CEOs face a paradox of profitable growth, defined by two opposing facts. First, in an increasingly turbulent and fast-moving world, fewer and fewer companies—only 9 percent over the past decade—manage to sustain more than a modest level of profitable growth for more than a few years.
And yet, nine out of ten executives feel they have ample opportunities for growth. What stands in their way, they say, is not the market but 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.
In our research for our new book Repeatability, we found that some companies share a common simplicity in the concept and execution of their strategy. We call these companies Great Repeatable ModelsSM. They focus on the few things that they do uniquely well, and replicate them again and again.
The journey of discovery that led us to the Great Repeatable Models has been a fascinating one. We started by evaluating “The CEO Agenda”. We heard from CEOs that their most difficult challenge in the job was managing their focus and energy in the face of increasing complexity. Asked how it felt, several painted images like Atlas holding an increasingly complex organization on their shoulders. Many said they often felt like the only people in the organization with a duty and ability to simplify. Most believed they were not winning the battle.
We then surveyed another 377 global executives. Again, 85 percent said that their biggest barriers to achieving their objectives were linked to internal complexity. The issues they identified were familiar: an inability of their organization to really focus resources, slow and cumbersome decision processes, challenges of mobilizing organizations that are not aligned, resources spread too uniformly, inability to invest for the long term.
When we looked at the companies that did succeed and adapt over much longer periods of time than their competitors, they proved not to be companies in inherently hot markets, but companies that had superior approaches in typical markets—companies like Nike, TetraPak, Enterprise, Hilti, Olam, Hankook Tire, IKEA, Vanguard, amazon, and Scania. The cold truth of hot markets is that market factors explain less than 20 percent of their success. What matters most today are deep capabilities of the company itself that turn the ability to learn, adapt and replicate success into competitive advantages.
Looking closely at the common design principles of the Great Repeatable Model companies yielded another stunning insight: Strong adherence to all three of the design principles increases the odds of sustaining success by 4 to 6 times. It all suggests that the three design principles of Great Repeatable Models define the standard for robust strategy today and should be in the mind of every CEO.
So what are the design principles? First, these companies achieve focus through a strong, well-differentiated core defined by frontline activities. You earn money in business by being different from competitors—in a way that gives you superiority in serving your core customers, or superior cost economics that lets you out-invest your competitors. Companies with repeatable models focus on a clear, measurable differentiation that defines front line actions and the systems that support them. These companies also have a clear method to replicate their differentiation in new conditions.
Talk to anyone at IKEA, the furniture retailer that has outgrown its market by two-and-a-half times over 25 years, and every person can explain why. They describe a unique system refined over decades to bring quality furniture to the masses at uniquely low cost by having the customer share in some of the activities like self-assembly and self-help in the stores.
IKEA looks simple. Yet, its simplicity is a hidden competitive advantage. IKEA has turned the art of continuous improvement into a powerful competitive weapon. IKEA’s simple is apparently not that simple for others.
The second design principle is the ability to embed clear nonnegotiables. In the typical company, only about 40 percent of employees say that they know the strategy and its priorities. Imagine if this were true of a football team or marching band. We found that successful companies like IKEA or Nike capture the key ideas of their strategy in few key principles and beliefs that we call nonnegotiables, and embed them in critical routines on the front line. This ensures that the company’s strategy is translated into front line action—the very place where most strategies fail.
Take Vanguard, the largest mutual fund company in the world. Vanguard’s non-negotiable principles include not being able to beat the market in the long run and the primacy of investor loyalty. These nonnegotiables shape Vanguard’s differentiation and translate to front line behaviors. Everyone from the CEO to a customer rep in the call center can describe them using similar pride and similar words. Vanguard has clarity of message that any political candidate would envy. When customers voted, in effect, with their cash during the financial crisis, Vanguard received more than 40% of all investment funds in the U.S.
The third design principle is adapting with closed-loop learning. The ability to learn and to adapt is an increasingly valuable source of competitive advantage. Companies like Scania and Apple illustrate this. They have well-developed customer feedback loops and stay highly attuned to fundamental changes in the marketplace.
Enterprise Rent-a-Car, for example, is the largest car rental company in the world, where a single measure drives everything. It is a measure of customer loyalty called ESQi that used to rank its 8000 branches. If you are near the bottom—no promotions. This turns continuous improvement into a lethal competitive weapon.
These three design principles of Great Repeatable Models represent a new and higher test of enduring strategy, and are the best antidote to the dangerous effects of complexity.