Finally, we compared the index values for each company with its total shareholder return (TSR) over the same period. By itself, the index provides a simple yet comprehensive check on a company’s readiness to grow. When combined with TSR data, it provides a framework for understanding which actions and attributes are likely to have the greatest impact on performance. We did, in fact, find a correlation: Companies with high scores on the Fit for Growth Index, as a group, scored higher in general performance as well.
A closer look at the index reveals that relatively few companies have comprehensively equipped themselves to drive superior growth. In fact, we found five recurring patterns in the scores: five types of companies, each with its own level of readiness for growth (see Exhibit 2). Like all archetypes, these are, of course, simplifications; their purpose is to distill the essential, common characteristics of each cluster, but not every company in an archetype group will display all the characteristics.
Nonetheless, all of the 197 companies we surveyed can be credibly assigned to one of the archetypes. When we did this, we found that more than three-quarters weren’t optimally equipped to win in their chosen space. A sizable majority were either “Distracted” (they lacked a clearly articulated “right to win” and set of differentiating capabilities) or “Capability Constrained” (they had not adequately operationalized a theoretically strong strategy and capabilities set). As might be expected, the number of companies that were “Strategically Adrift”—without a coherent strategy—was smaller; most major companies have developed a basic alignment to the needs of their market. The most telling finding: Only two categories, “In the Game” and “Ready for Growth,” provided consistently strong performance, and less than one-fifth of the companies (17 percent) fell into either of these two groups.
Performance and Readiness
What does this analysis tell us about corporate performance? How does a company’s “readiness for growth” affect its market return?
To measure the connection, we assigned each company a Fit for Growth Index score and compared it to the company’s total shareholder return over the two-year period from August 2010 through July 2012. Each company received a normalized TSR score between 0 and 100; 100 represented the company with the highest return in its industry segment, and 0 represented the company with the lowest. This form of calculation insulated the TSR results from external factors that might affect some sectors more than others—for example, higher-than-usual exposure to declines in spending due to the recession.
We found a strong correlation between shareholder return and levels of development in the key areas that make a company growth-ready. In addition, we discovered a clear “clumping” of archetypes. Those with similar patterns of development also had similar patterns of performance (see Exhibit 3).
Although the strength of the relationship varies by industry, our analysis confirms overall correlation. Almost three-quarters of companies with high index scores had high or medium-high TSR scores, and the companies with lower index scores tended to have lower TSR scores (see Exhibit 4).
Once the link between the index scores and market returns was established, the next logical question became, What specific elements, if any, in the index framework best explain strong performance? To find out, for each of 10 key subcomponents (listed in “Calculating the Fit for Growth Index”), we grouped our company sample into three bands (low, medium, and high scorers) and calculated the average TSR for each of those bands. This allowed us to determine those subcomponents that had the biggest gap between high- and low-scoring companies.
In general, we found distinct differences between the high and low TSR scorers. A few of the subcomponents within each of the building blocks (strategic clarity, resource alignment, and supportive organization) appear to have a particularly powerful impact on TSR scores. These are coherent strategy, strong capabilities, systematic investments, aligned initiatives, speed and decisiveness, and strong leadership. It should also be noted that even the high scorers in these areas achieved average TSR values of less than 60 on a scale from 0 to 100. This finding suggests that there is still room for improvement, even for this strongly performing peer group.