EY Growing Beyond: How high performers are accelerating ahead Nov 2012

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Working closely with businesses across the globe we see an ever increasing gap emerging between high and low performers and have identified key approaches the high performers have been taking to achieve sustainable growth. Certain key strategies emerge that are at the heart of business success with four key drivers that remain throughout: customer reach, operational agility, cost competitiveness and stakeholder confidence. You may find these insights helpful when discussing your own strategy for future growth.

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EY Growing Beyond: How high performers are accelerating ahead Nov 2012

  1. 1. Growing BeyondGrowing BeyondHow high performers areaccelerating ahead
  2. 2. In this reportExecutive summary 2Adjusting to the new reality 4Customer reach: Getting closer but looking beyond 10Operational agility: Moving quickly in a customized world 16Cost competitiveness: Finding the right balance 22Stakeholder confidence: To inform, to explain, to engage 26Conclusion 32Further reading 34About this report 36The benchmark findings for this report are drawn from a study undertaken in Augustand September 2012 by the Economist Intelligence Unit (EIU), surveying 1,500C-suite, board directors and senior managers from around the world.As with our earlier studies, we have factored out the impact of sector and distinguishedbetween the highest and the lowest quartile of performers — in both revenue andEBITDA growth — to see if we can identify specific patterns of action that might explainthe difference in performance.Source for all charts: EIU panel survey, August–September 2012. All charts showpercentage of respondents.
  3. 3. How high performerscontinue to grow beyondGrowth has become the magic word for both business and government. Taken for grantedin the pre-crisis years, the first bite of the credit crunch in 2007 ushered in an age inwhich growth has proven frustratingly elusive to many, rather than few. While no businessis immune to the health of the wider economy or its market, some companies havecontinued to prosper, even thrive, during the most difficult conditions of recent years. Andthe difference between these high performers and others is becoming more and morepronounced.What is it that high performers are doing differently?What are the lessons that all businesses can learn?These are the key questions addressed by a series of studies conducted by Ernst & Youngsince 2008, with a view to providing practical insights to help our clients navigate theharsh economic terrain. Our first study showed how high performers were proactivelyreacting to the first wave of the credit crunch by seeking out Opportunities in adversity.In 2009, we built on this with a study that analyzed the Lessons from change. In early2011, we explored how the high performers were Competing for growth by adopting newstrategies for new markets and new products, and taking new approaches to managing thetalent that is essential to achieving their goals. Later in 2011, we returned to this theme,analyzing how high performers are Growing Beyond, drawing out key lessons on how theywere growing beyond their competition by increasing their customer reach, operationalagility, cost competitiveness and stakeholder confidence.One year on and we test the water again.What has changed since our last survey?As we present this latest report in our Growing Beyond program, we would like to thankall the business leaders from around the world and Ernst & Young professionals who havetaken the time to share their insights with us. Growing Beyond How high performers are accelerating ahead 1
  4. 4. Executive summaryAccelerating aheadof the packEver since the onset of the global economic crisis, Ernst & Young has surveyed C-suite, boarddirectors and senior managers in large organizations to find out how they run their businesses.Our objective is to find out what it is that high performers Ernst & Young has identified four factors that driveare doing differently and set out the lessons that other competitive success in today’s global economy: customerbusinesses must learn if they are to emulate them. reach, operational agility, cost competitiveness and stakeholder confidence.The latest survey findings enable us to gain a fresh insightinto decision-making in boardrooms across the world anddraw some key new conclusions.This is how high performers are using these drivers to help them pull away from the competition:Customer reach Operational agilityHigh performers are more outward-looking and focused High performers respond smartly to change but,on the market. more importantly, respond speedily.• They seek deep understanding of their customers’ demands and • They understand that the risks of being first to market are expectations and are increasing marketing spend to attain this. beginning to outweigh the opportunities, but that speed of response is always critical.• They focus on finding new markets for existing products and services. High performers are nearly three times more likely • High performers continue to accelerate, while low performers than low performers to generate sales in new markets. are reaching the limits of their organizational capacity to respond.• They plan more carefully when entering new markets. They identify a clear demand for a current product or service, and • They understand that consistency can have a market cost that assess the scale and growth projections of that market. outweighs its management value. It can reduce their ability to respond to an increasingly varied and volatile world.• They prioritize innovation. Nearly twice as many high performers as low performers generate more than 10% of their sales from • They adapt flexibly to fast-changing circumstances, by deploying products or services developed in the past three years, focusing technology, devolving decision-making and enhancing the skills of on incremental innovation of new products for current customers their workforce. and current products for new markets. 2 Growing Beyond How high performers are accelerating ahead
  5. 5. Key findings 1 High performers are more outward-looking and focused on the market. 2 High performers respond smartly to change but, more importantly, respond 3 High performers understand what drives cost and what drives value. 4 High performers engage more with stakeholders and unleash their talent. speedily. And the difference between high performers and the rest is becoming more and more pronounced. Figure 1: High performers are ahead with respect to how they: Broaden product/ Prioritize service offer markets Focus on Reinforce These are just some of the actions key segments brand that divide higher-performing Customer companies and their lower- reach performing competitors. With the shadow of the economic crisis Accelerate Inform continuing to cross large parts of speed of response pricing process the global economy, businessesCreate flexible of all sizes and markets have a Sustain costwork/delivery platforms High reduction duty to constantly evaluate their Operational Cost agility performers competitiveness performance. Master seek ... Pass on innovation cost pressure Examining how they execute Improve Optimize against these four key areas collaboration capital — customer reach, operational agility, cost competitiveness and Stakeholder stakeholder confidence — is an confidence important starting point. Identify and Re-engage with explain risks internal talent Enhance Anticipate reporting regulatory compliance Cost competitiveness Stakeholder confidence High performers understand what drives cost High performers engage more with stakeholders and and what drives value. unleash their talent. • They are externally focused on value-creation and opportunity. • High performers seek to make the value they create visible to They place more emphasis on customer segmentation and their external stakeholders and have significantly increased market analysis. High performers recognize that understanding both the scope and frequency of reporting. what customers need, what they expect and what drives them is crucial when determining pricing strategies. • They understand that future success is global and value the ability to lead effectively in a global business environment. They • Because they understand their customers, high performers can offer their talent opportunities to operate internationally and see be more confident about increasing prices. access to talent as a reason to enter rapid-growth markets. • They know the difference between eliminating waste and simply • High performers place a greater focus on the individual. They cutting cost. They identify the actual organization-wide costs place greater emphasis on linking pay with performance and involved in supplying their service or product. providing customized development. • High performers focus more on efficiency than on reducing • High performers unleash their talent onto the market by headcount. Just a quarter of high performers have reduced devolving decision-making as far as they can and refine roles headcount, compared with 43% of low performers. and job descriptions to make them more flexible. Growing Beyond How high performers are accelerating ahead 3
  6. 6. Adjusting tothe new reality44 Growing Beyond How high performers are accelerating ahead
  7. 7. We may not yet have seen theworstIt is now over five years since the start of theglobal financial crisis. The shocks of 2007 and2008 heralded what is already one of thelongest periods of economic retrenchment inhistory. While governments, markets and peoplelong for a period of stability and recovery, allmust face up to a stark possibility:we may not yet have seen the worst.At least, that is the main conclusion from our latest study of howhigh performers are surviving — and indeed thriving — in the neweconomy. Of our 1,500 respondents, 83% predict that their marketwill become more competitive over the next two years. Indeed,this rises to 91% for our high performers, whose success we haveshown to be largely dependent on a deeper understanding ofmarket trends and customer demands. Looking ahead, these highperformers see difficult times — our study suggests that they tooare beginning to struggle to grow beyond the parameters of theeconomic crisis in which the world is engulfed.They are right to be concerned. The developed world strugglesunder a mountain of personal, corporate and sovereign debt thathas reached proportions that can no longer be passed from currentgenerations to the next. Democratic governments struggle to findcredible solutions that they can persuade their electorates to back.And the corporate world seems to be increasingly polarized intothose who can’t take action through lack of capital or opportunityand those who won’t, for fear of what lies ahead.Even the rapid-growth markets have not escaped the fragility ofthe global economy. Economic expansion in 25 leading rapid-growth countries has slowed sharply since the beginning of thisyear, according to Ernst & Youngs October 2012 Rapid-GrowthMarkets Forecast. Our forecast for 2013 growth has fallen byabout a sixth to 5.3% this year.Time, it is said, heals all woes, so eventually it is expected thatthe global economy will recover and return to health. But is theresomething that management should be doing rather than simplywatching the clock? Growing Beyond How high performers are accelerating ahead 5
  8. 8. Adjusting to the new realityThe new normal … year fiveOur research and work with clients continues to confirm four key features that characterizethe new economy. They seem to be shaping the market in which we all compete — and drivingincreased competitive intensity. These features are market variation, increased volatility,growing cost pressure and deep uncertainty.• Market variation • Cost pressureThe new economy is more varied than the old. We are competing As consumers and governments rein back their expenditure,in a multi-speed world in which variation between countries and and as borrowing to buy becomes harder, there is undoubtedlysectors has never been greater. Indeed, this variation goes beyond a greater cost consciousness in the wider economy. At the samecountries and sectors to regions and segments. For example, the time, however, the costs of many commodities continue togap in economic performance between members of the European rise. Thus margins are squeezed. In developed markets, manyUnion is considerable: the ratio between Greece and Germany employees are now enduring a fourth or fifth year of below-currently stands at 1:1.3. However, the gap in performance inflation pay-rises. This prolongs the downturn through dampeningbetween the 29 states that comprise India is much greater, with demand. In rapid-growth markets, however, wage inflation isa ratio closer to 1:5. With growing customization and variable becoming a major issue that threatens their competitive advantageperformance, the fragmentation of markets into myriad niche if passed to end users — and their profit margin, if not.segments will continue. • Uncertainty• Volatility In the past 12 months, any global board looking to manageAnother enduring feature of today’s interconnected market is its strategic risk will have increased the weight it attaches to majorvolatility. Stock market indicators of volatility, such as the VIX strategic threats. These threats include the break-up of theIndex, seem to have settled down in recent months compared Eurozone, the debt-default of the US, international conflict in thewith the past five years. But this is more a signal that the market Middle East and a major political or economic incident in one of theis beginning to make a permanent adjustment to volatility rather BRIC countries. Not surprisingly, perhaps, boards with cash preferthan heralding a new period of stability. Indeed, some are arguing to preserve their options to choose, rather than choose wrongly.that as the consumers of the rapid-growth markets play a biggerrole in the global economy, cyclical volatility has inevitably Similarly, within companies, employees remain uncertain aboutincreased. their economic security or their economic prosperity. Consumer confidence is low. Employee engagement is strained. 6 Growing Beyond How high performers are accelerating ahead
  9. 9. A gap becomes a growing gulfFive years after the start of the global downturn, many companies continue to struggle — certainlymore than we would have expected at this stage in previous recessions. But a growing number aredemonstrating that they have learnt to master the new economy and are pulling ahead.Figure 2: Change in the importance of business activities 2008 2012 2008-12 Securing the survival of your 74 65 65 -9 existing business Protecting your current business/assets 40 22 22 -18 Improving the performance of existing business/assets 39 30 30 -9 Restructuring the business to meet new conditions 37 23 23 -14 Taking advantage of the situation to pursue new market opportunities 19 26 26 +7Q: Over the next 12 months, what change do you expect in the importance that your organization attaches to the following activities? (Five-point scale)When we started this program in 2008, we asked companies to There is some variation across different regions of the world insay where they were focusing their efforts: from securing their how companies view the market. The US and Asia-Pacific showvery survival, through to taking advantage of the market to the biggest increase in the number of companies who believe theypursue new opportunities. We can see that, while the number in can pursue opportunities. They also, however, show the biggestcrisis has fallen over the past four years, it continues to be very increase in the number of companies in trouble. This suggests ansignificant. The number of companies feeling defensive about their increased polarization of performance. The gap is growing.current position has declined, but still accounts for one in fivecompanies. A sizeable group are now actively seeking to either Moreover, this emerging polarization in performance seems to holdimprove performance from their current assets or restructure their true across all major sectors. In none of the 13 sectors that weoperations. But the biggest increase has occurred in the group who have examined was there a material difference, except in miningnow believe they can take advantage of market opportunities. and metals and private equity, where the pattern is comparable.Figure 3: Change in the importance of business activities (sectors) % significant increase and increase80 Total70 Private equity Mining and metals60 Other sectors50403020 10 0 Securing Protecting Improving Restructuring PursuingQ: Over the next 12 months, what change do you expect in the importance that your organization attaches to the following activities? (Five-point scale) Growing Beyond How high performers are accelerating ahead 7
  10. 10. Adjusting to the new realityStaying ahead of the packWe asked respondents to choose up to three factors that would determine their futurecompetitiveness over the next two years.In general, the response to our survey on sources of competitive effectiveness. competition — the major area ofsuggests an increasing focus on the difference for five sectors. Costmarket, a continued focus on optimizing The facing page maps high performer optimization is seen as important for allcosts and a growing focus on talent and versus low performer responses for 12 the sectors, but is much important forinternal engagement. High performers, sectors. Each sector shows differences in the high performers.however, focus more on customer reach how high performers see the competitiveissues and human capital, while others challenge compared with their competitors. • Stakeholder confidence is seen as lessfocus more internally on optimizing costs important by most sectors, but it is anand improving organization. These are • Customer reach is an area of major area where the difference between highonly differences in emphasis. Our key difference in 9 of the 12 sectors. In 4 of and low performers is most material —overall finding is that optimal performance the sectors this is based on seeking especially in the area of talent.requires a balance across all dimensions. deeper customer relationships. In 7, the difference is based on innovation and, in • Operational agility is seen as the leastCare always needs to be taken when 8, based on market expansion. important area for focus, with theaggregating results. In seeking the macro exception of technology. For five sectorspattern we must not lose the micro insights. • Cost competitiveness is the second this is a key area of high performanceSectors vary greatly in the weighting placed area of focus, with branding — non-price focus.Figure 5: Critical factors for competitiveness — all respondents Customer reach Customer relationships Innovation Market expansion Technology Brand Operational Agility Cost agility 40% 50% 60% competitiveness Regulatory risk Cost optimization Stakeholder relationships Sustainability Talent High performers Stakeholder Low performers confidence 8 Growing Beyond How high performers are accelerating ahead
  11. 11. High performers approach the world differentlyAutomotive Banking Consumer products Customer relationships Customer relationships Customer relationships Innovation Market expansion Innovation Market expansion Innovation Market expansion Technology Brand Technology Brand Technology Brand Agility Agility AgilityRegulatory risk Cost optimization Regulatory risk Cost optimization Regulatory risk Cost optimizationStakeholder relationships Sustainability Stakeholder relationships Sustainability Stakeholder relationships Sustainability Talent Talent TalentInsurance Life sciences Media and entertainment Customer relationships Customer relationships Customer relationships Innovation Market expansion Innovation Market expansion Innovation Market expansion Technology Brand Technology Brand Technology Brand Agility Agility AgilityRegulatory risk Cost optimization Regulatory risk Cost optimization Regulatory risk Cost optimization Stakeholder relationships Sustainability Stakeholder relationships Sustainability Stakeholder relationships Sustainability Talent Talent TalentMining and metals Oil and gas Private equity Customer relationships Customer relationships Customer relationships Innovation Market expansion Innovation Market expansion Innovation Market expansion Technology Brand Technology Brand Technology Brand Agility Agility AgilityRegulatory risk Cost optimization Regulatory risk Cost optimization Regulatory risk Cost optimization Stakeholder relationships Sustainability Stakeholder relationships Sustainability Stakeholder relationships Sustainability Talent Talent TalentPower and utilities Real estate Technology Customer relationships Customer relationships Customer relationships Innovation Market expansion Innovation Market expansion Innovation Market expansion Technology Brand Technology Brand Technology Brand Agility Agility AgilityRegulatory risk Cost optimization Regulatory risk Cost optimization Regulatory risk Cost optimization Stakeholder relationships Sustainability Stakeholder relationships Sustainability Stakeholder relationships Sustainability Talent Talent Talent Growing Beyond How high performers are accelerating ahead 9
  12. 12. Customer reachGetting closerbut looking beyondWhen asked what factor was most critical to theircompany’s competitiveness in the next two years,high performers said deepening their relationshipwith customers, while low performers said costoptimization. There, fundamentally, is the crux of twovery different management approaches: one focusedon the market, the other on the operation. Both areclearly important and necessary within an organization,but our research suggests that high performanceis fundamentally driven by the predominance of amarkets model. What we learnt before High-performing companies have been entering new High-performing companies have been approaching markets by: product development by: • Taking care when expanding across borders — they • Carefully selecting customer segments that allow them to maximize their growth potential at home first and expand create long-lasting competitive advantage. only after carefully assessing opportunity, cost and risk. • Recognizing the value of innovation — they are ahead in • Developing new markets and creating additional value utilizing their planning process to drive innovation. from current products — new products for new sub- segments or new opportunities for existing assets. • Listening to their employees — recognizing their expertise in products and spotting new client needs. • Adopting increased caution — high performers are less likely to slow themselves with internal consultation and more likely to consult external stakeholders.10 Growing Beyond How high performers are accelerating ahead
  13. 13. Meeting a moving targetTargeting and satisfying customer needs The process of understanding and responding to changing market demands is rising fast up the corporate list of priorities. The needIt’s a simple aim, but it’s easier said than done — particularly to invest more in marketing as a consequence, and to considerin today’s volatile market. Shifting economic terrain, as well adapting products, services and delivery methods for new markets,as ongoing macro-trends, such as globalization and sweeping is recognized more by high performers than low performers.demographic change, mean that customer needs remain in Similarly, the trade-off between growing volume and growing valuea state of flux. Only those organizations that possess a deep shows that high performers are over 50% more likely to increaseunderstanding of customer demand and expectations will manage price than low performers — and almost 40% less likely to cut priceto match their service or product with demand. The process of to grow or protect volume.marketing — in which companies seek to shape choice to betteralign demand and supply — has risen as a focus area, especially for We have not previously focused on non-organic routes of growinghigh performers. revenue, through acquisition or merger. This is because, when they prove successful, these routes can normally be seen to have drivenExisting clients remain the focus of most companies when they the faster attainment of a strategic goal already covered by theare seeking new sales. Gaining a deep understanding of customers framework. It is noticeable, however, that from parity in responseand a close relationship with them is well-documented as a fruitful rates, we now see a much greater difference in the response ofarea of focus when looking to reduce costs. It is the top success high and low performers. High performers are now 40% morefactor among all categories of respondent. However, while it is still likely to be considering merging with or acquiring competitors tovery important, it has now been supplanted as the top response increase market share. This wave of sector restructuring has beenof high performers. They now list finding new markets for existing anticipated for some time. Interestingly, however, the responseproducts as being the most important area. These new markets suggests that it covers all sectors, with no particular sectorcould be new geographies or new segments in existing geographic standing out as more or less active.markets.Figure 6: Actions taken to increase sales High performers Low performers Gap: high vs. low TotalDevelop new geographic markets to sell existing 58 39 +19 48products/servicesIntroducing new products and/or services to meet evolving 57 49 +8 53needs of existing clients or to attract new customer segmentsBroadening existing product/service range to develop new 51 39 +12 46customer segments in existing geographic marketsIncreased investment on marketing and sales 42 33 +9 37Adapting existing product/service offerings for new 38 30 +8 33geographic marketsOpening new distribution channels/reorganizing 36 35 +1 39to address markets through multiple channelsMerging with and/or acquiring competitors to 35 25 +10 31increase market shareIncreasing prices 19 12 +7 14Cutting prices 13 21 -8 15Q: Which of the following actions is your company taking to increase sales? Growing Beyond How high performers are accelerating ahead 11
  14. 14. Customer reachGetting closer but looking beyond Figure 7: Proportion of sales generated in recentlyOn markets entered markets High performers Low performers All respondentsSuccessful pioneers need a plan 39 37Market expansion is a key feature of high performers’ strategies 28 28 25and their top priority in developing sales. Essential though the 19 22rapid-growth markets may be for the future, investing in other 14developed markets seems to be at least as important. We may be 7 9 6in the middle of a major rebalancing of the global economy, as 3 4 2 3 3 3 1 2 1 1rapid-growth markets increase their market share, but today — and 0% 1%–5% 6%–10% 11%–20% 21%–30% 31%–50% Above 50%indeed for the next decade — developed markets will continue toaccount for over 50% of global demand and a significantly higher Q: What proportion of your sales is generated in markets which your organization/proportion of profit for companies. company has entered in the past three years? A third of high performers have over 10% of their sales generated in markets entered in the past three years, compared to 13% of low Case study: PCH performers. Apart from oil and gas, this is true for all sectors. Liam Casey is the Ireland-born CEO of PCH International. When asked to identify the developed countries on which they The China-based supply chain management company is one should place their corporate bets, both high- and low-performing of the world’s leading manufacturers and distributors of survey respondents opted for the US. This is not surprising, smartphone and tablet accessories, working with consumer given the size of that market and its comparative resilience to the electronics brands to produce devices and ship them to wider global economy. Europe, however, performs less well, with customers around the world. only 4 of the top 10 national markets. The rapid-growth markets show, as expected, that the BRIC countries dominate, with China PCH’s base in Shenzhen, China — a city with a population of increasingly pulling ahead as the major focus. Of note, however, is more than 10 million people that, only two decades ago, was the particular focus that high performers are placing on Brazil. quiet and provincial — has played a crucial role in its growth story. Casey began his Chinese odyssey in 1995, leaving But care needs to be taken with simple lists such as these: behind his home in Cork, Ireland, to follow the example of a friend the figures lies considerable regional variation, as we have shown who had been making a good living from importing Chinese before. Attractiveness is shaped by perspective, which in turn is hardware into the US. After flying to Taiwan to attend a often influenced by proximity. High-performing companies in the trade show, Casey started his own business importing cables US, for example, are far more likely to see most potential in their from Shanghai to Cork. domestic market, followed by other Anglo-Saxon markets, such as the UK and Canada. Asia-Pacific based companies are more likely Casey says that PCH’s success as a start-up in China to favor their own region (including India), while the preferences of depended on making processes as straightforward and European companies are the most broadly spread. Ironic perhaps understandable as possible. “The big challenge was to take that, through history rather than intent, European companies are confusion out of business, so we had to keep things simple,” by some margin the most global in their spread of operations. he says. Consequently, as Western businesses’ interest in China grew, PCH was ideally placed to help them find a clear Certainly, there is little doubt that market opportunities exist route into the Chinese manufacturing sector. — even in the current economic environment. Although global trade collapsed during the financial crisis, it has since rebounded Source: Exceptional, Ernst & Young, 2012. Article author: Christian Doherty. strongly, led by trade among emerging markets. By 2020, world trade in goods will total around US$35t, two-and-a-half times its12 Growing Beyond How high performers are accelerating ahead
  15. 15. Figure 8: Top potential markets over the next five years Developed markets Rapid-growth markets High performers Low performers Gap: high vs. low High performers Low performers Gap: high vs. low US 51 40 +11 China 43 37 +6 UK 34 31 +3 India 32 29 +3 Germany 22 28 -6 Brazil 31 20 +11 Singapore 19 14 +5 Russia 19 21 -2 Australia 16 14 +2 South Africa 11 8 +3 Canada 16 12 +4 Indonesia 11 7 +4 Japan 15 14 +1 United Arab Emirates 10 3 +7 France 11 14 -3 Saudi Arabia 9 11 -2 Hong Kong 10 8 +2 Poland 8 10 -2 Norway 6 4 +2 Singapore 8 9 -1 Q: Which of the following developed/rapid-growth markets holds the greatest potential for your company over the next five years? (Select up to three)value in 2010, according to Ernst & Young’s 2012 report, Tradingplaces: the emergence of new patterns of international trade. At Rapid-growth markets are drivingthe same time, world trade in services will double to around US$6t. global growthAs new regional trade agreements are reached, companies will beassisted by lower trade barriers — as well as falling global transport Rapid-growth markets are becoming ever more important.and communications costs. This will enable organizations to market They have grown on average by 5.8% per year overtheir products around the world and coordinate with suppliers in the last decade, more than three times as fast as theother countries. advanced economies combined. But, importantly, their future potential is only now becoming clear. ContinuedIncreased fragmentation demands more planning industrialization and urbanization, along with strong population growth and the emergence of a substantialHigh performers seem to have a more developed plan for their middle-class, will further encourage their expansion.market-entry strategies than low performers. Their decision toenter a developed market is based on identifying a clear demand Although there has been a slower rate of expansion thisfor a current product or service, supported by the scale and growth year, a return to significant growth is likely from 2013.projections of that economy. For them, quantitative demographics Soaring domestic demand will offer businesses excitingand income per capita analysis is not enough. A potential move new markets for goods and services in the years ahead. Forinto new markets also prompts them to consider factors such as example, in 2011, two-thirds of consumer spending acrosspurchasing behavior, the power of local brands and changes in the world came from the advanced economies. But in 25attitude and consumer behavior. years’ time, Asia alone will have overtaken them as the largest source of consumer spending, at almost 40%.The increased variation in performance has resulted in a morefragmented market. Take Europe as an example. The ongoing This level of demand will ensure that rapid-growth marketsproblems of the Eurozone should not overshadow Germany, whose eventually replace the advanced economies as the keyconsistently robust economic performance has continued, even in driver of global growth, and the shift in import demandrecent years. But a closer analysis reveals that some German regions should also assist in rebalancing the global economy.— particularly in the west of the country — are vastly outperformingother regions, mainly in the east. Market segmentation is deepening For further information, see the latest edition ofand businesses don’t now necessarily want to serve a whole country. Ernst & Youngs Rapid-Growth Markets Forecast.Instead they prefer to target a specific segment of a country. Growing Beyond How high performers are accelerating ahead 13
  16. 16. Customer reachGetting closer but looking beyondOn productMatching customers’ evolving needs opportunities in their environment. While innovation is important to all companies, it is particularly important to high performers.Developing or adapting products or services holds the key to They deem it the second most important factor in determiningcreating new revenue streams. Over half our respondents say future success. Thirty-eight percent say they generate in excessthat selling new products to existing customers is their primary of 10% of their sales from products or services developed in thesource of increased sales — particularly in banking and technology. past three years, as opposed to only 21% of low performers. ButA further 33% report that they are adapting existing products for getting the balance right is important. The real difference happensnew markets, with life sciences and technology, again, in the lead between 11%–20% of new products — the difference in performance(see Figure 6, page 11). of companies with over 30% of new products is immaterial.One of the major drivers of change continues to be the impact of Figure 9: Global sales generated by product developmentstechnology. Digital technology now allows for both more focusedcommunication and consequent customization than ever before. 46Customers can search more widely for their specific requirements High performers Low performers All respondentsand are much less willing to compromise than before. Market 40segments are constantly being redefined by the "know it all, wantit all consumer." Moreover, while this started in consumer markets, 29 29it now affects the way people interact with government and utilities 26 22and how businesses interact with each other. 20 13As explored in a recent Ernst & Young study — This time its 12 10 9personal: from consumer to co-creator — digital technology is 5 6 5 4 5 4 3 3 4 3driving a revolution in consumer demand. Market segments areconstantly evolving, brand loyalty challenged, communication 0% 1%–5% 6%–10% 11%–20% 21%–30% 31%–50% Above 50%channels fragmented and consumers more informed anddemanding. To remain relevant to the new consumer, organizations Q: What proportion of global sales are accounted for by products developed in the past three years?must undergo a similarly radical transformation. The implicationsfor businesses are great and include intensifying the dialogue withcustomers, making service personal, delivering consistent multi- Our research has found that those companies that embedchannel service and providing an end-to-end brand experience. innovation into every aspect of their organization are the most successful. Innovation is not a tactic: it is simply what they do.Companies therefore need to tailor their goods and services to Our recent study, Innovating for growth: innovation 2.0 — amatch such niche requirements. Segmentation of the customer spiral approach to business model innovation, suggests a looselybase is the foundation for successful innovation, and is the third structured, circular process that allows companies to connect withmost quoted source of increased profitability for high performers. the various points of the spiral in different ways and at differentSuccessful segmentation requires companies to be both quick to times, ultimately reaching an innovative breakthrough. It setsexploit new opportunities and highly innovative in their breadth out how, for most innovative companies today, innovation is aof customer offerings. Yet this doesn’t happen automatically. The continuous cycle with ups and downs, input from different places,most innovative companies understand how to capitalize on the repetition, failure, and many steps back and forth.14 Growing Beyond How high performers are accelerating ahead
  17. 17. Figure 10: Spiral innovation system ip mindset and cult dersh ure LeaBy adopting this approach, the most innovative companies can: Pe Customers o• Take advantage of changes in the external environment pl g s in ea nie Inv nd pa nd Intuition• Continually revamp their business models to achieve Fu ski m es co to ion lls competitive advantage rs er siness model Oth Bu t ta• Innovate to obtain specific business outcomes, such as So loi cia Exp urement and KPIs s Capitalize i ce lizat increased agility or productivity Achieve s a nd serv Technology ion Suppliers Academics P ro c e s s e s Competitive advantageIt is difficult to be innovative in a world where competition comes u ctat you from all sides. But the spiral approach is a robust process od Meas Dev ent Pr io n elo Arfor innovation. If followed carefully, it can provide flexibility and io n at rnm en ea s of innovat pm Co I de t mpstructure for companies of all types, regardless of size or sector. ve or Go et Inn Ris s ovation process it re k tu m Fina ncial institutions uc an ge s tr ra a m Source: Innovating for growth: en t Exte rnal collaboration Inf innovation 2.0 — a spiral approach to Org anizat nce business model innovation, ion and governa Ernst & Young, 2012. Innovation enablerLessons from AsiaOne region in particular that has seen Figure 11: Which export countries or regions do you expect will hold thenew opportunities ricochet across best growth opportunities for your company over the next three years?borders is Asia. Its rapid-growth marketsare the fastest-growing economic regions For globally focused companies For regionally focused companiesin the world, with annual growth forecast Mainland China 42 Western Europe 32at more than 6% p.a. Companies from Middle East and North Africa 28 India 33these regions are expanding into new Indonesia 29 Brazil 20markets for various reasons: growth, Vietnam 25 Russia 18diversification, routes to market andaccess to resources, skills and technology. Middle East and North Africa 24 Eastern Europe (ex-Russia) 15 Brazil 24 US or Canada 14Our report Beyond Asia: strategies to Western Europe 23 Mainland China 8support the quest for growth explores Russia 18 Sub-Saharan Africa 8the differences among companies in their Singapore 7 US or Canada 18quest for growth, and contrasts findings Australia and New Zealand 15 Hong Kong (SAR)* 7for globally and regionally focusedcompanies. Asian companies are on a Note: Scores shown = percentage of respondentsvery successful expansion path, but are * Special administrative regionmeeting challenges and risks that even Asian companies must make to counter For further information, please seeestablished multi-nationals would find these obstacles are difficult, but essential, Beyond Asia: strategies to support thehard to overcome. The strategic moves steps toward globalization. quest for growth, Ernst & Young, 2012. Growing Beyond How high performers are accelerating ahead 15
  18. 18. Operational agilityMoving quickly ina customized worldThere will always be a time lag from the point whenan organization sees opportunities (and threats) towhen it executes its plan of response. How successfula company is in minimizing this elapsed time isone of the many factors that separate high and lowperformers. But the traditional source of speed hasbeen standardization of both product and process,neither of which addresses a new, fragmented marketof dynamically evolving customer demand. What we learnt before High performing companies have been gaining speed High performing companies have been increasing by: flexibility by: • Placing greater emphasis on empowering local-decision • Organizing around the customer, to ensure that they making, as well as the need to encourage employees to remain at the center of their thinking. innovate without active management intervention. • Effectively deploying digital sales tools to manipulate • Seeking speed from their suppliers and distribution masses of data to customize their response to a specific partners. They are significantly more likely to be willing to client. change both, in order to achieve a faster time to market. • Recognizing that proactive human resource • Remembering the importance of longer-term strategic programs may be required to get even good employees on goals. In most cases, lower performers seem to be working side in the quest for speed and flexibility. to a shorter time-frame.16 Growing Beyond How high performers are accelerating ahead
  19. 19. On speedBeing fast is more important than being first — 49% in this survey compared to 61% in 2011. Indeed, the gap between the two groups has grown.Only one person can ever be first to do something and the recordof commercial success for such pioneers is at best mixed. Speed, Three years ago, many companies were in a fight for their veryhowever, matters for everyone. Speed to market. Speed of change. survival and were under intense pressure to get new products toSpeed of operations. These are often the difference between success market for urgently-required new revenue. Today, with growingand failure. And in today’s competitive market, organizations deploy awareness that the road to recovery is long and challenging, therea variety of techniques to improve this aspect of their performance. may be less anxiety to rush a product to potential customers and aDe-layering management to increase the pace of decision-making greater willingness on the part of companies to pace themselves inis one example. Others include changing supply and distribution a more sustainable fashion.channels to respond quicker to market changes, and seekingpartnering agreements with key suppliers and distributors. Potentially, however, there is growing uncertainty about the business environment individual companies face. Recovery isIn our previous studies, we found that high performers were not happening as planned, leaving some more optimistic playersachieving their faster speeds by improving processes, especially by looking exposed. The risks of being first to market are beginningdevolving decision-making closer to the market, as well as seeking to outweigh the opportunities. Being fast to respond to a clearspeed from their supplier and distribution partners. opportunity seems a more efficient approach.When analyzing the changes in speed to market compared to three Equally some companies — particularly low performers — areyears ago, it appears, however, that while getting faster, the rate reaching the limits of their current organizational response,of acceleration is no longer as great as it was. Although 74% of having exhausted the incremental performance improvementshigh performers believe that their organization is getting faster that can be achieved without major change to their operations.at developing new products and services, this is 6% lower than in The transformation of organizations typically slows the existing2011. Low performers are experiencing an even faster deceleration operation down, regardless of the longer-term benefits. The DNA of the COO: time to claim the spotlight Why is so little known about the role of the COO, despite its • Where companies have a COO role, it tends to be senior long history? Ernst & Youngs The DNA of the COO: time to — 66% of those polled are a member of the executive claim the spotlight uncovers a compelling story of a wide- committee or board. ranging role that still needs to justify its existence, despite • COOs are generally very satisfied with their role, especially having a clear rationale. their potential for career development and influencing corporate strategy. The DNA of the COO explores the expectations and aspirations • Many COOs worry that they may not be sufficiently of those in the job, along with the skills, capabilities and accepted or respected by other members of the relationships they need to master in order to succeed. management team, but their peers do not share this What we find is a breed of executive that combines deep perception and, in fact, hold them in the highest regard. operational knowledge with broad strategic insight, and who • Motivation and hard work are seen as the attributes that has what it takes to become the next CEO. Yet we also find a have done most to get COOs where they are today. role that is fraught with challenges. Successful COOs have to adapt constantly to a fast-changing corporate and external The DNA of the COO incorporates analysis of two surveys: environment. They must possess a mastery of change, to a February 2012 pilot study of 200 COOs and an April help translate strategic vision into action. And they must 2012 survey of another 306 COOs and senior operations ultimately help the business to innovate and grow. professionals across Africa, America, Asia, Australia, Europe and the Middle East. In the second survey, a further 43 • The average COO is a 48-year-old male. He has typically respondents from across the C-suite were also polled to give been in his current role for six years. their perspective on how the COO is perceived by the rest • Over half (54%) of COOs have a Master’s degree or of the management team. You can download the report at higher, although there is no particular qualification that ey.com. dominates, given how sector-specific the role can be. Growing Beyond How high performers are accelerating ahead 17
  20. 20. Operational agilityMoving quickly in a customized worldOn flexibilityConsistency is a dangerous word Asia-Pacific show a greater reliance on generating internal responsiveness and increasing the use of external partnerships.Consistency remains a favorite mantra for management. This may reflect the stage of company development, but may alsoConsistency facilitates efficiencies in operations and the ability to be indicative of management and local culture.deliver a shared brand promise across service, sector and nationalboundaries. But, while such consistency at the level of an individual Comparing actions in pursuit of flexibility shows a stark contrastclient may well be essential, there is also a risk that it reduces between high and low performers. High performers are far aheadthe opportunity to respond in an increasingly varied and volatile in their use of technology, the breadth of their product or serviceworld. Indeed, the variation in markets and the volatility of recent portfolio, decentralizing decision-making and enhancing the skillsyears has demonstrated how vital it is for companies to possess of their workforce to utilize this freedom. There seems to be athe flexibility to adapt to fast-changing circumstances. New trends, collection of companies who have overcome the internal inertia ofshifting customer demands and an unpredictable, and ongoing, large organizations and empowered their people to leverage thefinancial crisis are just a few of the reasons why companies need organization to commercial successto be ready to move quickly, whenever necessary to respond toopportunities and threats. Low performers, by contrast, seemed trapped in a hostile ecosystem — challenging their partners in the supply chain to doIn seeking flexibility, organizations put different emphasis on more and still trying to connect their internal resources to thedifferent tools, depending on their country of origin. In the US, harsh reality of the competitive challenge the company faces. Thefor example, both high and low performers place much greater "control culture" that developed in previous decades, as companiesemphasis on the use and role of technology to achieve this goal. sought to recreate previous success, has become one of the majorBy contrast, the Europeans stress breadth of product range and obstacles to competitive success.decentralization of decision-making, while companies fromFigure 12: Actions taken to increase flexibility High performers Low performers Gap: high vs. low TotalIncreased use of technology 49 37 +12 40Enlarged the product/service portfolio 45 27 +18 35to meet different market needsMade internal support functions 43 41 +2 46more responsiveImproved and/or broadened 39 30 +9 35workforce skillsDecentralized decision-making 33 23 +10 30Made external partnerships 33 36 -3 34more efficientInvested in more flexible 28 22 +6 27manufacturing processesQ: Which of the following actions has your company taken to increase its flexibility over the past two years?18 Growing Beyond How high performers are accelerating ahead

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