Growth in Turbulent Times Future confident Growth in Turbulent Times Contents Growing in turbulent times Growing in turbulent times 03 Using an adjacent growth strategy during Using an adjacent growth strategy during turbulent times 09 turbulent times Building a growth engine during Building a growth engine during turbulent times 15 turbulent times Creating a Creating a sustainably advantaged portfolio 18 sustainably advantaged portfolio Leveraging lazy balance sheets in turbulent times 22 Leveraging lazy balance sheets in turbulent times Accelerated growth in turbulent times 28 Accelerated growth in turbulent times Strategic sensing during turbulent times 32 Strategic sensing during Leading in turbulent times 35 turbulent times Leading Managing risk in turbulent times 40 in turbulent times Managing War gaming for business during turbulent times 44 risk in turbulent times Key contacts 47 War gaming for business during turbulent times 02 Growth in Turbulent Times Growing in turbulent times Author: Mike Vincent Growing in turbulent times Death and taxes apart, the only other certainty in the world is change. Using an Nothing has brought this into sharper focus than COVID-19. adjacent growth strategy during turbulent times Building a growth engine during The 20th century experienced regular periods of relative calm, followed The SARS-CoV-2 (COVID-19) pandemic has caused the largest global turbulent times by calamities – two world wars, the great depression, the cold war, recession in history, with more than a third of the global population and even the Spanish flu. This 21st century appears to be following the being placed in lockdown. Global stock markets experienced their Creating a same trajectory. worst crash since 1987, and in the first three months of 2020 the sustainably advantaged portfolio G20 economies fell 3.4% year-on-year3. Between April and June 2020, The financial crisis that started in 2007 saw the first contraction of the the International Labour Organization4estimated that an equivalent Leveraging lazy global economy since World War II and the largest decline of trade of 400 million full-time jobs were lost across the world, and income balance sheets in in 80 years1 . It resulted in the collapse of large financial institutions, earned by workers globally fell 10 percent in the first nine months of turbulent times the bailout of banks by national governments and sharp declines in 2020, equivalent to a loss of over US$3.5 trillion. stock markets around the world. It contributed to the failure of key Accelerated businesses, significant declines in consumer wealth and economic The world that has been ushered in due to the pandemic has seen growth in turbulent times activity, the effects of which we felt for at least ten years. Many causes schools closed, businesses shuttered, staff working from home, social for the financial crisis have been suggested, including the result distancing becoming the norm, curfews, the wearing of face masks, of high risk, complex financial instruments, corporate governance and cities and provinces in lockdown. Strategic sensing during failures, regulatory dysfunctionality and the market failing to rein in the turbulent times excesses of Wall Street. Once again, companies locally and abroad, are typically looking to efficiency improvements and austerity measures to manage their way Leading Unsurprisingly CEO faith in global growth forecasting was eroded and through the crisis. The focus once again is inward. However, in many in many business leaders retreated into their shells, conserving cash and cases, those sources of value have already been wrung dry. turbulent times becoming internally focused. As a direct result of the crisis, by June 2011 South African businesses listed on the JSE had accumulated in Managing Might there be another approach to these 1 risk in excess of R470 billion in cash2 deposits and investors began to call for The Economist 2 Deloitte research turbulent times improved returns from the cash piles. The period was characterised calamities that positions companies for 3 The World Bank by credit tightening and a plunge in revenue. Unlike the 1930s, central future growth in a sustainable way? 4 COVID-19: Stimulating the War gaming for banks around the world stepped in to keep credit flowing through economy and employment: As business during measures such as “quantitative easing”. jobs crisis deepens, ILO warns turbulent times of uncertain and incomplete labour market recovery 03 Growth in Turbulent Times Why is revenue growth important? Figure 2: Growth performance It is common cause that markets reward companies for sustainable growth but mercilessly punish those that don’t grow. Research indicates that well over 70% of Total Shareholder Returns5 are Fast Performance Growing contributed by revenue growth. A significant part of a company’s R seners enhanin rowth G in (Growing fast, (Consistently strong in A turbulent times market capitalisation is driven by the market’s expectation on growth C x need to both revenue growth t 2 e turn profitable) and ROA) achieved through investments yet to be made. k r Using an a m adjacent growth h Figure 1: Growth expectations t strategy during w 21% 6% o turbulent times r rossindustry average e Building a growth nu engine during e Turnaround Mature Environmental v turbulent times e R tarets moneymakers R G (Struggling with (Profitable but A x Consumer Non-Durable C both growth growth t Creating a e 2 and profitability) is declining k Technology r sustainably a advantaged portfolio Consumer Services m 62% 11% Capital Goods Leveraging lazy balance sheets in Transportation < 2 x 2 x turbulent times median ROA median ROA Consumer Durable Accelerated Basic Material Return on assets2 growth in turbulent times Financials The research further showed that 87% of Fortune100 and Global 100 companies hit some type of growth stall. Of these, 54% Energy and Utilities experienced growth failures and posted slow to negative growth Strategic sensing during 0% 20% 40% 60% during the 10 years after the growth stall occurred. By far the majority turbulent times of the reasons that led to the growth stall in the first place were within Future growth expectation as % of market cap management’s control. Leading in Over the period of 1987-2005, Deloitte researched close on Start with a growth target turbulent times 5 000 companies in the USA to establish patterns for growth and Every journey must start with a destination in mind – so too the growth critical success factors. What we found was that companies that attain journey. Establishing the right growth target is difficult and requires Managing risk in critical mass (more than R3.5bn) have a greater chance of surviving bold leadership. The target should not be a thumb suck, but it should turbulent times than smaller companies. Of the companies that survived over this also not just be an extrapolation of historical achievements. Rather, period, only 27% experienced high growth that is two times that it should emerge from the interplay between internal and external War gaming for of market CAGR. But significantly, only 6% achieved performance factors and expectations. The target is critical to galvanising the business during enhancing growth over a long run that is growth that also improves the organisation and creating the momentum and excitement needed to turbulent times 5 Boston Consulting Group bottom line and key performance metrics. start the growth journey. Research 04 Growth in Turbulent Times Install a scalable and repeatable process As illustrated in Figure 3 below, there are three sources of In a period of inward focus such as that brought on by COVID-19, growth – core, adjacent, and new opportunities: getting back to growth requires a systematic process and organisational structure designed specifically to help companies Figure 3: Sources of growth Growing sustain long-term growth. It is not a short-term, one-off solution, but in rather a comprehensive approach to building “internal muscle” to Protecting the current business; Creating the future business; turbulent times deliver consistently against growth targets. This requires executive typically more certain typically less certain Using an Levels of uncertainty support and alignment in addition to a clear commitment to achieve adjacent growth the growth target. strategy during Core Adjacent New turbulent times A key success factor is to establish appropriate governance processes Building a growth upfront. Experience has shown that getting the governance right is the engine during single greatest contributing factor to success for any growth strategy. turbulent times Cast the net wide Creating a sustainably While there is no doubt that many growth ideas can be sourced advantaged portfolio internally, organisations need to cast their nets wide in order to source new revenue growth opportunities. Insights from competitors and Maximise profitable Utilise existing assets Develop new assets growth from the and capabilities to and capabilities to Leveraging lazy peers together with an understanding of market trends are important balance sheets in for growth opportunity sourcing. These opportunities could also be existing set of stretch the boundaries create new markets, turbulent times sourced from adjacent or emerging industries. products, customers, of the existing shift the basis of channels, and business outward competition or address Accelerated geographic markets non-consumption growth in turbulent times Strategic sensing during turbulent