When the world was shaken by a pandemic in 2020, it seemed that it would be enough to resolve the health crisis and everything would return to normal. Meanwhile, since then, reality has presented people with more challenges, and instead of calming down, the situation has developed and become more complicated. After the pandemic (or rather, in the so-called “in-between,” because the pandemic still isn’t letting up) came the Russian-Ukrainian war, galloping inflation, the specter of a near recession, and disruptions in the supply chain. What businesses can cope in such a volatile environment? Those that are ready for the future.
A measure of “future readiness”It’s what makes companies more resilient to potential crises and possible turmoil. Unexpected events surprise such businesses less, as they have both a solid present and the ability to adapt quickly to changes that the future brings built into their daily operations. What’s more – under new circumstances they are able to find further sources of growth and use them accordingly. As the world is becoming increasingly volatile and unpredictable, future readiness is becoming one of the key competencies that ensure a company’s not only survival, but also growth.
7 factors of future readiness
The IMD Center for Future Readiness has developed the Future Readiness Indicator, an index of future readiness that is the sum of seven factors that the adopted methodology takes into account. Companies can use it to be better prepared for what’s to come. What was taken into account?
Steady growth, not sinusoidal growth
In order for a company to be ready for the future, it must not only be highly profitable, but also stable – the growth of its operating profits must not be rapid, rising quickly and falling just as quickly, but should steadily increase in value. This allows the company to boast a strong balance sheet. Companies such as Netflix and Zoom saw strong user and revenue growth during the pandemic, but as restrictions eased and economies opened up, both platforms scored declines. This shows that it is important to have a strong foundation while strategically creating the future and investing capital in growth.
The important thing is that they say
When a company launches a new product or service, what matters is whether or not it gains media attention. When the media is silent and deafening silence rings out on the air, it’s a bad sign. On the other hand, when the market reacts positively to a novelty, and its popularity begins to spread to other countries and continents – it becomes louder and louder about it. It is important that key phrases for a particular industry appear both in media coverage of the company and in its corporate communications.
A sign of readiness for the future is investing in various ventures, as well as making acquisitions and filing new patents. It is also important for a company to be open to completely new ideas and solutions and external partnerships. This shows that it operates resiliently, is focused on growth, and is able to make the most of business opportunities that come its way. Mastercard is a company that for years offered the same set of services. However, when the field of cryptocurrencies and NFTs began to grow rapidly, the company partnered with Coinbase, allowing the exchange’s customers to make purchases on the NFT market with their debit and credit cards.
The power of productivity
Without it, there can be no success in the long term. The Future Readiness Indicator calculates the 3-year average of operating income per employee and EBITDA per employee, and in the case of banks, the parameter of assets under management per employee is additionally taken into account. When these indicators are at a good level, the company can generate more from its resources. Productivity can be increased by, among other things, using artificial intelligence to take over more mechanical activities so that human skills can be used for more important tasks.
Environment, society, governance
High performance is possible through sustainability and diversity in management. The greater the diversity, the greater the ability to innovate and be open to change. The IMD Center for Future Readiness, when evaluating companies, takes into account the percentage of women on the board and executive team (this applies to the banking sector), where the CEO comes from (if from outside – he or she is likely to have a fresher outlook and a broader perspective), and the competitiveness of the country in which the company is based. The environmental aspect is also important – conscious companies know that by reducing energy consumption and waste they can not only cut costs, but even make money.
Cash for a black hour
A smartly run business should be prepared for a so-called “black hour” or worse moment that can happen at any time. For this circumstance, it must have a cash buffer available. The higher the ratio of cash to total assets, the safer the company is. The parameter of total debt to equity of the company is also important. This assesses how much a business finances its operations through debt and whether the capital it has is able to cover the liabilities associated with outstanding debt.
The FRI analyzes the 5-year average price-to-earnings ratio. If it is high, it shows that investors are willing to pay a high amount per share today because they are hoping for more growth in the future. The 3-year average market capitalization, or the value of the company, is also taken into account, as well as the price-to-book value, or the ratio of the market value of the stock to the assets of the company’s balance sheet.
High performance and noteworthy achievements in the above areas are the common denominator of companies that do well in the face of various macroeconomic problems. It’s worth looking at them (indicators, results and companies) and making the necessary changes to be a business that is ready for the future, rather than constantly fearing it.