Home Economy, Policy & Business What makes companies future-ready?

What makes companies future-ready?

Howard Yu
We speak with the author of IMD business school’s Future Readiness Indicator report about how future-ready companies are for the post-pandemic economy, and what distinguishes resilient companies from others
An interview with
LEGO® Professor of Management and Innovation at IMD

Switzerland’s Institute for Management Development (IMD) released the Future Readiness Indicator report last week, which analyses 86 highest-grossing companies from the fashion and retail, automotive, financial services and technology industries. The research measures how future-ready companies are for the post-pandemic economy and what their likelihood of survival is in a world that will be defined by rapid, frequent change.

The US leads the list with 40 companies, followed by China and Germany with seven each; and France and Japan with six each. At the top of the tree in different sectors were companies such as Lululemon and Nike (fashion and retail), Tesla (automotive), Mastercard and Visa (financial services), and Google, Amazon and Microsoft (technology).

We speak with Howard Yu, author of the report, and LEGO® Professor of Management and Innovation at IMD, to learn more about what distinguishes the resilient companies from the rest, and the performance of Asian companies.

Unravel: When we talk about future readiness of companies, what really are we talking about?

Howard Yu: It is really around how much these organisations have already stepped up and built up capabilities that are most relevant to future competition. In the automotive sector, for instance, semiconductor shortages really exposed companies that were not prepared. Not many automakers have mastered deep knowledge around software as well as electronic components, but some have. This is what we mean by becoming future ready ahead of time – when a company has already scaled new capabilities relevant for future competition. There are different examples for different industries.

Among consumer brands, for example, companies that provide personalised offerings, omnichannel sale networks, connect more closely with their consumers, provide a targeted curation of offerings that require deep knowledge. In short, companies that are future-ready have already scaled up capabilities that are most critical for future competition.

Unravel: How did COVID-19 impact companies and how have responses to COVID-19 impacted the performance of companies in your research?

Mr Yu: The pandemic was like a stress test in that it exposed which companies are future-ready and which ones aren’t. Take e-commerce. All companies talk about digitalisation and e-commerce, and everyone seemed to be talking about an e-commerce strategy. COVID-19 exposed those who just talked, but never really did anything; or those who just experimented a little bit with it. We’re seeing many companies go bankrupt because they did not prepare for the future, but we also see companies like Lululemon and Nike just absolutely on fire, with their sales going through the roof. This is because these companies have scaled their capabilities prior to the pandemic, particularly in terms of going direct to the consumer and direct retailing. These companies have ongoing relations with consumers, be it in terms of letting them order their personalised sneakers online or simply in terms of reaching them directly.

COVID-19 has had an exposure effect, wherein companies that only talked but didn’t do anything have really struggled. On the other hand, however, companies that have been future-ready, are on much better ground as we move beyond the pandemic era.

Unravel: And why is digitising important to future readiness?

Mr Yu: We have to be very careful when we talk about digitisation because it means different things depending on the industry contexts. In the auto sector, when we talk about digitisation, it isn’t just about selling cars to customers online; the big part is whether you’re able to update your firmware so that when there are semiconductor chip shortages, you can use general chipsets and write firmware that keeps your production line humming rather than having to stop production. Tesla, NIO and BYD have done particularly well in this regard. So, in the auto sector, we are talking about deep digitisation going to the machine itself.

For consumer brands, digitisation can be thought of both on the front end and the back end. From getting personalised sneakers to ship very quickly to connecting more deeply with consumers. But if you’re a luxury brand like LVMH or Hermes, you don’t need to digitise your supply chain that much because we are talking of low volumes of sales. For brands such as these, while digitisation may not be as important, a learning attitude is critical, which has made them so good in redefining luxury and exclusivity, especially in the eyes of the millennial – this distinguishes a hip and trendy, prestigious brand versus something that just older people would like. Therefore, learning is absolutely critical, irrespective of sector.

Unravel: You also talk about collaboration. Why exactly is it important? And are we talking about collaboration between companies in the same industry or collaboration across different industries?

Mr Yu: Across industries. The pandemic has shown that all the companies that have generated outsized returns have not done so by coming up with killer apps or product features all by themselves, but through collaboration with others. In the financial sector, for example, everyone believed that retail banks will really transform and win because they own customer data and enjoy deep loyalty. But it turns out that the companies actually winning are payment companies such as Mastercard and Visa that have no direct relationships with consumers. They were making plastic cards and for a while, it was believed that these cards would disappear because of fintech disruption and so would these companies as a result, but that hasn’t happened. These companies embraced ‘frenemies’ – they partnered with both friends and supposed enemies. They have changed with the times and flipped their innovation and business models upside down. In doing so they have secured the longevity of their companies. Whether it is through partnerships with PayPal, Apple wallets or cryptocurrency upstarts, they’re working with them all. They have made their offerings so secure and easy for everyone to adopt.

Unravel: Broadly speaking, how are Asia based companies doing according to the readiness indicator?

Mr Yu: Asia is interesting. In the financial sector, we see quite a number of Asian companies popping up. Of course, the US dominates most of these rankings because the companies have been around for longer, have a more global presence and score well on diversity because they are so global due to their longer histories. But you’re starting to see the likes of DBS, Ping An and Ant Financial do well. We will increasingly see more financial institutions from Asia, including from India, on the rankings, scaling their business models in ways the West has not seen before.

If we look at the auto industry, Asian companies seem to be lagging somewhat, with the exception of a few like NIO or BYD. I think this is understandable as it is a function of the ecosystems these companies find themselves in. If we’re thinking about the future of cars, for instance, we need cutting edge city infrastructure to interact with autonomous vehicles to bring that capability to maturity. Ingenuity and innovation at a private company level aren’t sufficient; the broader ecosystem is important. You need the ease of doing business, and you need full-fledged infrastructure for entrepreneurs and companies to unleash their creativity.

Unravel: Company specific question. What makes Tesla different? Why does it fare so well?

Mr Yu: Is it irrational exuberance in the market? Everyone wants to buy Tesla, be it mutual funds, institutional investors or sovereign wealth funds. Bluntly speaking, COVID-19 exposed most auto manufacturers and showed they did not know what they were doing, barring perhaps Toyota, which was stockpiling semiconductors. But no one else was prepared for the semiconductor shortages. Moreover, Tesla is able to take any general-purpose chipset and rewrite its firmware to keep production going, where other companies in some cases had to halt production. Among most other auto companies, the gap between knowing and actually doing something was far too large. Tesla has shown clearly that it has mastered future readiness and it can scale. On this front, companies such as NIO and BYD have also done reasonably well. BYD has its own semiconductor fabrication factory and makes its own chipsets and has also supplied them to the likes of Toyota. NIO, meanwhile, is the only other company that has been able to rewrite firmware on the fly. Analysts understand these things.

Unravel: How do we define future readiness in the technology sector? What are the future-ready tech companies doing differently?

Mr Yu: Our measure is quite balanced and provides a balanced, composite score. The idea is that in order for a company to innovate in the future, its current business needs to be strong. So we look at recent financial performance, the trajectory of financial performance, and also at R&D intensity. Just because companies are making a lot of money doesn’t mean they are investing it into something new. Another important facet is the diversity of leadership at a company, and this refers not only to diversity in terms of gender and geography, but also diversity of opinion. And then there is collaboration. All of these factors help us arrive at a composite score.

Now when it comes to the tech sector, I think the most important determining longevity is the ability to branch out into new product areas. Apple, for example, has tried hard to move away from just the iPhone. No one wants to become the next Nokia. They need to demonstrate corporate entrepreneurship. Today, if you look at Amazon, is it a B2B company, or a B2C company? It isn’t quite clear. What is clear is that it is everywhere.

Unravel: We want to talk a little bit more about Asia. You have mentioned that in Asia, it isn’t about companies’ ingenuity alone, but also the broader ecosystem. That notwithstanding, are you optimistic about the region’s companies?

Mr Yu: Oh yes, I am. Asia is a fast-growth region, so I am very optimistic. Every company needs to be able to compete in Asia if it wants to be future-ready and wants to continue growing. In many ways, it is the next frontier of corporate growth. This is where Asian companies have a natural advantage, owing to geographical proximity to high-growth markets. As they are based in Asia, they should be able to understand these markets well, including the demographic and economic shifts being witnessed.

But companies must continue to exhibit a deep sense of curiosity, starting at the top and show a strong learning behaviour. Asian companies must embrace action. I don’t mean they should be reckless – but they must capture learning at every step.

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Howard Yu
LEGO® Professor of Management and Innovation at IMD

Howard Yu is the LEGO® Professor of Management and Innovation at IMD. He is the author of the award-winning book LEAP: How to Thrive in a World Where Everything Can Be Copied. He is also a two-times (2013-2015) prize-winning case writer awarded by the European Foundation for Management Development (EFMD) - Europe's largest network association in the field of management development, with more than 800 member organizations. In 2017, Yu was awarded for his work in the "outstanding case writer on the hot topic Big Data - Risks and Opportunities" category at the Case Centre Awards, which are called the business school Oscars by the Financial Times. He delivers customised training programmes at IMD for major global companies in Asia and Europe including China's TravelSky, China Resources, COFCO and Tencent; Japan's Nitto and Recruit Holdings; Singapore's Temasek, ASML, Daimler, Bosch, Electrolux, LEGO, Sanofi and Novartis. Professor Yu is a Hong Kong native and has worked in the Hong Kong banking industry.

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