The five pillars of sustainable growth

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Many companies set high expectations for growth, but few manage to expand sustainably and profitably year after year. In this brief audio presentation, Partner James Allen explains how five business principles can help companies can turn fast growth into long-term value.

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Transcript

Slide 1: Hi, my name is Jimmy Allen. I’m the co-leader of Bain’s Global Strategy practice. I want to talk about what we refer to as the “five pillars of sustainable growth,” which, in about 10 minutes, we’ll try to summarize the key insights from the four books we’ve written on growth and how they can apply to your business.

Slide 2: So first, just a little bit of background: When I was actually just starting at Bain, working with Chris Zook, who is the co-leader of the Global Strategy practice, he asked me to look at the Global 2000 annual reports. This is something we’ve been doing since 1989.

If you look at the Global 2000, on average, the CEOs of those companies are projecting to outgrow their industry by two times. Or another way to think about it that the entire world of business is projecting to take share from the entire world of business. Interestingly, on a profit basis, they actually say “We’ll outgrow profit four times the rate of our industry.”

Slide 3: So if that’s what the entire world of business is doing, it is a reasonable question to ask how many companies actually grow at twice the rate of the industry. And we’ve been looking at this for years.

If you take the total number of companies that are greater than $500 million, pass it through a screen of top- and bottom-line growth at double global GDP, and then make sure they also create value at the end of it. Ever since we’ve been doing it, the number has been roughly one in 10 companies grow sustainably and profitably. Ninety percent of companies fail to hit the growth projections they’re putting in their own annual reports.

Slide 4: So for us, it means growth is one of the hardest acts in business. Sustainable growth is incredibly hard. And when you ask 90% of companies what were the barriers to growth, the fascinating thing is that in only 15% of cases do they cite the market. Only in 15% of cases do they say “We didn’t grow because of something that happened externally.”

In the majority of cases, what they describe are internal barriers to their growth, which leads us to step back and say “What kills the future of growth is not the market, but your own internal complexity.”

Slide 5: And it’s in that context that we started developing this notion of the five key pillars of sustainable growth. And the context is “complexity is the silent killer of growth.” But, interestingly, the strategy itself is simplifying if done right.

The first pillar is: You have to have a strong, well-defined core business that you drive to its full potential. That is simplifying. You have to focus on a few things.

From leadership: We need to drive to leadership economics. Again, that’s simplifying. Let’s focus on those businesses where we’re leading and get better performance from them.

If you had to do one thing organically, the next pillar says: Be maniacally focused on customer advocacy. Worry about what you’re doing with your customers, first and foremost.

The fourth pillar says: If you have to move into businesses outside your core, make sure you’re doing it from your full potential, and make sure you’re incredibly disciplined, because adjacency expansions often kill businesses.

And then the final pillar, again very simplifying, is: Leverage a repeatable model. Figure out what it is that you do incredibly well that can be translated into a front-line routine and do it again and again.

Slide 6: So let’s quickly go through each of these and bring a little data. So the first pillar is about having a well-defined core business that you drive to full potential, and really what we mean is drive to leadership. And if you look at this slide, of the 10% of companies that grew sustainably and profitably over a 10-year period, 95% of them were leaders in their core business. And if you look often at growth strategies, they’re distracting management from the core business, trying to grow everywhere else but in the core. And our first principle is simplify, focus on your core and drive it to leadership.

Slide 7: The second thing we say is from leadership, capture leadership economics. And this slide is built on a ton of Bain work that we do every year, where we’re looking at the relationship between return on capital and your relative market share position, something that’s called RMS.

So if you look at this slide, look at the middle first. If you’re at parity in your industry—in other words, you’re fighting for leadership against someone else—in an RMS position, that means you’re between 0.6 of the leader of your industry or you’re at 1.2 over the follower of your industry, around that time frame. You should be getting your cost of capital. That’s the natural state of business.

But now move to the far right. If you’re a dominant player in your industry, 2.5 times the next player, you should be getting extraordinary economics.

In contrast, if you’re a distant follower in your business, far behind the leader, it’s almost impossible to make a return on capital equal to the cost of capital in your industry. And this is really important for us because by definition, every business is a complex portfolio of different market positions. Some are leading, some are following. What this says is: Where we have leading positions, double down and focus on them and get superior economics. That is simplifying.

Slide 8: The third pillar is about customer advocacy. If we could recommend one thing you do organically to lead in your industry, it would be to be maniacally focused on customer advocacy. But this is tough to say because everybody believes they’re already focused on the customer.

And in fact, 80% of companies, when asked, believe they deliver a superior proposition to their customers. The problem is if you ask the customers of those companies, in only 8% of cases do they agree. And we refer to this as a delivery gap, the difference between what you think you’re doing and the reality of how customers perceive you. But it’s simplifying because it says if you could do one thing, it would be to deliver on the promises you’ve already made in the market. Close that delivery gap.

And it’s no surprise that of those 10% of companies that we refer to as sustained value creators, they have twice the level of advocacy as the follower in their industry. In this case, we use the Net Promoter ScoreSM measure, which says: On a scale of zero to 10, how likely are you to recommend us to a colleague or friend? A 9 and 10 makes you promoter, 7 or 8 means you’re a passive, zero to 6 makes you’re a detractor. And a Net Promoter Score is just all your promoters minus your detractors.

And again, those companies that grow sustainably have twice the level of advocacy as the followers in their industry.

Slide 9: Honestly, I wish we could stop here. I wish we could just keep with the three pillars that say focus on your core, drive it to leadership, get leadership economics and if you could do one thing, maniacally focus on customer advocacy, but the reality of business leaders is they’re beset with adjacency expansion opportunities. They’re always balancing investments in their core versus investments in adjacencies.

And our one advice is to at least stay close to the core. The average failure rate of adjacencies is more than 75%. You can improve that by 50% by just pursuing step-one adjacencies. And it’s as simple as what we’ve tried to illustrate on this slide.

However you’ve defined your core, whatever the dimensions are, a one-step adjacency just moves that a little bit. So if you’re dealing with the same customers and channels, but move into a new international market, that’s a one-step adjacency.

The problem is, everything starts as a one-step adjacency. You all have been part of conversations where people say: “We’re in Indonesia, now let’s move to Malaysia. It’s the exact same business model. Don’t worry.” It sounds like a one step. Then six weeks into being in Malaysia, it’s: “Oh my goodness, all the customers are different.” Twelve weeks later, it’s: “My goodness, all the channels are different.” And what looked like a one-step adjacency ends up being a step-two, -three or -four adjacency, and you’re in big trouble.

So there’s a discipline around this of really being clear about how close to the core are each of these moves And are we being disciplined or are we just fooling ourselves because we want to justify all these different moves?

Slide 10: The final thing is to leverage Repeatable Models® in everything you do. We have a whole website on this, we have a book on this, but it’s as simple as saying, “once you’ve defined the core, translate it into what are the frontline routines and behaviors that we use every time to deliver something superior to customers, and let’s do that again and again.” As we think about adjacencies, let’s ask the question: “Does it leverage our existing Repeatable Models or is it a new area of growth requiring new activity sets, which simply adds complexity?”

Slide 11: So that’s it. A whirlwind tour through what we call the five pillars of sustainable growth. We hope you found it useful. Obviously, we’d love to engage on this if you’d like to follow on further. Here’s how to contact me, and thanks very much for listening.

Learn more: The strategic principles of repeatability