This article originally appeared on AsiaOne.
Bigger is not always better when it comes to succeeding in business. Who, for example, makes the most money producing tyres? It's not Bridgestone, the industry's global scale leader. Germany's Continental AG takes home three times more profit than Bridgestone and is far and away the tyre industry's economic leader. How? What the smaller company lacks in scale it makes up for with lower manufacturing costs and a more lucrative customer mix.
A lot of corporate strategy revolves around building scale, and for good reason. The largest companies enjoy huge advantages: They can spread costs over the widest base, wield the most market influence and benefit from the most accumulated experience.
But a recent Bain & Company analysis of 320 companies across 45 markets worldwide demonstrates that scale alone is often not enough to confer real economic leadership. In fact, 36 per cent of the scale leaders in our study didn't even manage to generate a positive return on capital. And 40 per cent of the economic leaders, such as Continental, weren't the largest companies in their industries.
None of this argues that scale isn't a powerful competitive advantage: The scale leader in our study was also the economic leader in its industry 60 per cent of the time. But companies such as Continental demonstrate that the classic strategic imperative for challengers - build scale or get out - is only one of several options. Our study also suggests that most scale leaders need to step up to the next level of performance if they want to keep challengers from eating into their profits.
James Hadley is co-leader of Bain & Company’s strategy practice. Jean-Pierre Felenbok is a Bain & Company partner based in Jakarta. The views expressed are their own.