According to McKinsey’s research, top performing flow-control companies were not necessarily the largest nor the richest. Successful companies were focussing on quality of revenue on three dimensions: operational excellence, product innovation, and business model innovation (see box text ).
However, in the recent years, there is concern, so McKinsey states, that the sector’s ability to create value has somewhat eroded as top performers are seeing flat to declining EP/R (economic profit as share of revenue), while their lower performing peers are experiencing negative EP/R. Furthermore, fewer companies (35 percent from 2015 to 2017 versus 45 percent from 2002 to 2015) are delivering above-average EP/R.
McKinsey however remains optimistic. “We strongly believe that the best days for the sector are still ahead. Our optimism is driven by the accelerating demand growth and by the advent of disruptive technologies that will help the sector capture value from this growth. Demand growth is underpinned by secular trends around rising demand for infrastructure driven by rapid urbanization in emerging markets and overhaul of aging infrastructure in developed markets. We expect those tailwinds to accelerate sector demand growth up to 4 percent CAGR, up from the average of 2 to 3 percent from 2012 to 2017.”
The consultancy expects further growth in revenues through value creation coming from disruptive technologies, such as Industrial Internet of Things (IIoT), artificial intelligence (AI), machine learning (ML), and augmented and virtual reality (AR and VR). “These technologies will provide companies with new opportunities to improve the economics of their existing markets and drive higher-quality revenue.”
These technologies will help companies further innovate across the three dimensions of quality of revenue: operational excellence, product innovation, and new business models. “The companies that embrace and appropriately deploy these technologies will find new revenue streams, sidestep competition, and break through the sector’s current value-generation plateau.”
Playbook for the future
McKinsey states that capturing this future value and subsequent growth is far from easy. The agency says the industry needs to embrace ‘new ways of working’. “The sector, however, is ill-prepared for change; less than one-third of executives feel that they have made significant progress in developing a playbook fit for the future”. As disruptive technologies and significant secular trends take hold, flow control companies have an opportunity to embrace a new frontier of products, business models, and operational excellence. The companies that pull ahead will be the organizations willing to embrace change and focus on achieving a stronger quality of revenue.