Disruption means businesses must invest in their strategy

How can business leaders, who are under growing pressure, deliver profitable growth?

Today, businesses across all industries face an array of challenges – from political and economic uncertainty to ongoing digital disruption, and intensifying regulatory pressures to rising customer expectations. Against this background, business leaders are under growing pressure to deliver profitable growth. The most critical question is “how?”

For UK companies, the urgency of this question is being heightened by three distinct strands of disruption. The first is the uncertainty surrounding Brexit. With the UK’s transition period now looking likely to run until the end of 2020, more certainty is provided in the short term, but uncertainty remains over the future relationship between the EU and the UK at the end of transition. Companies are already voicing concerns over the potential impacts in areas such as taxation, shipping – inbound and outbound – and customs.

The second strand of disruption is preparing for the next economic downturn. We’re now 10 years on from the start of the last recession – and of the 10 economic cycles we’ve seen since 1945, only one upturn has lasted more than a decade. Even this was a statistical quirk, with the UK narrowly escaping the US’s dotcom recession of 2000/2001, eight years in to the upturn. So it’s reasonable to expect the next slowdown will happen within the next couple of years. A full business cycle includes a “cut” event followed by a “growth” event – so businesses need to strike a careful balance between reducing costs and investing in the capabilities they’ll need to grow.

The third strand of disruption – arguably with the most profound impacts – is the one triggered by technology. This has two aspects. The first involves optimising ‘business as usual’, such as creating digital supply chains and digital manufacturing capabilities. The second is where the intersection of digital with other shifts is causing boundaries between existing value chains to break down, and whole industries to decompose or merge.

There are many examples. Take the manufacturing of car windscreens, where traditional glass is beginning to be replaced by surfaces capable of handling image projection and augmented reality in autonomous or semi-autonomous vehicles. Or financial services, where agile FinTech companies are carving out pieces of the value chain such as payments and competing with the banks, who used to control the end-to-end process.

As companies seek to respond to these strands of disruption, the pressure to improve performance is unrelenting. In PwC’s 21st Annual Global CEO Survey, 58% of UK business leaders said they were under increased pressure to deliver business results – meaning growth and profitability – within shorter timelines. Their top two initiatives to achieve this, not surprisingly, were organic growth (87%) and cost reduction (67%).

However, other research reveals profound misgivings about whether businesses really can achieve both of these at once. Getting this right, or being “Fit for Growth”, requires an understanding of where to invest to deliver on the growth strategy, and where to look for cost reductions. Only 23% of respondents to Strategy&’s global Fit for Growth Index are strongly confident in their company’s ability to make the right choices on difficult “where to play” decisions. Such statistics beg the question of how business leaders can simultaneously cut costs and invest in capabilities that drive organic growth – especially when many admit they lack the insights needed to do either with certainty.

Also, when asked about the extent to which their major projects are aligned with their strategy, only 37% of companies said that they were “strongly aligned”. The implication is that businesses are failing to target their investments in the capabilities required to deliver their strategy. Put simply, companies need to find a way to put their money where their strategy is.

“Put simply, companies need to find a way to put their money where their strategy is.”

Figure 1 uses Strategy&’s Fit for Growth Index to compare the performance of four categories of business. The ‘ready for growth’ group have succeeded in aligning their costs and strategy and are accelerating away from counterparts hampered by capability constraints or distracted by other priorities. The worst performers are ‘strategically adrift’, with a strategy that’s not fit-for-purpose, or for growth.

Figure 1: Fit for Growth companies generate higher returns

There are four steps UK companies can take to join this group:

First, understand and focus on the distinctive capabilities required to deliver the company’s strategy and underpin its future growth.

Second, Second, align the cost structure with these capabilities – by investing in them while protecting “good costs” and pruning “bad costs”.

Third, Third, reorganise for growth – by building an organisation that can sustain cost reductions while also empowering managers to drive growth.

Finally, Finally, enable change and cultural evolution – by fostering a workforce that’s ready, able and committed to change.

“Only 15% of businesses worldwide currently qualify for the ‘Ready for Growth’ category.”

In a world where UK business leaders are finding short-term pressures conflicting with long-term growth goals, they need to reconcile the two – by rebuilding the connection between strategy and cost control. Smart companies are starting today.

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