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Why executives should start acting like activist investors

The business environment is constantly changing, but most organizations have capital allocations that are very similar from year to year. The authors argue that incremental improvements in investment prioritization are not sufficient. What leaders need to do is take the behavior of successful activist investors and private equity firms and apply it to the internal management of funds and resources. This means following three strategies: 1) relentlessly focusing on the differentiators that drive long-term value creation; 2) creating more flexible investment allocation practices; and 3) enforcing trade-offs of operational resources.

For most organizations, funding levels across business lines and programs do not change meaningfully from year to year. However, the business environment is constantly changing. Companies today face an impending earnings recession, disruptive competitors, and fundamental shifts in customer and consumer behavior. To remain competitive, companies need to adopt “capital responsiveness” – the ability to:

    in the face of a changing business environment Quick transfer of capital to new high value use

  • Quick transfer of capital from new low value use
  • Significant and non-incremental changes to capital allocation locations

In other words, just for current investments Providing meaningful funding is not enough. Senior executives must wear the mantle of activist investors to ensure that money flows to the highest value uses across the business. According to a Gartner analysis of the capital allocation practices of 100 companies, only 38% consistently achieve any of the above capital responsiveness capabilities, and only 17% consistently achieve all three. The fastest-responding companies realized on average 2.5 percentage points more economic value added (return on invested capital less weighted average cost of capital) than their slower-responding peers.

More than just process improvements

Too often, companies try to address responsiveness by improving their investment prioritization process, such as:

  • Standardize investment evaluation metrics across the enterprise
  • Simplify investment decision rights by reducing excessive spend approval layers
  • Simplified investment business case

According to our research, about 80% reduction Companies dragged down by investment priorities have yet to achieve capital responsiveness. This is because reducing process friction alone does not significantly change where capital flows. As companies reduce process friction and introduce a new set of guidance When asked, we called it “capital activism,” however, the results looked very different: 71% achieved a high degree of capital responsiveness.

What is capital activism?

Capital Activism employs the most productive activist investors and private equity firms accepted behavior and apply it to the internal management of funds and resources. It requires functional and business leaders to actively steer capital flows by:

Treat the corporate portfolio as a set of trade-offs and Synergy.

  • Apply a “nothing is sacred, but strategy” mentality to the company’s investment choices. (Assuming the current strategy is correct.)
  • Capital activism improves capital responsiveness as it actively challenges both traditional investments and new opportunities attachment, these new opportunities reinforce siloed—rather than enterprise-wide—priorities. Capital activism leaders follow three strategies: 1. They relentlessly focus on the differentiator.
    Capital activism creates responsiveness in part because it always focuses on pushing Few differentiators for long-term enterprise value creation. This reduces the likelihood that competing priorities from different business units will anchor spending on siloed existing uses. For example, large fintech company Moneris has developed a simple project acceptance form for proposed new investments, which both simplifies the investment prioritization process and ensures that differentiators are highlighted. The table is based on a scoring model that generates a score for each item based on the task-weighted evaluation dimension. An independent control group verifies the form responses to ensure fairness and objectivity, and the approved item scores are meaningful to enforce rankings. Executives review this mandatory ranking at monthly project update meetings as a shared evidence base for prioritizing funding sources for new projects. This approach ensures that the most strategically aligned, highest value-added projects are always prioritized for investment. 2. They create more flexible investment allocation practices. Capital responsiveness is more than a one-time take on the flow of funds ability to reset. It means changes to investment allocation practices that allow organizations to adjust as often (and as many times as needed). The leader of a multinational software company realized that as the business environment evolved and new opportunities emerged, their annual funding process and resource allocation quickly became out of alignment with strategy. In response, the company’s Digital Enterprise Services group has restructured resources and funding around internal “product lines” that align with core business goals. However, once funds and resources are allocated to a product line, reallocating them disrupts the product workflow and results in “siloed” or underfunded product lines that cannot support the core functionality of the product. Product line funding with two different categories of funding and resources helps minimize disruption to workflow:

    • Fixed funding and resources are dedicated to each product line to ensure stability and support core competencies.
    • Flexible funding and resources are allocated based on product line contributions to strategic priorities and can be reallocated as priorities change.

    Companies fund their product lines through IT and business or enterprise investment budgets, with a significant portion of the IT budget allocated as fixed funds to support each product line core competencies.

    3. They force operational resource tradeoffs. Even if executives succeed in driving enterprise-level capital transfers, their organizations still Returns are difficult to achieve because operational resources—people, technology, and other capabilities—cannot support execution. This happens because business and functional leaders often have a high degree of autonomy in allocating operational resources. For a variety of perfectly legitimate reasons (including their compensation incentives), budget owners often tend to favor existing, siloed use of resources to focus on specific business units or functions, and to see their ongoing projects achieve success success. To ensure operational resources are re-prioritized in response to investments, Capital Activism leaders:

    • Through service and skills instead of Budget categories track resource utilization
    • Classify operating expenses into strategic categories to analyze resource usage against strategic goals
    • Using Metric Cascades (i.e. Drivers of Shareholder Value) to Bring Resource Tradeoffs into a Corporate Perspective

    A Large medical device companies drive capital activism thinking in their business by having finance leaders guide operations leaders and their teams through the enterprise’s financial and business model, including strategic time frames and key business drivers. To show the causal chain between operational and financial performance, it links types of operational decisions to shareholder value map elements. In a two-hour training, treasurers break down the ultimate goal of shareholder value through different levels of financial and operational metrics to demonstrate how individual plans affect cash flow. Analyzing individual decisions or plans not only in terms of additional expected revenue (for example, adding new features to existing products), but also in terms of non-obvious costs such as design costs, production line changes, and additional warranty costs, which drive automotive development The key to making investment and resource allocation decisions in the best interest of the business. It also helps make operational-financial connections more personal for business teams. Such exercises can give business leaders an understanding of how shifting (or not shifting) operational resources to accommodate new strategic investment priorities affects business performance. Capital responsiveness is critical to staying competitive in a disruptive world. To achieve this, leaders need to adopt the behaviors of successful activist investors and apply them to all investment prioritization activities by relentlessly focusing on differentiating bets, creating selectivity in capital flow, and enforcing Make operational resource tradeoffs that drive business value.



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