Here is an excerpt from an article written by Chris Zook for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.
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When it comes to investments, here’s a general truth: the larger a company gets, the smaller it thinks. The process is insidious, and companies must always be on the lookout for signs that it is setting in. If you want your business to grow sustainably at scale, you need to figure out how to make big investments that will best differentiate you in your core.
We were reminded of this a few years ago, when we studied a major European conglomerate with more than 50 distinct businesses spread across dozens of markets. The company had experienced no organic growth in over a decade, the stock price had melted away and it was seeking growth in all the wrong places. We soon figured out why.
First, the growth of most of its acquisitions had actually slowed after being acquired—the opposite of the justification for their purchase. Second, the company’s capital was spread uniformly across an extraordinary range of business types and competitive positions. The company was making big bets on its acquisitions, but it had many companies in the family and treated them all equally. It invested in its bad businesses hoping that they would become more like the good ones, and it didn’t invest massively in the good ones, because they were doing fine.
The result? Consistent mediocrity.
The best companies — those that grow sustainably and profitably at scale — reject that kind of “peanut butter” approach of spreading resources around as evenly as possible. Instead they’re “spiky” in how they allocate funds and they invest big in three areas: game-changing capabilities, next-generation leaders, and next generation business models:
They use the power of 10X — a willingness to commit 10 times the normal resources — on their critical capabilities. Amazon, for example, has learned that same-day delivery could increase revenues significantly, and it is also aware that new insurgent start-ups such as Instacart and WunWun are focusing on the instant delivery of certain products, so it has invested in its own delivery fleet, drone technology and more.
Mukesh Ambani, the wealthiest man in India, thinks the same way—and in doing so, he has made Reliance Industries, a Mumbai-based industrial giant, the most valuable company in his country. In 2000, Ambani thought big about critical capabilities for the future core of his business and built an integrated petrochemical complex designed to serve a full 25% of the giant Indian market, with technology and scale that gave it a 30% cost advantage over his regional competitors. Most companies would have backed off from such an investment.
The bottom line: Great leaders fight entropy and are willing to step up to a 10X decision to invest in game-changing capabilities.
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Here is a direct link to the complete article.
Chris Zook is a partner in Bain & Company’s Boston office and has been a co-head of the firm’s global strategy practice for twenty years. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth(Harvard Business Review Press, June 2016).