Growing Beyond-How High Performers Are Accelerating Ahead

7/29/2019 Growing Beyond-How High Performers Are Accelerating Ahead

1/40

Growing Beyond

How high performers areaccelerating ahead

Growing Beyond


2/40

In this report

Executive summary 2

Adjusting to the new reality 4

Customer reach: Getting closer but looking beyond 10

Operational agility: Moving quickly in a customized world 16

Cost competitiveness: Finding the right balance 22

Stakeholder condence: To inform, to explain, to engage 26

Conclusion 32

Further reading 34

About this report 36

The benchmark ndings for this report are drawn from a study undertaken in August

and September 2012 by the Economist Intelligence Unit (EIU), surveying 1,500

C-suite, board directors and senior managers from around the world.

As with our earlier studies, we have factored out the impact of sector and distinguished

between the highest and the lowest quartile of performers in both revenue and

EBITDA growth to see if we can identify specic patterns of action that might explain

the difference in performance.

Source for all charts: EIU panel survey, AugustSeptember 2012. All charts show

percentage of respondents.


3/40

1Growing Beyond How high performers are accelerating ahead

Growth has become the magic word for both business and government. Taken for granted

in the pre-crisis years, the rst bite of the credit crunch in 2007 ushered in an age in

which growth has proven frustratingly elusive to many, rather than few. While no business

is immune to the health of the wider economy or its market, some companies have

continued to prosper, even thrive, during the most difcult conditions of recent years. And

the difference between these high performers and others is becoming more and more

pronounced.

What is it that high performers are doing differently?

What are the lessons that all businesses can learn?

These are the key questions addressed by a series of studies conducted by Ernst & Young

since 2008, with a view to providing practical insights to help our clients navigate the

harsh economic terrain. Our rst study showed how high performers were proactively

reacting to the rst wave of the credit crunch by seeking out Opportunities in adversity.

In 2009, we built on this with a study that analyzed the Lessons from change. In early

2011, we explored how the high performers were Competing for growth by adopting new

strategies for new markets and new products, and taking new approaches to managing the

talent that is essential to achieving their goals. Later in 2011, we returned to this theme,

analyzing how high performers are Growing Beyond, drawing out key lessons on how theywere growing beyond their competition by increasing their customer reach, operational

agility, cost competitiveness and stakeholder condence.

One year on and we test the water again.

What has changed since our last survey?

As we present this latest report in our Growing Beyond program, we would like to thank

all the business leaders from around the world and Ernst & Young professionals who have

taken the time to share their insights with us.

How high performerscontinue to grow beyond


4/40

2 Growing Beyond How high performers are accelerating ahead

Executive summary

Accelerating ahead

of the pack

Ever since the onset of the global economic crisis, Ernst & Young has surveyed C-suite, board

directors and senior managers in large organizations to nd out how they run their businesses.

Our objective is to nd out what it is that high performersare doing differently and set out the lessons that other

businesses must learn if they are to emulate them.

The latest survey ndings enable us to gain a fresh insightinto decision-making in boardrooms across the world and

draw some key new conclusions.

Ernst & Young has identied four factors that drivecompetitive success in todays global economy: customer

reach, operational agility, cost competitiveness and

stakeholder condence.

This is how high performers are using these drivers to help them pull away from the competition:

Customer reach

High performers are more outward-looking and focused

on the market.

They seek deep understanding of their customers demands andexpectations and are increasing marketing spend to attain this.

They focus on nding new markets for existing products and

services. High performers are nearly three times more likely

than low performers to generate sales in new markets.

They plan more carefully when entering new markets. They

identify a clear demand for a current product or service, and

assess the scale and growth projections of that market.

They prioritize innovation. Nearly twice as many high performers

as low performers generate more than 10% of their sales fromproducts or services developed in the past three years, focusing

on incremental innovation of new products for current customers

and current products for new markets.

Operational agility

High performers respond smartly to change but,

more importantly, respond speedily.

They understand that the risks of being rst to market arebeginning to outweigh the opportunities, but that speed of

response is always critical.

High performers continue to accelerate, while low performers

are reaching the limits of their organizational capacity to

respond.

They understand that consistency can have a market cost that

outweighs its management value. It can reduce their ability to

respond to an increasingly varied and volatile world.

They adapt exibly to fast-changing circumstances, by deployingtechnology, devolving decision-making and enhancing the skills of

their workforce.


5/40


Key ndings

1 High performers aremore outward-lookingand focused on the market.

2 High performers respondsmartly to change but,more importantly, respond

speedily.

3 High performersunderstand what drivescost and what drives value.

4 High performers engagemore with stakeholdersand unleash their talent.

And the difference between high performers and the rest is becoming more and more pronounced.

Customerreach

Operationalagility

Stakeholderconfidence

Costcompetitiveness

Focus onkey segments

Createflexiblework/delivery

platforms

Acceleratespeed of response

Improvecollaboration

Optimizecapital

Masterinnovation

Sustain costreduction

Informpricing process

Pass oncost pressure

Prioritizemarkets

Reinforcebrand

Broaden product/service offer

Identify andexplain risks

Re-engage withinternal talent

Anticipateregulatory compliance

Enhancereporting

High

performers

seek ...

Figure 1: High performers are ahead with respect to how they:

These are just some of the actions

that divide higher-performing

companies and their lower-

performing competitors. With the

shadow of the economic crisis

continuing to cross large parts of

the global economy, businesses

of all sizes and markets have a

duty to constantly evaluate their

performance.

Examining how they execute

against these four key areas

customer reach, operational

agility, cost competitiveness and

stakeholder condence is animportant starting point.

Cost competitiveness

High performers understand what drives cost

and what drives value.

They are externally focused on value-creation and opportunity.They place more emphasis on customer segmentation and

market analysis. High performers recognize that understanding

what customers need, what they expect and what drives them is

crucial when determining pricing strategies.

Because they understand their customers, high performers can

be more condent about increasing prices.

They know the difference between eliminating waste and simply

cutting cost. They identify the actual organization-wide costs

involved in supplying their service or product.

High performers focus more on efciency than on reducing

headcount. Just a quarter of high performers have reduced

headcount, compared with 43% of low performers.

Stakeholder condence

High performers engage more with stakeholders and

unleash their talent.

High performers seek to make the value they create visible totheir external stakeholders and have signicantly increased

both the scope and frequency of reporting.

They understand that future success is global and value the

ability to lead effectively in a global business environment. They

offer their talent opportunities to operate internationally and see

access to talent as a reason to enter rapid-growth markets.

High performers place a greater focus on the individual. They

place greater emphasis on linking pay with performance and

providing customized development.

High performers unleash their talent onto the market by

devolving decision-making as far as they can and rene roles

and job descriptions to make them more exible.


6/40

4 Growing Beyond How high performers are accelerating ahead4

Adjusting tothe new reality


7/40


We may not yet have seen the

worst

It is now over ve years since the start of the

global nancial crisis. The shocks of 2007 and

2008 heralded what is already one of the

longest periods of economic retrenchment in

history. While governments, markets and people

long for a period of stability and recovery, all

must face up to a stark possibility:we may not yet have seen the worst.

At least, that is the main conclusion from our latest study of how

high performers are surviving and indeed thriving in the new

economy. Of our 1,500 respondents, 83% predict that their market

will become more competitive over the next two years. Indeed,

this rises to 91% for our high performers, whose success we have

shown to be largely dependent on a deeper understanding of

market trends and customer demands. Looking ahead, these high

performers see difcult times our study suggests that they too

are beginning to struggle to grow beyond the parameters of theeconomic crisis in which the world is engulfed.

They are right to be concerned. The developed world struggles

under a mountain of personal, corporate and sovereign debt that

has reached proportions that can no longer be passed from current

generations to the next. Democratic governments struggle to nd

credible solutions that they can persuade their electorates to back.

And the corporate world seems to be increasingly polarized into

those who cant take action through lack of capital or opportunity

and those who wont, for fear of what lies ahead.

Even the rapid-growth markets have not escaped the fragility ofthe global economy. Economic expansion in 25 leading rapid-

growth countries has slowed sharply since the beginning of this

year, according to Ernst & Young's October 2012 Rapid-Growth

Markets Forecast. Our forecast for 2013 growth has fallen by

about a sixth to 5.3% this year.

Time, it is said, heals all woes, so eventually it is expected that

the global economy will recover and return to health. But is there

something that management should be doing rather than simply

watching the clock?


8/40


Adjusting to the new reality

The new normal year ve

Our research and work with clients continues to conrm four key features that characterize

the new economy. They seem to be shaping the market in which we all compete and drivingincreased competitive intensity. These features are market variation, increased volatility,

growing cost pressure and deep uncertainty.

Market variationThe new economy is more varied than the old. We are competing

in a multi-speed world in which variation between countries and

sectors has never been greater. Indeed, this variation goes beyond

countries and sectors to regions and segments. For example, the

gap in economic performance between members of the European

Union is considerable: the ratio between Greece and Germany

currently stands at 1:1.3. However, the gap in performance

between the 29 states that comprise India is much greater, with

a ratio closer to 1:5. With growing customization and variable

performance, the fragmentation of markets into myriad niche

segments will continue.

VolatilityAnother enduring feature of todays interconnected market is

its volatility. Stock market indicators of volatility, such as the

VIX Index, seem to have settled down in recent months compared

with the past ve years. But this is more a signal that the market

is beginning to make a permanent adjustment to volatility

rather than heralding a new period of stability. Indeed, someare arguing that as the consumers of the rapid-growth markets

play a bigger role in the global economy, cyclical volatility has

inevitably increased.

Cost pressureAs consumers and governments rein back their expenditure,

and as borrowing to buy becomes harder, there is undoubtedly

a greater cost consciousness in the wider economy. At the same

time, however, the costs of many commodities continue to

rise. Thus margins are squeezed. In developed markets, many

employees are now enduring a fourth or fth year of below-

ination pay-rises. This prolongs the downturn through dampening

demand. In rapid-growth markets, however, wage ination is

becoming a major issue that threatens their competitive advantage

if passed to end users and their prot margin, if not.

UncertaintyIn the past 12 months, any global board looking to manage

strategic risk will have increased the weight it attaches to major

strategic threats. These threats include the break-up of the

Eurozone, the debt-default of the US, international conict in the

Middle East and a major political or economic incident in one of the

BRIC countries. Not surprisingly, perhaps, boards with cash prefer

to preserve their options to choose, rather than choose wrongly.

Similarly, within companies, employees remain uncertain about

their economic security or their economic prosperity. Consumer

condence is low. Employee engagement is strained.


9/40


A gap becomes a growing gulf

Five years after the start of the global downturn, many companies continue to struggle certainly

more than we would have expected at this stage in previous recessions. But a growing number aredemonstrating that they have learnt to master the new economy and are pulling ahead.

When we started this program in 2008, we asked companies to

say where they were focusing their efforts: from securing their

very survival, through to taking advantage of the market to

pursue new opportunities. We can see that, while the number in

crisis has fallen over the past four years, it continues to be very

signicant. The number of companies feeling defensive about their

current position has declined, but still accounts for one in ve

companies. A sizeable group are now actively seeking to either

improve performance from their current assets or restructure their

operations. But the biggest increase has occurred in the group whonow believe they can take advantage of market opportunities.

There is some variation across different regions of the world in

how companies view the market. The US and Asia-Pacic show

the biggest increase in the number of companies who believe they

can pursue opportunities. They also, however, show the biggest

increase in the number of companies in trouble. This suggests an

increased polarization of performance. The gap is growing.

Moreover, this emerging polarization in performance seems to hold

true across all major sectors. In none of the 13 sectors that we

have examined was there a material difference, except in miningand metals and private equity, where the pattern is comparable.

0

10

20

30

40

50

60

70

80

Securing Protecting Improving Restructuring Pursuing

Total

Private equity

Mining and metals

Other sectors

% significant increase and increase

Figure 3: Change in the importance of business activities (sectors)

Q: Over the next 12 months, what change do you expect in the importance that your organization attaches to the following activities? (Five-point scale)

Securing the survival of yourexisting business

74

Protecting your currentbusiness/assets 40

Improving the performance ofexisting business/assets 39

Restructuring the business tomeet new conditions 37

19Taking advantage of the situation topursue new market opportunities

65

22

30

23

26

-9

-18

-9

-14

+7

2008 2012 2008-12

65

22

30

23

26

Figure 2: Change in the importance of business activities

Q: Over the next 12 months, what change do you expect in the importance that your organization attaches to the following activities? (Five-point scale)


10/40


Adjusting to the new reality

Staying ahead of the pack

We asked respondents to choose up to three factors that would determine their future

competitiveness over the next two years.

In general, the response to our survey

suggests an increasing focus on the

market, a continued focus on optimizing

costs and a growing focus on talent and

internal engagement. High performers,

however, focus more on customer reach

issues and human capital, while others

focus more internally on optimizing costs

and improving organization. These are

only differences in emphasis. Our key

overall nding is that optimal performance

requires a balance across all dimensions.

Care always needs to be taken when

aggregating results. In seeking the macro

pattern we must not lose the micro insights.

Sectors vary greatly in the weighting placed

on sources of competitive effectiveness.

The facing page maps high performer

versus low performer responses for 12

sectors. Each sector shows differences in

how high performers see the competitive

challenge compared with their competitors.

Customer reach is an area of major

difference in 9 of the 12 sectors. In 4 of

the sectors this is based on seeking

deeper customer relationships. In 7, the

difference is based on innovation and, in

8, based on market expansion.

Cost competitiveness is the second

area of focus, with branding non-price

competition the major area of

difference for ve sectors. Cost

optimization is seen as important for all

the sectors, but is much important for

the high performers.

Stakeholder condence is seen as less

important by most sectors, but it is an

area where the difference between high

and low performers is most material

especially in the area of talent.

Operational agility is seen as the least

important area for focus, with the

exception of technology. For ve sectors

this is a key area of high performance

focus.

Figure 5: Critical factors for competitiveness all respondents

Customer relationships

Market expansion

Brand

Cost optimization

Sustainability

Talent

Stakeholder relationships

Regulatory risk

Agility

Technology

Innovation

High performers

Low performersStakeholderconfidence

Operationalagility

Costcompetitiveness

Customer reach

40% 50% 60%


11/40



Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation


Market expansion

Brand

Cost optimization

Sustainability

Talent


Regulatory risk

Agility

Technology

Innovation

Automotive

Insurance

Mining and metals

Power and utilities

Banking and capital markets

Life sciences

Oil and gas

Real estate

Consumer products

Media and entertainment

Private equity

Technology

High performers approach the world differently


12/40


When asked what factor was most critical to their

companys competitiveness in the next two years,

high performers said deepening their relationship

with customers, while low performers said cost

optimization. There, fundamentally, is the crux of two

very different management approaches: one focused

on the market, the other on the operation. Both are

clearly important and necessary within an organization,

but our research suggests that high performance

is fundamentally driven by the predominance of a

markets model.

Customer reach

Getting closerbut looking beyond

What we learnt before

High-performing companies have been entering newmarkets by:

Taking care when expanding across borders they

maximize their growth potential at home rst and expand

only after carefully assessing opportunity, cost and risk.

Developing new markets and creating additional value

from current products new products for new sub-

segments or new opportunities for existing assets.

Adopting increased caution high performers are less

likely to slow themselves with internal consultation andmore likely to consult external stakeholders.

High-performing companies have been approachingproduct development by:

Carefully selecting customer segments that allow them to

create long-lasting competitive advantage.

Recognizing the value of innovation they are ahead in

utilizing their planning process to drive innovation.

Listening to their employees recognizing their

expertise in products and spotting new client needs.


13/40


Meeting a moving target

Targeting and satisfying customer needs

Its a simple aim, but its easier said than done particularly

in todays volatile market. Shifting economic terrain, as well

as ongoing macro-trends, such as globalization and sweeping

demographic change, mean that customer needs remain in

a state of ux. Only those organizations that possess a deep

understanding of customer demand and expectations will manage

to match their service or product with demand. The process of

marketing in which companies seek to shape choice to better

align demand and supply has risen as a focus area, especially for

high performers.

Existing clients remain the focus of most companies when they

are seeking new sales. Gaining a deep understanding of customers

and a close relationship with them is well-documented as a fruitful

area of focus when looking to reduce costs. It is the top success

factor among all categories of respondent. However, while it is still

very important, it has now been supplanted as the top response

of high performers. They now list nding new markets for existingproducts as being the most important area. These new markets

could be new geographies or new segments in existing geographic

markets.

The process of understanding and responding to changing market

demands is rising fast up the corporate list of priorities. The need

to invest more in marketing as a consequence, and to consider

adapting products, services and delivery methods for new markets,

is recognized more by high performers than low performers.

Similarly, the trade-off between growing volume and growing value

shows that high performers are over 50% more likely to increase

price than low performers and almost 40% less likely to cut price

to grow or protect volume.

We have not previously focused on non-organic routes of growing

revenue, through acquisition or merger. This is because, when they

prove successful, these routes can normally be seen to have driven

the faster attainment of a strategic goal already covered by the

framework. It is noticeable, however, that from parity in response

rates, we now see a much greater difference in the response of

high and low performers. High performers are now 40% more

likely to be considering merging with or acquiring competitors to

increase market share. This wave of sector restructuring has been

anticipated for some time. Interestingly, however, the responsesuggests that it covers all sectors, with no particular sector

standing out as more or less active.

High performers Low performers Gap: high vs. low Total

Develop new geographic markets to sell existingproducts/services

Introducing new products and/or services to meet evolvingneeds of existing clients or to attract new customer segments

Broadening existing product/service range to develop newcustomer segments in existing geographic markets

Increased investment on marketing and sales

Adapting existing product/service offerings for newgeographic markets

Opening new distribution channels/reorganizingto address markets through multiple channels

Merging with and/or acquiring competitors toincrease market share

Increasing prices

Cutting prices

58

57

51

42

38

36

35

19

13

39

49

39

33

30

35

25

12

21

48

53

46

37

33

39

31

14

15

+19

+8

+12

+9

+8

+1

+10

+7

-8

Figure 6: Actions taken to increase sales

Q: Which of the following actions is your company taking to increase sales?


14/40


Customer reachGetting closer but looking beyond

On markets

Successful pioneers need a plan

Market expansion is a key feature of high performers strategies

and their top priority in developing sales. Essential though the

rapid-growth markets may be for the future, investing in other

developed markets seems to be at least as important. We may be

in the middle of a major rebalancing of the global economy, as

rapid-growth markets increase their market share, but today and

indeed for the next decade developed markets will continue to

account for over 50% of global demand and a signicantly higher

proportion of prot for companies.

A third of high performers have over 10% of their sales generated

in markets entered in the past three years, compared to 13% of low

performers. Apart from oil and gas, this is true for all sectors.

When asked to identify the developed countries on which they

should place their corporate bets, both high- and low-performing

survey respondents opted for the US. This is not surprising,

given the size of that market and its comparative resilience to the

wider global economy. Europe, however, performs less well, with

only 4 of the top 10 national markets. The rapid-growth markets

show, as expected, that the BRIC countries dominate, with China

increasingly pulling ahead as the major focus. Of note, however, is

the particular focus that high performers are placing on Brazil.

But care needs to be taken with simple lists such as these: behindthe gures lies considerable regional variation, as we have shown

before. Attractiveness is shaped by perspective, which in turn is

often inuenced by proximity. High-performing companies in the

US, for example, are far more likely to see most potential in their

domestic market, followed by other Anglo-Saxon markets, such as

the UK and Canada. Asia-Pacic based companies are more likely

to favor their own region (including India), while the preferences of

European companies are the most broadly spread. Ironic perhaps

that, through history rather than intent, European companies are

by some margin the most global in their spread of operations.

Certainly, there is little doubt that market opportunities exist

even in the current economic environment. Although global

trade collapsed during the nancial crisis, it has since rebounded

strongly, led by trade among emerging markets. By 2020, world

trade in goods will total around US$35t, two-and-a-half times its

3

28 28

22

63 3

7

39

19

9

21 1

4

37

25

14

31 2

0 % 1%5% 6%10% 11%20% 21%30% 31%50% Above 50%

High performers Low performers All respondents

Figure 7: Proportion of sales generated in recentlyentered markets

Case study: PCHLiam Casey is the Ireland-born CEO of PCH International.

The China-based supply chain management company is one

of the worlds leading manufacturers and distributors of

smartphone and tablet accessories, working with consumer

electronics brands to produce devices and ship them to

customers around the world.

PCHs base in Shenzhen, China a city with a population of

more than 10 million people that, only two decades ago, was

quiet and provincial has played a crucial role in its growth

story. Casey began his Chinese odyssey in 1995, leaving

his home in Cork, Ireland, to follow the example of a friend

who had been making a good living from importing Chinese

hardware into the US. After ying to Taiwan to attend a

trade show, Casey started his own business importing cables

from Shanghai to Cork.

Casey says that PCHs success as a start-up in China

depended on making processes as straightforward and

understandable as possible. The big challenge was to take

confusion out of business, so we had to keep things simple,

he says. Consequently, as Western businesses interest in

China grew, PCH was ideally placed to help them nd a clear

route into the Chinese manufacturing sector.

Source: Exceptional, Ernst & Young, 2012. Article author: Christian Doherty.

Q: What proportion of your sales is generated in markets which your organization/

company has entered in the past three years?


15/40


Developed markets

51

34

22

19

16

16

15

11

10

6

US

UK

Germany

Singapore

Australia

Canada

Japan

France

Hong Kong

Norway

High performers

40

31

28

14

14

12

14

14

8

4

Low performers

+11

+3

-6

+5

+2

+4

+1

-3

+2

+2

Gap: high vs. low

Rapid-growth markets

43

32

31

19

11

11

10

9

8

8

China

India

Brazil

Russia

South Africa

Indonesia

United Arab Emirates

Saudi Arabia

Poland

Singapore

High performers

37

29

20

21

8

7

3

11

10

9

Low performers

+6

+3

+11

-2

+3

+4

+7

-2

-2

-1

Gap: high vs. low

Figure 8: Top potential markets over the next ve years

Rapid-growth markets are driving

global growthRapid-growth markets are becoming ever more important.

They have grown on average by 5.8% per year over

the last decade, more than three times as fast as the

advanced economies combined. But, importantly, their

future potential is only now becoming clear. Continued

industrialization and urbanization, along with strong

population growth and the emergence of a substantial

middle-class, will further encourage their expansion.

Although there has been a slower rate of expansion this

year, a return to signicant growth is likely from 2013.

Soaring domestic demand will offer businesses exciting

new markets for goods and services in the years ahead. For

example, in 2011, two-thirds of consumer spending across

the world came from the advanced economies. But in 25

years time, Asia alone will have overtaken them as the

largest source of consumer spending, at almost 40%.

This level of demand will ensure that rapid-growth markets

eventually replace the advanced economies as the key

driver of global growth, and the shift in import demand

should also assist in rebalancing the global economy.

For further information, see the latest edition of

Ernst & Young's Rapid-Growth Markets Forecast.

value in 2010, according to Ernst & Youngs 2012 report, Trading

places: the emergence of new patterns of international trade. At

the same time, world trade in services will double to around US$6t.

As new regional trade agreements are reached, companies will be

assisted by lower trade barriers as well as falling global transport

and communications costs. This will enable organizations to market

their products around the world and coordinate with suppliers in

other countries.

Increased fragmentation demands more planning

High performers seem to have a more developed plan for their

market-entry strategies than low performers. Their decision to

enter a developed market is based on identifying a clear demand

for a current product or service, supported by the scale and growth

projections of that economy. For them, quantitative demographicsand income per capita analysis is not enough. A potential move

into new markets also prompts them to consider factors such as

purchasing behavior, the power of local brands and changes in

attitude and consumer behavior.

The increased variation in performance has resulted in a more

fragmented market. Take Europe as an example. The ongoing

problems of the Eurozone should not overshadow Germany, whose

consistently robust economic performance has continued, even in

recent years. But a closer analysis reveals that some German regions

particularly in the west of the country are vastly outperforming

other regions, mainly in the east. Market segmentation is deepeningand businesses dont now necessarily want to serve a whole country.

Instead they prefer to target a specic segment of a country.

Q: Which of the following developed/rapid-growth markets holds the greatest potential for your company over the next ve years? (Select up to three)


16/40


Customer reachGetting closer but looking beyond

On product

Matching customers evolving needs

Developing or adapting products or services holds the key to

creating new revenue streams. Over half our respondents say

that selling new products to existing customers is their primary

source of increased sales particularly in banking and technology.

A further 33% report that they are adapting existing products for

new markets, with life sciences and technology, again, in the lead

(see Figure 6, page 11).

One of the major drivers of change continues to be the impact of

technology. Digital technology now allows for both more focused

communication and consequent customization than ever before.

Customers can search more widely for their specic requirements

and are much less willing to compromise than before. Marketsegments are constantly being redened by the "know it all, want

it all consumer." Moreover, while this started in consumer markets,

it now affects the way people interact with government and utilities

and how businesses interact with each other.

As explored in a recent Ernst & Young study This time its

personal: from consumer to co-creator digital technology is

driving a revolution in consumer demand. Market segments are

constantly evolving, brand loyalty challenged, communication

channels fragmented and consumers more informed and

demanding. To remain relevant to the new consumer, organizations

must undergo a similarly radical transformation. The implicationsfor businesses are great and include intensifying the dialogue with

customers, making service personal, delivering consistent multi-

channel service and providing an end-to-end brand experience.

Companies therefore need to tailor their goods and services to

match such niche requirements. Segmentation of the customer

base is the foundation for successful innovation, and is the third

most quoted source of increased protability for high performers.

Successful segmentation requires companies to be both quick to

exploit new opportunities and highly innovative in their breadth

of customer offerings. Yet this doesnt happen automatically. The

most innovative companies understand how to capitalize on the

opportunities in their environment. While innovation is important

to all companies, it is particularly important to high performers.

They deem it the second most important factor in determining

future success. Thirty-eight percent say they generate in excess

of 10% of their sales from products or services developed in the

past three years, as opposed to only 21% of low performers. But

getting the balance right is important. The real difference happens

between 11%20% of new products the difference in performance

of companies with over 30% of new products is immaterial.

Our research has found that those companies that embed

innovation into every aspect of their organization are the most

successful. Innovation is not a tactic: it is simply what they do.

Our recent study, Innovating for growth: innovation 2.0 a

spiral approach to business model innovation, suggests a loosely

structured, circular process that allows companies to connect with

the various points of the spiral in different ways and at different

times, ultimately reaching an innovative breakthrough. It sets

out how, for most innovative companies today, innovation is a

continuous cycle with ups and downs, input from different places,

repetition, failure, and many steps back and forth.

Q: What proportion of global sales are accounted for by products developed in the

past three years?

High performers Low performers All respondents

5

26

29

20

9

45

12

46

22

10

4 3 4

6

40

29

13

5

3 3

0% 1%5% 6%10% 11%20% 21%30% 31%50% Above 50%

Figure 9: Global sales generated by new productdevelopment


17/40


18/40


Operational agility

Moving quickly ina customized world


High performing companies have been gaining speedby:

Placing greater emphasis on empowering local-decision

making, as well as the need to encourage employees to

innovate without active management intervention.

Seeking speed from their suppliers and distribution

partners. They are signicantly more likely to be willing to

change both, in order to achieve a faster time to market.

Remembering the importance of longer-term strategicgoals. In most cases, lower performers seem to be working

to a shorter time-frame.

High performing companies have been increasingexibility by:

Organizing around the customer, to ensure that they

remain at the center of their thinking.

Effectively deploying digital sales tools to manipulate

masses of data to customize their response to a specic

client.

Recognizing that proactive human resource

programs may be required to get even good employees onside in the quest for speed and exibility.

There will always be a time lag from the point when

an organization sees opportunities (and threats) to

when it executes its plan of response. How successful

a company is in minimizing this elapsed time is

one of the many factors that separate high and low

performers. But the traditional source of speed has

been standardization of both product and process,

neither of which addresses a new, fragmented market

of dynamically evolving customer demand.


19/40


On speed

Being fast is more important than being rst

Only one person can ever be rst to do something and the record

of commercial success for such pioneers is at best mixed. Speed,

however, matters for everyone. Speed to market. Speed of change.

Speed of operations. These are often the difference between success

and failure. And in todays competitive market, organizations deploy

a variety of techniques to improve this aspect of their performance.

De-layering management to increase the pace of decision-making

is one example. Others include changing supply and distribution

channels to respond quicker to market changes, and seeking

partnering agreements with key suppliers and distributors.

In our previous studies, we found that high performers wereachieving their faster speeds by improving processes, especially by

devolving decision-making closer to the market, as well as seeking

speed from their supplier and distribution partners.

When analyzing the changes in speed to market compared to three

years ago, it appears, however, that while getting faster, the rate

of acceleration is no longer as great as it was. Although 74% of

high performers believe that their organization is getting faster

at developing new products and services, this is 6% lower than in

2011. Low performers are experiencing an even faster deceleration

49% in this survey compared to 61% in 2011. Indeed, the gap

between the two groups has grown.

Three years ago, many companies were in a ght for their very

survival and were under intense pressure to get new products to

market for urgently-required new revenue. Today, with growing

awareness that the road to recovery is long and challenging, there

may be less anxiety to rush a product to potential customers and a

greater willingness on the part of companies to pace themselves in

a more sustainable fashion.

Potentially, however, there is growing uncertainty about the

business environment individual companies face. Recovery is

not happening as planned, leaving some more optimistic playerslooking exposed. The risks of being rst to market are beginning

to outweigh the opportunities. Being fast to respond to a clear

opportunity seems a more efcient approach.

Equally some companies particularly low performers are

reaching the limits of their current organizational response,

having exhausted the incremental performance improvements

that can be achieved without major change to their operations.

The transformation of organizations typically slows the existing

operation down, regardless of the longer-term benets.

The DNA of the COO: time to claim the spotlight

Why is so little known about the role of the COO, despite its

long history? Ernst & Young's The DNA of the COO: time to

claim the spotlight uncovers a compelling story of a wide-

ranging role that still needs to justify its existence, despite

having a clear rationale.

TheDNA of the COO explores the expectations and aspirations

of those in the job, along with the skills, capabilities and

relationships they need to master in order to succeed.What we nd is a breed of executive that combines deep

operational knowledge with broad strategic insight, and who

has what it takes to become the next CEO. Yet we also nd a

role that is fraught with challenges. Successful COOs have to

adapt constantly to a fast-changing corporate and external

environment. They must possess a mastery of change, to

help translate strategic vision into action. And they must

ultimately help the business to innovate and grow.

The average COO is a 48-year-old male. He has typically

been in his current role for six years.

Over half (54%) of COOs have a Masters degree orhigher, although there is no particular qualication that

dominates, given how sector-specic the role can be.

Where companies have a COO role, it tends to be senior

66% of those polled are a member of the executive

committee or board.

COOs are generally very satised with their role, especially

their potential for career development and inuencing

corporate strategy.

Many COOs worry that they may not be sufciently

accepted or respected by other members of the

management team, but their peers do not share thisperception and, in fact, hold them in the highest regard.

Motivation and hard work are seen as the attributes that

have done most to get COOs where they are today.

The DNA of the COO incorporates analysis of two surveys:

a February 2012 pilot study of 200 COOs and an April

2012 survey of another 306 COOs and senior operations

professionals across Africa, America, Asia, Australia, Europe

and the Middle East. In the second survey, a further 43

respondents from across the C-suite were also polled to give

their perspective on how the COO is perceived by the rest

of the management team. You can download the report atey.com.


20/40


Operational agility

Moving quickly in a customized world

High performers Low performers Gap: high vs. low Total

Increased use of technology

Enlarged the product/service portfolioto meet different market needs

Made internal support functionsmore responsive

Improved and/or broadenedworkforce skills

Decentralized decision-making

Made external partnerships

more efficient

Invested in more flexible

manufacturing processes

49

45

43

39

33

33

28

40

35

46

35

30

34

27

37

27

41

30

23

36

22

+12

+18

+2

+9

+10

-3

+6

Figure 12: Actions taken to increase exibility

On exibility

Consistency is a dangerous word

Consistency remains a favorite mantra for management.

Consistency facilitates efciencies in operations and the ability to

deliver a shared brand promise across service, sector and national

boundaries. But, while such consistency at the level of an individualclient may well be essential, there is also a risk that it reduces

the opportunity to respond in an increasingly varied and volatile

world. Indeed, the variation in markets and the volatility of recent

years has demonstrated how vital it is for companies to possess

the exibility to adapt to fast-changing circumstances. New trends,

shifting customer demands and an unpredictable, and ongoing,

nancial crisis are just a few of the reasons why companies need

to be ready to move quickly, whenever necessary to respond to

opportunities and threats.

In seeking exibility, organizations put different emphasis on

different tools, depending on their country of origin. In the US,

for example, both high and low performers place much greater

emphasis on the use and role of technology to achieve this goal.

By contrast, the Europeans stress breadth of product range and

decentralization of decision-making, while companies from

Asia-Pacic show a greater reliance on generating internal

responsiveness and increasing the use of external partnerships.

This may reect the stage of company development, but may also

be indicative of management and local culture.

Comparing actions in pursuit of exibility shows a stark contrastbetween high and low performers. High performers are far ahead

in their use of technology, the breadth of their product or service

portfolio, decentralizing decision-making and enhancing the skills

of their workforce to utilize this freedom. There seems to be a

collection of companies who have overcome the internal inertia of

large organizations and empowered their people to leverage the

organization to commercial success

Low performers, by contrast, seemed trapped in a hostile

ecosystem challenging their partners in the supply chain to do

more and still trying to connect their internal resources to the

harsh reality of the competitive challenge the company faces. The

"control culture" that developed in previous decades, as companies

sought to recreate previous success, has become one of the major

obstacles to competitive success.

Q: Which of the following actions has your company taken to increase its exibility over the past two years?


21/40


Case study: DuPont

When Ellen Kullman became CEO of Delaware-based science

company DuPont at the beginning of 2009, she had to move

fast. Demand collapsed in every country, in every businessoutside of agriculture, in a three-month period, and it was

totally unprecedented.

We literally had to get everybody to stop what they were

doing. Wed review a business, determine what was going on,

and a week later, it would be different.

In her rst few months in the top job, Kullman eliminated

about 4,500 jobs and narrowed DuPonts focus to 13

business lines. And that was just the start. We set out to

further streamline and simplify the company, and we took

out a layer of leadership and got really clear on what success

looks like coming out of the recession, says Kullman.

That clear view of the business began immediately after

she became CEO. We started within days, she says. If we

used to run a monthly review process, it became a weekly

process, and if a business was running a weekly process,

some months it was a daily process.

The results were nothing short of stunning. Earnings

increased by 23% in the third quarter of 2011, beating

estimates by US$500m.

Source: Exceptional, Ernst & Young, 2012. Article author: Lester Picker.

Taking advantage of technology

Increased use of technology is the most popular way that high

performers seek to improve their exibility. Almost half have

taken this step, compared to 37% of low performers. Compared

with earlier times, when technology was often a source ofstandardization, imposing its requirements on the world,

technology is now uid and multifaceted and provides the route to

far greater customization and exibility.

Take cloud computing, for example. Over the past few years a wide

array of hardware and software services have become available

over the internet. Both consumers and businesses are taking

advantage of the possibilities. Mature sales-force management

services, email and photo editing, and smartphone applications

are just some of the ways in which cloud computing represents

a fundamental shift. And then there is social networking, which

many organizations are now using to promote products and

services, and to communicate directly with their customers. As

cloud adoption becomes more widespread, its ability to help

businesses to become more agile is likely to lead to an increasing

pace of change in all industries worldwide.

But as business moves into the virtual world, and more and more

data is transmitted over the internet and via cloud computing,

the importance of information security grows. Some 60% of

respondents in Into the cloud, out of the fog: Ernst & Young's

2011 Global Information Security Survey believe that their risk has

increased, and only 3% feel their risk is decreasing. It is important

for information security to be strategically aligned with the broader

business agenda and based on an organizations risk tolerance.

This is just one of many challenges facing todays CIOs. The

inuence of information technology on business has grown so

quickly that many IT functions are still struggling to marry their

technical expertise with a new business perspective. In addition

to security issues, there are increasingly complex IT and business

operating models, new regulations and cost-efciency demands.


22/40


Operational agility

Moving quickly in a customized world

Our 2012 report, The DNA of the CIO: opening the door to the

C-suite, found that less than one-in-ve of more than 300 CIOs

polled are members of their organizations top management team.

And just 43% said they participate in strategic decision-making.

In the evolution from providing tactical support for the business

to becoming a strategic partner, CIOs need to align the priorities

of IT to those of the business. CIOs also need to provide wise

counsel, turning information into insights when the business is

seeking to deploy new technology. The need to be faster to market

may encourage organizations to procure and implement new

technologies, but it is vital that they understand the risks that

those new technologies may present.

Companies today are investing in technology for many reasons,

but ve goals stand out: innovating processes to get faster, nding

new ways to engage with the market, developing new products,

reducing costs and increasing exibility. High performers place

much greater emphasis on using technology to engage with the

market and for developing new products and services.

Looking ahead three years, the opportunity to develop new

products and services through technology has risen to be top

priority for all and high performers continue to seek new ways to

engage with the market. They are also putting greatly increased

emphasis on nding new ways to collaborate with third parties.

Given the ongoing technological transformation and the need to

invest to stay competitive, organizations perhaps feel that reducing

technology spending is not a wise course of action at this time.

41

39

37

33

30

26

20

19

34

38

30

38

33

30

16

21

Engaging with and selling to

new customers

Innovating your processes to increase

your speed of response

Developing new products or services

Reducing your operating costs


your flexibility

Reducing your production costs

Improving your reporting

More collaborative environment within

the organization and the supply chain

High performers Low performers

41

36

35

34

27

27

23

13

37

32

32

33

35

25

27

11

Developing new products or services

Engaging with and selling to

new customers


your flexibility


your speed of response

Reducing your operating costs

More collaborative environment within

the organization and the supply chain

Reducing your production costs

Improving your reporting

Today In three years

Figure 13: Objectives of current and future investment in use of technology

Q: Considering your organization's use of technology, please prioritize the objective of your organization's current investment today, and in three years' time.

(Select up to three)


23/40


Case study: Nycomed

In 2010, Nycomed, a privately owned, global pharmaceutical

company demonstrated how a exible, scalable nance

model can drive business value. It did this by introducing theGAIN program, which involved a comprehensive review of

the existing G&A operating model and cost structure for its

European business.

By comparing the ndings of a feasibility study with leading

practices for nance organizations, the following goals were

identied to improve the exibility and scalability of the

nance function:

Move transactional accounting and reporting processes

out of 24 local countries and into four hubs

Move accounts payable to Service Center Europe in Poland

Implement a scanning system and automatic approval for

invoices

Outsource legal statutory reporting to an external service

provider managed by the hubs on a regional level

Strengthen and focus on business controlling processes

supporting the local business to be retained in the local

sites

Ensure the nance role operates as a business partner

close to the local business

Implement SAP as the nancial backbone in nine Eastern

European countries and the UK, to have a Europe-wide

SAP platform

Implement automatic payment Implement standard travel expense process and outsource

to an external service provider

Source: Performance, Ernst & Young, 2012.

The DNA of the CIO: opening the door

to the C-suite

For many years, CIOs have been talking about becoming a

true partner to the business and the executive management

team to assist them in their strategic decision-making. But,

as The DNA of the CIO: opening the door to the C-suite

highlights, relatively few have broken out of their comfort

zones to actually make that step. The encouraging news is

that many CIOs nd the remit and responsibilities of their

existing role hugely rewarding and enjoyable. Nevertheless,

many more will need to test the limits of their comfort zones

if they want to become a relevant partner to the business

and better aligned with the biggest organizational issues.

Our report is based on our survey of 301 senior IT

professionals from Europe, North America, Asia, LatinAmerica, Australia and South Africa. It also draws on in-

depth interviews with a further 25 CIOs from these regions.

A further 40 respondents from across the rest of the C-suite

were polled to provide a perspective on how the CIO is

perceived by the rest of the executive management team.

Of the CIOs interviewed in our survey, 64% enjoy the

scope and remit of their role. The CIOs contribution in any

business can be wide ranging in its scope:

Execution: All CIOs are involved in the execution of the

basics keeping systems up and running, while keeping

close tabs on the organizations overall IT spend.

Enablement: This is where a more operational focus starts

to give way to something more strategic in nature from

improving business decisions by acting as an information

broker to proactively enhancing business processes.

Development: At the highest level, CIOs are called upon

to help develop the business further. From delivering

transformation through to introducing business model

innovation, this can be the most rewarding part of the job

but is only open to those who truly consider the rest of the

C-suite as equal peers and the least often pursued.

For more information, see the full report, available at

ey.com.


24/40



Finding the

right balance


High-performing companies have been improving their

pricing through:

Seeking a deeper understanding of where value is created.

Price-setting is a dynamic dialogue affected by many

variables and high performers are proactive in seeking to

shape this dialogue.

Placing signicantly more emphasis on understanding

competitors pricing, enabling them to understand when

there is a short-term opportunity and also a more sustained

threat from a competitor.

Putting a stronger focus on premium pricing. As in our

previous studies, high performers seem to focus on seeking

premium pricing, wherever possible.

High-performing companies having been seeking

sustainable cost reduction through:

Being three times more likely than lower performers to

focus on front-ofce efciencies.

Finding the cost of capital marginally lower than low-

performers, and nding access to capital markedly easier.

Optimizing transfer pricing, reviewing intercompany

lending structures and reassessing corporate and enterprise

locations.

Low costs do not automatically translate into high

prots. The best-performing companies not only

understand what drives cost, but more importantly

understand how that spend creates value. To get

pricing right, the company must identify how value is

created and the total value-chain-wide costs involved

in supplying the service or product. Possessing an

informed pricing policy, an effective program of cost

reduction and well-managed cash ow are just a few

of the ways in which high performers approach this

challenge. Cutting costs in isolation will not lead to

sustainable success.


25/40


On price

Prot starts with pricing

The market may set the market price, but it doesnt determine

how much value is created or captured by individual companies.

The importance attached to brand strength when entering either

developed or emerging markets reects this. Brand is ultimately a

proxy for non-price based competition in any market.

Even in todays difcult commercial environment, 9% of all

respondents are planning to increase price by more than 20%

in the next two years. This reects the cost pressure that all

organizations are facing. As ination costs edge upwards, and the

price of goods, labor and raw material gets more expensive, all

companies have the difcult task of adjusting their prices without

alienating their current or future customer base. But failing

to maintain price or build premium brand positions is dangerous.

This results directly in a massive downward dynamic withinorganizations that is internally focused and demoralizing.

More than half of high performers believe that they can increase

price by more than 5% a proxy perhaps for the real rate of

ination in the next two years. This is marginally up from two

years ago. In contrast, only 14% of low performers now believe

they can increase their price by more than 5% down from 21%

from two years ago. This sets an entirely different context for

these organizations: one externally focused on value-creation and

opportunity, the other internally focused on reductions and cuts.

Fundamentally, this ability to increase price shows the value of the

actions taken by high performers to better understand current and

future demand and build a brand that captures the most value from

this. Because they know what their customers want, and how they

value it, high performers are more condent about how far they

can go with price increases. There is signicant variation between

sectors in the extent to which price rises are seen to increase

sales. While the level of overall response does not vary materially

across sectors, high performers in banking, mining and metals

and life sciences see opportunities in this area. These sectors also

scored highest on making changes to pricing policy in the past

three years. By contrast, high performers in technology, media and

entertainment and asset management saw little opportunity.

Increase by more than 20%

6%10% increase

1%5% increase

No change

Decline

19

31

29

13

9

Low performers

4

10

41

26

18

High performers Total

9

20

44

17

11

Increase by more than 20%

6%10% increase

1%5% increase

No change

Decline

28

19

27

12

12

High performers Total

14

21

31

20

11

Low performers

7

14

29

31

17

2012

2010

Figure 14: Future pricing of own primary products/services

Q: Over the next two years, how do you expect prices for your company's primary products/services to change?

Case study: Leica Camera AG

A passion for photography and an appetite for risk inspired

Andreas Kaufmann to invest in Leica Camera AG. As

Chairman of its supervisory board, he has helped to cement

the companys reputation as one of the worlds most

exclusive camera brands.

Under Kaufmanns leadership, Leica bought back its

distribution networks and changed contracts with dealersto ensure that they meet quality standards, hit price points

and distribute selectively. The company has also launched

a fresh approach to product development that saw all R&D

conducted with an eye toward price levels. In the past, if an

engineer had an idea to improve a camera, we might have

pursued that with abandon. With our new process, we rst

make sure that any developments working their way through

the pipeline will be ones that will sell at a particular price,

explains Kaufmann. Were not a luxury brand, but we are

elite, and price plays a role in how we see products.

Leica certainly seems to have found the right mix of

technical quality and distinctive design at prices acceptable

to the market. While its cameras may to the untrained eye,

at least appear retro in style, customers are still willing

to pay tens of thousands of dollars for them.

Source: Exceptional, Ernst & Young, 2012. Article author: Rhea Wessel.


26/40



Finding the right balance

On cost

Maximizing efciencies effectively

The increasing competition in the market underlines why

it is so important for companies never to lose sight of their

costs. Although cost reduction does not explain difference in

performance because companies should always be focused on

cost a combination of high operating expenses and increased

complexity in many markets is forcing companies to rethink their

approach. Our September 2011 research indicated that low

performers were much more likely to be lowering production

costs, reducing headcount or deferring R&D. They were twice as

likely to focus more on the back ofce, whereas high performers

were three times more likely to focus on front-ofce efciencies.

Cutting costs is not the same as eliminating waste. Although allcompanies have a similarly strong focus on reducing costs in

non-frontline activities, high performers take a more strategic

view and focus more on efciency than reducing headcount. High

performers also place more emphasis on customer segmentation

and market analysis, with 42% taking actions in this area compared

to 34% of low performers. Again, this shows that high performers

know the importance of understanding their customer. Recognizing

what they need and expect, and what drives them, is crucial when

determining the future viability of pricing strategies.

Management attitudes clearly vary between the two groups. Low

performers have been far more active in headcount reduction

43% versus 26% and have also been more prone to offshoring

their operations to lower-cost locations, and taking actions to

reduce their tax liability. They are also twice as likely as high

performers to take no signicant actions to increase protability.

Companies in similar sectors would be expected to face similar cost

pressures, but, as Figure 16 shows, there are important variations.The number one cost pressure for low performers is price erosion.

This reects failure to meet market demand effectively. The

consequence of this is dramatic, as it can divert the organization

away from the market and onto cost reduction, rather than taking

Continual focus on cost reduction in

non-front-line activities

Process innovation and advances

in technology

Back office integration and

efficiency initiatives

Customer segmentation and

profitability analysis

Pricing policy changes

Improved cash forecasting

Reduced headcount

Moved operations to lower

cost locations

Reduced tax liability

No significant changes

48

45

43

42

36

27

26

18

16

3

45

31

36

34

25

30

43

22

25

6

45

31

36

34

25

30

43

22

25

6

+3

+14

+7

+8

+11

-3

-17

-4

-9

-3

High performers TotalLow performers Gap: high vs. low

Figure 15: Changes over the past two years to increase protability

Q: What changes has your organization/company made (if any) to drive increased protability over the past two years?


27/40


more strategic actions to improve market share. In contrast,

high performers are more likely to be struggling with labor costs,

ination and the price of raw materials.

Again, however, there are regional variations to consider. High

and low performers in the US are far less likely to see labor costs,

exchange uctuation or input costs as principle cost concerns.

For them, the primary challenges are price erosion and decline in

demand. Companies in Asia-Pacic, however, report signicantly

higher concerns over labor costs and exchange rate uctuations

than those from the other regions, partly reecting the devaluation

of major developed currencies, such as the dollar, euro and pound.

Working capital competitiveness

Many companies have seen their working cash reduce and the

cost and availability of capital remains restrictive. All should seek

a stronger working capital position to free up cash, boost exibility

and improve margins. Ernst & Youngs 2011All tied up: working

capital management survey contacted some 2,000 of the largest

companies (by sales) based in the US and Europe. The report

covered six extra regions, including Asia and Latin America. It

found that, compared with 2010, the working capital performance

of companies in the US has improved, while stalling in Europe.

For companies headquartered outside the US and Europe, a big

disparity in performance is revealed. While part of this gap maybe explained by variations in market characteristics, payment

practices and supply chain infrastructures, there are also marked

differences in the degree of management focus on cash and

process efciency. It is therefore important for industry leaders to

continue implementing truly effective working capital management

strategies. The fact that US and European companies still have up

to US$1.2t of cash unnecessarily tied in working capital a sum

equivalent to nearly 7% of their combined sales points to the

potential for further signicant gains.


-4

Labor cost inflation 43

Exchange rate fluctuation 43

Input cost inflation (i.e., raw materials,energy, pre-fabricated products)

38

Increased regulatory andcompliance requirements

38

Price erosion

Demand decline

Investor/stakeholder pressure

36

25

22

Interest on and/or servicing debt 18

41

40

35

40

37

29

24

20

37

36

31

40

42

33

26

22

+6

+7

+7

-2

-6

-8

-4

Figure 16: Most signicant cost pressures

Q: Which of the following cost pressures are most signicant for your company?

Case study: GlaxoSmithKline

When Simon Dingemans became CFO of health care giant

GlaxoSmithKline (GSK) in April 2011, he saw a chance for

nance to be much more involved, to improve delivery and

to help drive performance much more directly. This meant

improving the quality of decision-making and focusing

nance on driving the returns out of the strategy that weve

laid out over the last two or three years, says the CFO.

When it comes to R&D, GSK is breaking down some of the

industrial infrastructure to create more exible, smaller

operating units. This strategy has allowed much better

targeting of resources, which has released considerable cost

savings. Enhanced productivity and nancial efciency has

improved the internal rate of return on R&D up from around

11% in 2010 to 12% in 2012.

Finance is also playing a part in simplifying GSKs business

more broadly and reaping the rewards. Driving cost out ofthe business by reducing and simplifying the manufacturing

and R&D footprints and by centralizing support functions

has, so far, produced annual savings of 2.2b (US$3.4b). A

further 600m (US$925m) of savings have been identied,

by really working the existing programs of footprint

reduction, process simplication and new infrastructure

investment to improve our processes, Dingemans says.

Source: Capital Insights, Ernst & Young, 2012.


28/40


Stakeholder confidence

To inform, to explain,to engage


High-performing companies have been engaging withexternal stakeholders by:

Talking about specics: they share both broader and

granular detail with more coverage of non-nancial KPIs,

putting signicantly more effort into identifying and

managing risk, and proactively measuring and reporting

their environmental performance.

Paying more attention to their long-term reputation

management and taking action to ensure a long-term

relationship with business owners, nanciers, key

contributors, inuencers and the communities they touch.

Being more likely to discuss the impact of regulatory

change and potential environmental risks.

High-performing companies have been buildinginternal engagement by:

Engaging proactively with their internal stakeholders as

critical contributors to the achievement of their growth

strategies.

Broadening their workforce skills, equipping their teams to

be more productive through training, mentoring and sharing

knowledge, and improving internal communications.

Beneting from past strength: high-performing companies

had less need to implement major headcount reductions

during the recession or cut back on staff benets.

Business is not just about numbers. The way a

company communicates its story to its stakeholders

has become ever more important. In part, this is

down to the rise of social media and the insatiable

appetite of the 24/7 media cycle. But it is also down

to the volatility of todays market. There is now a

heavier requirement for information about future

business plans and strategies. The way businesses

communicate to their internal and external audiences

is another factor that helps separate the high-

performing companies from the low. What lessons can

we draw?


29/40


On external

Making the value visible

Companies today are operating under two opposing pressures.

On the one hand, there is much greater scrutiny than ever before.

Enhanced governance processes, strengthened regulatory regimes

and increasingly demanding shareholders and stakeholders require

higher levels of disclosure and compliance than in previous years.

Yet on the other hand, the world of business has never been more

complex, as companies compete or collaborate as partners across

ever-changing value chains to serve disparate and dynamic market

segments. Success comes to those who can bring the value that

they create to the attention of their stakeholders.

Effectively communicating an organizations performance to

diverse, geographically spread stakeholders is far from easy. How

do you gain their attention? Should it be via multimedia or the

written word? Yet in todays uncertain economic times, building

and maintaining the condence of stakeholders is critical. Allorganizations need to tell their performance story effectively

and consistently to the investment community, regulators,

commentators and customers.

Previous research shows that the economic crisis has generated a

greater need for active communication with external stakeholders.

And this demand continues to be seen today. It should come as

little surprise that, according to our survey, nancial information

is in most demand. There are also growing requirements for

information on risk management and business planning.

Two areas of particular importance relate to sustainability and

human capital. Both are complex areas where we might perhaps

have expected to see a growing demand for meaningful information.

Unlike in previous years, however, there no longer seems to be

much difference between high and low performers in this area. The

scores are similar for almost all categories. Indeed, if anything, low

performers see a greater need to improve their performance.

The narrative story, of course, varies by sector and so we nd:

Media and entertainment companies planning to increase the

amount of nancial information they release

Technology and life sciences seeking to increase theircommunication around their business planning

Banking communicating more about risk

Power and utilities reporting more on sustainability

Enhanced communication can also help address another important

area of concern. Ernst & Youngs Growing Beyond: a place for


-4

Business planning and outlook 54

Financial information 53

Risk reporting and information on

how risk will be managed47

Information on innovation

and development26

Reporting on corporate social responsibility

and environmental sustainability

Frequency and detail of

reporting requirements

Information on human capital situation

and expected future development

23

22

17

New channels of reporting (i.e., digital

and mobile reporting formats)11

50

54

47

29

24

23

19

13

50

52

47

29

22

25

21

15

+4

+1

0

-3

+1

-3

-4

Figure 17: Areas with increased demand for information by stakeholders

Q: As a result of the recent economic and market volatility, for which of the following has demand from your company's stakeholders increased the most?


30/40


Stakeholder confidence

To inform, to explain, to engage

integrity: 12th global fraud survey found that bribery, corruption

and fraud remain widespread. In the survey, based on 1,758

interviews with senior decision-makers in a sample of the largest

companies in 43 countries, 39% of respondents reported that

bribery or corrupt practices occur frequently in their countries.

The challenge is even greater in rapid-growth markets, where a

majority of respondents believe these practices to be common.

Multinational businesses have to confront this challenge.

At the same time, many countries are strengthening their

enforcement regimes. For example, the UK has introduced a

Bribery Act and India has implemented a raft of proposed anti-

bribery, anti-corruption (ABAC) legislation. As regulatory activity

intensies, the risk of external scrutiny of corporate activity also

increases. Senior management have to ensure that they and their

companies are not found wanting, should their activities come

under the spotlight.

Developing channels of communication with contacts across the

nance function and other executives within the business will help

boards ensure that they have a full and accurate picture of what

is occurring across their organization. Companies also need to be

prepared to deal with investigations and enforcement actions that

result from whistle-blowing complaints made directly to regulators.

Processes need to be in place for prompt investigation and

communication with enforcement agencies.

Case study: USAID

Few organizations have as diverse a mix of stakeholders as

USAID. The largest

Documents

Growing Beyond-How High Performers Are Accelerating Ahead