One of the best strategy articles I have seen in a long time just came out from McKinsey. The summary of the article is this.
- Most companies are in the middle of the pack.
- Nearly all the profit is made by the top quintile.
- To get from the middle to the top, you need to make a combination of bold moves (much more dynamic than your peers) in the following areas:
- Programmatic M&A. You need a steady stream of deals every year, each amounting to no more than 30 percent of your market cap but adding over ten years to at least 30 percent of your market cap.
- Dynamic reallocation of resources. Winning companies reallocate capital expenditures at a healthy clip, feeding the units that could produce a major move up the power curve while starving those unlikely to surge.
- Strong capital expenditure. You meet the bar on this lever if you are among the top 20 percent in your industry in your ratio of capital spending to sales. That typically means spending 1.7 times the industry median.
- Strength of productivity program. This means improving productivity at a rate sufficient to put you at least in the top 30 percent of your industry.
- Improvements in differentiation. You need business-model innovation and pricing advantages that result in raising your gross margin to the top 30 percent in your industry.
It sounds pretty basic, but that's what makes it so powerful. Abandon the status quo, make bold moves in five areas, and the odds of improved outcome go up dramatically.
You can find a copy of the article here.
