Managing change
Adapting to changecan be instrumental to a company's success. In these changing global times, a decentralized organizational structure, flexible strategies and innovative thinking can spell competitive advantage.
Successful companies are quick to spot changes in their immediate environment and can flexibly adapt their strategies. In addition, companies with a more decentralized organizational structure can respond better to challenges. These are the results of a study by Roland Berger Strategy Consultants that surveyed 1700 companies in Europe, the US and Japan from 1991 to 2005. In the past few years, managing companies has become more difficult. This is due to big changes in global economic relationships, a shift in the balance of economic power (with the rise of China and India) and increasing competition for raw materials. Climate change and the global political situation also play important roles.
Corporate strategies must become more flexible
This increasing complexity has an impact on corporate strategy. To be successful, companies must recognize changes in their environment early on and adjust their strategies better to changing conditions. Previously, business strategies were mapped out for a traditional time frame of seven to ten years, but given shifting realities, this is no longer a suitable reference point. Nowadays, companies need to think more in terms of strategic scenarios. Companies have to flesh out alternatives in an effort to weed out obsolete strategies.
Successful companies are quick to spot changes in their immediate environment and can flexibly adapt their strategies. In addition, companies with a more decentralized organizational structure can respond better to challenges. These are the results of a study by Roland Berger Strategy Consultants that surveyed 1700 companies in Europe, the US and Japan from 1991 to 2005. In the past few years, managing companies has become more difficult. This is due to big changes in global economic relationships, a shift in the balance of economic power (with the rise of China and India) and increasing competition for raw materials. Climate change and the global political situation also play important roles.
Corporate strategies must become more flexible
This increasing complexity has an impact on corporate strategy. To be successful, companies must recognize changes in their environment early on and adjust their strategies better to changing conditions. Previously, business strategies were mapped out for a traditional time frame of seven to ten years, but given shifting realities, this is no longer a suitable reference point. Nowadays, companies need to think more in terms of strategic scenarios. Companies have to flesh out alternatives in an effort to weed out obsolete strategies.
Decentralized companies can respond better to new challenges
To meet these strategic requirements, companies have to decentralize. Decentralized organizations know their environment – e.g. their clients and suppliers – better than centralized ones, because they can be closer to them and respond to their immediate needs. Furthermore, decentralized firms tend to be more innovative, since they can allow their employees more individual freedoms and can better support the development of original ideas. A study of companies in the capital goods industry shows that 47% of successful companies regularly put their products to the test. Among the less successful companies, this number was only 28%. Successful firms generate 27% of their sales with new and innovative products, whereas for less successful companies, this figure is only 18%. Successful companies also achieve a higher share of standardization (64%) than their less successful peers (40%). 59% of the top companies in this area have reduced the number of suppliers, in contrast to 45% of the less successful.
Companies that excel in defining functional strategies leave their competitors behind when it comes to important key performance indicators. For example, the productivity of the leading 1700 companies in the triad markets (Europe, US, Japan) rose at an average annual rate of 7.2% between 1991 and 2005. Productivity in the other companies rose by 4.1% per year. The free cash flows of leading companies increased by 53.5%; those of their competitors, by 43.2%. In addition, leading companies hire more people: From 1991 to 2005, the number of employees went up an average of 12.4%. Competitors hired only 3.8% more employees. Over this period, total shareholder returns at leading companies rose by an average 19.5%, while that of competitors climbed only 12.7%.
To meet these strategic requirements, companies have to decentralize. Decentralized organizations know their environment – e.g. their clients and suppliers – better than centralized ones, because they can be closer to them and respond to their immediate needs. Furthermore, decentralized firms tend to be more innovative, since they can allow their employees more individual freedoms and can better support the development of original ideas. A study of companies in the capital goods industry shows that 47% of successful companies regularly put their products to the test. Among the less successful companies, this number was only 28%. Successful firms generate 27% of their sales with new and innovative products, whereas for less successful companies, this figure is only 18%. Successful companies also achieve a higher share of standardization (64%) than their less successful peers (40%). 59% of the top companies in this area have reduced the number of suppliers, in contrast to 45% of the less successful.
Companies that excel in defining functional strategies leave their competitors behind when it comes to important key performance indicators. For example, the productivity of the leading 1700 companies in the triad markets (Europe, US, Japan) rose at an average annual rate of 7.2% between 1991 and 2005. Productivity in the other companies rose by 4.1% per year. The free cash flows of leading companies increased by 53.5%; those of their competitors, by 43.2%. In addition, leading companies hire more people: From 1991 to 2005, the number of employees went up an average of 12.4%. Competitors hired only 3.8% more employees. Over this period, total shareholder returns at leading companies rose by an average 19.5%, while that of competitors climbed only 12.7%.
For top companies to maintain or improve their position, they must be able to react to changes in their environment rapidly. Otherwise they run the risk of disappearing from the market. A good example can be found in a comparison of the Forbes 100 lists from 1917 and 1987: 61 of 100 companies no longer existed in 1987. Of the remaining 39, only 18 were still on the Forbes list in 1987. A comparison of the S&P 500 index yields similar results: of the 500 companies originally on the list in 1957, only 74 were still there in 1997. Moreover, only a quarter of the 1700 companies surveyed from 1991 to 2005 in the triad markets experienced above-average sales and profit growth.
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