Rebooting and Relearning to Find Growth
in Uncomfortable Places
in Uncomfortable Places
ZERO-BASING THE BIG PICTURE“WE ARE HEADED FOR A WORLD OF ZEROES, INCLUDING ZERO INFLATION, ZERO GROWTH IN PER CAPITA GDP, AND ZERO GROWTH IN PRODUCTIVITY.”
– Nigel Wilson, CEO, Legal and General – an FTSE 100 global financial services firm with over $1 trillion in assets under management and over $100 billion in revenue
Nigel Wilson’s much-quoted comment from an online discussion hosted by the Financial Times in early 2016 echoes the perceptions of many senior business leaders that assumptions about growth and plans to achieve it must start at zero. What is foreseen is a future held hostage by an external environment in which growth will be nearly impossible to come by. Winning will require transforming incremental business as usual into extraordinary zero-based approaches to growth.
ZERO-BASING THE MICRO-PICTURE
Even more than the big picture, the micro-picture within which consumer goods companies are operating is also dominated by zero-based realities, further abetting the rise of a zero-based mindset. Arguably, though, this zero-based mindset has served them well. At the time of this writing, publicly traded companies have never had more stock market success, with most major global stock market indices near all-time highs and many companies driving record levels of earnings per share.
Big companies have achieved this success largely by managing the denominator of the earnings-per-share equation and buying back shares. In 2015 and 2016, Barclay’s Bank estimated that the S&P 500 returned more cash to shareholders through buybacks and dividends than was earned. Driving returns on a smaller capital base has meant putting first priority on expense reduction rather than on topline growth in order to succeed.
Added to this mix are activist investors like 3G Capital Partners that bring an intense focus on expense reduction as the pathway to shareholder value creation. It means that big companies must slash operating expenses in order to keep shareholders happy and to fend off hostile takeovers.
The best known and perhaps most widely used expense-reduction strategy is zero-based budgeting (ZBB). Some form of ZBB has been utilized by virtually every large enterprise during the 2010s. However, its virtue of driving short-term shareholder value through expense reduction comes with downsides. Ironically, the original purpose behind ZBB was to force companies to focus on the work needed to succeed now, thereby purging structures and budgets of work that was past its useful life. Unfortunately, to paraphrase Peter Drucker, the zero-based process has become overly focused on doing things right, meaning cheaper, and has lost sight of doing the right things.