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Act Now to Fund Innovation and Growth

May 06, 2019

Contributor: Jackie Wiles

Successful companies fund innovation by powering through economic turns and uncertainty.

U.S. speed skater Apolo Anton Ohno was trailing three competitors when he rounded the final turn of the men's 1,500 meter short track at the 2010 Winter Olympics. Ohno jostled fiercely with two skaters who then wiped out, leaving Ohno to take second place, and his eighth Olympic medal.

As an elite competitor, Ohno knows that heading into a turn — when momentum is shifting, visibility is poor and the outcome uncertain — is his single best shot to pursue and seize the lead.

“ Winners spur innovation, change strategy and take risks, while others are eaten away by conservatism and cost-cutting”

Gartner research shows this “winning in the turns” dynamic also plays out in business, where a select few companies take advantage of recession or other periods of uncertainty or volatility. They power through such turns to leave the competition in their wake — and they sustain their gains. But winning in the turns takes discipline, confidence and preparation. 

Our analysis of corporate performance in recent years shows:

  • Very few companies — just 60 of the largest publicly traded companies in the U.S. and Europe — ended up as winners after the last big turn (the recession that ended in mid-2009).
  • This select few sustained their outperformance for the subsequent decade.

What differentiates the leadership at winning companies? First, progressive business leaders prepare to navigate turns even before the turns are clearly in view. Second, their mindset and actions before, during and after the turns separate their organization from the pack and determine its long-term destiny.

“Your organization’s performance in the turn is a prime opportunity to seize and sustain a competitive edge, but you have to prepare before the turn to come out ahead,” says Shvetank Shah, Senior Vice President at Gartner. “This applies whether you are on the executive committee crafting enterprise strategy or leading your function to execute it.”

Turns come in many forms

Economic turns are common in business, and most executives have survived several, but a variety of changes force shifts in strategic and operational decisions.

These turns may be sudden (e.g., enormous security breaches) and can blind side you unexpectedly (e.g., new competition from outside your industry). The g-forces in the turn may be extreme (a non-traditional competitor that doesn’t need to make a profit) and the time to impact short due to digital capabilities (viral anti-brand social media).

Turns often coincide, increasing the need to react on different business vectors and requiring a high-performing executive team.

Recession is probably the most talked-about turn on the radar right now, even though supporting evidence for a sustained downturn is far from definitive. Still, even the possibility raises key questions for companies whose boards and shareholders remain squarely focused on margins. For example, chief financial officers (CFOs) are asking:

  • How do we make decisions when leading indicators offer no conclusive signal on recession?
  • Is even the threat of recession constricting our growth investments?
  • Is our corporate profitability robust enough to handle a recession?
  • Is our balance sheet liquid enough to withstand a prolonged recession?

Don’t wait for clear signals

If you’re like most business leaders, you’d prefer not to make big moves until the signals are clearer, or you may look for ways to weather the uncertainty — most likely first targeting low-hanging cost-cutting to improve a few performance metrics.

But neither a “wait-and-see” approach nor defensive cost-cutting will power you through adversity — not least because today’s current state of uncertainty won’t magically disappear. There is little clarity on a range of economic, regulatory, geopolitical and trade issues, and digital disruption has anyway made widespread and multidimensional uncertainty the new normal.

“ A very small number of companies broke away from the pack during the [Great Recession] — and their performance continued to improve for the subsequent decade”

The risk of paralysis is very real, especially if your organization lacks institutional memory of what worked and what didn’t during the last downturn. Many of today’s leaders have only experienced the decade-long bull market. Fewer than half of current CxOs were functional heads in 2008-09, and less than 10% were heading the same function in their current company.

"Lack of preparation creates business risk,” says Shah. “In today’s business environment, being right is only half the battle. Companies also need to be fast. When the environment changes, the companies that are fast at making adjustments are the ones that will win."

Read more: 6 Mindset Traits of Disruptive Digital Leaders

What does winning in the turns look like?

Gartner has been studying standout performers since the Great Recession (end-2007 to mid-2009), when we found that some companies emerged at the top of their industry, capturing significant gains over their peers in the course of the turn.

In 2016, we scanned for signs of sustained performance by looking for publicly traded companies in the U.S. and Europe that had consistent year-over-year revenue and margin improvement, as well as long-term growth that exceeded their industry peers in the last 20 years (1994-2014).

We found a select group of just 60¹ companies that had outperformed in this way. Forty-two companies from the Fortune 1000² averaged total shareholder return (TSR) that was 7.01 percentage points higher than their Fortune 1000 peers.

As a group, their TSR over 1994-2014 was 16.49% vs. 9.48% in the rest of the Fortune 1000. In early 2019, we revisited the aggregate performance of these winners, and found they had continued to outperform as of 2017³, maintaining the competitive advantage they gained by accelerating out of the 2008 turn.

On average, those outperformers posted a 13% annualized growth rate in earnings before interest, tax, depreciation and amortization (EBITDA) in 2009-2017, compared to a 1% annualized contraction in EBITDA among a control group of Fortune 1000 peers.

“Simply put, a very small number of companies broke away from the pack during the hard times — and their performance continued to improve for the subsequent decade,” says Shah.

What do winners do differently?

The good news is that experience suggests there is a path to winning in the turns. Proven winners do two key things:

  1. Commit before the turn to the differentiating elements of their strategy — including talent strategy — to position themselves to power through uncertain times, not simply respond to them.
  2. Effectively balance top- and bottom-line growth across business conditions. By contrast, our research shows that focusing only on cost-cutting has historically tended to come at the expense of top-line growth.

You certainly can’t defer action on strategy, talent and costs until you have greater clarity on the outlook — or are already under financial pressure from new or changing risks and operating conditions. Instead, power through volatility and uncertainty with a proactive, concerted and coordinated effort to:

  1. Test your team’s current preparedness to make decisions and act confidently as opportunities or risks quickly materialize.
  2. Re-examine key leadership messages and talent positioning to ensure that the organizational climate is “turns-ready.”
  3. Increase the discipline with which you allocate resources.

Strategy: Act confidently despite uncertainty

Senior leadership and corporate strategists need more than ever to maintain their strategic focus on critical growth and transformation initiatives, despite the escalating volatility in operating conditions. It is easy to become distracted, and ultimately paralyzed, by the degree of change and the breadth of the risk minefield.

Don’t delay or shy from critical decisions (e.g., investments, acquisitions). Gartner data from the last recession shows that executives regretted acting too slowly and investing too little. Three things to do now to prepare:

  1. Pull forward debate on underlying decision criteria and weightings, and consider proactively how priorities and criteria could change under alternate scenarios.
  2. Implement a bottom-up process in which a variety of assumptions are tested to better capture and reflect uncertainties.
  3. Model “end-state” options by evaluating how a range of actions and investments available today might open and close strategic options for business development in the future.

To fortify your strategy for the next turn, ask these types of questions of yourself and you leadership teams now:

  • What are the hidden risks in our supplier and customer value chains?
  • Are we in a good position to quickly detect the missteps of our competitors and exploit their weaknesses?
  • Have we scheduled time to validate the most likely scenarios our firm will face this year and agree on the most appropriate response?
  • What are the hidden risks in our supplier customer value chain?
  • How will our (external) customers react, and what should we be doing in response?
  • Do we need to change our tone from the top/messaging about risk-taking as we head into the late stages of the cycle?
  • ​Do we have the ability to quickly detect missteps by our competitors and exploit their weaknesses?

Talent: Identify and install your workforce of the future

For most organizations, talent accounts for almost one-third of the cost base average, and is a key competitive advantage. The turns present an opportunity to revamp your playbook around hiring, development and performance management. Three things to do now to prepare:

  1. Identify competitors for critical talent, especially competitors that are struggling — and harbor talent who could be restless. When fortunes turn, the best talent wants to be on a winning team and is more willing to move companies.  
  2. Use changing times as an opportunity to reorient talent programs and services to align more closely with the future needs of the company. Too many HR programs, services and training are maintained by default; winners make sure to prioritize those that deliver value.
  3. Make sure to build and nurture engagement among leaders. During the turns, leaders are asked to do and contribute more just as rewards and promotions become rarer. Winners proactively build their leadership bench strength, in part by weeding out stagnant leaders, and they ensure space and opportunities for the next generation of leaders.  

To maintain alignment between talent acquisition and development and business needs, ask these types of questions of yourself and your leadership team now:

  • What alternative staffing models might help?
  • How can I use the opportunity to introduce agile approaches across my organization?
  • How does my mix of generalists/specialists change? Does my structural mix of labor change?
  • What can we do to shape organizational culture, messaging and the impact of change on our people and environment?
  • How should we be recognizing (or differentiating) our top performers during a period of slow growth?
  • How does our compensation structure change across geographies?
  • Have I identified potential latent hires at other firms?

Costs: Look to guard growth and elevate innovation funding

Smart cost management hinges on cost optimization — a continuous process of using resources to create and protect your business’s sources of value while reducing costs as much as possible. Three things to do now to prepare:

  1. Use the prospect of radical change as an opportunity to lower their organization’s long-term cost base, leveraging the “burning platform” as a shared prism for all stakeholders to agree on how to simplify, consolidate, automate outsource and otherwise reprioritize or deprioritize their activities.
  2. Establish executive-committee consensus on cost-performance trade-offs upfront so as to depoliticize these choices and ensure that a clear “cost architecture” is established for all subsequent tactical decisions.
  3. Assign accountability and authority to “growth guardians” in their organizations to protect critical growth and innovation initiatives.    

To make sure your cost architecture is designed to guard growth and elevate innovation funding, ask these types of questions of yourself and your leadership team now:

  • How can I use this opportunity to fundamentally change the cost architecture/structure of my organization?
  • How long will it take to realize the savings? How can I track them?
  • How do I manage/optimize costs during turns?
  • How do I run cost optimization as an always-on discipline?
  • Where do I rust-proof our business vs promoting investment?
  • How do I justify our budget in a time of declining revenue?
  • What are the negative effects of cost-cutting?

No one is immune to volatility

No company is immune from volatility or other risks stemming from today’s perpetually shifting economic, business and operating conditions. Some may be more protected than others against, say, an economic downturn. But in the digital age, every company faces multidimensional business model change — changes in value proposition, profit model, business capabilities and/or customer base.

Our research shows that winners spur innovation, change strategy and take risks, while others are eaten away by conservatism and cost-cutting.

Winning also means creating excitement for employees: Risk, when it pays off, is exhilarating. Employees that witness and participate in enterprise agility will have higher morale and sense of purpose. Executives that take risks and move the organization forward are positioned for greater leadership opportunities.

In the public sector, winning is tied to mission success. In the face of changing administrations or budget difficulties, winning is proven through mission momentum and productivity. Ultimately this success should lead to budget stability or increased investment. A public sector entity that succeeds in the turns is a great place to work for those that are passionately civic-minded.

Most importantly, winners exhibit discipline and confidence even as the pressure mounts — and when others waver. Based on our experience with practitioners, we find that this wavering happens because these skills must be consistently practiced rather than turned on (or up) when times get tough. Now is the time to begin — failing to create a plan for powering through turns could be a grave mistake.

¹ 60 out of a total of 729 publicly traded companies in the U.S. and Europe with 20 years of complete financial information.
² 42 out of the 543 companies with 20 years of complete financial information.
³ 2017 was the last year for which full-year data was available at the time. Number of companies studied was 30, as 12 of the original 42 were eliminated due to acquisition, divestiture or data availability.

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