Next weekend France will see the youngest president in its history settle into the Élysée Palace after a campaign that even the most canny political analysts couldn’t have predicted three or four years ago. They would also have wondered at the sanity of anyone telling them that Donald Trump would be US president, the UK would be leaving the EU in 2019, and Britain’s official political opposition would be run by a committed socialist with no government experience or any previous leadership ambitions.
Yet, despite the political whirlwind that’s swept through a lot of the rich world in the past two years, many investors and managers are less worried than they were even a few months ago. Emmanuel Macron’s election as president of France is the third European vote that has seen defeat for right-wing populists (after Austria and the Netherlands) in the past year, and commentators are now far more confident of a pro business, pro free-trade future. Volatility indices are at historic lows and the Federal Reserve thinks the US economy is in robust health too.
But as the past few years have taught everybody, nothing should be taken for granted. Real wage growth is still elusive in the US and the UK, President Trump’s trumpeted claims about infrastructure spending are still yet to materialize, and politics can often get in the way of policy (as Bloomberg points out after the ouster of James Comey).
So while the world’s managers may be sitting in front of an optimistic market forecast, they are still hesitant to invest in growth opportunities because they can’t rely on formerly cast iron predictions about capital and labor markets, tax regulations or countless geopolitical tensions.
Such high levels of uncertainly across the past few years have made the average large company efficient but risk-averse. Most firms have cut bad businesses and costs, strengthened the balance sheet, and are consistently returning profits to shareholders. Assurance functions like Finance, Enterprise Risk Management, Legal, Audit, and Procurement have nearly doubled in size at the average company. Meanwhile, executives in R&D are finding it harder than ever to fund their ideas.
Time for Some Big Bets
Companies that want to succeed in this economy must be able to respond quickly to changes that allow them to fund new growth. The most successful companies across the long term are those that are comfortable making growth bets – and doing so without prevarication. But this doesn’t mean companies should trade off hard-won efficiency to find growth. The main problem is the attitudes and processes that govern how they invest in growth. Finance and other corporate functional teams can help remove seven “anchors” that hold back a company from growing.
This type of “efficient growth” is a particularly valuable goal to strive for in the current business landscape when economies could be at the peak of their growth cycle. Yet growth of this kind is rare. Only 60 of the 729 public companies in the US and Europe with 20 years of complete financial information have mastered the balance between cost and risk management and invested successfully in transformative growth across the past two decades.
One of the main differences between these efficient growth companies and the rest is that they are not swayed as much by the business cycle, or by the type of residual, broad risk aversion common among executives today. And this becomes clear when considering the timing of their M&A deals, new product launches, and overall capital allocation decisions.
These companies have grown profitably more quickly and across a longer time frame than their peers, not just because of a superior approach to cost management, but also because of a superior approach to investment. In fact, efficient growth firms on average operate with over 10% higher SG&A costs as a percentage of revenue.