Source: BCG

Boston Consulting Group

Risky Business: Value Creation in a Volatile Economy is the thirteenth annual report in the Value Creators series published by The Boston Consulting Group. Each year, we publish detailed empirical rankings of the stock market performance of the world’s top value creators and distill managerial lessons from their success. We also highlight key trends in the global economy and world capital markets and describe how these trends are likely to shape future priorities for value creation. Finally, we share our latest analytical tools and client experiences to help companies better manage value creation.

This year’s report addresses the challenges of value creation in a volatile economy, with a special focus on how companies can manage uncertainty and risk in their decisions about target-setting and capital deployment.

 

The further the world moves from the financial crisis of 2008, the clearer it becomes that the event marked a fundamental turning point in the global economy.

  • Although the economy has improved somewhat, many of the problems associated with the crisis and subsequent Great Recession remain unresolved.

  • Growth remains sluggish; there are even increasing signs that the recovery may be faltering in the developed world.

  • Combined public and private debt as a percentage of GDP has reached unsustainable levels in a number of developed countries.

  • Inflation is a significant medium-term risk.

This “new normal” has produced a corresponding sea change in investor sentiment and priorities.

  • Given the volatility and uncertainty of the current economic environment, professional investors are becoming increasingly sensitive to risk.

  • These investors are looking for companies that can deliver low risk and consistent returns at or slightly above the market average.

  • Further, they are clamoring for companies to start deploying the trillions of dollars they have accumulated on their balance sheets by increasing cash payouts to investors.

Navigating this new environment will require companies to confront three basic challenges.

  • First, they need to understand how the new environment is likely to affect their aspirations and ambitions for delivering shareholder value and reset their value-creation strategy appropriately.

  • Second, they need to translate the company’s revised value-creation strategy into a detailed plan for the company as a whole and for each of its individual operating units.

  • Finally, and perhaps most important, they need to incorporate in-depth considerations of uncertainty and risk into strategy development and planning, as well as into their approach to setting value creation targets.

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