Myth 2: It’s all about profitability

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 by 30%. Folks at McKinsey seem to nail this one, showing that only the lowest profitability firms give investors good returns by improving ROIC.

Shame then that most of the popular tools of strategy analysis are based on research that tries to distinguish what makes some firms more profitable than others !

Of course you need to be adequately profitable, or promise to be so, if you are going to get the cash and other resources to deliver growth.

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