McKinsey: Best practice in core business diversification creates value

06 February 2017 Consultancy.uk

Core business diversification allows a business to, among others, create new revenue pools, strengthen portfolios, secure competitive advantage, and acquire skills and capabilities that were previously lacking in the core business. Expansion come with risks however, with more than 70% businesses embarking on the journey finding that it creates little value or underperforming on their expectations. New research highlights that utilising best practice in the scanning, evaluation and integration of diversification efforts reaps benefits.

Expanding and diversifying a business beyond its core business proposition comes with considerable opportunities, if done right; but also with considerable risks. New research from McKinsey & Company, titled ‘Growing beyond the core business’, explores in how far businesses that expand their businesses outside of the core are able to create value, and what best practices set those that do create significant value out from the rest

Companies pursue new act to access new profit pools

 

According to the research, which involved 1,143 executives at companies with revenues above $500 million, only around a third of businesses are able to create value of more than 10% of their total business through diversification efforts. In total, around 50% of respondents said that the biggest revenue-generating move has created some financial value, while 28% say it has created significant value. 9% say that it added no value, 8% say it destroyed value and 2% say it destroyed significant value.

Reasons to make the move

The reasons cited by respondents for expanding their respective businesses beyond their core businesses differ across respondents. 61% however, cite that it provides them with access to new profit pools, whereby 49% say that it secures long-term growth options outside their core industry and 23% say that it is to diversify risk and exposure to business cycles within their core industry.

The research also found that 60% of respondents, justify their expansions outside the company’s core business on the basis of it strengthening their core business. Around 28% said that it secured a competitive advantage for their core business, 25% said it allowed them to acquire skills and capabilities that were lacking in their core business and 20% said it allowed them to acquire technology or R&D assets to leverage in their core business.

For most companies, the move to diversify their offering is aimed at creating long-term value. Around 10% of businesses said that they expanded their business as a source of short-term growth.

At diversified companies in emerging markets

The research also considered in how far home-market companies in emerging markets prised their ability to diversify business practices beyond their core market, relative to developed market companies diversifying offerings in an emerging market. The research found that emerging market players were 1.4x more likely to have their diversification efforts generate significant value for their companies.

The study shows that 45% of emerging-economy companies believe that they are better position, due to them having more opportunities to reinvest retained earnings into new businesses, while 37% said that they are advantaged because it is easier for them to leverage relationships with local stakeholders. Respondents also said that they felt better positioned to attract talent, cited by 24%, and better positioned to attract investors, cited by 19%. 11% said that they felt that they would have no advantage.

Most companies lack best practice

The firm sought to identify the ‘best practices’ employed by companies that were able to improve the likelihood that a company expanding its business beyond its core business is able to generate significant value.

The research notes that three key best practices were identified, ‘scanning for expansion opportunities’, ‘evaluating expansion opportunities’ and ‘integrating new activities into core business’. Mastering these three key steps in the diversification process, has a 1.9x, 2.1x and 2.0x chance of improving the diversification outcomes respectively, even while the % of respondents found to be following best practice came in at 27%, 29% and 22% respectively.

A number of other factors were found to be important in the diversification process, including executing the move, through acquisitions, partnerships, allocating organic-growth resources, which was found to make a positive outcome 1.7x more likely, while clear management of new activities was found to be particularly effective, increasing the chance of success by 2.7x.

Best practice can drive significant value

The effect of the three key ‘best practices’, scanning, evaluating and integrating, identified by McKinsey as inherently able to boost diversification outcomes, were considered in more detail.

When it comes to scanning for expansion opportunities, around 40% agreed that having a clear strategy for expanding into activities in new product/service categories was about to create significant value in their biggest move outside their core bussiness, compared to 10% that disagreed. Around 36% of companies said that the use of a wide variety of sources to identify extension opportunities created significant value, compared to 23% that disagreed. Companies that have a clear process to scan for opportunities in new categories too, the research found, agreed more than disagreed that it allowed them to drive significant value creation.

Around 37% of companies evaluating expansion opportunities said that they agreed that, a clear process to evaluate opportunities in new categories created value, compared to 19% the disagreed. 36% of respondents also said that clear criteria to evaluate whether opportunities would be worthwhile to pursue created value, compared to 14% that disagreed.

Finally, 42% of companies that have an institutionalised approach to, and processes for, integrating acquisitions agree, compared to 17% that disagree.

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How First Consulting generates more insight using fewer reports

08 March 2019 Consultancy.uk

Organisations are continuously investing in more advanced data collection and manipulation methods to enable smarter and more informed business decisions. In order to maximise their business value, companies understand the growing need for performance related insights from their data. First Consulting, a consultancy firm specialised in business change, has helped many clients in the utilities sector to deliver effective change through improved use of their data.

Most utilities firms are structured in such a way that every business unit has a team of analysts who are responsible for providing relevant data insights to their business colleagues. The business analysis teams form the link between business decision making and IT by translating business requests into meaningful actions and delivering information via reports.

Typically, the business user will receive a unique report for each information request, with each new report requiring individual, tailored support from the analyst team. This limits the productivity of the analyst teams and minimises their ability to address new data requests. The growing demand for information puts additional pressure on these teams, as a significant amount of time is required simply to gather and update the required data. This has caused reporting portfolios to expand dramatically. However, due to the analysts’ already stretched capacity, reports do not always deliver the most vital information and documentation is often incomplete.

Redesigning information delivery

At First Consulting, business consultants work in close collaboration with their clients to improve the mechanism for the delivery of information and analysis in response to business requests. The improved structure focuses on providing information per role type, rather than per request. As such, one dashboard is designed for each organisational role type, with all the relevant information presented in a single overview. This allows all individuals of a given role type to open a single dashboard and view what they need, as opposed to collating a large range of disparate links and unique reports which, previously, were all required to enable business decision making.

Moving from unique reports for each request, to reusing KPIs in a select group of dashboards

By implementing this new way of working, clients are able to reduce the reporting portfolio from over 100 reports to fewer than 20 dashboards (see figure above). In addition, the capacity for data maintenance can be reduced significantly by using modular KPIs, allowing for the re-use of data across multiple dashboards.

Changing while everyday work continues

In order to deliver effective change, it is essential that day-to-day processes remain unaffected whilst transitioning to a new reporting landscape. First Consulting achieves this by embedding business consultants within the client’s analysis team to gain feedback and determine exactly what visuals are necessary within the dashboards. This focuses effort on the outcome (such as what should be presented in the final dashboard) and allows a broad range of requirements to be considered in the business context and combined, where appropriate.

Key users and stakeholders are involved from the outset to help define what makes a high-quality dashboard. Adopting this approach helps the team to produce an optimal output that contains the key business information for the appropriate roles in an easy-to-use format.

Once it is clear what should be included in the final dashboard and how this should be presented, the team works according to the priorities set out by the product owner. This ensures that analysts work on the requirements which deliver the most value and which form the most coherent dashboards.

Main results

The advantages of implementing straightforward, no-nonsense solutions using fewer reports are particularly noticeable for the business and for the analyst teams:

  • Making adjustments is easier and maintaining and updating data costs less time
  • Management information is displayed in one location and is displayed according to defined standards, facilitating decision making
  • There is greater capacity within the business for complex analysis and project support

First Consulting combines process, technology, and implementation consulting to deliver impactful and value-adding solutions. The firm has more than 200 consultants based in the UK and the Netherlands.