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ReportThe Most Adaptive Companies 2012Winning in an Age of Turbulence
The Boston Consulting Group (BCG) is a global managementconsulting firm and the world’s leading advisor on business strate...
The Most AdaptiveCompanies 2012Winning in an Age of Turbulence                     Martin Reeves                     Clair...
Contents                       	 3	   Introduction                       	 4	   The Landscape of Turbulence               ...
IntroductionW      hile the phenomenon of turbulence is not new, its nature       and degree have changed over time. In re...
The Landscape ofTurbulence                       T    urbulence is rising on all dimensions.                            We...
Exhibit 1 | Turbulence Has Increased Across Multiple Dimensions                        Demand is becoming more            ...
The Value ofAdaptive Advantage                       I n our recent Harvard Business Review                         articl...
To explore the full rankings of 417 adaptive                       decile companies. By contrast, over thecompanies across...
scores in their industries) lost 40 percent of                 The value of adaptiveness is increasing.                   ...
The Cost of                                                           AdaptivenessG   iven the rising levels of turbulence...
What Sets AdaptiveCompanies Apart?                       T   he BCG Adaptive Advantage Index can                          ...
Highly Adaptive Large Companies, 2012   The following 27 companies had a market         peers achieving scores at orin sig...
brainstorm and share ideas. It increases the     in 2011. The company’s BCG Adaptive Advan-                       volume o...
nues in its core advertising business, which        which content owners can distribute informa-operates within a very tur...
holds. Revenues from its recycling business       The company has identified the shifting eco-                       grew ...
The Road to                          Adaptive AdvantageT   he BCG Adaptive Advantage Index    can help companies enhance t...
“compulsory dissenting opinions” for key      ue from 2006 to 2011. But by building up its                            deci...
Appendix I                                                                                              MethodologyWe crea...
periods, as outlined above, to determine its       scores at or above 100 on our adaptiveness                       index ...
Appendix II                                                                  Sector and Industry RankingsThe sector and in...
Distributors                          Adaptive Category      Company Name                    Adaptive Advantage Index Scor...
Internet and Catalog Retail Adaptive Category      Company Name                     Adaptive Advantage Index Score        ...
Specialty Retail                          Adaptive Category      Company Name              Adaptive Advantage Index Score ...
Food and Staples Retailing Adaptive Category      Company Name                     Adaptive Advantage Index Score         ...
Energy                         Energy Equipment and Services                          Adaptive Category      Company Name ...
Health Care Equipment and Supplies Adaptive Category      Company Name                    Adaptive Advantage Index Score  ...
Pharmaceuticals                          Adaptive Category      Company Name                             Adaptive Advantag...
Airlines Adaptive Category      Company Name                         Adaptive Advantage Index Score Highly Adaptive       ...
Electrical Equipment                          Adaptive Category      Company Name               Adaptive Advantage Index S...
Professional Services Adaptive Category      Company Name                Adaptive Advantage Index Score                   ...
Information Technology                         Communications Equipment                          Adaptive Category      Co...
Internet Software and Services Adaptive Category      Company Name                             Adaptive Advantage Index Sc...
Software                          Adaptive Category      Company Name                        Adaptive Advantage Index Scor...
Containers and Packaging  Adaptive Category      Company Name                       Adaptive Advantage Index Score        ...
BCG's Report
BCG's Report
BCG's Report
BCG's Report
BCG's Report
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  1. 1. ReportThe Most Adaptive Companies 2012Winning in an Age of Turbulence
  2. 2. The Boston Consulting Group (BCG) is a global managementconsulting firm and the world’s leading advisor on business strategy.We partner with clients from the private, public, and not-for-profitsectors in all regions to identify their highest-value opportunities,address their most critical challenges, and transform their enterprises.Our customized approach combines deep in­ ight into the dynamics of scompanies and markets with close collaboration at all levels of theclient organization. This ensures that our clients achieve sustainablecompet­tive advantage, build more capable organizations, and secure ilasting results. Founded in 1963, BCG is a private company with77 offices in 42 countries. For more information, please visit bcg.com.
  3. 3. The Most AdaptiveCompanies 2012Winning in an Age of Turbulence Martin Reeves Claire Love Nishant MathurAugust 2012 | The Boston Consulting Group
  4. 4. Contents 3 Introduction 4 The Landscape of Turbulence 6 The Value of Adaptive Advantage 9 The Cost of Adaptiveness 1 0 What Sets Adaptive Companies Apart? 15 The Road to Adaptive Advantage 17 Appendix I: Methodology 19 Appendix II: Sector and Industry Rankings Consumer Discretionary Consumer Staples Energy Health Care Industrials Information Technology Materials Telecommunication Services Utilities2 | The Most Adaptive Companies 2012
  5. 5. IntroductionW hile the phenomenon of turbulence is not new, its nature and degree have changed over time. In recent years, we haveseen new and powerful drivers—digitization, connectivity, tradeliberalization, global competition, and business model innovation—increase turbulence and make it more persistent.Since the mid-1980s, this perfect storm of forces has been creating a“new normal” of chronic turbulence that can undermine incumbentpositions and business models with unprecedented speed. Indeed vol-atility in revenue growth, in revenue ranking, and in operating mar-gins have more than doubled since the 1960s. Executives must nowmaster the art of what we call adaptive advantage.In this report, we explore a powerful new measure of that art: theBCG Adaptive Advantage Index. We have developed the index tomeasure how well a company adapts to turbulence in its environ-ment. We calculated index scores for 2,500 public companies in theU.S. over a 30-year period. We found through our analysis that adap-tiveness creates value over both the short (6-year horizon) and long(30-year horizon) term. The BCG Adaptive Advantage Index not onlyserves as a metric of past performance but also has predictive pow-er—the most adaptive companies, as ranked by the index, are morelikely than unadaptive companies to outperform in the future. The Boston Consulting Group | 3
  6. 6. The Landscape ofTurbulence T urbulence is rising on all dimensions. We define and measure turbulence at the industry level through a combination of •• Turbulence has increased in intensity. Volatility in revenue growth, in revenue ranking, and in operating margins have several metrics: the rate of change in de- all more than doubled since the 1960s. mand growth and profit margins as well as the volatility of capital market expectations •• Turbulence today persists much longer than and revenue rankings. (For details about our in preceding periods. The average duration approach, see the Methodology section in of periods of high turbulence has quad- Appendix I to this report.) Exhibit 1 shows rupled over the past three decades. how unpredictability in these areas has multiplied since the mid-1950s. Turbulence has a profound impact. It de- stroys a significant proportion of the value Few industries and companies are immune. companies create during stable periods. Over See the interactive graphic “The Landscape the past 30 years, the companies studied in of Turbulence” to chart how turbulence lev- the index saw their overall market capitaliza- els have changed since the 1980s across ma- tion grow eight times larger during stable jor sectors. The interactive makes plain a few quarters, but one-third of that value was de- unsettling facts about the present business stroyed during turbulent quarters—and that environment: effect has been amplified in recent years. •• Turbulence strikes more frequently than in the past. More than half of the most turbulent quarters over the past 30 years have occurred during the past decade.4 | The Most Adaptive Companies 2012
  7. 7. Exhibit 1 | Turbulence Has Increased Across Multiple Dimensions Demand is becoming more ... industry position is becoming unpredictable ... increasingly unstable … 5-year average revenue Annual average positional growth volatility (%)¹ volatility² 80 80 60 60 40 40 322 230 20 20 0 0 1950 1960 1970 1980 1990 2000 2010 1950 1960 1970 1980 1990 2000 2010 … companies are facing large … and there is increasing volatility in changes in profitability … market expectations 5-year average EBIT margin 5-year average market-cap-growth volatility (%)¹ volatility (%)³ 12 75 9 60 6 45 291 3 30 74 0 15 1950 1960 1970 1980 1990 2000 2010 1950 1960 1970 1980 1990 2000 2010 xx Percentage increase in turbulenceSources: Compustat; BCG ValueScience Center; BCG analysis.1 Weighted average across 9,960 U.S. public companies, based on revenue.2 Average positional volatility among S&P 500 firms.3 Weighted average across Russell 3000 index constituents, based on market cap. The Boston Consulting Group | 5
  8. 8. The Value ofAdaptive Advantage I n our recent Harvard Business Review article, we explored how the rise in turbu- lence demands a new dynamic source of for the period from October 2005 to Septem- ber 2011. The sidebar “Highly Adaptive Large Companies, 2012” highlights companies that competitive advantage: adaptive advantage. had a market cap greater than $20 billion and Adaptive companies adjust and learn better, that were classified as highly adaptive be- faster, and more economically than their cause they ranked among the top 50 percent rivals. of their industry peers achieving scores at or above 100 on our adaptiveness index. We ex- By learning how adaptive they are compared cluded companies in the financial sector from with others and what practices make some this list because government intervention in players more adaptive, companies can learn this sector had a distorting effect. Similarly, how to enhance their own adaptive capabili- we excluded companies whose marked in- ties. To help companies assess their adaptive- crease in outperformance during turbulent ness, we have created the BCG Adaptive Ad- quarters was coincident with major M&A ac- vantage Index, which takes an outside-in, tivity. cross-industry perspective, using publicly available data. The index measures a company’s outperfor- Adaptiveness was measured mance relative to its industry during the in terms of a company’s per- quarters of highest turbulence in demand, competition, margins, and capital market ex- formance relative to its peers pectations. By examining outperformance in during turbulent quarters. the seven most turbulent quarters of the past six years, we were able to identify the set of companies that outperformed their peers un- Adaptiveness was measured in terms of a der the most difficult circumstances. (For company’s performance relative to its peers more about how the index was created, see during turbulent quarters. A score of 105 the Methodology section in Appendix I to this means that, on average, the company outper- report.) formed its industry by 5 percentage points during a single turbulent quarter—a major In our analysis, we examined BCG Adaptive achievement in tough times, and a perfor- Advantage Index scores for 2,500 U.S. public mance effect that can compound significantly companies across a wide range of industries over time.6 | The Most Adaptive Companies 2012
  9. 9. To explore the full rankings of 417 adaptive decile companies. By contrast, over thecompanies across 9 major sectors and 59 in- period from 1982 to 2011, the top-deciledustries, view “The Interactive Rankings of companies in the index grew their marketAdaptive Companies” at bcgperspectives.com capitalization by 18 percentage points moreand in Appendix II to this report. Both the in- per year, on average, than the bottom-decileteractive and the Appendix II rankings high- ones. (See Exhibit 2.)light the highly adaptive companies as we de-fined them above, as well as the companieswe categorized as adaptive—those thatranked among the bottom 50 percent of the Find interactive rankings ofscores at or above 100 on our adaptiveness 417 adaptive companies atindex in their industry. bcgperspectives.com.In analyzing the most adaptive companies,BCG has identified several key findings thathold across industries: Adaptiveness creates a performance gap between the top performers and the rest ofAdaptiveness creates both short-term and the pack. In stable quarters, both adaptivelong-term value. Increases in index scores and unadaptive companies grew; interesting-showed a strong relationship to growth in a ly, however, unadaptive companies tended tocompany’s market capitalization over the grow slightly faster. But during turbulententire period we studied. The same pattern quarters, the most highly adaptive companiesheld for a company’s total shareholder return grew while the least adaptive companiesover the entire period. From 2006 to 2011, generally declined significantly. For example,companies ranked in the top decile in the from 2006 to 2011, this performance gapBCG Adaptive Advantage Index grew their resulted in highly adaptive companiesmarket capitalization by 31 percentage points doubling their value, while highly unadaptivemore per year, on average, than the bottom- companies (those with the lowest index Exhibit 2 | Adaptiveness Pays Off in Both the Short and Long Term Compound annual growth rate (CAGR) of average company market cap (2006–2011)¹ (%) CAGR of company market cap (1982–2011)² (%) 20 40 10 30 R²=0.91 0 R² = 0.65 20 (10) (20) 10 0 10 20 30 40 50 60 70 80 90 0 10 20 30 40 50 60 70 80 90 Adaptiveness score decile Adaptiveness score decile Sources: Compustat; BCG ValueScience Center; BCG analysis. Note: The CAGRs were weighted to reflect the average adaptiveness scores of each decile of companies in the index. 1 Adaptiveness scores were calculated from 2006 to 2011 for 2,217 U.S. public companies. 2 Adaptiveness scores were calculated from 1982 to 2011 for 1,209 U.S. public companies. The Boston Consulting Group | 7
  10. 10. scores in their industries) lost 40 percent of The value of adaptiveness is increasing. their value. (See Exhibit 3.) Adaptiveness is of more importance today than a decade ago. The relationship between Adaptiveness predicts future performance. a higher score on the BCG Adaptive Advan- Companies with high scores on the BCG tage Index and a company’s higher overall Adaptive Advantage Index were more likely growth has become twice as strong over the to experience higher future growth in value, past 30 years. on average, than companies ranked low on the index. Exhibit 3 | Adaptiveness Can Help a Company Scale the Heights of Performance Market capitalization ($billions) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010 2011 2012 Highly adaptive companies Highly unadaptive companies Sources: Compustat; BCG ValueScience Center; BCG analysis.8 | The Most Adaptive Companies 2012
  11. 11. The Cost of AdaptivenessG iven the rising levels of turbulence across the majority of the industries westudied, most companies would be advised to Specifically, from 2006 to 2011, the average growth in market cap experienced during stable quarters by the top-decile companiesenhance their adaptive capabilities. But on the index was 3 percentage points loweradaptiveness is not a panacea, and it is not than that of bottom-decile companies. Duringachieved at zero cost. Therefore, companies turbulent quarters in this same timeframe,must learn when to apply adaptive approach- however, the top-decile companies grew theires and when to apply more classical ap- market cap by 25 percentage points moreproaches to strategy. than the bottom-decile companies did. This pattern held not only in recent years but alsoAdaptiveness is of less value during stable pe- over the 30-year period from 1982 to 2011.riods than in unstable periods. This shouldnot be surprising since the flexibility, experi-mentation, and redundancy necessary foradaptiveness come at the expense of static Adaptiveness is not a pana-efficiency. Rather than aiming to maximize cea and is not achieved atperformance through efficiency by reducingredundancy and variation, adaptive compa- zero cost.nies welcome redundancy and variation. It isfrom this diversity and dynamism that theylearn new and better ways of coping with Interestingly, a very small minority of compa-change. nies were able to break this tradeoff and out- perform during both stable and unstable pe-Therefore adaptive advantage must be de- riods. Future research will explore theployed at the right place and time. For details distinctive practices that these “ambidex-about when to apply an adaptive approach, trous” companies deploy.see “Why Strategy Needs a Strategy?”, BCG’sPerspective exploring strategy styles, and“Your Strategy Needs a Strategy,” a HarvardBusiness Review article by Martin Reeves,Claire Love, and Philipp Tillmanns, scheduledfor publication in August/September 2012. The Boston Consulting Group | 9
  12. 12. What Sets AdaptiveCompanies Apart? T he BCG Adaptive Advantage Index can be used to identify the most adaptive companies and learn from the distinctive In this section, we explore how five highly adaptive (or adaptive) companies with high scores on the BCG Adaptive Advantage Index practices that facilitated their success. See the deploy these dynamic capabilities. sidebar “Highly Adaptive Large Companies, 2012” for a list of the most adaptive large companies as identified by our index. Signal Advantage Beset by competition in the fast-changing re- Adaptive advantage is rooted in five adaptive tail landscape, Target realized that it faced a capabilities: marketplace that has “changed more in the last five years than the previous 50,” accord- •• Signal Advantage—the ability to read and ing to Andrew Pole, group manager of guest act on change signals analytics at Target. To combat periods of high turbulence during the downturn, Gregg •• Experimentation Advantage—the ability to Steinhafel, CEO of Target, outlined a set of experiment rapidly and economically to growth drivers in 2008: strengthen guest loy- learn new and better ways of coping with alty, boost shopping frequency, and increase change transaction size. •• Organizational Advantage—the ability to organize in ways that promote adaptation, including enhancing knowledge flow, Signal-reading tactics have diversity, risk taking, collaboration, and helped Target boost its rev- flexibility enues by 17 percent from •• Systems Advantage—the ability to harness 2006 through 2011. the diversity and adaptive potential of multicompany ecosystems Target used signal advantage as one of the •• Ecosocial Advantage—the ability to weapons to achieve these goals. Signal advan- continuously adapt the business model to tage helped the company produce an impres- changes in the ecological, social, and sive score of 105 on the BCG Adaptive Advan- economic spheres over both the short and tage Index, which classifies it as a highly long term adaptive company.10 | The Most Adaptive Companies 2012
  13. 13. Highly Adaptive Large Companies, 2012 The following 27 companies had a market peers achieving scores at orin significantly in- ing move that has resulted above 100 on cap greater than $20 billion and ranked the BCGcoupon redemption and increased creased Adaptive Advantage Index. among the top 50 percent of their industry purchasing of diapers and products in the 3M Google Allergan MasterCard Amazon McDonald’s Apple Nike Baxter Occidental Petroleum The Coca-Cola Company Precision Castparts Cognizant Priceline.com Covidien Southern Company Danaher Corporation Target Deere & Company Time Warner Cable DirecTV TJX Companies Disney VMware Express Scripts Yum! Brands Ford Motor CompanyTarget follows three steps to separate valu- baby category overall. Signal-reading tacticsable signals from background noise and then like these have helped Target boost its reve-to turn them into actionable information. nues by 17 percent and its EBIT by 6 percentFirst, it acquires relevant internal and exter- from 2006 through 2011. Over the same peri-nal data about its customers and uses those od, in the multiline retail industry overall,to construct a “guest portrait.” Second, it rec- revenues grew by just 4 percent, and EBITognizes hidden patterns in the data, such as declined by 7 percent.major inflection points in customers’ pur-chasing habits, including marriage, pregnan-cy, moving to a new home, and graduation. Experimentation AdvantageWhile most shoppers don’t purchase all Thanks to its knack for creating hundreds ofhousehold and grocery products from one new products each year—Post-it Notes thestore, the likelihood that they will do so in- most famous among them—3M has achievedcreases at such inflection points. Identifying a score of 108 on the BCG Adaptive Advan-these customers helps Target drive up the val- tage Index, classifying it as a highly adaptiveue of its average transaction per customer. company.Third, Target leverages these insights by de- Over the past six years, in particular, 3M hastermining the right message to send its outperformed other industrial conglomeratesguests—such as baby-product promotions to during periods of turbulence—boosting itsnew moms, grocery offers to lure new shop- market capitalization by 5 percent even as itspers into the store, or back-to-school sales for industry market cap declined 45 percent. Onestudents—via the online and offline channels of the secrets behind 3M’s outperformance iseach customer is most likely to use. its superior economics of experimentation relative to other players in the industry. Following these steps, Target has been suc-cessful at predicting when a woman is likely To manage the economics of experimenta-to be farther along in her pregnancy. It has tion, 3M does several things well. It promotesused that insight, for example, to identify idea generation by allowing employees to de-30 percent more guests to be contacted with vote 15 percent of their schedules to “slacka mailer featuring baby diapers—a market- time” and by hosting technology forums to The Boston Consulting Group | 11
  14. 14. brainstorm and share ideas. It increases the in 2011. The company’s BCG Adaptive Advan- volume of ideas converted to experiments by tage Index score was 107, classifying it as a providing multiple channels of seed capital, highly adaptive company. Over just the past such as the “Genesis” grant to fund experi- six years, it has increased its market cap by ments. And it accelerates the scale-up of suc- 62 percent, whereas the average company in cessful experiments through its Pacing Plus the Internet software and services industry program (which focuses on leapfrog technolo- saw its market cap decline by 27 percent dur- gies) and its Acceleration Initiative (which ing the same period. addresses large opportunities and markets). The programs help allocate more corporate Google’s organizational structure and culture resources to experiments and speed up their perfectly encapsulate its adaptive traits. commercialization. Google is famous for fostering creativity and breakthrough products by allowing engineers Supporting all these efforts is a culture that to spend 20 percent of their working time on rewards experimentation with equivalent any project that they believe can benefit technical and managerial career paths, pro- Google. Less well-known is how Google or- vides prizes for top innovators, and tolerates ganizes itself into flexible, diverse, and modu- failure. As George Buckley, the company’s for- lar units of employees that can be reconfig- mer CEO, explained, “At 3M, because of our ured quickly. To enable cross-functional wide diversity of technologies and end mar- collaboration, Google fosters a “marketplace kets, the term ‘failure’ is rarely applied to of ideas” in which briefs about new ideas and R&D, and invention here is almost always re- projects are published internally. Employees purposed and reused.” can vote for the most promising projects and choose which ones to support with their time. Google organizes itself into Google also maintains a flat organization in which people have the “capacity to self-gov- flexible, diverse, and modular ern with the help of their peers.” The leader- ship team at AdSense describes itself as a units of employees that can “mesh,” as opposed to a hierarchical struc- be reconfigured quickly. ture. In a recent survey, 95 percent of Ad- Sense employees said they believed that their managers worked for them. Experimentation has become the company’s standard operating procedure. One measure The company also strives to limit rules and of the success of its efforts is the company’s bureaucracy. Google employees use an online New Product Vitality Index (NPVI), which tool to share bureaucratic “incidents,” which calculates the percentage of sales generated are rated on a scale from “Dilberty” to “Goog- by products introduced within the past five ley.” Google then organizes “bureaucracy years. Even during the turbulent periods of buster” meetings in which employees share 2009, 3M maintained its NPVI at 29 percent, the so-called Dilberty processes that they per- which added 1 to 2 percent to its overall ceive as impeding innovation. In addition, the growth rate and helped the company outper- company encourages constructive friction form its industry. during discussions in which employees de- bate the pros and cons of options. And it also gives employees the freedom to fail: Larry Organizational Advantage Page, Google’s CEO, has said he would “rath- Often when a company gets big fast, its abil- er make the mistake in moving too fast than ity to innovate grinds to a halt. Bureaucracy make no mistakes and move too slow.” can stifle the ability of even the most ener- getic employees to adapt to changing busi- All these practices add up to create an enor- ness conditions. By contrast, Google has con- mous capability for rapid-fire innovation and sistently remained a nimble innovator, even learning, helping Google launch and improve as the number of employees reached 32,000 products and achieve steady growth in reve-12 | The Most Adaptive Companies 2012
  15. 15. nues in its core advertising business, which which content owners can distribute informa-operates within a very turbulent Internet tion with minimal barriers to entry. Growth insoftware and services industry. e-book readership has attracted many pub- lishers, and, as a result, more than 1 million e-books are available on the Kindle ecosys-Systems Advantage tem. Amazon opened its platform beyondAmazon ranks among the highly adaptive Kindle devices, allowing books to be read oncompanies in the rise-and-fall industry of In- such competing devices as those running Ap-ternet and catalog retail, with a score of 102 ple’s iOS and Android. It also has expandedon the BCG Adaptive Advantage Index. Ama- the estimated $5 billion Kindle ecosystem be-zon has seen its market cap rise 400 percent yond books to include other forms of mediaover the same six-year period covered by the such as movies, music, and apps. Tight feed-index. Its outperformance in a very turbulent back loops through customer ratings ofindustry stems in part from its advantaged books, apps, and other content enable Ama-management of business ecosystems. zon to improve recommendations and allow customers to make better selections. ThroughAmazon’s approach enabled it to extend its such tactics, Amazon now derives an estimat-adaptive capacity beyond its own organiza- ed 10 percent of its total $48 billion in reve-tional boundaries to include the network of nues from the Kindle ecosystem.partners in its broader ecosystem. Amazonbuilt its selling ecosystem as a diverse, flex-ible network of partners who interface seam- Ecosocial Advantagelessly with customers. The preferences and A normally staid business once known exclu-trust of those customers, combined with Am- sively for carting garbage to landfills mightazon’s rigorous process of experimentation, not immediately come to mind as an exampledrive a continual evolution of the system. of ecosocial advantage. What then explainsAmazon’s minimal barriers to entry and at- Waste Management’s score of 101 on the BCGtractive value proposition enabled more than Adaptive Advantage Index and classification2 million third-party sellers of all sizes and of as an adaptive company?all types of goods—individuals and profes-sionals—to market their products to millionsof customers on its platform. Amazon’s outperformanceUnlike some other online marketplaces, Ama- in a turbulent industry stemszon created a seamless customer experienceby using common standards for products sold in part from its advantagedon its platform—including the ability to view management of businessall prices for a given product across differentsellers or to view all products by a specific ecosystems.seller. The ecosystem continuously evolvesthrough customer ratings, which serve astight feedback loops between customers and In response to increasing concerns about eco-sellers. Amazon also enhances the platform logical sustainability, Waste Managementthrough real-time testing of its homepage de- adapted its business model for long-term sus-sign, ranking algorithms, and search results. tainability. The landfill specialist now earnsAs a result of such efforts, the number of sell- substantial profits not just from garbage han-ers and customers on Amazon.com is increas- dling but also from such sustainable activitiesing, and sales from third-party sellers have as recycling, renewable energy, and waste-re-grown faster than Amazon’s direct sales— duction consulting to other businesses. Theand accounted for 36 percent of total units company pioneered the operation of a recy-sold in 2011. cling program in a major city by launching Seattle’s program in 1988. It is now NorthAnother example of Amazon’s ecosystem- America’s largest recycler, with 131 facilitiesbased approach is its Kindle business, in serving municipalities, businesses, and house- The Boston Consulting Group | 13
  16. 16. holds. Revenues from its recycling business The company has identified the shifting eco- grew by 74 percent from 2006 to 2011, total- logical values of its customers, treating these ing $1.6 billion in 2011. values as unmet needs and building profit- able new businesses and business models in Furthermore, Waste Management has accel- response. In the process, it has attained the erated expansion of businesses that turn gar- holy grail of sustainability: getting rewarded bage into electricity. Wheelabrator, its waste- for doing the right things. Increased growth to-energy incineration subsidiary, has and profitability from recycling and renew- generated up to 12 percent of the company’s able energy businesses have helped the com- net income since 2009, despite accounting for pany deliver measurable outperformance only about 7 percent of its revenues. The during times of turbulence. company also manages 110 landfill-gas-to-en- ergy projects. Together, these businesses gen- erate enough electricity to power 1.1 million homes—more than the entire solar energy in- dustry generates in the U.S. Finally, as companies deal with increasing amounts of waste as well as rising energy and commodity prices, Waste Management now offers “sustainability services,” advising com- panies how to use—and throw away—less.14 | The Most Adaptive Companies 2012
  17. 17. The Road to Adaptive AdvantageT he BCG Adaptive Advantage Index can help companies enhance theiradaptive capabilities and thereby increase adaptive advantage: signal, experimentation, organizational, systems, and ecosocial advan- tage. This can be done by comparing yourtheir performance in turbulent times. Com- practices on each of these dimensions withpanies can take three concrete steps to those in the case studies in this and otherprogress down the road to adaptive ad- reports in BCG’s Adaptive Advantage series.vantage. BCG’s Adaptive Advantage Diagnostic can also help assess a company’s level of compe-Step 1: Identify the most adaptive players in tence in the five adaptive capabilities ofyour industry. The interactive rankings adaptive advantage.associated with this report can help youdetermine the most adaptive players in yourindustry. Consider the following questionswhen assessing your company’s relative Evaluate capabilities thatadaptiveness: drive signal, experimentation,•• How turbulent is your industry? organizational, systems, and ecosocial advantage.•• Who are the most adaptive companies in your industry? Step 3: Design and take measures to address•• Are you more or less adaptive than your any capability gaps. For example, companies key competitors? can engage on some of the following simple starting points:•• Are your competitors gaining advantage by becoming more adaptive over time? •• Signal Advantage—Sense and respond to trends and uncertainties. •• What can you learn from more adaptive competitors? •• Experimentation Advantage—Measure and manage your economics of experi-Step 2: Assess your adaptive capabilities, mentation.pinpointing strengths and identifying thegaps. Evaluate your strengths and weakness •• Organizational Advantage—Foster diversityin relation to the five capabilities that drive and adaptation by embracing the idea of The Boston Consulting Group | 15
  18. 18. “compulsory dissenting opinions” for key ue from 2006 to 2011. But by building up its decisions. capabilities to match those of even the lowest decile of adaptive companies, such a player •• Systems Advantage—Try changing the unit could unlock significant additional value. of analysis from “the firm” to “the ecosys- tem” when you next assess your strategy. The current business environment requires a deft ability to uncover strategies and capabili- •• Ecosocial Advantage—Turn negative ties that will allow organizations to maneuver externalities into business opportunities. through uncertainty. By first gaining an un- derstanding of its adaptive advantage and then building and expanding that advantage, B uilding your capabilities in each of the five areas above improves your compa- ny’s adaptiveness to turbulence. And that can a company can proactively position itself to benefit during times of turbulence. It can then translate this powerful source of advan- translate into significant financial rewards. tage into long-term, sustainable strategies and We estimate that the average large, unadap- financial benefits. tive company lost 13 percent of its initial val-16 | The Most Adaptive Companies 2012
  19. 19. Appendix I MethodologyWe created the BCG Adaptive Advantage market-cap growth rates were measured overIndex using publicly available data for 2,500 each quarter and averaged over the six-yearU.S. public companies across a wide range period.of industries. Periods of turbulence were identified forWe calculated each company’s BCG Adaptive each industry by assessing turbulence in de-Advantage Index score by measuring the mand, competition, margins, and capital mar-weighted-average outperformance of a com- ket expectations. Turbulence in demand andpany’s market-cap growth rates versus the margins was measured by the absolute rateweighted-average market-cap growth rates of change in industry revenues and EBITin its industry during that industry’s seven margins, respectively, per quarter. Turbulencemost turbulent business quarters from Octo- in competition was measured by taking theber 2005 through September 2011. Through- weighted average of the absolute change inout the report, we refer to this six-year period companies’ rankings by revenues within anas 2006 to 2011. industry each quarter. To account for compa- ny size, we weighted the average using com-The BCG index categorized companies using pany revenues.the Global Industry Classification Standard(GICS), which was developed by MSCI and Turbulence in the capital market expecta-Standard & Poor’s. To find definitions of the tions of an industry was measured by takingindustries and sectors, see http://www. the weighted average of the standard devia-standardandpoors.com/indices/articles/en/us/ tions of daily market-cap growth rates of the?articleType=PDF&assetID=1245186418839. industry’s companies over a quarter. To ac- count for company size, we weighted the av-Outperformance was measured in terms of erage using company market cap.market-cap growth rates because market capcorrelates strongly with total shareholder re- These four measures were combined andturn (TSR) and, ultimately, with value genera- adjusted for any cross-correlations amongtion. It also conveys information about past them to create a net turbulence metric. Weand potential future performance; also, mar- used this net turbulence metric to identifyket cap data are available in greater detail the seven most turbulent periods in eachthan are other measures of performance. The industry; then, we calculated the companies’fluctuations of stock market prices, typically average relative outperformance in market-over shorter intervals, are mitigated since cap growth during those seven turbulent The Boston Consulting Group | 17
  20. 20. periods, as outlined above, to determine its scores at or above 100 on our adaptiveness index score. index as highly adaptive and the bottom 50 percent as adaptive. We then selected the An index score of 105 means that, on average, ten largest companies (as measured by the company outperformed its industry by revenues) in each industry to compile these 5 percentage points during a single turbulent tables. quarter—a major achievement in tough times, and a performance effect that can Companies belonging to the financial sector compound significantly over time. If, for ex- (as designated by GICS codes) were excluded ample, the turbulent quarters were sequen- from the index because government interven- tial, such a score would, by compounding tion in the sector had a distorting effect on over seven quarters, translate into a 41 per- the outperformance exhibited by certain cent outperformance in market-cap growth companies. Similarly, we excluded companies over the industry. whose marked increase in outperformance during turbulent periods was coincident with We determined the level of adaptiveness major M&A activity. of each company relative to other companies in its industry: in each industry, we classified the top 50 percent of companies achieving18 | The Most Adaptive Companies 2012
  21. 21. Appendix II Sector and Industry RankingsThe sector and industry rankings in Ap- “The Interactive Rankings of Adaptive Com-pendix II highlight the largest highly adaptive panies” charts detailed data, by industry, forand adaptive companies for 59 industries all 417 of these companies. The interactivein 9 sectors. The listed scores have been graphic indexes each company’s—and eachrounded to the nearest whole numbers; the industry’s aggregate—market cap to 1 in Q4rankings were based on raw index scores. At 2005 and charts indexed growth over the sub-bcgperspectives.com, the interactive graphic sequent six years.Consumer Discretionary Auto Components Adaptive Category Company Name Adaptive Advantage Index Score Dana Holding Corporation 110 TRW Automotive 107 Tenneco 106 Highly Adaptive Shiloh Industries 105 Dorman Products 104 Modine Manufacturing Company 104 Drew Industries 102 Gentex Corporation 101 Adaptive Cooper Tire & Rubber Company 100 Autoliv 100 Automobiles Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Ford Motor Company 105 Source: BCG analysis. The Boston Consulting Group | 19
  22. 22. Distributors Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Pool Corporation 101 Adaptive Genuine Parts Company 100 Diversified Consumer Services Adaptive Category Company Name Adaptive Advantage Index Score DeVry 114 Weight Watchers International 108 Highly Adaptive H&R Block 104 Strayer Education 103 Capella Education Company 103 Coinstar 101 Adaptive Apollo Group 101 Mac-Gray Corporation 100 Hotels, Restaurants, and Leisure Adaptive Category Company Name Adaptive Advantage Index Score Chipotle Mexican Grill 111 McDonald’s 108 Highly Adaptive Buffalo Wild Wings 106 Yum! Brands 104 Panera Bread 103 Churchill Downs 102 Darden Restaurants 102 Adaptive Wynn Resorts 101 Texas Roadhouse 100 Life Time Fitness 100 Household Durables Adaptive Category Company Name Adaptive Advantage Index Score Tupperware Brands 113 Garmin 109 Highly Adaptive Tempur-Pedic 107 NVR 102 M.D.C. Holdings 102 Helen of Troy 101 Newell Rubbermaid 101 Adaptive Jarden Corporation 101 Toll Brothers 101 Leggett & Platt 100 Source: BCG analysis.20 | The Most Adaptive Companies 2012
  23. 23. Internet and Catalog Retail Adaptive Category Company Name Adaptive Advantage Index Score Priceline.com 109 Highly Adaptive Amazon 102 Adaptive Netflix 100Leisure Equipment and Products Adaptive Category Company Name Adaptive Advantage Index Score Polaris Industries 106 Highly Adaptive Mattel 103 Hasbro 102 Adaptive Jakks Pacific 101Media Adaptive Category Company Name Adaptive Advantage Index Score DirecTV 109 Highly Adaptive Time Warner Cable 103 Disney 103 Thomson-Reuters 102 Cablevision Systems 102 Time Warner 102 Adaptive Omnicom Group 101 Viacom 101 The Washington Post Company 101 Interpublic Group of Companies 100Multiline Retail Adaptive Category Company Name Adaptive Advantage Index Score Dollar Tree 110 Highly Adaptive Target 105 Family Dollar Stores 104 Saks 101 Adaptive 99 Cents Only Stores 101Source: BCG analysis. The Boston Consulting Group | 21
  24. 24. Specialty Retail Adaptive Category Company Name Adaptive Advantage Index Score TJX Companies 105 Staples 104 Highly Adaptive Ross Stores 104 AutoZone 103 Home Depot 102 Lowe’s 102 PetSmart 101 Adaptive Best Buy 101 CarMax 100 Gap 100 Textiles, Apparel, and Luxury Goods Adaptive Category Company Name Adaptive Advantage Index Score Crocs 118 Highly Adaptive Fossil 107 Nike 104 Deckers Outdoor 104 Adaptive Under Armour 103 Iconix Brand Group 102 Source: BCG analysis. Consumer Staples Beverages Adaptive Category Company Name Adaptive Advantage Index Score Craft Brew Alliance 108 National Beverage 106 Highly Adaptive The Coca-Cola Company 103 Hansen Beverage Company 103 Molson Coors Brewing 103 Adaptive Dr Pepper Snapple Group 102 MGP Ingredients 100 Source: BCG analysis.22 | The Most Adaptive Companies 2012
  25. 25. Food and Staples Retailing Adaptive Category Company Name Adaptive Advantage Index Score PriceSmart 124 Highly Adaptive Spartan Stores 105 Harris Teeter Supermarkets 104 Kroger Company 103 Costco Wholesale Corporation 103 United Natural Foods 102 Adaptive Whole Foods Market 102 Wal-Mart Stores 102 Weis Markets 101 Winn-Dixie Stores 101Food Products Adaptive Category Company Name Adaptive Advantage Index Score Green Mountain Coffee Roasters 143 The J.M. Smucker Company 107 Highly Adaptive Flowers Foods 105 Fresh Del Monte Produce 104 Cal-Maine Foods 104 Archer Daniels Midland 102 Hormel Foods 102 Adaptive General Mills 102 Lancaster Colony Corporation 101 Sanderson Farms 100Household Products Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Church & Dwight 102Personal Products Adaptive Category Company Name Adaptive Advantage Index Score Medifast 108 Highly Adaptive Usana Health Sciences 104 Elizabeth Arden 103 Adaptive Estée Lauder Companies 103Tobacco Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Vector Group 100 Adaptive Star Scientific 100Source: BCG analysis. The Boston Consulting Group | 23
  26. 26. Energy Energy Equipment and Services Adaptive Category Company Name Adaptive Advantage Index Score Oceaneering International 107 McDermott International 107 Highly Adaptive FMC Technologies 106 Diamond Offshore Drilling 105 Cameron International 104 RPC 103 Schlumberger 103 Adaptive Tidewater 101 Dresser-Rand 100 Lufkin Industries 100 Oil, Gas, and Consumable Fuels Adaptive Category Company Name Adaptive Advantage Index Score World Fuel Services 111 Highly Adaptive Delek U.S. Holdings 105 Occidental Petroleum 105 Anadarko Petroleum 103 Chevron 103 Apache 102 Adaptive Marathon Oil Company 102 Alon USA 101 EOG Resources 101 Exxon Mobil 101 Source: BCG analysis. Health Care Biotechnology Adaptive Category Company Name Adaptive Advantage Index Score Alexion Pharmaceuticals 112 Highly Adaptive Regeneron Pharmaceuticals 110 Celgene Corporation 104 Cubist Pharmaceuticals 103 Acorda Therapeutics 102 Amgen 102 Adaptive BioMarin Pharmaceutical 102 Cepheid 102 Gilead Sciences 101 United Therapeutics 100 Source: BCG analysis.24 | The Most Adaptive Companies 2012
  27. 27. Health Care Equipment and Supplies Adaptive Category Company Name Adaptive Advantage Index Score Baxter 106 C. R. Bard 105 Highly Adaptive Becton, Dickinson and Company 105 Covidien 104 Cooper Companies 104 Edwards Lifesciences 104 Intuitive Surgical 102 Adaptive Zimmer 101 Dentsply International 101 KCI 100Health Care Providers and Services Adaptive Category Company Name Adaptive Advantage Index Score Express Scripts 107 Highly Adaptive Owens & Minor 105 AmerisourceBergen 103 Cardinal Health 103 Medco Health Solutions 103 Henry Schein 102 Adaptive McKesson Corporation 100 Community Health Systems 100 Quest Diagnostics 100 UnitedHealth Group 100Health Care Technology Adaptive Category Company Name Adaptive Advantage Index Score athenahealth 110 Highly Adaptive Quality Systems 105 Transcend Services 102 SXC Health Solutions 101 Adaptive Cerner Corporation 101Life Sciences Tools and Services Adaptive Category Company Name Adaptive Advantage Index Score Bruker 115 Highly Adaptive Illumina 107 Caliper Life Sciences 103 Adaptive Bio-Rad Laboratories 100Source: BCG analysis. The Boston Consulting Group | 25
  28. 28. Pharmaceuticals Adaptive Category Company Name Adaptive Advantage Index Score Perrigo 109 Akorn 108 Obagi Medical Products 107 Highly Adaptive Jazz Pharmaceuticals 106 Mylan 106 Allergan 105 Forest Laboratories 103 Impax Laboratories 102 Adaptive Abbott Laboratories 102 ViroPharma 101 Source: BCG analysis. Industrials Aerospace and Defense Adaptive Category Company Name Adaptive Advantage Index Score AAR Corporation 109 Precision Castparts 109 Highly Adaptive Goodrich 109 B/E Aerospace 106 Esterline Technologies 104 United Technologies 102 Rockwell Collins 101 Adaptive Alliant Techsystems 101 Boeing 100 Teledyne Technologies 100 Air Freight and Logistics Adaptive Category Company Name Adaptive Advantage Index Score C.H. Robinson Worldwide 105 Highly Adaptive Forward Air Corporation 103 Pacer International 102 FedEx 101 Adaptive UTI Worldwide 100 Expeditors International of Washington 100 Source: BCG analysis.26 | The Most Adaptive Companies 2012
  29. 29. Airlines Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Allegiant Travel Company 105 JetBlue Airways 104 Adaptive Alaska Air Group 102 Copa Holdings 100Building Products Adaptive Category Company Name Adaptive Advantage Index Score Griffon 109 AAON 106 Highly Adaptive Lennox International 105 American Woodmark Corporation 101 Owens Corning 101 Adaptive Trex Company 101 Armstrong World Industries 100Commercial Services and Supplies Adaptive Category Company Name Adaptive Advantage Index Score Rollins 107 Clean Harbors 105 Highly Adaptive Stericycle 105 Tetra Tech 104 Waste Connections 104 Sykes Enterprises 103 United Stationers 102 Adaptive Iron Mountain 102 Corrections Corporation of America 101 Waste Management 101Construction and Engineering Adaptive Category Company Name Adaptive Advantage Index Score Furmanite 112 Sterling Construction Company 110 Highly Adaptive AECOM 108 MasTec 106 Layne Christensen 104 URS Corporation 104 Fluor Corporation 103 Adaptive Comfort Systems USA 103 KBR 102 Jacobs Engineering Group 102Source: BCG analysis. The Boston Consulting Group | 27
  30. 30. Electrical Equipment Adaptive Category Company Name Adaptive Advantage Index Score AZZ 111 Polypore International 108 Highly Adaptive Powell Industries 106 Ametek 104 Encore Wire Corporation 103 Roper Industries 103 Preformed Line Products 102 Adaptive Regal-Beloit Corporation 102 Emerson Electric 101 Hubbell 100 Industrial Conglomerates Adaptive Category Company Name Adaptive Advantage Index Score Raven Industries 109 Highly Adaptive 3M 108 Carlisle Companies 107 Seaboard Corporation 103 Adaptive General Electric 101 Standex International 100 Machinery Adaptive Category Company Name Adaptive Advantage Index Score Cummins 106 Deere & Company 103 Highly Adaptive Danaher Corporation 103 Paccar 102 Dover Corporation 102 Pentair 102 Eaton Corporation 101 Adaptive The Timken Company 101 Caterpillar 101 Parker Hannifin 100 Marine Adaptive Category Company Name Adaptive Advantage Index Score Adaptive Genco Shipping & Trading 103 Source: BCG analysis.28 | The Most Adaptive Companies 2012
  31. 31. Professional Services Adaptive Category Company Name Adaptive Advantage Index Score ICF International 120 IHS 111 Highly Adaptive Huron Consulting Group 107 VSE Corporation 106 Towers Watson 106 CBIZ 105 Insperity 104 Adaptive FTI Consulting 104 Dun & Bradstreet 100 Kforce 100Road and Rail Adaptive Category Company Name Adaptive Advantage Index Score Marten Transport 106 J.B. Hunt Transport 103 Highly Adaptive Knight Transportation 102 Arkansas Best Corporation 102 Union Pacific 102 Adaptive Werner Enterprises 101 Heartland Express 101Trading Companies and Distributors Adaptive Category Company Name Adaptive Advantage Index Score DXP Enterprises 106 W.W. Grainger 105 Highly Adaptive Kaman Corporation 103 Rush Enterprises 103 Fastenal Company 102 Titan Machinery 101 Adaptive Watsco 100 MSC Industrial Direct 100Source: BCG analysis. The Boston Consulting Group | 29
  32. 32. Information Technology Communications Equipment Adaptive Category Company Name Adaptive Advantage Index Score F5 Networks 110 Finisar Corporation 107 Brocade 107 Highly Adaptive Riverbed Technology 107 Plantronics 106 Netgear 105 Qualcomm 103 Polycom 103 Adaptive Arris Group 102 Emulex Corporation 102 Computers and Peripherals Adaptive Category Company Name Adaptive Advantage Index Score Stratasys 111 Quantum Corporation 108 Highly Adaptive Super Micro Computer 107 Apple 106 EMC Corporation 101 Adaptive NetApp 101 Dot Hill Systems 100 Electronic Equipment, Instruments, and Components Adaptive Category Company Name Adaptive Advantage Index Score Viasystems Group 120 TTM Technologies 112 Highly Adaptive Amphenol Corporation 105 Flir Systems 104 AVX Corporation 102 ScanSource 101 Trimble Navigation 101 Adaptive Tech Data Corporation 101 Synnex Corporation 100 PC Connection 100 Source: BCG analysis.30 | The Most Adaptive Companies 2012
  33. 33. Internet Software and Services Adaptive Category Company Name Adaptive Advantage Index Score Akamai Technologies 109 Google 107 Highly Adaptive ValueClick 107 Equinix 107 Monster Worldwide 106 j2 Global 106 RealNetworks 104 Adaptive DealerTrack 104 Digital River 103 Vistaprint 102IT Services Adaptive Category Company Name Adaptive Advantage Index Score MasterCard 108 Highly Adaptive Teradata Corporation 107 Cognizant 106 Global Payments 103 Fidelity National Information Services 103 Visa 103 Adaptive Accenture 102 IBM 101 Lender Processing Services 101 SAIC 101Office Electronics Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Xerox 101Semiconductors and Semiconductor Equipment Adaptive Category Company Name Adaptive Advantage Index Score Micron Technology 113 Highly Adaptive Advanced Micro Devices 112 Marvell 107 Broadcom Corporation 104 Lam Research Corporation 103 Altera Corporation 102 Adaptive Nvidia 102 Intel 100 Analog Devices 100 Xilinx 100Source: BCG analysis. The Boston Consulting Group | 31
  34. 34. Software Adaptive Category Company Name Adaptive Advantage Index Score Citrix Systems 107 Salesforce.com 107 Highly Adaptive VMware 107 Intuit 106 Nuance Communications 106 BMC Software 103 Oracle 103 Adaptive Synopsys 103 Parametric Technology Corporation 101 Microsoft 101 Source: BCG analysis. Materials Chemicals Adaptive Category Company Name Adaptive Advantage Index Score FMC Corporation 106 Valspar Corporation 106 Highly Adaptive Airgas 105 Westlake Chemical 104 Sherwin-Williams 104 Praxair 103 RPM International 102 Adaptive Ashland 101 Monsanto 101 DuPont (E. I.) De Nemours 100 Construction Materials Adaptive Category Company Name Adaptive Advantage Index Score Eagle Materials 105 Highly Adaptive Texas Industries 102 Adaptive Martin Marietta Materials 101 Source: BCG analysis.32 | The Most Adaptive Companies 2012
  35. 35. Containers and Packaging Adaptive Category Company Name Adaptive Advantage Index Score Temple-Inland 115 Highly Adaptive Crown Holdings 102 Boise 102 Packaging Corporation of America 101 Adaptive Ball Corporation 101 Greif 101 Metals and Mining Adaptive Category Company Name Adaptive Advantage Index Score Cliffs Natural Resources 111 Highly Adaptive Horsehead Corporation 106 Amcol International 105 Stillwater Mining Company 104 Compass Minerals 104 Newmont Mining Corporation 103 Adaptive Freeport-McMoRan Copper & Gold 103 Titanium Metals Corporation 102 Reliance Steel & Aluminum Co. 102 Southern Copper Corporation 101 Paper and Forest Products Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive Buckeye Technologies 114 International Paper Company 101 Adaptive MeadWestvaco 101 Source: BCG analysis.Telecommunication Services Diversified Telecommunication Services Adaptive Category Company Name Adaptive Advantage Index Score Adaptive AboveNet 103 Wireless Telecommunication Services Adaptive Category Company Name Adaptive Advantage Index Score Highly Adaptive nTelos Holdings Corporation 108 Adaptive MetroPCS Communications 102 Source: BCG analysis. The Boston Consulting Group | 33

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