Occasionally I am going to share some blog posts from my archives. Most were posted on sites that are no longer active, so this is a way to bring them back.
This blog was from early 2018.
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 and the title 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 in the middle 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 in 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 impacts success. Also, how you spend what you have, becomes very important. Allocation of your resources based on Trends and Moves is key.
How to Impact the Power Curve – Trends
Trends are 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.
How to Impact the Power Curve – Moves
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. 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. It also comes from your Market Sensing activities.
Once you know and understand what your customers value and need, and their motivations for buying, you can develop products with differentiation. A product with differentiation is critical to driving organic growth and profitability.
If you do this, you will be Market-Driven. 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 (if you don’t have the Endowment needed to place the right bets).
To do this you should score all of your opportunities on multiple factors (strategic fit, value proposition, ROI, etc.). Base these opportunity scores on objective market data, so again Market Sensing capabilities are key.
With these scores, you have a ranked pipeline of opportunities to consider for your strategy.
When doing that, identify the opportunities that have the best chance of success based on the current situation (Market Maturity, Market Dynamics, Competitive Landscape, and Market Position). This is actually where I thought McKinsey was going with that title, as to get to sustainable profitable growth you need to be able to start new growth curves (hockey sticks).
You Can Move to the Top 20%
The key thing to know is that you can move to the Top 20% (or stay there).
To do that, start with knowing and understanding your market and translate that knowledge into inorganic and organic growth strategies. Allocate your resources on the strategies that have the best chance of success for you and your company.
If you want to learn how you can increase the odds of success for your growth strategy through Market Sensing capabilities, feel free to e-mail me at email@example.com.
The knowledge you can gain from Market Sensing capabilities gives you foresight on Trends, helps you develop M&A strategies and target lists, enables you to create products with differentiation, and of course helps you allocate your resources based on objective opportunity scoring.
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