It's not uncommon for sufferers of heart attacks to brush off their early symptoms as heartburn. Nearly one out of every eight initial diagnoses of cancer is wrong.

A company's health, too, can be seriously misunderstood—which leads decision-makers to underestimate an ailment's destructive potential, to attack the wrong symptoms or to overlook strategic opportunities to boost vigour.

Misplaced focus is more common than you might think. In a recent survey we conducted of 180 executives, 54% said they understood what drives profits in their businesses, but only 16% said profit trends at their companies were as strong as they'd like. How to deal with the discrepancy? Companies that start their remedial action by diagnosing the true source of their pain and the best path to perfect health outperform the quick-fix camp in the long run.

The key to any good diagnosis is asking the right questions. For most companies, three critical queries yield important clues to the real source of underperformance.

Customers: how do customers rate your fitness?

The best source for learning how your company is performing compared with competitors is through customer feedback. A telecommunications company, for instance, thought it was doing such a good job of serving its wireless service provider customers that it decided to reduce its costs in that business. But customers contacted as part of a performance diagnostic told the telco that it took too long to get a new network running properly once it was installed, and that the company was lagging its competitors in this area.

Eureka. Rather than cutting costs, the company focused instead on reducing the time from network installation to final customer sign-off. Because customers had routinely withheld payments until their networks ran smoothly, resolving this issue released $1 billion of accounts receivable off the balance sheet.

Costs: where are you carrying extra pounds?

Lowering costs may seem a guarantee of improved performance and a worthy end in itself. But the critical measure is how far a company can lower production costs below the average for its industry. Our research shows that every time production doubles, the cost per unit of that good or service should fall about 20%. That means any company that wants to remain competitive must manage its costs down the curve for its industry.

Again, misplaced focus can damage a company's health. A heavy manufacturing company invested massively to improve the efficiency of its machining capability—when the right solution turned out to be outsourcing machining altogether.

For a diversified packaged foods company, streamlining operations was not the answer to its uncompetitive cost structure. Retrenching, the firm conducted a four-month diagnostic that identified an opportunity in disguise: purchasing a contract manufacturer whose low-cost production capability ultimately gave the company a new lease of life.

Capabilities: what muscles do you have to grow?

Finally, just as any good athlete needs to understand where and how to strengthen their abilities, similarly companies may need to enhance capabilities—or even uncover hidden strengths to improve performance. Acco Brands, one of the world's largest suppliers of branded office products, found its core products such as binders and staplers under attack from private labels with low-cost offerings. Acco seemed to have no choice but to dramatically cut costs and lower prices.

But by taking the time to talk to customers and survey the competitive landscape, Acco identified another path. Although the company did indeed need to take costs out of its supply chain, Acco's Swingline business had a strong brand position and a track record of rapid innovation. Acco invested not only in cost reduction, but in further strengthening its innovation capability in staplers.

As a result, Acco was able to introduce six new stapler models that drove 10% point-of-sale revenue growth over the following 12 months and shortened the replacement cycle for staplers. Now Acco is consciously flexing its innovation muscles across a number of product categories.

Today, leading medical centres such as the Mayo Clinic in the US invite patients to have a thorough round of tests before anything goes wrong.

Companies can take the same approach—holistically benchmarking their company's customer feedback, costs and capabilities versus competitors—to save themselves from greater pain down the road.

CASES

Group Process in the Challenger Launch Decision (A), 9-603-068, Edmondson, A, Feldman, L, Harvard Business School Publishing, 2002

Group Process in the Challenger Launch Decision (B), 9-603-070

Group Process in the Challenger Launch Decision (C), 9-603-072

Group Process in the Challenger Launch Decision (D), 9-603-073

Broadfields NHS Hospital Trust, 497-004-1, British Association of Medical Managers, 1997

All cases are available on www.ecch.com

- Gib Carey and Hernan Saenz are partners in Bain's Chicago and Boston offices respectively. Both are senior members of Bain's Global Performance Improvement Practice.