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(originally published by Booz & Company)


The Agility Factor

A few large companies in every industry show consistently superior profitability relative to their peers, and they all have one thing in common: a highly developed capacity to adapt their business to change.

Everybody knows that big corporations, by nature, maneuver like battleships. Held back by their own inertia and current business strategies, they cannot turn quickly when the competitive environment changes. Everybody also knows that high performance, as measured by shareholder returns, is impossible to sustain over the long term; no company consistently beats the market.

But a recent in-depth study of long-term performance suggests an alternative point of view about business strategy. When the measure of performance is profitability, a few large companies in every industry consistently outperform their peers over extended periods. And they maintain this performance edge even in the face of significant business change in their competitive environments. The one factor they seem to have in common is agility. They adapt to business change more quickly and reliably than their competitors; they have found a way to turn as quickly as speedboats when necessary.

ExxonMobil is a good example. Throughout the 1980s, when it was still just Exxon, it was the largest, most profitable oil and gas company in the world. It achieved that performance through disciplined decision making. When diversification proved unprofitable, it rapidly shed ancillary businesses, such as steel and office equipment, to focus on oil and gas. When oil prices fell, it reduced overhead costs by shrinking corporate headquarters and relocating HQ from Manhattan to Dallas. Exxon also moved aggressively into Asian markets where it had had little presence historically.

Then in 1989, Exxon fell from grace. The company reeled under the regulatory, legal, and media scrutiny brought on by the Valdez tanker spill in Alaska’s Prince William Sound. It spent US$2 billion on the cleanup effort, and paid more than $6 billion in punitive fines and damage claims over the next seven years. Moreover, the perceived arrogance and indifference of Exxon management created a public relations disaster. Also in 1989, its Baton Rouge refinery exploded, and Exxon spilled 567,000 gallons of heating oil into an estuary between New York and New Jersey. When Lee Raymond took over from Lawrence Rawl as chairman in April 1993, Exxon had dropped on Fortune’s list of most admired companies from number six to 110. As Raymond noted in a rare interview, a good day for him was one in which “Exxon” or his name did not appear in the papers.

Many companies would have reacted by putting in place short-term fixes and doing whatever they could to return to their old ways of operating. Instead, Exxon quietly moved to internalize the lessons of the Valdez spill and to build the capabilities required for future profitability. Over the next few years, Exxon dramatically raised its health, safety, and environmental performance. Recognizing that external upheavals could occur at any time, the company relentlessly drove for efficiency over the 1990s—a fortunate move because oil prices continued to fall throughout the decade. Exxon exited businesses and markets where it did not have critical mass, reduced employment by 3 percent per year, improved its exploration capability (where it had historically lagged behind its competitors), and pushed production efficiency even harder. Through all these measures, and by taking full advantage of the innate discipline for which it was known, Exxon halved its cost of finding oil and greatly improved its exploration success rate. In 1995, Lee Raymond was able to say, “Exxon is now much more efficient at getting on with it.”

Exxon’s focus on execution, technical excellence, and capital efficiency positioned the firm well to exploit the rise in oil prices that began in 1998. In 1999, Raymond, dubbed by Businessweek as the “anti-celebrity CEO,” engineered the largest acquisition in history to that point, and one of the most successful, with Exxon’s purchase of Mobil. In 2000, the combined company became the most profitable in history, a ranking it still holds today, and launched a new series of exploration initiatives to spur growth in oil and gas reserves.

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