Aligning with the herd is a normal and predictable outcome in times of uncertainty and dislocation
In the context of the last century, the world is in unprecedented territory in terms of a global public health emergency and its devastating flow-on impacts in dislocating economic activity. There is still much water to travel under both these bridges. There is little surprise that authorities, people, and companies are responding increasingly in both similar and predictable ways – it is natural and easy to get swept up in the ‘herd’. Being nestled within the herd feels the ‘safest’ place in times of extreme uncertainty and dislocation.
There are disproportionate rewards for those happy to run on the edge of the herd
However, empirical data collated and presented by global consulting company, McKinsey, suggests that those companies that have the courage to stay on the edge of the herd, i.e. be an outlier, have a materially higher probability of long-term prosperity than those seeking the full protection of the running herd.
In the recently published book, Strategy Beyond The Hockey Stick, the authors interrogate a deep pool of empirical (trend financial performance) data on public companies in their quest to determine what differentiates the mere 8% of ‘outlier’ companies at the edge of the economic profit herd, their ability to capture over 90% of the available economic profit, and on-average, deliver 30 times the economic profit of those companies running in the herd. The insights uncovered by the authors Bradly, Hirt and Smit, has the potential to be even more powerful if implemented during the current times of extreme economic and market uncertainty.
Starting position (endowment) and industry trends matter
There is little surprise that there are benefits in both a company’s starting position (endowment) and the macro industry trends in which it is exposed. If you are larger company with a strong balance sheet, have a track record of successful and consistent investment in R&D, and operate in a growing industry segment then your probability of outperforming is clearly enhanced. However, the more insightful outcomes of the research are that companies can have a greater control over their future based on their relative application of five big value levers – levers that can be grouped into two categories.
Performance management is a minimum requirement just to keep up
The first group of levers is around performance management. These are activities that center around productivity improvement, cost management and differentiation in products and customer strategies. These are response actions that are essentially innate to (nearly) all members of the herd; a necessary minimum precondition to just ‘keep up’ and limit the risk of getting trampled by the rest of the herd. However, in performance management endeavors you have to materially outperform the rest of the herd in order to build a leadership position – something that is difficult to sustain over long periods of time.
The right portfolio management can accelerate and enhance performance management
The second group of value levers lies around portfolio management – making clear choices around how limited resources are allocated, managing a more vibrant portfolio of capital investments opportunities than your competitors, and executing ‘programmatic’ acquisition and divestment. It is these portfolio decisions that are at the heart of strategy itself – making discrete choices and trade-offs with scarce resources. A key risk is that these critical value decisions are only made during ‘fair weather’ conditions – and are neglected when the weather is rough and during times of uncertainty. However, empirical data suggests that performance ‘outliers’ to the herd demonstrate a stronger track record of pulling on both productivity and portfolio levers throughout the entire economic cycle.
Running on the edge of the herd requires courage but is the key to sustained value leadership
To do this effectively requires courage to run on the edge of the herd. It requires maintaining a perspective of the broader competitive landscape and the value opportunities that may arise – something that is difficult seeing through the dust raised by the herd. It requires the space to pivot and shift direction quickly so that when conditions change there is an unfair competitive advantage in responding to new customer or market conditions. It requires taking some calculated risk at times when the rest of the herd is consumed by just keeping up with the ‘pack’.
While most companies in the herd will ‘hunker’ down and execute their crisis management plans to protect the current, economic value leaders will be doing this and scanning the horizon to leverage the new opportunities that emerge from uncertainty and dislocation – making decisions that will embed their leadership further into the future.