Evolution of a new matrix - Return on New Capabilities

On similar lines, human skills and talents have also grown in leaps and bounds in way of creating, upgrading and consuming technology to the best of their interests.
Evolution of a new matrix - Return on new capabilities

The last decade has witnessed the evolution of more billion dollar businesses than in the last one century. There has been a phenomenal mushrooming of enterprises globally, although with a considerably high success rate.

Multiple reasons are making it happen - that an innovative, previously non-existent idea is getting converted into reality and making way into people's hearts and pockets. There is a world of technology, talent and monetization of various social aspects that is making even the presumably impossible idea tick.

Globalization is yet another factor that has added on to the success rate and given way to a complex scenario of multiple markets with several variations and disparity.

The rapid development of technology that has been in motion since the late 20th century has created huge avenues for enterprises to think differently.

On similar lines, human skills and talents have also grown in leaps and bounds in way of creating, upgrading and consuming technology to the best of their interests. As a simple example, within only 15 years, the computer has moved from a desktop PC to a small, easy-to-use, portable device that fits into pockets.

At the same time, data that was hardly measured in even gigabytes about 10 years back, has now zoomed up to finding new names, such as zettabytes and exabytes! We have shrunk what could shrink, and grown what could grow.

It is in this capability to think beyond the existing is what has been the actual reason for the success and also failure of the major organizations.

Taking the example of Nokia, the market leader in mobile phones for almost 13 years - its capability to think differently, take risks and gauge trends made it possible to become a household name globally. But it had to lose out the position to Apple and Samsung, in spite of having all resources and the rich experience treasure.

The reason was their incapability to think differently and move fast in staying ahead of time. Apple, on the contrary, was quick to identify the true market demand and create value through its products, positioning and price.

However, success is relative and so is capability. In the intensively competitive market today, maintaining the top slot is extremely tricky. Apple did lose out more than 33 percent market capital in less than a year.

Similar theory applies to other industries as well. Airtel is a success in India, but failed to capture the African market. So is the story of SAIL in comparison to Tata Steel. Different markets can command different levels of capability, making it a fairly relative aspect in determining the success of a company.

These are reasons that are now giving way to take a fresh look at the success matrix that typically comprises of Return on Assets, Return on Capital Employed, and Economic Value Added. There needs to be another angle to the matrix that is more forward looking - Return on New Capability (RoNC).

With costs, revenues and markets being the factors that decide the success or failure of a company, there needs to be a mechanism that can trace the efficiency of capital employed in new capability. It should measure the returns on new capability in terms of facing competitors and meet market expectations.

For instance, one lever of capability performance with regards to products could be: Revenue from new products + Revenue from new services / Total revenue.  With regards to market, it can be Revenue from new markets/ Total revenue and with regard to cost, it can be Cost saved from new processes / Total cost incurred.

Evaluating on these measures can imply that if a certain percentage of revenues are getting generated from new products, services or markets, it represents that the company is agile and is able to adopt to future trends in the market.

Moreover, it can also help in identifying new ways of reducing cost to add back to the profitability of the company.

Brands, products, services or companies have a certain lifecycle for generating and employing new capabilities. There will be a certain amount of time required to let the new idea incubate, nurture, develop and flourish.

However, by keeping a metric to measure the key levers, the chances of success can be raised or corrected and the company can reap benefits.

Authored by Sandeep Kumar, VP- Business Consulting & Abhinav Verma, Senior Associate Consultant -ITC Infotech

Image: Corbis

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