Not long ago, the odds of a company surviving in the ensuing decade were relatively high and the competitive advantage of market leaders was to a large degree unassailable and durable. Today we are living in a very different world. Globalization and technology have fundamentally altered business strategy and have added layers of complexity to companies’ operating models all around the world.
Artificial intelligence is already having a dramatic impact on manufacturing, value chain management and the way in which we anticipate and meet customers’ needs, and competing in developing countries has forced companies to redesign their operating models to adapt to the realities and dynamics of local markets. The advent of COVID-19 has only added to the uncertainty and exacerbated the stormy environment we now live in. According to one recent study, a public company in the United States has a 1 in 3 chance of failing over the next 5 years. Those are alarming odds.
Companies are in the business of meeting customer needs while creating sustainable long-term value. Value is created when a business earns a rate of return which exceeds its cost of capital while acting in a manner that is socially and environmentally responsible. However, in the United States, 4 out of 5 publicly traded companies are either net destroyers of value or barely earn their cost of capital. Given the lack of external scrutiny, similar statistics for privately held companies are likely even more dire. To aggravate matters, as the forces of disruption continue to intensify, remaining competitive will become increasingly challenging in the years ahead. Given this backdrop, market leaders, middle-of-the-pack players and laggards alike must radically improve productivity and rethink their business and operating models if they are to survive and come out ahead in the “new normal”.
A recipe to beat the odds
The success of a transformation effort can and should be measured in terms of the economic value the company is able to generate once implementation is complete. Experience shows that there are a few key factors that strongly impact the success of a transformation effort and many of them are levers that can be readily affected by a company’s management team. We group these factors into three categories:
- Industry trends
- Financial capacity
- Management initiatives
Industry trends play an important role in determining a company’s future economic performance. Industries showing deteriorating economics provide a challenging environment for achieving success. Nonetheless, by taking a more granular approach to defining what products or services to offer and which customer segments to serve, companies can generate superior returns even in sectors where average industry economics are mediocre at best.
Financial capacity has to do with a company’s size at the outset of the process and its access to capital to take advantage of unique growth or acquisition opportunities. Coupled they provide a significant competitive advantage relative to smaller or more indebted players. Financial capacity can be greatly enhanced, however, by launching a series of performance improvement initiatives at the outset of the transformation process.
Last but certainly not least, substantive, and clearly articulated strategic and operational initiatives undertaken by management are the essence of a broad transformation effort. We break down these initiatives into four groups:
- Performance Improvement
- Portfolio optimization
- Rethinking and revamping business and operating models; and
- Organizing for long-term value creation
We will be exploring this set of initiatives in depth in subsequent articles. For now, suffice it to say that a major transformation effort is a daunting task for any company. When kicking off the process it is crucial to quickly find ways to improve productivity and free up cash. This allows the company to secure the resources to invest in bold new initiatives and energizes the organization to fuel the momentum of the transformation process.
The forces of disruption are intensifying at an accelerating pace. Business incumbents cannot afford to stand still if they are to survive, let alone thrive in the “new normal”. The urge to transform has never been greater for leaders and laggards alike. Fortunately, companies can succeed in their quest for renewal and performance improvement by aggressively implementing a set of sound and complementary transformation initiatives.