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Published on October 10th, 2022
How We Determine If A Business Is Future-Ready?
Published on October 10th, 2022
Everyone wants to be future-ready. Every employee wants to be confident they are employed by and building a career with a future-ready organization, and every manager understands that it’s not about what your team produced last quarter, but future readiness is what really makes a difference.
Whether you are a leader who wants to become future-ready as an individual, an executive who wants to make sure your function or business unit is future-proof, or someone who oversees an entire organization who wants to ensure your company becomes future-ready, the IMD Future Readiness Indicator is a powerful and meaningful tool. You know why it matters, but how does it all work?
Measuring Future-Ready Businesses
Becoming future-ready is a very evasive concept. Fortunately, with our research methodology, there is a way to count it, to measure it. Everyone can manage their future readiness, and we’ll show you how.
Within each industry, highly ranked companies repeatedly reinvent themselves. They redefine how to design and manufacture their products, or they reimagine how to deliver their services. Future-ready organizations “leap” repeatedly. They have leaped from their historic areas of expertise to new knowledge. They are outward-looking, they are curious, and they assimilate new concepts from other industries.
At IMD we always compare top leaders of organizations that are becoming future-ready. A future-ready business is not only about having a hot product, and what we learned in 2022 is that it requires a balanced approach. That is why in our FRI (Future Readiness Indicator), we take a composite score perspective to create the industry-specific ranking tables (Discover the automotive industry).
Ranking is interesting. But what choices companies have made, and how they’ve come to make those is even more profound. This is why there is also a computer-aided textual analysis algorithm that investigates a company’s attitudes, a key determinant to being a future-ready business.
Our Research Methodology
On our team, led by Howard Yu, we’ve been tracking how likely a firm is to successfully move toward a new knowledge discipline in its effort to prepare for the future. We introduced the Future Readiness Indicator to measure how prepared for a changing future companies are sector by sector. We began with four industries: Automotive, Fashion & Retail, Financial services, and Technology, including the key players in each industry.
Industry rankings go beyond leadership evaluations and business performance analysis and are instead based on seven main factors.
- Financial fundamentals
- Investors’ expectations of future growth
- Business diversity
- Employee diversity/ESG
- Research and development
- Early results of innovation efforts
- Cash and debt
These seven main factors, which aggregate into an overall result, comprise 32 variables.
How IMD Synthesizes the Data
All of these variables are hard data that you could find too, but no one has synthesized it quite like the Future Readiness team. The variables are contingent on publicly available data on company websites, annual reports, press releases, news stories, and special reports on topics such as corporate social responsibility.
For data on volume of press coverage, the team consulted Factiva, a global news database that covers various premium sources, and counted the number of press releases on each trending topic previously identified in this industry for the past three years. Supplementary third-party data is provided by CrunchBase, which specializes in the topic of corporate ventures, Espacenet, which specialized in patent search, Google trends and annual reports.
Crunching the Numbers
To calculate the Indicator, first, we collected historical data for each company. Then we performed calculations for each variable (e.g., 3Y CAGR, or the three-year compound annual growth rate in Revenue) before we standardized the criteria data. Next, we aggregated variables to the main factors and then determined the overall ranking.
For the purpose of comparison, we ranked each company from 1 (best) to n (worst, n=sample size) on a scale of 1 to 100. *note: factors are subject to change by industry, thus the number of variables may vary across industries.
The calculated ranking is paired with textual analysis from an algorithm that analyses public news sources from the last decade to answer important questions on companies’ behaviors, for example:
- Which companies are more proactive learners?
- Which companies would rather exploit near term opportunities than explore capabilities that have less immediate pay off?
- Which companies are more committed to embracing digital trends?
This approach follows a long history of research from the academic management literature. We also compare the scores between companies in each calendar quarter is to ensure a fair baseline as companies face the similar circumstances at the same point in time.
What constitutes a Future-Ready Business?
So, with all this research and analysis what did we find? A future-ready business has a bias towards learning, and that attitude and philosophy typically leads to outstanding returns for investors, not only in trendy industries like fashion, where Lululemon commands outstanding scores in our Indicator, but in other sectors we’ve studied as well.
At IMD, our researchers focus on measures that have been shown to fuel innovation, and in turn, investment in the digital tools and talents that create and maintain brands that everyone can love. To make sure you can have future-ready business, you may be best suited joining the likes of Tesla, Alphabet, and Lululemon, all of whom scored a perfect 100 on our weighted scorecard and definitively proved they are future-ready companies.
With all these factors in mind, is your organization one of the companies of the future?
It’s shocking to see Coca-Cola making an appearance in the alcohol section of the grocery aisles. For more than 100 years, it has stayed away from alcohol, never allowing an association with any booze. It’s been as much a branding choice as a decision for the sanity of its supply chain.