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Three questions that lead to profitable growth

Chris Zook, partner at Bain & Company

This post is part of the HBR Insight Center report Growing the Top Line.

Self-awareness is not always pretty. We go to some lengths to avoid it, tucking our stomachs in as we pass a mirror, weighing ourselves at the most favorable times, and favoring people who compli­ment us. No real harm done. However, when management teams do the same in their businesses, great harm can occur, for self-awareness is the first building block of successful growth strategies.

Hubris, false confidence, and the tendency to downplay contrary data are at the root of many of the great growth blunders and missed opportunities in the history of business. Yet, our research at Bain reveals it is the rare management team that passes our three tests of true self-awareness. Here they are, in the form of simple questions that we find altogether too few management teams can answer.

1. What is our core? This may be the most important question in business. It’s essentially the same as asking, “What is our competitive advantage?” Analysis of company performance shows that over 80% of profitable growth comes not from general market characteristics but from performing better than the other companies in your industry. That’s the cold truth even in hot markets.

The three biggest determinants of that advantage are:

  • Achieving “leadership economics” — leadership in the strongest part of your business (the core of the core), not only just in market share but also in market influence and in the ability (and incentive) to outinvest competitors;
  • Having customers more loyal to your company than to your competitors; and
  • Having a clear, simple, and repeatable model at the center of your strategy.

The companies that have all three are not always the most glamorous, but they are usually the ones that adapt and endure. These are companies like IKEA, Tetra Pak, Singapore Airlines, Tesco, Apple, Enterprise Rent-a-Car, Nike, and Vanguard. 22 Growing the Top Line

Yet, how much effort do most executives spend in deep reflection on the true underlying driv­ers of competitive advantage? How much more is spent looking for the next hot market?

In my 15+ years as co-head of the Bain strat­egy practice, I have led countless workshops with executive teams in which we have asked each team member privately to identify the most important factors differentiating their company from its competitors and how those factors relate to their company’s strongest capabilities. It is the rare management team that agrees on the answers, and many have not even discussed these issues in any systematic way for a long time. They are like the couple who has not talked about their relationship for years, taking their core for granted, only to dis­cover that they are worlds apart.

2. Do our management team, frontline employ­ees, and core customers agree on how we are most differentiated in the marketplace? This sounds like an easy one, but surveys show that fewer than half of employees in even the average company believe they understand the strategy of their business and what it’s built on. Moreover, we have found that while 80% of managers believe they are highly differenti­ated in their core market, only 8% of custom­ers, when asked, agree. Closing the gap in per­ception between the CEO and the front line is the first step toward self-awareness — and the first step toward unlocking a flow of powerful insights needed to adapt and grow.

3. What is the historic success rate of our growth investments and what do the suc­cessful ones have in common? I once worked with a company that, having examined its past 10 years of growth investments, was shocked when it compared how much was spent (over $10 billion) with its success rate (below 18%). What’s more, the firm was surprised to find that the most successful ones all followed a similar pattern. Companies can learn a great deal by doing painful postmortems of this kind. The average success rate is only 20% to 25%, we found in a study we did of growth ini­tiatives in nearly 200 companies, whereas the success rate at the best companies, which cre­ate a successful repeatable model, is fully two to three times higher. You can interpret many of the outcomes of competitive battles — such as Nike versus Reebok in the period between 1990 and 2005 — as the triumph of one com­pany that had deliberately applied a repeatable model over a competitor that had not.

If you want to pursue profitable growth, you must first do the hard work of self-reflection before turning to the sexy part of gazing out at the heavens.

For more articles like this one, download the Harvard Business Center Review report: Growing the Top Line.

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