James Allen, co-leader of Bain Consulting's strategy practice, has written a short article for the Wall Street Journal about the scale advantages (or lack thereof) of industry leaders. Allen reviews the findings from research the firm conducted across 45 industries. Certainly, scale had its advantages in many of these industries. However, it's far from a guarantee of success. Allen summarizes the conclusions:
Strikingly, we found that on average, 80% of the economic profit pool was concentrated in the hands of just one or two players in each market. These strong performers generated nearly two times their cost of capital in profits. And among these economic leaders, 40% were not scale leaders at all. These best-performing companies, it turns out, achieve economic leadership in other ways.
As I've written before on this blog, executives consistently overestimate the benefits of scale. This study should cause them to reconsider their beliefs. Moreover, the biggest firms should ask themselves: In what ways are our scale and scope key disadvantages relative to innovative newcomers?
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