BUSINESS SPECIAL...Paradox of Growth

Paradox of Growth

Complexity is the silent killer of growth, says Bain's James Allen

In a New Delhi hotel teeming with Bain partners, everyone passing by nods at James Allen. That's because in a world of management consultants, the thought leaders, with their cutting-edge insights, tend to get top-dog status. And Allen who is partner at Bain & Company's London office and co-leader of the firm's Global Strategy Practice falls in the hallowed high priest category. Along with Chris Zook, Allen penned Repeatability: Build Enduring Businesses for a World of Constant Change', an analytical tome on how companies with a core differentiated model married with speed, adaptability, and simplicity build world class businesses. In a chat with CD, he discusses the idea of repeatable business models:
Why is complexity such a key issue for big businesses?
A key component of a differentiated strategy is how simple it is. We studied companies that have done well consistently over 20 years. All of them chose simplicity over complexity. Complexity is increasing, and Chris (Zook) and I are absolutely convinced that the biggest issue facing businesses is going to be complexity. Growth begets complexity. When you grow, the next incremental percentage of growth requires smaller and smaller choices. And if you have been around for a long time, each time you try to grow, you create more and more complex businesses. And each time you reorganise to manage that complexity, or throw in some IT solution to solve the complexity, things get worse.
Do companies have the skills required to deal with complexity?
The best CEOs are saying, if I am not the person who simplifies no one else will. They know that if they start complexity, by the time it hits frontline it will be worse. CEOs are always talking about how to simplify around themes. The worst CEOs are not. They are in the complexity creating business. They get seduced and excited about every adjacency expansion. They want to redefine the business in a way that makes them great and big and powerful. But the fact is that in the world of complexity probably the primary mission of the CEO is to simplify the mission, so that it's understood by everybody.
Don't growth and simplicity have opposite pulls?
It is the inherent paradox of business. Growth creates complexity. Complexity is the silent killer of growth. The data we collated is just astounding. Only 10% of companies grow sustainably and profitably. If you speak with management teams, only 10% say that lack of growth opportunities is a problem. It is all about internal problems. Nike is one of the best examples of growth if you look at it from a product proliferation perspective. It went from a running shoes company to selling golf clubs. If you ask the management team they will say Nike has grown by having a fantastic global brand to being the best at managing icons in sports, having the greatest sports apparel value chain and then creating great running shoes for the athletes. Everything that we do is interesting but those four things we do well. And in that they have dominated sport after sport after sport. So what looks like complexity, I call the one hand rule. Talk to any Nike executive, in one hand they will be able to tell you why they are differentiated from other repeatable models, like this.
There was an interesting fact in the book. 60-70% of company executives surveyed thought their company had a differentiated offering. And when you went to the customers, only 8% thought the product was differentiated.
It is amazing. 96% per cent say that they are customer focused, I find it funny that 4% think they aren't. But 80% believe they deliver a differentiated proposition to the customers when you interview their customers, in only 8% of cases do they agree. We say that is the delivery gap. It is the difference of sitting in a board room with a PowerPoint presentation, saying how we are differentiated versus the reality of customer experience. To me that reinforces the need for simplicity. If you just did what you said you were going to do. You just kept the promises that you initially gave to your customers that is wildly differentiated in a world where we have a very few things that excite us. Look at the IKEA story. People are excited about bookcases. Why? Because there has been a price drop of 85% since the book case in introduced, and it is a fantastic product.
What are the three principles that are at the core of your book?
The first is that the best companies are winning through simplicity. Number two is the great repeatable model. It is a very interesting combination of principles. Principle one is what I always called hard and fact based. How you differentiated, how you define it as a front-line activity. You better make sure it is actually differentiated. So principle one is core focus differentiation. Principle two is completely the opposite. Get your employees to implement it, believe in it and create it in their own words and translate it in into behaviors and routines for a favourable customer experience. Strategy is not a strategy until it is translated into a routine used by the front line. And if you talk to great companies, the Walmarts, the McDonalds, they always use strategies what the front like gives. Principle two is much softer, it is more about capturing hearts and minds. Principle three is adaptability, because if you have a repeatable model with no ability to adapt, you are going to be a dinosaur. So that's a hard-soft, loose-tight framework of principles. And I think the third thread is the redefinition of personal leadership. We are seeing more and more CEOs articulate now about my job is a battle for energy. And I need to be the one that has the energy at the end of the day. They will talk to you about when I find I am tired, I do undue damage to my organisation. But if I can keep my energy and keep focus, and keep things simple, I am value adding.
Why is low cost always a dominant differentiating factor?
Cost is a huge factor because it is signifies an obsession of continuous improvement. The time the business is actually at it is best is the day I create a pizza and hand it to you. I am the inventor, I know my product, my cost base is minimal, you are my customer, you give me great feedback and I know about you. From that point as I get two people, three people, I get further and further removed from my customer. I introduce more and more layers and complexity. One of the issues about cost leadership is the obsession to what is my customer willing to pay for, what can they afford, and I think about that as I add costs, is it truly value adding. They use the phrase of what will she pay for, so internally we could add a new widget here, but will she pay for the benefit for it. Cost leadership is often a great profit for a company that is always trying to get scale advantage, always trying to continuously improve, drive out cost. And often a leader that does not have a cost leadership denotes complexity, laziness, lack of attention, so again and again one of the things we found that cost in itself is important but it is a proxy of how are you running that firm.
Isn't this whole repeatability model about excellence in execution?
Absolutely. It's about the transformation of the power of routine. What a contradictory statement. Routine is what you do everyday on the front-line. Do you keep your promises to customers? It really, really matters. I was talking to the founders of a leading sandwich maker in the UK. Starbucks and Costa Coffee were coming in and this sandwich company wasn't introducing complex coffee. I sat down with the founders and said you are going to get killed and his response was: ‘My proposition is we serve fast food with a smile. My front line stops smiling with complex coffee.’ He knew exactly what his proposition was at the front-line delivery. That smile in the end was more important than complex coffee outlets, and this is the CEO who thinks about what affects his front-line. So the transformation power of routine is a huge idea, and when it goes wrong, the management team somehow gets confused that there is something else they are supposed to do other than deliver everyday to the customer.
Do companies forget the reason for their success as they get into multiple things?
As companies grow more complex they begin to define themselves with a set of activities. So they try to bring everybody together and they say how do we describe ourselves so that everybody feels a part of it. So they come up with stupid mission statements and forget what the customer needs. The best company continually return to what we call founding principles. Which is why were we in this business in the first place, and now that we are bigger how do we bring scale advantage to delivering that simple founding principle. What were we when we were at our greatest is often the question asked. The nature of growing is to forget who you are, forget what is it you stand for, who you are, and what focus on what routines or actions matter at the customer level.
Where does growth in emerging markets fit in your model?
The first angle is how do established global companies view India and the second is how do Indians view their own international expansion going forward. India is a growth market and every multinational is looking at the rise of the Indian middle class. The first question you ask is can we take the repeatable model that we used in developed markets and bring in to India, and the answer is yes. But you are not going to hit that emerging middle class and so then the question is, how far do we adapt? You need a proposition that can capture that initial consumer and India is important enough to be worth making that adaption. But if global companies do too much adaptation, with a different model for India, for China, then you die in complexity. Ten years ago it was one global business model to conquer the world. Now everybody is saying it is an uneven world and there is a fundamentally different growth rate in developing geographies, and these require different models. This is a potential source of complexity, unless they get the right repeatable model.
    Indian companies expanding internationally face a dilemma too. Fast growth happens in emerging economies if you get the right team together and you have the right government relationships and right capital. You can add value in lots of different businesses. If they just take the complexity of their Indian operations and start magnifying that in every new market they go into, they will face issues. We are talking to a lot of Indian founders about what it is they are trying to expand, what they represent, who they are. They have a complex portfolio in India, but if they are thinking about going abroad, it is a challenge. Western companies have made many mistakes and learnt the lessons.

Vinod Mahanta CDET120720