THE TIME TO TRANSFORM IS NOWDANISH COMPANIES ARE UNPREPARED FOR A POTENTIAL DOWNTURN

By Jesper Damm, Christian Gruss, Matias Pollmann-Larsen, and Awais Shafique

It’s hard to avoid. Seen from any angle, there seems to be consensus that the

global economy is losing momentum after a period of robust growth. Weakening business sentiments and consumer confi-dence, decreasing global trade, and increas-ing debt levels are only a few of the indications that the risk of a downturn is real. Not surprisingly, in a highly intercon-nected world where the Danish economy closely follows the global one, Denmark is likely to be significantly impacted. This raises the question: Are Danish companies prepared for the slowdown?

We analyzed total shareholder return (TSR) over the last five years as an indica-tor of how prepared Danish companies re-ally are for a potential downturn. Our theo-ry was that there is evidence that companies that perform well before a downturn have secured competitive advan-tages that make them more likely to win during, and after, a downturn. TSR mea-sures the return of all cash flows to inves-tors in a given time period, and is therefore a good measure of both overall readiness

and the development of individual compo-nents that contribute to it. The TSR analy-ses of 50 of Denmark’s largest companies show a significant contraction year-over-year and performance well below global benchmarks across sectors. When we look at the components of TSR, we see that the contraction is driven by a decline in oper-ating performance indicating companies are losing competitiveness when it comes to growth and earnings. In other words, Danish companies do not have strong foun-dation from which to face a potential downturn. There is no time to lose in reme-dying this situation.

Performance of Danish compa-nies is getting worseA weighted average of 50 of Denmark’s larg-est listed companies1 reveals TSR contract-ing by 19ppt last year compared with the last five years. (See Exhibit 1.) About 50% of this contraction is driven by a decline in op-erational performance, both revenue growth and margin improvement, as com-panies have gradually been losing competi-

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tiveness. The companies are now at a level where the operational performance is not delivering any return at all. Market mood, as measured by the multiple changes, is also contributing negatively with a 9ppt decline. This is, however, less surprising given the political and macroeconomic situation. The effect of financing remains stable, indicating no major change in capital structures.

The TSR contraction in itself is worrying because both operational performance and market mood can be expected to sour in a downturn. Even more alarming—and a wake-up call for CEOs—is the fact that op-erational performance, already declining, is now at a contribution level of zero. With companies not in a position to directly in-fluence the market mood, operational per-formance is the key lever to drive TSR.

The decline in operational performance is consistent across most sectors, although we do see differences in the magnitude of the drop. The decline is most pronounced for industrial goods (down16ppt) and health care (down 12ppt), closely followed by Fi-nancial institutions (down 7ppt), and con-sumer goods (down 7ppt). Conversely, oper-ational performance is stable within technology, media, and telecommunications (no change), and increasing for transporta-tion and logistics (up 13ppt). It is normal for

industries to vary, however a more alarming trend is the global benchmark. Comparing the performance of Danish companies with the average for S&P 500 companies in each sector shows that Danish companies are sig-nificantly below global performance across all sectors. (See Exhibit 2.) The relative un-derperformance is again most significant for industrial goods and health care where the benchmark companies have delivered double-digit operational improvements in-dicating deeper issues for those Danish companies that have experienced decline. Based on their TSRs, the Danish companies are no longer following their global peers—they are already falling behind.

The time to act is now: preemp-tive transformationIt is often said that time is money, and this is never more true than when it comes to business transformations. Our analysis of hundreds of transformations involving re-structuring found that preemptive change generates significantly higher long-term value than reactive change. Outperfor-mance following preemptive transforma-tion is a fact not only in the aggregate, but across most industries, since preemptive transformations take less time, cost less, and increase leadership stability more, than reactive change. The effect of preemp-

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Operationalimprovements delta: -9%

Note: Weighted average for 50 of Denmark’s largest listed companies. Data sample consisting of companies listed in Denmark with market cap above 500mDKK and where data existed for at least two companies in a sector for all 5 years ( January 1, 2014 to December 31, 2018).Source: Capital IQ; BCG ValueScience analysis.

EXHIBIT 1 | TSR in Denmark is contracting by 19 ppt – mainly driven by performance issues

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tion is continuous, and the earlier a trans-formation is initiated, the better. In other words, companies have no time to lose. (See Exhibit 3.)

No matter how ominous the situation is to-day, Danish companies will need to assess their readiness for a potential downturn and their need for a preemptive transfor-mation over the coming months. Launch-ing a preemptive transformation within this time window will increase the likeli-

hood the effort will succeed and provide a cushion to absorb challenges in case a downturn hits. The transformation should take a holistic view and consider opportu-nities for growth as well as margin im-provement, with an emphasis on the latter, to realize quick wins while building a foun-dation for sustained performance.

To initiate a preemptive transformation, companies must develop a clear-eyed view of their current situation and define their

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Benchmarknot available

Source: Capital IQ; BCG ValueScience analysis.1Based on average for S&P 500 companies in each sector.

Exhibit 2 | DK performance below global benchmark across sectors

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0 to 0.1 <-0.3 -0.1 to 0 -0.2 to -0.1 -0.3 to -0.2 0.1 to 0.2 0.2 to 0.3 >0.3

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Reactive2 Preemptive2

The earlier the better

Average three-year relative TSR post-transformation1

One-year relative TSR pre-transformation1

Source: Sources: Compustat; S&P Capital IQ; BCG Henderson Institute. 1Performance measured as TSR relative to the industry average. 2Reactive transformation defined as negative TSR relative to the industry in the year.

Exhibit 3 | The earlier a company transforms, the better its future performance

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collective transformation ambition. Once the future direction has been set, commu-nication is critical to engaging and energiz-ing the company. As the transformation starts to take shape and the case for change becomes clear, the company can shift gears from planning the transformation to lead-ing it. This means immediately kicking off a Triage/Rapid Assessment and no-regret moves—initiatives that are relatively easy to implement in the first hundred days and that can generate results in 3 to 12 months. These initiatives should close performance gaps in a few critical areas, reduce costs, improve top- and bottom-line performance, and free up cash in order to fuel lon-ger-term initiatives. In parallel, the compa-ny must launch broader initiatives to rein-vent itself for the future and build

sustainable performance with a focus on innovation, growth, and long-term value creation.

For an in-depth analysis of preemptive transformation, including success factors and a six-step approach to success, please refer to the BCG paper “Preemptive Trans-formation – Fix it Before it Breaks.”

Note1. Data sample consisting of companies listed in Denmark with market cap above 500mDKK and where data existed for at least two companies in a sector for all 5 years ( January 1 2014 to December 31, 2018).

About the AuthorsJesper Damm is a Partner and Managing Director in the Copehnhagen office of BCG. You can reach him at damm.jesper@bcg.com.

Christian Gruss is a Partner and Managing Director in the Copenhagen office of BCG. You can reach him at gruss.christian@bcg.com.

Matias Pollmann-Larsen is a Principal in the Copenhagen office of BCG. You can reach him at pollman-larsen.matias@bcg.com.

Awais Shafique is a Project Leader in the Copenhagen office of BCG. You can reach him at shafique.awais@bcg.com.

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