Analysing the 2,400 largest companies in the world over a period of more than 10 years. The writers of the book “Strategy Beyond the Hockey Stick” and McKinsey advisers Chris Bradley, Martin Hirt and Sven Smit did this to find out the key to economic success. What makes one company more successful than another? How do you achieve doing business ‘beyond the hockey stick’?
This research shows that a large part of these companies had a comparable profit level. For example, 60% of these performed on average. There are two groups of 20% that deviate significantly from this. These are the poor and the top performers. The researchers found several reasons why some of the companies deviate positively from the average of the majority of companies. These reaseons are:
- Structured M&A
- Dynamic allocation of resources
- Above-average investments
- Efficient production
- Differentiation of the organization
The majority of M&As (mergers and acquisitions) do not realize any added value, which is a shame. Do you want to ensure that your M&As do pay off and that you achieve your strategic objectives? Then ensure a structured M&A strategy. In order for the integration of your companies to succeed, you need a clear goal, strategy, organization and culture. Because of this structure you achieve your goals faster and the return increases.
Dynamic allocation of resources
The use of money, talents and the attention of management in the places where they add the most value. The McKinsey study shows that management does not know where, how much and how they can re-allocate. This can be done in four different ways:
- Avoid averages. Look carefully at the different numbers. This can, for example, differ greatly per location or department. Ensure to take this into account while allocating resources.
- Focus on value creation. Use the right tool to always be able to assess where the resources are going. This can be the expected profit that you divide by the financial resources you need to make the profit.
- Facts and logic. It can be difficult to turn past performance into a success or to improve it. Even more difficult is to pull out the plug as soon as things do not get better. But sometimes that is the start of success. Therefore, base the allocation on facts and logic and not on hope or trust.
- Be dynamic. Resources must be adjusted regularly. This may be due to certain events that make it necessary, such as the sudden decrease of the oil price in 2015. The allocation of resources should not be done once a year, but must be an ongoing process.
What is also noticeable with the top performers is that they invest above average. This is about more than just money. Successful organizations also invest in intangible added value to grow the business. Consider international presence, the production process, customer relationships or the service departments.
McKinsey also sees that companies that achieve above-average returns have efficient production. The continuous improvement of efficiency in order to reduce the cost price and reduce the working capital is therefore a spearhead of management. Because this increases the return on total invested capital.
Differentiation of the organisation
Companies that use M&A in a strategic way to grow will probably achieve a higher return on their assets in the long term.
An important observation is that many companies look at their own organization when formulating the strategy. This is also called the ‘inside view’ by the writers. This ‘inside view’ is often subjective and is not well substantiated. With such a strategy, management wants to keep everyone happy because it is risk-avoiding and has vague prospects.
Based on the research, it is therefore important to look at how you, as an acquiring organization, can add value in a strategic way. Both materially and immaterially. That makes one company more successful than another.
Doing business ‘beyond the hockey stick’ requires making certain ‘moves’. Looking for more ways to grow your business? Read about it in this blog.