Five truths (and a lie) about business transformation

It is therefore crucial for companies to develop a compelling transformation plan and story from the start of their journey, and to define a clear communications program towards their shareholders. Additionally, businesses must be disciplined and aggressive in making quick wins in cost reduction.

Over the long term (five years), the drivers of value creation are reversed, such that the lion's share of TSR outperformance is driven by successful cost reductions (32%). And revenue growth (43%), while investor expectations play a lesser role (25%). This indicates that in the long run, execution is key, as investors will hold executives to their promises. Plus, it shows that you can't fight your way to greatness: differential growth is essential for sustainable value creation.

Truth #4: Transformations require long-term focus

Achieving sustainable growth and a future-proof operating model requires approaching transformations with a long-term focus, rather than simply focusing on solving performance issues or catching up with performance. peers in terms of technology stack or organizational best practices.

Our data shows that having a long-term strategic focus has a strong positive impact on transformation performance, being associated with a 12.5 percentage point higher TSR impact over a five-year horizon.

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Measured using a proprietary algorithm that quantifies companies' strategic direction based on semantic patterns in 10-K filings.



Remarks:

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Measured using a proprietary algorithm that quantifies companies' strategic direction based on semantic patterns in 10-K filings.


Long-term focus can be achieved by creating an entrepreneurial culture in which new ideas are constantly developed and in which leaders are willing to take risks on unproven models. To support a future orientation, companies must complement traditional, retrospective performance measures with forward-looking measures. For example, 3M pioneered the New Product Vitality Index (NPVI), a metric that tracks the share of sales of products that did not exist five years ago.

Beyond mindset, culture and metrics, a long-term orientation also means investing in exploring new ideas that could form the basis of future advantage: R&D spending above industry average are associated with a 2.9 percentage point improvement in TSR performance over the period. during a transformation.

Capital spending above the industry average is also linked to better transformation results, to the tune of 3.7 percentage points of TSR over a five-year horizon. This indicates that leaders need to strike the right balance between identifying new sources of growth and improving their existing model, for example by upgrading production machinery. It also emphasizes that operational efficiency must be linked not only to reductions, but also to selective investments.

Truth #5: You can't make things up as you go along

Transformations are complex and require achieving multiple goals simultaneously, usually under immense pressure from without and within. As a result, businesses cannot transform over time.

Implementing a formal transformation program that we identify based on a combined analysis of company announcements and restructuring spending has a positive impact (5.9 percentage points) on long-term TSR. term during periods of transformation. Additionally, the scale of the program and willingness to invest in change is important, with our results further showing a strong and positive correlation between above-industry average restructuring spending and TSR results (+5, 7 percentage points over five years).

Formalizing the transformation involves defining clear governance and processor, setting up a dedicated transformation office to coordinate and track the progress of change initiatives, as well as communicating regularly to the leadership team so that roadblocks can be addressed. be resolved quickly. Additionally, it may involve establishing a transformation lead to lead an ambitious change effort, which our past research shows can significantly improve the chances of transformation. However, simply having a CTO on staff is not a panacea. The role must be designed appropriately and filled by a persistent, vigilant and flexible individual who is trained for the position.

A lie: you are special and this information does not apply to you

Empirical models of transformation are quite stable: at any point in the last 20 years, about 30% of companies have significantly underperformed their industry for several years, making transformation necessary for performance reasons.

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Underperformance is identified as an annualized deterioration in TSR, relative to the company's industry average, of 10 percentage points or more over a two-year period.



Remarks:

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Underperformance is identified as an annualized deterioration in TSR, relative to the company's industry average, of 10 percentage points or more over a two-year period.


(See Table 2.) However, successful transformations are the exception rather than the norm, even when measured by very modest standards. More than 70% of companies fail to outperform their industry peer group average, both in the short term (one year) and long term (five years), following a previous period of declining performance. These figures are quite similar to the findings of our 2018 report, which show that although the world has changed significantly in recent years, the challenges of keeping up with this change have remained remarkably persistent.