Beating the market might sound like an expression better suited to investing than to business strategy but a new report entitled “The strategic yardstick you can’t afford to ignore” from Mckinsey Insight offers some credible clues into strategic approaches in the current market forces. I have translated these into measures that HR can use to review and then reinvent there strategy.
I will not replicate the data here,that is best read by reading the article or full report. However it is worth noting that the data helps concentrate our minds to ‘focus on the presence, absence, or possibility of market-beating value creation to transform the discussion of strategy from something vague and conceptual into something specific and concrete.”
The current position of the corporate world is described as a relatively small number of elites with many companies “stuck in their strategic “class” but contrary to mythology companies at the top “cannot rest on their laurels because almost half drop out and one in eight slides all the way to the bottom.” Most strikingly, only 11 percent of companies in the middle make the leap to the top league.
The report indicates that to “the gravity of the corporate middle class” requires businesses to “expand or reinvent themselves unusually rapidly, often in the context of an industry whose overall performance is improving.” But both the biggest creators of economic profit might be large but equally the biggest destroyers of economic profit are also large. So class alone is not the determinate factor. For us in HR this suggests those who focus on maintaining performance measures on profit is falling well short of effective.
How does the top cohort maintain performance?
Another key indicator in the report shows how top-quintile companies offset the impact of declining return on invested capital by attracting a disproportionate share of investment. For strategists this suggest we look beyond the point of employing engagement with clients and add potential and current investors into the stakeholder matrix.
Naturally the report adequately separates out that obvious: ‘a rising tide helps lift some companies, such as the wireless-telecommunications-services industry.’ Here we have a clear marker of how creativity and talent management can create opportunity for growth. What is an emerging market? Where are the trends taking us and how does the talent pool adapt to meet this? Of course risk, investment and research are Board level decisions, but do out communication systems enable those with a finger on the pulse to be heard? Who is the next inventor (or are you happy to be stuck in your class)?
Okay, so new ideas and new markets is not your bag. Their is comfort. “At a granularity level of 128 global industries” the report says ‘only 40 percent of a company’s economic profit is explained by the industry.’ This highlights the fundamental distinction between between performance and capability, defined as “a company’s unique proprietary advantage, encapsulated in privileged assets and special capabilities.”
It takes real work to isolate these factors and I would argue the the tools many of use every day are no longer enough. Take the classic performance matrix of the nine box grid. The mere uniformity of this is a straitjacket that defines performance not by it uniqueness but because it is uniform. To get the most out of talent we need to localise and dare I suggest, throw of the matrix.
So, what are the implications for strategists?
- If you’re in the elite mobilize your investor potential and watch for signs of change.
- If you’re in the middle then odds are against you unless you reinvent and elevate your strategy with a “high degree of rigor.”
- If you’re at the bottom, of course you need increased performance and improving ROIC but you also need a new rising market to “get you out of the basement.”
Coauthor Chris Bradley narrates a slideshow of this article’s exhibits in “Are you beating the market?”
About the report and authors
The report is described as a systematic scan of the economic-profit performance of nearly 3,000 global companies “yields fresh insight about where and how to compete.” You can download an article introducing the report and showing the relevant data from McKinsey Insight.
The authors; Chris Bradley is a principal in McKinsey’s Sydney office, where Angus Dawson is a director; Sven Smit is a director in the Amsterdam office. The authors acknowledge the contributions of Alex Harper, Taichi Hoshino, Bin Jiang, Pia Mortensen, and the team at the McKinsey Strategy and Trends Analytics Centre (STAC) to the development of the article.