A new book by Bain strategy consultants Chris Zook and James Allen titled “Repeatability” summarizes their findings from research on what most explains the differences in performance between companies. Some of their key messages includes:
- Differentiation is the essence of strategy and that “companies that sustained a high level of performance over many years…more than 80% of them had this kind of well-defined and easily understood differentiation at the center of their strategy;”
- That superior performance is found in all industries, that there aren’t certain sectors that are inherently more profitable or more easily profitable than others. As such, organizations that claim that they are in a “tough industry where profits are tough to achieve than in other industries” are just making excuses. “The cold truth about hot markets is this: Over the long run, a company’s strategic differentiation and execution matter far more to its performance—our research suggests at least four times as much—than the business it happens to be in. Every industry has leaders and laggards, and the leaders are typically the most highly differentiated.”
- That over time, what might have been some form of differentiation erodes not just because competitors respond, but because “the growth generated by successful differentiation begets complexity, and a complex company tends to forget what it’s good at. Products proliferate. Acquisitions take it far from its core. Frontline employees, more and more distant from the CEO’s office, lose their sense of the company’s strategic priorities…Small wonder that ‘reinvention’ and ‘disruption’ have become leading buzzwords; companies struggling with complexity and fading differentiation come to believe they must reimagine their entire business models quickly and dramatically or else be overwhelmed by upstarts with disruptive innovations.”
- Successful organizations resist moving away from their core strengths and “do not reinvent themselves through periodic ‘binge and purge’ strategies. Instead they relentlessly build on their fundamental differentiation, going from strength to strength. They learn to deliver their differentiation to the front line, creating an organization that lives and breathes its strategic advantages day in and day out. They learn how to sustain it over time through constant adaptation to changes in the market. And they learn to resist the siren song of the idée du jour better than their less-focused competitors. The result is a simple, repeatable business model that a company can apply to new products and markets over and over again to generate sustained growth. The simplicity means that everyone in the company is on the same page—and no one forgets the sources of success.”
Consider Tetra Pak, a company that in 2010 sold more than 150 billion packages in 170 markets around the world. Tetra Pak’s carton packages extend the shelf life of products and eliminate the need for refrigeration. The shapes they take—squares and pyramids, for example—stack more efficiently in trucks and on shelves than most cans or bottles. The packaging machines that use the company’s unique laminated material lend themselves to high-volume dairy operations. These three features set Tetra Pak well apart from its competitors and allow it to produce a package that more than compensates for its cost.
Another example is IKEA, who have not “attempted to diversify into business that would inspire a different model nor has it reinvented itself.” They have focused on DIY-lite with most of their products requiring some form of assembly at home from cleverly designed products that offer reasonable style and quality at a relatively low price and are usually packaged in flat packs that make for easier handling and transportation through IKEA’s system (and into your trunk). In addition to copying design and style trends of more expensive brands, IKEA has applied relentless continual improvement to its processes so that items like the Billy bookcase are over 75% cheaper in constant dollars than when they were introduced in 1979.
Helpfully, the authors provide a framework to think about potential sources of differentiation:
Opportunities for differentiation are rich and varied in virtually every industry. To examine them more closely, we built a database of 8,000 global companies and tracked their performance over 25 years. We created another database of 200 global companies, which we studied in detail. We supplemented that research with two other data sets: a survey conducted with the Economist Intelligence Unit of nearly 400 global executives, and 50 interviews with chief executives around the world. Building on the data, we cataloged 250 assets or capabilities that can contribute to differentiation and sorted them into three major clusters of five categories each.
We cataloged 250 assets or capabilities that can make up a company’s differentiation. We then sorted them into three major clusters, each with five categories, to create the Differentiation Map. Assuming that four or five categories are required to achieve differentiation, these 15 basic categories generate more than 5,000 distinct ways in which a company can differentiate itself. (It is possible, however, to break the categories down further, in which case the number of ways to differentiate explodes into more than a million.)
Below is an example of how to map a company, in this case Vanguard’s differentiating strengths.
Of course it is important to consider those cases where companies really do not have world-beating differentiating strengths to begin with. In other words, while it is important in the authors views to avoid the temptation to water-down one’s differentiating strengths but rather to enhance, reinforce and “repeat” the successful formula, albeit in new geographies and sometimes new products, many companies do not excel at something meaningful. They might think they have a differentiating element, but in truth they are mediocre in all areas. This is why there are so few truly outstanding companies in terms of long-term sustainable results.