Five Truths (and One Lie) About Corporate Transformation

As such, it is crucial that companies craft a compelling transformation plan and narrative at the beginning of their journey, and define a clear communication agenda towards their stakeholders. Additionally, companies must demonstrate discipline and drive by applying quick results to reduce costs.

In the long term (five years), the drivers of value creation are reversed, so that most of TSR's outperformance is due to successful cost reductions (32%). and revenue growth (43%), while investor expectations play a minor role (25%). This indicates that, in the long term, execution is key, as investors will keep executives delivering on their promises. Also, it proves that you can't fight your way to greatness: Differential growth is essential for sustained value creation..

Truth #4: Transformations require a long-term orientation

Achieving sustainable growth and a future-proof operating model requires undertaking transformations with a long-term orientation, rather than simply focusing on addressing performance issues or catching up with peers in terms of technology or organizational best practices.

Our data shows that having a long-term strategic orientation exhibits a strong positive impact on transformation performance, associated with a 12.5 percentage point higher TSR impact over a five-year horizon.

³




3
It is measured by leveraging a proprietary algorithm that quantifies companies' strategic orientation based on semantic patterns in 10-K filings.



Grades:

3
It is measured by leveraging a proprietary algorithm that quantifies companies' strategic orientation based on semantic patterns in 10-K filings.


A long-term orientation It can be achieved creating a company culture, in which new ideas are constantly developed and leaders are willing to take risks with unproven models. To support a future orientation, companies must complement traditional, backward-looking performance metrics with future-oriented ones. For example, 3M He pioneered the New Product Vitality Index (NPVI), a metric that tracks the proportion of sales of products that did not exist five years ago.

Beyond mindset, culture and metrics, a long-term orientation also means investing in exploring new ideas that could be the basis for future advantages: R&D spending above the industry average is associated with a 2.9 percentage point improvement in TSR performance over the previous year. course of a transformation.

Higher-than-industry-average capital expenditures are also linked to better transformation outcomes, to the tune of 3.7 TSR percentage points over a five-year horizon. This indicates that leaders must find the right balance between identifying new sources of growth and improving their existing model, for example, by modernizing production machinery. It also emphasizes that operational effectiveness must be linked not only to cuts, but also to selective investments.

Truth #5: You can't make things up as you go along.

Transformations are complex and require achieving several objectives simultaneously, generally under immense pressure from outside and inside. As a result, companies cannot make the transformation on the fly.

Implementing a formal transformation program, which we identify based on a combined analysis of corporate announcements and restructuring expenditures, has a positive impact (5.9 percentage points) on long-term TSR during transformation periods. Furthermore, the scale of the program and the willingness to invest in change are important, and our results further show a strong, positive correlation between above-industry average restructuring spending and TSR results (+5.7 percentage points in five years).

Formalizing the transformation involves defining clear governance and process (or establishing a dedicated transformation office) to coordinate and track the progress of change initiatives, as well as regularly communicating this to the executive leadership team so that obstacles can be addressed promptly. Additionally, it may mean establishing a transformation director to lead an ambitious change effort, which our previous research shows can significantly improve the odds of transformation. However, simply having a CTO on staff is not a panacea. The job must be appropriately designed and performed by someone who is persistent, vigilant and flexible—and who is qualified for the job.

A lie: you are special and these ideas do not apply to you

The empirical patterns of transformation are quite stable: at any point in the last 20 years, approximately 30% of companies significantly underperformed their industry over a period of several years, making transformation a necessity. for performance reasons.

⁴




4
Underperformance is identified as an annualized deterioration in TSR, relative to the company's industry average, of 10 pp or more over a two-year period.



Grades:

4
Underperformance is identified as an annualized deterioration in TSR, relative to the company's industry average, of 10 pp or more over a two-year period.


(See Table 2.) However, successful transformations are the exception rather than the norm, even when measured by very modest criteria. More than 70% of companies fail to outperform their industry peer group average in either the short (one year) or long term (five years), after a prior period of declining performance. These figures are quite similar to the findings of our 2018 report, which show that while the world has changed significantly in recent years, the challenges of keeping up with that change have remained remarkably persistent.