Monthly Archives: February 2017

Inspiring a new narrative of progress

Growth is shifting, disruption is accelerating, and societal tensions are rising. Confronting these dynamics will help you craft a better strategy, and forge a brighter future.

“The trend is your friend.” It’s the oldest adage in investing, and it applies to corporate performance, too. We’ve found through our work on the empirics of strategy that capturing tailwinds created by industry and geographic trends is a pivotal contributor to business results: a company benefiting from such tailwinds is four to eight times more likely to rise to the top of the economic-profit performance charts than one that is facing headwinds.

It’s easy, however, to lose sight of long-term trends amid short-term gyrations, and there are moments when the nature and direction of those trends become less clear. Today, for example, technology is delivering astounding advances, and more people are healthy, reading, and entering the global middle class than at any period in human history. At the same time, the post–Cold War narrative of progress fueled by competitive markets, globalization, and innovation has lost some luster.

Those contradictions are showing up in politics, and the long-term trends underlying them are reshaping the business environment. Corporate leaders today need to rethink where and how they compete, and also must cooperate in the crafting of a new societal deal that helps individuals cope with disruptive technological change.

That broad narrative of intensifying competition, as well as the growing need for cooperation, contains challenges, but also great opportunity. We hear about the challenges every day in our conversations with global business leaders: How long can their traditional sources of competitive advantage survive in the face of technological shifts? How will changing consumer and societal expectations affect their business models? What does it mean to be a global company when the benefits of international integration are under intense scrutiny?

All good questions. But they should not distract from the extraordinary opportunities available to leaders who understand the changes under way and who convert them into positive momentum for their businesses. Our hope in this article is to help leaders spot those opportunities by clarifying nine major global forces and their interactions. Significant tension runs through each of them, so much that we’d characterize them as “crucibles,” or spaces in which concentrated forces interact and where the direction of the reactions under way is unclear. These crucibles, therefore, are spaces to watch, in which innovation “temperature” is high.

  • The first three crucibles reflect today’s global growth shifts. The globalization of digital products and services is surging, but traditional trade and financial flows have stalled, moving us beyond globalization. We’re also seeing new growth dynamics, with the mental model of BRIC (Brazil, Russia, India, and China) countries giving way to a regional emphasis on ICASA (India, China, Africa, and Southeast Asia). Finally, the world’s natural-resource equation is changing as technology boosts resource productivity, new bottlenecks emerge, and fresh questions arise about “resources (un)limited?”
  • The next three tensions highlight accelerating industry disruption. Digitization, machine learning, and the life sciences are advancing and combining with one another to redefine what companies do and where industry boundaries lie. We’re not just being invaded by a few technologies, in other words, but rather are experiencing a combinatorial technology explosion. Customers are reaping some of the rewards, and our notions of value delivery are changing. In the words of Alibaba’s Jack Ma, B2C is becoming “C2B,” as customers enjoy “free” goods and services, personalization, and variety. And the terms of competition are changing: as interconnected networks of partners, platforms, customers, and suppliers become more important, we are experiencing a business ecosystem revolution.
  • The final three forces underscore the need for cooperation to strike a new societal deal in many countries. We must cooperate to safeguard ourselves against a “dark side” of malevolent actors, including cybercriminals and terrorists. Collaboration between business and government also will be critical to spur middle-class progress and to undertake the economic experiments needed to accelerate growth. This is not just a developed-market issue; many countries must strive for a “next deal” to sustain progress.

How to makes a CEO exceptional

New CEOs face enormous challenges as they start assembling a management team and setting a strategic direction in today’s volatile environment. To provide some guidance for transitioning CEOs, we looked at the experiences of exceptional CEOs, those defined as the very top performers in our data set of roughly 600 chief executives at S&P 500 companies between 2004 and 2014.

Competing in a data driven world

Is big data all hype? To the contrary: earlier research may have given only a partial view of the ultimate impact. A new report from the McKinsey Global Institute (MGI), The age of analytics: Competing in a data-driven world, suggests that the range of applications and opportunities has grown and will continue to expand. Given rapid technological advances, the question for companies now is how to integrate new capabilities into their operations and strategies—and position themselves in a world where analytics can upend entire industries.

A 2011 MGI report highlighted the transformational potential of big data. Five years later, we remain convinced that this potential has not been oversold. In fact, the convergence of several technology trends is accelerating progress. The volume of data continues to double every three years as information pours in from digital platforms, wireless sensors, virtual-reality applications, and billions of mobile phones. Data-storage capacity has increased, while its cost has plummeted. Data scientists now have unprecedented computing power at their disposal, and they are devising algorithms that are ever more sophisticated.

Earlier, we estimated the potential for big data and analytics to create value in five specific domains. Revisiting them today shows uneven progress and a great deal of that value still on the table (exhibit). The greatest advances have occurred in location-based services and in US retail, both areas with competitors that are digital natives. In contrast, manufacturing, the EU public sector, and healthcare have captured less than 30 percent of the potential value we highlighted five years ago. And new opportunities have arisen since 2011, further widening the gap between the leaders and laggards.

The tempo of transactions at first

More than half of new CEOs of S&P 500 companies launch some form of transaction during their first two years in office. Whether acquisition, merger, or divestiture, deal making is the second most likely strategic action for a new CEO to undertake, we’ve found. Few are able to maintain the pace of deals over the course of their tenure, though, and this appears to be a missed opportunity.

 

The case for programmatic M&A

Our work has shown the strategic value of sustained transactions. We looked at different approaches to M&A activity and assessed the success of each in delivering shareholder returns. In “programmatic” deal making, for example, CEOs use M&A regularly (typically three to four deals per year) and meaningfully (with an average of 20 percent of companies’ market capitalization acquired over ten years). That contrasts with a “large deal” approach, where companies transform themselves with one deal valued at more than 30 percent of their market capitalization. The research found that companies that pursue a programmatic M&A agenda outperformed their peers, achieving an average of 3 percent excess total returns to shareholders. “Large deal” strategies, on average, destroyed value.

 

An early burst

How does CEO behavior stack up against the programmatic M&A model? Fairly well during the initial years of many CEOs, according to our research. A review of all mergers, acquisitions, and divestitures by the nearly 600 CEOs who left S&P 500 companies between 2004 and 2014 showed that CEOs conducted significantly more M&A activity early in their tenures. On average, the number of deals (regardless of deal size) completed by year two of their tenure was 50 percent higher than the average number of deals done in the five years before they took the helm (Exhibit 1).