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Why CFOs should build resilience long before they need it
Short-term results and future growth are often presented as competing priorities. But Fabio Bocchio, CFO of Pirelli, tells IMD that sustained short-term performance is the fruit of years of disciplined capital allocation, strategic positioning, and operational resilience.
Rapid read:
- The strongest organizations prepare for disruption long before it arrives.
- Capital allocation decisions made today determine a company’s ability to withstand tomorrow’s shocks.
- Financial discipline, strategic clarity, and targeted innovation are the foundations of lasting resilience.
Amid a predictably unpredictable stream of global crises, the task of allocating capital to long-term investments while keeping short-term performance on track has become increasingly challenging. But for Fabio Bocchio, CFO of tire manufacturer Pirelli, if businesses are to be delivering strong short-term results in 10 years’ time, they must start building resilience now.
Keeping two markets in view
Reporting financials on a quarterly basis creates constant pressure to hit or exceed targets and can result in a cycle of short-term thinking. But separating short- and long-term value creation is, at least in part, a false dichotomy.
The perceived divide between short-term results and long-term strategy is especially pertinent to the automotive industry. As well as the general environment of volatility and geopolitical instability, automotive is grappling with a historic inflection point: the transition from the internal combustion engine (ICE) to electric vehicles (EVs). To make this transition, companies such as Pirelli must keep both the ICE and electric markets, with their contrasting dynamics and growth profiles, constantly in mind.
“We try to find the right balance between the older tires, which at present create most value for the company, and the electric product that is at the beginning of its product life cycle,” says Bocchio. Pirelli’s Cyber™ Tire system, which collects data directly from the tires themselves, is designed for a new generation of smart vehicles. “It’s still early days in terms of sales, but we believe it is an important technological evolution for the market,” says Bocchio. “These tires will pay the bills in 10 years, but we need to invest today.”
Pirelli has chosen to double down and pursue the high-value end of the market, which has proven much more resilient over the past 10 years.
Sustainability must be sustainable
For Pirelli, allocating capital to developing new products for a more sustainable future while working to reduce the climate impact of its own operations is a symbiotic “dual benefit.” “Product innovation, the circularity of the raw materials that go into our product, reducing waste and producing tires that can help electric cars do more mileage with the same battery creates value for us, for the end-user, and for the automotive industry,” says Bocchio.
But while sustainability innovation will reap future benefits, resilience demands precisely calibrated capital allocation. “Sustainability must be financially sustainable,” says Bocchio. This requires businesses to identify areas where they can create value for shareholders and help the planet. Among other initiatives, Pirelli is gradually electrifying its tire-curing process and replacing steam-powered systems, significantly reducing energy consumption. Focusing on these dual-benefit projects embeds sustainability in the day-to-day activities of the company.
A focus on sustainable innovation means that businesses can more seamlessly incorporate future environmental regulations. Bocchio points out that higher environmental standards for tires, such as the new Euro 7 rules, allow organizations such as Pirelli, which have invested significantly in environmental innovation, to thrive. Such regulation helps level the playing field when competing with low-cost manufacturers operating to lower environmental standards.
Premium positioning as a tool of resilience
But innovation must navigate market forces, and the tire industry is experiencing significant downward price pressure from Pirelli’s cut-price competitors. In response, Pirelli has chosen to double down and pursue the high-value end of the market, which has proven much more resilient over the past 10 years, driven by premiumization and the growth in sports utility vehicles (SUVs).
Market positioning has become a tool of resilience. For example, while competitors are forced to move production to lower-cost locations such as Southeast Asia, which is more exposed to supply chain risk from geopolitical volatility, Pirelli has the flexibility to nearshore some manufacturing to its core markets, including the US. While nearshoring is more expensive, Pirelli’s high-end focus allows it to absorb the shock.
When we sit down with the carmaker to choose the right tire for the car, we try to have an alternative plan, so that if anything does happen, we would be able to switch from one side to the other.
Balance-sheet discipline is the core of resilience
Manufacturers can significantly reduce their exposure to risk by thinking ahead when it comes to supply chain disruption. They should look to identify backup options as early as possible in the process.
“When we sit down with the carmaker to choose the right tire for the car, we try to have an alternative plan, so that if anything does happen, we would be able to switch from one side to the other,” Bocchio explains. Long-term planning enables the manufacturer to pivot quickly to protect value.
Businesses should be taking the same approach to their balance sheets. While allocating capital to innovation and business growth is essential, so is building resilience against short-term shocks. This means reducing leverage and increasing cash generation, a strategy that Bocchio says Pirelli has made a conscious decision to follow in the face of market volatility.
Resilience must take root long before the crisis
For Pirelli, short-term results and long-term strategic success are not competing priorities; they are part of one overall goal. Resilience to short-term shocks relies on good long-term decision-making. Businesses must allocate capital to financially viable sustainability efforts, reduce leverage, and pursue a clearly defined strategic market positioning. By taking the longer view, CFOs can help their businesses see beyond the current unsettled weather to the clear skies beyond.
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