Mounting macroeconomic and geopolitical challenges could make 2022 harder to navigate than the past two years of pandemic turmoil. Persistent inflation and tighter monetary policy have raised costs and weakened consumer confidence, fueling fears of a renewed economic downturn. The Russia-Ukraine war has halted company sales in the region, while also lowering supplies of critical commodities and rupturing supply chains worldwide.
This all makes for a potent cocktail of volatility. But no matter what external shocks come next, there is one factor that has been shown to make organizations more operationally resilient in times of crisis and responsive to consumers and new market opportunities: their “future-readiness”. This is the degree to which they are ready to respond to shifts in the competitive landscape. Being “future-ready” means being internally robust, being able to adapt and find and scale new sources of growth.
In times of turmoil, like today, future readiness is the foundation for resilience. When companies are not future-ready, they tend to be wrong-footed by surprise events, such as Covid-19. And as the world becomes more uncertain, future-readiness is ever more important. Those who are future-ready can be reasonably optimistic.
At the IMD Center for Future Readiness, we have compiled the Future Readiness Indicator, which measures how prepared companies are for the future. Today, we released our ranking of 23 financial services companies and 22 automakers in their respective industries. Our ranking is based on seven factors given equal weight in the methodology. Companies can use the model to boost their future-readiness.
To compile our rankings, we gauged a company’s financial performance by looking at five numbers, starting with the growth rate of a company’s operating revenue. Not only do we expect a future-ready company to deliver above-average profitability, but there should be consistent, not erratic, growth in operating cash flow. That’s because you need a strong balance sheet to invest in the future.
Technology companies such as Peloton, Zoom and Netflix had experienced rapid growth during the pandemic, fuelled by access to cheap credit and higher consumer demand during lockdown. Now, as monetary policy tightens and economies reopen, these platforms are losing subscribers and the stay-at-home stocks are plummeting.
The lesson is that a strong financial foundation is crucial. Future-ready organizations leverage a healthy balance sheet to consistently reinvest their capital in research and development. Companies need to be winning today while simultaneously building the future.
Our second metric gauges the trajectory of new product rollouts, by looking at whether the product gains media traction. When a new product is winning market acceptance and expanding across geographies, it gains publicity. No news is bad news.
To come up with a measure for the early results of innovation, we curated a list of words, phrases and acronyms related to the most salient disruptions in each industry. For automakers, we found media talk up electric vehicles, autonomous driving, connected cars, and other similar phrases. In finance, it’s blockchain, artificial intelligence, mobile payment, and mobile services.
We searched through Factiva, a global news database of more than 33,000 sources, to calculate how many such mentions companies received. We also looked at how many times organizations themselves mentioned these phrases in their corporate communications. We then calculate a three-year average score for such mentions. This is one way to gauge a company’s market traction.
Today’s innovations will have been built upon the prior intensity of a company’s investments in new ventures — the third factor in our ranking. We measure the total number of investments in the past three years, as well as total acquisitions. In addition, we gauge the number of patents filed, on top of the number of Application Programming Interfaces created. APIs make a company’s services available to third parties.
This highlights how the most future-ready companies look for strategic partnerships. Consider payment incumbents Visa and Mastercard, which have collaborated with fintech challengers to expand their services. Customers of the cryptocurrency exchange Coinbase, for example, can use Mastercard credit and debit cards to make purchases on Coinbase’s NFT marketplace. This is a platform for minting and buying nonfungible tokens, which have exploded in popularity. The deal underscores Mastercard’s openness to new ideas and external partnerships, two important factors in being future-ready.
A company’s productivity is our fourth measurement. Productivity is the key to long-term success. We calculate a three-year average of operating revenue per employee, EBITDA per employee, and for banks specifically, assets under management per employee. The higher these metrics, the more output a company can generate from its resources. One way to increase productivity is to leverage artificial intelligence to free people from manual drudgery, so they can spend more of their time completing higher-value tasks.
We also look at ESG (environmental, social and governance) performance, including the diversity of senior management, which correlates with innovation. Specifically, for banks, we look at the proportion of women on the board and executive team. We also explore the background of the CEO, because industry outsiders bring fresh perspectives. In addition, we look at the competitiveness of the country where the company is headquartered, to gauge the ease of doing business.
Sustainability makes good business sense. By reducing energy and waste, a company can lower costs and even generate additional revenue. Tesla, for one, has been selling carbon credits for years. This used to be its main source of income, before it was producing electric vehicles profitably.
We have created a company’s ESG score based on existing scores from ratings agencies, but taking into account governance controversies reported by the media. Tesla, for instance, should in theory score highly for ESG, given the green credentials of electric vehicles. But, it scores poorly because of chief executive Elon Musk’s own governance issues. In 2018, for example, he and Tesla were fined $40m by a regulator because Musk tweeted (dishonestly) that he had “funding secured” to take Tesla private.
In addition, we measure a company’s cash buffer, the amount set aside for a rainy day. This includes cash to total assets — the portion of assets held in cash or near-cash securities. A high cash ratio indicates safety. We also look at total debt to equity, which evaluates a company’s financial leverage by dividing total liabilities by shareholder equity. This measures how much a company finances its operations through debt, as opposed to growth, and the ability of shareholder equity to cover outstanding debts.
Performing well across all these dimensions is hard, but doing that can lead to better performance on the stock market, which is the seventh metric of the Future Readiness Indicator. We assess stock market performance in terms of the five-year average price to earnings ratio. A high P/E ratio means investors are willing to pay a high share price today because they expect higher growth in future.
Further, we gauge the three-year average market capitalization, or how much a company is worth, and the price to book value, the ratio of the market value of shares over a company’s assets on the balance sheet.
We use all of these metrics to produce a balanced composite score for our resulting industry rankings. And what they show is that the most future-ready companies exhibit specific behaviors that make them more likely to successfully navigate the mounting macro problems facing executives today, and whatever comes next.
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