The Three Questions That Lead to Profitable Growth

Chris Zook

Here is an excerpt from an article written by Chris Zook for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a free subscription to HBR email alerts, please click here.

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

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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.

[Here is the first of three questions to which Zook responds.]

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 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.

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 that has not talked about their relationship for years, taking their core for granted, only to discover that they are worlds apart.

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To read the complete article, please click here.

Chris Zook is co-head of the Global Strategy Practice at Bain & Company. He is the author of Profit from the Core and numerous other books and HBR articles, including “The Great Repeatable Business Model,” coming up in the November 2011 issue.

 

Roger Martin on Why You Can’t Analyze Your Way to Growth

Here is an excerpt from an article written by Roger Martin for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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

The biggest enemy of top-line growth is analysis and its best friend is appreciation.

Sure, in a small minority of companies and industries, like the smartphone business these days, there is explosive growth, and if an analysis is done of past trends, it shows lots of opportunity for top-line growth.

But in the majority of businesses, if the available data are crunched, it shows a slowly growing industry — one growing with GDP or population. That generally convinces the company in question that there aren’t really opportunities for top-line growth, and that in turn becomes a self-fulfilling prophecy.

The fundamental reason is that analysis of data is all about the past. Data analysis crunches the past and extrapolates it into the future. And the past does not include opportunities that exist but have not yet happened. So, analysis conspicuously excludes ways to serve customers that have not been tried or imagined or ways to turn non-customers into customers.

Thus the more we rely on data analysis, the more it will tell a dour story on top-line growth — and not give particularly useful insights. The data analysis of P&G’s home care business — hard surface cleaners, dish and dishwater detergents — would have indicated that there weren’t many opportunities for top-line growth circa 2000. These categories were growing at something between population growth and GDP growth, clearly candidates for harvesting or maybe sale.

If instead, the core tool is not analysis but rather appreciation —deep appreciation of the consumer’s life — what makes it hard or easy; what makes her (in this category) happy or sad — there is the opportunity to imagine possibilities that do not exist.

For instance, suppose your consumers have to clean floors. It’s easy enough to appreciate that mopping a floor is a fairly miserable task. Think about what it involves: getting out and filling a bucket, dragging the bucket around and repeatedly jamming the mop in and out of it, and then dumping out and cleaning the bucket. If you appreciate your floor-cleaning customers, you’ll be looking to help them avoid having to go through this experience every time they have to clean a floor — because not every floor will need such a heavy-duty approach. It was out of this appreciation-triggered insight that the electrostatic Swiffer anti-mop was born and produced massive top-line growth, approaching $1 billion in sales in a decade.

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Organizationally and behaviorally, analysis and appreciation are two very different things. Analysis is distant, done in office towers far from the consumer. It requires lots of quantitative proficiency but very little experience in the business in question. It depends on data-mining: finding data sources to crunch, often from data suppliers to the industry. Appreciation is intimate, done in close proximity to the consumer. It requires qualitative proficiency and deeper experience in the business. It requires the manufacture of unique data, rather than the use of data that already exists.

In my experience, most organizations have more of the former capabilities and behaviors than of the latter and hence most struggle with top-line growth. The biggest issue isn’t the absence of top-line growth opportunities but rather the lack of belief that they exist. And that is driven by the dominance of analysis over appreciation.

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To read the complete article, please click here.

Roger Martin (www.rogerlmartin.com) is the Dean of the Rotman School of Management at the University of Toronto in Canada. He is the author, most recently, of Fixing the Game. For more information, including events with Roger, click here.