Businesses need strategic pivots as a great value migration revs up

The covid pandemic has battle-tested the resilience of India’s corporates. Top executives reacted swiftly, reorganizing supply chains, speeding up decision-making and adopting remote-working models. As companies emerge from the pandemic, business leaders are now focused on how to pivot their operations and strategies to optimize—and in some cases, re-imagine—their businesses for the ‘next normal’.

The call to re-imagine business strategies has come from the great migration of value—happening since 2015 but accelerated by over 10 times since the onset of the pandemic—towards companies and business models that use disruptive technology and customer-centricity in an agile manner to leapfrog their competitors.

McKinsey research shows that of all the market capitalization gains witnessed so far since just prior to the onset of the pandemic, in February 2020, a handful of 25 global firms (call them the ‘mega 25’) have captured as much as 40% of all the value migration gains. For example, electric vehicle (EV) maker Tesla, one of these ‘mega 25’ companies, now has a market capitalization equivalent to that of the next 10 largest global automotive manufacturers combined.

The value migration is also a reflection of the accelerating divergence in the operating performance of companies, both across sectors and within most of them. Even before the pandemic, the top 20% of companies globally by economic profit (defined as net absolute value created by a company after returning cost of capital) have been gradually pulling away from their peers since 2015.

Will the great value migration continue? Only time will tell, but one of the leading indicators—where the funding from the institutional private equity and venture capital (PE/VC) investors is channelled—confirms that these funding flows are indeed lopsided in favour of those sectors where value migration gains are higher. These include tech-intensive companies in software and SaaS (software as a service), pharmaceuticals and biotechnology, financial technology, energy transitions, logistics and consumer products/services that are drawing the lion’s share of such funding. At $165 billion, SaaS alone accounted for 17% of the total capital flows from global PE/VC funding.

In a recent McKinsey survey to understand the drivers of productivity that companies will put into action between 2020 and 2025, executives cited automation and technology, business reorganization and agility, and adopting digital channels as the main enablers of productivity gains. Our sector analysis shows that a pivot towards sustainable business strategies could unlock incremental real productivity growth of approximately 1.5 to 3.0 percentage points per year in the next five years.

As chief executive officers (CEOs) step back to craft strategies and transform their organizations, there are five elements of the ‘pivot’ that become apparent.

First, raise digital customer access and engagement, often using the data thus generated to continue to bring new offerings and commerce to them—i.e., think ecosystems, omni-channels, direct-to-consumer modes of operation and ownership of customer data. Significant value has migrated to digital ecosystems and many leading Indian companies have already taken steps to build such digital ecosystems. For example, a healthcare company has created India’s largest omnichannel healthcare system—and the fastest growing health-tech platform—with over 6.5 million registered users. It offers customers personalization at an individual level, consistency of customer experience across channels and customer journeys, and an opportunity to develop and promote more personalized products and services.

Second, get on the right side of sustainability. There is no hiding place after CoP-26—‘net zero’ is likely coming to every country and its firms—and proactive movers are likely to get rewarded the most. Our global research shows that corporates with higher environmental, social and governance (ESG) performance show superior financial performance as well—up to 10-20% higher valuation multiples and better funding availability. ESG projects, especially focused on decarbonization, circular products and packaging, water/waste management, hydrogen and so forth, are projected to generate $5 trillion in addressable market value by 2025. The value from embracing ESG also extends to retaining and attracting talent, as they experience a sense of purpose at the workplace.

Third, embrace the power of the cloud as a real value creator with potential to deliver huge gains across sectors, such as high-tech, oil and gas, retail and healthcare services, insurance and banking. Cloud and digital technologies are now seen as strategic differentiators and value creators across the organization—from research and development to logistics and sales and marketing—and are an intrinsic part of boardroom discussions. Our research estimates that by 2030, Fortune 500 companies alone stand to benefit by more than $1 trillion in improved earnings before interest, taxes, depreciation and amortization (EBITDA).

Fourth, build speed and agility as a muscle. During the pandemic, many companies were forced to move swiftly to optimize their operations. Now, this speed must be woven into the design of an organization. Companies must anticipate future shifts in demand and get ready to re-imagine their entire commercial and operating models with due agility. There are three aspects to consider while building for speed: Rethink ways of working (for example, by configuring agile squads to speed up decision-making), redesign non-hierarchical structures (by way of empowered teams that leverage a hybrid work model, for example), and reshape the talent pool (field tomorrow’s leaders today and foster a culture of learning and development).

Finally, companies must envision partnership ecosystems that would enable them to stay asset-light, not owning every piece of the value chain. Many of India’s fastest-growing digital-native companies have woven an extraordinary partner ecosystem to enable an asset-light approach. Larger companies must also rebalance their capital allocation towards growth and the creation of optionality that could promote resilience.

India offers a tremendous opportunity for its companies to grow and create value in the coming decade. Embracing five elements of the ‘pivot’ outlined above towards sustainable business strategies could enable positive value migration as companies chart their path ahead.

Rajat Dhawan is India managing partner, McKinsey & Company