To keep up with today’s rapidly changing marketplace, business leaders must rethink their portfolio management strategies and plan for the post-COVID next normal.
As we all know, the economic shock of 2020 has completely shifted the business landscape, affected customer behavior, changed public health policies, and much more.
Yet these changes only represent the beginning of a much longer trend. And according to analysts such as McKinsey, many of these changes will become permanent.
For instance, as a result of the COVID-19 pandemic, researchers expect:
- A greater preference for remote working
- Changes to customer sentiment, expectations, and spending habits
- Shifts in public health policies and practices
- Accelerated digital transformation across the entire economy
- An increased focus on resilient business processes and practices
In short, the post-COVID world will look very different from the pre-COVID world, which is why McKinsey refers to that era as the next normal.
Preparation is a must, yet given the breadth of the current crisis, performance changes are not enough.
Instead, McKinsey argues, business transformations should embrace both performance and portfolio management changes.
Why Business Transformation Should Extend Beyond Portfolio Management
To get the best results from an organizational change program, McKinsey advises going “all in” on business transformation initiatives.
Many organizational change efforts focus on performance improvements, but McKinsey’s research has shown that bigger is better – at least in terms of business change.
They found that:
- The global distribution of economic profit is highly uneven
- Business transformations that generated the best results embraced both performance and portfolio improvements
- To see substantial gains, relative improvements must exceed the majority of industry competitors for multiple years
Though bigger transformation projects tend to feel riskier than smaller changes, McKinsey claims that the reverse is true. In fact, larger moves reduce risk.
As they put it, “when you’re parked on the side of a volcano, staying put is your riskiest move.”
Five Big Moves to Make in Performance and Portfolio Management
When evaluating performance- and portfolio-related business changes, McKinsey classified five big changes that organizations can make.
In their definition of change, the two performance-related moves are:
- Differentiation
- Productivity improvements
The three portfolio-related moves are:
- Resource reallocation
- Programmatic merger and acquisition
- Exceeding the industry median’s capital expenditure to sales for at least a decade
After analyzing a data set of 1,435 companies that invested in transformation, the consultancy discovered that the best results incorporated both performance- and portfolio-enhancing moves.
In their analysis, for instance, the probability of moving up to the top quintile of the power curve increased in proportion to the number of moves the companies made.
Those that made no moves at all, for instance, had only a 4% probability of moving up the economic curve.
Companies that made at least one performance move or portfolio move, on the other hand, saw that number increase to 7% and 11% respectively.
Organizations that went all in and engaged in both, however, had a 22% probability of moving up to the top quintile.
Why Now Is the Time to Invest in Change
As mentioned above, the COVID-19 crisis has had a major impact on the global economy, our livelihoods, and the state of the world in general.
The challenges that we are facing today only reinforce the need to engage in organizational transformation, sooner rather than later.
Another study by McKinsey, for instance, found that the gap is widening between high-performing industries and low-performing ones.
In 2020, for instance, certain industries actually saw outsized growth and performance compared to their 2018 numbers, such as:
- Semiconductors
- Pharmaceuticals
- Software
- Technology hardware
On the other hand, industries that were already performing poorly in 2018 have seen even more losses.
A few examples include:
- Energy
- Banks
- Insurance
- Diversified financial
This widening gap, says the firm, is really just an acceleration of trends that already existed. Between 2018 and 2020, for instance, companies in the top quintile gained $335 billion while those in the bottom quintile lost $303 billion.
Generally speaking, poor performers were those that held onto legacy business models and strategies.
Forward-thinking companies with future-ready models, on the other hand, have been able to survive, if not thrive, during the crisis.
Final Thoughts
Performance improvement, as we have seen, is only one type of business transformation that can lead to improved organizational resilience, performance, and profitability in the wake of COVID-19.
To make real progress in today’s challenging times, it is necessary to make big moves and go all-in on those transformation efforts.
As McKinsey has pointed out, the best transformations include both performance- and portfolio-related moves that are sustained over a long time period.
Yet it is just as critical to understand the key drivers of today’s economic change, such as digitization, globalization, and COVID-19.
An understanding of these trends can help business leaders make informed investments and decisions as we move forward into the post-COVID next normal.
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