards variable cost structure by retaining core business capabilities and outsourcing non-core to the better owner should be explored to improve the revenue cost structure of assets. Additionally, this will lead to greater focus on the product or service that you offer in the market.
If your company is struggling to tap full potential on indicators such as margin, growth, total shareholders return, return on invested capital than your peers, then it is the right time to evaluate your asset planning. EY 2020 Global Corporate Disinvestment Study highlights that ‘asset-light companies in any sector achieve a greater total shareholder return (TSR) than their asset-intensive peers in the same sector.
Is your company eyeing a sizable market acquisition? In the present environment, an asset-light approach will be instrumental to create value and attain exponential growth.
Do you possess the ability to develop an ecosystem of partnerships? Asset-light Organisations capable of fostering continuous and competent partnerships through pivotal business transformations (such as JVs, business partnerships, third-party partnerships) can achieve higher growths.
Are you facing challenges to decide the right asset strategy for your business? Don’t worry. We will help you strike a balanced asset strategy for your business’ growth.