Myth 2: It’s all about profitability

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Here’s another that just jumps out of the strategy books and articles. Strong performance, it is said, shows up in higher profitability [return on sales or invested capital]. So good strategy which leads to that lovely ambiguous phrase, ‘sustained competitive advantage’, shows up in persistently higher profitability than competitors.

Well, sometimes – but investors value growth in free cash flows. So would you rather get $15 a year back from a company you have invested in, or $12 that grows ...

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Profitability or growth?

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Much of what we know about strategy comes from research into why some firms are more profitable than others – but investors value growth in cash flows [see chapter 1 of Strategic Management Dynamics]. An article in McKinsey Quarterly ‘How to choose between growth and ROIC‘ [return on invested capital] confirms the importance of this issue and shows how investors benefit from growth, depending on companies’ profitability.

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