Everybody professes an interest in growing. Everyone wants to outperform the market. Yet the challenges to do so are for the most part under-estimated and the appetite required to resource adequately in order to decisively disrupt is generally lacking.
An interview with Stephen Hall and Conor Kehoe, two McKinsey directors, on why companies are reluctant to aggressively reallocate resources reveals that strategic inertia springs from two sources. According to Kehoe, there is unwillingness internally to move people and/or capital to unproven initiatives. And there is resistance from investors who, even though they like the long term results, are hesitant to accept short term downturns.
The business case for redistributing strategic energy though is clear. In this study, the firm compared those who reallocate resources at a high level with those that were much more reluctant to do so. The difference was a 3.9% difference in annual incremental returns to shareholders. Over 20 years, that amounts to a doubling in total returns to shareholders (assuming all dividends are reinvested).
Companies that actively reallocated resources continued to perform better through the economic downturn, in fact enjoyed higher returns during tough times, and experienced more consistent returns over the long term. McKinsey’s conclusion: “it is more incumbent than ever on companies to make difficult trade-offs between the funding of promising growth opportunities (which require nurturing with more capital) and of mature or underperforming ones (which may need pruning). We found that high reallocators … tended to reallocate existing and new resources equally; low reallocators, by contrast, had a much harder time taking resources away from existing lines of business and tended predominantly to reallocate new resources.”
The dilemma parallels that facing brand owners. To what extent should they make the most of today and how much should they be shuffling the cards and resourcing for disruption in order to gain longer term advantage?
Perhaps the answers for where to focus resources and when can be found in another recent piece of McKinsey research. It concludes that the chances of outperforming the market vary markedly depending on where you sit in that market.
Across an economy, companies in the top 20% of sectors create almost 70 times more economic profit than the 60% of companies in the middle quintiles.
Perhaps not surprisingly, market volatility is also variable.
In terms of upward movement, nearly 80% of those companies that start in the middle quintiles will still be there ten years later. Only 11% will move into the top quintile. Meanwhile, almost half of those in the top league will drop out over that 10 year period and one in eight will fall all the way to the lowest quintile. Where companies do move up, the vast majority will do so on the back of improved economic profit-taking for their industry. On average, industry effects account for 40% of performance, while the remaining 60% can be attributed to company decisions.
My conclusions:
Everyone needs to be resourcing for change – however the approach they take will depend on where they are in the market at any given point:
Disrupt with speed. Top performing brands in top performing companies need to be the most attentive to retaining share and the most willing to shift resources in order to continue leading the market. They must drive the conversation in terms of market direction and react swiftly and decisively to changes in the market if they are to remain at the top of their game. Succeeding at this level is about being a first mover and a thought leader, restless, ambitious and iterative. The challenge for many is retaining the capital required to keep evolving whilst rewarding shareholders at levels investors feel are befitting of a market leader.
Disrupt through demand. Brands in the broad middle need to actively search for market elevators, shifting their strategic and operational resources on cue to make the most of identified opportunities and riding the uplift into the premier league. Given the resources available to these brands, these are big calls. They require courageous leaders and rigorous strategy and often a great deal of determination to combat reluctance internally. The brands that make the move north from here are often early adopters with a challenger attitude and a well geared balance sheet.
Disrupt with service. Lowest quintile brands probably need to focus the hardest on running their brands efficiently and improving their attractiveness as investments in order to gain the resources needed to move upwards. The temptation here is to run down the brand – but all that does is push the offering into the commodity category. Shifting public perceptions of a low-end brand requires patience, real skill and a turnaround mentality. My experience of working with these brands is that transformation is incremental, often operationally driven, and, because so much resource is tied up in low turn assets, returns can often pivot on developing a strong service-focused culture to attract and retain customers.
Acknowledgements
Photo of “The Elevator” taken by krnlpanik, sourced from Flickr
