The global consulting firm McKinsey just released their book “Strategy Beyond the Hockey Stick” and introduce the concept of the Power Curve of Economic Profit and how to beat the odds in your strategy.
I am a fan and user of multiple models that McKinsey created (GE-McKinsey Portfolio Model, 7-S Framework) and as they are the McKinsey of strategy consulting (see what I did there) I always like to see what they are talking about so I checked out their article “Strategy to beat the odds” (http://bit.ly/2HeadUj) to learn more.
The core concept they talk about is the Power Curve of Economic Profit (the curve looks like the one in this picture - source McKinsey).
The Y Axis is the Average Economic Profit of a company and the X-Axis is company percentile based on performance – those with low Economic Profits (losses actually) are the bottom 20%, those with average Economic Profits (not much profit) are the middle 60% and those with high Economic Profits (very high) are the top 20%. What they found is that on a year to year basis, 8% of those companies in the middle are able to push their way into the top 20%, but that 14% of those companies fall into the bottom 20%.
Interesting statistics, however realizing this is focused on $1B+ companies it would be interesting to see how this plays out for the middle market. One big take away for me is that no matter where you are on the Power Curve, you have a chance to move up (or down) and that is based on three key things, your companies Endowment (access to resources, cash, debt), Trends of the industry (realizing industries and geographies have a big impact on profitability) and Moves you make.
Now Endowment is hard to control, especially if you are hunting giants – they tend to have more Endowment than small companies, but the good news is Endowment is only one area that impact success. Also, how you spend what you have, becomes very important. Allocation of your resources based on Trends and Moves is key.
Since Endowment is the hardest one to control lets focus on Trends and Moves.
Trends is where I see companies being able to differentiate themselves. The better market insight and foresight you have, the better you can predict and react to Trends leading to your success. Building and strengthening your Market Sensing capabilities is key for this. Talk to customers in your market (yours, your competitors, non-customers), talk to customers in new markets, read about the markets, understand leading indicators, analyze internal data. So many things you can do to get ahead of the Trends and catch the “tailwinds” as McKinsey says.
Next is Moves and McKinsey identifies five moves: Programmatic M&A, Resource Re-Allocation, Capital Programs, Industry Leading Productivity and Differentiation. As I am not a Corporate Finance or Productivity Guru I will leave the Capital Programs and Industry Leading Productivity for someone else (if you want suggestions e-mail me).
Programmatic M&A is a great strategy for growth and to add profits, and if you have the resources to fund it (stock, debt, cash, investors) inorganic growth can quickly change your Economic Profits, though it also has risks. Key is having a defined strategy for the M&A and executing within that strategy. Build this strategy based on the trends you identify through your Market Sensing Activities.
Differentiation is hard, but valuable, and also comes from your Market Sensing activities. Once you know and understand what your customers value, need and their motivations for buying, you can now develop products that are differentiated and leverage this to drive organic growth and profitability. Remember Market Driven companies are 31% more profitable than self-centered companies, they are the ones who constantly conduct Market Sensing activities (George Day “Market Driven Organization” 1999).
Finally, Resource Re-Allocation or maybe just Resource Allocation which is likely more relevant if you don’t have the Endowment needed place the right bets. I recommend to all of my clients that they should score all of their opportunities based on multiple factors (strategic fit, value proposition, ROI, etc.) so they can allocate their resources on those opportunities that score the best. Oh yeah, these opportunity scores need to be based on market data – Objective – so again back to Market Sensing. I also like to have my clients get strategic about growth and identify the opportunities that have the best chance of success based on Market Maturity, Market Dynamics, Competitive Landscape and Market Position (where I thought McKinsey was going with that title, but they didn’t).
The key thing to know is that you can move to the Top 20% (or stay there), it starts with knowing and understanding the market and translating that knowledge into inorganic and organic growth strategies and allocating your resources on the strategies that have the best chance of success for you and your company.
If you are interested in learning more about how you can increase the odds of success for your strategy through Market Sensing capabilities that give your foresight on Trends, help M&A strategies and target lists, create products with differentiation and allocate your resources based on objective opportunity scoring, feel free to e-mail me at firstname.lastname@example.org. I always enjoy a good conversation about the strategy and McKinsey models.
Also, check out our MO2 program that can help jump start your market knowledge and help you identify M&A strategies with targets and opportunities for differentiating existing and new products - http://www.inventisstrategies.com/mo2.html.
And, check out our Growth Strategy Action Workshop where we can help you focus your growth strategy on the 1-3 growth opportunities that have the best chance of success - http://www.inventisstrategies.com/gsaw.html.
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