What factors determine solid financial performance?

To find common elements of successful companies, we selected a group of European companies that responded quickly to the financial crisis by implementing major cost- reduction programs. We compared their financial performance with a peer group of companies that did not respond to the financial crisis and found they significantly outperformed their peers in the following two years*.

However, among the companies that implemented major cost-reduction programs, we noted a number of differences: some companies responded to the crisis for proactive reasons – to maintain solid financial performance – while others did so as a result of distress, i.e., because their financial condition forced them to do so.

To strengthen their position, today and in the future, companies should be aware of how these visionary variables impact their long-term financial performance stability.

This prompts the question what makes companies achieve superior performance improvement? What do proactive companies do differently compared with those in distress? Focusing on these questions, our investigation identified three factors that are known as “visionary variables:” (i) degree of innovation; (ii) degree of centralization and (iii) degree of internally sourced CEOs. Does the value of these visionary variables correlate to superior performance improvement? Are there any differences between UK companies and continental European companies?

What we found was that, first of all, our group of companies (that reacted quickly to changing market conditions) significantly outperformed their control group. Secondly, among them we identified a group of proactive companies that scored notably higher on our visionary variables, outperforming the distressed companies. Furthermore, we found noteworthy differences between proactive UK companies and proactive European companies in the index: the UK companies were significantly more innovative and less centralized, compared with their European counterparts.

Our investigation showed that proactive companies that quickly respond to changing market conditions outperform their peers. They score higher on the visionary variables of innovation, centralization and internally sourced CEOs.

To strengthen their position, today and in the future, companies should be aware of how these variables affect their long-term stability. And, by adopting an innovative mindset, executing their business operations as efficiently as possible and ensuring a strong common corporate culture, championed by an internally sourced CEO, companies can help themselves to withstand and thrive in today’s tough economic climate.

* These companies are included in an index consisting of 37 European companies, 12 of which are UK based.

The complete article was written by:

  • Sebastiaan Nijhuis
    Director, Advisory Services, Ernst & Young, the Netherlands
  • Jelmer Westerhuis
    Advisor, Advisory Services, Ernst & Young, the Netherlands

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