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Bold moves are less risky than a timid corporate strategy

Bold moves are less risky than a timid corporate strategy

By Sven Smit

The business world is full of hockey stick plans—projections of soaring future growth after an initial dip to account for first-year spending. More often than not, those gains fail to materialize. Why? Because many companies don’t back their bold aspirations with equally bold actions.

In contrast, consider the experience of Wendell Weeks. When he was named CEO of Corning in 2005, the company was in deep trouble. Heavily invested in telecommunications, Corning had been laid low by the bursting of the dot-com bubble. The optical fiber business—the division Weeks led prior to his appointment—was hit particularly hard. Corning’s revenue dropped in half, profits turned into heavy losses, and by October 2002 the share price had plummeted 99% from its peak in September 2000. Despite a long and proud history—Corning made the glass encasing Thomas Edison’s lightbulb, windows for the Apollo lunar landings, and the first fiber-optic cable—some wondered if the company would survive.

Fast forward a decade and Corning’s competitive position couldn’t be more different. Under Weeks’ leadership, Corning became the No. 1 global producer of LCD glass and—thanks to a big investment in glass for handheld devices—the leader in smartphone cover glass as well. Corning’s average annual economic profit improved by around $1.7 billion between 2004 and 2014.

How did Weeks accomplish such a turnaround? He realized that to make a major leap in performance, companies have to make big, bold moves on multiple fronts. It’s an insight my colleagues and I recently confirmed in a major study: Incremental moves don’t get companies very far. Incrementalism, in fact, increases the risk of stagnation and decline.

We have found that five strategic moves in particular make the difference: active resource reallocation, differentiation and productivity improvements, strong capital expenditure, and programmatic M&A. They may sound obvious—most companies already pursue these measures in some form—but what matters is how big a big move is. Just because a move feels big, is hard to do, or takes a lot of resources does not mean it will have a real impact. It needs to pass a certain threshold.

Active resource reallocation

Peanut butter tastes great on a sandwich, but spreading corporate resources (capital, operating expenses, talent) like peanut butter across business units doesn’t work out so well. To make a leap in performance, resources must go to the most important growth opportunities, and how much you reallocate matters. Companies that shift more than 50% of their capital spending across their businesses over 10 years create 50% more value than counterparts that move resources at a slower clip.

These shifts have to span industries, geographies, operating segments, projects, products, and customer groups. Freeing up resources from underperforming units and moving them to over-performing ones is likely to generate considerable friction in the executive ranks, and inertia can set in. So here’s a fact leaders should remember: At a time when average CEO tenures are rapidly dropping, chief executives who move in their first few years to reallocate resources to new growth areas tend to keep their jobs longer than their more timid peers.

When Pieter Nota took over Philips’ consumer business in 2010, he sold some underperforming operations, such as the TV business, and, more importantly, launched a massive resource-reallocation initiative. He invested in attractive new niches, such as juicers, and started managing resource allocations not just across the five business groups he led but on the level of more than 150 “business market” cells within these groups, such as coffee makers in Italy and shavers in China. That led to a rapid acceleration of growth that turned the consumer business from the worst- to the best-performing division at Philips within five years.

Strong capital programs

The second big move is expanding faster than your industry. This qualifies as “big” when your ratio of capital expenses to sales exceeds 1.7 times the industry median for at least 10 years. Successful investment programs are about managing a pipeline, making sure it includes somewhat risky, medium-term options for the company and some longer-term, even-higher-risk options.

Canadian National Railway became a top performer through a robust program of capital spending. Between 2005 to 2014, CN invested more than C$17 billion in this move—a staggering 85% of its 2004 capital base. Railroads are a capital-intensive business, and more than half of CN’s investment went into track infrastructure. However, the investment wasn’t just about sprawling farther and wider; most of that spending went into repairs and upgrades that would improve the network’s capacity and operational efficiency. The efforts helped deliver an 18% annual TRS growth over the decade—making the formerly state-owned railroad one of the most successful privatizations ever.

Distinctive productivity improvement

Productivity programs are a management favorite. Companies like Toyota made their fortunes on productivity-led advantages. But today everybody is chasing productivity gains. To move the needle, such programs must clear a high threshold: deliver a 25% higher improvement than your industry median over a 10-year period. If your industry improves productivity at 2% per year, you need to consistently deliver above 2.5% per year.

It requires extraordinary means and effort to force the entire organization to consistently drive productivity and then capture the bottom-line impact. Toyota succeeded primarily by establishing a company-wide culture of continuous productivity improvement that is deeply embedded and constantly reinforced. In my experience advising clients, I find that all too often companies give away their hard work on productivity in pricing or, worse, lose it when other parts of the organization absorb the gains, creating the dreaded German sausage effect: You squeeze on one end, and the fat sloshes to the other end.

Global toy and entertainment company Hasbro showed how to tackle productivity right. In the late 1990s, Hasbro’s complex portfolio of businesses, relying on a large network of global suppliers, bogged it down in efficiencies. So the company embarked on a turnaround with the goal of becoming a smaller but more profitable version of itself. It consolidated business units and locations, invested in automated processing and customer self-service, reduced headcount, and abandoned some businesses. Hasbro’s expenses as a proportion of sales fell from an average of 42% in 2004 to 29% 10 years later. Sales productivity lifted, too: Over the decade, Hasbro shed more than a quarter of its workforce yet still grew revenue by 33%.

Differentiation improvement

The fourth big move covers innovation in products, services, and business models—that is, strengthening the competitiveness of your business. Differentiation improvements lead to gains in market share and pricing, which are vital to raising performance. Our analysis shows that for this move to really transform your performance, your average gross margin must exceed your industry’s by 30% over a decade.

Burberry did that, and more. In the early 2000s, the British luxury fashion house was losing its cachet. To defend against this brand drift, it moved aggressively into the retail channel, and within a decade, retail was contributing 70% of its revenue. The retail presence also gave Burberry more control over customers’ interaction with its brand, and improved its margins by taking out retailer middlemen and boosting its bargaining power with wholesalers. Burberry then invested heavily in digital innovation, and got into new product lines, such as high-margin beauty products. As a result of these differentiation moves, its gross margin rose from 59% to 76%, and its annual TRS grew at 17% over the decade.

Programmatic M&A

The myth that 75 percent of all mergers fail has long been dispelled. Mergers and acquisitions do work to boost growth, but success depends on the type of M&A you pursue. The path that holds the most promise is programmatic M&A, whereby you regularly make relatively small deals. Our research found that the most successful M&A programs execute on average at least one deal per year, cumulatively amounting to more than 30% of a company’s market capitalization over 10 years, and with no single deal being more than 30% of its market cap.

This makes intuitive sense considering that M&A requires mastery of capabilities through repeated deals. Companies that do programmatic M&A over years, often decades, become true masters of the art of identifying, negotiating, and integrating acquisitions.

Corning shows the value of this move. The company spent net $3.2 billion on mergers, acquisitions and divestitures over the period we studied, buying 12 businesses and selling nine. At all times, the company sought to maintain a strong M&A pipeline that was about five to 10 times its annual target for increasing revenue through acquisitions. Weeks’ team understood that doing three deals a year meant it had to do due diligence on 20 companies and submit five bids.


I know that big moves feel scary. Over decades of interacting with business leaders, I’ve often seen teams start with high ambitions only to have risk aversion eat away at them. The CEO may focus on the quarter rather than the decade ahead. Managers worry that failing to achieve a big target will affect their careers. Even successful entrepreneurs can turn cautious, wary of putting what they built in peril.

To fend off such tendencies, keep in mind that four of the five big moves are asymmetric; in other words, the upside opportunity far outweighs the downside risk. And the more big moves you make, the more you raise your chances of outperformance. Corning is a case in point. Under Weeks’ leadership, the company made all five of the big moves over a decade, and leapt from the bottom quintile of corporate performance to the top. Aside from its aggressive M&A program, Corning invested $14 billion in capital spending. Sales productivity went up by 80%, gross margin expanded by 14%, and the ratio of expenses to sales fell by 30%. Importantly, 90% of the improvement in Corning’s economic profit was attributable to the company—not the market, not the industry, but to the company’s big moves.

Corning’s turnaround backs the fundamental finding from our research effort: To leap up the corporate charts, you need to move boldly and aggressively. Companies that make one or two big moves have a 17% chance of moving to the top quintile of corporate performers—more than double the odds they’d have if they made none. Three big moves boost these odds to 47%. The riskiest move of all? Incrementalism.

Sven Smit is a senior partner in our Amsterdam office, leader of our Western European region, and co-author of Strategy Beyond the Hockey Stick with Martin Hirt and Chris Bradley.

This article originally appeared on LinkedIn.