Strategy Breakout

If you like stats here's an interesting one. Of 100% of all enterprises in the world, 90% of profits generated come from just 20% or just 1/5th of all the companies. Although it hasn't been measured internally, the same likely holds true internally, meaning that 80% of operations bring in just 10% of the value. Couple that with the fact that the average company returns a meager 2% above its cost of capital means that most enterprises are little better than an employment agency struggling to keep the lights on. What makes this top quintile of enterprises – the ones that deliver 90% of the profits, so special? If you'd like to find out and discover how you can guide your company to join them….read on.

Authors Bradley, Hirt and Smit in their book "Strategy Beyond the Hockey Stick", do a deep dive into what makes the top tier of enterprises so distinct. There are two major reasons for their exceptional success. First, they know "where you play", and second, they know “how you play”. Let’s look at each in greater detail.

Approximately 55% of business's results are dependent on "where you play". These consist of external factors where the only control you have is determining whether to play in those markets or not. So choose wisely; rank market opportunities using the following criteria:

· Market size: Bigger markets are better markets so give larger markets a higher ranking score.

· Market growth: Higher growth rates are attractive. Rank faster growing markets higher and use percentages cautiously. A market with 10 units that suddenly doubles to 20 units grew by 100%.  That's a lot different than 1000 units growing to 2000 units, so use your judgement and look for long term growth.

· Profit margins: Higher profit margins are obviously more attractive but never compare percentages! A product selling for $200 with a cost of $100 will give you the same profit margin percentage as one selling for $2000 with a $1000 cost. There is a big difference between putting $100 in the bank vs $1000.

· Competitive intensity: the more intense the competition the more likely future margins will get squeezed. Avoid markets with high competitive intensity unless you have a clear, defendable competitive advantage.

Remember, where you invest determines 55% of your overall profitability. Rank your opportunities and invest in the winners.

The other 45% of your overall profitability is determined by "how you play". These are internal factors in your control.  Bradley, Hirt and Smit break these internal elements into five distinct areas. The importance of each will vary depending on the life cycle of your products.

· Mergers and Acquisitions: Both company and product acquisitions can boost your profits by introducing a new technology to your existing customer base or by adding new geographic territories in which to sell your existing products.

· Jettisoning underperformers: Pulling the pin on a product or business unit is always tough. Top performing companies consistently make these hard decisions cutting loose the underperformers.

· Dynamic allocation of resources: Top 20% companies aggressively move resources to businesses with high probabilities of success.   Peanut butter strategies that thinly spread resources across all business operations might keep everyone happy but never work!

· Productivity programs: Top quintile firms relentlessly hunt for productivity gains and consistently outperform others. Make productivity improvements part of your DNA.

· Commitment to R&D: Groundbreaking R&D ( projects where failure is an accepted outcome ) is a key factor in determining if you'll be in the top profit quintile or not.

To join the elite club and start generating profits that are significantly greater than 2% above your average cost of capital you'll need to put a focused strategy into play. First determine "where you to play" and invest in these markets. Second plan "how you play", manipulating internal factors that you control with the above pointers in mind.     Rather than being a make work project, develop a breakout strategy and earn a healthy return on your efforts.