It is true that the best predictor of a corporation's future profitability is its current profitability. High levels of profitability are more often than not followed by high profits. But, this is less and less likely to happen. A significant number of corporations fail to fit the pattern of being consistently high performers. Instead, they are what Worley, Williams, and I call "thrashers" in our new book, The Agility Factor. Their profits fluctuate over the years from being very good, to average, to below average and then often repeat the cycle. They stand in contrast to sustained high performers that have above average levels of profitability for decades. In a given year they may not have the highest level of profitability in their industry, but year after year, they are better than most.
What differentiates the thrashers from the consistently high-performing corporations? We found the answer by examining the financial performance and management practices of over 400 large corporations in more than 20 different industries. We looked at their performance over 32 years and found clear differences between the consistently high performers and the thrashers. It is worth mentioning that in addition to thrashers and sustainable effective organizations, there were firms that were consistently low performers. What captured our attention is the way in which the consistently high performers were managed relative to the thrashers. The consistently high-performing corporations appeared to have been able to perform at a high level as a result of accurately perceiving and responding to changes in the business environment. The agility they were capable of allowed them to change in ways that kept them profitable, while other corporations were left behind still doing what used to work. The agility they demonstrated is particularly important today in our rapidly changing business environment, which quickly outdates current business realities and demands that business respond to a rapidly changing environment. Agility gives organizations the ability to adapt to the fluctuations of this rapidly changing environment.
We found that the consistently high-performing companies have four agility routines that enable them to change effectively and thereby continue high levels of profitability. The following are the four:
1. They are able to strategize in a way that allowed them to adjust their business models to changes in the environment and establish an internal climate that supports change.
2. They accurately perceived changes in the external environment, especially in the short run, but also into the future.
3. They are able to effectively test possible responses to changes in the environment so that they can respond effectively to what is happening to the environment on the basis of evidence.
4. They implement changes effectively so that they are able to keep their products and services current.
Individually, these routines are what may be described as "good practices." And it is true that most organizations can effectively execute at least one of these routines. However, thrashers and poor performers typically lack the ability to execute at least three of the four repeatedly as the environment changes. Firms with one or two of these agility routines were found to be 9 times more likely to be thrashers and under-performers with respect to ROA and profitability. Firms that were consistently high performers had the capability to execute at least three routines. They were able to utilize these agility routines and change at a degree that thrasher and low performing firms could not match.
Our findings help to explain why so few companies are able to be consistently high performers. Agility that is based on the four routines cannot be developed overnight. It needs to be systematically built on a foundation of management practices that fit together in a way that creates an agile organization.
It takes a lot of good practices to achieve this. Because of the increasing rate of change, it is likely that in the future, it will take even more than it has in the past. It is encouraging, however, that there are four identifiable routines that organizations can develop that will allow them to be consistently high performers, if not the best performer in any given year or short period of time. The good news is that not only is creating a sustainably effective organization possible, but we also know quite a bit about how to do it.
Crossposted from Forbes.com