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It’s essentially a holy grail for many businesses—identifying sustainable competitive advantage. But Chris Zook points out that it’s elusive for most companies. He notes that, on average, less than one in 10 achieve profitable growth over the course of a decade.
Zook is the former head of Bain’s global strategy practice. He’s also coauthor of the book Repeatability: Build Enduring Businesses for a World of Constant Change.
In this episode, he shares three key principles that can help your organization find and maintain an enduring competitive advantage—with real world examples drawn from IKEA, Enterprise Rent-A-Car, and Nike.
This episode originally aired on HBR IdeaCast in March 2012 . And just a note—we recorded this by phone. While the audio quality is not great, the conversation is. I think you’ll enjoy it. Here it is.
SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. I’m talking today with Chris Zook, a partner at Bain & Company, and co-head head of their strategy practice. He’s the co-author, with James Allen, of Repeatability: Build Enduring Businesses for a World of Constant Change. Chris, thanks so much for chatting with us.
CHRIS ZOOK: Oh, thank you very much.
SARAH GREEN: So part of what drew me to your idea is that, while you talk about this world of constant change, which sounds exciting and exhausting at the same time, your strategic prescription for companies is actually to focus on simplicity and to fight against complexity. Is that realistic in today’s world?
CHRIS ZOOK: Well, it’s quite interesting. The work in the book Repeatability was really borne of a paradox that we began observing, which was that from a database, we created about 8,000 businesses in the last 25 to 30 years at Bain & Company. We found that only now less than 1 in 10 companies achieve even a modest level of sustained and profitable growth over a 10-year period on average. And yet, the paradox comes in collision with a very interesting additional fact, which is that 9 in 10 executives nearly, when surveyed, say that they actually feel they face adequate opportunities in their business.
And yet, the reality is that only 1 in 10 actually succeed in achieving the targets. And when we began drilling down into this in what turned out to be about a three-year project on the root cause of more enduring competitive advantage in a world where it seemed shorter, we asked 377 executives what was the number one barrier to achieving their goals. And 85% of them answer it in a way that was related to the broad theme of complexity. They either felt it was becoming more difficult to react to an increasingly fast world in businesses that are more complex and more muscle-bound, or to see and perceive what they need to react to or internally to decide, and to mobilize, or to focus resources for a long enough period of time. But we were fascinated that it was not being in the wrong market, some amazing competitor move, some technology that they coveted but did not have that served as their main barrier. They actually cited, over and over again, this topic of complexity.
SARAH GREEN: So in your view, complexity– rising complexity– is not just like a bad weather system that’s moving through and we have to deal with it. It’s something that can actually be managed with the right strategic approach?
CHRIS ZOOK: Yeah, I think that the clash of complexity and speed, maybe several decades ago, was a world of long periods, of more calm, punctuated by brief periods of turbulence when those two things come into conflict. I think we’re now finding that, in a separate piece of work we did, for example, that we called “The CEO’s Agenda,” we asked CEOs what was their number one issue in their job.
And they actually said– and we’d never heard this before– they overwhelmingly said it was managing their time and energy in the face of growing complexity. And when we probed further, it was really a sense that the world is moving faster. I just came from Davos. In one talk after another, I would hear economists, and historians, and even the leader of the forum say that it was almost as if history was happening faster.
History is happening at warp speed. Product cycle times are shorter. Companies stay in their position for shorter times. There’s more you have to react to. And yet, institutions– whether government institutions or businesses– are more complex and slower moving, and therefore less adaptable. And I think adaptability is becoming much more a headline in the success factors of businesses than it used to be. A general direction and adaptability is proving to be one key element of success factors.
SARAH GREEN: Yeah. So that’s a little bit about the current moment we’re in. But of course, the idea of looking for a sustainable source of competitive advantage has been the holy grail for business for a long time. As you say, it’s about as common as a holy grail since no 1 in 10 of the companies in your study actually get to something like that. So how does Repeatability help companies get closer?
CHRIS ZOOK: Well, we began looking a lot more closely at the drivers of enduring success because we found many, many companies– a very large percentage– would have two, or three, or even four good years. But not very many, only 1 in 10, would achieve that on average for 10. And when you got to 15, the odds of success went down even more.
And so we began a process of interviewing CEOs, and executives, and building another database of about 200 companies with a lot of their practices and characteristics of their strategies in search of what we call the design principles of enduring strategies. And what we found were three design principles that, when all three were adhered to at a very high level, resulted in businesses, on average, being able to have as much as five to six times longer duration of maintaining competitive advantage. And all three of them we’re actually related, in some way, to the theme of simplicity. What we found– I guess the headline, in a way, for the whole study– is the idea that complexity proved to be the silent killer of profitable growth.
SARAH GREEN: Hm. So can you walk us through some of those principles quickly?
CHRIS ZOOK: Sure. The first one is much more borne of classical strategy. It is really the presence of an extremely clear form of differentiation in your most important core business, uniqueness against your competitors so that it just really jumps out at you and hits you in the face. An example of this might be, let’s say, Ikea, the furniture retailer which has outgrown its market by 2 and 1/2 times for over 25 years.
And it’s amazing. When you ask the people in the company whether it’s a front line or whether it’s senior executive of how Ikea is special, they all rattle off a very clear and very crisp set of factors, from the self-assembly, to the layout, and color, and branding of the store, to how they design to a price point. So the first of the three principles of the great repeatable models is what we called a well-defined, clear, measurable differentiation literally that everyone in your company can understand. You can hear this and say, well, of course that’s true. But it’s quite amazing.
We did some work on differentiation where we asked a whole lot of customers and then their suppliers of a range of products, from cellphones to rental cars, how differentiated they felt the product that they were consuming was. And only 8% of customers for this set of products said that they thought it was very differentiated and unique, versus 80% of the suppliers. And we called this difference the delivery gap or the differentiation gap. And it’s amazing.
In my role as head of strategy practice at Bain, I very often walk into client situations with my partners. And we find that, actually, the management team has assumed they know what their core differentiation is, but actually haven’t discussed it in years. It’s almost like a couple that may not, for 10 years, have discussed the essence of the relationship. And suddenly, they wake up and discover that they’re on different planets.
SARAH GREEN: OK. So that’s the first one. Tell us a little bit about the other two.
CHRIS ZOOK: The way I would characterize the second design principle is the absolute ability to hard wire the key four, five, or six principles or ideas of the strategy. So just think of the Ikea example, all the way through the organization into front line routines using a small number of principles and beliefs that we’ve been calling the non-negotiables. And so the existence of these non-negotiables in a company and their use in driving the strategy, almost like the operating manual, a strategy to the front line, was the second design principle.
A simple and great example is Vanguard, the company which, during the financial crisis, amazingly captured 40% of all the free money circulating in the United States. And it’s very interesting. If you talk to the phone operators or the CEO at Vanguard, they will speak in almost identical words about the key principles that define how the company operates from a belief and loyalty to the small investor such that they will even turn down money from others that they feel are hot money to the concept that you can’t beat the market in the long run, which caused them to favor and ultimately really develop the science of indexed funds. And so that would be a second one.
And again, you can hear this and say, well, of course. Isn’t this how strategies get done? But actually, companies layer in so much complexity that very often, the wiring, the signal from the top to the front line, just doesn’t really occur. We got hold of some data on 300,000 employees from hundreds of employee surveys of companies. And what we found is that in only about 40% of the cases did the average employee in the average company– not even the worst company– say that they had any idea about what the strategy and its key objectives were. And imagine if you had a marching band or a football team where only 40% of the people had an idea of what the game plan was. You’d have chaos.
So that’s the second design principle. It’s the ability to drive through a few ideas, the non-negotiables, all the way to the front line. I think that’s becoming a much more important test of strategy in a world where the CEOs are getting drawn farther from the front line.
SARAH GREEN: So what’s the final one? What’s the third one?
CHRIS ZOOK: The final one has proved, actually, to be the most difficult on average for companies to do. But as we observe companies around the world– and even as we observe our own mix of business at Bain working for clients– we’re seeing a much more intense focus on this third design principle, which is about feedback loops and systems for learning around the four or five absolutely most important variables of the strategy that are really highlighted, that link to people’s pay perhaps, that are not necessarily financial measures.
But they may be measures of customer loyalty. They may be measures of products working correctly the first time in the field. But we found that the ability to turn learning and continuous improvement into a competitive advantage was much more profound in the great repeatable model companies, like Ikea, or Vanguard, or maybe Enterprise Rent-A-Car. Enterprise is an interesting example of this because they’re the largest hirer of college graduates now in America, amazingly, and the second largest fleet next to the post office in America an and have outgrown, by a factor of two, the rental car market for nearly 20 years.
And if you talk to Andy Taylor, Jr., the son of the founder and CEO, until recently, he says that basically the whole company is built around one measurement, one feedback number, which they call ESQI. It’s a customer loyalty measure of, would you come back or not? And they actually rank order every single one of 8,000 branches every week, publish the data. And if you’re in the bottom section of that group, there are no promotions and no bonuses. And as a result, the learning of the lower group goes up very fast because they share practices, and they study assiduously the ones that are at the top. And it’s become an enormously powerful source of competitive advantage.
So the first is the differentiation, the first design principle, clarity of it, simplicity of it. The second is the ability to translate into non-negotiable principles and push it down to shorten the distance from the CEO to the front line. And the third is a few really super-ordinately important and powerful learning systems that everyone knows about and serves, in a way, as a measure of the health and robustness of the core itself.
SARAH GREEN: One of the interesting pairings I think that you talk about in the book to illustrate those three principles was comparing Nike versus Reebok. What did you learn from that contrast?
CHRIS ZOOK: It’s so interesting sometimes to go back and follow the history of two companies, in this case Nike and Reebok, that started– at least in a moment in time– in remarkably similar circumstances. Around 1990, they were both 100% athletic footwear, rubber-soled sneakers. They were approximately the same size. The brands were approximately equally known. And they were both approximately similarly profitable.
And yet, along the way, Nike developed a repeatable model around a few very simple and clear forms of differentiation to do with performance, and design of materials, and the brand, and their supply chain to Asia, and above all being superb at signing contracts with top athletes of the world, like Roger Federer. Whereas by contrast, Reebok wandered around, following what turned out to be a pattern of no pattern, really, and wandered into everything, began seeing themself for a while as the general shoe company, and wandered into Western boots, rock port walking shoes.
Those were not successful. They exited. They tried fashion for a while and had joint ventures with Ralph Lauren in fashion, which were not that successful. They went back to performance, but were a bit late to copy Nike and came out with a range of products, like the pump, which were not that successful. And they wandered around for nearly 20 years in the twilight of marginal economics, where actually the stock price is almost completely flat for 18 years until they were purchased by Adidas, the German competitor to Nike.
And I think what this said is, if you are a company, and you have a competitor, and you’re able– just like maybe Walmart versus Kmart would be another example. There’s a lot of examples. General Motors versus Toyota would be another. And you have a well-defined, repeatable model that adheres to these design principles, you drive learning much more quickly. You have your resources much more focused. And the probability of your growth bets, like going into a new segment for Nike, is much, much higher. A Nike’s odds of success from going into cycling, or tennis, or running, or football, or golf, or volleyball, or one segment after another, has been extremely high product after product because of their repeatable formula to do it, whereas the success rate of the typical growth move is 20%.
And for Reebok, it was much lower than that. So I think the Nike/Reebok contrast attests to the power of focus, a power of the design principles of repeatable models, and above all, the competitive power. If you are doing it and your competitor isn’t, you– in a relatively quick time– can be in a position of game, set, and match.
SARAH GREEN: Hm. Well, Chris, that’s good advice. And I know there’s a lot more of it in the book. Thanks again for sharing some of your time with us today.
CHRIS ZOOK: Oh, my pleasure.
HANNAH BATES: That was Chris Zook – in conversation with Sarah Green on HBR IdeaCast. Zook is the former head of Bain’s global strategy practice. He’s also coauthor of the book Repeatability: Build Enduring Businesses for a World of Constant Change.
We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.
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