Uncover the hidden levers of power

September 23, 2022 wpbackupsckb 569 Views 0 Comments

In brief

Three elements of trust are most strongly connected to performance.

1. The hidden power of trust

Advanced statistical analysis of data from PwC’s 25th Annual Global CEO Survey uncovers a relationship between customer trust and financial performance that’s highly significant, with influence rivaling prominently researched variables such as industry and company size. Trust accounted for 31% of the statistical model’s variance for profit margins.

New PwC research shows that trust isn’t a fuzzy concept. It’s an intangible asset tightly linked with corporate performance.

The first lever is trust. Advanced data analysis using responses from more than 4,500 CEOs about customer engagement and business performance shows that customer trust really does improve business outcomes. The research also suggests a three-part checklist to quickly identify improvement opportunities, and enables leaders to benchmark themselves against our surveyed CEOs. Second, sweating the small stuff—in this case, actively managing small projects—is PwC’s shorthand description for a striking new finding: big deals get the headlines, but our analytics show that starting and stopping small projects can improve performance just as much. To realize the full potential of dynamic capital reallocation—roughly five percentage points in profitability, on average, for active reallocators—leaders should pay serious attention to the operating and decision-making norms that enable (or inhibit) nimble moves, both small and large. Finally, if you’re struggling to prioritize or address a proliferation of challenges in these turbulent times, management professor Richard Rumelt explains how a coherent strategy, rather than an ambitious wish list, improves your chances of success.

In brief

1. Trust

2. Dynamism

3. Coherence

Diagnostics

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To understand the performance-driving power of trust, PwC created a “customer trust index,” and then teased out the relationship between trust and results. The data comes from the 4,446 chief executives who took part in the most recent CEO Survey. There’s a wide gap between what leaders and their customers believe about trust. In PwC’s 2022 Consumer Intelligence Series Survey, for example, 87% of senior executives said their company was highly trusted, but only 30% of consumers polled at the same time said they highly trusted companies. So, instead of relying on perceptions of trust, the survey quizzed CEOs about the nature of their customer engagement.

Illustration of someone holding umbrella over other people

Quantifying trust

Each question reflected a different dimension of customer trust: loyalty, reliability, foresight, intuition, competency, and benevolence. The questions were specific (e.g., “Thinking about the customers who frequently purchase your products and services, how often would you say they update their preferences to receive a more tailored experience?”). The responses were then aggregated and normalized by industry to generate the trust index, with quartiles ranging from most to least trusted. (Demographic characteristics, such as the company location or size, were taken into account to ensure a fair comparison across companies.) PwC’s team undertook factor analysis, which involves grouping highly interrelated individual questions into variables that can be analyzed and correlated with performance outcomes. Across the survey as a whole, customer trust was an extremely positive and statistically significant correlate with data from the same survey about a company’s financial performance. In other words, higher scores on the customer trust index and better performance outcomes went hand in hand.

From analysis of the six factors comprising its customer trust index, the PwC team identified three that are most likely to influence performance. Those are CEO perceptions of their customers’ propensity to:

to a competitor’s products or services

Switch

feedback if the company’s products or services exceed expectations

Provide

(or buy into) new updates or changes to a company’s products or services

Resist

I got a knock on my door one day. Two engineers standing at the door, and they said, ‘We want to develop a wearable, and we’re very cognizant that wearables may impact privacy. So we want your team embedded from the very start of this, because we’re really focused on health data.’

—Jane Horvath, September 2022

Dive deeper on trust: Translating trust into business reality

“And so that is how it flows at Apple. When they have an idea, they bring the privacy professionals—
not only my team, but we also have a team of privacy engineers that also embeds in products.”

Saying “no” creates positive returns

The PwC team then grouped highly interrelated individual questions into variables and correlated these with performance outcomes. The performance data came from answers to questions about profit margins and (for some industries) return on assets over the previous 12 months. Because the survey asked about both starting and stopping initiatives, the PwC team believes there is unlikely to be a link between strong business performance and more frequent resource allocation simply due to a surplus of resources. After all, why would such a surplus cause leaders to stop investing?

The 4,446 CEOs who took the survey were asked about the frequency with which they and their organizations employed seven resource reallocation mechanisms. Three of those tools (initiating investments in new projects, stopping low-potential or non-aligned projects, and doubling down on high-potential projects) were at the project level, and four (scaling up high-performing businesses, trimming low-performing businesses, divesting businesses, and acquiring businesses) represented business-level decisions.

The effect of project-level action on profit margins

Analysis of data from PwC’s 25th Annual Global CEO Survey showed that companies that redeployed resources more frequently achieved profit margins roughly five percentage points higher than companies that were less active. The PwC team looked at seven different mechanisms for resource allocation, comparing profit margins to how often they were employed; five proved to be statistically significant. Though this regression analysis shows only a correlation between resource reallocation and performance, the researchers have strong reason to believe there is a causal relationship between the variables.

Research shows that sweating the small stuff—by frequently starting and stopping projects—contributes as much to performance as big deals and enterprise-wide decisions.

2. The hidden power of dynamism

Beware the red flags of excess centralization.

Five ways to combat a “set it and forget it” mindset

These include approval requirements for relatively minor initiatives that bubble up to high levels of the organization, and command-and-control funding for projects that are clearly the domain of individual business units.

Google at one time allowed employees to allocate up to 20% of their time to projects of their choosing. AdSense, Gmail, and Google News are three noteworthy outcomes.

Encourage bets on innovation at every level.

Devise “stop” mechanisms to ensure that small projects don’t get out of control. The baking company Goodman Fielder used to maintain more than 500 R&D projects. The company appointed a “project killer” who reduced that number to 200.

Install a kill switch.

Don’t be afraid of acquisitions—including smaller, lower-risk ones that likely contribute to the performance benefits uncovered in this research.

Place small regular bets with M&A.

Although they aren’t for everyone, agile operating approaches—intended to decentralize authority, empower employees, and reduce barriers to decision-making—can facilitate project-level resource reallocation.

Assess your agility.

Listen to podcast

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Climber helping teammate with a helping hand

Don’t

Consider the example of a tech company that undertook a strategic reset. First, its management team conducted a strategic review to identify its main challenges. Then, company leaders scored each challenge, from zero to ten, on its importance (how critical is it?) and its addressability (is there a good chance it could be surmounted over the next three to four years?). Plotting these scores quickly revealed which challenges—manufacturing problems and culture—the company needed to put at the core of its strategy.

3. The hidden power of strategic coherence

—Richard Rumelt, September 2022

When starting strategy work, avoid the language of goals and ambitions and, instead, emphasize the logic of challenges, policy, and action. I start my own search for the crux of a challenge simply by asking, ‘What makes this situation so hard?’”

Hand drawn portrait of Richard Rumfelt

Many business strategies are incoherent, according to business professor Richard Rumelt, reflecting the C-suite’s overreliance on tactical response even in the face of major inflection points such as market fluctuations, geopolitical instability, and disruptive trends in technology and workforce dynamics. Rumelt suggests that strategic coherence—a management priority championed by PwC since the 2010 publication of “The Coherence Premium” in Harvard Business Review—emerges from a quest to conquer the most important challenges facing a company: the crux. If those challenges aren’t high-stakes, then they’re not really strategic. If they contradict one another, they’re incoherent.

Illustration of male and female coworker stacking post it notes.

Harnessing trust, dynamically allocating resources, and striving for strategic coherence can create value in uncertain times.

October 2022

In brief

1. Trust

2. Dynamism

3. Coherence

Diagnostics

Define strategy in terms of goals and ambitions—for example, “the company will double revenue over the next decade.”

Emphasize the logic of challenges, policy, and action—e.g., “we will invest in pilots to assess technical feasibility.”

Shy away from talking about difficulties.

Have frank discussions about the problems you face.

Indulge in wishful thinking about challenges.

Identify the importance and addressability of key challenges.

Build a strategy around a challenge if there is no feasible solution.

Choose a challenge you can overcome.

Rely on your first intuition.

Think again. Ensure you have identified the crux challenge. Then act.

Asian woman carrying baby girl shopping for produce in grocery store

What if we told you that tools to meet many of the difficult challenges facing your company are actually hiding in plain sight?

pwc.com

Source: PwC analysis of data from PwC’s 25th Annual Global CEO Survey

Source: Albert O. Hirschman, Exit, Voice, and Loyalty (1972)

Hear Apple’s Chief Privacy Officer on embedding trust in product development

Watch: PwC’s Richard Oldfield outlines the potential of three critical performance levers that you’re likely overlooking.
Read transcript

This issue of strategy+business highlights three hidden levers of power that, when activated, move the performance needle. Two were revealed, according to new analysis of PwC’s survey data, to be even more powerful than expected, and the third may be more fundamental but is all-too-often overlooked.

In depth

TRUST | INSIGHT 1

TRUST | INSIGHT 2

TRUST | TAKE ACTION

African american young female working together with vietnamese businesswoman colleague, putting post it notes on window glass in office.
Black businesswoman working together with asian businesswoman colleague, putting post it notes on window glass in office.

DYNAMISM | INSIGHT 1

Share of performance variance associated with corporate resource reallocation

Source: PwC analysis of data from PwC’s 25th Annual Global CEO Survey

DYNAMISM | INSIGHT 2

It is often harder to stop an initiative in an organization than to start one. This analysis suggests the right no can be valuable—hitting “stop” could free up resources for a more valuable “start”—and that leaders should advise managers to avoid letting things run on autopilot.

DYNAMISM | TAKE ACTION

Dive deeper on dynamism: The overlooked power of day-to-day dynamism

Jumble of coloured wires with some straightening out.

COHERENCE | INSIGHT

Your strategy may be more of a wish list than a plan.

The profit-boosting power of making new moves

Source: PwC analysis of data from PwC’s 25th Annual Global CEO Survey

Source: Richard Rumelt

Plotting your challenges to find the crux

Don’ts and Dos

A guide to developing a coherent strategy

Dive deeper on strategic coherence: Strategic coherence for tumultuous times

Diagnostics: Assessing your powers

Are your newly revealed powers sufficiently developed for you to win in the market? Where are they strong, and where are they weak? How do you make them more potent? Take our diagnostic tests to reveal your organization’s trust profile and strategic coherence.

STRATEGY PROFILER

Now test the coherence of your strategy

Illustration of trees along a path with the words the contender, the supercompetitor, the restless, the stretched, the untopped and the drift

By using the Strategy Profiler—a time-tested tool on the website of Strategy&, PwC’s global strategy consulting business—you can find out in five minutes how coherent and powerful your company’s strategy is.

TAKE THE TEST

Exit

What are we doing to guard against customer defections?

Trust, dynamic resource reallocation, and strategic coherence shouldn’t be brand-new additions to your tool kit. But for too many companies, they’ve been taken for granted, left at the bottom of the drawer, as leaders looked past them in search of seemingly newer—or flashier—ways to manage disruption. The fresh evidence presented here, however, suggests a renewed focus on trust, sweating the small stuff, and driving for strategic coherence will add value to your organization. It’s time to dust off those old levers and put your rediscovered powers to work. They’re right there if you choose to see them.

In conclusion

Portrait by Noli Novak

Artwork by James Yang

—Sherlock Holmes in the film Sherlock Holmes (2009)

It’s

Illustration of three rain drops

Illustration by James Yang

Illustration of three post it notes

Voice

How can we better engage our customers in dialogue about our products and services?

Loyalty

How can we encourage our customers to come with us as we evolve our offering?

Illustration by James Yang

Go deeper on hidden levers of power

Black and white image of Climber helping teammate with a helping hand.

Translating trust into business reality

New PwC research shows that trust isn’t fuzzy. It’s tightly linked with corporate performance.

Starting and stopping projects contribute at least as much to performance as making big, business-level decisions and deals, according to new PwC research.

The overlooked power of day-to-day dynamism

Black and white image of Black businesswoman working together with asian businesswoman colleague, putting post it notes on window glass in office.

UCLA professor Richard Rumelt writes that the best way to address uncertainty is to identify key challenges instead of focusing on hoped-for results and ambitions.

Strategic coherence for tumultuous times

Black and white image of jumble of wires with some straightening out.

Check out The Leadership Agenda for more sharp, actionable insights from PwC curated to help global leaders build trust and deliver sustained outcomes

Like what you’ve seen?

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EXPLORE

The new podcast from strategy+business, which convenes a global community of solvers to tackle the world’s most important problems

Like what you’ve heard?

EXPLORE

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Contact us

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Richard Oldfield
Global Markets Leader Email

Aaron Gilcreast
Global Valuations Leader Principal, PwC United States Email

Kai Lakhdar
Partner, PwC Canada Email

Fredrik Lindblad
Partner, PwC Sweden Email

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©2022 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Strategy+business is published by certain member firms of the PwC network. Articles published in strategy+business do not necessarily represent the views of the member firms of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see www.strategyand.pwc.com. No reproduction is permitted in whole or part without written permission of PwC. “Strategy+business” is a trademark of PwC. Cookie Policy Change analytics preferences

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overt,

it’s

covert.”

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Three checklist questions for a consumer trust stress-test

Our diagnostic uses questions from our CEO Survey to plot your trust profile over six key dimensions. Take the two-minute test to reveal your profile and compare it to the average score of thousands of CEOs.