Knowledge Center: Article
What are the sources of corporate success?8/10/2017
Every company wants to be the best, which means a lot of people are all vying for one top spot. And they’re using a number of different tactics to get there. Some claim you’ve got to move quickly in everything you do. Another even more prominent tactic right now is to focus on disruption—finding or anticipating a trend and getting to it first. While there is a lot of pressure to become the next Airbnb or Uber—which is not by nature a misguided objective—it’s possible that such a focus on disruption could cause a company to miss the opportunity to simply become a better version of itself.
One of our goals in writing a book on improving corporate performance was to explore why some companies succeed and some fail. When we began our research into the sources of success, we considered the possibility that success relied on being in the right industry or geographic market. But as Figures 1 and 2, taken from our book Accelerating Performance, illustrate, we found that while overall industry and geographic market are important, what matters more is a company’s performance within an industry or geography.
The margin of difference between being average in the most profitable industries and being average in the least profitable industries is 19 percentage points. Similarly, the difference between being average in the most and least profitable geographies is 16 percentage points. That’s nothing to scoff at—strategy certainly has its place. But the differences within industries and within geographies are far greater—34 percentage points between the best and worst performers within an industry and 38 percentage points between the best and worst performers within a country or region.
If you did this same analysis for companies 20 and 40 years ago, you’d find that industry and geography have consistently mattered less over time. Why? Essentially, the reason is the “creative destruction” effect of the globalization of capital. Wide variations used to exist in the attractiveness of industries, but as capital has become ever more global, liquid, and informed (largely as a result of the twin forces of deregulation and privatization as well as the rise of powerful, activist investors), the less-productive industries have been “Uber-ized.” If an industry or subindustry doesn’t earn its cost of capital plus a healthy margin over a business cycle, death approaches. Picking the right industry and geography matters a lot. But the importance of the right-hand side of Figures 1 and 2 is climbing.
Instead of success depending on radical change—the sort that an emphasis on speed or disruption would dictate—our research found that, to be competitive, a company must exploit new sources of growth while sustaining the source of today’s competitive advantage. The companies that stand out make sense of changes in their current environment, not a radically new one. And they act in a timely manner, but they do it smartly—in certain areas at certain times. As such, they don’t get lost in an all-out frenzy, blindly pressing ahead and forgoing proper treatment of their employees—and, by extension, their customers.
We also found that a company’s growth rate and its potential for improved profitability both correlate much more strongly with performance on certain management metrics than they do with moving into a different industry or geography. And the rewards of acceleration are significant: at the team level, our research found that accelerating teams deliver 22.8% more economic impact than derailing teams do.
Sustaining acceleration requires a portfolio of initiatives composed of long-term commitments as well as small bets, balancing speed and quality, providing access to the right information, and always preparing for changing circumstances. These are the activities that distinguish the companies that succeed from the ones that fail.
About the authors
Colin Price is an alumnus of Heidrick & Struggles' London office.
Sharon Toye (firstname.lastname@example.org) is a partner in the Leadership Consulting Practice and the knowledge leader for teams; she is based in the London office.
A version of this article originally appeared on LinkedIn. It is adapted from Colin and Sharon’s recent book, Accelerating Performance: How Organizations Can Mobilize, Execute, and Transform with Agility (Wiley & Sons, January 2017).