In brief
Today’s business environment is increasingly complex. Enterprises are confronted by rapid shifts in market dynamics, evolving customer preferences, intensifying competition and rising cost pressures. As a result, it is becoming increasingly challenging for enterprises to grow or defend their core business and they need to adapt in order to win.
In today’s demanding marketplace, business leaders are often so entrenched in managing day to day operations that they seldom have the opportunity to take a step back and assess their current state. In our opinion, this disconnect has led most enterprises to develop linear strategies that fail to consider their priorities, performance and capability gaps as a whole.
Without having a deep understanding of an enterprise’s starting point, business leaders cannot make impactful decisions that influence the enterprise’s successful path forward. Companies that are able to deliver true stakeholder value are those that have developed a culture of honest and periodic self-assessment and reevaluation.
Business leaders that develop effective strategies are those that balance long term bets with short term, tactical decision making. This report covers the three key steps that enable value creation in a complex and evolving business environment: evaluate current state, prioritize strategic issues and drive decision making.
Effective diagnosis of the current state requires an in-depth analysis of an enterprise’s commercial positioning and operational performance. There are several fundamental considerations to keep in mind when conducting a current-state diagnostic that can be broadly categorized into industry and enterprise factors. It is imperative to select the appropriate metrics to quantify performance against these considerations in order to understand their gaps and strategic priorities.
To understand an enterprise’s performance, business leaders must first develop hypotheses informed by data. A clear definition and aggregation of data against key performance indicators (KPIs) is vital to the evaluation process.
A further triangulation of these hypotheses with data points from primary (e.g., expert interviews, surveys) and secondary research is critical in generating meaningful insights. By benchmarking these KPIs to a broader peer set, business leaders can understand how their enterprise has performed relative to competitors. This can help develop further insight into the key drivers limiting better performance.
The primary considerations for an effective evaluation of the industry dynamics include:
The primary considerations for an effective evaluation of enterprise performance include:
The changing business climate can create significant commercial and operational challenges. Effective business leaders are able to leverage insights from an evaluation of their current state to prioritize their strategic path forward and thus help their enterprises adapt and win in the market.
A robust understanding of an enterprise’s current state helps define the potential strategic pathway the business needs to take. At EY-Parthenon, we have developed the “EY-Parthenon prioritization matrix” (shown below) to aid this process.
Our framework helps business leaders identify their enterprise’s current position based on an evaluation of current state. The enterprise’s position in the matrix can help prioritize strategic issues and the path forward based on the enterprise’s need to survive or restructure its core business, transform its approach to business as usual, or sustain market position and historical performance levels.
Enterprises that generally suffer from a combination of unfavorable market dynamics and weak enterprise performance can be defined as being in the Survive mode. These enterprises struggle with profitability and revenue growth, often because they face high operating costs and a commoditized marketplace. The key issues to prioritize for these types of businesses could include:
Enterprises in the Transform mode are those that are at an inflection point in their life cycle and are looking to maximize stakeholder value. Their strategic priorities could be driven by a need to enhance enterprise performance or overcome external market challenges. A few examples of such priorities include:
Operational issues
Commercial issues
In many instances, enterprises are uncertain how to prioritize operational/cost improvements over product/market strategies; these companies are stuck in what we call the “paradox vortex.”
Enterprises that lead their markets are defined as being in the Sustain mode. They are driven by a desire to consistently create stakeholder value by staying ahead of the competition. Their strategic priorities include:
It is important to stress that not all enterprises can be characterized as purely being in the Survive, Sustain or Transform modes. In reality, an enterprise’s priorities and issues can fall in between surviving and transforming, or sustaining and transforming the way it does business. Once these priorities have been identified, a road to success must be paved with a set of concrete milestones and staged strategic decisions.
Realizing strategic objectives requires translating theory into action plans. Business leaders have several tools at their disposal but often struggle to achieve the right balance when making strategic decisions.
At EY-Parthenon, we have developed the decision diamond framework (shown below), which plots strategic actions along four key dimensions — product portfolio, market footprint, operating model and cost structure — to translate insights from EY-Parthenon’s prioritization matrix into actionable steps.
The shape of the decision diamond is characterized by its size and symmetry, reflecting the balance and magnitude of performance against the four dimensions respectively. In our experience, enterprises that lead their market define the optimal shape — a large and symmetric diamond whose outer bounds are calibrated by its performance on each of the dimensions. Most enterprises fall short of this optimal shape due to linear strategies that fail to consider the enterprise’s priorities, performance and capability gaps as a whole.
The key dimensions of the decision diamond include:
A. Divesting underperforming business segments: identify underperforming (high cost base, low revenue growth) business segments, including products, brands and market; develop an efficient and cost-effective carve-out plan for associated assets (e.g., property, plant and equipment [PPE]); divest identified segments to increase liquidity and focus on improving performance of the remaining core business
B. Driving rapid cost reduction in core business: identify/eliminate drivers of efficiency loss and material waste; reduce nonessential personnel headcount to cut direct and indirect labor costs; track and mitigate nonessential expense purchases; drive vendor consolidation and revisit contractual agreements to achieve procurement-related savings
C. Improving liquidity through working capital-related quick wins: restructure vendor and customer payment terms to reduce the cash conversion cycle; drive efficiency in order-to-cash, forecast-to-fulfill and procure-to-pay processes to limit inventory-related costs
D. Optimizing production throughput: rationalize capacity and optimize throughput by reducing downtime and eliminating production bottlenecks to prevent stock-outs and reduce production costs
E. Driving quick wins through strategic investments: prioritize potential investments to prevent performance rollback and boost stakeholder confidence; invest in potential low-cost technology upgrades to streamline manufacturing processes; hire key talent to support strategic initiatives
A. Optimizing route-to-market (RTM) model economics: Understand the economics and structure of the current RTM model, including cost, price, channel partners, geographic reach and volume lift; evaluate channel partner performance and identify opportunities to top-grade channel partner; re-evaluate arrangements and renegotiate contracts to reduce “cost-to-serve” while not compromising on service levels
B. Improving salesforce effectiveness and delayering governance structures: understand current performance gaps by analyzing key metrics (including salesforce productivity) and customer and salesforce feedback; redefine and ratify a clear sales strategy and set specific team goals, reporting structures and bonus thresholds; target high-value accounts and direct sales resources to opportunities with the biggest payback; ensure customer engagement during the sales cycle
C. Driving margin expansion: identify opportunities to increase the blended price point and reduce costs; develop channel-specific pricing and identify cross-sell and upsell opportunities; consolidate supplier base to drive economies of scale; meaningfully rationalize trade and advertising spend to capture customer acquisition-related savings
D. Refining cash conversion and throughput: renegotiate and consolidate vendor contracts and payment terms; invest in new technologies to improve throughput and capacity utilization; continue to eliminate production bottlenecks, limit waste and reduce complexity in product design
E. Improving capital efficiency and fixed cost leverage: conduct a strategic review of PPE across the value chain to identify underperforming assets on a return on capital employed (ROCE) basis; develop a plan to rationalize selected parts of the production process by either optimizing remaining assets or outsourcing to third-party operators
A. Continuing to invest in core business to drive defensibility and differentiation: identify areas to maintain differentiation and defensibility, including branding, customer acquisition, intellectual property/R&D and talent; prioritize investments based on strategic goals and core competencies
B. Identify strategic acquisitions for market consolidation: identify meaningful and value-accretive acquisition opportunities to increase market share through category, market or vertical expansion; strengthen product portfolio; drive to achieve robust integration to capture revenue and cost synergies
C. Create new segments/categories: develop products that have the potential to disrupt the status quo in the current marketplace; drive to enhance the customer experience and deliver best-in-class quality
D. Continue to strive for operational excellence: drive toward a leaner cost structure and a best-in-class operating model to continue to improve margins and ensure end-to-end control; refine processes by focusing on data-driven insights to manage performance; conduct periodic stress tests to mitigate potential issues in a timely manner
E. Strategic divestitures: assess health of business portfolio to identify underperforming business units (segments and/or markets); measure the marginal value (contribution vs. cost) of business unit to the broader portfolio and enterprise’s objectives; make disposal decision
In today’s complex marketplace, linear business strategies do not succeed. To adapt to changing business climates, business leaders will increasingly need to develop multipronged strategies that consider their business’s operating model, cost structure, product portfolio and market footprint.
When developing successful strategies, business leaders need to rationalize the trade-offs among timing, economics and competitive response. Some strategies could be slow-moving and accretive but show cumulative results over extended periods, while others could be quick wins that have a shorter turnaround.
Business leaders need to view adapting to the changing business environment as a continuous process to stay ahead of the competition and deliver true value to stakeholders. Without creating a culture of self-assessment and re-invention, enterprises risk eroding long-term stakeholder value. Those that are unable to adapt will fail. The journey to unlock value begins today.
Companies that deliver stakeholder value are dedicated to regular self-assessments and reevaluations. We explore this and other key steps that help organizations deliver value creation in a changing business environment.
How EY-Parthenon can help
EY-Parthenon professionals recognize that CEOs and business leaders are tasked with achieving maximum value for their organizations’ stakeholders in this transformative age. We challenge assumptions to design and deliver strategies that help improve profitability and long-term value.
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