Article

Gaining an edge over peers

Successful companies relentlessly build on their fundamental differentiation, going from strength to strength.

By Chris Zook and James Allen

Published on November 28, 2011
min read


Differentiation is the essence of strategy, the prime source of competitive advantage. You earn money not just by performing a valuable task but by being different from your competitors in a manner that lets you serve your core customers better and more profitably. In studying companies that sustained a high level of performance over many years, we found that more than 80 per cent of them had a well-defined and easily understood differentiation at the centre of their strategy. But differentiation tends to wear with age, and not just because competitors try hard to undermine or replicate it. Often the real problem is internal: The growth generated by successful differentiation begets complexity, and a complex company tends to forget what it’s good at. 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 or else be overwhelmed by upstarts with disruptive innovations. Most of the time, however, reinvention is the wrong way to go. Our experience, supported by more than 15 years of research into high performance, has led us to the conclusion that most really successful companies don’t 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 organisation that lives and breathes its strategic advantages day in and day out. And they learn how to sustain it over time through constant adaptation to changes in the market. 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. 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 catalogued 250 assets or capabilities that can contribute to differentiation and sorted them into three major clusters of five categories each. The strongest sources of differentiation in a company’s strongest businesses are its crown jewels. Yet our research shows that most management teams spend little time discussing or measuring them and therefore don’t agree on what they are. This lack of clarity permeates entire organisations. One way to bring data to bear on such a range of views is to rate the success of your company’s past 20 growth investments and determine what they have in common. As you deliberate about your key differentiators, you might consult these criteria: Are they (1) truly distinctive? (2) measurable against competitors? (3) relevant to what you deliver to your core customers? (4) mutually reinforcing? (5) clear at all levels of the company? The ability to recognise and test the sources of your differentiation in this way is important for focusing innovation. Most innovations affect only one part of a business model, leaving the rest intact. The more precise your understanding of your model and the sources of its success, the more precisely you can focus innovation resources on the areas where the threats and the need for change are greatest. The best way to grow is usually by replicating your strongest strategic advantage in new contexts. Companies typically expand in one or more of four ways: They create or purchase new products and services, create or enter new customer segments, enter new geographic locations, or enter related lines of business. A company can pursue each of these strategies in various ways—for example, adding new price points or finding new uses for a product or service that will appeal to new customers. The power of a repeatable model lies in the way it turns the sources of differentiation into routines, behaviours and activity systems that everyone in the organisation can follow so that when a company sets out on a particular growth path, it knows how to maintain the differentiation that led to its initial success. Supporting differentiation Although differentiation is at the heart of a repeatable model, it needs the support of a rigorously focused yet flexible organisation. Our research shows that powerful differentiations create the most enduring profits when a company delivers them to the front line in the form of simple, nonnegotiable principles and when it creates robust learning systems that facilitate constant adaptation. Nonnegotiable rules: Analysis of our 200-company database reveals that 83 per cent of the best-performing businesses had established explicit, widely understood principles across the organisation, while only 26 per cent of the worst performers had done so. Indeed, a link between well-defined, shared core principles and front-line behaviour was more highly correlated with business performance than any other factor we studied. The logic of this connection seems clear. Nonnegotiables translate the most important beliefs and assumptions underlying the company’s differentiation into a few prescriptive statements that all employees can use as a reference point for making trade-offs and decisions. Robust learning systems: Clear differentiation supported by nonnegotiables confers a competitive advantage—for a while. As markets shift, however, successful organisations must also be able to adapt to new circumstances. Both our research and the recent history of business reflect the importance of supporting your differentiation with rapid learning and adaptation. Some 48 per cent of managers in our top group of performers felt that their companies were characterised by strong learning systems, compared with only 9 per cent among the rest. The search for profitable growth is becoming increasingly difficult. Today fewer than 10 per cent of companies achieve more than a modest level of profitable growth over a decade, and the odds of success are declining. A series of interviews we conducted with CEOs regarding their challenges on the job spotlight two reasons for this state of affairs. One is that companies are forced to adapt faster than ever. The other is the need to control ever-growing levels of complexity. Our findings show that the simplest strategies, built around the sharpest differentiations, have advantages not only with customers but also internally, with the front-line employees who must mobilise faster and adapt better than competitors. When people in an organisation understand the sources of its differentiation, they move in the same direction quickly and effectively, improving the business model as they go. And they turn in remarkable performance year after year. Chris Zook and James Allen are partners at the global consulting firm Bain & Co. and lead its Strategy practice. They are the authors of Repeatability: Build Enduring Businesses for a World of Constant Change.

Differentiation is the essence of strategy, the prime source of competitive advantage. You earn money not just by performing a valuable task but by being different from your competitors in a manner that lets you serve your core customers better and more profitably.

In studying companies that sustained a high level of performance over many years, we found that more than 80 per cent of them had a well-defined and easily understood differentiation at the centre of their strategy. But differentiation tends to wear with age, and not just because competitors try hard to undermine or replicate it. Often the real problem is internal: The growth generated by successful differentiation begets complexity, and a complex company tends to forget what it’s good at. 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 or else be overwhelmed by upstarts with disruptive innovations.

Most of the time, however, reinvention is the wrong way to go. Our experience, supported by more than 15 years of research into high performance, has led us to the conclusion that most really successful companies don’t 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 organisation that lives and breathes its strategic advantages day in and day out. And they learn how to sustain it over time through constant adaptation to changes in the market. 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.

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 catalogued 250 assets or capabilities that can contribute to differentiation and sorted them into three major clusters of five categories each.

The strongest sources of differentiation in a company’s strongest businesses are its crown jewels. Yet our research shows that most management teams spend little time discussing or measuring them and therefore don’t agree on what they are. This lack of clarity permeates entire organisations.

One way to bring data to bear on such a range of views is to rate the success of your company’s past 20 growth investments and determine what they have in common.

As you deliberate about your key differentiators, you might consult these criteria: Are they (1) truly distinctive? (2) measurable against competitors? (3) relevant to what you deliver to your core customers? (4) mutually reinforcing? (5) clear at all levels of the company?

The ability to recognise and test the sources of your differentiation in this way is important for focusing innovation. Most innovations affect only one part of a business model, leaving the rest intact. The more precise your understanding of your model and the sources of its success, the more precisely you can focus innovation resources on the areas where the threats and the need for change are greatest.

The best way to grow is usually by replicating your strongest strategic advantage in new contexts. Companies typically expand in one or more of four ways: They create or purchase new products and services, create or enter new customer segments, enter new geographic locations, or enter related lines of business.

A company can pursue each of these strategies in various ways—for example, adding new price points or finding new uses for a product or service that will appeal to new customers.

The power of a repeatable model lies in the way it turns the sources of differentiation into routines, behaviours and activity systems that everyone in the organisation can follow so that when a company sets out on a particular growth path, it knows how to maintain the differentiation that led to its initial success.

Supporting differentiation

Although differentiation is at the heart of a repeatable model, it needs the support of a rigorously focused yet flexible organisation.

Our research shows that powerful differentiations create the most enduring profits when a company delivers them to the front line in the form of simple, nonnegotiable principles and when it creates robust learning systems that facilitate constant adaptation.

Nonnegotiable rules: Analysis of our 200-company database reveals that 83 per cent of the best-performing businesses had established explicit, widely understood principles across the organisation, while only 26 per cent of the worst performers had done so. Indeed, a link between well-defined, shared core principles and front-line behaviour was more highly correlated with business performance than any other factor we studied.

The logic of this connection seems clear. Nonnegotiables translate the most important beliefs and assumptions underlying the company’s differentiation into a few prescriptive statements that all employees can use as a reference point for making trade-offs and decisions.

Robust learning systems: Clear differentiation supported by nonnegotiables confers a competitive advantage—for a while. As markets shift, however, successful organisations must also be able to adapt to new circumstances.

Both our research and the recent history of business reflect the importance of supporting your differentiation with rapid learning and adaptation. Some 48 per cent of managers in our top group of performers felt that their companies were characterised by strong learning systems, compared with only 9 per cent among the rest.

The search for profitable growth is becoming increasingly difficult. Today fewer than 10 per cent of companies achieve more than a modest level of profitable growth over a decade, and the odds of success are declining. A series of interviews we conducted with CEOs regarding their challenges on the job spotlight two reasons for this state of affairs.

One is that companies are forced to adapt faster than ever. The other is the need to control ever-growing levels of complexity.

Our findings show that the simplest strategies, built around the sharpest differentiations, have advantages not only with customers but also internally, with the front-line employees who must mobilise faster and adapt better than competitors. When people in an organisation understand the sources of its differentiation, they move in the same direction quickly and effectively, improving the business model as they go. And they turn in remarkable performance year after year.

Chris Zook and James Allen are partners at the global consulting firm Bain & Co. and lead its Strategy practice. They are the authors of Repeatability: Build Enduring Businesses for a World of Constant Change.