During the COVID-19 crisis, resilience rose to the top of the strategic agenda, and many leaders also indicated a desire to extract lessons to increase preparedness for future crises. Our research indicates that resilience, although less emphasized in stable periods, creates significant value and does so well beyond times of crisis. Nearly two-thirds of long-run outperformers do better than peers in response to shocks.
Crises often precipitate or accentuate the need to transform because of the immediate pressure on performance. Crisis-driven transformations often aim to ameliorate performance pressure by increasing cost and asset efficiency. But what is their impact on resilience and long-term performance? And how can companies transform for not only efficiency but also resilience?
To better understand the impact of large-scale change programs on building resilience, we applied an evidence-based approach to study more than 1,200 corporate transformations over the past 25 years. The evidence indicates that roughly half of corporate transformations fail to improve resilience in response to future crises. The same dataset also offers valuable insights into how some companies successfully transform for resilience.
MEASURING THE IMPACT OF A RESILIENT TRANSFORMATION
To study the success factors of a resilient transformation, we must first quantify the total value created by resilient companies in response to crises. Our past research has identified three stages during which resilience creates value relative to peers:
- First, the immediate impact can be lower than that on peers because they better absorb the shock.
- Second, they can have higher recovery speeds by rapidly adapting to new circumstances.
- Finally, they can have a greater recovery extent (in the 12-month period following a shock) by reimagining their business to flourish in new circumstances.
Cumulatively, the relative performance (TSR benchmarked to industry median) across all three stages is the total value of resilience displayed in response to a crisis.
To measure the impact of change programs on resilience, we have studied the difference in total resilience in response to industry shocks during the five-year period following a corporate transformation. While roughly half of transformations fail to improve resilience, a significant spread in outcomes exists. The top quartile of resilient transformations improved performance relative to industry by 25 percentage points (pp) in response to future crises, while the bottom quartile saw a decline of 20 pp.
What can we learn from the outperformers?
- Growth acceleration is the main driver of a resilient transformation. Whereas large-scale change programs, especially crisis-induced ones, typically target cost reduction, differential growth contributes most of the incremental value created by resilient transformations. Transformations that accelerate growth improve performance relative to industry during each stage of future crises (+6 pp total impact on average), while transformations that only reduce costs see future resilience decline.
- Transformations that reduce debt and increase flexibility improve resilience. Transformations that reduce debt loads improve the ability to cushion the initial impact of a future shock. Furthermore, transformations that reduce fixed asset intensity boost adaptivity and recovery speed by shifting costs toward variable expenses. Growth transformations that do both increase the odds of improving resilience from half to nearly two-thirds and yield an average change in TSR performance relative to industry of +10 pp in response to future crises.
- Transformations are empirically less likely to build resilience when a crisis is no longer fresh. If history is any guide, resilience now risks losing its spot on the corporate agenda as the performance of economies and companies recover. Immediately following a crisis, transformations are 19% more likely to be growth-oriented and 20% less likely to increase debt than those at least 12 months removed. However, our research shows that allowing resilience to fall off the change agenda would be a mistake. In today’s dynamic business environment, resilience has benefits across the whole economic cycle.
GROWTH DRIVES RESILIENT TRANSFORMATIONS
Our past research indicates that transformations often aim primarily at reducing costs. While this may improve performance in the short run, on average it does not lead to greater resilience in future crises. In contrast, transformations that accelerate growth, in aggregate, improve total resilience by 6 pp, while those that decelerate growth, on average, fail to improve resilience.
While growth transformations succeed in improving performance relative to industry during each of the three stages of future crises, nearly half of the improvement manifests in the extent of future recovery. In this third stage, after the recovery has taken hold, companies begin to reimagine their products and business models to thrive in the altered circumstances resulting from the shock. Growth-oriented transformations create significant advantage in this period by building the capability to spot and capitalize on new growth opportunities.
For example, Nvidia’s 2015 corporate transformation restructured operations toward strategic growth areas in deep learning, automated driving, and gaming. Following the transformation, Nvidia doubled its growth rate over the next 12 months to 26%. With the semiconductor industry recovering to prepandemic highs in June, Nvidia once again shifted its strategic focus to identifying new growth drivers. In June 2020, the organization announced a partnership with the Daimler AG unit Mercedes-Benz to build software-defined computing architecture for automated driving and in April 2021 unveiled the company’s first data center GPU. Having previously performed in line with peers during postrecovery periods, Nvidia has thus far outperformed industry peers by 11 pp in the COVID-19 recovery.
By Martin Reeves, Lars Fæste, and Tom Deegan
Read the full article at https://www.bcg.com/en-mx/publications/2021/transform-for-resilience-in-good-times.
