Businesses need a strategic pivot as a great value migration improves

The call to re-imagine business strategies has come from the Great Migration of Price – which has been happening since 2015 but has accelerated more than 10 times since the start of the pandemic – toward companies and business models that use disruptive technology. and use customer-centricity in an agile way. To leapfrog your competitors.

McKinsey’s research shows that of all the market capitalization gains seen so far just before the start of the pandemic in February 2020, 25 global firms (calling them the ‘mega 25’) have captured up to 40%. All value migration benefits. For example, electric vehicle (EV) maker Tesla, one of these ‘mega 25’ companies, now has a market capitalization equal to the combined market capitalization of the next 10 largest global automotive manufacturers.

Price migration is also a reflection of rapid divergence in companies’ operating performance, both across sectors and within most of them. Even before the pandemic, the top 20% of companies globally with economic profit (defined as the net absolute value created by a company after cost of return of capital) have been slowly moving away from their peers since 2015.

Will the Great Value Migration Continue? Only time will tell, but one of the key indicators – where funding comes from institutional private equity and venture capital (PE/VC) investors – confirms that these funding flows are indeed in favor of sectors where price migration benefits. are higher. These include tech-intensive companies in software and SaaS (software as a service), pharmaceuticals and biotechnology, financial technology, energy transition, logistics and consumer products/services that are pulling the lion’s share of such funding. . At $165 billion, SaaS alone accounted for 17% of total capital inflows from global PE/VC funding.

In a recent McKinsey survey to understand the drivers of productivity that companies will take action between 2020 and 2025, executives cited automation and technology, business restructuring and agility, and the adoption of digital channels as the main drivers of productivity gains. Gave. Our sector analysis shows that a pivot towards sustainable business strategies could unlock real productivity growth of approximately 1.5 to 3.0 percentage points per year over the next five years.

As chief executive officers (CEOs) step back to craft strategies and transform their organizations, the five elements of the ‘pivot’ become clear.

First, increase digital customer reach and engagement, often using the data thus generated to bring new offerings and commerce to them – i.e., ecosystem, omni-channel, direct-to-consumer mode of operation and ownership of customer data. Consider it. Significant value has shifted to the digital ecosystem and several major Indian companies have already taken steps to build such a digital ecosystem. For example, a healthcare company has built India’s largest omnichannel healthcare system—and fastest growing health-tech platform—with over 6.5 million registered users. It provides customers with the opportunity to develop and promote more personalized products and services, including personalization at the individual level, continuity of the customer experience across channels and customer journeys.

Second, get to the right side of the fixture. There is no hiding place after CoP-26 – ‘net zero’ is likely to come up for every country and its firms – and active movers are likely to be rewarded the most. Our global research shows that corporates with higher environmental, social and governance (ESG) performance show better financial performance as well as higher valuation multipliers of up to 10-20% and better funding availability. ESG projects, particularly focused on decarbonization, circular products and packaging, water/waste management, hydrogen and so forth, are projected to generate $5 trillion in addressable market value by 2025. The value from embracing ESG also extends to retaining and attracting talent as they experience a sense of purpose at the workplace.

Third, embrace the power of the cloud as a real value creator with the potential to deliver huge profits in sectors such as high-tech, oil and gas, retail and healthcare, insurance and banking. Cloud and digital technologies are now seen as strategic differentiators and value creators across the organization – from research and development to logistics and sales and marketing – and are an intrinsic part of boardroom discussions. Our research estimates that by 2030, only Fortune 500 companies will have more than $1 trillion in better earnings before interest, taxes, depreciation and amortization (EBITDA).

Fourth, build speed and agility as a muscle. During the pandemic, many companies were forced to move quickly to optimize their operations. Now, this momentum needs to be woven into the design of an outfit. Companies must anticipate future demand changes and be prepared to re-imagine their entire commercial and operational models with due agility. There are three aspects to consider when building for speed: rethink working methods (for example, by configuring agile squads to accelerate decision making), redesign non-hierarchical structures (a Through empowering teams that leverage hybrid work models, by example), and reshaping the talent pool (fielding the leaders of tomorrow and fostering a culture of learning and growth).

Finally, companies should envision partnership ecosystems that enable them to remain asset-light, without owning every piece of the value-chain. Many of India’s fastest growing digital-native companies have built an exceptional partner ecosystem to enable asset-light approaches. Large companies should also rebalance their capital allocation to develop and build alternatives that can foster resilience.

India offers a tremendous opportunity for its companies to grow and create value in the coming decade. Adopting the five elements of the ‘pivot’ outlined towards sustainable business strategies can enable positive value migration as companies move their way forward.

Rajat Dhawan is India’s Managing Partner, McKinsey & Company