How firms should respond to shifting trends in global economic profits

Chris Bradley, senior partner based in our Sydney office and co-author of Future of Asia, reflects on how endowments, use of technologies and willingness to take bold steps in areas such as M&A, R&D and new business models will define Asia’s winning companies in the next decade.

What are the biggest megatrends you’re seeing in Asian corporations?

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If there’s one phenomenon—I think the biggest thing in the last 10 years—it’s the disappearance of returns. Economic profit which is the measure we use in strategy and is the profit left over after you’ve paid your cost of capital, has disappeared across the world.

It went from almost 720 billion in total 10 years ago to about zero today.

That’s not necessarily because margins are falling, it’s actually because capital intensity is increasing. In most markets around the world we’re seeing balance sheets growing faster than revenues both on the tangible and intangible capital.

And it’s not just a China and an Asia problem, even though the capital intensity there has also grown and more than half of the world’s new capital went into Asia—it’s all around the world.

I think it’s getting tougher and tougher to find that growth. The days of sitting in a very niche—a nice protected niche—seem to be behind us and the firm’s that are winning are the ones that are making big moves around reallocating resources around going big on digital, around programmatic M&A programs and around reinventing their business models to attain a fundamentally higher level of productivity.

What will it take for these corporations to continue creating value through 2020?

So how are companies going to evolve over the next decade? Well, actually we’ve done a lot of work on this and what is it that defines winning companies and what separates winning companies from those who kind of stay put? And it comes down to three really simple things.

The first one is your endowment—did you start in a good place? Do you have a healthy pipeline of R&D? Is your balance sheet in good shape?

The second factor is trends—do you have the wind at your back? One thing we know over the very very long term—even great companies are humbled by trends, and companies that start humble can be made great by trends behind them.

And well, what are the trends that matter? Well, you know what? We don’t know exactly how they’re going to play out, but we know the really big forces at work. We know the forces of demographics, you know the forces of technology and we know that the world is going to be more connected, more information enabled and more automated so that you’ve got to get on the right side of that trend to win but the third factor and it’s really the one that makes the difference is what moves did you make and there’s one thing we know one lesson to remember.

It’s go big or go home. So we know that if you have the right package of endowment if you move to where the trends are at your back and you make really big moves and big relative to the competition, you’re going to be one of the winners in 2030.

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