Professional Documents
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Growing Beyond
How high performers are accelerating ahead
In this report
Executive summary Adjusting to the new reality Customer reach: Getting closer but looking beyond Operational agility: Moving quickly in a customized world Cost competitiveness: Finding the right balance Stakeholder confidence: To inform, to explain, to engage 2 4 10 16 22 26
The benchmark findings for this report are drawn from a study undertaken in August and September 2012 by the Economist Intelligence Unit (EIU), surveying 1,500 C-suite, board directors and senior managers from around the world. As with our earlier studies, we have factored out the impact of sector and distinguished between the highest and the lowest quartile of performers in both revenue and EBITDA growth to see if we can identify specific patterns of action that might explain the difference in performance. Source for all charts: EIU panel survey, AugustSeptember 2012. All charts show percentage of respondents.
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&Young since 2008, with a view to providing practical insights to help our clients navigate the harsh economic terrain. Our first study showed how high performers were proactively reacting 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 early 2011, we explored how the high performers were Competing for growth by adopting new strategies for new markets and new products, and taking new approaches to managing the talent 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 they were growing beyond their competition by increasing their customer reach, operational agility, 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 thank all the business leaders from around the world and Ernst&Young professionals who have taken the time to share their insights with us.
Executive summary
This is how high performers are using these drivers to help them pull away from the competition:
Customer reach
High performers are more outward-looking and focused on the market.
They seek deep understanding of their customers demands and
expectations and are increasing marketing spend to attain this.
Operational agility
High performers respond smartly to change but, more importantly, respond speedily.
They understand that the risks of being first to market are
beginning to outweigh the opportunities, but that speed of response is always critical.
Key findings
High performers respond smartly to change but, more importantly, respond speedily.
High performers understand what drives cost and what drives value.
High performers engage more with stakeholders and unleash their talent.
And the difference between high performers and the rest is becoming more and more pronounced.
Customer reach
Accelerate speed of response Create exible work/delivery platforms Master innovation Improve collaboration Inform pricing process
Operational agility
Cost competitiveness
These are just some of the actions that divide higher-performing companies and their lowerperforming competitors. With the shadow of the economic crisis continuing to cross large parts of the global economy, businesses of all sizes and markets have a duty to constantly evaluate their performance. Examining how they execute against these four key areas customer reach, operational agility, cost competitiveness and stakeholder confidence is an important starting point.
Stakeholder condence
Identify and explain risks Enhance reporting Re-engage with internal talent Anticipate regulatory compliance
Cost competitiveness
High performers understand what drives cost and what drives value.
They are externally focused on value-creation and opportunity.
They place more emphasis on customer segmentation and market analysis. High performers recognize that understanding what customers need, what they expect and what drives them is crucial when determining pricing strategies.
Stakeholder confidence
High performers engage more with stakeholders and unleash their talent.
High performers seek to make the value they create visible to
their external stakeholders and have significantly increased both the scope and frequency of reporting.
44
Cost pressure
As consumers and governments rein back their expenditure, and as borrowing to buy becomes harder, there is undoubtedly a greater cost consciousness in the wider economy. At the same time, however, the costs of many commodities continue to rise. Thus margins are squeezed. In developed markets, many employees are now enduring a fourth or fifth year of belowinflation pay-rises. This prolongs the downturn through dampening demand. In rapid-growth markets, however, wage inflation is becoming a major issue that threatens their competitive advantage if passed to end users and their profit margin, if not.
Volatility
Another enduring feature of todays interconnected market is its volatility. Stock market indicators of volatility, such as the VIX Index, seem to have settled down in recent months compared with the past five years. But this is more a signal that the market is beginning to make a permanent adjustment to volatility rather than heralding a new period of stability. Indeed, some are arguing that as the consumers of the rapid-growth markets play a bigger role in the global economy, cyclical volatility has inevitably increased.
Uncertainty
In the past 12 months, any global board looking to manage strategic risk will have increased the weight it attaches to major strategic threats. These threats include the break-up of the Eurozone, the debt-default of the US, international conflict in the Middle East and a major political or economic incident in one of the BRIC countries. Not surprisingly, perhaps, boards with cash prefer to preserve their options to choose, rather than choose wrongly. Similarly, within companies, employees remain uncertain about their economic security or their economic prosperity. Consumer confidence is low. Employee engagement is strained.
2012 65 22 30 23 26
74 40 39 37 19
65
22 30 23 26
Q: 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 say where they were focusing their efforts: from securing their very survival, through to taking advantage of the market to pursue new opportunities. We can see that, while the number in crisis has fallen over the past four years, it continues to be very significant. The number of companies feeling defensive about their current position has declined, but still accounts for one in five companies. A sizeable group are now actively seeking to either improve performance from their current assets or restructure their operations. But the biggest increase has occurred in the group who now believe they can take advantage of market opportunities.
There is some variation across different regions of the world in how companies view the market. The US and Asia-Pacific show the biggest increase in the number of companies who believe they can pursue opportunities. They also, however, show the biggest increase in the number of companies in trouble. This suggests an increased polarization of performance. The gap is growing. Moreover, this emerging polarization in performance seems to hold true across all major sectors. In none of the 13 sectors that we have examined was there a material difference, except in mining and metals and private equity, where the pattern is comparable.
Q: Over the next 12 months, what change do you expect in the importance that your organization attaches to the following activities? (Five-point scale)
Technology
Brand
Cost competitiveness
Regulatory risk
Cost optimization
Sustainability Talent
Stakeholder condence
Consumer products
Customer relationships Innovation Market expansion
Technology
Brand
Technology
Brand
Technology
Brand
Agility
Agility
Agility
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Insurance
Customer relationships Innovation Market expansion
Life sciences
Customer relationships Innovation Market expansion
Technology
Brand
Technology
Brand
Technology
Brand
Agility
Agility
Agility
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Private equity
Customer relationships Innovation Market expansion
Technology
Brand
Technology
Brand
Technology
Brand
Agility
Agility
Agility
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Real estate
Customer relationships Innovation Market expansion
Technology
Customer relationships Innovation Market expansion
Technology
Brand
Technology
Brand
Technology
Brand
Agility
Agility
Agility
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Regulatory risk
Cost optimization
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Stakeholder relationships
Sustainability Talent
Customer reach
10
Low performers 39 49 39 33 30 35 25 12 21
Total
58 57 51 42 38 36 35 19 13
11
Customer reach
On markets
Successful pioneers need a plan
Market expansion is a key feature of high performers strategies and their top priority in developing sales. Essential though the rapid-growth markets may be for the future, investing in other developed markets seems to be at least as important. We may be in the middle of a major rebalancing of the global economy, as rapid-growth markets increase their market share, but today and indeed for the next decade developed markets will continue to account for over 50% of global demand and a significantly higher proportion of profit for companies.
Low performers
All respondents
28
25
22 14
7 3 0%
21%30%
31%50%
Above 50%
Q: What proportion of your sales is generated in markets which your organization/ company hasentered 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 performers. Apart from oilandgas, this is true for all sectors. When asked to identify the developed countries on which they should place their corporate bets, both high- and low-performing survey respondents opted for the US. This is not surprising, given the size of that market and its comparative resilience to the wider global economy. Europe, however, performs less well, with only 4 of the top 10 national markets. The rapid-growth markets show, as expected, that the BRIC countries dominate, with China increasingly pulling ahead as the major focus. Of note, however, is the particular focus that high performers are placing on Brazil. But care needs to be taken with simple lists such as these: behind the figures lies considerable regional variation, as we have shown before. Attractiveness is shaped by perspective, which in turn is often influenced by proximity. High-performing companies in the US, for example, are far more likely to see most potential in their domestic market, followed by other Anglo-Saxon markets, such as the UK and Canada. Asia-Pacific based companies are more likely to favor their own region (including India), while the preferences of European companies are the most broadly spread. Ironic perhaps that, through history rather than intent, European companies are by some margin the most global in their spread of operations. Certainly, there is little doubt that market opportunities exist even in the current economic environment. Although global trade collapsed during the financial crisis, it has since rebounded strongly, led by trade among emerging markets. By 2020, world trade in goods will total around US$35t, two-and-a-half times its
12
Rapid-growth markets
High performers China India Brazil Russia South Africa Indonesia United Arab Emirates Saudi Arabia Poland Singapore 43 32 31 19 11 11 10 9 8 8 Low performers 37 29 20 21 8 7 3 11 10 9 +3 +4 +7 -2 -2 -1 Gap: high vs. low +6 +3 +11 -2
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&Youngs 2012 report, Trading places: the emergence of new patterns of international trade. At the same time, world trade in services will double to around US$6t. As new regional trade agreements are reached, companies will be assisted by lower trade barriers as well as falling global transport and communications costs. This will enable organizations to market their products around the world and coordinate with suppliers in other countries.
13
Customer reach
On product
Matching customers evolving needs
Developing or adapting products or services holds the key to creating new revenue streams. Over half our respondents say that selling new products to existing customers is their primary source of increased sales particularly in banking and technology. A further 33% report that they are adapting existing products for new markets, with life sciences and technology, again, in the lead (see Figure 6, page 11). One of the major drivers of change continues to be the impact of technology. Digital technology now allows for both more focused communication and consequent customization than ever before. Customers can search more widely for their specific requirements and are much less willing to compromise than before. Market segments are constantly being redefined by the "know it all, want it all consumer." Moreover, while this started in consumer markets, it now affects the way people interact with government and utilities and how businesses interact with each other. As explored in a recent Ernst & Young study This time its personal: from consumer to co-creator digital technology is driving a revolution in consumer demand. Market segments are constantly evolving, brand loyalty challenged, communication channels fragmented and consumers more informed and demanding. To remain relevant to the new consumer, organizations must undergo a similarly radical transformation. The implications for businesses are great and include intensifying the dialogue with customers, making service personal, delivering consistent multichannel service and providing an end-to-end brand experience. Companies therefore need to tailor their goods and services to match such niche requirements. Segmentation of the customer base is the foundation for successful innovation, and is the third most quoted source of increased profitability for high performers. Successful segmentation requires companies to be both quick to exploit new opportunities and highly innovative in their breadth of customer offerings. Yet this doesnt happen automatically. The most innovative companies understand how to capitalize on the opportunities in their environment. While innovation is important to all companies, it is particularly important to high performers. They deem it the second most important factor in determining future success. Thirty-eight percent say they generate in excess of 10% of their sales from products or services developed in the past three years, as opposed to only 21% of low performers. But getting the balance right is important. The real difference happens between 11%20% of new products the difference in performance of companies with over 30% of new products is immaterial.
High performers
Low performers
All respondents
29 26 22
29
20 13 10 9 4 5 4 3 3 5 4 3
12 5 6
0%
1%5%
6%10%
11%20%
21%30%
31%50%
Above 50%
Q: What proportion of global sales are accounted for by products developed in the past three years?
Our research has found that those companies that embed innovation into every aspect of their organization are the most successful. Innovation is not a tactic: it is simply what they do. Our recent study, Innovating for growth: innovation 2.0 a spiral approach to business model innovation, suggests a loosely structured, circular process that allows companies to connect with the various points of the spiral in different ways and at different times, ultimately reaching an innovative breakthrough. It sets out how, for most innovative companies today, innovation is a continuous cycle with ups and downs, input from different places, repetition, failure, and many steps back and forth.
14
Oth er co m
Take advantage of changes in the external environment Continually revamp their business models to achieve
urement and KPIs Meas
lls ski nd ea pl
Fu nd in g
s nie pa
ion
Intuition
Inv
rs to es
Capitalize
s a nd serv
Academics
competitive advantage Innovate to obtain specific business outcomes, such as increased agility or productivity It is difficult to be innovative in a world where competition comes at you from all sides. But the spiral approach is a robust process for innovation. If followed carefully, it can provide flexibility and structure for companies of all types, regardless of size or sector.
Exp loi ta t
siness model Bu
i ce
Achieve
Technology
Suppliers
Pr od
Ar ea s
u ct
en t
of innovat
Source: Innovating for growth: innovation 2.0 a spiral approach to business model innovation, Ernst & Young, 2012.
ge m en t
Exte
rnal collaboration
s ra Inf
24 23 18 18 15
14 8 8 7 7
Our report Beyond Asia: strategies to support the quest for growth explores the differences among companies in their quest for growth, and contrasts findings for globally and regionally focused companies. Asian companies are on a very successful expansion path, but are meeting challenges and risks that even established multi-nationals would find hard to overcome. The strategic moves
Asian companies must make to counter these obstacles are difficult, but essential, steps toward globalization.
For further information, please see Beyond Asia: strategies to support the quest for growth, Ernst&Young, 2012.
tr uc tu re
or s
Inn
ovation process
de
io n
Go ve rnm ent
at
io n
P ro c e s s e s
Competitive advantage
pm elo Dev
it et mp Co
k Ris
a an m
15
Operational agility
16
On speed
Being fast is more important than being first
Only one person can ever be first to do something and the record of commercial success for such pioneers is at best mixed. Speed, however, matters for everyone. Speed to market. Speed of change. Speed of operations. These are often the difference between success and failure. And in todays competitive market, organizations deploy a variety of techniques to improve this aspect of their performance. De-layering management to increase the pace of decision-making is one example. Others include changing supply and distribution channels to respond quicker to market changes, and seeking partnering agreements with key suppliers and distributors. In our previous studies, we found that high performers were achieving their faster speeds by improving processes, especially by devolving decision-making closer to the market, as well as seeking speed from their supplier and distribution partners. When analyzing the changes in speed to market compared to three years ago, it appears, however, that while getting faster, the rate of acceleration is no longer as great as it was. Although 74% of high performers believe that their organization is getting faster at developing new products and services, this is 6% lower than in 2011. Low performers are experiencing an even faster deceleration 49% in this survey compared to 61% in 2011. Indeed, the gap between the two groups has grown. Three years ago, many companies were in a fight for their very survival and were under intense pressure to get new products to market for urgently-required new revenue. Today, with growing awareness that the road to recovery is long and challenging, there may be less anxiety to rush a product to potential customers and a greater willingness on the part of companies to pace themselves in a more sustainable fashion. Potentially, however, there is growing uncertainty about the business environment individual companies face. Recovery is not happening as planned, leaving some more optimistic players looking exposed. The risks of being first to market are beginning to outweigh the opportunities. Being fast to respond to a clear opportunity seems a more efficient approach. Equally some companies particularly low performers are reaching the limits of their current organizational response, having exhausted the incremental performance improvements that can be achieved without major change to their operations. The transformation of organizations typically slows the existing operation down, regardless of the longer-term benefits.
17
Operational agility
On flexibility
Consistency is a dangerous word
Consistency remains a favorite mantra for management. Consistency facilitates efficiencies in operations and the ability to deliver a shared brand promise across service, sector and national boundaries. But, while such consistency at the level of an individual client may well be essential, there is also a risk that it reduces the opportunity to respond in an increasingly varied and volatile world. Indeed, the variation in markets and the volatility of recent years has demonstrated how vital it is for companies to possess the flexibility to adapt to fast-changing circumstances. New trends, shifting customer demands and an unpredictable, and ongoing, financial crisis are just a few of the reasons why companies need to be ready to move quickly, whenever necessary to respond to opportunities and threats. In seeking flexibility, organizations put different emphasis on different tools, depending on their country of origin. In the US, for example, both high and low performers place much greater emphasis on the use and role of technology to achieve this goal. By contrast, the Europeans stress breadth of product range and decentralization of decision-making, while companies from Asia-Pacific show a greater reliance on generating internal responsiveness and increasing the use of external partnerships. This may reflect the stage of company development, but may also be indicative of management and local culture. Comparing actions in pursuit of flexibility shows a stark contrast between high and low performers. High performers are far ahead in their use of technology, the breadth of their product or service portfolio, decentralizing decision-making and enhancing the skills of their workforce to utilize this freedom. There seems to be a collection of companies who have overcome the internal inertia of large organizations and empowered their people to leverage the organization to commercial success Low performers, by contrast, seemed trapped in a hostile ecosystem challenging their partners in the supply chain to do more and still trying to connect their internal resources to the harsh reality of the competitive challenge the company faces. The "control culture" that developed in previous decades, as companies sought to recreate previous success, has become one of the major obstacles to competitive success.
Low performers 37 27 41 30 23 36 22
Total
49 45 43 39 33 33 28
Q: Which of the following actions has your company taken to increase its flexibility over the past two years?
18
19
Operational agility
Our 2012 report, The DNA of the CIO: opening the door to the C-suite, found that less than one-in-five of more than 300 CIOs polled are members of their organizations top management team. And just 43% said they participate in strategic decision-making. In the evolution from providing tactical support for the business to becoming a strategic partner, CIOs need to align the priorities of IT to those of the business. CIOs also need to provide wise counsel, turning information into insights when the business is seeking to deploy new technology. The need to be faster to market may encourage organizations to procure and implement new technologies, but it is vital that they understand the risks that those new technologies may present. Companies today are investing in technology for many reasons, but five goals stand out: innovating processes to get faster, finding new ways to engage with the market, developing new products,
reducing costs and increasing flexibility. High performers place much greater emphasis on using technology to engage with the market and for developing new products and services. Looking ahead three years, the opportunity to develop new products and services through technology has risen to be top priority for all and high performers continue to seek new ways to engage with the market. They are also putting greatly increased emphasis on finding new ways to collaborate with third parties. Given the ongoing technological transformation and the need to invest to stay competitive, organizations perhaps feel that reducing technology spending is not a wise course of action at this time.
In three years
Developing new products or services Engaging with and selling to new customers Innovating your processes to increase your exibility Innovating your processes to increase your speed of response Reducing your operating costs More collaborative environment within the organization and the supply chain Reducing your production costs 13 11 27 35 27 25 23 27 41 37 36 32 35 32 34 33
Reducing your operating costs Innovating your processes to increase your exibility Reducing your production costs
Improving your reporting More collaborative environment within the organization and the supply chain
Q: Considering your organization's use of technology, please prioritize the objective of your organization's current investment today, and in three years' time. (Select up to three)
20
21
Cost competitiveness
22
On price
Profit starts with pricing
The market may set the market price, but it doesnt determine how much value is created or captured by individual companies. The importance attached to brand strength when entering either developed or emerging markets reflects this. Brand is ultimately a proxy for non-price based competition in any market. Even in todays difficult commercial environment, 9% of all respondents are planning to increase price by more than 20% in the next two years. This reflects the cost pressure that all organizations are facing. As inflation costs edge upwards, and the price of goods, labor and raw material gets more expensive, all companies have the difficult task of adjusting their prices without alienating their current or future customer base. But failing to maintain price or build premium brand positions is dangerous. This results directly in a massive downward dynamic within organizations that is internally focused and demoralizing. More than half of high performers believe that they can increase price by more than 5% a proxy perhaps for the real rate of inflation in the next two years. This is marginally up from two years ago. In contrast, only 14% of low performers now believe they can increase their price by more than 5% down from 21% from two years ago. This sets an entirely different context for these organizations: one externally focused on value-creation and opportunity, the other internally focused on reductions and cuts. Fundamentally, this ability to increase price shows the value of the actions taken by high performers to better understand current and future demand and build a brand that captures the most value from this. Because they know what their customers want, and how they value it, high performers are more confident about how far they can go with price increases. There is significant variation between sectors in the extent to which price rises are seen to increase sales. While the level of overall response does not vary materially across sectors, high performers in banking, mining and metals and life sciences see opportunities in this area. These sectors also scored highest on making changes to pricing policy in the past three years. By contrast, high performers in technology, media and entertainment and asset management saw little opportunity.
Low performers 4 10 41 26 18 9 20 44 17 11
Total
19 31 29 13 9
Low performers 7 14 29 31 17 14 21 31 20 11
Total
28 19 27 12 12
Q: Over the next two years, how do you expect prices for your company's primary products/services to change?
23
Cost competitiveness
On cost
Maximizing efficiencies effectively
The increasing competition in the market underlines why it is so important for companies never to lose sight of their costs. Although cost reduction does not explain difference in performance because companies should always be focused on cost a combination of high operating expenses and increased complexity in many markets is forcing companies to rethink their approach. Our September 2011 research indicated that low performers were much more likely to be lowering production costs, reducing headcount or deferring R&D. They were twice as likely to focus more on the back office, whereas high performers were three times more likely to focus on front-office efficiencies. Cutting costs is not the same as eliminating waste. Although all companies have a similarly strong focus on reducing costs in non-frontline activities, high performers take a more strategic view and focus more on efficiency than reducing headcount. High performers also place more emphasis on customer segmentation and market analysis, with 42% taking actions in this area compared to 34% of low performers. Again, this shows that high performers know the importance of understanding their customer. Recognizing what they need and expect, and what drives them, is crucial when determining the future viability of pricing strategies. Management attitudes clearly vary between the two groups. Low performers have been far more active in headcount reduction 43% versus 26% and have also been more prone to offshoring their operations to lower-cost locations, and taking actions to reduce their tax liability. They are also twice as likely as high performers to take no significant actions to increase profitability. Companies in similar sectors would be expected to face similar cost pressures, but, as Figure 16 shows, there are important variations. The number one cost pressure for low performers is price erosion. This reflects failure to meet market demand effectively. The consequence of this is dramatic, as it can divert the organization away from the market and onto cost reduction, rather than taking
Figure 15: Changes over the past two years to increase profitability
High performers
Continual focus on cost reduction in non-front-line activities Process innovation and advances in technology Back ofce integration and efciency initiatives Customer segmentation and protability analysis Pricing policy changes Improved cash forecasting Reduced headcount Moved operations to lower cost locations Reduced tax liability No signicant changes
Low performers 45 31 36 34 25 30 43 22 25 6
Total
48 45 43 42 36 27 26 18 16 3
Q: What changes has your organization/company made (if any) to drive increased profitability over the past two years? 24
For companies headquartered outside the US and Europe, a big disparity in performance is revealed. While part of this gap may be explained by variations in market characteristics, payment practices and supply chain infrastructures, there are also marked differences in the degree of management focus on cash and process efficiency. It is therefore important for industry leaders to continue implementing truly effective working capital management strategies. The fact that US and European companies still have up to US$1.2t of cash unnecessarily tied in working capital a sum equivalent to nearly 7% of their combined sales points to the potential for further significant gains.
Low performers 37 36 31 40 42 33 26 22
Total
43 43 38 38 36 25 22 18
Q: Which of the following cost pressures are most significant for your company?
25
Stakeholder confidence
26
On external
Making the value visible
Companies today are operating under two opposing pressures. On the one hand, there is much greater scrutiny than ever before. Enhanced governance processes, strengthened regulatory regimes and increasingly demanding shareholders and stakeholders require higher levels of disclosure and compliance than in previous years. Yet on the other hand, the world of business has never been more complex, as companies compete or collaborate as partners across ever-changing value chains to serve disparate and dynamic market segments. Success comes to those who can bring the value that they create to the attention of their stakeholders. Effectively communicating an organizations performance to diverse, geographically spread stakeholders is far from easy. How do you gain their attention? Should it be via multimedia or the written word? Yet in todays uncertain economic times, building and maintaining the confidence of stakeholders is critical. All organizations need to tell their performance story effectively and consistently to the investment community, regulators, commentators and customers. Previous research shows that the economic crisis has generated a greater need for active communication with external stakeholders. And this demand continues to be seen today. It should come as little surprise that, according to our survey, financial information is in most demand. There are also growing requirements for information on risk management and business planning. Two areas of particular importance relate to sustainability and human capital. Both are complex areas where we might perhaps have expected to see a growing demand for meaningful information. Unlike in previous years, however, there no longer seems to be much difference between high and low performers in this area. The scores are similar for almost all categories. Indeed, if anything, low performers see a greater need to improve their performance. The narrative story, of course, varies by sector and so we find:
Media and entertainment companies planning to increase the Technology and life sciences seeking to increase their Banking communicating more about risk Powerandutilities reporting more on sustainability
Enhanced communication can also help address another important area of concern. Ernst&Youngs Growing Beyond: a place for communication around their business planning amount of financial information they release
Low performers 50 52 47 29 22 25 21 15
Total
54 53 47 26 23 22 17 11
Q: As a result of the recent economic and market volatility, for which of the following has demand from your company's stakeholders increased the most?
27
Stakeholder confidence
integrity: 12th global fraud survey found that bribery, corruption and fraud remain widespread. In the survey, based on 1,758 interviews with senior decision-makers in a sample of the largest companies in 43 countries, 39% of respondents reported that bribery or corrupt practices occur frequently in their countries. The challenge is even greater in rapid-growth markets, where a majority of respondents believe these practices to be common. Multinational businesses have to confront this challenge. At the same time, many countries are strengthening their enforcement regimes. For example, the UK has introduced a Bribery Act and India has implemented a raft of proposed antibribery, anti-corruption (ABAC) legislation. As regulatory activity intensifies, the risk of external scrutiny of corporate activity also increases. Senior management have to ensure that they and their companies are not found wanting, should their activities come under the spotlight.
Developing channels of communication with contacts across the finance function and other executives within the business will help boards ensure that they have a full and accurate picture of what is occurring across their organization. Companies also need to be prepared to deal with investigations and enforcement actions that result from whistle-blowing complaints made directly to regulators. Processes need to be in place for prompt investigation and communication with enforcement agencies.
28
On internal
Unleashing your talents
Our research since the start of the downturn has shown that one of the biggest drivers of differential performance relates to how companies develop and deploy talent. The latest data confirms this. Some 42% of respondents identified talent management as the second most challenging function to manage globally. The economic crisis has clearly had a major impact on employees. One in five of our respondents has cut staffing levels by over 5% in their main markets, and a further 32% have frozen or reduced headcount by up to 5%. Special management skills are needed to maintain engagement during such difficult times. While high performers have also felt the strain, the pressure has clearly been less and cutting jobs has never been a priority for them in optimizing performance. Indeed, almost 40% of them have been increasing their talent in key markets. But there is much more to the difference than simply redundancy. We have included human capital factors on a range of measures and, time and again, there is a significant difference between the responses of high and low performers: In managing an international or multicultural workforce, high performers place a much greater focus on the individual. They are significantly ahead in linking an individuals pay with their performance, providing customized training and development, and offering opportunities to their talent to operate internationally. In managing direct reports, they neither abandon hierarchy nor micromanage. But they are far more likely to devolve decisionmaking as far as they can and to make roles more flexible. In looking to assess the effectiveness of their talent management, all types of respondent regard elements such as employee satisfaction and retention rates as key measures. High performers, however, are ahead in recognizing the reality of the skills gap, the value of the employer brand and diversity in management teams. Our current research does not suggest that high-performing companies create an easier environment for their employees. Instead, they create a high performance culture where individual talents can be developed and then unleashed on the market.
High performers are 60% more likely to identify talent as one of High performers are 50% more likely to see access to talent as a High performers are 43% more likely to be achieving flexibility
through devolving decision-making and 30% more likely to be seeking to improve their workforce skills as a result. Consequently, high performers are 16% more likely to have a concern about labor cost pressures. In a major study published in November 2012 Paradigm shift: building a new talent management model to boost growth Ernst&Young explores the talent management challenge in the new economy. Applying the high performer versus low performer methodology to the findings shows significant areas of difference. reason to enter rapid-growth markets. the critical factors for determining future competitiveness.
29
Stakeholder confidence
On leadership
For the first time in this program, we have asked respondents explicitly what they consider to be the most important attributes for leaders of their organization. We have been surprised by the difference that has been revealed. The important point is not the difference in the scores that are given by different groups most of the scores are similar and, indeed, for six of the criteria high performers give a lower score. The two most critical areas of difference concern the ability to lead effectively in an international business environment, where high performers gave a 10% higher weighting, and decisiveness, which high performers mentioned 6% more often. Both reflect an understanding that future success is global or at least crossborder and that an imperfect decision in a context of local empowerment is much better than a slow one. High-performing organizations are complex and challenging and consequently call for greater skill in their leadership. This is reflected in the increased importance that these companies attach to both their current and future leaders. The importance of leadership is reflected in the very high emphasis placed on succession planning.
Figure 18: Most important leadership attributes for future C-suite leaders
High performers
Can lead in an international business environment Articulates and embodies the values and culture of the organization Can command the respect of colleagues and reports Engages effectively with multiple stakeholders Decisiveness Strikes the right balance between risk-taking and caution Has industry expertise Has a strong grasp of the nancials Is a good risk manager
47 44 38 33 33 32 30 21 12
-2 -4
-4 -2 -6 -1
Q: What do you consider to be the most important attributes for potential C-level leadership of your organization?
30
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Conclusion
In this report we have detailed the differences we have observed between high and low performers. Why not ask yourself these questions about your own organization: Have you got your external 1 market focus correctly prioritized?
Have you got the balance of existing clients and future targets right? Are you operating in the right mix of segments and countries for sustainable growth?
Have you reviewed and de-layered your processes and devolved decisionmaking sufficiently to move quickly, but still safely?
Do you have a clear understanding of where the optimal balance sits between efficiency and effectiveness?
Have you got an effective and inclusive innovation process that is listening sufficiently to those who work most closely with your clients namely your own people?
Are you sure that the consistency you seek has a management value that outweighs its market capitalization?
Are you communicating the 7 value you create effectively with your external stakeholders?
In addition to compliance, have you got clear objectives for each audience you need to influence?
When was the last time you fundamentally reviewed the value you were creating and how you could capture more?
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Looking at high and low performers may be interesting, but our study is not driven by a desire to record the achievement of others.
Instead we are looking to identify what might be learnt so that others may apply those lessons and improve their performance. Our research over the past four years has shown that in every country, in every sector and in every market segment, there are companies that have grown beyond the constraints of the market to enjoy sustainable success. If the economy is to return to health, we all need more companies to join that group. The pursuit of competitive success isnt easy in benign economic times, let alone the environment weve experienced in the past five years. Living with the high longer-term cost of cheap debt is a new and painful experience for all of us. Add in the long-term challenges presented by shifting demographics, climate change and the ongoing march of globalization, and the difficulties have only increased. High performers, however, have not achieved their performance through luck, but by people taking the right decisions in the light of the market that they face. How they have continued to prosper holds important lessons for us all. Fundamentally, what distinguishes high performers from others is the recognition that focus, innovation, cost and execution are no longer distinct choices for competitive advantage, but must all co-exist as critical elements when seeking the optimal balance of competitive success. That recognition is based on having deeper understanding of the drivers of value in their specific markets, the imagination to think differently and the courage to translate those thoughts into action. The bigger challenge, perhaps, is the challenge of adopting a new mindset to how your company engages with the market. For those with an interest in the working of the global economy, the economic crisis we face has shaken many long-held assumptions and brought into question the beliefs and practices developed in pre-crisis days. Not all these established practices may be wrong, but all of them need to be questioned in the light of the new economy and potentially balanced by a set of new imperatives, many of which are not yet clear. That is much easier to say than to do, as most of us inevitably operate to patterns shaped by our experience as much as our conscious intellect. What is clear, however, is that recovery in the global economy is neither imminent nor inevitable and, should it come, will reveal a radically different competitive landscape. Survival, let alone success, is not guaranteed, but the chances are improved for those businesses that recognize the scale of the change required and mobilize the shared intent to jump the growth gap.
markets
Customer reach
Operational agility
Growth
Cost competitiveness
Stakeholder condence
ew
N
ta len ts
odu New pr
s ct
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Further reading
In todays rapidly changing world, its vital to make the right decisions today to sustain your business tomorrow. Ernst&Young has a clear perspective on the pressing issues that your business is now facing and a deep knowledge of your industry. Customer reach
Beyond Asia: new patterns of trade in Asia-Pacific
How well-positioned are you for an Asia-centric future in international trade? We examine the trends you can expect from now to 2020.
Innovating for growth: innovation 2.0 a spiral approach to business model innovation
We look at how to take advantage of changes in the external environment, build the right mindset and culture, and innovate to obtain specific business outcomes.
Exceptional
Exceptional
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A quarterly business journal that provides in-depth analysis of topical business issues. It explores how companies can spur innovation and position themselves for long-term success.
Competitive strength
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Working capital management report 2012
Magazine
T Magazine 09
09
T Magazine
Examines major business issues, from dealing with the post-crisis world to the changing environment for risk management, through a prism of tax. Each edition features the insights of high-level executives, experts, policy-makers and academics.
Changing Europe: for tax and tax directors Measuring the tax teams performance
Joining up
The corporate tax director: more connected than ever to business
Capital Insights
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the shots Lead strapline
Deutsche Telekom CFO Lead strapline supporting copy line 1 Timotheus Httges on Lead strapline supporting copy line 2 collaboration, innovation and communication
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Two line Metals and Mining M&A: heading What the future holds One line heading Cross-border financing line Poland: RisingTwo in the east heading
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Many CFOs are struggling to maintain liquidity. Others are stockpiling cash like never before. We explore ways of tackling the challenges.
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Stakeholder confidence
Growing Beyond
Growing pains
Growing pains: companies in rapid-growth markets face talent challenges as they expand
As companies globalize, it is proving very difficult to get the talent equation right. This report explores the four major talent-related challenges.
Growing Beyond
Reporting
Its more than the numbers
Reporting
Addressing the broad topics around reporting and governance, Reporting features articles on a mixture of business, regulatory and investor matters and represents the views of reporters, regulators, investors and advisors.
Ernst & Youngs DNA of the CFO series captures the aspirations and insights of nearly 1,000 CFOs from around the world. Find out what your peers think about their role, their future and their people. Visit ey.com/cfo. See More | Insight
Paradigm shift
This report explores the talent management challenge in the new economy, applying the high versus low performer methodology to show significant areas of difference.
2012 EYGM Limited. All Rights Reserved. ED 0113
What accounting issues will you need to consider if a country leaves the Eurozone?
The financial crisis has increased the amount of time boards spend addressing strategic risk
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For this study, Ernst&Young commissioned the Economist Intelligence Unit (EIU) to survey C-suite, board directors and senior managers in large organizations. This study took place between 13 August and 14 September 2012. More than 1,500 C-suite, board directors and senior managers responded. Results are compared by relative high and low performance in each sector, based on EBITDA and revenue growth over the last two years.
Geography
Western Europe Asia-Pacic North America Middle East and Africa Eastern Europe Latin America 9% 7% 8% 5% 28 % 43 %
Revenue
US$10b or more US$5bUS$9.9b US$1bUS$4.9b US$500mUS$999.9m US$250mUS$499.9m 9% 26 % 23 % 23 % 19 %
Performer groups
High performers Low performers 26 % 25 %
Stakeholder
SVP/VP/Director Head of department Other C-level executive CFO/Treasurer/Comptroller CEO/President/Managing director Head of business unit Board member CIO/Technology director 3% 3% 9% 6% 17 % 19 % 23 % 22 %
Sector Sector Consumer products Power and utilities Real estate Media and entertainment Oil and gas Life sciences Banking and capital markets Technology Mining and metals Insurance Automotive Asset management Private equity Other 5% 5% 6% 8% 8% 8% 7% 7% 7% 7% 7% 10% 9% 9%
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2012 EYGM Limited. All Rights Reserved. EYG No. AU1332 In line with Ernst&Youngs commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst&Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. The views of third parties set out in this publication are not necessarily the views of the global Ernst&Young organization or its member firms. Moreover, they should be seen in the context of the time they were made. www.ey.com ED 1113 EMEIA MAS E168.1012
Growing Beyond
In these challenging economic times, opportunities still exist for growth. In Growing Beyond, were exploring how companies can best exploit these opportunities by expanding into new markets, finding new ways to innovate and taking new approaches to talent. Youll gain practical insights into what you need to do to grow. Join the debate at www.ey.com/ growingbeyond.