How firms secure their profits

Due to changes in their operating environment and the limit of costs savings being reached, firms must prepare for the “next phase of corporate competition” as the McKinsey Global Institute puts it.

In their recently published report “Playing to win: The new global competition for corporate profits”, the McKinsey Global Institute (MGI) analyses the behaviour of corporate profits within a three decade time frame starting in 1980 and predicts changes in the corporate environment until 2025. Previously, altii has reported about the importance of M&A transaction and intellectual property in sustaining profits as well as new competition from emerging markets and tech firms for established corporations. Firms must prepare for the new operating landscape to remain competitive.

How the operating landscape changes

One change in business operations is the increasing war for talent. While human capital is an increasing and critical source of a competitive advantage, 38 percent of firms could not find the talent they needed, says McKinsey. This war for talent is likely to increase as in advanced economies, one third of today’s workforce will retire within the next two decades, resulting in a loss of skills and experience.
Furthermore, the war for talent is becoming a global one. Emerging markets firms are increasingly attractive for employees and are closing the gap between them and multinationals in terms of remuneration and career opportunities. With this increasing war for talent, remunerations are likely to increase.

Other factors, including interest rates, sustainability and consumption may as well have reached their limits and restrict further profit growths.
With benchmark rates close to zero, interest rates cannot fall any further. When interest rates increase again, managing balance sheets will become more difficult, says the MGI report.
Moreover, sustainability plays a more crucial role in consumer behaviour. If consumer do not put corporation under pressure, regulators will do as the trend of deregulation is rolled back in some industries. With increasing pressure on public households, corporate taxes may as well be increased in the upcoming years.
Finally, consumption may have reached a high as populations are ageing and many people will retire within the next decades. As the report expects consumption in emerging markets to reach a high within the next decade, GDP growth could slow down by 40 percent to just 2.1 percent annually. 

Preparing for the next phase of corporate competition

In order to stay competitive, the McKinsey Global Institute points out three characteristics of successful firms: First, they are active in fast growing markets. As revenues shift to emerging markets, profits do so as well. Second, profitable firms need to develop intellectual property that pays off from investing in research and development. Finally, firms must enhance their operations and lower production costs for every dollar of sales.

Some strategies can help firms to secure and grow their profits:

  • Understand and monitor the new landscape: Study industries, investigate and fix weaknesses and exploit changes. Firms need to understand their competitors.
  • Prepare for tech disruption: As tech firms may pose a thread to your business model, firms can use own VC funds and accelerators to disrupt themselves before others do so.
  • Seek out patient capital: Do not focus on maximising quarterly earning but focus on the long-term game.
  • Stay agile in the face of volatility: Firms must game out multiple worst case scenarios and plan to make daily operations more efficient.
  • Building intellectual assets: Building intellectual assets increases pricing power, brand reputation and much more. Firms should also leverage other assets as customer data.
  • Go to war for talent: Offering bold new incentives and maintaining a good reputation helps to attract the best employees. Moreover, the management of human capital must become a higher strategic priority.