Once seen as just a defensive tactic used by underperforming companies, asset-light strategies and business models are now becoming an essential tool to fuel growth and strengthen an ecosystem of partnerships. Recent Ernst & Young LLP research indicates that regardless of market position, an asset-light approach can help companies achieve higher total shareholder returns (TSR),1 among other financial benefits.
An asset-light strategy or business model involves transferring capabilities, such as people, process and technology, to “better owners” in order to enable companies to transition fixed costs to a variable cost structure, enhance agility, and facilitate a shift of resources that allows a focus on core capabilities.
EY Asset-light survey result
Analysis shows asset-light companies have outperformed their peers on total shareholder return over the last five years.
More than half of February 2021 webcast respondents believe that digitization and innovation are the key drivers for considering an asset-light strategy.
How asset-light models can be a strategic tool to build innovative, agile ecosystems
At its core, asset-light is about creating mutually advantageous partnerships that allow all parties to focus and manage the capabilities they are best at while creating greater profits and shareholder value for the benefit of all partners in a business’s ecosystem.
In addition to total shareholder returns, there may be other financial benefits. For example, another recent Ernst & Young LLP study found that companies that transitioned manufacturing ahead of a sale were 17 percentage points more likely to exceed expectations on the valuation of the remaining businesses and were more likely to exceed expectations on the price of the divestment.
Analysis shows asset-light companies outperform peers on total shareholder return
Ernst & Young LLP research of US Fortune 500 public companies across several sectors shows that asset-light companies achieved a greater total shareholder return when compared with their asset-heavy peers. We define asset-light companies as those that have a five-year property, plant and equipment (PPE) to sales ratio average lower than their respective sector mean. On average, the asset-light companies outperformed their asset-heavy peers by four percentage points in the last five years of total shareholder returns. Sample selected sectors are highlighted in the graphic below.
Is an asset-light model and strategy the right answer for your company?
Companies typically begin their asset-light journey by identifying which assets and capabilities are core to delivering value to their customer base right now. For example, sellers may find a path to greater operational agility by transitioning their manufacturing operations to a contract manufacturer rather than carving out an entire business unit and disposing of a valuable brand.
Overall, companies should begin by asking several key questions including:
-Is your company performing at its full potential — on growth, margin, return on invested capital (ROIC) and total shareholder returns metrics vs. peers? Is there an opportunity to perform even better?
-Do you have businesses or capabilities that need to be retained or non-core assets that may have a better owner in the marketplace?
-Can you create a greater focus in your organization by retaining your core capabilities only?
-Is your business model adequate for the products and services you sell in various markets?
-Have you undertaken any significant business model transformations (e.g., third-party partnerships, JVs) in the last two to three years?
Based on the responses to the questions above, companies should conduct a rapid analysis on three levels:
-Markets – determine which markets or geographies to play in
-Product and service – determine the right business model(s) based on respective product position(s) and marketplace offerings
-Capabilities – determine which capabilities are core and which are not
Full Potential Paradigm review
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