Profitable growth is a paradox for CEOs. In an increasingly turbulent and fast-moving world, fewer and fewer companies - only 11% over the last decade - are able to sustain more than a modest level of profitable growth for more than a few years.
And yet, nine out of 10 global business leaders feel they have ample growth opportunities. What stands in their way, they say, is not the market. Instead, it is internal complexity that slows their reaction time, clouds their focus and strangles their company's ability to adapt. In short, complexity is the silent killer of profitable growth.
This paradox is a familiar one for many Indian CEOs and promoters who diversified or expanded their businesses during the years of heady growth.
But our research reveals that some companies have found a way to beat complexity. We call these companies Great Repeatable Models and they share a common simplicity in the concept and execution of their strategy: they focus on the few things that they do uniquely well, and replicate them again and again. Our discovery of Great Repeatable Models began with our evaluation of the CEO agenda. CEOs told us that their most difficult challenge was managing their focus and energy in the face of increasing complexity. They often felt like the only people in the organisation with a duty and ability to simplify. Most believed they were not winning the battle.
In a survey of 377 global executives, 85% cite forms of internal complexity as the biggest barrier to achieving their objectives. The issues they identify are familiar: the inability of their organisation to really focus resources, slow and cumbersome decision processes, challenges of mobilising organisations that are not aligned, and an inability to invest for the long term.
When we examined the companies that succeeded and adapted over much longer periods than their competitors, they proved not to be companies in inherently hot markets, but companies with superior approaches in typical markets: companies like Olam, Larsen & Toubro (L&T), TetraPak, Ikea, BHP Billiton and Scania. The cold truth of hot markets is that globally, market factors explain less than 20% of any company's sustained success. What matters most today is the ability of companies to learn, adapt and replicate success.
A close look at the three common design principles of the Great Repeatable Model companies yields another insight: strong adherence to all three principles increases the odds of sustained success by 4-6 times.
These same principles also can rejuvenate companies that have lost their way. Take Lego, which had diversified its brand too far from its core in the 1990s. Profitability plummeted and, by 2003, Lego was at risk of a takeover. Lego took some painful steps - including divesting certain brands - to refocus on its core. It also began immediately acting on customer feedback. By 2009, it had turned around, with net profits increasing 63% and pre-tax margin rising to 24%.
So what are the design principles of Great Repeatable Models?
The first is a strong, well-differentiated core defined by frontline activities. You earn money in business by being different from competitors: serving your core customers better than your competitors can or maintaining superior cost economics that allow you to out-invest competitors. Great Repeatable Model companies also focus on their clear, measurable differentiation. It defines how their front line behaves and what systems support them. And these companies have a clear method of replicating that differentiation in new situations.
Look at L&T, India's largest engineering and construction firm, whose revenue grew at an annual rate of 22% over the last 10 years. After demerging its cement business in 2004, L&T focused on its core capabilities of engineering and the management of complex projects and developed a repeatable approach that allowed it to enter and win in new verticals in India. Now L&T is taking this same approach to international markets. Forbes has listed L&T as the most innovative company in India, and the ninth-most worldwide. The Sensex has rewarded L&T with a 30% yearly return over the past 10 years.
The second design principle is a set of embedded and clear non-negotiables. In a typical company, only about 40% of employees say they know the company's strategy. Successful companies - such as leading commodity firm Olam - capture the essence of their strategy in a few key principles and beliefs that we call non-negotiables, and embed them in critical routines on the front line. This ensures that the company's strategy is translated into frontline action - the very place where most strategies fail.
Olam, for example, uses non-negotiables to implement its strategic tenet that its supply chains must extend right up to the farm gate. One such non-negotiable is that managers, even the most city-bound MBAs, must live in a rural area in a developing country to learn what really occurs at the front line. Another is that each local manager must give relationships with local farmers the highest priority. In 1989, Olam's entire business consisted of collecting and shipping cashews out of Nigeria. Today, thanks in part to non-negotiables such as these, it is the global leader in agriculture supply-chain management.
The third design principle is adapting with closed-loop learning. For example, in Apple stores, technical service representatives at the Genius Bar collect and sort notes to find repeatable issues on products. And visitors to Apple stores sometimes receive a survey with their receipt asking whether they would recommend the store and enquiring about their visit. The ability to learn and adapt from customer feedback and from fundamental changes in the marketplace is a valuable source of competitive advantage, as illustrated by Apple and other companies, such as Google.
The three design principles of Great Repeatable Models are a new and higher test of enduring strategy, and are the best antidote to the dangerous effects of complexity.