What sets the world’s top companies apart from their rivals? See how they become fit for growth by building competitive muscle and cutting the corporate fat.
What sets the world’s best-performing companies apart from their rivals? In our work with many leading companies and as we set out in Fit for Growth*, our new book, it comes down to three things:
Companies that follow this Fit for Growth approach build competitive muscle while cutting the corporate fat that weighs down other companies. They take proactive and strategic cost actions (as opposed to reactive and tactical ones), freeing up funds to reinvest in those parts of the business that are most important for growth. At the same time, they put in place an organizational fabric that guides employees to do the right things day in and day out.
Sticking with this formula means making tough decisions. Leaders may decide to exit an entire business or product line that does not profit from the company’s differentiating capabilities and therefore is not at the heart of its identity. They may opt to outsource support functions that do not have to be world class to enable their strategy. They may defer or stop projects in one area so they can funnel investments to a higher-priority area. Such decisions have real consequences for real people, and making them is never comfortable or easy. But the sense of purpose and energy that this sort of strategic clarity and coherence delivers to an organization cannot be overstated. It is those companies that stick to this guiding philosophy that demonstrate market-leading returns year after year.
To demonstrate the truth of that statement, we developed the Fit for Growth Index, a quantitative metric that measures how well a company connects its cost and growth agendas. It assesses companies on the three factors: strategic clarity and coherence; resource alignment; and organizational alignment.
Having seen how these three major elements create value in the market, we wanted to determine how important they are in driving results. We correlated the index scores of about 200 companies in various sectors with their financial performance, namely, total shareholder return adjusted for industry-specific factors. A clear correlation is evident between how fit a company is for growth and its total shareholder returns.
Few companies are truly prepared for growth. Less than one-fifth of the companies we assessed seemed well prepared for growth. Very few — only 6 per cent — demonstrated strength in all three elements.
High-performing companies tightly link their growth and cost agendas. They clearly understand what capabilities are critical to winning with their strategy, and they funnel the bulk of their resources to those differentiating capabilities.
Companies need to combine all three elements to unlock outstanding results. Those that integrate and align differentiating capabilities, cost structure, and organization generate the highest financial returns. You cannot excel in only one of these elements and hope for the same result. Companies stumble on the second imperative — they identify the right differentiating capabilities, but they do not have the heart or discipline to redirect resources to them from everyday activities.
The best companies outperform because their strategies are clear, differentiated and well-articulated. They have demonstrated resilience to market and environmental changes. Their most important capabilities are highly advanced and lead their industries. Their resources are systematically directed to initiatives and opportunities with the highest strategic and financial returns. Their organizational structures support key capabilities and have efficient decision making and talent in the right places. And their culture of cost management extends to the front line.