RESEARCH REPORT

In brief

In brief

  • In an era of digital disruption, organizations are challenged to pivot towards new, scalable businesses while transforming existing operations.
  • The Wise Pivot requires an investment approach that enables companies to create major new businesses without prematurely abandoning their core.
  • Companies that master the Wise Pivot are in the best position to drive the most value out of their core business and pursue new business activities.
  • Pivoting wisely is a unique journey for each organization – we provide “starting” scenarios so companies can forge their own path.


Who’s thriving, in the age of constant disruption?

Look no further than Nike, whose long-term growth plan involves a massive transformation to accelerate product innovations, double its speed to market and strengthen its customer’s retail and online experience. Or Merck KGaA, the pharmaceutical and chemical giant, which for the past decade has not only restructured its business but has also expanded into new industry segments – to the tune of US$21 billion in new acquisitions – to deliver unprecedented growth and strong margins in recent years.

These companies are just a handful of organizations that are investing in the future – to purposefully prepare their business for change. They do so by directing available investment capacity towards scalable new businesses, while continuing to transform and grow their core business. But striking the right balance can be challenging.

33%

of companies we analyzed (out of 1,500) have adopted an aggressive investment strategy, focused on future opportunities.

55%

of companies we analyzed (out of 1,500) have adopted a cautious investment strategy, focused on their core business.

Pivot to new business, confidently

The Wise Pivot calls for a new investment strategy. That strategy starts by assessing an organization’s investment capacity (resources available to invest) and investment velocity (the speed at which the company has been embracing new business activities). The Wise Pivot is also dependent on having the confident and right mindset that puts leadership – specifically the CFO – at the heart of the decision-making table, to strike a holistic, effective interplay between investments in old and new business activities.

Timing is critical—Be ready to flex

Some companies only begin to transform as a reactive response to disruption. Pivoting wisely, though, means keeping an eye on the timing to shift investments and activities to new businesses:

  • When things are going well: Pivoting from a position of strength enables organizations to take calculated risks with new business activities.
  • When industry disruption gives rise to possibilities in completely new areas: Having the courage to experiment in new markets early, in order to identify opportunities that could lead to strong financial gains in the near future.

To capitalize on these opportunities, a company’s investment strategy needs to flex - as pivoting wisely takes years – between maintaining a strong, profitable business that can meet shareholder expectations while also creating options for future growth.

"The risks are high. Over-investing in new areas to stimulate innovation can mean overstretching financial capacities, while moving too slowly can make companies obsolete."

– OMAR ABBOSH, Group Chief Executive – Communications, Media & Technology

One size does not fit all

The path that any given company should pursue depends on its position, as well as the opportunity that triggers action. Here are four different “starting” scenarios to consider, each reflecting a different level of investment capacity and appetite to make decisive moves:

Determined
33% of companies

Adopted an aggressive investment strategy supported by high investment capacity, to create future growth options ahead of peers.

What's next? How to scale new businesses at speed?

Compelled
12% of companies

Adopted an aggressive investment strategy, but appetite to invest in future growth is limited by investment capacity.

What's next? Which alternative funding sources can help increase investment capacity?

Reserved
22% of companies

Adopted a cautious investment strategy, despite high investment capacity, focusing on maintaining current business.

What's next? Which new markets to attack leveraging the strong current business?

Restrained
33% of companies

Adopted a cautious investment strategy, need to replenish investment capacity or find new growth opportunities within limits.

What's next? How to reform the current business to replenish investment capacity?

The critical role of the CFO

It is imperative to bring the right mindset to the decision-making table. Who better to include than the CFO, whose position and expertise are uniquely suited to helping a company strike a balance between investments in old and new business activities?

Here’s how CFOs can support the CEO:

  1. Create commitment for new businesses

    Recognizing a winning idea is not easy—but committing to it with multi-year investments in innovation, acquisition of new assets and new skills is even harder. Why? New businesses, particularly those that are powered by emerging technologies, often take longer to build and scale but offer potential rewards later.

    What CFOs can do:

    • Collaborate with other business leaders to define their own “businesses of the future”, even if the existing business is not under imminent pressure.
    • Define the economic profile and relevant success metrics for new businesses.
    • Rotate and prioritize capital allocation to support the growth of new businesses to avoid having to compete with the core business.
    • Support the capability to drive experimentation in the New.
  2. Be transparent about synergies

    As companies pursue new growth opportunities, they should be proactive about seeking synergies across the core and new businesses—in terms of products, channels, customers, operational efficiencies, and talent.

    What CFOs can do:

    • Bundle/repurpose relevant assets to create oxygen for growth.
    • Create management incentives so that the business unit leads leverage new digital capabilities and create management accounting incentives to bring innovation back into the core.
    • Encourage a transition of finance talent with the right skills from the old parts to new parts of the business.
    • Develop a compelling story for the investor community that boosts confidence in the company’s ability to realize synergies between existing and new businesses.
  3. Grow through ecosystem partnerships

    Leveraging partnerships across ecosystems within and beyond industry boundaries can enable a company to exploit and scale new, often riskier opportunities much faster than they would be able to otherwise.

    What CFOs can do:

    • Develop a commercial ecosystem strategy to identify and seize new opportunities or ideas.
    • Set up a financial mechanism to lock in innovation from the ecosystem.
    • Adopt a new investor or “outside in” mind-set.
    • Know when to walk away from partnerships that limit growth potential to find more strategic, or more profitable, opportunities.

Learning to pivot wisely

In today’s world, stability in business is not the end game. Opportunity comes from learning to pivot wisely. That pivot will be different for each company, while success relies on the same factors: the willingness of business leaders, especially CFOs, to commit to new businesses, be transparent about synergies and collaborate. Companies that follow the traditional finance route will be hard pressed to get to the New—but by making a Wise Pivot, they can seize the opportunity to lead in the New.

About the research

We leveraged our diagnostic model to evaluate the investment and financial activities of companies undertaking a Wise Pivot. The model assesses the pivot intensity of companies over a five-year period, using two measures:

  • Investment capacity: a function of three factors, including liquidity, cash replenishment capability and access to financing that are combined to determine an index score.
  • Investment velocity: is a combination of the direction (the shift of investment into future business) and rate of investment (how quickly investments are allocated in comparison to competitors).

1500

non-financial services companies

14

Industries

About the Authors

Dr. Christian Campagna

Senior Managing Director – CFO & Enterprise Value


David Axson

Managing Director – CFO & Enterprise Value


Dr. Vedrana Savic

Managing Director – Thought Leadership


Dr. Daniel Huedig

Senior Principal – Corporate Finance Research

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