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 subscription to HBR email alerts, please click here.

Note: 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.


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