- In the 2020s, the importance of defying the average will be greater than ever and more important than the choice of sector in which you operate.
- To compete, businesses must build the capacity for continual reinvention which is necessary for a faster changing environment.
- To achieve this, leaders will have to build hybrid human-machine learning organizations, master the science of organizational change and harness human diversity.
A simple, popular framework for business strategy is to focus on where to play (which industry or market to serve) and how to win (what it takes to outperform in that area). However, the “how” is now much more important than “where”: the reward for being a top performer is increasing across all industries. Unfortunately, these rewards are offset by an increasingly rapid regression to the mean.
As a new decade begins, all companies – regardless of their starting positions – will need to reinvent themselves for sustained success in the new competitive environment of the 2020s.
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Defying the average is more important than ever
Over time, markets become commoditized: new competitors appear, products become more standardized, and consumers become better educated to choose between alternatives, forcing down prices to marginal cost and returns on the cost of capital. Strategy has always been about defying the powerful forces of commoditization by being exceptional relative to other players in some respect, such as scale, differentiation, speed, or capabilities.
Some industries are more attractive than others on average, but the spread of performance within industries is an order of magnitude greater than that across industries. In other words, how to play (and being exceptional relative to your peers) matters much more than where to play – and there is no such thing as a bad industry.
Entering the 2020s, the importance of defying the average is greater than ever. For one thing, the value of being exceptional has increased, for example, the difference in operating margin between the top and bottom quartile companies within each industry has nearly doubled in the past three decades. This is attributable in part to the rise of winner-take-all, platform-based business models, which have come to dominate the list of the world’s most valuable companies.
It’s also a bad time to be merely average. In the long run, growth drives returns, but growth rates have been trending downward. Demographic trends will further slow future growth in most major economies.
Even in acutely adverse circumstances, some companies compete and outperform. Our study of 5,000 US companies across the last four economic downturns showed that on average companies saw both revenue growth and profitability decline. However, 14% improved their performance in both dimensions, gaining a clear advantage over their peers across all industries.
Maintaining outperformance requires continuous reinvention
Even if your company is beating the average today, you can’t rely on momentum alone to guarantee future success. Business has become increasingly dynamic, driven by rapid technological and social change. As a result, past performance has become a weaker indicator of future success and the ability to compete.
According to our analysis, top companies are falling faster: only 44% of industry leaders by operating income remain there five years later, down from 77% in the mid-20th century. Over the same time span, the rate at which companies drop out of the Fortune 100 has increased by 60%. In periods longer than one year, there is now no correlation between past and future total shareholder returns.
In other words, what it takes to succeed tomorrow will be different from what it takes to succeed today; advantage needs to be constantly renewed. The traditional metrics used to manage a business, such as sales, profitability and return on assets are backwards-looking and therefore less and less useful for indicating whether a company is set up for future success. Regardless of their starting position, leaders need to manage their organizations’ vitality – the capacity to reinvent themselves for the future – alongside running the business today.
How to reinvent your company for the new decade
Even if business leaders recognize the need to continually reinvent their organizations to compete, they still face the question of what specifically it will take to win in the next decade. Though we have no all-seeing crystal ball, many of the key forces that will reshape business in the 20s are already in plain sight:
- Artificial intelligence will be increasingly adopted at scale;
- Technology will redefine the relationships between companies, customers and workers;
- Demographic headwinds will depress long-term growth;
- The changing geopolitical power map will continue to undermine existing institutions;
- Climate and other externalities will bring the social contribution of business under further scrutiny;
- The combination of these forces will produce uncertainty in many dimensions.
These trends point to several competitive imperatives that will apply broadly across geographies and sectors and help companies defy the gravity of averageness in the next decade:
- Compete on the rate of learning by integrating AI, data systems and other technologies; shaping and tapping into larger networks of collaborators and pursuing dynamic advantage rather than static capabilities;
- Build a hybrid learning organization that combines the speed and pattern-matching capabilities of algorithms, the higher-order reasoning and imagination of humans, and new management models that remove the bottlenecks of hierarchical decision-making;
- Apply the science of change to build capacity for continual reinvention, which will be necessary in a faster-changing environment;
- Harness human diversity to increase the range of ideas, approaches and capabilities within the organization, thus creating advantages in both innovation and resilience;
- Pursue social as well as economic value by following a clear social purpose and integrate social and ecological considerations into strategy to maintain trust with all stakeholders and to thrive in the long run.
Regardless of where they play or their track record, all businesses face the challenge of defying the average in the 2020s. Leaders cannot rely on what has worked in the past; they must reinvent their strategies, organizations, people and mindsets in order to be exceptional tomorrow.