How Ready Are You for Growth?
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A Booz & Company study reveals that only 17 percent of companies are poised for a profitable future.

A Booz & Company study reveals that only 17 percent of companies are poised for a profitable future.

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  • 1. ONLINE JUNE 18, 2013strategy+businessHow Ready Are Youfor Growth?A Booz & Company study reveals that only 17 percent of companiesare poised for a profitable future.BY ASHOK DIVAKARAN AND VINAY COUTO
  • 2. www.strategy-business.com1Since the economic crisis, many companies havebeen trying to figure out the best way to reposi-tion themselves for greater performance andsuccess in the future. Clearly the answer involves somecombination of growth strategy and cost management.Over the past several years, working in a variety ofindustries, we have seen firsthand that companies thatdo three things together seem to be better positioned fora sustainable return to high performance. First, they cre-ate clarity and coherence in their strategy, articulatingthe differentiating capabilities that they will need to winin the marketplace. Second, they put in place an opti-mized cost structure and approach to capital allocation,with continual investment in the capabilities critical tosuccess, while proactively cutting costs in less-criticalareas to fund these investments. Third, they build sup-portive organizations. They redesign their structures,incentives, decision rights, skill sets, and other organiza-tional and cultural elements to more closely align theirbehavior to their strategy, and to harness the collectiveactions of their people.We call this the Fit for Growth* approach, becauseit builds competitive muscle while cutting the corporatefat that weighs a company down. At companies that usethis approach, cost actions are proactive and strategic (asopposed to reactive and tactical), freeing up funds to bereinvested in those parts of the business that are mostimportant for growth (see Exhibit 1, page 2). At the sametime, an organizational fabric is put in place that guidesemployees to do the right things day in and day out,thus helping the entire enterprise build and sustaincompetitive advantage (see “Is Your Company Fit forGrowth?” by Deniz Caglar, Jaya Pandrangi, and JohnPlansky, s+b, Summer 2012).In order to test this hypothesis, we created a quan-titative metric—the Fit for Growth Index—that is builton these three elements (see “Calculating the Fit forGrowth Index,” page 3). We then analyzed almost 200companies headquartered in Europe and NorthAmerica, selected from a wide range of industries. Mostof these companies are active in markets around theworld. We calculated an index score for each of thesesample companies, based on an analysis of their basicbusiness attributes (for example, their portfolio of prod-ucts and presence in critical markets), and key actionsthat they had undertaken over a 24-month period toimprove performance.Finally, we compared the index values for eachHow Ready Are You for Growth?A Booz & Company study reveals that only 17 percent of companies are poisedfor a profitable future.by Ashok Divakaran and Vinay Couto*Fit for Growth is a registered service mark of Booz & Company Inc. in the United States.
  • 3. company with its total shareholder return (TSR) overthe same period. By itself, the index provides a simpleyet comprehensive check on a company’s readiness togrow. When combined with TSR data, it provides aframework for understanding which actions and attrib-utes are likely to have the greatest impact on perform-ance. We did, in fact, find a correlation: Companieswith high scores on the Fit for Growth Index, as agroup, scored higher in general performance as well.A closer look at the index reveals that relativelyfew companies have comprehensively equipped them-selves to drive superior growth. In fact, we found fiverecurring patterns in the scores: five types of companies,each with its own archetypal characteristics (see Exhibit 2,page 3). Like all archetypes, these are, of course, simplifi-cations; their purpose is to distill the essential, commoncharacteristics of each cluster, but not every company inan archetype group will display all the characteristics.In plotting the results of the 197 companies we sur-veyed, and comparing them to the archetypes, we foundthat more than three-quarters weren’t optimallyequipped to win in their chosen space. A sizable major-ity were either “Distracted” (they lacked a clearly artic-ulated “right to win” and set of differentiatingcapabilities) or “Capability Constrained” (they had notadequately operationalized a theoretically strong strate-gy and capabilities set). As might be expected, thenumber of companies that were “Strategically Adrift”—without a coherent strategy—was smaller; most majorcompanies have developed a basic alignment to theneeds of their market. The most telling finding: Onlytwo categories, “In the Game” and “Ready for Growth,”provided consistently strong performance, and lessthan one-fifth of the companies fell into either of thesetwo groups.(continued on page 4)2Ashok Divakaranashok.divakaran@booz.comis a partner with Booz &Company based in Chicago.He specializes in strategy-driven transformation forproduct- and innovation-basedcompanies.Vinay Coutovinay.couto@booz.comis a senior partner with Booz &Company based in Chicago. Heis the global leader of thefirm’s organization, change,and leadership practice,focusing on global organizationrestructuring and turnaroundprograms in the automotive,consumer packaged goods,and retail industries.Also contributing to this articlewere Booz & Company princi-pal Jitendra Chhikara, seniorassociate Ritesh Sharma, andsenior manager Marc Johnson.www.strategy-business.comExhibit 1: Fit for Growth* FrameworkThese three building blocks can be assessed and scored. In combination, they provide useful indicators of whether a company is ready for growth.Company’s Strategy & Way to PlayStrategic Clarity and CoherenceRelease FundsInvest in Higher-Value-AddedPrioritiesEnable and SustainReductionsResource Alignment Supportive OrganizationArticulates how the business creates differentiated value for customers• Clearly articulated and coherentstrategy• Sustainable and differentiatedcapabilities for growth• Presence in critical product, market,and customer segments• Systematic investments indifferentiating capabilities• Proactive and tailored costreduction actions• Lean cost structure inlow-criticality areas• Organizational structure that ismarket-back and tied to the basiccharacteristics of the business• Coherent and supportive incentives,decision rights, skill sets, cultures* Fit for Growth is a registered service mark of Booz & Company Inc. in the United States.Source: Booz & Company
  • 4. www.strategy-business.com3Exhibit 2: Five Archetypes of FitnessThese profiles of company types are based on recurring patterns evident in the Fit for Growth Index results.Low score on strategicclarity and coherence(regardless of scores inresource alignment andsupportive organization)• Strategy and criticalpriorities are unclear andnot widely understood,even among topmanagement• Differentiatingcapabilities needed to winin the market are notclearly articulated orexhibit large gaps• Approach is fundamen-tally reactive, withstrategic decisions beingeasily swayed by externalevents or competitors’actions• Susceptible to beingoutflanked by competitorsor being left flat-footed byfundamental shifts in theirindustry• With strategy unclear,cost structure,investments, andorganization are inevitablymisaligned and incapableof driving high performanceMedium score onstrategic clarity andcoherence, and low ormedium score in bothresource alignment andsupportive organization• Generally middle-of-the-pack in effectivenessand efficiency, whichjeopardizes thelonger-term “right to win”• Core elements ofstrategy and some criticalcapabilities exist at the“table stakes” level, butare not distinctive enoughto serve as a competitiveadvantage• Lack of a focused anddifferentiated strategymakes it difficult tomobilize investment andelevate performance totop-quartile levelsHigh score on strategicclarity and coherence,and low or medium scorein both resourcealignment and supportiveorganization• Category includes manycompanies traditionallythought of as competentperformers• Have strong strategies,and a coherent andclearly articulated set ofcapabilities• However, execution isn’tkeeping pace with intent—critical areas of thebusiness may not bereceiving enoughinvestment, and coststructure may bemisaligned with strategicpriorities• May be held back byinadequate practices,processes, ortechnologies• Have a big-pictureunderstanding of what ittakes to win, but theyneed more discipline inexecutionHigh score on bothstrategic clarity andcoherence and onresource alignment; lowor medium score onsupportive organization• From a marketeffectiveness perspective,doing almost everythingright• Strategy is clear,differentiated, and wellarticulated• Capabilities aredistinctive, well developed,and drive clear competitiveadvantage• But are held back fromachieving full potential byorganizational attributes(e.g., complicated matrixstructures, onerousgovernance processes,high leadership turnover,talent gaps, or amisaligned culture)High scores on allattributes• Strategy is clear,differentiated, wellarticulated, and hasdemonstrated resilienceto market andenvironmental changes• Capabilities are highlyadvanced and lead theindustry• Resources aresystematically directed toinitiatives andopportunities with thehighest strategic andfinancial returns• Organizationalstructures support keycapabilities, with talent inthe right places andefficient decision making• Market success rests ona foundation of coherent,proven, and sustainablefundamentals, rather thanon transitory factors suchas managerial talent orfavorable marketconditionsStrategically Adrift Distracted Capability Constrained In the Game Ready for GrowthSource: Booz & Company14% 49% 20% 11% 6%Percent ofcompanies:Calculating the Fitfor Growth IndexThe index assesses companies inthree key areas: strategic clarityreinforced by an aligned group ofcapabilities; an aligned resourcebase and cost structure; and a sup-portive organization. Each companyreceived a composite score from 1 to5 based on its “fitness” in each ofthese areas (5 being the most fit). Incalculating the scores, we weightedthe three factors as follows: strate-gic clarity and coherence at 50 per-cent, resource alignment at 30percent, and supportive organizationat 20 percent. The second and thirdfactors together constitute a com-pany’s execution capability. Thus, acompany’s index score is derived inequal parts from its strategy and itsexecutional fitness. These weight-ings reflect our belief that strategyand execution are equally importantin determining performance.The three factors, in turn, weremade up of several components,each with its own weighting. Thesesubcomponents are:• Strategic clarity and coher-ence: coherent strategy (15 percent),strong capabilities (10 percent),strong/coherent product portfolio (10percent), presence in critical mar-kets (15 percent)• Resource alignment: systemat-ic investments in differentiatingcapabilities (10 percent), thoughtfulcost reduction (15 percent), andimprovement initiatives aligned withstrategy (5 percent)• Supportive organization: speedand decisiveness (10 percent), strongleadership (5 percent), supportiveculture (5 percent)Our survey sample comprised 197companies in 17 industries. Com-panies were chosen to yield a bal-anced sample including high,medium, and low financial perform-ers in each industry, based on theirtotal shareholder return over a two-year period. To supplement ourknowledge of the companies, weexamined information from researchdatabases, analysts’ reports, earn-ings call transcripts, and businessperiodicals.
  • 5. Performance and ReadinessWhat does this analysis tell us about corporate per-formance? How does a company’s “readiness forgrowth” affect its market return?To measure the connection, we assigned each com-pany a Fit for Growth Index score and compared it tothe company’s total shareholder return over the two-year period from August 2010 through July 2012. Eachcompany received a normalized TSR score between 0and 100; 100 represented the company with the high-est return in its industry segment, and 0 represented thecompany with the lowest. This form of calculation insu-lated the TSR results from external factors that mightaffect some sectors more than others—for example,higher-than-usual exposure to declines in spending dueto the recession.We found a strong correlation between shareholderreturn and levels of development in the key areas thatmake a company growth-ready. In addition, we discov-ered a clear “clumping” of archetypes. Those with simi-lar patterns of development also had similar patterns ofperformance (see Exhibit 3, page 5).Although the strength of the relationship varies byindustry, our analysis confirms correlation. Almostthree-quarters of companies with high index scores hadhigh or medium-high TSR scores, and the companieswith lower index scores had lower TSR scores (seeExhibit 4, page 6).Once the link between the index scores and marketreturns was established, the next logical questionbecame, What specific elements, if any, in the indexframework best explain strong performance? To findout, for each of the 10 index subcomponents, wegrouped our company sample into three bands (low,4www.strategy-business.commedium, and high scorers) and calculated the averageTSR for each of those bands. This allowed us to deter-mine those subcomponents that had the biggest gapbetween high- and low-scoring companies. In general,we found distinct differences between the high and lowTSR scorers. A few of the subcomponents within eachof the building blocks (strategic clarity, resource align-ment, and supportive organization) appear to have aparticularly powerful impact on TSR scores. These arecoherent strategy, strong capabilities, systematic invest-ments, aligned initiatives, speed and decisiveness, andstrong leadership. It should also be noted that even thehigh scorers in these areas achieved average TSR valuesof less than 60 on a scale from 0 to 100. This findingsuggests that there is still room for improvement, evenfor this strongly performing peer group.Implications for ManagementThree distinct messages emerge from our research. Firstis the clear relationship between the index scores andmarket performance. Doing well on the attributes of theindex matters.Second, the majority of companies we analyzedhave some distance to go before they can be consideredtruly ready for sustainable growth. Only about a fifth ofour sample fell under a strongly positive archetype (“Inthe Game” or “Ready for Growth”). To close this gap,the other companies would need to fine-tune theirstrategies, raise their differentiating capabilities toworld-class levels, back up those capabilities with judi-cious cost restructuring and sustained and focusedinvestment, and redesign their organization to be truly“fit for purpose”—aligned with the needs of the businessand the strategy.(continued on page 6)
  • 6. What a “Ready forGrowth” CompanyLooks LikeAlthough every company is different,our analysis revealed a set of com-mon characteristics that underpinmany of the companies in thestrongest “Ready for Growth” arche-type. Consider these elementsacross the three building blocks ofthe framework:• Strategic clarity and coherence:At “Ready for Growth” companies,strategic priorities are specific,actionable, and—most critically—widely understood at all levels of thecompany. Leaders make clear choic-es, striving for “best-in-class”prowess only in the distinctive capa-bilities that create sustainable com-petitive advantage, and accepting“good enough” in other areas.Through rigorous, forward-lookingreview processes, they are able tokeep their strategies relevant, sens-ing and rapidly adapting to marketchanges. They’re quicker to inno-vate, are willing to make calculatedbig bets, and feel no qualms aboutkilling investments that aren’t pay-ing off.• Resource alignment: In the areaof resource allocation, “Ready forGrowth” companies employ a disci-plined process that ensures ade-quate funding for high-growth, coreactivities. Clear and objective invest-ment criteria prevent departmentrivalries and other parochial con-cerns from interfering with the allo-cation of funds to top corporatepriorities. These companies managespending strategically, making rig-orous trade-offs based on costtransparency and a deep under-standing of how they earn money.Acquisitions are made only if theyadvance the company’s strategicpositioning, and never if the targetwon’t be a good cultural fit.• Supportive organization: “Readyfor Growth” companies are organiza-tionally efficient, flexible, and lean.They align their power structuresand allocate decision rights in waysthat best serve strategic prioritiesand business realities, rather thanaligning them with historical lega-cies or individual agendas. Theycreate nimble mechanisms forgover-nance and collaborationacross business units. Talent man-agement practices support keycapabilities by moving the best peo-ple into pivotal roles. A coherent cul-ture sets norms and expectationsthat reflect the requirements forsuccess in the marketplace. Anethos of excellence and continuousimprovement prevails, reinforced bysystems that reward performance.Exhibit 3: The Correlation of the Index and Performance020406080100Luxottica GroupTime Warner CableDiageoU.S. BancorpWhole Foods MarketBlackRockComcastREADY FOR GROWTHIN THE GAMECAPABILITY CONSTRAINEDDISTRACTEDSTRATEGICALLY ADRIFTKEY:This diagram shows the comparative placement of 197 sample companies on scales showing performance (two-year normalized total shareholderreturn on the y-axis) and readiness for growth (the Fit for Growth Index score on the x-axis).Fit for Growth Index ScoreNormalizedTSR ScoreSource: Booz & Company1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0Limited BrandsCapital One FinancialWal-Mart Storeswww.strategy-business.com5
  • 7. 6www.strategy-business.comThird, the archetypes reveal specific factors thatappear to matter more than others in explaining per-formance. In a world of tough choices, these constitutethe logical places where companies should focus theirattention first.To chart a path forward, a company can calculateits own index score and determine the archetype thatmost closely matches its situation. Then, it can developan action plan, focusing on the highest-return levers, toimprove performance. For most companies—those thatfall under the “Distracted” archetype—an action pathcould include:• A rigorous review of the capabilities needed toachieve a leading position in their industry, versus thosethat are secondary• A dispassionate assessment of where they standagainst these capabilities on two fronts: their level ofeffectiveness, and their relative levels of funding andinvestment• An action plan to scale back in the less-criticalareas, and a corresponding plan to redirect funds fromthese areas to more critical needs• A series of targeted interventions within theirorganization to increase speed and quality of decisionmakingIn the final analysis, most business leaders wouldagree that robust strategies, cost and investment man-Exhibit 4: Distribution of Normalized TSR Scoresby Fit For Growth Index ScoreCompanies with higher index scores (at right) have better TSR profiles.The width of each column reflects the number of companies falling intothat index score category.19%34%47%16%27%45%12%42%31%27%26COMPANIES107COMPANIES64COMPANIESNormalizedTSRFit for Growth Index ScoreLow andMedium LowMediumHighHighHigh HighMedium HighMediumHighMedium HighMedium LowMedium LowMediumLowLowLowSource: Booz & CompanyMEDIUM HIGH HIGHMEDIUM LOWLOWKEY:agement, and fine-tuned organizations are critical toperformance. But they may not be aware of howmuch these factors can reinforce one another if the con-ditions are right. Mastering all three is the hard part,and our research shows that few companies do so.Making improvements requires a clearheadedness aboutone’s strengths and weaknesses, an understanding of thelinks to performance, and the development of a detailedplan of attack to reap the benefits. As is often the case,a good portion of the answer ultimately lies in focus andexecution. +ResourcesDeniz Caglar, Jaya Pandrangi, and John Plansky, “Is Your Company Fitfor Growth?” s+b, Summer 2012: Manifesto of the three-part prescriptionto make companies ready for sustained expansion.Paul Leinwand and Cesare Mainardi, The Essential Advantage: How toWin with a Capabilities-Driven Strategy (Harvard Business Review Press,2011): Chapter 9 spells out a process for cutting costs while growingstronger.Deniz Caglar, Marco Kesteloo, and Art Kleiner, “How Ikea ReassembledIts Growth Strategy,” s+b (online only), May 7, 2012: Interview with IanWorling, Ikea’s director of business navigation, on the way this highlycapable and frugal retailer moved forward after the Great Recession.
  • 8. ConsumerProducts and thePower of Fitnessby Deniz Caglar, Jaya Pandrangi,and Thomas RipsamTo test the relationship betweenindex scores and shareholder return,we looked closely at the consumerpackaged goods industry. Thisindustry is a good proving ground forseveral reasons. It’s a big industrywith companies of all sizes thatoperate in markets around theworld. Our sample comprised 23companies in the food, beverage,household products, and relatedsegments. Most are multinationalswith a broad global presence.These segments don’t exhibitidentical results, but they do sharecertain broad characteristics rele-vant to our analysis of the factorsthat affect long-term performance.Their common foundational ele-ments—such as a similar distribu-tion channel structure—supportbasic comparability across compa-nies. Perhaps most important, rela-tively low barriers to entry makeconsumer products a wide-opencompetitive battleground, wherecompanies live or die by smartstrategies and sharp execution. Towin, consumer products companiesmust offer something customersreally want but can’t get elsewhere.This requires a strategy that capital-izes on distinctive capabilities to cre-ate truly differentiated products.Companies can’t execute such astrategy unless they optimize costsand tailor their organization to deliv-er on the value proposition that setsthem apart from competitors.How, then, do index scores line upwith shareholder return in the con-sumer products industry? We founda remarkably clear correlation (seeExhibit A).The survey data also revealedwhich components of the index hadthe greatest impact on shareholderreturn. Gaps between high- and low-performing companies were biggestin factors related to strategic clarityand coherence, and resource align-ment. Differences between high- andmedium-performing companieswere most pronounced in the sup-portive organization category.For deeper insight, we examinedtwo particularly strong performersthat embody the key principles of theFit for Growth approach. Global bev-erage giant Diageo and Church &Dwight Company, a midsized compa-ny best known for its Arm & Hammerbrand, stand out for the coherence oftheir strategies, the power of theirdifferentiating capabilities, and theirfocused use of resources and organi-zational structures to create a rightto win in the marketplace.DiageoDiageo is a global alcoholic bever-ages company with brands thatinclude Johnnie Walker, Smirnoff,and Guinness. Diageo sells in morethan 180 countries and derives 40percent of its sales from emergingmarkets. These figures reflect thecompany’s overarching growth strat-egy of expanding leading brands intonew markets, using a tailoredapproach for each.Diageo relies on a small set of dif-ferentiating capabilities: marketing,supply chain and distribution chan-nel efficiencies, innovation, and jointbusiness planning with customers(known as the “Diageo Way ofSelling”). Capabilities are adapted tomeet the needs of local markets. Forexample, Diageo cultivates a premi-um image in North America, andemphasizes product innovation toTyson Foods J.M. SmuckerCampbell SoupKelloggGeneral MillsCoca-ColaDiageoMolson Coors BrewingConAgra FoodsAmerican GreetingsAvon ProductsColgate-PalmoliveWhirlpoolNewell RubbermaidCloroxMattelKimberly-ClarkPepsiCoAnheuser-Busch InBevConstellation BrandsBrown-FormanExhibit A: The Fit for Growth Index and Consumer Packaged Goods020406080100Church & DwightCompanies such as Kimberly-Clark, Mattel, and Brown-Forman have demonstrated an ability toproduce sustained shareholder value. They also score high on the index. Consumer productsmanufacturers with low index scores produced lower two-year total shareholder returns.Fit for Growth Index ScoreNormalizedTSR ScoreSource: Booz & Company1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0www.strategy-business.com7
  • 9. 8www.strategy-business.commiddle-class consumers in emerg-ing markets.Diageo manages costs and invest-ments to strengthen these key capa-bilities, in part by seeking effi-ciencies in other areas. It reducescosts through careful strategicsourcing of ingredients and otherdirect materials, operational opti-mization, alignment between itssupply footprint and growth oppor-tunities, and the use of value-enhancing distribution channels inemerging markets—to name a few ofits tactics.Diageo has built a fit-for-purpose,efficient, and effective organization.The company’s geographic organiza-tion maximizes brand value by com-bining a focus on individual growthmarkets with a global marketingsupport system. Employee satisfac-tion scores are high; many employ-ees praise Diageo’s meritocraticculture, strong leadership, focus onresults over “face time,” socialresponsibility, diversity, and work–life balance.Church & DwightChurch & Dwight has assembled astrong portfolio of home-care andpersonal-care brands in both thepremium and value categories. Itsstrategy emphasizes identifying andacquiring niche brands withuntapped residual equity, such asNair and Pepsodent. Church &Dwight mines this value by giving thebrands wide distribution and promi-nent shelf space, then cross-polli-nates and extends the brands intoadjacent categories.This strategy requires superiorcapabilities in areas such as brandextension, innovation in categories inwhich a brand is the market leader,and being a “fast follower” in nichesin which it is a value player. Church &Dwight develops these capabilitiesthrough resource alignment.Investments focus on brand devel-opment and marketing for a smallset of “power brands” that drivegrowth at the company. Innovationinvestments focus on breakthroughsin areas of market leadership, suchas condoms (Trojan), and closely fol-low market leaders in value nichessuch as baking soda (Arm &Hammer). More broadly, Church &Dwight fosters a financial culturethat is highly focused on perform-ance, supported by aggressive costmanagement.The approach has paid off forshareholders. Church & Dwight’sTSR has ranked among the highestreturns of the consumer productsindustry for most of the past decade.Deniz Caglardeniz.caglar@booz.comis a partner with Booz & Companybased in Chicago. He focuses onorganizational design and cost fit-ness in the consumer packagedgoods and retail industries.Jaya Pandrangijaya.pandrangi@booz.comis a partner with Booz & Company inCleveland. Her work focuses ongrowth and cost fitness strategy forconsumer products and retail com-panies.Thomas Ripsamthomas.ripsam@booz.comis a partner with Booz & Companybased in Munich. He specializes instrategy-based improvement of top-line and bottom-line performance.
  • 10. strategy+business magazineis published by Booz & Company Inc.To subscribe, visit strategy-business.comor call 1-855-869-4862.For more information about Booz & Company,visit booz.com• strategy-business.com• facebook.com/strategybusiness• http://twitter.com/stratandbiz101 Park Ave., 18th Floor, New York, NY 10178Looking for Booz Allen Hamilton? It can be found at at www.boozallen.com© 2013 Booz & Company Inc.