Wednesday, July 10, 2013

How Ready Are You for Growth?



Since the economic crisis, many companies have been trying to figure out the best way to reposition themselves for greater performance and success in the future. Clearly the answer involves some combination of growth strategy and cost management.


Over the past several years, working in a variety of industries, we have seen firsthand that companies that do three things together seem to be better positioned for a sustainable return to high performance.
First, they create clarity and coherence in their strategy, articulating the differentiating capabilities that they will need to win in the marketplace. Second, they put in place an optimized cost structure and approach to capital allocation, with continual investment in the capabilities critical to success, while proactively cutting costs in less-critical areas to fund these investments. Third, they build supportive organizations. They redesign their structures, incentives, decision rights, skill sets, and other organizational and cultural elements to more closely align their behavior to their strategy, and to harness the collective actions of their people.

We call this the Fit for Growth* approach, because it builds competitive muscle while cutting the corporate fat that weighs a company down. At companies that use this approach, cost actions are proactive and strategic (as opposed to reactive and tactical), freeing up funds to be reinvested in those parts of the business that are most important for growth (see Exhibit 1). At the same time, an organizational fabric is put in place that guides employees to do the right things day in and day out, thus helping the entire enterprise build and sustain competitive advantage (see “Is Your Company Fit for Growth?” by Deniz Caglar, Jaya Pandrangi, and John Plansky, s+b, Summer 2012).



In order to test this hypothesis, we created a quantitative metric—the Fit for Growth Index—that is built on these three elements (see “Calculating the Fit for Growth Index”). We then analyzed almost 200 companies headquartered in Europe and North America, selected from a wide range of industries. Most of these companies are active in markets around the world. We calculated an index score for each of these sample companies, based on an analysis of their basic business attributes (for example, their portfolio of products and presence in critical markets), and key actions that they had undertaken over a 24-month period to improve performance.

CALCULATING THE FIT FOR GROWTH INDEX

The index assesses companies in three key areas: strategic clarity reinforced by an aligned group of capabilities; an aligned resource base and cost structure; and a supportive organization. Each company received a composite score from 1 to 5 based on its “fitness” in each of these areas (5 being the most fit). In calculating the scores, we weighted the three factors as follows: strategic clarity and coherence at 50 percent, resource alignment at 30 percent, and supportive organization at 20 percent. The second and third factors together constitute a company’s execution capability. Thus, a company’s index score is derived in equal parts from its strategy and its executional fitness. These weightings reflect our belief that strategy and execution are equally important in determining performance.
T
he three factors, in turn, were made up of several components, each with its own weighting. These subcomponents are:
Strategic clarity and coherence: coherent strategy (15 percent), strong capabilities (10 percent), strong/coherent product portfolio (10 percent), presence in critical markets (15 percent)
Resource alignment: systematic investments in differentiating capabilities (10 percent), thoughtful cost reduction (15 percent), and improvement initiatives aligned with strategy (5 percent)
Supportive organization: speed and decisiveness (10 percent), strong leadership (5 percent), supportive culture (5 percent)

Our survey sample comprised 197 companies in 17 industries. Companies were chosen to yield a balanced sample including high, medium, and low financial performers in each industry, based on their total shareholder return over a two-year period. To supplement our knowledge of the companies, we examined information from research databases, analysts’ reports, earnings call transcripts, and business periodicals.

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