Traditional measurements of company value like total shareholder return (TSR) and market capitalization may help identify what companies are presently the healthiest. But, according to a new study by Accenture, they don’t have much to say about prospects for future competitiveness.
The reason, Accenture says, is that companies historically have pursued value creation by focusing only on growth or profitability, or both. What they should be deploying today, in order to best position themselves for competitiveness later, is an 'interdependent' strategy focused equally on growth, profitability, and a third dimension: sustainability and trust.
The authors of the study, Mark Pearson and Bill Theofilou, made the case in an earlier-published white paper for why growth and profitability are 'hard-wired' to sustainability and trust. Thanks to digital technologies, 'the world has a front-row seat into your business operations,' they wrote. 'Accountability is no longer just to customers and shareholders, but to society at large. If a company fails to uphold its covenant with customers, it will never achieve profitable growth.'
Leading companies, the authors said, are quantifying how sustainability generates tangible value and taking action to reduce waste, improve labor conditions, and invest in causes that their customers care about and that their brands stand for.
For the new study, Accenture created a 'Competitive Agility Index' (CAI) based on an analysis of 5,200 data points on 350 companies across nine industries. The consulting firm leveraged publicly available data for the growth and profitability dimensions, and for sustainability and trust developed an algorithm based on various trust indices and industry-specific factors.
The index 'shows that this interdependent strategy can yield far greater revenue and EBITDA improvement than one that focuses on just one or two of the dimensions,' Accenture says.
For example, according to an analysis of a sample set of 47 automotive/industrial companies, a $30 billion company that adopts this strategy could see revenue rise by almost $1 billion and EBITDA increase by 2%. Similar improvements were observed in every sector studied. In the insurance and electronics sectors, a one-point improvement in the CAI could yield gains of 6% and 6.6% in EBITDA, respectively, according to Accenture.
The most competitively agile company in the automotive/industrial sector, BMW, had an index score of 63.8, compared with the average of 34.6. 'BMW factors in consideration of the environment along the entire value chain and has a clear commitment to the preservation of resources embedded in its approach,' Accenture says.
Interestingly, the leaders identified by the analysis are in stark contrast to those holding leading positions in TSR or market cap. BMW ranked only 5th in market cap and 15th in TSR in the automotive/industrial sector, the study found.
In the electronics/high-tech sector, CAI leader Apple was also first in market cap but only 12th in TSR. '[Apple’s] sustainable practices such as [issuing] the largest green bond by any U.S. company focused on renewable energy sources and resource efficiency generates loyal customer devotion and profitable operations,' the study report says. 'And, by combining these characteristics with high revenues, high-profit margins, and low operating expense ratios, Apple has a winning formula for continued success.'
For comparable reasons, the CAI leader in the retail segment, Inditex (better known by its major brand’s name, Zara), was 6th among retailers in market cap and way down the list at 34th in TSR. And Colgate-Palmolive, which took the CAI crown in the consumer goods segment, was 10th in market cap and 31st in TSR.
'Companies that don’t adopt an interdependent strategy that integrates the three competitive dimensions are at risk of being overestimated by the market - or worse, succumbing to the competition,' says Theofilou.
According to the report, the market is overestimating 22% of the studied companies. About the same proportion, 21%, are underestimated. 'They have adopted integrated strategies, but their value and competitive position haven’t been conveyed to the market,' the study says.
The market has correctly valued more than half (54%) of the studied companies, divided among two groups almost equally. Some are 'striving to survive' and must 'create an interdependent strategy and start by taking action against the [dimension] which will deliver the fastest results,' Accenture says.
The rest are 'disruptive companies' that are early adopters of the interdependent strategy and dominate their respective markets. Although they are best positioned for future competitiveness, maintaining their lead is not a given: 'They must continually reinvent or reposition themselves while using an integrated growth, profitability, and sustainability strategy.'
This article was originally published by our sister site, CFO.com