(Adapted translation and commentary) The podcast interview on June 17, 2021, between senior leaders of McKinsey, the world’s number one strategic consulting firm, featured the article “How to future-proof your organization?”
The word they used was exceptionally good: “future-proof” literally means “armor protection against the future,” while figuratively meaning protecting the organization against future uncertainties/changes. What I liked most was the passage shared by Mr. Chris Gagnon, a senior partner (managing shareholder) at McKinsey: One of the most mysterious miracles (in financial markets) over the past 50 years is the success of private equity investment funds (equity capital). In reality, these investment funds only perform the work of buying and reselling companies from the market, and subsequently making these companies grow dramatically (compared to when they were not yet acquired).
According to Chris Gagnon: Think about it. It is truly strange, with no reason explaining why these companies (after investment funds inject capital) succeed so dramatically compared to companies operated solely by founding owners/shareholders. Investment funds do not inject too much extra money. Nor do they recruit additional personnel with glittering CVs.
The single thing they do differently is being extremely clear about the “reform and value-creation plan” for the business they invest in.
That is not a flashy, fancy phrase like the word “strategy.” What investment funds usually talk about is the “mathematics/quantification” of the plan. For instance: “We (the investment fund) buy a company at a price of 2 billion dollars. We want this company to reach a value of 5 billion dollars. So where will that 3 billion dollars come from?”
And so they have a checklist (a list, or in the form of OKRs), 10–12 pages long, written specifically and clearly so that anyone can understand it. After that, they deploy and execute.
(For instance: within that 3 billion, 1.5 billion comes from M&A activities, 1 billion dollars of value from organic growth activities. Within that 1 billion, 300 million USD must come from segment A, while 700 million in value comes from segment B. Segment B is currently lacking 4 leaders and 20 engineers. Segment A needs an additional investment of 30 million. As for M&A, it must acquire 3 additional companies, with each company bringing in at least 100 million in revenue and achieving a profit margin of 18%.
Mr. Gagnon remarked further: We need to remember that, if we want people (human beings, meaning in comparison to other species) to do something well and effectively, one of the most important things is needing to tell them extremely clearly what we need them to achieve.
When targets have been stated clearly like that, people will know how to act to achieve these targets in the most effective manner.
For instance: with EQuest, there is a need to avoid noble, abstract jargon that is hard to picture and hard to measure, such as: “forge willpower for Alpha School students,” “train top students at Newton School,” “turn American Polytechnic College into a leading college in Vietnam,” or “internationalize Phu Xuan University.”
Instead, it can be written as: “every student at Alpha School runs 5km,” “Newton School needs to achieve 30 city-level excellent student awards, 10 national awards, and 3 international awards,” “American Polytechnic College must increase from 3,000 students to 5,000 students,” “Phu Xuan University will recruit 20 lecturers who are not Hue natives, including 5 foreign lecturers.”
In summary, the secret to the success of investment funds when deploying the so-called “value-creation strategy” contains absolutely no mystery at all. Strategy consists of actions that are the more concrete, effective, clear, tangible, countable, and visible, the easier they are to execute.
(Adapted translation and commentary from a very small portion of the article: “How to future-proof your organization”, June 17, 2021, Diane Brady, Chris Gagnon, and Elizabeth Mygatt, McKinsey Insights.)
Nguyen Quoc Toan
