- On the Basics –
We have said that strategic management is an evolution and a destination. What does this
mean? Discuss in detail.
Provide three examples of how your team company is or is not a ‘strategic management’
firm.
Lastly, clearly and succinctly describe your team company’s mission statement as well as
the 2020 goals and objectives of the firm.
- On Corporate Governance –
Discuss three traditional roles of the board of directors. Also, identify and discuss the most
urgent governance issue impacting your team company’s board – what are they doing to
manage this important issue?
Lastly, identify and evaluate a major philanthropic initiative/program to which your team
company contributes or leads that aims to do good while also helping the firm do well.
- On Competition – The Five Forces & The Blue Ocean
We have said that competition forces society to be better by providing superior value. Identify and discuss your team company’s competitive advantage and core competency – in essence, the magic sauce that makes the company stay in the game.
Provide a descriptive discussion of the Porter’s Five Forces Model of your team’s company and include what Wheelen and Hunger call the sixth force in your analysis.
Kim and Mauborgne argue that sustaining a “competitive advantage” is to make the competition irrelevant – hence, the blue ocean metaphor. Identify and discuss what must be done to achieve or sustain your team company’s position in a ‘blue ocean’. Pull from the readings to support your response while including a ‘four actions framework’ model.
- On the Value Chain –
Identify and discuss the business model that best describes your team company.
Provide a descriptive overview of the various components of Porter’s value chain model
as they apply to your CEO company. Identify the areas within the value chain needing to
be strengthened. Ultimately, what is the profit/margin goal of your firm?
Lastly, what are the central pillars of your CEO company’s corporate theory? Identify the
company’s assets and activities that are rare, distinctive, and valuable.
i. Pull from Zenger to support your response while providing an illustrative model
of the company’s corporate theory as well.
5. On General Strategy –
- Define and discuss the current business and corporate strategies of your team company
using the language from our readings.
- What are the strengths and weaknesses of the current strategies?
- Lastly, identify the most urgent decision needing to be made to ensure the competitive
sustainability of the company or to move toward a sustainable competitive advantage.
team company is Apple, and CEO company is Amazon.
ten pages is your minimum target; dig deep into the readings and lectures; provide unique insight; reach for high-level analysis, presentation and formatting; use 12-point, Times New Roman font; double- space; use endnotes to cite your sources using full APA bibliographic formatting including page numbers; pay attention to details; put some time into this assignment; teach me something new.
- team company
DR. SEAN D. JASSO
EXAM GRADING CRITERIA
(95%): A
Superior writing and organization
Wide coverage of the material with significant, well developed examples
Extensive citations throughout
Little to no grammatical errors
Highly sophisticated critical thinking
Highly descriptive language
Unique insight
Well beyond the volume of discussion
Comprehensive analysis, discussion and rigor
(90%): A-
Strong writing and organization
Strong coverage of the material
Strong examples
Descriptive language
Beyond the standard volume of discussion
Strong evidence of critical thinking
(87%): B+
Well written and organized
Strong review and command of the material
Evidence of slight underdevelopment of key issues
Good references/citations throughout
Effective and correct use of supporting models/illustrations
Very good balance of volume of discussion
(85%): B
Good writing and organization
Good review of the material
The answers are there, but lacks high-level critical thinking
Evidence of models/illustrations, yet potentially lacking supporting narrative
Complete and generally correct
Potentially unbalanced volume of discussion
(80%): B-
Completed
Correct answers, but lacks development
Writing and organization is ‘average’
Citations/references to supporting readings are minimal OR a bulk of the exam is summarized
Lacks critical development
(75%): C
Done
Skims the surface of the material
Poorly organized and written
Evidence of minimal time commitment
Potentially correct answers, but missing a major portion or entire question
SPOTLIGHT ON STRATEGY FOR TURBULENT TIMES
Spotlight ARTWORK Tara DonovanUntitled, 2008, polyester film
HBR.ORG
What Is
the Theory
f ̂ Fiof
y
Firm?
Focus less on competitive advantage and more on growth
that creates value, by Todd Zenger
f asked to define strategy, most execu-
tives would probably come up with
something like this: Strategy involves
discovering and targeting attractive
markets and then crafting positions that
deliver sustained competitive advan-
tage in them. Companies achieve these
positions by configuring and arranging
resources and activities to provide either
unique value to customers or common
value at a uniquely low cost. This view of strategy as
position remains central in business school curricula
around the globe: Valuable positions, protected from
imitation and appropriation, provide sustained profit
streams.
Unfortunately, investors don’t reward senior
managers for simply occupying and defending po-
sitions. Equity markets are full of companies with
powerful positions and sluggish stock prices. The
retail giant Walmart is a case in point. Few people
would dispute that it remains a remarkable firm. Its
early focus on building a regionally dense network
of stores in small towns delivered a strong positional
advantage. Complementary choices regarding ad-
vertising, pricing, and information technology all
continue to support its low-cost and flexibly mer-
chandised stores.
Despite this strong position and a successful stra-
tegic rollout, Walmart’s equity price has seen little
growth for most of the past 12 or 13 years. That’s be-
cause the ongoing rollout was anticipated long ago,
and investors seek evidence of newly discovered
value—value of compounding magnitude. Merely
sustaining prior financial returns, even if they are
outstanding, does not significantly increase share
price; tomorrow’s positive surprises must be worth
more than yesterday’s.
Not surprisingly, I consistently advise MBA stu-
dents that if they’re confronted with a choice be-
tween leading a poorly run company and leading a
well-run one, they should choose the former. Imag-
ine assuming the reins of GE from Jack Welch in Sep-
tember 2001 with shareholders’ having enjoyed a 40-
fold increase in value over the prior two decades. The
expectations baked into the share price of a company
like that are daunting, to say the least.
To make matters worse, attempts to grow often
undermine a company’s current market position.
As Michael Porter, the leading proponent of strat-
egy as positioning, has argued, “Efforts to grow blur
June 2013 Harvard Business Review 73
SPOTLIGHT ON STRATEGY FOR TURBULENT TIMES
uniqueness, create compromises, reduce fit, and
ultimately undermine competitive advantage. In
fact, the growth imperative is hazardous to strategy.”
Quite simply, the logic of this perspective not only
provides little guidance about how to sustain value
creation but also discourages growth that might in
einy way move a compeiny away from its current stra-
tegic position. Though it recognizes the dilemma, it
offers no real advice beyond “Dig in.”
Essentially, a leader’s most vexing strategic chal-
lenge is not how to obtain or sustain competitive
advantage—which has been the field of strategy’s
primary focus—but, rather, how to keep finding new,
unexpected ways to create value. In the following
pages I offer what I call the corporate theory, which
reveals how a given company can continue to create
value. It is more than a strategy, more than a map to
a position—it is a guide to the selection of strategies.
The better its theory, the more successful an organi-
zation wül be at recognizing and composing stiategic
choices that fuel sustained growth in value.
The Greatest Theory Ever Told
Value creation in all realms, from product devel-
opment to strategy, involves recombining a large
number of existing elements. But picking the right
combinations out of a vast array is like being a blind
explorer on a rugged mountain range. The strategist
CEinnot see the topography of the surrounding land-
scape—the true value of various combinations. All
he or she can do is try to imagine what it is like.
In other words, leaders must draw from available
knowledge and prior experience to develop a cogni-
tive, theoretical model of the landscape and then
make an educated guess about where to find valu-
able configurations of capabilities, activities, and re-
sources. Actually composing the configurations will
put the theory to the test. If it’s good, the leader will
gain a refmed vision of some portion of the adjacent
topography—perhaps revealing other valuable con-
figurations and extensions.
Companies that enjoy sustained success are typi-
cally founded on a coherent theory of value creation.
All too often such companies get into trouble when
the founders’ successors lose sight ofthat theory—
whereas turnarounds, when they occur, often in-
volve a return to it. The history of the Walt Disney
Company provides a case in point. Its founder had
a very clear theory about how his company created
value, which was captured in an image held in the
company’s archives and reproduced here (see the
exhibit “Walt Disney’s Theory of Value Creation in
Entertainment”).
The image depicts a range of entertainment-
related assets—books and comic books, music, TV,
a magazine, a theme park, merchandise licensing—
surrounding a core of theatrical films. It illustrates
a dense web of synergistic connections, primarily
between the core and other assets. Thus, as precisely
labeled, comic strips promote films; films “feed ma-
terial to” comic strips. The theme park, Disneyland,
plugs movies, and movies plug the park. TV publi-
cizes products of the music division, and the film di-
vision feeds “tunes and talent” to the music division.
Walt’s theory in words might read: “Disney sustains
value-creating growth by developing an unrivaled ca-
pability in family-friendly animated (and live-action)
Walt Disney’s Theory of
Value Creation in Entertainment
This 1957 map of Walt Disney’s vision defined his company’s key
assets, including a valuable and unique core, and identified patterns
of complementarity among them. It implicitly revealed the industry’s
future evolution and provided guidance concerning adjacent competitive
terrain that Disney might explore. The asset and capability combinations
that emerged from the theory have evolved with time, but the theory
itself has not fundamentally changed.
¡iuComíK ••/
I i MOPS I
COMIC STRIPS
74 Harvard Business Review June 2013
WHAT IS THE THEORY OF YOUR FIRM? HBR.ORG
Traditionally, practitioners see strategy as the
process of discovering and targeting attractive
markets and then crafting positions that will
deliver sustained advantage in them.
Unfortunately, investors don’t
reward senior managers for
simply occupying and defend-
ing market positions. They look
for evidence that the company
can continually find new
competitive advantages.
To do that, managers
need a corporate theory that
explains how they can create
value by combining the
company’s unique resources
and capabilities with other
assets.
A good theory incorporates
foresight about an industry’s
future, insight into which inter-
nal capabilities can optimize
that future, and cross-sight
into which assets can be
configured to create value.
The successes of the Walt
Disney Company and Mittal
Steel were driven by good
corporate theories. In contrast,
AT&T’s strategic actions after
the spin-off of the Baby Bells
provide a cautionary tale about
what can happen when
a large company lacks a
coherent theory.
films and then assembling other entertainment as-
sets that both support and draw value from the char-
acters and images in those films.”
The power of this theory was perhaps most viv-
idly revealed following Walt’s death. Within 15 years
leadership at Disney seemed to lose sight of his vi-
sion. As the company’s films markedly shifted away
from the core capability of animation, the engine of
value creation ground to a halt. Film revenues de-
clined. Gate receipts at Disneyland flattened. Charac-
ter licensing slipped. The Wonderful World of Disney,
the TV show that American families had gathered to
watch every Sunday evening, in a nationwide em-
brace, was dropped from network broadcast. By the
time I entered college, in the late 1970s, the Disney
franchise many of us had grown to love as children
had all but disappeared.
Attesting to the depths of Disney’s disarray, cor-
porate raiders in 1984 attempted the unthinkable:
a hostile acquisition of the company with a view
to selling off key assets, including the film library
and prime real estate surrounding the theme parks.
The capital markets embraced this idea, leaving the
board with a critical choice: sell Disney to the raiders,
who would pay a significant price premium but dis-
mantle the company, or find new management. The
board chose the latter and hired Michael Eisner.
Eisner rediscovered Walt’s original theory and
used it to guide a heavy investment in animated pro-
ductions, generating a string of hits that included
The Little Mermaid, Beauty and the Beast, and The
Lion King. Over the next 10 years Disney’s box office
share jumped from 4% to 19%. Character licensing
grew by a factor of eight. Attendance and margins at
the theme parks rose dramatically. Disney’s share of
income from video rental and sales soared from 5.5%
to 21%. Eisner opened new theme parks, made fur-
ther investments in live-action films, and expanded
into adjacent businesses consistent with the theory.
including retail stores, cruise ships, Saturday morn-
ing cartoons, and Broadway shows. By essentially
dusting off Walt’s theory and aggressively pursu-
ing strategic actions consistent with it, Disney won
growth in its market capitalization from $1.9 billion
in 1984 to $28 billion in 1994.
That cycle has repeated itself in the years since:
Although the move into Broadway shows was com-
plementary to animated films, character licensing,
and theme parks, other strategic moves, such as the
1988 acquisition of a Los Angeles TV station, the 1995
purchase of Cap Cities/ABC, and the 1996 purchase
of the Anaheim Angels, failed to reflect the theory’s
logic. Meanwhile, Eisner allowed the core animation
asset to atrophy again as the company failed to keep
up with technology trends and the best-in-the-world
animators migrated from Disney to Pixar. Disney
gained access to their skills through a contract, but
the relationship between Disney and Pixar grew con-
tentious and was finally severed just before Eisner
stepped down, in October 2005.
His successor, Robert Iger, quickly moved not
merely to repair the Pixar relationship but to acquire
the company, for more than $7 billion. Disney’s re-
cent acquisitions of Marvel and Lucasfilm fuel this
central asset, although they carry the company into
somewhat unfamiliar terrain: The Marvel and Star
Wars casts are quite different from Disney’s tradition-
ally princess-heavy character set. Whether this stra-
tegic experiment proves to be value-creaüng remains
to be seen. But Walt Disney’s road map for growth
has clearly endured long past his death, providing
a remarkable illustration of posthumous leadership.
The Three “Sights” of Strategy
The Disney strategy has all the hallmarks of a power-
ful corporate theory. It has consistently given senior
managers enhanced vision—a tool they repeatedly
used to select, acquire, and organize complementary
June 2013 Harvard Business Review 75
SPOTLfGHT ON STRATEGY FOR TURBULENT TIMES
Steve Jobs’s Corporate Theory of Value Creation
On August lo, 2on, Apple surpassed ExxonMobil to
become the world’s most valuable corporation—a
remarkable feat for a company left for dead in 1997.
Although credit for Apple’s success correctly goes to
Steve Jobs, the real substance of his genius has often
been misunderstood. Like Walt Disney’s, his greatest
contribution was not a product, a plan, or a managerial
attribute; it was a corporate theory of value creation-
one that nearly every purported industry or strategy
expert consistently encouraged him and his successors
at Apple to abandon.
Jobs’s theory was apparent in the
famous Apple II computer, launched in
1977. Although its inner workings were
the brainchild of Apple’s cofounder, Steve
Wozniak, Jobs was responsible for the
friendly packaging, the sleek casing, and
the marketing-focused company that
brought the product to consumers with
tremendous fanfare. A wave of entries into
the personal computing space followed,
each introducing a unique software and
hardware platform.
But in 1981 the industry was trans-
formed when IBM introduced the IBM
PC. It was an instant success, widely
applauded for its open architecture. The
industry rapidly moved toward generating
IBM-compatible software and hardware.
Cheaper, faster, and greater storage
capacity quickly came to define competi-
tive success. Competing platforms rapidly
disappeared and is years of intense
competition ensued, until Dell eventually
discovered a powerful position.
Jobs, however, continued managing to
a very different set of performance criteria,
reflecting his theory of value creation.
That theory not only guided Apple’s strat-
egy in computing but defined a succession
of future moves and choices. It took on
greater clarity with time, but essentially it
held that consumers would pay a premium
for ease of use, reliability, and elegance in
computing and other digital devices, and
that the best means for delivering these
was relatively closed systems, significant
vertical integration, and tight control over
design.
Like Disney’s, Jobs’s theory incorporated
all three strategic “sights.” It was inspired
by foresight about the evolution of cus-
tomer tastes. Jobs recognized that com-
puters would become a consumer good,
akin to the Sony Walkman. He believed
that consumers would appreciate aesthet-
ics and aspired to create a device with the
elegance of a Porsche or a well-designed
kitchen appliance.
His insight was that the internal capabil-
ity most critical to value creation in this
bundles of assets, activities, and resources. How can
you tell if your own corporate theory is as good? The
answer depends on the extent to which it provides
what I call the strategic “sights”: foresight, insight,
and cross-sight. Let’s look at these a bit more closely.
Foresight. An effective corporate theory ar-
ticulates beliefs and expectations regarding an in-
dustry’s evolution, predicts future customer tastes
or consumer demand, foresees the development of
relevant technologies, and perhaps even forecasts
the competitive actions of rivals. Foresight suggests
which asset acquisitions, investments, or strategic
actions will prove valuable in predicted future states
of the world. It should be both relatively specific and
somewhat different from received wisdom. If it is
too generic, it won’t identify which assets are valu-
able. If it is too widely shared, the desired assets and
capabilities will be expensive to acquire (because
competed for) or else not unique (and therefore un-
likely to create sustained value). Walt Disney’s fore-
sight was that family-friendly visual fantasy worlds
had vast appeal.
Insight. If competing companies own assets
identical to yours, they can replicate your strategic
actions with equal or perhaps even refined capac-
ity, thus undermining any superior foresight in your
theory. An effective corporate theory is therefore
company-specific, reflecting a deep understanding
of the organization’s existing assets and activities. It
identifies those that are rare, distinctive, and valu-
able. Disney’s key insight was recognizing the value
of the company’s early lead and substantial invest-
ment in animation and its capacity to create timeless,
unique characters that, unhke real actors, required
no agents.
Cross-sight. A well-crafted corporate theory
identifies complementarity that the company is sin-
gularly able to assemble or pursue by acquiring as-
sets that can be combined with existing ones to cre-
ate value. Disney’s theory suggested a broad array of
entertainment assets that could draw value from a
core of animation.
Together these three sights enable leaders to
compose a succession of value-creating actions.
Foresight regarding future demand, technology, and
consumer tastes highlights domains in which to
search for cross-sight. Insight regarding unique as-
sets focuses the search for foresight and cross-sight.
Cross-sight reveals valuable complementarities,
highlighting the domain of foresight.
76 Harvard Business Review June 2013
WHAT IS THE THEORY OF YOUR FIRM? HBR.ORG
competitive terrain was design. Of course,
that was in part a reflection of his person-
ality: Jobs was a self-proclaimed artist,
obsessed with color, finish, and shape; but
he transferred this obsession to the tech-
nology as well. Walter Isaacson, Jobs’s
biographer, wrote, “He got hives, or worse,
when contemplating great Apple software
running on another company’s crappy
hardware, and he likewise was allergic to
the thought of unapproved apps or con-
tent polluting the perfection of an Apple
device.” In pursuing Jobs’s focus on design,
Apple made heavy R&D investments, much
larger in percentage terms than those of
any of its competitors.
His theory also provided cross-sight, in
that it helped Jobs identify external assets
through which value could be created,
including the graphical user interface (GUI)
technology that Apple obtained from Xerox.
During his famous visit to Xerox, Jobs
repeatedly expressed incredulity that the
company was not aggressively commer-
cializing the technology. He saw that GUI
perfectly fit his theory, because it made
a computer easy to use and attractive
to engage with. Some regard what next
transpired as one of the greatest technol-
ogy transfers in history.
The Macintosh was the first fully formed
embodiment of Jobs’s theory, and it gar-
nered wide acclaim and remarkably high
margins (as Jobs had predicted). But the
IBM standard was already well established,
and the opposing network economics were
overwhelming. Although the Mac survived
as a very profitable niche product. Bill
Gates and others exerted enormous pres-
sure to port the look and feel of the Macin-
tosh operating system to the IBM platform.
Jobs, however, refused to countenance any
such experiment.
For years academics and journalists
derided this strategic refusal. Jobs was
banished from Apple for more than a
decade, in part for his dogged insistence
on sticking to his theory. His subsequent
vindication has become the stuff of legend.
He returned to Apple in 1996, shortly
after the struggling enterprise had been
shopped unsuccessfully to HP, Sun, and
even IBM. Most people anticipated that he
would simply dress the company up for
sale. Instead he reimposed his theory with
a vengeance, trimming the product range
and introducing a new line of Macintosh
products, not available for license. More
important, he used it to explore adjacent
terrain, producing a remarkably success-
ful series of strategic moves across a wide
range of product categories.
Apple was not the first to design a digital
music library, manufacture an MP3 player,
or market a smartphone. But it was the
first to craft and configure those devices
and their user environment with elegant,
easy-to-use designs and with tight control
of complementary products, infrastructure,
and market image. Apple has shown that
Jobs’s theory has broad application beyond
computing, with industries and product
categories ranging from TV, video systems,
home entertainment, portable readers,
information delivery, and even automotive
systems as possible targets. In contrast,
the well-positioned Dell has struggled to
find a way out of a declining PC industry.
When Strategy Lacks a Theory
Not all corporate theories are created equal, however,
and some companies never discover valuable ones.
The story of AT&T is a case in point.
In 1984 the seven regional Bell Operating Compa-
nies were spun off from AT&T, eliminating Ma Bell
from local telephone service and slashing assets
from $150 billion to $34 billion. AT&T was left with
its long-distance business, its manufacturing arm
(Western Electric), and its R&D organization. Bell
Labs. With no clear path for growth, the company
needed a new theory of value creation.
Its first strategic actions after the breakup sug-
gest that its leaders had composed a theory whereby
they would leverage what they perceived as broad
managerial competence to invest large cash ñows
from long-distance service in diverse acquisitions
and new businesses. Over the next several years the
company got into data networking, financial ser-
vices, computing, and an internet portal. The mar-
ket was distinctly unimpressed, and in 1995 AT&T
abandoned its diversification theory, announcing
that it would divest two key assets, NCR and Lucent
Technologies—essentially carving itself into three
distinct companies.
Management quickly composed a new theory
that reflected its belief in the value of acquiring the
“last mile” connection to local customers and provid-
ing a bundled package of telephone, broadband in-
ternet, and cable services. This theory drove a series
of costly cable-industry acquisitions in 1998-1999,
totaling more than $80 billion. Unfortunately, the
theory was rather widely shared by other companies
and investors, and purchase prices reflected this (the
cost per subscriber exceeded $4,000). Nevertheless,
the market initially applauded these moves, driving
AT&T’s share price to an all-time high of $60. But by
May 2000 the stock had dropped back close to $40
a share. In response, AT&T again began questioning
its theory—or at least its ability to sell that theory
to Wall Street. In October 2000 the company an-
nounced that it would spin ofFthe wireless and cable
units, and five years later it put itself up for sale.
The moral of the AT&T story is clear: It pays to
invest a lot of time and energy in crafting a robust
theory that, like Disney’s, is quite specific as to how
combinations of assets create value. AT&T’s first
theory following the breakup never made clear how
the company’s supposed managerial competence
could be uniquely applied to new types of assets; it
June 2013 Harvard Business Review 77
SPOTLIGHT ON STRATEGY FOR TURBULENT TiMES HBR.ORG
lacked insight and cross-sight and certainly any vi-
sion of the future. The company’s second theory was
equally fiawed: It contained foresight, but in a form
that was already widely shared and thus could not
generate unique cross-sights.
Bargain Hunting with a
Corporate Theory
The real power of a well-crafted corporate theory
becomes particularly evident when companies go
shopping. Value creation in markets always comes
down to prices paid, and a good corporate theory en-
ables the acquirer to spot bargains that are uniquely
available to it.
Mittal Steel is a good example. From its origin,
in 1976, until 1989, it was a very small player in an
such assets—especially ones with integrated technol-
ogy and large iron ore deposits—was unthinkable, so
the field was wide open for Mittal.
Mittal’s insight was its understanding of the
value of DRI and its own ability to lead turnarounds
in formerly state-owned enterprises. Its foresight
was an early recognition of the value of iron ore as-
sets—given the strong growth in demand for steel in
emerging economies—and the virtues of industry
consolidation. Its cross-sight was to recognize the
types of assets that could benefit from the compa-
ny’s distinct capabilities.
By 2004 Mittal had emerged as the world’s largest
and lowest-cost steel producer. Lakshmi Niwas Mit-
tal, the company’s owner, is now one of the world’s
wealthiest people. This success came from having a
An effective corporate theory is company-
specific; it identifies those assets and activities
that are rare, distinctive, and valuable.
industry consistently ranked at the bottom in fi-
nancial performance. Mittal began as a small mill in
Indonesia, where it developed a capability in a new
iron ore input technology called direct reduced iron
(DRI), which provided mini-mills with a high-quality
alternative to scrap metal.
Mittal simply grew with Indonesia’s emergence as
a tiger economy. But in 1989 it made its first major ex-
pansion move by acquiring a troubled steel operation
owned by the government of Trinidad and Tobago—
a mill that was operating at 25% capacity and losing
$1 million a week. Mittal quickly proceeded to turn
this business around as it transferred knowledge, de-
ployed DRI, and increased sales. A succession of sig-
nificant acquisitions followed over the next 15 years,
primarily of assets in the former Soviet bloc; each
proved to be a gold mine.
A clear and simple corporate theory guided this
acquisition program: Mittal knew how to create value
from poorly understood and poorly managed state-
owned steel operations in developing economies
where demand for the product was growing fast. To
other steel companies, many of which were focused
on improving their internal operations, acquiring
corporate theory that functioned as a rather remark-
able treasure map, one that continues to reveal as-
sets uniquely valuable to Mittal.
THE PSYCHOLOGIST Kurt Lewin famously commented,
“There is nothing so practical as a good theory.” The-
ories define expectations about causal relationships.
They enable counterfactual reasoning: If my theory
accurately describes my world, then when I choose
this, the foUowing will occur. They aie dynamic and
can be updated on the basis of contrary evidence or
feedback. Just as academic theories enable scien-
tists to generate breakthrough knowledge, corporate
theories are the genesis of value-creating strategic
actions. They provide the vision necessary to step
into uncharted terrain, guiding the selection of what
are necessarily uncertain strategic experiments. A
better theory yields better choices. Only when your
company is armed with a well-crafted corporate
theory will its search for value be more than a ran-
dom walk. 0 HBR Reprint R1306D
B a Todd Zenger is the Robert and Barbara Frici< Profes- n n sor of Business Strategy at Washington University in St. Louis's Olin Business School.
78 Harvard Business Review June 2013
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STRATEG
by W. Chan Kim and
Renee Mauborgne AONETIME ACCORDION PLAYER, Stilt Walker, andfire-eater, Guy Lalibertd is now CEO of one ofi Canada’s largest cultural exports. Cirque du
Soleil. Founded in 1984 by a group of street performers,
Cirque has staged dozens of productions seen by some
40 million people in 90 cities around the world. In 20
years, Cirque has achieved revenues that Ringling Bros,
and Barnum & Bailey-the world’s leading circus-took
more than a century to attain.
Cirque’s rapid growth occurred in an unlikely setting.
The circus business was (and still is) in long-term decline.
Alternative forms of entertainment – sporting events,
TV, and video games – were casting a growing shadow.
Children, the mainstay of the circus audience, preferred
PlayStations to circus acts. There was also rising sentiment.
76 HARVARD BUSINESS REVIEW
fueled by animal rights groups, against the use of animals,
traditionally an integral part of the circus. On the supply
side, the star performers that Ringling and the other cir-
cuses relied on to draw in the crowds could often name
their own terms. As a result, the industry was hit by steadily
decreasing audiences and increasing costs. What’s more,
any new entrant to this business would be competing
against a formidable incumbent that for most of the last
century had set the industry standard.
How did Cirque profitably increase revenues by a fac-
tor of 22 over the last ten years in such an unattractive
environment? The tagline for one of the first Cirque pro-
ductions is revealing: “We reinvent the circus.”Cirque did
not make its money by competing within the confines
of the existing industry or by stealing customers fro
m
Ringling and the others. Instead it created uncontested
market space that made the competition irrelevant. It
pulled in a whole new group of customers who were tra-
ditionally noncustomers of the industry-adults and cor-
porate clients who had turned to theater, opera, or ballet
and were, therefore, prepared to pay several times more
than the price of a conventional circus ticket for an un-
precedented entertainment experience.
To understand the nature of Cirque’s achievement, you
have to realize that the business universe consists of
two distinct kinds of space, which we think of as red and
blue oceans. Red oceans represent all the industries in
existence today-the known market space. In red oceans,
industry boundaries are defined and accepted, and the
competitive rules of the game are well understood. Here,
companies try to outperform their rivals in order to grab
a greater share of existing demand. As the space gets
more and more crowded, prospects for profits and growth
are reduced. Products turn into commodities, and in-
creasing competition turns the water bloody.
Blue oceans denote all the industries not in existence
today-the unknown market space, untainted by com-
petition. In blue oceans, demand is created rather than
OCTOBER 2004 77
Blue Ocean Strategy
fought over. There is ample opportunity for growth tbat
is both profitable and rapid. There are two ways to create
blue oceans. In a few cases, companies can give rise to
completely new industries, as eBay did with the online
auction industry. But in most cases, a blue ocean is cre-
ated from within a red ocean when a company alters the
boundaries of an existing industry. As will become evi-
dent later, this is what Cirque did. In breaking through
the boundary traditionally separating circus and theater,
it made a new and profitable blue ocean from within the
red ocean of the circus industry.
Cirque is just one of more than 150 blue ocean cre-
ations that we have studied in over 30 industries, using
data stretching back more than too years. We analyzed
companies that created those blue oceans and their less
successful competitors, which were caught in red oceans.
In studying these data, we have observed a consistent
pattern of strategic thinking behind the creation of new
markets and industries, what we call blue ocean strategy.
The logic behind blue ocean strategy parts with tradi-
tional models focused on competing in existing market
space. Indeed, it can be argued that managers’ failure
to realize the differences between red and blue ocean
strategy lies behind the difficulties many companies
encounter as they try to break from the competition.
In this article, we present the concept of blue ocean
strategy and describe its defining characteristics. We as-
sess the profit and growth consequences of blue oceans
and discuss why their creation is a rising imperative for
companies in the future. We believe that an understand-
ing of blue ocean strategy will help today’s companies as
they struggle to thrive in an accelerating and expanding
business universe.
Blue and Red Oceans
Although the term may be new, blue oceans have always
been with us. Look back 100 years and ask yourself
which industries known today were then unknown. Tbe
answer: Industries as basic as automobiles, music record-
ing, aviation, petrochemicals, Pharmaceuticals, and man-
agement consulting were unheard-of or had just begun
to emerge. Now turn the clock back only 30 years and
ask yourself the same question. Again, a plethora of
W. Chan Kim (chan.kim@insead.edu) is the Boston Con-
sulting Group Bruce D. Henderson Chair Professor of Strat-
egy and International Management at Insead in Eontaine-
bleau, Erance. Renee Mauborgne (renee.mauborgne@
insead.edu) is the Insead Distinguished Eellow and a pro-
fessor of strategy and management at Insead. This article
is adapted from their forthcoming book Blue Ocean Strat-
egy: How to Create Uncontested Market Space and Make
the Competition Irrelevant (Harvard Business School
Press, 2005).
A Snapshot of
Blue Ocean Creation
This table identifies the strategic elements that were
common to blue ocean creations in three different
industries In different eras. It is not intended to be
comprehensive in coverage or exhaustive in content
We chose to show American industries because
they represented the largest and least-regulated
market during our study period. The pattern of blue
ocean creations exemplified by these three industries
is consistent with what we observed in the other
industries in our study.
multibillion-dollar industries jump out: mutual funds,
cellular telephones, biotechnology, discount retailing,
express package delivery, snowboards, coffee bars, and
home videos, to name a few. Just three decades ago, none
of these industries existed in a meaningful way.
This time, put the clock forward 20 years. Ask your-
self: How many industries that are unknown today will
exist tben? If history is any predictor of the future, the
answer is many. Companies have a huge capacity to cre-
ate new industries and re-create existing ones, a fact that
is reflected in the deep changes that have been necessary
in the way industries are classified. The half-century-old
Standard Industrial Classification (SIC) system was re-
placed in 1997 by the North American Industry Classifi-
cation System (NAICS). The new system expanded the
ten SIC industry sectors into 20 to refiect the emerging
realities of new industry territories-blue oceans. The ser-
vices sector under the old system, for example, is now
seven sectors ranging from information to health care and
social assistance. Given that these classification systems
are designed for standardization and continuity, such a re-
placement shows how significant a source of economic
growth the creation of blue oceans has been.
Looking forward, it seems clear to us that blue oceans
will remain the engine of growth. Prospects in most
established market spaces – red oceans – are shrinking
steadily. Technological advances have substantially im-
proved industrial productivity, permitting suppliers to
produce an unprecedented array of products and services.
And as trade barriers between nations and regions fall and
information on products and prices becomes instantly and
globally available, niche markets and monopoly havens
are continuing to disappear. At the same time, there is lit-
tle evidence of any increase in demand, at least in the de-
veloped markets, where recent United Nations statistics
even point to declining populations. The result is that in
more and more industries, supply is overtaking demand.
78 HARVARD BUSINESS REVIEW
(A
if
io
o
E
o
3
E
o
u
m
I –
Key blue ocean creations
Was the blue ocean
created by a new
entrant or an
incumbent?
Was it driven by
technology pioneering
or value pioneering?
At the time of the blue
ocean creation, was
the industry attractive
or unattractive?
Ford Model T
Unveiled in 1908,theModetT was the first mass-produced
car, priced so that many Americans could afford it.
GM’s “car for every purse and purpose”
GM created a blue ocean in 1924 by injecting fun and
fashion into the car.
Japanese fuel-efficient autos
Japanese automakers created a blue ocean in the mid-1970s
with small, reliable lines of cars.
Chrysler minivan
With its 1984 minivan, Chrysler created a new class of auto-
mobile that was as easy to use as a car but had the passenger
space of a van.
CTR’s tabulating machine
In 1914, CTR created the business machine industry by
simplifying, modularizing,and leasing tabulating machines.
CTR later changed its name to IBM.
IBM 650 electronic computer and System/360
In 1952, IBM created the business computer industry by simpli-
fying and reducing the power and price of existing technology.
And it exploded the blue ocean created by the 650 when in
1964 it unveiled the System/360, the first modularized com-
puter system.
Apple personal computer
Although it was not the first home computer, the all-in-one,
simple-to-use Apple II was a blue ocean creation when it
appeared in 1978.
Compaq PC servers
Compag created a blue ocean in 1992 with its ProSignia
server, which gave buyers twice the file and print capability
of the minicomputer at one-third the price.
Dell built-to-order computers
In the mid-1990s, Deli created a blue ocean in a highly
competitive industry by creating a new purchase and delivery
experience for buyers.
Nickelodeon
The first Nickelodeon opened its doors in 1905, showing short
films around-the-clock to working-class audiences for five cents.
Palace theaters
Created by Roxy Rothapfel in 1914, these theaters provided
an operalike environment for cinema viewing at an affordable
price.
AMC multiplex
In the 1960s, the number of multiplexes in America’s subur-
ban shopping malls mushroomed.The multiplex gave viewers
greater choice while reducing owners’costs.
AMC megaplex
Megaplexesjntroducedin 1995,offered every current block-
buster and provided spectacular viewing experiences in
theater complexes as big as stadiums, at a lower cost to
theater owners.
New entrant
Incumbent
Incumbent
Incumbent
Incumbent
Incumbent
New entrant
Incumbent
New entrant
New entrant
Incumbent
Incumbent
Incumbent
Value pioneering*
(mostly existing technologies)
Value pioneering
(some new technologies)
Value pioneering
(some new technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
[some new technologies)
Value pioneering
(650: mostly existing technologies)
Value and technology pioneering
(System/360: new and existing
technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
(mostly existing technologies)
Value pioneering
(mostly existing technologies)
Unattractive
Attractive
Unattractive
Unattractive
Unattractive
Nonexistent
Unattraaive
Nonexistent
Unattractive
Nonexistent
Attractive
Unattractive
Unattractive
*Driven by value pioneering does not mean that technologies were not involved. Rather, it means that
the defining technologies used had largely been in existence, whether n that industry or elsewhere.
OCTOBER 2004 79
Blue Ocean Strategy
This situation has inevitably hastened the commoditi-
zation of products and services, stoked price wars, and
shrunk profit margins. According to recent studies, major
American brands in a variety of product and service cate-
gories have become more and more alike. And as brands
become more similar, people increasingly base purchase
choices on price. Peopie no ionger insist, as in the past,
that their laundry detergent be Tide. Nor do they neces-
sarily stick to Colgate when there is a special promotion
for Crest, and vice versa. In overcrowded industries, dif-
ferentiating brands becomes harder both in economic
upturns and in downturns.
The Paradox of Strategy
Unfortunately, most companies seem becalmed in their
red oceans. In a study of business launches in 108 compa-
nies, we found that 86% of those new ventures were line
extensions-incremental improvements to existing indus-
try offerings-and a mere 14% were aimed at creating new
markets or industries. While line extensions did account
for 62% of the total revenues, they delivered only 39% of
the total profits. By contrast, the 14% invested in creating
new markets and industries delivered 38% of total reve-
nues and a startling 61% of total profits.
So why the dramatic imbalance in favor of red oceans?
Part of the explanation is that corporate strategy is heav-
ily influenced by its roots in military strategy. The very
language of strategy is deeply imbued with military ref-
erences – chief executive “officers” in “headquarters,”
“troops” on the “front lines.” Described this way, strategy
is all about red ocean competition. It is about confronting
an opponent and driving him off a battlefield of limited
territory. Blue ocean strategy, by contrast, is about doing
business where there is no competitor. It is about creating
new land, not dividing up existing land. Focusing on the
red ocean therefore means accepting the key constrain-
ing factors of war-limited terrain and the need to beat
an enemy to succeed. And it means denying the distinc-
tive strength of the business world-the capacity to create
new market space that is uncontested.
The tendency of corporate strategy to focus on win-
ning against rivals was exacerbated by the meteoric rise
of Japanese companies in the 1970s and 1980s. For the
first time in corporate history, customers were deserting
Western companies in droves. As competition mounted
in the global marketplace, a slew of red ocean strategies
emerged, all arguing that competition was at the core of
corporate success and failure. Today, one hardly talks
about strategy without using the language of competi-
tion. The term that best symbolizes this is “competitive
advantage.” In the competitive-advantage worldview,
companies are often driven to outperform rivals and
capture greater shares of existing market space.
Of course competition matters. But by focusing on
competition, scholars, companies, and consultants have
ignored two very important – and, we would argue, far
more lucrative – aspects of strategy: One is to find and
develop markets where there is little or no competi-
tion-blue oceans-and the other is to exploit and protect
blue oceans. These challenges are very different from
those to which strategists have devoted most of their
attention.
Toward Blue Ocean Strategy
what kind of strategic logic is needed to guide the cre-
ation of blue oceans? To answer that question, we looked
back over lOO years of data on blue ocean creation to see
what patterns could be discerned. Some of our data are
presented in the exhibit “A Snapshot of Blue Ocean
Creation.” It shows an overview of key blue ocean cre-
ations in three industries that closely touch people’s
lives: autos – how people get to work; computers – what
people use at work; and movie theaters – where people
go after work for enjoyment. We found that:
80 HARVARD BUSINESS REVIEW
Blue Ocean Strategy
Blue oceans are not about technology innovation.
Leading-edge technology is sometimes involved in the
creation of blue oceans, but it is not a defining feature of
them. This is often true even in industries that are tech-
nology intensive. As the exhibit reveals, across all three
representative industries, blue oceans were seldom the
result of technological innovation per se; the underlying
technology was often already in existence. Even Ford’s
revolutionary assembly line can be traced to the meat-
packing industry in America. Like those within the auto
industry, the blue oceans within the computer industry
did not come about through technology innovations
alone but by linking technology to what buy-
ers valued. As with the IBM 650 and the Com-
paq PC server, this often involved simplifying
the technology.
Incumbents often create blue oceans-
and usually within their core businesses.
GM, the Japanese automakers, and Chrysler
were established players when they created
blue oceans in the auto industry. So were CTR
and its later incarnation, IBM, and Compaq
in the computer industry. And in the cinema
industry, the same can be said of palace the-
aters and AMC. Of the companies listed here,
only Ford, Apple, Dell, and Nickelodeon were
new entrants in their industries; the first three
were start-ups, and the fourth was an estab-
lished player entering an industry that was
new to it. This suggests that incumbents are
not at a disadvantage in creating new market
spaces. Moreover, the blue oceans made by in-
cumbents were usually within their core busi-
nesses. In fact, as the exhibit shows, most blue oceans are
created from within, not beyond, red oceans of existing
industries. This challenges the view that new markets are
in distant waters. Blue oceans are right next to you in
every industry.
Company and Industry are the wrong units of analy-
sis. The traditional units of strategic analysis – company
and industry – have little explanatory power when it
comes to analyzing how and why blue oceans are created.
There is no consistently excellent company; the same
company can be brilliant at one time and wrongheaded
at another. Every company rises and falls over time. Like-
wise, there is no perpetually excellent industry; relative
attractiveness is driven largely by the creation of blue
oceans from within them.
The most appropriate unit of analysis for explaining
the creation of blue oceans is the strategic move-the set
of managerial actions and decisions involved in making
a major market-creating business offering. Compaq, for
example, is considered by many people to be “unsuccess-
ful” because it was acquired by Hewlett-Packard in 2001
and ceased to be a company. But the firm’s ultimate fate
does not invalidate the smart strategic move Compaq
made that led to the creation of the multibillion-dollar
market in PC servers, a move that was a key cause of the
company’s powerful comeback in the 1990s.
Creating blue oceans builds brands. So powerful is
blue ocean strategy that a blue ocean strategic move can
create brand equity that lasts for decades. Almost all of
the companies listed in the exhibit are remembered in
no small part for the blue oceans they created long ago.
Very few people alive today were around when the first
Model T rolled off Henry Ford’s assembly line in 1908, but
the company’s brand still benefits from that blue ocean
Red Ocean Versus Blue Ocean Strategy
The imperatives for red ocean and blue ocean
strategies are starkly different.
Red ocean strategy
Compete in existing market space.
Beat the competition.
Exploit existing demand.
Make the value/cost trade-off.
Align the whole system of a com-
pany’s activities with its strategic
choice of differentiation or low cost.
Blue ocean strategy
Create uncontested market space.
Make the competition irrelevant.
Create and capture new demand.
Break the value/cost trade-off.
Align the whole system of a company’s
activities in pursuit of differentiation
and low cost.
move. IBM, too, is often regarded as an “American insti-
tution” largely for the blue oceans it created in comput-
ing; the 360 series was its equivalent of the Model T.
Our findings are encouraging for executives at the large,
established corporations that are traditionally seen as the
victims of new market space creation. For what they reveal
is that large R&D budgets are not the key to creating new
market space. The key is making the right strategic moves.
What’s more, companies that understand what drives a
good strategic move will be well placed to create multiple
blue oceans over time, thereby continuing to deliver high
growth and profits over a sustained period. The creation
of blue oceans, in other words, is a product of strategy and
as such is very much a product of managerial action.
The Defining Characteristics
Our research shows several common characteristics
across strategic moves that create blue oceans. We found
that the creators of blue oceans, in sharp contrast to com-
panies playing by traditional mles, never use the compe-
tition as a benchmark. Instead they make it irrelevant by
OCTOBER 2004 81
Blue Ocean Straten
In blue oceans, demand is created rather than
fought over.There is ample opportunity for
growth that is both profitable and rapid. ^
creating a leap in value for both buyers and the com-
pany itself. (The exhibit “Red Ocean Versus Blue Ocean
Strategy” compares the chief characteristics of these
two strategy models.)
Perhaps the most important feature of blue ocean strat-
egy is that it rejects the fundamental tenet of conven-
tional strategy: that a trade-off exists between value and
cost. According to this thesis, companies can either cre-
ate greater value for customers at a higher cost or create
reasonable value at a lower cost. In other words, strategy
is essentially a choice between differentiation and low
cost. But when it comes to creating blue oceans, the evi-
dence shows that successful companies pursue differen-
tiation and low cost simultaneously.
To see how this is done, let us go back to Cirque du
Soleil. At the time of Cirque’s debut, circuses focused on
benchmarking one another and maximizing their shares
of shrinking demand by tweaking traditional circus acts.
This included trying to secure more and better-known
clowns and lion tamers, efforts that raised circuses’ cost
structure without substantially altering the circus expe-
rience. The result was rising costs without rising revenues
and a downward spiral in overall circus demand. Enter
Cirque. Instead of following the conventional logic of
outpacing the competition by offering a better solution
to the given problem-creating a circus with even greater
fun and thrills-it redefined the problem itself by offering
people the fun and thrill of the circus and the intellectual
sophistication and artistic richness of the theater.
In designing performances that landed both these
punches. Cirque had to reevaluate the components of the
traditional circus offering. What the company found was
that many of the elements considered essential to the
fun and thrill of the circus were unnecessary and in many
cases costly. For instance, most circuses offer animal acts.
These are a heavy economic burden, because circuses
have to shell out not only for the animals but also for their
training, medical care, housing, insurance, and transpor-
tation. Yet Cirque found that the appetite for animal
shows was rapidly diminishing because of rising public
concern about the treatment of circus animals and the
ethics of exhibiting them.
Similarly, although traditional circuses promoted their
performers as stars, Cirque realized that the public no
longer thought of circus artists as stars, at least not in the
movie star sense. Cirque did away with traditional three-
ring shows, too. Not only did these create confusion
among spectators forced to switch their attention from
one ring to another, they also increased the number of
performers needed, with obvious cost implications. And
while aisle concession sales appeared to be a good way
to generate revenue, the high prices discouraged parents
from making purchases and made them feel they were
heing taken for a ride.
Cirque found that the lasting allure of the traditional
circus came down to just three factors: the clowns, the
tent, and the classic acrobatic acts. So Cirque kept the
clowns, while shifting their humor away from slapstick
to a more enchanting, sophisticated style. It glamorized
the tent, which many circuses had abandoned in favor
of rented venues. Realizing that the tent, more than
anything else, captured the magic of the circus. Cirque
designed this classic symbol with a glorious external
finish and a high level of audience comfort. Gone were
the sawdust and hard benches. Acrobats and other
thrilling performers were retained, but Cirque reduced
their roles and made their acts more elegant by adding
artistic fiair.
Even as Cirque stripped away some of the traditional
circus offerings, it injected new elements drawn from the
world of theater. For instance, unlike traditional circuses
featuring a series of unrelated acts, each Cirque creation
resembles a theater performance in that it has a theme
and story line. Although the themes are intentionally
vague, they bring harmony and an intellectual element
to the acts. Cirque also borrows ideas from Broadway.
For example, rather than putting on the traditional
“once and for all” show, Cirque mounts multiple produc-
tions based on different themes and story lines. As with
Broadway productions, too, each Cirque show has an
original musical score, which drives the performance,
lighting, and timing of the acts, rather than the other
way around. The productions feature abstract and spiri-
tual dance, an idea derived from theater and ballet. By
introducing these factors, Cirque has created highly so-
phisticated entertainments. And by staging multiple pro-
ductions. Cirque gives people reason to come to the circus
more often, thereby increasing revenues.
82 HARVARD BUSINESS REVIEW
Blue Ocean Strategy
Cirque offers the best of both circus and theater. And
by eliminating many of the most expensive elements of
the circus, it has been able to dramatically reduce its cost
structure, achieving both differentiation and low cost.
(For a depiction of the economics underpinning blue
ocean strategy, see the exhibit “The Simultaneous Pur-
suit of Differentiation and Low Cost”)
By driving down costs while simultaneously driving up
value for buyers, a company can achieve a leap in value
for both itself and its customers. Since buyer value comes
from the utility and price a company offers, and a com-
pany generates value for itself through cost structure
and price, blue ocean strategy is achieved only when the
whole system of a company’s utility, price, and cost activ-
ities is properly aligned. It is this whole-system approach
that makes the creation of blue oceans a sustainable strat-
egy. Blue ocean strategy integrates the range of a tirm’s
functional and operational activities.
A rejection ofthe trade-off between low cost and dif-
ferentiation implies a fundamental change in strategic
mind-set-we cannot emphasize enough how funda-
mental a shift it is. The red ocean assumption that indus-
try structural conditions are a given and firms are forced
to compete within them is based on an intellectual world-
view that academics call the structuralist view, or environ-
mental determinism. According to this view, companies
and managers are largely at the mercy of economic forces
greater than themselves. Blue ocean strategies, by con-
trast, are based on a worldview in which market bound-
aries and industries can be reconstructed by the actions
and beliefs of industry players. We call this the recon-
structionist view.
The founders of Cirque du Soleil clearly did not feel
constrained to act within the confines of their industry.
Indeed, is Cirque really a circus with all that it has elimi-
nated, reduced, raised, and created? Or is it theater? If
it is theater, then what genre – Broadway show, opera,
ballet? The magic of Cirque was created through a recon-
struction of elements drawn from all of these alternatives.
In the end. Cirque is none of them and a little of all of
them. From within the red oceans of theater and circus,
Cirque has created a blue ocean of uncontested market
space that has, as yet, no name.
Barriers to Imitation
Companies that create blue oceans usually reap the ben-
efits without credible challenges for ten to 15 years, as
was the case with Cirque du Soleil, Home Depot, Federal
Express, Southwest Airlines, and CN N, to name just a few.
The reason is that blue ocean strategy creates consider-
able economic and cognitive barriers to imitation.
For a start, adopting a blue ocean creator’s business
model is easier to imagine than to do. Because blue ocean
creators immediately attract customers in large volumes.
they are able to generate scale economies very rapidly,
putting would-be imitators at an immediate and continu-
ing cost disadvantage. The huge economies of scale in
purchasing that Wal-Mart enjoys, for example, have sig-
nificantly discouraged other companies from imitating its
business model. The immediate attraction of large num-
bers of customers can also create network externalities.
The more customers eBay has online, the more attrac-
tive the auction site becomes for both sellers and buyers
of wares, giving users few incentives to go elsewhere.
When imitation requires companies to make changes
to their whole system of activities, organizational politics
may impede a would-be competitor’s ability to switch to
the divergent business mode! of a blue ocean strategy.
For instance, airlines trying to follow Southwest’s exam-
ple of offering the speed of air travel with the fiexibility
and cost of driving would have faced major revisions in
The Simultaneous Pursuit of
Differentiation and Low Cost
A blue ocean is created in the region where a company’s
actionsfavorably affect both its cost structure and its value
proposition to buyers. Cost savings are made from eliminat-
ing and reducing the factors an industry competes on. Buyer
value is lifted by raising and creating elements the industry
has never offered. Over time, costs are reduced further as
scale economies kick in, due to the high sales volumes that
superior value generates.
OCTOBER 2004 83
Blue Ocean Strategy
routing, training, marketing, and pricing, not to men-
tion culture. Few established airlines had the flexibility
to make such extensive organizational and operating
changes overnight. Imitating a whole-system approach is
not an easy feat.
The cognitive barriers can be just as effective. When
a company offers a leap in value, it rapidly earns brand
buzz and a loyal following in the marketplace. Experience
shows that even the most expensive marketing cam-
paigns struggle to unseat a blue ocean creator. Microsoft,
for example, has been trying for more than ten years to
occupy the center of the blue ocean that Intuit created
with its financial software product Quicken. Despite all
of its efforts and all of its investment, Microsoft has not
been able to unseat Intuit as the industry leader.
In other situations, attempts to imitate a blue ocean
creator conflict with the imitator’s existing brand image.
The Body Shop, for example, shuns top models and makes
no promises of eternal youth and beauty. For the estab-
lished cosmetic brands like Est^e Lauder and L’Oreal, im-
itation was very difficult, because it would have signaled
a complete invalidation of their current images, which
are based on promises of eternal youth and beauty.
A Consistent Pattern
while our conceptual articulation ofthe pattern may be
new, blue ocean strategy has always existed, whether or
not companies have been conscious ofthe fact. Just con-
sider the striking parallels between the Cirque du Soleil
theater-circus experience and Ford’s creation of the
Model T.
At the end ofthe nineteenth century, the automobile
industry was small and unattractive. More than 500 auto-
makers in America competed in turning out handmade
luxury cars that cost around $1,500 and were enormously
unpopular with all but the very rich. Anticar activists tore
up roads, ringed parked cars with barbed wire, and orga-
nized boycotts of car-driving businessmen and politicians.
Woodrow Wilson caught the spirit ofthe times when he
said in 1906 that “nothing has spread socialistic feeling
more than the automobile.” He called it “a picture ofthe
arrogance of wealth.”
Instead of trying to beat the competition and steal
a share of existing demand from other automakers.
Ford reconstructed the industry boundaries of cars and
horse-drawn carriages to create a blue ocean. At the
time, horse-drawn carriages were the primary means of
local transportation across America. The carriage had
two distinct advantages over cars. Horses could easily ne-
gotiate the bumps and mud that stymied cars-especially
in rain and snow-on the nation’s ubiquitous dirt roads.
And horses and carriages were much easier to maintain
than the luxurious autos of the time, which frequently
broke down, requiring expert repairmen who were ex-
pensive and in short supply. It was Henry Ford’s under-
standing of these advantages that showed him how he
could break away from the competition and unlock enor-
mous untapped demand.
Ford called the Model T the car “for the great multi-
tude, constructed ofthe best materials.” Like Cirque, the
Ford Motor Company made the competition irrelevant.
Instead of creating fashionable, customized cars for week-
ends in the countryside, a luxury few could justify.
Ford built a car that, like the horse-drawn carriage, was
for everyday use. The Model T came in just one color,
black, and there were few optional extras. It was reliable
and durable, designed to travel effortlessly over dirt roads
in rain, snow, or sunshine. It was easy to use and fix.
People could leam to drive it in a day. And like Cirque,
Ford went outside the industry for a price point, looking
at horse-drawn carriages ($400), not other autos. In igo8,
the first Model T cost $850; in 1909, the price dropped
to $609, and by 1924 it was down to $290. In this way.
Ford converted buyers of horse-drawn carriages into car
buyers – just as Cirque turned theatergoers into circus-
goers. Sales ofthe Model T boomed. Ford’s market share
surged from 9% in 1908 to 6i% in 1921, and by 1923, a ma-
jority of American households had a car.
Even as Ford offered the mass of buyers a leap in value,
the company also achieved the lowest cost structure
in the industry, much as Cirque did later. By keeping
the cars highly standardized with limited options and
interchangeable parts. Ford was able to scrap the prevail-
ing manufacturing system in which cars were constructed
by skilled craftsmen who swarmed around one work-
station and built a car piece by piece from start to finish.
Ford’s revolutionary assembly line replaced craftsmen
with unskilled laborers, each of whom worked quickly
and efficiently on one small task. This allowed Ford to
make a car in just four days – 21 days was the industry
norm-creating huge cost savings.
Blue and red oceans have always coexisted and always
will. Practical reality, therefore, demands that companies
understand the strategic logic of both types of oceans.
At present, competing in red oceans dominates the field
of strategy in theory and in practice, even as businesses’
need to create hlue oceans intensifies. It is time to even
the scales in the field of strategy with a better balance of
efforts across both oceans. For although blue ocean strate-
gists have always existed, for the most part their strategies
have been largely unconscious. But once corporations re-
alize that the strategies for creating and capturing blue
oceans have a different underlying logic from red ocean
strategies, they will be able to create many more blue
oceans in the future. ^
Reprint R0410D
To order, see page 159.
84 HARVARD BUSINESS REVIEW
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Awareness of the fi ve forces can help a company understand the structure of its
industry and stake out a position that is more profi table and less vulnerable to attack.
78 Harvard Business Review | January 2008 | hbr.org
1808 Porter.indd 781808 Porter.indd 78 12/5/07 5:33:57 PM12/5/07 5:33:57 PM
P
e
t
e
r
C
ro
w
th
e
r
Editor’s Note: In 1979, Harvard Business Review
published “How Competitive Forces Shape Strat-
egy” by a young economist and associate professor,
Michael E. Porter. It was his fi rst HBR article, and it
started a revolution in the strategy fi eld. In subsequent
decades, Porter has brought his signature economic
rigor to the study of competitive strategy for corpora-
tions, regions, nations, and, more recently, health care
and philanthropy. “Porter’s fi ve forces” have shaped a
generation of academic research and business practice.
With prodding and assistance from Harvard Business
School Professor Jan Rivkin and longtime colleague
Joan Magretta, Porter here reaffi rms, updates, and
extends the classic work. He also addresses common
misunderstandings, provides practical guidance for
users of the framework, and offers a deeper view of
its implications for strategy today.
THE FIVE
COMPETITIVE
FORCES THAT
by Michael E. Porter
hbr.org | January 2008 | Harvard Business Review 79
SHAPE
IN ESSENCE, the job of the strategist is to under-
STRATEGYSTRATEGY
stand and cope with competition. Often, however,
managers defi ne competition too narrowly, as if
it occurred only among today’s direct competi-
tors. Yet competition for profi ts goes beyond es-
tablished industry rivals to include four other
competitive forces as well: customers, suppliers,
potential entrants, and substitute products. The
extended rivalry that results from all fi ve forces
defi nes an industry’s structure and shapes the
nature of competitive interaction within an
industry.
As different from one another as industries
might appear on the surface, the underlying driv-
ers of profi tability are the same. The global auto
industry, for instance, appears to have nothing
in common with the worldwide market for art
masterpieces or the heavily regulated health-care
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strateg
y
80 Harvard Business Review | January 2008 | hbr.org
delivery industry in Europe. But to under-
stand industry competition and profi tabil-
ity in each of those three cases, one must
analyze the industry’s underlying struc-
ture in terms of the fi ve forces. (See the ex-
hibit “The Five Forces That Shape Industry
Competition.”)
If the forces are intense, as they are in
such industries as airlines, textiles, and ho-
tels, almost no company earns attractive re-
turns on investment. If the forces are benign,
as they are in industries such as software,
soft drinks, and toiletries, many companies
are profi table. Industry structure drives
competition and profi tability, not whether
an industry produces a product or service, is
emerging or mature, high tech or low tech,
regulated or unregulated. While a myriad
of factors can affect industry profi tability
in the short run – including the weather
and the business cycle – industry structure,
manifested in the competitive forces, sets
industry profi tability in the medium and
long run. (See the exhibit “Differences in
Industry Profi tability.”)
Understanding the competitive forces, and their under-
lying causes, reveals the roots of an industry’s current profi t-
ability while providing a framework for anticipating and
infl uencing competition (and profi tability) over time. A
healthy industry structure should be as much a competitive
concern to strategists as their company’s own position. Un-
derstanding industry structure is also essential to effective
strategic positioning. As we will see, defending against the
competitive forces and shaping them in a company’s favor
are crucial to
strategy.
Forces That Shape Competition
The confi guration of the fi ve forces differs by industry. In
the market for commercial aircraft, fi erce rivalry between
dominant producers Airbus and Boeing and the bargain-
ing power of the airlines that place huge orders for aircraft
are strong, while the threat of entry, the threat of substi-
tutes, and the power of suppliers are more benign. In the
movie theater industry, the proliferation of substitute forms
of entertainment and the power of the movie producers
and distributors who supply movies, the critical input, are
important.
The strongest competitive force or forces determine the
profi tability of an industry and become the most important
to strategy formulation. The most salient force, however, is
not always obvious.
For example, even though rivalry is often fi erce in com-
modity industries, it may not be the factor limiting profi t-
ability. Low returns in the photographic fi lm industry, for
instance, are the result of a superior substitute product – as
Kodak and Fuji, the world’s leading producers of photo-
graphic fi lm, learned with the advent of digital photography.
In such a situation, coping with the substitute product be-
comes the number one strategic priority.
Industry structure grows out of a set of economic and
technical characteristics that determine the strength of
each competitive force. We will examine these drivers in the
pages that follow, taking the perspective of an incumbent,
or a company already present in the industry. The analysis
can be readily extended to understand the challenges facing
a potential entrant.
THREAT OF ENTRY. New entrants to an industry bring
new capacity and a desire to gain market share that puts
pressure on prices, costs, and the rate of investment nec-
essary to compete. Particularly when new entrants are
diversifying from other markets, they can leverage exist-
ing capabilities and cash fl ows to shake up competition, as
Pepsi did when it entered the bottled water industry, Micro-
soft did when it began to offer internet browsers, and Apple
did when it entered the music distribution business.
Michael E. Porter is the Bishop William Lawrence University Pro-
fessor at Harvard University, based at Harvard Business School in
Boston. He is a six-time McKinsey Award winner, including for his
most recent HBR article, “Strategy and Society,” coauthored with
Mark R. Kramer (December 2006).
The Five Forces That Shape Industry Competition
Bargaining
Power of
Supplier
s
Threat
of New
Entrants
Bargaining
Power of
Buyers
Threat of
Substitute
Products or
Services
Rivalry
Among
Existing
Competitors
1808 Porter.indd 801808 Porter.indd 80 12/5/07 5:34:13 PM12/5/07 5:34:13 PM
hbr.org | January 2008 | Harvard Business Review 81
The threat of entry, therefore, puts a cap on the profi t po-
tential of an industry. When the threat is high, incumbents
must hold down their prices or boost investment to deter
new competitors. In specialty coffee retailing, for example,
relatively low entry barriers mean that Starbucks must in-
vest aggressively in modernizing stores and menus.
The threat of entry in an industry depends on the height
of entry barriers that are present and on the reaction en-
trants can expect from incumbents. If entry barriers are low
and newcomers expect little retaliation from the entrenched
competitors, the threat of entry is high and industry profi t-
ability is moderated. It is the threat of entry, not whether
entry actually occurs, that holds down profi tability.
Barriers to entry. Entry barriers are advantages that incum-
bents have relative to new entrants. There are seven major
sources:
1. Supply-side economies of scale. These economies arise
when fi rms that produce at larger volumes enjoy lower costs
per unit because they can spread fi xed costs over more units,
employ more effi cient technology, or command better terms
from suppliers. Supply-side scale economies deter entry by
forcing the aspiring entrant either to come into the industry
on a large scale, which requires dislodging entrenched com-
petitors, or to accept a cost disadvantage.
Scale economies can be found in virtually every activity
in the value chain; which ones are most important varies
by industry.
1
In microprocessors, incumbents such as Intel
are protected by scale economies in research, chip fabrica-
tion, and consumer marketing. For lawn care companies like
Scotts Miracle-Gro, the most important scale economies are
found in the supply chain and media advertising. In small-
package delivery, economies of scale arise in national logisti-
cal systems and information technology.
2. Demand-side benefi ts of scale. These benefi ts, also known
as network effects, arise in industries where a buyer’s willing-
ness to pay for a company’s product increases with the num-
ber of other buyers who also patronize the company. Buyers
may trust larger companies more for a crucial product: Re-
call the old adage that no one ever got fi red for buying from
IBM (when it was the dominant computer maker). Buyers
may also value being in a “network” with a larger number of
fellow customers. For instance, online auction participants
are attracted to eBay because it offers the most potential
trading partners. Demand-side benefi ts of scale discourage
entry by limiting the willingness of customers to buy from a
newcomer and by reducing the price the newcomer can com-
mand until it builds up a large base of customers.
3. Customer switching costs. Switching costs are fi xed costs
that buyers face when they change suppliers. Such costs may
arise because a buyer who switches vendors must, for ex-
ample, alter product specifi cations, retrain employees to use
a new product, or modify processes or information systems.
The larger the switching costs, the harder it will be for an en-
trant to gain customers. Enterprise resource planning (ERP)
software is an example of a product with very high switching
costs. Once a company has installed SAP’s ERP system, for ex-
ample, the costs of moving to a new vendor are astronomical
because of embedded data, the fact that internal processes
have been adapted to SAP, major retraining needs, and the
mission-critical nature of the applications.
4. Capital requirements. The need to invest large fi nan-
cial resources in order to compete can deter new entrants.
Capital may be necessary not only for fi xed facilities but also
to extend customer credit, build inventories, and fund start-
up losses. The barrier is particularly great if the capital is
required for unrecoverable and therefore harder-to-fi nance
expenditures, such as up-front advertising or research and
development. While major corporations have the fi nancial
resources to invade almost any industry, the huge capital
requirements in certain fi elds limit the pool of likely en-
trants. Conversely, in such fi elds as tax preparation services
or short-haul trucking, capital requirements are minimal
and potential entrants plentiful.
It is important not to overstate the degree to which capital
requirements alone deter entry. If industry returns are at-
tractive and are expected to remain so, and if capital markets
are effi cient, investors will provide entrants with the funds
they need. For aspiring air carriers, for instance, fi nancing
is available to purchase expensive aircraft because of their
high resale value, one reason why there have been numer-
ous new airlines in almost every region.
5. Incumbency advantages independent of size. No matter
what their size, incumbents may have cost or quality advan-
tages not available to potential rivals. These advantages can
stem from such sources as proprietary technology, preferen-
tial access to the best raw material sources, preemption of
the most favorable geographic locations, established brand
identities, or cumulative experience that has allowed incum-
Industry structure drives competition and profi tability,
not whether an industry is emerging or mature, high tech or
low tech, regulated or unregulated.
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
82 Harvard Business Review | January 2008 | hbr.org
bents to learn how to produce more effi ciently. Entrants try
to bypass such advantages. Upstart discounters such as Tar-
get and Wal-Mart, for example, have located stores in free-
standing sites rather than regional shopping centers where
established department stores were well entrenched.
6. Unequal access to distribution channels. The new en-
trant must, of course, secure distribution of its product or
service. A new food item, for example, must displace others
from the supermarket shelf via price breaks, promotions,
intense selling efforts, or some other means. The more lim-
ited the wholesale or retail channels are and the more that
existing competitors have tied them up, the tougher entry
into an industry will be. Sometimes access to distribution
is so high a barrier that new entrants must bypass distribu-
tion channels altogether or create their own. Thus, upstart
low-cost airlines have avoided distribution through travel
agents (who tend to favor established higher-fare carriers)
and have encouraged passengers to book their own fl ights
on the internet.
7. Restrictive government policy. Government policy can
hinder or aid new entry directly, as well as amplify (or nul-
lify) the other entry barriers. Government directly limits or
even forecloses entry into industries through, for instance,
licensing requirements and restrictions on foreign invest-
ment. Regulated industries like liquor retailing, taxi services,
and airlines are visible examples. Government policy can
heighten other entry barriers through such means as ex-
pansive patenting rules that protect proprietary technol-
ogy from imitation or environmental or safety regulations
that raise scale economies facing newcomers. Of course,
government policies may also make entry easier – directly
through subsidies, for instance, or indirectly by funding ba-
sic research and making it available to all fi rms, new and old,
reducing scale economies.
Entry barriers should be assessed relative to the capa-
bilities of potential entrants, which may be start-ups, foreign
fi rms, or companies in related industries. And, as some of
our examples illustrate, the strategist must be mindful of the
creative ways newcomers might fi nd to circumvent appar-
ent barriers.
Expected retaliation. How potential entrants believe in-
cumbents may react will also infl uence their decision to
enter or stay out of an industry. If reaction is vigorous and
protracted enough, the profi t potential of participating in
the industry can fall below the cost of capital. Incumbents
often use public statements and responses to one entrant
to send a message to other prospective entrants about their
commitment to defending market share.
Newcomers are likely to fear expected retaliation if:
Incumbents have previously responded vigorously to
new entrants.
Incumbents possess substantial resources to fi ght back,
including excess cash and unused borrowing power, avail-
•
•
able productive capacity, or clout with distribution channels
and customers.
Incumbents seem likely to cut prices because they are
committed to retaining market share at all costs or because
the industry has high fi xed costs, which create a strong mo-
tivation to drop prices to fi ll excess capacity.
Industry growth is slow so newcomers can gain volume
only by taking it from incumbents.
An analysis of barriers to entry and expected retaliation is
obviously crucial for any company contemplating entry into
a new industry. The challenge is to fi nd ways to surmount
the entry barriers without nullifying, through heavy invest-
ment, the profi tability of participating in the industry.
THE POWER OF SUPPLIERS. Powerful suppliers capture
more of the value for themselves by charging higher prices,
limiting quality or services, or shifting costs to industry par-
ticipants. Powerful suppliers, including suppliers of labor,
can squeeze profi tability out of an industry that is unable
to pass on cost increases in its own prices. Microsoft, for in-
stance, has contributed to the erosion of profi tability among
personal computer makers by raising prices on operating
systems. PC makers, competing fi ercely for customers who
can easily switch among them, have limited freedom to raise
their prices accordingly.
Companies depend on a wide range of different supplier
groups for inputs. A supplier group is powerful if:
It is more concentrated than the industry it sells to.
Microsoft’s near monopoly in operating systems, coupled
with the fragmentation of PC assemblers, exemplifi es this
situation.
The supplier group does not depend heavily on the in-
dustry for its revenues. Suppliers serving many industries
will not hesitate to extract maximum profi ts from each one.
If a particular industry accounts for a large portion of a sup-
plier group’s volume or profi t, however, suppliers will want
to protect the industry through reasonable pricing and as-
sist in activities such as R&D and lobbying.
Industry participants face switching costs in changing
suppliers. For example, shifting suppliers is diffi cult if com-
panies have invested heavily in specialized ancillary equip-
•
•
•
•
•
Differences in Industry Profi tability
The average return on invested capital varies markedly from
industry to industry. Between 1992 and 2006, for example,
average return on invested capital in U.S. industries ranged as
low as zero or even negative to more than 50%. At the high
end are industries like soft drinks and prepackaged software,
which have been almost six times more profi table than the
airline industry over the period.
1808 Porter.indd 821808 Porter.indd 82 12/5/07 5:34:24 PM12/5/07 5:34:24 PM
hbr.org | January 2008 | Harvard Business Review 83
ment or in learning how to operate a supplier’s equipment
(as with Bloomberg terminals used by fi nancial profession-
als). Or fi rms may have located their production lines adja-
cent to a supplier’s manufacturing facilities (as in the case
of some beverage companies and container manufacturers).
When switching costs are high, industry participants fi nd it
hard to play suppliers off against one another. (Note that
suppliers may have switching costs as well. This limits their
power.)
Suppliers offer products that are differentiated. Phar-
maceutical companies that offer patented drugs with dis-
tinctive medical benefi ts have more power over hospitals,
health maintenance organizations, and other drug buyers,
for example, than drug companies offering me-too or ge-
neric products.
There is no substitute for what the supplier group pro-
vides. Pilots’ unions, for example, exercise considerable sup-
plier power over airlines partly because there is no good
alternative to a well-trained pilot in the cockpit.
The supplier group can credibly threaten to integrate for-
ward into the industry. In that case, if industry participants
make too much money relative to suppliers, they will induce
suppliers to enter the market.
•
•
•
THE POWER OF BUYERS. Powerful customers – the fl ip
side of powerful suppliers – can capture more value by forc-
ing down prices, demanding better quality or more service
(thereby driving up costs), and generally playing industry
participants off against one another, all at the expense of
industry profi tability. Buyers are powerful if they have nego-
tiating leverage relative to industry participants, especially
if they are price sensitive, using their clout primarily to pres-
sure price reductions.
As with suppliers, there may be distinct groups of custom-
ers who differ in bargaining power. A customer group has
negotiating leverage if:
There are few buyers, or each one purchases in volumes
that are large relative to the size of a single vendor. Large-
volume buyers are particularly powerful in industries with
high fi xed costs, such as telecommunications equipment, off-
shore drilling, and bulk chemicals. High fi xed costs and low
marginal costs amplify the pressure on rivals to keep capac-
ity fi lled through discounting.
The industry’s products are standardized or undifferenti-
ated. If buyers believe they can always fi nd an equivalent
product, they tend to play one vendor against another.
Buyers face few switching costs in changing vendors.
•
•
•
Profi tability of Selected U.S. Industries
Average ROIC, 1992–2006
N
u
m
b
e
r
o
f
In
d
u
st
ri
e
s
ROIC
0% 5% 10% 15% 20% 25% 30% 35%
4
0
50
30
20
10
0
10th
percentile
7.0%
25th
percentile
10.9%
Median:
14.3%
75th percentile
18.6%
90th percentile
25.3%
or higheror lower
Average Return on Invested Capital
in U.S. Industries, 1992–2006
Security Brokers and Dealers
Soft Drinks
Prepackaged Software
Pharmaceuticals
Perfume, Cosmetics, Toiletries
Advertising Agencies
Distilled Spirits
Semiconductors
Medical Instruments
Men’s and Boys’ Clothing
Tires
Household Appliances
Malt Beverages
Child Day Care Services
Household Furniture
Drug Stores
Grocery Stores
Iron and Steel Foundries
Cookies and Crackers
Mobile Homes
Wine and Brandy
Bakery Products
Engines and Turbines
Book Publishing
Laboratory Equipment
Oil and Gas Machinery
Soft Drink Bottling
Knitting Mills
Hotels
Catalog, Mail-Order Houses
Airlines
Return on invested capital (ROIC) is the appropriate measure
of profi tability for strategy formulation, not to mention for equity
investors. Return on sales or the growth rate of profi ts fail to
account for the capital required to compete in the industry. Here,
we utilize earnings before interest and taxes divided by average
invested capital less excess cash as the measure of ROIC. This
measure controls for idiosyncratic differences in capital structure
and tax rates across companies and industries.
Source: Standard & Poor’s, Compustat, and author’s calculations
Average industry
ROIC in the U.S.
14.9%
40.9%
37.6%
37.6%
31.7%
28.6%
27.3%
26.4%
21.3%
21.0%
19.5%
19.5%
19.2%
19.0%
17.6%
17.0%
16.5%
16.0%
15.6%
15.4%
15.0%
13.9%
13.8%
13.7%
13.4%
13.4%
12.6%
11.7%
10.5%
10.4%
5.9%
5.9%
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
84 Harvard Business Review | January 2008 | hbr.org
Buyers can credibly threaten to integrate backward and
produce the industry’s product themselves if vendors are
too profi table. Producers of soft drinks and beer have long
controlled the power of packaging manufacturers by threat-
ening to make, and at times actually making, packaging ma-
terials themselves.
A buyer group is price sensitive if:
The product it purchases from the industry represents
a signifi cant fraction of its cost structure or procurement
budget. Here buyers are likely to shop around and bargain
hard, as consumers do for home mortgages. Where the prod-
uct sold by an industry is a small fraction of buyers’ costs or
expenditures, buyers are usually less price sensitive.
The buyer group earns low profi ts, is strapped for cash,
or is otherwise under pressure to trim its purchasing costs.
Highly profi table or cash-rich customers, in contrast, are gen-
erally less price sensitive (that is, of course, if the item does
not represent a large fraction of their costs).
The quality of buyers’ products or services is little af-
fected by the industry’s product. Where quality is very much
affected by the industry’s product, buyers are generally less
price sensitive. When purchasing or renting production qual-
ity cameras, for instance, makers of major motion pictures
opt for highly reliable equipment with the latest features.
They pay limited attention to price.
The industry’s product has little effect on the buyer’s
other costs. Here, buyers focus on price. Conversely, where
an industry’s product or service can pay for itself many times
over by improving performance or reducing labor, material,
or other costs, buyers are usually more interested in quality
than in price. Examples include products and services like tax
accounting or well logging (which measures below-ground
conditions of oil wells) that can save or even make the buyer
money. Similarly, buyers tend not to be price sensitive in ser-
vices such as investment banking, where poor performance
can be costly and embarrassing.
Most sources of buyer power apply equally to consum-
ers and to business-to-business customers. Like industrial
customers, consumers tend to be more price sensitive if they
are purchasing products that are undifferentiated, expensive
relative to their incomes, and of a sort where product perfor-
mance has limited consequences. The major difference with
consumers is that their needs can be more intangible and
harder to quantify.
Intermediate customers, or customers who purchase the
product but are not the end user (such as assemblers or distri-
bution channels), can be analyzed the same way as other buy-
ers, with one important addition. Intermediate customers
gain signifi cant bargaining power when they can infl uence
the purchasing decisions of customers downstream. Con-
sumer electronics retailers, jewelry retailers, and agricultural-
equipment distributors are examples of distribution chan-
nels that exert a strong infl uence on end customers.
•
•
•
•
•
Producers often attempt to diminish channel clout
through exclusive arrangements with particular distributors
or retailers or by marketing directly to end users. Compo-
nent manufacturers seek to develop power over assemblers
by creating preferences for their components with down-
stream customers. Such is the case with bicycle parts and
with sweeteners. DuPont has created enormous clout by
advertising its Stainmaster brand of carpet fi bers not only
to the carpet manufacturers that actually buy them but
also to downstream consumers. Many consumers request
Stainmaster carpet even though DuPont is not a carpet
manufacturer.
THE THREAT OF SUBSTITUTES. A substitute performs
the same or a similar function as an industry’s product by a
different means. Videoconferencing is a substitute for travel.
Plastic is a substitute for aluminum. E-mail is a substitute
for express mail. Sometimes, the threat of substitution is
downstream or indirect, when a substitute replaces a buyer
industry’s product. For example, lawn-care products and ser-
vices are threatened when multifamily homes in urban areas
substitute for single-family homes in the suburbs. Software
sold to agents is threatened when airline and travel websites
substitute for travel agents.
Substitutes are always present, but they are easy to over-
look because they may appear to be very different from the
industry’s product: To someone searching for a Father’s Day
gift, neckties and power tools may be substitutes. It is a sub-
stitute to do without, to purchase a used product rather than
a new one, or to do it yourself (bring the service or product
in-house).
When the threat of substitutes is high, industry profi tabil-
ity suffers. Substitute products or services limit an industry’s
profi t potential by placing a ceiling on prices. If an industry
does not distance itself from substitutes through product
performance, marketing, or other means, it will suffer in
terms of profi tability – and often
growth potential.
Substitutes not only limit profi ts in normal times, they
also reduce the bonanza an industry can reap in good times.
In emerging economies, for example, the surge in demand
for wired telephone lines has been capped as many con-
sumers opt to make a mobile telephone their fi rst and only
phone line.
The threat of a substitute is high if:
It offers an attractive price-performance trade-off to the
industry’s product. The better the relative value of the sub-
stitute, the tighter is the lid on an industry’s profi t poten-
tial. For example, conventional providers of long-distance
telephone service have suffered from the advent of inex-
pensive internet-based phone services such as Vonage and
Skype. Similarly, video rental outlets are struggling with the
emergence of cable and satellite video-on-demand services,
online video rental services such as Netfl ix, and the rise of
internet video sites like Google’s YouTube.
•
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The buyer’s cost of switching to the substitute is low.
Switching from a proprietary, branded drug to a generic
drug usually involves minimal costs, for example, which is
why the shift to generics (and the fall in prices) is so substan-
tial and rapid.
Strategists should be particularly alert to changes in other
industries that may make them attractive substitutes when
they were not before. Improvements in plastic materials, for
example, allowed them to substitute for steel in many au-
tomobile components. In this way, technological changes
or competitive discontinuities in seemingly unrelated busi-
nesses can have major impacts on industry profi tability. Of
course the substitution threat can also shift in favor of an
industry, which bodes well for its future profi tability and
growth potential.
RIVALRY AMONG EXISTING COMPETITORS. Rivalry
among existing competitors takes many familiar forms, in-
cluding price discounting, new product introductions, ad-
vertising campaigns, and service improvements. High rivalry
limits the profi tability of an industry. The degree to which ri-
valry drives down an industry’s profi t potential depends, fi rst,
on the intensity with which companies compete and, second,
on the basis on which they compete.
The intensity of rivalry is greatest if:
Competitors are numerous or are roughly equal in size
and power. In such situations, rivals fi nd it hard to avoid
poaching business. Without an industry leader, practices de-
sirable for the industry as a whole go unenforced.
Industry growth is slow. Slow growth precipitates fi ghts
for market share.
Exit barriers are high. Exit barriers, the fl ip side of entry
barriers, arise because of such things as highly specialized
assets or management’s devotion to a particular business.
These barriers keep companies in the market even though
they may be earning low or negative returns. Excess capacity
remains in use, and the profi tability of healthy competitors
suffers as the sick ones hang on.
Rivals are highly committed to the business and have
aspirations for leadership, especially if they have goals that
go beyond economic performance in the particular industry.
High commitment to a business arises for a variety of reasons.
For example, state-owned competitors may have goals that
include employment or prestige. Units of larger companies
•
•
•
•
•
may participate in an industry for image reasons or to offer
a full line. Clashes of personality and ego have sometimes
exaggerated rivalry to the detriment of profi tability in fi elds
such as the media and high technology.
Firms cannot read each other’s signals well because of
lack of familiarity with one another, diverse approaches to
competing, or differing goals.
The strength of rivalry refl ects not just the intensity of
competition but also the basis of competition. The dimen-
sions on which competition takes place, and whether rivals
converge to compete on the same dimensions, have a major
infl uence on profi tability.
Rivalry is especially destructive to profi tability if it gravi-
tates solely to price because price competition transfers prof-
its directly from an industry to its customers. Price cuts are
usually easy for competitors to see and match, making suc-
cessive rounds of retaliation likely. Sustained price competi-
tion also trains customers to pay less attention to product
features and service.
Price competition is most liable to occur if:
Products or services of rivals are nearly identical and
there are few switching costs for buyers. This encourages
competitors to cut prices to win new customers. Years of air-
line price wars refl ect these circumstances in that industry.
Fixed costs are high and marginal costs are low. This
creates intense pressure for competitors to cut prices below
their average costs, even close to their marginal costs, to steal
incremental customers while still making some contribution
to covering fi xed costs. Many basic-materials businesses, such
as paper and aluminum, suffer from this problem, especially
if demand is not growing. So do delivery companies with
fi xed networks of routes that must be served regardless of
volume.
Capacity must be expanded in large increments to be
effi cient. The need for large capacity expansions, as in the
polyvinyl chloride business, disrupts the industry’s supply-
demand balance and often leads to long and recurring peri-
ods of overcapacity and price cutting.
The product is perishable. Perishability creates a strong
temptation to cut prices and sell a product while it still has
value. More products and services are perishable than is
commonly thought. Just as tomatoes are perishable because
they rot, models of computers are perishable because they
•
•
•
•
•
Rivalry is especially destructive to profi tability if it gravitates
solely to price because price competition transfers profi ts directly
from an industry to its customers.
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soon become obsolete, and information may be perishable
if it diffuses rapidly or becomes outdated, thereby losing its
value. Services such as hotel accommodations are perishable
in the sense that unused capacity can never be recovered.
Competition on dimensions other than price – on product
features, support services, delivery time, or brand image, for
instance – is less likely to erode profi tability because it im-
proves customer value and can support higher prices. Also,
rivalry focused on such dimensions can improve value rela-
tive to substitutes or raise the barriers facing new entrants.
While nonprice rivalry sometimes escalates to levels that
undermine industry profi tability, this is less likely to occur
than it is with price rivalry.
As important as the dimensions of rivalry is whether ri-
vals compete on the same dimensions. When all or many
competitors aim to meet the same needs or compete on the
same attributes, the result is zero-sum competition. Here,
one fi rm’s gain is often another’s loss, driving down profi t-
ability. While price competition runs a stronger risk than
nonprice competition of becoming zero sum, this may not
happen if companies take care to segment their markets,
targeting their low-price offerings to different customers.
Rivalry can be positive sum, or actually increase the aver-
age profi tability of an industry, when each competitor aims
to serve the needs of different customer segments, with dif-
ferent mixes of price, products, services, features, or brand
identities. Such competition can not only support higher av-
erage profi tability but also expand the industry, as the needs
of more customer groups are better met. The opportunity
for positive-sum competition will be greater in industries
serving diverse customer groups. With a clear understand-
ing of the structural underpinnings of rivalry, strategists can
sometimes take steps to shift the nature of competition in
a more positive direction.
Factors, Not Forces
Industry structure, as manifested in the strength of the fi ve
competitive forces, determines the industry’s long-run profi t
potential because it determines how the economic value
created by the industry is divided – how much is retained
by companies in the industry versus bargained away by cus-
tomers and suppliers, limited by substitutes, or constrained
by potential new entrants. By considering all fi ve forces, a
strategist keeps overall structure in mind instead of gravitat-
ing to any one element. In addition, the strategist’s atten-
tion remains focused on structural conditions rather than
on fl eeting factors.
It is especially important to avoid the common pitfall of
mistaking certain visible attributes of an industry for its un-
derlying structure. Consider the following:
Industry growth rate. A common mistake is to assume
that fast-growing industries are always attractive. Growth
does tend to mute rivalry, because an expanding pie offers
opportunities for all competitors. But fast growth can put
suppliers in a powerful position, and high growth with low
entry barriers will draw in entrants. Even without new en-
trants, a high growth rate will not guarantee profi tability if
customers are powerful or substitutes are attractive. Indeed,
some fast-growth businesses, such as personal computers,
have been among the least profi table industries in recent
years. A narrow focus on growth is one of the major causes
of bad strategy decisions.
Technology and innovation. Advanced technology or in-
novations are not by themselves enough to make an indus-
try structurally attractive (or unattractive). Mundane, low-
technology industries with price-insensitive buyers, high
switching costs, or high entry barriers arising from scale
economies are often far more profi table than sexy indus-
tries, such as software and internet technologies, that attract
competitors.2
Government. Government is not best understood as a
sixth force because government involvement is neither in-
herently good nor bad for industry profi tability. The best
way to understand the infl uence of government on competi-
tion is to analyze how specifi c government policies affect the
fi ve competitive forces. For instance, patents raise barriers
to entry, boosting industry profi t potential. Conversely, gov-
ernment policies favoring unions may raise supplier power
and diminish profi t potential. Bankruptcy rules that allow
failing companies to reorganize rather than exit can lead to
excess capacity and intense rivalry. Government operates at
multiple levels and through many different policies, each of
which will affect structure in different ways.
Complementary products and services. Complements
are products or services used together with an industry’s
product. Complements arise when the customer benefi t
of two products combined is greater than the sum of each
product’s value in isolation. Computer hardware and soft-
ware, for instance, are valuable together and worthless when
separated.
In recent years, strategy researchers have highlighted the
role of complements, especially in high-technology indus-
tries where they are most obvious.3 By no means, however,
do complements appear only there. The value of a car, for ex-
ample, is greater when the driver also has access to gasoline
stations, roadside assistance, and auto insurance.
Complements can be important when they affect the
overall demand for an industry’s product. However, like
government policy, complements are not a sixth force de-
termining industry profi tability since the presence of strong
complements is not necessarily bad (or good) for industry
profi tability. Complements affect profi tability through the
way they infl uence the fi ve forces.
The strategist must trace the positive or negative infl uence
of complements on all fi ve forces to ascertain their impact on
profi tability. The presence of complements can raise or lower
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barriers to entry. In application software, for example, barri-
ers to entry were lowered when producers of complemen-
tary operating system software, notably Microsoft, provided
tool sets making it easier to write applications. Conversely,
the need to attract producers of complements can raise bar-
riers to entry, as it does in video game hardware.
The presence of complements can also affect the threat
of substitutes. For instance, the need for appropriate fueling
stations makes it diffi cult for cars using alternative fuels to
substitute for conventional vehicles. But complements can
also make substitution easier. For example, Apple’s iTunes
hastened the substitution from CDs to digital music.
Complements can factor into industry rivalry either posi-
tively (as when they raise switching costs) or negatively (as
when they neutralize product differentiation). Similar analy-
ses can be done for buyer and supplier power. Sometimes
companies compete by altering conditions in complemen-
tary industries in their favor, such as when videocassette-
recorder producer JVC persuaded movie studios to favor
its standard in issuing prerecorded tapes even though ri-
val Sony’s standard was probably superior from a technical
standpoint.
Identifying complements is part of the analyst’s work. As
with government policies or important technologies, the
strategic signifi cance of complements will be best under-
stood through the lens of the fi ve forces.
Changes in Industry Structure
So far, we have discussed the competitive forces at a single
point in time. Industry structure proves to be relatively sta-
ble, and industry profi tability differences are remarkably
persistent over time in practice. However, industry structure
is constantly undergoing modest adjustment – and occasion-
ally it can change abruptly.
Shifts in structure may emanate from outside an industry
or from within. They can boost the industry’s profi t potential
or reduce it. They may be caused by changes in technology,
changes in customer needs, or other events. The fi ve com-
petitive forces provide a framework for identifying the most
important industry developments and for anticipating their
impact on industry attractiveness.
Shifting threat of new entry. Changes to any of the seven
barriers described above can raise or lower the threat of new
entry. The expiration of a patent, for instance, may unleash
new entrants. On the day that Merck’s patents for the cho-
lesterol reducer Zocor expired, three pharmaceutical mak-
ers entered the market for the drug. Conversely, the prolif-
eration of products in the ice cream industry has gradually
fi lled up the limited freezer space in grocery stores, making
it harder for new ice cream makers to gain access to distribu-
tion in North America and Europe.
Strategic decisions of leading competitors often have a
major impact on the threat of entry. Starting in the 1970s, for
Industry Analysis in Practice
Good industry analysis looks rigorously at the
structural underpinnings of profi tability. A fi rst
step is to understand the appropriate time
horizon. One of the essential tasks in industry
analysis is to distinguish temporary or cyclical changes
from structural changes. A good guideline for the
appropriate time horizon is the full business cycle for
the particular industry. For most industries, a three-
to-fi ve-year horizon is appropriate, although in some
industries with long lead times, such as mining, the
appropriate horizon might be a decade or more. It is
average profi tability over this period, not profi tability in
any particular year, that should be the focus of analysis.
The point of industry analysis is not to declare
the industry attractive or unattractive but to
understand the underpinnings of competition
and the root causes of profi tability. As much as
possible, analysts should look at industry structure
quantitatively, rather than be satisfi ed with lists of
qualitative factors. Many elements of the fi ve forces
can be quantifi ed: the percentage of the buyer’s
total cost accounted for by the industry’s product (to
understand buyer price sensitivity); the percentage of
industry sales required to fi ll a plant or operate a logis-
tical network of effi cient scale (to help assess barriers
to entry); the buyer’s switching cost (determining the
inducement an entrant or rival must offer customers).
The strength of the competitive forces affects
prices, costs, and the investment required to
compete; thus the forces are directly tied to
the income statements and balance sheets of
industry participants. Industry structure defi nes
the gap between revenues and costs. For example,
intense rivalry drives down prices or elevates the costs
of marketing, R&D, or customer service, reducing
margins. How much? Strong suppliers drive up input
costs. How much? Buyer power lowers prices or
elevates the costs of meeting buyers’ demands, such
as the requirement to hold more inventory or provide
fi nancing. How much? Low barriers to entry or close
substitutes limit the level of sustainable prices. How
much? It is these economic relationships that sharpen
the strategist’s understanding of industry competition.
Finally, good industry analysis does not just list
pluses and minuses but sees an industry in over-
all, systemic terms. Which forces are underpinning
(or constraining) today’s profi tability? How might shifts
in one competitive force trigger reactions in others?
Answering such questions is often the source of true
strategic insights.
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example, retailers such as Wal-Mart, Kmart, and Toys “R” Us
began to adopt new procurement, distribution, and inven-
tory control technologies with large fi xed costs, including
automated distribution centers, bar coding, and point-of-sale
terminals. These investments increased the economies of
scale and made it more diffi cult for small retailers to enter
the business (and for existing small players to survive).
Changing supplier or buyer power. As the factors under-
lying the power of suppliers and buyers change with time,
their clout rises or declines. In the global appliance industry,
for instance, competitors including Electrolux, General Elec-
tric, and Whirlpool have been squeezed by the consolidation
of retail channels (the decline of appliance specialty stores,
for instance, and the rise of big-box retailers like Best Buy
and Home Depot in the United States). Another example is
travel agents, who depend on airlines as a key supplier. When
the internet allowed airlines to sell tickets directly to cus-
tomers, this signifi cantly increased their power to bargain
down agents’ commissions.
Shifting threat of substitution. The most common reason
substitutes become more or less threatening over time is
that advances in technology create new substitutes or shift
price-performance comparisons in one direction or the other.
The earliest microwave ovens, for example, were large and
priced above $2,000, making them poor substitutes for con-
ventional ovens. With technological advances, they became
serious substitutes. Flash computer memory has improved
enough recently to become a meaningful substitute for low-
capacity hard-disk drives. Trends in the availability or per-
formance of complementary producers also shift the threat
of substitutes.
New bases of rivalry. Rivalry often intensifi es naturally
over time. As an industry matures, growth slows. Competi-
tors become more alike as industry conventions emerge,
technology diffuses, and consumer tastes converge. Industry
profi tability falls, and weaker competitors are driven from
the business. This story has played out in industry after in-
dustry; televisions, snowmobiles, and telecommunications
equipment are just a few examples.
A trend toward intensifying price competition and other
forms of rivalry, however, is by no means inevitable. For ex-
ample, there has been enormous competitive activity in the
U.S. casino industry in recent decades, but most of it has
been positive-sum competition directed toward new niches
and geographic segments (such as riverboats, trophy proper-
ties, Native American reservations, international expansion,
and novel customer groups like families). Head-to-head ri-
valry that lowers prices or boosts the payouts to winners has
been limited.
The nature of rivalry in an industry is altered by mergers
and acquisitions that introduce new capabilities and ways of
competing. Or, technological innovation can reshape rivalry.
In the retail brokerage industry, the advent of the internet
lowered marginal costs and reduced differentiation, trigger-
ing far more intense competition on commissions and fees
than in the past.
In some industries, companies turn to mergers and con-
solidation not to improve cost and quality but to attempt to
stop intense competition. Eliminating rivals is a risky strat-
egy, however. The fi ve competitive forces tell us that a profi t
windfall from removing today’s competitors often attracts
new competitors and backlash from customers and suppli-
ers. In New York banking, for example, the 1980s and 1990s
saw escalating consolidations of commercial and savings
banks, including Manufacturers Hanover, Chemical, Chase,
and Dime Savings. But today the retail-banking landscape
of Manhattan is as diverse as ever, as new entrants such as
Wachovia, Bank of America, and Washington Mutual have
entered the market.
Implications for Strategy
Understanding the forces that shape industry competition
is the starting point for developing strategy. Every company
should already know what the average profi tability of its
industry is and how that has been changing over time. The
fi ve forces reveal why industry profi tability is what it is. Only
then can a company incorporate industry conditions into
strategy.
The forces reveal the most signifi cant aspects of the com-
petitive environment. They also provide a baseline for sizing
up a company’s strengths and weaknesses: Where does the
company stand versus buyers, suppliers, entrants, rivals, and
substitutes? Most importantly, an understanding of industry
structure guides managers toward fruitful possibilities for
strategic action, which may include any or all of the follow-
ing: positioning the company to better cope with the current
competitive forces; anticipating and exploiting shifts in the
forces; and shaping the balance of forces to create a new in-
Eliminating rivals is a risky strategy. A profi t windfall from
removing today’s competitors often attracts new competitors and
backlash from customers and suppliers.
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dustry structure that is more favorable to the company. The
best strategies exploit more than one of these possibilities.
Positioning the company. Strategy can be viewed as build-
ing defenses against the competitive forces or fi nding a posi-
tion in the industry where the forces are weakest. Consider,
for instance, the position of Paccar in the market for heavy
trucks. The heavy-truck industry is structurally challenging.
Many buyers operate large fl eets or are large leasing com-
panies, with both the leverage and the motivation to drive
down the price of one of their largest purchases. Most trucks
are built to regulated standards and offer similar features, so
price competition is rampant. Capital intensity causes rivalry
to be fi erce, especially during the recurring cyclical down-
turns. Unions exercise considerable supplier power. Though
there are few direct substitutes for an 18-wheeler, truck buy-
ers face important substitutes for their services, such as cargo
delivery by rail.
In this setting, Paccar, a Bellevue, Washington–based com-
pany with about 20% of the North American heavy-truck
market, has chosen to focus on one group of customers:
owner-operators – drivers who own their trucks and contract
directly with shippers or serve as subcontractors to larger
trucking companies. Such small operators have limited clout
as truck buyers. They are also less price sensitive because of
their strong emotional ties to and economic dependence on
the product. They take great pride in their trucks, in which
they spend most of their time.
Paccar has invested heavily to develop an array of fea-
tures with owner-operators in mind: luxurious sleeper cabins,
plush leather seats, noise-insulated cabins, sleek exterior styl-
ing, and so on. At the company’s extensive network of dealers,
prospective buyers use software to select among thousands
of options to put their personal signature on their trucks.
These customized trucks are built to order, not to stock, and
delivered in six to eight weeks. Paccar’s trucks also have aero-
dynamic designs that reduce fuel consumption, and they
maintain their resale value better than other trucks. Paccar’s
roadside assistance program and IT-supported system for dis-
tributing spare parts reduce the time a truck is out of service.
All these are crucial considerations for an owner-operator.
Customers pay Paccar a 10% premium, and its Kenworth and
Peterbilt brands are considered status symbols at truck stops.
Paccar illustrates the principles of positioning a company
within a given industry structure. The fi rm has found a por-
tion of its industry where the competitive forces are weaker –
where it can avoid buyer power and price-based rivalry. And it
has tailored every single part of the value chain to cope well
with the forces in its segment. As a result, Paccar has been
profi table for 68 years straight and has earned a long-run
return on equity above 20%.
In addition to revealing positioning opportunities within
an existing industry, the fi ve forces framework allows com-
panies to rigorously analyze entry and exit. Both depend on
answering the diffi cult question: “What is the potential of
this business?” Exit is indicated when industry structure is
poor or declining and the company has no prospect of a su-
perior positioning. In considering entry into a new industry,
creative strategists can use the framework to spot an indus-
try with a good future before this good future is refl ected in
the prices of acquisition candidates. Five forces analysis may
also reveal industries that are not necessarily attractive for
the average entrant but in which a company has good reason
to believe it can surmount entry barriers at lower cost than
most fi rms or has a unique ability to cope with the industry’s
competitive forces.
Exploiting industry change. Industry changes bring the
opportunity to spot and claim promising new strategic posi-
tions if the strategist has a sophisticated understanding of
the competitive forces and their underpinnings. Consider,
for instance, the evolution of the music industry during the
past decade. With the advent of the internet and the digital
distribution of music, some analysts predicted the birth of
thousands of music labels (that is, record companies that
develop artists and bring their music to market). This, the
analysts argued, would break a pattern that had held since
Edison invented the phonograph: Between three and six
major record companies had always dominated the industry.
The internet would, they predicted, remove distribution as
a barrier to entry, unleashing a fl ood of new players into the
music industry.
A careful analysis, however, would have revealed that
physical distribution was not the crucial barrier to entry.
Rather, entry was barred by other benefi ts that large music
labels enjoyed. Large labels could pool the risks of develop-
ing new artists over many bets, cushioning the impact of
inevitable failures. Even more important, they had advan-
tages in breaking through the clutter and getting their new
artists heard. To do so, they could promise radio stations and
record stores access to well-known artists in exchange for
promotion of new artists. New labels would fi nd this nearly
impossible to match. The major labels stayed the course, and
new music labels have been rare.
Using the fi ve forces framework, creative strategists may be
able to spot an industry with a good future before this good future
is refl ected in the prices of acquisition candidates.
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This is not to say that the music industry is structurally
unchanged by digital distribution. Unauthorized download-
ing created an illegal but potent substitute. The labels tried
for years to develop technical platforms for digital distribu-
tion themselves, but major companies hesitated to sell their
music through a platform owned by a rival. Into this vacuum
stepped Apple with its iTunes music store, launched in 2003
to support its iPod music player. By permitting the creation
of a powerful new gatekeeper, the major labels allowed in-
dustry structure to shift against them. The number of major
record companies has actually declined – from six in 1997 to
four today – as companies struggled to cope with the digital
phenomenon.
When industry structure is in fl ux, new and promising
competitive positions may appear. Structural changes open
up new needs and new ways to serve existing needs. Estab-
lished leaders may overlook these or be constrained by past
strategies from pursuing them. Smaller competitors in the
industry can capitalize on such changes, or the void may well
be fi lled by new entrants.
Shaping industry structure. When a company exploits
structural change, it is recognizing, and reacting to, the in-
evitable. However, companies also have the ability to shape
industry structure. A fi rm can lead its industry toward new
ways of competing that alter the fi ve forces for the better.
In reshaping structure, a company wants its competitors
to follow so that the entire industry will be transformed.
While many industry participants may benefi t in the process,
the innovator can benefi t most if it can shift competition in
directions where it can excel.
An industry’s structure can be reshaped in two ways: by re-
dividing profi tability in favor of incumbents or by expanding
the overall profi t pool. Redividing the industry pie aims to
increase the share of profi ts to industry competitors instead
of to suppliers, buyers, substitutes, and keeping out potential
entrants. Expanding the profi t pool involves increasing the
overall pool of economic value generated by the industry in
which rivals, buyers, and suppliers can all share.
Redividing profi tability. To capture more profi ts for indus-
try rivals, the starting point is to determine which force or
forces are currently constraining industry profi tability and
address them. A company can potentially infl uence all of the
competitive forces. The strategist’s goal here is to reduce the
share of profi ts that leak to suppliers, buyers, and substitutes
or are sacrifi ced to deter entrants.
To neutralize supplier power, for example, a fi rm can stan-
dardize specifi cations for parts to make it easier to switch
among suppliers. It can cultivate additional vendors, or alter
technology to avoid a powerful supplier group altogether.
To counter customer power, companies may expand services
that raise buyers’ switching costs or fi nd alternative means
of reaching customers to neutralize powerful channels. To
temper profi t-eroding price rivalry, companies can invest
more heavily in unique products, as pharmaceutical fi rms
have done, or expand support services to customers. To scare
off entrants, incumbents can elevate the fi xed cost of com-
peting – for instance, by escalating their R&D or marketing
expenditures. To limit the threat of substitutes, companies
can offer better value through new features or wider product
accessibility. When soft-drink producers introduced vending
machines and convenience store channels, for example, they
dramatically improved the availability of soft drinks relative
to other beverages.
Sysco, the largest food-service distributor in North Amer-
ica, offers a revealing example of how an industry leader
can change the structure of an industry for the better. Food-
service distributors purchase food and related items from
farmers and food processors. They then warehouse and de-
liver these items to restaurants, hospitals, employer cafete-
rias, schools, and other food-service institutions. Given low
barriers to entry, the food-service distribution industry has
historically been highly fragmented, with numerous local
competitors. While rivals try to cultivate customer relation-
ships, buyers are price sensitive because food represents a
large share of their costs. Buyers can also choose the substi-
tute approaches of purchasing directly from manufacturers
or using retail sources, avoiding distributors altogether. Sup-
pliers wield bargaining power: They are often large com-
panies with strong brand names that food preparers and
consumers recognize. Average profi tability in the industry
has been modest.
Sysco recognized that, given its size and national reach, it
might change this state of affairs. It led the move to intro-
duce private-label distributor brands with specifi cations tai-
lored to the food-service market, moderating supplier power.
Sysco emphasized value-added services to buyers such as
Faced with pressures to gain market share or enamored with
innovation for its own sake, managers can spark new kinds of
competition that no incumbent can win.
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hbr.org | January 2008 | Harvard Business Review 91
credit, menu planning, and inventory management to shift
the basis of competition away from just price. These moves,
together with stepped-up investments in information tech-
nology and regional distribution centers, substantially raised
the bar for new entrants while making the substitutes less
attractive. Not surprisingly, the industry has been consolidat-
ing, and industry profi tability appears to be rising.
Industry leaders have a special responsibility for improv-
ing industry structure. Doing so often requires resources that
only large players possess. Moreover, an improved industry
structure is a public good because it benefi ts every fi rm in
the industry, not just the company that initiated the im-
provement. Often, it is more in the interests of an industry
leader than any other participant to invest for the common
good because leaders will usually benefi t the most. Indeed,
improving the industry may be a leader’s most profi table
strategic opportunity, in part because attempts to gain fur-
ther market share can trigger strong reactions from rivals,
customers, and even suppliers.
There is a dark side to shaping industry structure that is
equally important to understand. Ill-advised changes in com-
petitive positioning and operating practices can undermine
industry structure. Faced with pressures to gain market share
or enamored with innovation for its own sake, managers may
Defi ning the industry in which competi-
tion actually takes place is important
for good industry analysis, not to
mention for developing strategy and
setting business unit boundaries. Many
strategy errors emanate from mistak-
ing the relevant industry, defi ning it too
broadly or too narrowly. Defi ning the
industry too broadly obscures differ-
ences among products, customers, or
geographic regions that are important
to competition, strategic positioning,
and profi tability. Defi ning the industry
too narrowly overlooks commonalities
and linkages across related products or
geographic markets that are crucial to
competitive advantage. Also, strate-
gists must be sensitive to the possibil-
ity that industry boundaries can shift.
The boundaries of an industry con-
sist of two primary dimensions. First is
the scope of products or services. For
example, is motor oil used in cars part
of the same industry as motor oil used
in heavy trucks and stationary engines,
or are these different industries? The
second dimension is geographic scope.
Most industries are present in many
parts of the world. However, is com-
petition contained within each state,
or is it national? Does competition take
place within regions such as Europe
or North America, or is there a single
global industry?
The fi ve forces are the basic tool to
resolve these questions. If industry
structure for two products is the same
or very similar (that is, if they have the
same buyers, suppliers, barriers to en-
try, and so forth), then the products are
best treated as being part of the same
industry. If industry structure differs
markedly, however, the two products
may be best understood as separate
industries.
In lubricants, the oil used in cars is
similar or even identical to the oil used
in trucks, but the similarity largely ends
there. Automotive motor oil is sold to
fragmented, generally unsophisticated
customers through numerous and of-
ten powerful channels, using extensive
advertising. Products are packaged in
small containers and logistical costs are
high, necessitating local production.
Truck and power generation lubricants
are sold to entirely different buyers in
entirely different ways using a separate
supply chain. Industry structure (buyer
power, barriers to entry, and so forth)
is substantially different. Automotive
oil is thus a distinct industry from oil
for truck and stationary engine uses.
Industry profi tability will differ in these
two cases, and a lubricant company
will need a separate strategy for com-
peting in each area.
Differences in the fi ve competi-
tive forces also reveal the geographic
scope of competition. If an industry
has a similar structure in every country
(rivals, buyers, and so on), the pre-
sumption is that competition is global,
and the fi ve forces analyzed from a
global perspective will set average
profi tability. A single global strategy is
needed. If an industry has quite differ-
ent structures in different geographic
regions, however, each region may
well be a distinct industry. Otherwise,
competition would have leveled the dif-
ferences. The fi ve forces analyzed for
each region will set profi tability there.
The extent of differences in the fi ve
forces for related products or across
geographic areas is a matter of degree,
making industry defi nition often a mat-
ter of judgment. A rule of thumb is that
where the differences in any one force
are large, and where the differences
involve more than one force, distinct
industries may well be present.
Fortunately, however, even if indus-
try boundaries are drawn incorrectly,
careful fi ve forces analysis should
reveal important competitive threats.
A closely related product omitted from
the industry defi nition will show up as a
substitute, for example, or competitors
overlooked as rivals will be recognized
as potential entrants. At the same
time, the fi ve forces analysis should
reveal major differences within overly
broad industries that will indicate the
need to adjust industry boundaries or
strategies.
Defi ning the
Relevant Industry
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LEADERSHIP AND STRATEGY | The Five Competitive Forces That Shape Strategy
92 Harvard Business Review | January 2008 | hbr.org
trigger new kinds of competition that no incumbent can win.
When taking actions to improve their own company’s com-
petitive advantage, then, strategists should ask whether they
are setting in motion dynamics that will undermine industry
structure in the long run. In the early days of the personal
computer industry, for instance, IBM tried to make up for
its late entry by offering an open architecture that would
set industry standards and attract complementary makers
of application software and peripherals. In the process, it
ceded ownership of the critical components of the PC – the
operating system and the microprocessor – to Microsoft and
Intel. By standardizing PCs, it encouraged price-based rivalry
and shifted power to suppliers. Consequently, IBM became
the temporarily dominant fi rm in an industry with an endur-
ingly unattractive structure.
Expanding the profi t pool. When overall demand grows,
the industry’s quality level rises, intrinsic costs are reduced,
or waste is eliminated, the pie expands. The total pool of
value available to competitors, suppliers, and buyers grows.
The total profi t pool expands, for example, when channels
become more competitive or when an industry discovers
latent buyers for its product that are not currently being
served. When soft-drink producers rationalized their inde-
pendent bottler networks to make them more effi cient and
effective, both the soft-drink companies and the bottlers
benefi ted. Overall value can also expand when fi rms work
collaboratively with suppliers to improve coordination and
limit unnecessary costs incurred in the supply chain. This
lowers the inherent cost structure of the industry, allowing
higher profi t, greater demand through lower prices, or both.
Or, agreeing on quality standards can bring up industrywide
quality and service levels, and hence prices, benefi ting rivals,
suppliers, and customers.
Expanding the overall profi t pool creates win-win oppor-
tunities for multiple industry participants. It can also reduce
the risk of destructive rivalry that arises when incumbents
attempt to shift bargaining power or capture more mar-
ket share. However, expanding the pie does not reduce the
importance of industry structure. How the expanded pie
is divided will ultimately be determined by the fi ve forces.
The most successful companies are those that expand the
industry profi t pool in ways that allow them to share dispro-
portionately in the benefi ts.
Defi ning the industry. The fi ve competitive forces also
hold the key to defi ning the relevant industry (or industries)
in which a company competes. Drawing industry boundaries
correctly, around the arena in which competition actually
takes place, will clarify the causes of profi tability and the ap-
propriate unit for setting strategy. A company needs a sepa-
rate strategy for each distinct industry. Mistakes in industry
defi nition made by competitors present opportunities for
staking out superior strategic positions. (See the sidebar
“Defi ning the Relevant Industry.”)
Typical Steps in Industry Analysis
Defi ne the relevant industry:
■ What products are in it? Which ones are part of
another distinct industry?
■ What is the geographic scope of competition?
Identify the participants and segment them into
groups, if appropriate:
Who are
■ the buyers and buyer groups?
■ the suppliers and supplier groups?
■ the competitors?
■ the substitutes?
■ the potential entrants?
Assess the underlying drivers of each competitive
force to determine which forces are strong and which
are weak and why.
Determine overall industry structure, and test the
analysis for consistency:
■ Why is the level of profi tability what it is?
■ Which are the controlling forces for profi tability?
■ Is the industry analysis consistent with actual
long-run profi tability?
■ Are more-profi table players better positioned in
relation to the fi ve forces?
Analyze recent and likely future changes in each
force, both positive and negative.
Identify aspects of industry structure that might be
infl uenced by competitors, by new entrants, or by
your company.
Common Pitfalls
In conducting the analysis avoid the following com-
mon mistakes:
■ Defi ning the industry too broadly or too narrowly.
■ Making lists instead of engaging in rigorous
analysis.
■ Paying equal attention to all of the forces rather than
digging deeply into the most important ones.
■ Confusing effect (price sensitivity) with cause
(buyer economics).
■ Using static analysis that ignores industry trends.
■ Confusing cyclical or transient changes with true
structural changes.
■ Using the framework to declare an industry attractive
or unattractive rather than using it to guide strategic
choices.
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hbr.org | January 2008 | Harvard Business Review 93
Competition and Value
The competitive forces reveal the drivers of industry compe-
tition. A company strategist who understands that competi-
tion extends well beyond existing rivals will detect wider
competitive threats and be better equipped to address them.
At the same time, thinking comprehensively about an in-
dustry’s structure can uncover opportunities: differences in
customers, suppliers, substitutes, potential entrants, and ri-
vals that can become the basis for distinct strategies yielding
superior performance. In a world of more open competition
and relentless change, it is more important than ever to
think structurally about competition.
Understanding industry structure is equally important
for investors as for managers. The fi ve competitive forces
reveal whether an industry is truly attractive, and they help
investors anticipate positive or negative shifts in industry
structure before they are obvious. The fi ve forces distinguish
short-term blips from structural changes and allow investors
to take advantage of undue pessimism or optimism. Those
companies whose strategies have industry-transforming
potential become far clearer. This deeper thinking about
competition is a more powerful way to achieve genuine
investment success than the fi nancial projections and trend
extrapolation that dominate today’s investment analysis.
If both executives and investors looked at competition
this way, capital markets would be a far more effective force
for company success and economic prosperity. Executives
and investors would both be focused on the same funda-
mentals that drive sustained profi tability. The conversation
between investors and executives would focus on the struc-
tural, not the transient. Imagine the improvement in com-
pany performance – and in the economy as a whole – if all
the energy expended in “pleasing the Street” were redirected
toward the factors that create true economic value.
1. For a discussion of the value chain framework, see Michael E. Porter, Com-
petitive Advantage: Creating and Sustaining Superior Performance (The Free
Press, 1998).
2. For a discussion of how internet technology improves the attractiveness of
some industries while eroding the profi tability of others, see Michael E. Porter,
“Strategy and the Internet” (HBR, March 2001).
3. See, for instance, Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition
(Currency Doubleday, 1996).
Reprint R0801E
To order, see page 139.
“Do you have to barge into my offi ce every day and talk about work?”
P.
C
. V
e
y
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THE STRATEGIST
BE THE LEADER Y
O
UR BUSINESS NEEDS
C
ynthia A. Montgomery
To Anneke, Mathea, and Nils
That you may find places where you
can make a difference that matters
And to Bjørn, forevermore
In the end, it is important to remember that we cannot become what we need
to be by remaining what we are.
—Max De Pree, CEO of Herman Miller, in Leadership Is an Art
Cover
Dedication
Epigraph
Chapter 8 – The Essential Strategist
Introduction
What I Learned in Office Hours
YOU’RE ABOUT TO get a revisionist view of strategy. It’s not that what you’ve
learned is incorrect. It’s that it’s incomplete.
Strategy is a fundamental course at nearly every business school in the
world. I have been privileged to teach variations of it for more than thirty
years—first at the University of Michigan, then at the Kellogg School at
Northwestern, and for the last twenty-plus years at the Harvard Business
School.
For most of that time I worked with MBA students, until the center of my
teaching shifted to executive education. It was this experience, particularly a
five-year stint in Harvard’s Entrepreneur, Owner, President program (EOP),
that inspired this book.1 Working intimately with leaders from nearly every
industry and nation as they confronted their own real-world strategic issues
changed not only how I teach strategy, but, more fundamentally, how I think
about it. The experience led me to challenge some of strategy’s basic
precepts, and ultimately to question both the culture and mind-set that have
grown up around it. Even more important, teaching in EOP forced me to
confront how strategy is really made in most businesses, and by whom.
All of this convinced me that it is time for a change. Time to approach
strategy in a different way and time to transform the process from a
mechanical, analytical activity to something deeper, more meaningful, and far
more rewarding for a leader.
THE ROAD TO HERE
Fifty years ago strategy was taught as part of the general management
curriculum in most business schools. In the academy as well as in practice, it
was identified as the most important duty of the president—the person with
overarching responsibility for setting a company’s course and seeing the
journey through. This vital role encompassed both formulation and
implementation: thinking and doing combined.
Although strategy had considerable depth then, it didn’t have much rigor.
Heuristically, managers used the ubiquitous SWOT model (Strengths,
Weaknesses, Opportunities, and Threats) to assess their businesses and
identify attractive competitive positions. How best to do that, though, was far
from clear. Other than making lists of various factors to consider, managers
had few tools to help them make these judgments.
In the 1980s and ’90s, my colleague Michael E. Porter broke important
new ground in the field. His watershed came in firming up the Opportunities
and Threats side of the analysis by bringing much-needed economic theory
and empirical evidence to strategy’s underpinnings, providing a far more
sophisticated way to assess a firm’s competitive environment. This led to a
revolution in both the practice and teaching of strategy. In particular,
managers came to understand the profound impact industry forces could have
on the success of their businesses and how they could use that information to
position their firms propitiously.
Advances over the next few decades not only refined the tools but spawned
a whole new industry. Strategy in many ways became the bailiwick of
specialists—legions of MBAs and strategy consultants, armed with
frameworks, techniques, and data—eager to help managers analyze their
industries or position their firms for strategic advantage. In truth, they had a
lot to offer. My own academic training and research in this period reflected
this intellectual environment, and what I did in the classroom for many years
thereafter was a living embodiment of this “new” field of strategy.
In time, though, a host of unintended consequences developed from what in
its own right was a very good thing. Most notably, strategy became more
about formulation than implementation, and more about getting the analysis
right at the outset than living with a strategy over time. Equally problematic,
the leader’s unique role as arbiter and steward of strategy had been eclipsed.
While countless books have been written about strategy in the last thirty
years, virtually nothing has been written about the strategist and what this
vital role requires of the person who shoulders it.
It wasn’t until years into this shift that I fully realized what had happened.
It was classic Shakespeare: As a field, we had hoisted ourselves on our own
petard. We had demoted strategy from the top of the organization to a
specialist function. Chasing a new ideal, we had lost sight of the value of
what we had—the richness of judgment, the continuity of purpose, the will to
commit an organization to a particular path. With all good intentions, we had
backed strategy into a narrow corner and reduced it to a left-brain exercise. In
doing so, we lost much of its vitality and much of its connection to the day-
to-day life of a company, and we lost sight of what it takes to lead the effort.
Teaching in the EOP program drove these insights home for me.
When I first started working with the group, I used a curriculum that was
much like one I would use in any executive program. Through a series of
class discussions and presentations, we discussed the enduring principles of
strategy, the frameworks that capture them, and a series of case studies that
brought the concepts and tensions alive. We still do that—and it’s a valuable
part of what we do.
But in between class sessions, the EOP students—all accomplished
executives and entrepreneurs—started to ask if they could meet me in my
office to talk about various situations they were facing in their companies.
These conversations often took place at unusual hours, and sometimes lasted
far into the evening. Most started out predictably enough: We talked about
the conditions in their industries, the strengths and weaknesses of their own
companies, and their efforts to build or extend a competitive advantage.
Some discussions ended there, and a thoughtful application of whatever we’d
been doing in class seemed to meet the need.
Often, though, these conversations took a different turn. Alongside all the
conventional questions were ones about what to do when the limits of
analysis had been reached and the way forward was still not clear; questions
about when to move away from an existing competitive advantage and when
to try to stay the course; questions about reinventing a business or identifying
a new purpose, a new reason to matter. Even though many of the companies
at issue were remarkably successful (one had grown from a start-up to $2
billion in revenue in just nine years), almost none had the kind of long-run
sustainable competitive advantage that strategy books tout as the Holy Grail.
Working with these managers, typically over three years, and hearing the
stories within the stories, I came to see that we cannot afford to think of
strategy as something fixed, a problem that is solved and settled. Strategy—
the system of value creation that underlies a company’s competitive position
and uniqueness—has to be embraced as something open, not something
closed. It is a system that evolves, moves, and changes.
In these late-night one-on-one conversations, I also saw something else: I
saw the strategist, the human being, the leader. I saw how responsible these
executives feel for getting things right. I saw how invested they are in these
choices, and how much is at stake. I saw the energy and commitment they
bring to this endeavor. I saw their confidential concerns, too: “Am I doing
this job well? Am I providing the leadership my company needs?”
And, more than anything, I saw in these conversations the tremendous
potential these leaders hold in their hands, and the profound opportunity they
have to make a difference in the life of a company. In those moments
together, we both came to understand that if their businesses were going to
pull away from the pack, to create a difference that mattered, it had to start
with them.
A NEW UNDERSTANDING
In all our lives there are times of learning that transform us, that distance us
from the familiar, and make us see it in new ways. For me, the EOP
experience was one of those times. It not only changed some of my most
central views about strategy; it gave me a new perspective on the strategist,
and on the power and promise of that role.
In these pages I will share with you what I have learned. In doing so, I
hope that you will gain a new understanding about what strategy is, why it
matters, and what you must do to lead the effort. I also hope that you will
come to see that beyond the analytics and insights of highly skilled advisors
and the exhortations of “how-to” guides, there is a need for judgment, for
continuity, for responsibility that rests squarely with you—as a leader.
Because this role rests with you, The Strategist is a personal call to action.
It reinstates an essential component of the strategy-making process that has
been ignored for decades: You. The leader. The person who must live the
questions that matter most.
That’s why my ultimate goal here is not to “teach strategy,” but to equip
and inspire you to be a strategist, a leader whose time at the helm could have
a profound effect on the fortunes of your organization.
Author’s Note
The examples and stories in this book are based largely on five years’
teaching in one of the comprehensive executive programs at Harvard
Business School. In the pages of this book, I refer to this program as the
Entrepreneurs, Owners, Presidents program (EOP), though the actual name of
the program is different. You can find more information about various
executive programs the school offers at www.exed.hbs.edu.
In some cases, companies’ locations or certain details about them or
individuals have been changed or composites of student experiences have
been created so as not to violate the privacy of former students. Where names
of companies or individuals are disclosed, it is done with express permission,
and the details in the accompanying discussions have been approved for
release by the firms.
In some instances, I have presented cases in class in a different way than
they are described here or used other cases than the ones in this book to make
the same important points.
Chapter 1
Strategy and Leadership
Does your company matter?
That’s the most important question every business leader must answer.
If you closed its doors today, would your customers suffer any real
loss?1 How long would it take, and how difficult would it be, for them to
find another firm that could meet those needs as well as you did?
Most likely, you don’t think about your company and what it does in
quite this way. Even if you’ve hired strategy consultants, or spent weeks
developing a strategic plan, the question probably still gives you pause.
If it does or if you’re not sure how to respond, you’re not alone.
I know this because I’ve spent the better part of my life working with
leaders on their business strategies. Again and again, I’ve seen them
struggle to explain why their companies truly matter. It’s a difficult
question.
Can you answer it?
If you cannot, or if you’re uncertain of your answer, join me as I
explore this question with a group of executives now gathering.
It is evening on the campus of the Harvard Business School. The kickoff
orientation to the Entrepreneur, Owner, President program (“EOP” for short),
one of the flagship executive programs at the school, is about to begin. Along
with five of my fellow faculty, I sit in the “sky deck,” the last and highest
row of seats, in Aldrich 112, an amphitheater-style classroom characteristic
of the school, and watch as the newest group of executives stream into the
room.
I see that there are considerably more men than women, and that the
majority appear to be in their late thirties to mid-forties. Most exude an air of
seasoned self-confidence. That’s no surprise—they’re all owners, CEOs, or
COOs of privately held companies with annual revenues of $10 million to $2
billion—the kind of small- to medium-size enterprises that drive much of the
global economy. Most arrived on campus within the last few hours and have
had just enough time to find their dorm rooms and meet the members of their
living groups before heading here to Aldrich.
The information they provided in their applications tells part of their
stories: Richard, a third-generation U.S. steel fabricator; Drazen, CEO of a
media firm in Croatia; Anna, founder and head of one of the largest private
equity groups in South America; and Praveen, the scion of a family
conglomerate in India. But this is just a taste of their diversity and
accomplishments. The richer details and the breadth of the class will emerge
in the weeks ahead.
As the clock ticks past the hour, some last-minute arrivals burst through the
door. They are typical first-time EOPers in their lack of concern about being
late. Most of these people hail from worlds where meetings don’t start until
they arrive. That will change in the coming days, as they make the adjustment
from the top-of-the-line leather chairs in their offices back home to the
standard-issue seats that line the classrooms. Indeed, for their time here, they
will be without many of the supports they rely on in their daily lives, such as
administrative assistants and subordinates to whom they can delegate work
and problems. Families are strongly discouraged from living near campus and
are prohibited from dorms once classes begin. BlackBerrys and cell phones
are allowed, but never in class.
A final hush settles as the program begins with an overview of who’s here:
164 participants from thirty-five countries, with a collective 2,922 years of
experience. Two-thirds of their businesses are in service industries, the
remainder in manufacturing.
They are here to participate in an intensive management boot camp for
experienced business leaders. It spans topics in finance, marketing,
organizational behavior, accounting, negotiations, and strategy, and runs for
nine weeks in total, divided into three three-week sessions spread over three
years. Between sessions, students return to their businesses and start to apply
what they have learned. Debriefs the following year are an opportunity for
feedback and reflection on what has worked and what hasn’t. This structure
has given the faculty an exceptional opportunity to develop a hands-on
curriculum that brings theory and practice much closer together, even for a
school that has always championed the connection.
Why do these talented, seasoned managers from every major world culture
come to this program? As heads of their companies, why do they elect to
spend tens of thousands of dollars to send themselves to school?
THE VIEW FROM THE BALCONY
If past participants are any indication, these executives have not come to
seek specific answers to narrow questions. They have come to learn how to
be more effective leaders and to find ways to make their businesses more
successful. Successful in what ways, and through what means, for most, is
still an open question. They are here to throw themselves into the program, to
be challenged, to discover what they might learn in this environment.
This experience will be an important juncture for many, in their careers and
even their lives. What they learn here will lead them to think in broader, more
far-reaching ways. To explain how this happens, I’ve always liked the
metaphor of a dance taking place in a great hall.Most dancers spend all their
time on the dance floor, moved by the music, jostled by dancers around them,
completely absorbed in the flow. But it’s not until they extricate themselves
from the crowd and move to the balcony above that the larger picture
becomes clear. It is then that overall patterns become apparent and new
perspectives emerge. Often these reveal opportunities for better choices about
what to do down on the dance floor.
Many EOPers have spent years without ever leaving the dance floor.
Absorbed by the day-to-day challenges of running a business, they’ve never
gone to the balcony. On one level, our job is to help them understand the
value of going to the balcony in the first place. On another, it is to equip them
with the tools to see their dances in new ways, ways that reveal options they
may never have considered before.
THE STRATEGY COURSE
When it’s time for the faculty to introduce their courses, I stand and give a
quick summary of the work we’ll be doing in strategy. Like most
businesspeople, these managers are likely to be familiar with at least a vague
definition of strategy. The word itself comes from the ancient Greek for
“general”—specifically for the general on campaign in the field. In business,
strategy is a company’s campaign in the marketplace: the domain in which it
competes, how it competes, and what it wants to accomplish.
We will begin our journey with the fundamentals—what strategy is, how to
craft it, and how to evaluate it. We’ll then push the envelope on current
practice by challenging strategy’s elusive goal—the long-run sustainable
competitive advantage—and introduce a dynamic model of strategy that is
better grounded and better suited for the competitive realities most managers
face.
All of this material is prelude to the last and most challenging task they
will face here, when every member of the class will be asked to apply the
concepts and frameworks we’ve been studying to their own companies and
present their own strategies for critiquing by their EOP colleagues. The
exercise takes many days and, in the end, the class votes on a winner, what
they consider the “best strategy” in the group.
This step from the general to the highly particular, from the objective to the
subjective, is where things become profoundly real for most executives. This
is when the appraisals of cases—now their cases—get deadly serious and the
discussions especially heartfelt. These are competitive people. A spirit of
intense rivalry prevails. Most refine their strategies through multiple
iterations, often working through the night for one more iteration. These
weeks are arduous for some, exhilarating for others, and, for most, a healthy
mix of both.
GETTING TO THE REALITY OF YOUR STRATEGY
Having seen hundreds if not thousands of such strategies in their initial
form, what is clear to me is this: Many leaders haven’t thought about their
own strategies in a very deep way. Often, there is a curious gap between their
intellectual understanding of strategy and their ability to drive those insights
home in their own businesses.
Some EOPers find it extremely difficult to identify why their companies
exist. Accustomed to describing their businesses by the industries they’re in
or the products they make, they can’t articulate the specific needs their
businesses fill, or the unique points that distinguish them from competitors on
anything beyond a superficial level. Nor have they spent much time thinking
concretely about where they want their companies to be in ten years and the
forces, internal and external, that will get them there.
If leaders aren’t clear about this, imagine the confusion in their businesses
three or four levels lower. Yet, people throughout a business—in marketing,
production, service, as well as near the top of the organization—must make
decisions every day that could and should be based on some shared sense of
what the company is trying to be and do. If they disagree about that, or
simply don’t understand it, how can they make consistent decisions that
move the company forward? Similarly, how can leaders expect customers,
providers of capital, or other stakeholders to understand what is really
important about their companies if they themselves can’t identify it? This is
truly basic—there is no way a business can thrive until these questions are
answered.
Even so, the exercises in EOP are designed to do more than set high
standards, communicate concepts, and improve participants’ existing
strategies. The overarching goal is something different, something deeper and
more personal. It is to make clear to these executives that strategy is the heart
of the ongoing leadership their companies need from them. That’s why
competition for “best strategy” is so hard fought and generates so much
energy. CEOs, accustomed to asking questions and being deferred to, are
challenged by their peers and encouraged to think and rethink parts of their
strategies they’d taken for granted. Most of them describe it as a pivotal
experience that fundamentally changes their views of their own businesses.
Behind the scenes, though, the real contest is closer in: It’s each of these
leaders pushing their own ideas to the increasingly high standards they
themselves have come to demand of excellent strategies and of themselves as
leaders. It’s that process, more than any short-term answers they might find
here, that will serve them well in the long run.
LEADERSHIP AND STRATEGY ARE INSEPARABLE
Many leaders today do not understand the ongoing, intimate connection
between leadership and strategy. These two aspects of what leaders do, once
tightly linked, have grown apart. Now specialists help managers analyze their
industries and position their businesses for competitive advantage, and
strategy has become largely a job for experts, or something confined to an
annual planning process. In this view, once a strategy has been identified, and
the next steps specified, the job of the strategist is finished. All that remains
to be done is to implement the plan and defend the sustainable competitive
advantage it has wrought. Or at least that’s the positive take on the story.
But, if this were so, the process of crafting a strategy would be easy to
separate from the day-to-day management of a firm. All a leader would have
to do is figure it out once, or hire a consulting firm to figure it out, and make
sure it’s brilliant. If this were so, the strategist wouldn’t have to be concerned
with how the organization gets from here to there—the great execution
challenge—or how it will capitalize on the learning it accumulates along the
way.
But this is not so.
What’s been forgotten is that strategy is not a destination or a solution. It’s
not a problem to be solved and settled. It’s a journey. It needs continuous, not
intermittent, leadership.
It needs a strategist.
Good strategies are never frozen—signed, sealed, and delivered. No matter
how carefully conceived, or how well implemented, any strategy put into
place in a company today will eventually fail if leaders see it as a finished
product. There will always be aspects of the plan that need to be clarified.
There will always be countless contingencies, good and bad, that could not
have been fully anticipated. There will always be opportunities to capitalize
on the learning a business has accumulated along the way.
The strategist is the one who must shepherd this ongoing process, who
must stand watch, identify and weigh, decide and move, time and time again.
The strategist is the one who must decline certain opportunities and pursue
others. Consultants’ expertise and considered judgments can help, as can
perspectives and information from people throughout an organization. But, in
the end, it is the strategist who bears the responsibility for setting a firm’s
course and making the choices day after day that continuously refine that
course.
That is why strategy and leadership must be reunited at the highest level of
an organization. All leaders—not just those who are here tonight—must
accept and own strategy as the heart of their responsibilities.
I say little of this tonight in the classroom. But it is on my mind as I return
to my seat in the sky deck and reflect on all the would-be strategists I’ve
worked with over the years as well as those of you who are just starting out.
My hope is that you will come not only to understand the vital role of the
strategist, but also to embrace it for yourself.
Five years ago, when I first started teaching in EOP, I heard the program
described as challenging and transformative. At the time, “challenging”
struck me as right, but “transformative” seemed closer to hype. Having seen
it happen again and again, I now share the optimism.
As our orientation session draws to a close, I join the executives and fellow
faculty as we head en masse to Kresge Hall for cocktails and dinner. Our
work is about to begin in earnest.
In all my classes, I pose one fundamental question: “Are you a
strategist?” Sometimes it’s spoken, often it’s only implicit, but it’s
always there. We talk about the questions strategists ask, about how
strategists think, about what strategists do. My intent is not to coach
these executives in strategy in the way they might learn finance or
marketing. As business heads, they aren’t going to be functional
specialists. But they do need to be strategists.
Are you a strategist?
It’s a question all business leaders must answer because strategy is so
bedrock crucial to every company. No matter how hard you and your
people work, no matter how wonderful your culture, no matter how good
your products, or how noble your motives, if you don’t get strategy right,
everything else you do is at risk.
My goal in this book is to help you develop the skills and sensibilities
this role demands, and to encourage you to answer the question for
yourself. It’s a difficult role and it may be tempting to try to sidestep it. It
requires a level of courage and openness to ask the fundamental
questions about your company and to live with those questions day after
day. But little you do as a leader is likely to matter more.
Chapter 2
Are You a Strategist?
HERE’S A TEST of your strategic thinking. It’s the same one I give my
EOPers right at the beginning of the course.
Step into the shoes of Richard Manoogian, CEO of Masco Corporation, a
highly successful company on the verge of a momentous decision.1 You’ve
got a big pile of money and must decide whether to invest it in a far-reaching
new business venture. The stakes are high, and it’s not an easy or obvious
decision. If you don’t go ahead, you could be passing up an opportunity for
growth in a new direction and hundreds of millions of dollars in future
profits. If you take the plunge and turn out to be wrong, you may have wasted
$1–2 billion. Either way, you will have to live with the results for many
years.
To make the decision, you’ll first need to know something about Masco
and its marketplace. The story begins more than two decades ago, but its
lessons are timeless, and the intervening years allow us to take a long view on
the company and the industry.
FIRST, CONSIDER THE COMPANY
It’s 1986. Masco is a successful $1.15 billion company that has just
recorded its twenty-ninth consecutive year of earnings growth. Its ability to
wring outsized profits out of industries that are neither high tech nor
glamorous has won it the monicker of “Master of the Mundane” on Wall
Street. Its portfolio includes faucets, kitchen and bathroom cabinets, locks
and building hardware, and a variety of other household products.2 Masco
expects the businesses to generate $2 billion in free cash flow over the next
few years.
What would you do with all that money? Masco’s leaders want to tackle
other mundane businesses where their prowess can “change the game.” They
envision becoming the “Procter & Gamble of consumer durables.” In their
immediate sights is the U.S. household furniture business, where they see
another opportunity to seize profitable dominance of a sleepy industry.
Is Manoogian’s idea a promising one? If so, is Masco the company to lead
the charge?
When I raise these questions the first morning in class, the executives don’t
immediately jump up. Like you, they enjoy being the decision maker; it’s the
role they play in their real-life jobs, but they’re reluctant to put themselves on
the line with a group they’ve just met. With some coaxing, though, we’re
soon deep into Masco’s situation and the issues Manoogian faces.
The case for Manoogian’s strategy looks compelling. Through a long
record of triumphs in durable goods industries, Masco distinguished itself
through efficient manufacturing, good management, and innovation. Its
biggest success to date was reinventing the faucet business. Prior to Masco’s
entry, the industry was highly fragmented and had a general lack of brand
recognition, minimal advertising, and a low level of salesperson training.
Leveraging the company’s deep metalworking expertise, garnered in its early
years as a supplier to the automotive industry, Masco’s founder, Richard’s
father Alex, solved an engineering problem that made one-handle faucets
workable. When he couldn’t interest faucet companies in his patented
innovation, Masco began making and selling the faucets itself.
Homeowners loved them, finding them a big improvement over traditional
faucets that forced users to fiddle with hot and cold water separately. This
extra functionality was particularly valued in kitchens where utility and
maintenance-free operation were important. Not neglecting two-handle
faucets, the company introduced a model with a new type of valve. This
design, also patented, eliminated rubber washers, the major cause of faucet
failure.
Masco went on to innovate in many other aspects of these new products,
from basic manufacturing to distribution and marketing. It was the first to
create brand recognition for a faucet with its Delta and Peerless brands. It was
the first to introduce see-through packaging, to market faucets direct to the
consumer through the do-it-yourself channel, and to advertise faucets on TV
during the Olympics. In refashioning an industry of “me-too” products and
boldly setting itself apart from others, Masco demonstrated that it was
creative, able to apply traditional capabilities in new ways, and willing to take
risks and make them pay off—abilities Richard Manoogian hoped would
enable him to transform the furniture business.
NOW CONSIDER THE INDUSTRY
At the time Manoogian was weighing this decision, household furniture
was a $14 billion business in the United States that didn’t make much money.
With high transportation costs, low productivity, and eroding prices, it had
about 2 percent annual growth, and return on sales, on average, was about 4
percent. There were more than 2,500 manufacturers, but 80 percent of sales
came from only four hundred. Not all players were small, but most were, and
many were family firms that had stuck it out through thick and thin, reluctant
to leave the only livelihood their families had known for generations. Making
matters worse, both sales and profits were cyclical and tied to broad
economic factors such as new home starts and sales of existing homes.
Management in the industry was generally regarded as unsophisticated, and
hadn’t made many significant changes in the previous fifty years. Wesley
Collins, a furniture executive and trenchant observer of industry conditions,
summed it up dramatically:
When everything else in our lives was changing, furniture stood its
ground. While we put a man on the moon . . . furniture put another steak
on the backyard grill and muttered, “My god, the price of oak went up
again.”
When videotape put the home movie camera in the trash can forever,
and tape cassettes put the plastic record-maker six feet under, and word
processors put typewriters in the closet, and microwave popcorn killed
the makers of popcorn makers . . . the furniture industry said, “Thanks,
but we’ll stand pat.”
While we sat on our tuffets, the consumer forgot all about us. Our
share of consumer expenditures slipped year after year. We lost over 40
percent of the retail furniture space in America, 25 percent of the
retailers shut their doors, and department stores discontinued furniture
right and left for products that gave them a better ratio of margin and
turns per square foot.3
Collins went on to say that “the average tobacco chewer spends more for
Levi Garrett Chewing Tobacco every year than he does for furniture.”
Most furniture purchases were discretionary and highly postponable, and,
as Collins noted, there were many substitutes and lots of competition for the
customer’s dollar. New innovations and designs were quickly knocked off by
competitors, eliminating any advantage the innovators might have
momentarily enjoyed.
Equally distressing, in the United States, there was little brand recognition
in the industry. Customers didn’t know much about furniture and weren’t
motivated enough to find out. There was little advertising and consumer
research had shown that many American adults could not name a single
furniture brand. Think for a minute: “What brand of sofa do you have in your
living room?” When I pick an executive in the class at random and ask this
question, the response is usually a startled look, a long moment of silence,
and then, something like “Brown leather?” Everyone laughs, but when I open
the question to the entire class, only a few hands go up and they’re inevitably
executives from Europe. Yet when I ask how many of them know the brand
of car their neighbors drive, virtually all hands go up. Yours probably would,
too.
On top of its marketing challenges, the industry was riddled with
inefficiencies, extreme product variety, and long lead times that frustrated
customers. Buyers often received partial shipments; for example, a dining
table might arrive weeks or months before the chairs that went with it.
The real issue, though, is not whether there are problems in the industry but
what they mean. Are all these problems an opportunity for a courageous
company with the right skills? Or are they red flags warning outsiders to stay
away?
When I ask my executives whether they would take the plunge, most
respond with a resounding “Yes!” They’re energized, not intimidated, by the
challenges. Most say, in effect, “Where there’s challenge, there’s
opportunity.” If it were an easy business, they say, some company would
already have seized the opportunity: It would be much tougher to dislodge a
strong leader than to gain ground in an industry like this where there are no
big players, no Microsofts already established. “It’s a horse race,” someone
once said, “and all the other horses are slow.”
Further, they note, the furniture industry is much like the faucet industry
before Masco entered. The opportunity is a great fit with Masco’s
manufacturing skills, its marketing savvy, and its strong management
capabilities. It’s another chance for Masco to bring money, sophistication,
and discipline to a fragmented, unsophisticated, and chaotic industry.
Opponents can’t get past how awful the furniture business is. They can’t
imagine any company overcoming such huge hurdles. So the arguments go
back and forth. Enthusiasm and a gung-ho spirit on one side struggle against
caution and concern on the other. In one discussion, an exasperated
proponent blurted out, “Look, this isn’t about being passive investors in some
yet-to-be-invented furniture industry index fund. We’re going to be players in
this game. We can make things happen. If Starbucks or Under Armour had
listened to you naysayers, they wouldn’t have done anything!”
What’s your inclination at this point?
Usually when the time comes for a decision in my classes, “Do it” wins
definitively, by at least a 2-to-1 margin.
So what, in fact, happened?
Masco did enter and in a bold way. Over two years, it bought Henredon
(high-end furniture) for $300 million, Drexel Heritage (mid-price) for $275
million, and Lexington Furniture (low–middle) for $250 million. Combined,
the revenues from the three made Masco the second-largest player in the U.S.
furniture industry. It followed up by spending $500 million for Universal
Furniture Limited (low end), which had manufacturing operations in ten
countries on three continents and followed a ready-to-assemble concept—
component parts were manufactured in low-cost countries and shipped in
containers to five U.S. locations for assembly. Now Masco was both the
largest furniture company in the world and one of the only firms with
products spanning nearly every price point, a strategy that had worked well
for the firm in faucets.
In total, Masco spent $1.5 billion acquiring ten companies and another
$250 million upgrading their manufacturing facilities and investing in new
marketing programs.
Presenting Manoogian with its Gold Award in the Building Materials
Industry, the Wall Street Transcript cited his
imagination, foresight and strategic sense. . . . Manoogian has acquired
low growth, mature products and become the dominant player in those
product categories. . . . [H]is most recent set of acquisitions has been in
the furniture industry. His strategy is to do to the furniture industry what
he did to the faucet and kitchen cabinet industry. . . .4
With this historical update, the classroom crackles with energy. Executives
who had advocated for bold action nod their heads to one another or give
each other high-fives and thumbs-up, pleased that they’ve nailed their first
Harvard case. I hear little “told-you-so” comments directed at the naysayers,
who sit in grim silence. Someone once even called across the room: “Don’t
worry, Bob. One bad decision won’t ruin your reputation. We won’t hold it
against you the rest of the program.”
But it doesn’t take long for those who opposed entry to speak up.
“But how did Masco do?”
“They bought great brand names,” says someone.
“But how did they do?”
“They’re number one in market share. What more do you want?”
“But did they make money?”
There, as it’s said, is the rub.
When I post Masco’s financial results, silence falls as people absorb the
numbers. In a few seconds, there are whispered expletives around the room.
After thirty-two years of consecutive earnings growth, Masco’s net income
fell 30 percent. Two years later, operating earnings from furniture came to
$80 million on sales of $1.4 billion, an operating margin of 6 percent, versus
14 percent for the rest of the company. After many years of struggle, Masco
announced its intentions to sell its furniture businesses, leading one analyst to
comment:
In the spring, management will go on the road with restated financials
illustrating their “core” earnings growth as if they never entered the
furniture business. They hope to rebuild investor confidence in the old
[pre-furniture] Masco . . . as a growth company by showing their track
record and prospects in the building materials arena. Given the $2
billion furniture “mistake,” this won’t be easy.
In a sad postscript, Masco discovered that exiting the furniture business
was much harder than entering it. After a number of deals fell through, it
eventually succeeded in selling its furniture firms, at a loss of some $650
million.5 When it was all over, CEO Manoogian admitted, “The decision to
go into the home furnishings business was probably one of the worst
decisions I’ve made in 35 years.”6
It’s a sobering moment in the classroom. The executives there didn’t intend
to open their careers at the Harvard Business School by losing hundreds of
millions of dollars their first morning.
So, let me ask you again, as I do the managers in my class: “Are you the
strategist your business needs?”
Chapter 3
The Myth of the Super-Manager
AS A STRATEGIST, what can you learn from Masco’s foray into furniture and
the support most executives give that ill-fated decision?
Even if you were undecided or skeptical about the furniture industry, I’m
willing to bet that some part of you supported Masco’s move. No one
respects timid, passive managers. Bold, visionary leaders who have the
confidence to take their firms in exciting new directions are widely admired.
Isn’t that a key part of strategy and leadership?
In truth, it is. But the confidence every good strategist needs can readily
balloon into overconfidence. A belief that is unspoken but implied in much
management thinking and writing today is that a highly competent manager
can produce success in virtually any situation. One writer calls this “the sense
of omnipotence that plagues American management, the belief that no event
or situation is too complex or too unpredictable to be brought under
management control.”1
I call this belief, when taken to its extreme, the myth of the super-manager.
It seems to come naturally to many successful entrepreneurs and senior
managers who see themselves as action-oriented problem solvers, confident
doers for whom difficulties are daunting but solvable challenges. I see it
behind Masco’s leap into furniture manufacturing and behind executives’
choice of the same path every time I teach the case. Confidence matters. But
there’s much more to strategy and leadership than a steadfast belief that a
daring vision backed by good management can overcome virtually all
obstacles. Without the rest of it, “bold” too often becomes “reckless.”
Look at what such thinking did to Masco. Operating profitability dropped
to half its historical average, and the firm’s stock price was lower when it left
the furniture industry than when it entered ten years earlier. And money was
only part of the cost. Where Wall Street had spoken of Masco as a “Master of
the Mundane,” it began to speak of the company’s “past glory” and “bitter
shareholders.”2 The company lost momentum as its leaders spent years
distracted by a massive venture that ultimately failed.
For Masco, its move into furniture was a defining moment, but not a
positive one. A legacy built over decades was shattered, an affirmation of a
well-known Warren Buffett maxim: “It takes twenty years to build a
reputation and five minutes to ruin it.” All because the strategist got this one
choice wrong.
What happened?
Your instinct, like most managers’, is probably to seek the answer by
looking at Masco itself and its leaders. Surely, the ultimate fault lies there.
But to get the full picture, you must look as much outside as inside the firm.
Here is a first clue.
As our faculty team was preparing to teach the case for the first time, a
colleague, the most senior in the room, said, “Wait a minute. This story
sounds very familiar.” He left the meeting and went back to his office files.
There he found “Mengel Company (A),” a case so old it was typed on
onionskin paper.
Set in 1946, the Mengel case describes the firm’s plans to revolutionize the
highly fragmented furniture industry. Mengel’s bold idea? Build scale, gain
efficiencies by leveraging its manufacturing skills, and establish brand
identity. To do this, it would buck industry practice and spend $500,000 on
national advertising to “make the average consumer style-conscious” and
build its “Permanized” brand name.3 I had never heard of Mengel, but with
an eerie sense of déjà vu, I wondered if Masco’s leaders had known about
them.
My own research in the industry led to the following list. What do you
think these seemingly disparate companies have in common?
Consolidated Foods
Champion International
Mead
General Housewares
Ludlow
Intermark
Georgia Pacific
Beatrice Foods
Scott Paper
Burlington Industries
Gulf + Western
Like Mengel and Masco, these are all companies that tried and failed to
find fortune in furniture manufacturing.
Most were regarded as well-run companies. Like Masco, they considered a
fragmented, chaotic industry to be an opportunity for good managers to apply
their skills. With great expectations and high hopes of success, they all
jumped in with the intention of reshaping the industry through the infusion of
“professional management.” Years later, they all left.
UNDERSTANDING THE FORCES
Most executives find this list both revealing and disconcerting. These were
companies with considerable track records, yet they all failed in the same
endeavor. Was there something problematic about the endeavor itself? Was
something at work in the furniture industry that was outside the control of
these companies and their leaders?
Here’s another clue.
Look at the chart on Relative Industry Profitability. It shows the average
return on equity for twenty industries over the twenty-year period from 1990
to 2010. The chart was compiled from Standard & Poor’s and Compustat
databases that include data on all companies that traded on U.S. stock
exchanges.
Are you surprised by how much profitability varies by industry? Compare
Tobacco companies at 36.1 percent average annual return on equity—which
means leading firms in the industry do even better—with Airlines at -10
percent or Commercial Equipment at -2 percent.
In my experience, most executives understand that average profitability
will differ from industry to industry, but the scale of variation often comes as
a surprise. Annual average returns in the most profitable industries are well
more than double those in median industries, and more than four or five times
those at the bottom of the distribution. Researchers have found similar
differences in other countries, in both advanced and emerging economies.4
Are these vast differences from industry to industry caused by random
variation? It’s not likely—they’re too large and too consistent. Do some types
of businesses attract great managers while others attract only poor ones?
Sometimes, but not enough to account for the differences.
In fact, these variations are caused by economic forces that shape each
industry’s competitive landscape differently.5 As Michael Porter has shown,
some of these relate to the nature of rivalry within the industry itself; others
have to do with the balance of power between the industry and its suppliers
and customers, substitute products, and potential new entrants. Sometimes
the forces are fierce and lead to low levels of industry profitability; other
times they’re relatively benign and set the scene for much more profitable
outcomes.
The collective impact of these forces on the profitability of individual
firms, and, in turn, on industries in which they operate, is called the industry
effect. You may be surprised to learn that some and perhaps much of your
company’s performance is determined by such forces.6
These competitive forces are beyond the control of most individual
companies and their managers. They’re what you inherit, a reality that you
have to deal with. It’s not that a firm can never change them, but in most
cases it’s very difficult to do. The strategist’s first job is to understand them
and how they affect the playing field where competition takes place.
MAKING THE DISTINCTIONS
As suggested by the above chart, industries can be arrayed along a
continuum extending from “Unattractive” to “Attractive,” where
attractiveness refers to the degree to which industry competitive forces
restrict, allow, or even foster firm profitability. The table below identifies the
most important of these economic forces and characterizes what they
probably would be like in industries at the bounds of such a continuum.7
Unattractive………. …………to Attractive
High. Many homogeneous competitors
and homogeneous products. Innovations
quickly copied. Slow growth. Excess
capacity. Price competition.
Rivalry among firms Low. One or a few dominant,
differentiated players. Unique
products. Strong brand
identities. Rapid industry
growth. Shortage of capacity.
High. Industry is dependent on a few,
concentrated suppliers producing unique
products, and Industry is not important
source of profitability to suppliers.
Power of suppliers Low. Many suppliers
producing homogeneous
products. Price competition
and plentiful supply make it
easy to procure supplies at
reasonable cost.
High. Customers have lots of choice
among similar products. Low levels of
brand awareness. Low switching costs.
Low levels of emotional involvement
Power of customers Low. Products are scarce,
highly differentiated, and
important to customers’ well-
being. Customers have
with purchase. limited choice. Brands are
strong.
Low. Industry is easy to enter and
sometimes difficult to exit, creating
excess capacity. Strategies of existing
competitors can be easily replicated or
surpassed. Entry requires low levels of
capital, modest scale, and no scarce or
specialized resources.
Barriers to entry and exit High. It is difficult or not
economical for new firms to
enter your industry. Entry
requires economies of scale,
product differentiation, high
capital investment, regulatory
approval, or accumulation of
special expertise or
experience.
High. Wide variety of compelling
substitute products are available that
meet customers’ needs at attractive
relative prices.
Availability of substitute
products
Low. Customers have few or
no choices of alternative
products that could meet their
needs at comparable prices.
Note how closely many of the competitive conditions in furniture
manufacturing mirror those in the left-hand “Unattractive” column.
• Rivalry among furniture firms is intense, as shown by the high number of
firms making similar furniture and by the ability of firms to copy
innovations made by competitors.
• Suppliers to the furniture industry, such as textile makers, dominate the
vendor relationship because no furniture company buys enough textiles to be
an important customer.
• Customers in the industry are powerful because furniture purchases are
highly postponable, products are long-lived and commodity-like, and
customers are not brand sensitive.
• Entry barriers are low, meaning that new firms can flood in and pull down
prices if industry conditions ever become more attractive. On the other hand,
the industry can be difficult to exit, especially for the many family firms that
have few alternative options, making excess capacity slow to leave the
industry.
• Substitute products abound. New furniture must compete for the customer’s
dollar with countless alternatives—including used furniture or hand-me-
down furniture passed from user to user. Since many customers consider
furniture a discretionary purchase, it must also compete with a plethora of
products such as televisions and sound systems that customers are more
excited about and consider to be a better value for their discretionary dollars.
Even when furniture prices lagged increases in the consumer price index,
sales did not respond.
How do you react to the existence of these forces?
It isn’t a happy lesson for many executives I teach. It seems to say, “Your
prospects are predetermined—the game is up—or, if not up, a big chunk of it
is out of your control.” Action-oriented executives, I find, prefer not to think
of themselves as in the grip of outside forces. They prefer to believe in free
will, not determinism. The possibility that their industries might drive or
heavily influence their own performance isn’t near the top of their minds. As
proactive leaders and believers in the power of management, they tend to
focus on what they can control, while ignoring or underestimating what they
cannot.
REJECTING THE MYTH
Ironically, the most successful and admired leaders, the titans of business,
understand the profound significance of competitive forces outside their
control. They know the crucial importance of picking the right playing field.
They don’t buy the management myth that a truly good manager can prevail
regardless of the circumstances.
Look at Jack Welch, Fortune magazine’s “Manager of the Century.” You
probably don’t remember that when he took over General Electric, Welch
sold off more than 200 businesses worth more than $11 billion and used that
money to make more than 370 acquisitions. Why? He wanted out of
industries where conditions were too negative, where he thought it would be
too hard for GE to flourish. “I didn’t like the semiconductor business,” he
said. “I thought it was too cyclical and it required too much capital. There
were some very big players in it and only one or two were making any money
on a sustained basis. . . . [Exiting that business] allowed us to put our money
into things like medical equipment, power generation, all kinds of industries
where we changed the game. . . .”8
A comment from the Sage of Omaha himself, Warren Buffett, caps the
point:
When a management with a reputation for brilliance tackles a business
with a reputation for bad economics, it is the reputation of the business
that remains intact.9
Buffett and Welch, two of the strongest managers on record, recognize that
industry matters a lot. They understand that a significant measure of a firm’s
success depends on competitive forces beyond a manager’s control, and they
use that knowledge to their own advantage—by picking playing fields where
they can win and, within those fields, carefully positioning their businesses to
work with, not against, the forces.
BUT WHAT ABOUT . . . ?
Despite such counsel, the myth of the super-manager lives on for many
executives. It’s reinforced in practice just often enough to give it credence.
Sometimes, even in the toughest lines of business, there is a plan that works.
Individual firms on occasion have not only achieved great success in
industries where most others have failed, but they’ve even changed the basic
competitive context of the industries.
Such stories receive inordinate attention in business books and media, and
executives are always quick to bring them up: Starbucks’s revolution in the
coffee house business. Southwest’s triumphs in discount airlines. Cirque du
Soleil’s reinvention of the circus business. Even Masco’s coup in faucets.
Yes, it does happen.
But none of these strategies appeared out of the blue from the unfettered
minds of super-managers. They came from a deep comprehension of the
industries involved and the conditions at work in them. The founders of
Southwest discovered a way to exploit a hole in the fare and route structures
of established competitors. Starbucks succeeded not simply by brewing better
coffee and creating an attractive coffee house experience, but by gaining
scale and building the unique corporate skills needed to replicate that
experience not tens or hundreds but thousands of times.
The founders of Cirque du Soleil, performers themselves, understood the
essence of the traditional circus—that it was focused on children and that its
economics were badly strained by the expense of transporting and caring for
large, wild animals. By focusing on an adult audience, which let them drop
many of the animal acts, they skillfully positioned themselves to avoid one of
the industry’s greatest drains on profits while targeting customers with the
highest willingness to pay.10 That’s not a cavalier disregard for industry
forces: It’s surgical precision.
Look, too, at Warren Buffett’s portfolio. Most people don’t know he’s
made significant investments in furniture. Like Masco, he also saw potential
in the industry. But Buffett chose to invest in furniture retailing, not
manufacturing, and bought several successful furniture sellers around the
United States. He seems to be experimenting to see if these downstream
retailers can benefit from the intensely competitive conditions upstream in
furniture manufacturing—the very conditions that brought down Masco,
Mengel, and all the others. In the long run, these may not turn out to be
Buffett’s most brilliant ventures, but they reveal a real strategist playing his
cards carefully with a deep appreciation of the forces at work in the industry.
No one can say that the decision to enter or remain in a tough industry is
right or wrong on the face of it. Remaking a difficult business, as Masco set
out to do, isn’t easy, but as we’ve seen, it can and has been done. When it
works, though, it’s always a two-sided affair: It involves an industry, or part
of an industry, that can be changed and a firm with a viable way to do so.
THE MISSING INFORMATION
What does all this tell you about Masco and its failed furniture venture?
For the full answer, we must look more closely at Masco’s actions and at
how most of my students—people much like you, I suspect—saw only the
upside potential of the opportunity.
After a class has voted for Masco to enter furniture manufacturing (and
they always do), I ask the strongest proponents of the move how the firm
should proceed. What specific actions should Masco’s managers take that
will cause it to perform above the average in its new line of business?
Alongside the bold decision to enter, the proponents’ plans usually look
surprisingly lackluster. Nearly all of them start with “Masco should acquire
. . .” and go on to add some grand but vague statements about rationalizing
production, improving efficiency, leveraging the company’s professional
management, using “power marketing,” and so on. When I want to know
what the company would do differently, how “professional management”
would work here, or what would set the firm apart from others, the answers
get progressively vague and superficial. They haven’t thought about all that.
What becomes clear is that their arguments are propelled by an enthusiasm
for the company itself, for what it’s achieved in the past, and for the
storehouse of capabilities it could bring to a new venture. What is missing is
a specific plan that shows why all of that will matter in this industry, and how
it will neutralize the long-lived forces that have broken so many other firms.
These discussions always remind me of how French generals after World
War I responded to the fact that, in the previous half century, Germany had
twice defeated French armies. The generals took a number of steps, including
construction of the now-infamous Maginot Line, but a key reason, they said,
that France would not be defeated again was the élan vital of the French
soldier. Élan vital means “vital spirit” and the gist of French thinking was
that the superior determination or attitude of the French army would defeat
whatever the Germans threw at it. Of course, we know how well that worked.
It was the military equivalent of the myth of the super-manager.
Masco’s vital spirit wasn’t enough, either. Its leaders hoped its superior
management and manufacturing skills would lead it to victory on a new front,
and that the same strategy that had brought it great success in faucets would
do the same in furniture. But, while similar in some ways, the two industries
were different in other ways that Masco either failed to notice or appreciate.
Masco’s purchases of furniture companies at three price points—low,
middle, and high—reflected its belief that significant scope economies, or
savings that come from producing a wide range of products, were possible in
furniture. That approach had worked in faucets, where a range of products
could be made in the same factory, sold through the same channels, installed
by the same plumber, and often bought by the same customer for use in
different locations in a house. In furniture, however, manufacturing,
distribution, retailing, and customers differ dramatically from the top end of
the market to the bottom, making scope economies much more difficult to
achieve. Discount furniture is mass-produced and mass-marketed, while
expensive furniture is largely handmade and distributed through specialty
retail shops. Few customers buy furniture at both ends of the price and
quality spectrum, and the products are almost never found at the same
retailer.
Similarly, scale economies were difficult to come by in furniture. Even
after it purchased its way to market leadership, Masco held only a paltry 7
percent of the market, compared with its 30 percent in faucets. Seven percent
was unlikely to confer much, if any, economic advantage, particularly when
spread across so many styles, so many manufacturing plants, so many
channels, and so many price points.
Like other furniture manufacturers, Masco’s fortunes were hindered by the
industry’s extreme product variety, high shipping costs, and cyclicality,
which in combination make it extraordinarily difficult to manage a supply
chain efficiently, or profitably substitute capital equipment for labor. Without
a compelling way to address these issues, a manufacturer will always be at
their mercy.
Above all, Masco failed to learn the biggest lesson of its success in faucets.
Its one-handle and washerless products gave it unique advantages that
addressed important customer needs. Everything else it did in that industry
flowed from those key differences. In a market where functionality was
crucial, Masco had a demonstrable product edge. In furniture, an industry
ruled more by fashion than function, Masco had no such core advantage,
nothing that was strong enough to counter the gravitational pull of the
industry’s unattractive competitive forces.
Like those French generals, Masco failed to access its own battle readiness.
It placed unwarranted faith in its superior management élan vital and
underestimated the forces it was up against. One executive used a different
but similar metaphor to describe what the company did: “Masco walked into
a lion’s den and was unprepared to meet a lion.”
THE STRATEGIST IN REMORSE
Richard Manoogian, CEO-strategist and son of the company’s founder,
took the outcome hard. At stake wasn’t merely a company he ran but the
legacy his father had created and passed on to him. Father and son had strung
together thirty-one years of consistently superior performance and created a
superb reputation on Wall Street. All of that went up in smoke. In a story
titled, “The Masco Fiasco,” Financial World observed: “The Masco Corp.
was once one of America’s most admired companies; not anymore.” Though
Manoogian promised to return the company to “its past glory,” he would
have to regain the trust of his shareholders, many of whom felt “stuck in a
nine-year nightmare of broken promises.”11
It was a case of the overconfident strategist. Along with many other
companies that tried to crack the furniture industry, Masco believed a
disorganized, competitive, low-profit business offered easy prospects for a
disciplined, well-managed company. By some process of optimistic thinking,
superficial analysis, and misplaced analogy, serious industry problems began
to look like golden opportunities.
The same hopeful thinking reappears every time I teach the Masco case. In
their initial analysis of the furniture business, my students—all seasoned
executives—duly note how unattractive it is. Yet when the time comes to
decide what Masco should do, they prefer to interpret every problem as an
opportunity (an “insurmountable opportunity,” as some wag once said).
Chaos, cyclicality, fragmentation? Great! No dominant player and low brand
recognition? Wonderful! A difficult-to-manage supply chain with large,
expensive items, and huge variety? Terrific! Seemingly, there was nothing
Masco’s resources and prowess could not overcome or turn to their
advantage. It is the myth of the super-manager in full force.
I suspect Masco fell into the same trap. In the face of deeply ingrained,
long-lived industry problems, its leaders succumbed to a costly bout of
irrational faith in the power of superior management.
THE POWER OF REALISM
Do the lessons of Masco resonate with you?
More than twenty years after the Masco fiasco, my students repeatedly
approach me to say, “My industry is just like the furniture business! I’m
working really hard and getting nowhere.” For them it’s a eureka moment.
The issues they’ve been battling suddenly come into focus, and they
understand the larger reasons for their struggles.
They, like Welch, Buffett, and other astute business leaders, grasp the
lesson of the industry effect and its profound implications for firm
performance. They recognize that, as in the famous serenity prayer, you must
accept the things you cannot change, have the courage to change the things
you can, and the wisdom to know the difference. It’s a lesson great strategists
understand well, but it’s not an easy lesson to accept and master. The myth of
the super-manager is hard to let go.
The fundamental lessons here are simple but of paramount importance for
the strategist.
First, you must understand the competitive forces in your industry. How
you respond to them is your strategy. That means if you don’t understand
them, your strategy is based on luck and hope.
Second, even if you understand your industry’s competitive forces, you
must find a way to deal with them that is up to the challenge. That may mean
skillful positioning, deliberate efforts to counter negative forces or exploit
favorable ones, or even a timely exit. But don’t be trapped by the myth into
believing that your superior management skills will carry you to success.
Third, whatever you do, don’t underestimate the power of these forces.
Their impact on the destiny of your business may well be as great as your
own.
The story you will write as a strategist will be set against the backdrop of
your industry. It must be true to its realities, while having a difference that’s
all its own. It’s to the second of these challenges that we now turn.
Chapter 4
Begin with Purpose
WE’VE LEARNED SOME painful lessons about the challenges that confront
strategists in the face of unattractive industry forces. With this chapter, I
begin mapping the path out of the wilderness: specifically, explaining how
some astute strategists have managed to distinguish their businesses even in
the face of such headwinds.
The journey starts with an individual: Ingvar Kamprad, the founder of
IKEA
who by all accounts built one of the world’s greatest fortunes. Like
Richard Manoogian of Masco, Kamprad was in the furniture business, but his
story couldn’t be more different. In 2010, his privately held company, which
he started in 1943 at the age of seventeen, had sales of 23.1 billion euro, net
profits of 2.5 billion euro, and gross margins of 46 percent.
And the numbers don’t even begin to capture IKEA’s powerful hold on
consumers. As BusinessWeek put it, “Perhaps more than any other company
in the world, IKEA has become a curator of people’s lifestyles, if not their
lives. IKEA World [is] a state of mind that revolves around contemporary
design, low prices, wacky promotions, and an enthusiasm that few
institutions in or out of business can muster.”1
How did Kamprad succeed where Manoogian failed? He built his company
by creating what I like to call a difference that matters. (The full meaning of
this phrase will become clear as the story unfolds.) He did so, not by ignoring
industry forces, as Manoogian did, but by creating a company that could
thrive and add value in the midst of them.
If you’re one of the millions who have shopped at IKEA, you’ll likely have
indelible memories of vast, bright, modern stores designed so that entering
customers follow a winding path through a huge building filled with
furnishings and a great miscellany of housewares. When you chose a piece of
furniture—a simple Micke desk for 69 euro, or a ten-person Norden dining
table for 269 euro—you noted the information on an order slip, continued on
the path to a warehouse-like room, wrestled a flat box containing the item
onto your shopping trolley, carted it home on the rooftop of your car, and
assembled it yourself. If you brought the kids, you may have parked them in
the on-site child care center; you may also have stopped at the restaurant to
sample tasty and inexpensive food ranging from salmon to Swedish meatballs
and lingonberry tarts. It’s almost a theme park: probably not a customer
experience you’d relish if you’ve made your fortune, but when you were
starting out, there was nothing that could match it.
RURAL ROOTS
One could say that Ingvar Kamprad was a natural-born entrepreneur.
“Trading was in my blood” he told his biographer, Bertil Torekull.2 Kamprad
was about five when his aunt helped him buy a hundred boxes of matches
from a store in Stockholm that he then sold individually at a profit in his rural
hometown of Agunnaryd, deep in the farmland of Smaland. Soon he was
selling all sorts of merchandise: Christmas cards, wall hangings,
lingonberries (he picked them himself), fish (which he caught), and more. At
eleven, he made enough money to buy a bicycle and typewriter. “From that
time on,” he recounted, “selling things became something of an obsession.”3
Before going to the School of Commerce in Gothenburg, Kamprad signed
the paperwork to start his own trading firm, IKEA Agunnaryd [I for Ingvar,
K for Kamprad, E for the family farm Elmtaryd, and A for Agunnaryd]. The
mail-order business grew to include everything from fountain pens and
picture frames to watches and jewelry. With a keen eye for value, Kamprad
ferreted out the lowest-cost sources. Frugality was the norm in Smaland. Its
farmers, eking their living from a harsh and spare environment, had to make
every penny count.
Noticing that his toughest competitor in the catalog business sold furniture,
Kamprad decided to add some to his offerings, supplied by small local
furniture makers. Furniture quickly became the biggest part of his business;
in the postwar boom, Swedes were buying a lot of it. In 1951, at age twenty-
five, he dropped all his other products to focus exclusively on furniture.
Almost immediately he found himself in a crisis. Growing competition
from other mail-order firms led to a price war. Across the industry, quality
dropped as merchants and manufacturers cut costs. Complaints started to
mount. “The mail order trade was risking an increasingly bad reputation,”
Kamprad said.4 He didn’t want to join the race to the bottom, but how could
he persuade customers that his goods were sound when they had only catalog
descriptions to rely on? His answer: create a showroom where customers
could see the merchandise firsthand. In 1953 he opened one in an old two-
story building. The furniture was on the ground floor; upstairs were free
coffee and buns. Over a thousand people came to the village for the opening,
and a gratifying number wrote out orders. By 1955, IKEA was sending out a
half a million catalogs and had sales of 6 million krona.
Kamprad understood his customers on a personal level. As he would later
say, in explaining IKEA’s philosophy, “Since IKEA turns to the many people
who as a rule have small resources, the company must be not just cheap, nor
just cheaper—but very much cheaper . . . the goods must be such that
ordinary people can easily and quickly identify the lowness of the price.”5
By following this philosophy, Kamprad became a force to contend with in
the Swedish furniture industry—and, not liking his low prices, the industry
struck back. Sweden’s National Association of Furniture Dealers began
pressuring suppliers to boycott him and, with the support of the Stockholm
Chamber of Commerce, banned him from trade fairs. Many of the suppliers
stopped selling to him, and those that continued to do business with IKEA
resorted to cloak-and-dagger maneuvers: sending goods to fictitious
addresses, delivering in unmarked vans, and changing the design of products
sold to IKEA so they wouldn’t be recognized. Soon Kamprad was suffering
the humiliation of not being able to deliver on orders.
He counterattacked on several fronts—for example, he began paying
suppliers within ten days, as opposed to the standard industry practice of
three or four months, and he started a flock of little companies to act as
intermediaries. These moves helped, but IKEA was growing rapidly and
supplies were short. Without a reliable source of supply, Kamprad feared his
business would be doomed.
Having heard that Poland’s communist government was hungry for
economic development, Kamprad began scouring the Polish countryside. He
found many eager and willing small manufacturers laboring in the shadow of
the bureaucracy. Their plants were antiquated and the quality of their
products was dreadful, so Kamprad located better-quality (though used)
machinery in Sweden. He and his staff moved the machinery to Poland and
installed it, working hand in hand with the manufacturers to raise
productivity and quality. The furniture they turned out ended up costing
about half as much as Swedish-made equivalents and Kamprad was able to
nail down his costs on a huge new scale.
Thus the boycott turned out to be what I call an “inciting incident,” to
borrow a phrase from screenwriter Robert McKee—an event that propelled a
critical strategic shift.6 “New problems created a dizzying chance,” Kamprad
said. “When we were not allowed to buy the same furniture others were, we
were forced to design our own, and that came to provide us with a style of
our own, a design of our own. And from the necessity to secure our own
deliveries, a chance arose that in its turn opened up a whole new world to
us.”7
To Kamprad, it wasn’t enough to simply source in developing countries.
He also brought extraordinary determination and imagination to his drive for
lower costs. For example, he wasn’t afraid to draw on unconventional
sources. He turned the job of making a particular table over to a ski
manufacturer, who could deliver it at an especially low price. He bought
headboards from a door factory, and wire-framed sofas and tables from a
maker of shopping carts. IKEA was also a pioneer in building “board-on-
frame furniture,” comprised of finished wood on a particleboard core, which
is both cheaper and lighter than solid wood.
Then, of course, there is the iconic IKEA packaging—the famous flat pack
with its do-it-yourself assembly. While the company didn’t invent this
approach, it was the first to grasp and systematically exploit its full potential.
The flat pack provides huge cost savings by making shipping, distribution,
and storage much more efficient and thus much cheaper. It saves
manufacturing steps; it saves shipping costs from factory to store; it saves
stocking and handling costs in the store; and it eliminates delivery costs for
most customers.
IKEA opened its first store in 1958 in Almhult. Five years later it opened
one in Norway, and two years after that, a second Swedish store in
Stockholm. It became a nascent global player with openings in Switzerland in
1973 and Germany in 1974. It entered the United States in 1985, China in
1998, Russia in 2000, and Japan in 2006. In 2010, IKEA had 280 stores in
twenty-six countries, and served 626 million visitors.8
BEYOND LOW PRICES
So how do you account for IKEA’s success in this terrible industry?
Most likely your immediate thought is “low prices, low prices, low prices.”
Indeed, IKEA’s prices are so low they’re not just a difference in degree from
competitors’ but a difference in kind.
Over the past decade, the company has lowered its prices by 2 to 3 percent
a year on average. Every aspect of IKEA’s operation is subject to ongoing
scrutiny to see where further costs can be taken out. Even flat packs have
been repeatedly redesigned to gain small efficiencies in the use of space.
Kamprad regarded the customary perks of business leadership as waste, too.
Stories are legend of his flying coach class or taking a bus instead of a taxi or
limousine. It’s an attitude that’s been adopted wholeheartedly by others in the
company who speak of spending money unnecessarily as a “disease, a virus
that eats away at otherwise healthy companies.”9
But IKEA is not a dollar store: Low prices don’t begin to tell the whole
story. Scandinavian design was becoming popular around the world in the
1950s and it suited IKEA’s strategy perfectly. The simplicity of the clean
lines made the furnishings particularly appealing; it also made them cheaper
to produce than more ornate designs. Kamprad pushed this envelope farther,
hiring first-class talent who could design for both style and for frugal
manufacturing techniques. Perhaps IKEA’s greatest design achievement has
been to make its furniture look and feel more expensive than it is. A turning
point came in 1964 when a respected Swedish furniture magazine compared
IKEA furniture with more highly regarded brands. IKEA’s, it found, was
often as good or better. That shocked the industry and helped to persuade
consumers that they had nothing to lose—either financially or in terms of
status—by shopping at IKEA.
Unlike so many discount retail stores, IKEA’s are anything but dark and
dingy. The company’s vibrant colors (mostly blue and yellow, the colors of
the Swedish flag) are everywhere, and except for the weekend crowds, the
stores are pleasant places to visit. You can make a day of it: Come with the
family, try out the sofas, use the computerized tools to design your own
kitchen, and have a full-fledged Swedish meal at the restaurant. If, at the end
of the day, you’ve bought too much to load onto your car, you can rent an
IKEA van to drive it all home, or even pay to have things delivered,
assembled, and set up.
So, what is it that is special about IKEA? I ask you. Low price? Design?
Flat pack? Swedish meatballs? What? The answer, of course, is “all of the
above.” The centerpiece is low cost—without that, nothing else works—but
everything else not only supports low cost but adds its own distinctive
attraction.
At this point, you, like many managers, may feel like, “Okay, we’re done
—we’ve cracked the case. We know the answer, time to move on.” Maybe
so. But what is the real lesson here? What do you take with you to apply to
your company? That low cost with some added distinctive features is a
winning combination?
Often it is.
But what if I tell you there is a deeper insight here, an insight that applies
to all businesses whether you’ve decided to compete on low price or with
differentiated, specialty products. It’s something else that was behind
everything IKEA did.
A CONCEPT COMPANY
If Ingvard Kamprad were here and we asked him to describe the essence of
what IKEA was doing, what would he say?
His own words are instructive: “We are a concept company.” He goes on to
describe the idea that guides the firm. IKEA offers “a wide range of well-
designed, functional home furnishing products at prices so low that as many
people as possible will be able to afford them.” This serves the company’s
aim to create “a better everyday life for the many.”10
These words weren’t said by Kamprad on rare occasions. He said them
often, over and over. He wrote them out, and more like them, in statements
and booklets he printed and distributed to employees. All new employees are
indoctrinated with these ideas, and they’re prominent in the company’s
annual report today.
Although IKEA calls this statement its “concept,” the word I prefer is
purpose. Purpose is the way IKEA or any other company describes itself in
the most fundamental terms possible—why it exists, the unique value it
brings to the world, what sets it apart, and why and to whom it matters.
Notice how IKEA’s purpose as expressed above answers all these questions.
I suspect, though, that some of you, like some EOPers, are leery of lofty
prose. Perhaps you consider Kamprad’s words mostly PR fluff—fancy words
to dress up a hard-nosed, cost-cutting approach. But these words don’t just
“dress up” low prices. On the contrary, they are what drive IKEA’s low
prices and all the other features that make it stand out.
To underline the point, consider something else Kamprad wrote in “A
Furniture Dealer’s Testament,” a document he prepared to keep the growing
company focused on what it was all about:
We have decided once and for all to side with the many. . . . The many
usually have limited financial resources. It is the many whom we aim to
serve. The first rule is to maintain an extremely low level of prices. But
they must be low prices with a meaning. We must not compromise either
functionality or technical quality.11
So it wasn’t low prices alone that drove IKEA. Low prices weren’t the goal
but rather a means to an end: “low prices with a meaning”—a better everyday
life for the many.
What was Masco’s purpose in furniture? It didn’t really have one, did it—
other than a vague belief that it would have some sort of scale advantage and
would bring professional management skills and capabilities to an industry
that sorely lacked them. In contrast, IKEA’s clear and compelling purpose
addressed a long-lived market need, created a distinctive niche, and mattered
a lot to its customers.
As you mull the idea of corporate purpose, you may make the connection
to the more familiar “competitive advantage.” In fact, the terms purpose and
competitive advantage could be used in conjunction with each other, but
competitive advantage places the focus on a firm’s competition. That’s
important, but it’s not enough. Leaders too often think the heart of strategy is
beating the competition. Not so. Strategy is about serving an unmet need,
doing something unique or uniquely well for some set of stakeholders.
Beating the competition is critical, to be sure, but it’s the result of finding and
filling that need, not the goal.
Consider the power of purpose and the differences it spawns across firms.
In the last chapter we looked at the average profitability of different
industries as a whole. We treated each industry as if it were a single entity,
and showed the average profitability of firms in each industry, the industry
effect. Here we consider the variation in profitability within an industry,
across players. This is the firm effect—the difference between an individual
firm’s profitability and the average profitability in its industry. Positive or
negative, large or small, it’s the sum of the impact of all a firm’s actions.
Firm effects are directly tied to the work of a strategist, and over the long
run are one of the best indicators of success or failure on the job. Within an
industry, they can vary widely, even though most of the players work in a
similar context and face largely the same competitive forces (See Exhibit 4-1,
below). In tobacco, for example, Imperial Tobacco and Altria have returns
that are even higher than the industry average, giving them positive firm
effects. Reynolds American and others, in contrast, have negative firm
effects. In airlines, Ryanair and Southwest buck the negative industry return
while many of their competitors fare far, far worse.
The chart on Furniture Retailing shows the net profit margin for a number
of furniture retailers around the globe. Average profits in the industry are low
(4.9 percent), but some firms do better than the average, and IKEA (whole
returns are estimates) is at or near the top of the pack.12
The key question: What explains the firm effect that creates such
differences among players in an industry? What can lead a company like
IKEA to excel even in a business as tough as this?
The answer, I believe, begins with purpose. Purpose is where performance
differences start. Nothing else is more important to the survival and success
of a firm than why it exists, and what otherwise unmet needs it intends to fill.
It is the first and most important question a strategist must answer. Every
concept of strategy that has entered the conversation of business managers—
sustainable competitive advantage, positioning, differentiation, added value,
even the firm effect—flows from purpose.
EFFECTIVE PURPOSES
All this sounds attractive to the leaders I’ve worked with. It seems to lift
their work above the dog-eat-dog world of cutthroat competition and harsh
reality. Most of them want to feel that what they do matters in some context
larger than themselves and larger even than their companies. They want to
play their roles on as large a stage as possible. And so they embrace the idea
of purpose because it feels inspiring. And, as we’ll see, that’s part of it. But to
be a serious guide for a company, a purpose needs to do much more.
A good purpose is ennobling. It makes a firm’s endeavors noble or more
dignified. In addition to its other merits, a good purpose can satisfy this need.
It is inspiring to all involved, to the employees pursuing it, to customers, and
to others in your value chain. The people at IKEA don’t believe they’re
flogging cheap furniture. They believe they’re creating “a better everyday
life” for the many people who can’t afford top-end furnishings.
In a Gallup poll nearly all respondents said it is “very important” or “fairly
important” to them to “believe life is meaningful or has a purpose,” but less
than half of the workers in any industry felt strongly connected to their
organization’s purpose. Equally interesting, a number of people in less than
life-and-death careers (for example, septic tank pumping, retail trades,
chemical manufacturing) felt a strong connection to the goals of their
organizations, while others in some traditional “helping” fields (for example,
hospital workers) felt far less connection. An analysis of the work concluded:
There is no such thing as an inherently meaningless job. There are
conditions that make the seemingly most important roles trivial and
conditions that make ostensibly awful work rewarding. . . . The least
engaged group sees their work as simply a job: a necessary
inconvenience and a way of earning money with which they can
accomplish personal goals and enjoy themselves outside of work.13
Don’t overlook the role of purpose in fostering the care and commitment
that lead people to produce good results. Consider a business forms company
that sells its services to small businesses. You can’t get much more mundane
than invoices and sales slips, but the people there said: “What we do isn’t
glamorous, but it’s essential. When you can’t pay people or give the customer
a receipt, the business stops running.”
A good purpose puts a stake in the ground. It says “We do X, not Y.” “We
will be this, not that.” It’s a commitment.
Choosing to be one thing means not being something else. Michael Porter
recognized that such choices involve trade-offs—letting some things go in
order to be better at something else.14 Companies that don’t choose, for
whatever reason, run the risk of ending up in no-man’s-land, being nothing of
distinction to anyone. If your purpose does not preclude you from
undertaking certain kinds of work, then it’s not a good purpose. Purpose, like
strategy, is about choice, and a real choice contains, if only implicitly, both
positive (“We do this”) and negative (“By implication, then, we don’t do
something else”) elements.
One executive I worked with in the EOP program, Pedro Guimaraes, a
CEO of a small but growing movie production company, discovered this only
after he clarified his purpose. His firm was primarily backed by an angel
investor, a woman who had become very wealthy from her own business
ventures and now, through this company, was pursuing a longtime personal
love of movies and culture in general. As part of our work in the program,
Pedro wrote out his purpose for the company, describing how it would make
money through the production of advertising and movies that were
commercial successes.
When he showed the purpose to his investor, he discovered what had only
been simmering under the surface of their relationship. He wanted to produce
top-grossing box-office hits and make profits. She had little interest in those
and instead, primarily wanted to produce art films, the kind once made by
Ingmar Bergman in Sweden or Federico Fellini in Italy. At that moment he
finally understood why the investor had balked at a number of projects he had
proposed. From the outset they had been on different pages, but had never
dug deeply enough into their respective purposes to see the incompatibility.
They parted company amicably, and each went on to ventures that were more
consistent with their different aims.
A good purpose sets you apart; it makes you distinct. If you can only
describe your business generically—“We’re a PR firm” or “We’re an IT
consulting company”—then you don’t have a real purpose. Somehow the
reason you exist, the specific customers you’ve chosen to serve, the market
needs you fill, must set you apart from others who generically do what you
do. Generically, IKEA is a furniture retailer, but that description doesn’t
begin to say why it matters or what distinguishes it from others in the
industry. Here is how IKEA describes its difference:
From the beginning, IKEA has taken a different path. . . . It’s not difficult
to manufacture expensive fine furniture. Just spend the money and let the
customers pay. To manufacture beautiful, durable furniture at low prices
is not so easy. It requires a different approach. Finding simple solutions,
scrimping and saving in every direction. Except on ideas.15
Where do differences come from? They arise from innovation, new ideas,
and deep insights about how things are and how they could be better in some
consequential way. These can be anything from a new production technology
that enhances efficiency, to new, different, and more appealing products, to a
change in the way products or services are sold or delivered. Sometimes what
matters is not just one innovation, but a cluster of innovations that flow from
a new concept, a new way of doing business. This was the case for IKEA. Its
greatest innovations were not in original furniture designs, or even in the
technical invention of the flat pack, but in a new idea of how to go to market
and how to provide a set of customers with products and a shopping
experience that met their needs resoundingly well.
IKEA’s experience illustrates a key advantage of a good purpose. A clear
sense of what a company is striving to do can serve as a focal point or a core
organizing principle around which a whole set of innovations and distinctive
features can coalesce.
Above all, a good purpose sets the stage for value creation and capture.
Good economics are not the only reason your business exists, but without
them, it’s unlikely that any of your other goals will be realized.
Whatever your purpose, it must mean something to others in ways that
produce good economic outcomes for you. What made IKEA’s purpose so
powerful was not just that it was distinctive or well-defined, or that it made
people feel part of something bigger and more important. It also drove
IKEA’s superior performance in its industry.
ADDING VALUE FOR EVERYONE
The acid test, then, of a purpose is this: Will it give you a difference that
matters in your industry?
Not all differences are equal. You need a difference with real
consequences. I often see companies claim differences that in fact are simply
points of distinction without much consequence in their industries—“one-
stop shopping,” “oldest continually operated,” “largest independent supplier.”
Even a legitimate difference such as “best-in-class quality” is often rendered
meaningless by companies that trumpet the words but don’t make the
investments or tough trade-offs such a goal requires.
IKEA’s purpose set it up to deal with the industry forces that scuttled
Masco and many others in the furniture business. The company took two of
the industry’s biggest problems—price competition and customers’ low
willingness to pay—and made them a virtue through specific techniques such
as lean manufacturing, the flat pack, and store design. It dealt with the
industry’s costly practice of manufacturing a huge variety of furnishings by
selling a limited selection of furniture pieces within one style.
Many people think about strategy as a zero-sum game between a firm and
its competitors, suppliers, and customers: How do we win? How do we get
what’s best for us? In doing so, they largely focus on the sphere that’s closest
to home: increasing their own profits—through higher prices or lower costs.
On the Added Value chart, it’s the region called “Value captured by firm.”16
A trio of economists17 —Adam Brandenburger, Barry Nalebuff, and
Harborne Stuart—who study game theory suggest a wider angle. They
remind us that managers need to think not only about what’s best for their
own firms, but also about how what they do affects others. This involves the
two outer lines: Customers’ Willingness to Pay (essentially customers’
satisfaction with a good or service) and Suppliers’ Willingness to Supply
(essentially their opportunity cost—the lowest price at which they would be
willing to sell to a particular firm). It’s when a company drives a wider
wedge between these lines—expanding the total value created—that its
existence matters in an industry. When it does so, it is much more likely to be
able to claim some of the value for itself—i.e., increase its own profitability
—without making its partners in trade less well off.
Wal-Mart is a classic example. It offers its customers good quality products
at considerably lower prices, increasing the value customers capture from the
relationship. At the same time, Wal-Mart lowers its own costs by lowering
the costs of its suppliers. It does this by buying in scale, sharing information,
and taking costs out of their systems.
There are interesting parallels between Sam Walton and Ingvar Kamprad—
for example, they both nurtured their vision of low-cost retailing in
backwaters, where they learned how to court customers without much
money. The most important parallel, though, from the standpoint of strategy,
is that they both understood the benefits of adding value through one’s
existence, not just fighting over who gets the biggest share of the pie.
As it was growing into the company it has become, IKEA helped its
suppliers save money. It designed furniture to be less expensive to
manufacture. Its flat-pack approach eliminated significant shipping and
assembly costs. It ordered in volume and provided data that made its
suppliers more efficient. For suppliers, all of these drove down the costs of
doing business with IKEA, and, in turn, reduced the price at which they were
willing to sell to the firm.
There’s still more to IKEA’s difference that matters. Through design and
the distinctiveness of its approach, it created name recognition in a business
not known for strong brands. It broke an ancient tradition of furniture as a
long-term investment, and promoted the view of furniture as fashion. And it
countered customers’ general reluctance to shop for furniture by providing
free child care and low-priced restaurants with good food, both of which
increased the length of time people spent in the store.18 So IKEA created
value all around: Vendors could produce and sell for less, customers were
pleased with the experience yet able to pay less, and IKEA was able to
capture some of that value itself.
Successful premium-priced players, like BMW or Disney, create value
differently. Their goal is to provide uncommonly good products or services
that command high prices and generate particularly high levels of customer
satisfaction. To do so, they typically incur higher-than-average costs that are
more than compensated for by increases in customers’ willingness to pay.
For any firm, however, the logic is the same: You create value by driving
the widest wedge you can between the satisfaction of your customers and the
all-in costs of your suppliers.19 That means not only moving your own costs
or prices relative to others in the industry, but moving one or both of those
outer lines as well.
Viable purposes, worthy of guiding everything else that happens in a
company, must matter not only to you but also to those with whom you do
business. Creating value for others is the surest way to capture some yourself.
DOES YOUR BUSINESS MATTER?
It’s not as easy as you might think to know whether your business has a
viable purpose, or whether it truly adds value in your industry. Financial
success at any given moment is an indication, but may prove fleeting.
However, there is one simple question20 that—if you can answer it honestly
—will give you a good idea. In essence, it’s the one I asked you at the start of
this book:
If your company disappeared today, would the world be different
tomorrow? Despite our long discussions about purpose, and their general
buy-in to the idea, this question always catches EOP executives by surprise.
Frankly, it’s not a question most have been asked or asked themselves. It’s a
real soul-searcher. But it’s one I hope you recognize that you need to answer.
Here’s what it means to be different in a way that matters in your industry.
It means that, if you disappear, there will be a hole in the world, a tear in the
universe of those you serve, your customers. It means customers or suppliers
won’t be able to go out and immediately find someone else to take your
place.
If you don’t have that difference, nobody will mourn you when you’re
gone.
And if they won’t miss you then, how much do they need you now?
One more question: Whose job is it to find an answer, to make sure there’s
an answer?
It’s your job, the job of the strategist, the leader who’s responsible for the
success and survival of the firm.
It may not be the job of the strategist to invent a firm’s purpose on the
lonely mountaintop and then come down and deliver it. Many people may be
involved in its creation. But whether there is a purpose and whether that
purpose is viable is a leader’s first responsibility.
This is the strategist’s job.
Are you a strategist?
Chapter 5
Turn Purpose into Reality
AS THE IKEA story demonstrates, defining a sound and distinctive purpose
for your business is essential. It is a strategist’s way to stake a claim. With it,
you have earned the right to play, to take part in the game.
But winning the game? That takes more.
Consider the experience of Domenico De Sole, an Italian-born, Harvard-
trained tax attorney who in 1994-95 was thrust into the top job at Gucci.1
Though he had previously led the company’s North American operations, he
was stunned by what he discovered when he saw the entirety of the once-
admired company. Sales were plummeting, customers were indifferent, and
red ink was flowing. Internally, Gucci had reached a state of paralysis:
Management was balkanized and people were scared to make important
decisions, even about such basic issues as guaranteeing a supply of bamboo
handles for Gucci’s signature handbag. “There was no merchandise, no
pricing, no word processors, no bamboo handles. It was crazy!” he said later.
Though there were impressive handbag designs, “the company couldn’t
produce them or deliver them.”2
Gucci, once a symbol of high fashion and inspired design, had lost its way
so badly that the investors who owned it wanted out. An effort to sell the
company had failed after the bids were deemed too paltry to accept, so the
investment group asked De Sole to put the house in order and sell the
company’s shares to the public—as soon as possible.
De Sole somehow had to create value in a failing company that was
operating in a notoriously difficult industry. Clearly a strong purpose alone,
no matter how well crafted, was not going to solve his many pressing
problems. He needed a broader range of tools to stop the bleeding and restore
Gucci’s luster.
When I introduce De Sole and the Gucci challenge to the EOP executives,
some of them are always dismayed. Eyebrows raise. They look to one
another and to me, as if to ask: “Gucci? The designer fashion industry? Are
you sure that’s relevant to us?” I understand their concerns. For one thing,
many of these managers view the world of fashion as almost an outlier, so
much about glamor and celebrity that it is not subject to the laws of real
markets. But in a high-profile, high-margin industry that has grown over the
decades despite its sensitivity to economic downturns, Gucci’s revival is a
story of triumph and outstanding management. It didn’t just come back, it
soared back in what is widely regarded as a spectacular business turnaround.
The lessons it offers for strategists are timeless. Sooner or later, nearly all
leaders will wrestle with at least some of De Sole’s challenges. And the tools
he used to navigate his way toward winning were just as valuable and
meaningful when Gucci was once again clicking on all cylinders as they were
when the business was foundering.
A Bellman’s Legacy
To understand the crossroads where De Sole stood, it helps to understand
the company’s history.
Guccio Gucci opened his first leather goods workshop-cum-store in
Florence, Italy, in 1923, focusing on fine artisanship and a standard of quality
shaped by his years working as a bellman in London’s Savoy Hotel, where he
absorbed the impeccable taste of the very rich and very famous. The formula
proved successful, and as his business grew, he built a reputation for products
of style and beauty. At the urging of his son Aldo, Gucci expanded the
business to Rome, Milan, and, in 1953, to New York. Just two weeks later,
Guccio Gucci died.
With Aldo at the helm, brother Rodolfo in charge of the successful Milan
operation, and brother Vasco running the factory in Florence, the company’s
growth was nothing short of phenomenal. The post–World War II period saw
a new appetite for luxury goods in the developed world, along with the
economic growth to pay for them, and Gucci products represented classic
style “handmade” for a savvy elite.
“Quality is remembered long after price is forgotten” was how Aldo put it,
embossing the statement in gold letters on pigskin plaques displayed in Gucci
stores. The great movie star beauties of the day, like Sophia Loren and Grace
Kelly, were photographed carrying Gucci bags. Eleanor Roosevelt and the
queen of England were known to favor Gucci umbrellas. The label conferred
the status of belonging in the same company as these women and showed that
you had the means to buy something exquisite. Women from Beverly Hills to
London, from Paris to Tokyo packed the stores, an enthusiasm that lasted
through much of the 1970s.
So, I ask my students and you, where was Gucci fitting into its competitive
landscape? How was it drawing in customers and keeping profits up?
For the answer, it’s instructive to look at what can be thought of as a profit
frontier,3 a visual map that weighs a customer’s willingness to pay a high or
low price for particular products against a company’s ability to produce those
products at a high or low cost. For instance, a company that sells products at
the lowest prices in an industry must, by necessity, keep its costs extremely
low, or it’s off the frontier. A company like Gucci can afford higher costs
only if its customers are willing to pay generous prices. According to Michael
Porter, the frontier can be thought of “as the maximum value that a company
delivering a particular product or service can create at a given cost, using the
best available technologies, skills, management techniques, and purchased
inputs.”4
Companies actually on the profit frontier represent best in class; for every
price, they are the most efficient producers. Those off the frontier are less
efficient and less able to differentiate their products or services. They are at
sea in an industry defined and dominated by companies on the frontier.
Through the 1970s, Gucci was on the upper left-hand corner of the frontier;
it stood with Hermès and Chanel in a high-cost, high-willingness-to-pay
position, its brand resonating with elegance, wealth, and success. But the
company began unraveling after the death of Vasco Gucci in 1975. Aldo and
Rodolfo then each held 50 percent of the company. Aldo, however, believed
that he had put far more into building the family business than his brother had
and resented that the two shared ownership equally. He wanted more, and to
get it, he developed another company under the Gucci umbrella.
The new business, 80 percent of which was owned by Aldo and his three
sons, produced a line of small canvas items sporting the Gucci logo and
trimmed in leather with striped webbing. The Gucci Accessories Collection,
as the business was called, would reach a wider range of consumers, develop
and license new product lines distributed through a new set of channels, and
extend the reach of the Gucci brand. Launched in 1979 and managed by
Aldo’s son, Roberto, the accessories collection turned out to be a surprisingly
lucrative venture, realizing abundant revenue for virtually no expense,
primarily via licensing arrangements.
Too Many Cooks
This seemingly simple solution would turn into a fiasco—and soon a
vendetta worthy of a Sopranos episode. “All happy families are alike,” wrote
Tolstoy; “every unhappy family is unhappy in its own way.” He could have
added a whole other category of family dynamics—that of a family-owned
company, a situation that often challenges both companies and families.
The new accessories collection spurred another of Aldo’s sons, Paolo, to
develop his own line of cheaper products for younger customers, an initiative
his father took extreme measures to stop. In retaliation, Paolo contacted the
U.S. Internal Revenue Service, informing it that his father, then on the brink
of becoming a U.S. citizen, had been cheating on his taxes, which helped
send the eighty-one-year-old man to prison. Paolo also tried to tar his cousin
Maurizio, Rodolfo’s son, with the same charge, and Maurizio fled to
Switzerland. The Italian newspaper La Repubblica wrote: “G isn’t for Gucci,
but for Guerra,” the word for war in Italian.5
With the Gucci family now in turmoil and very often in court, items with
the Gucci name proliferated like some kind of illness-inducing bacteria.
Unbridled licensing plastered the name, along with the red-and-green logo,
on sneakers, packs of playing cards, whiskey—in fact, on a total of 22,000
different products. As Women’s Wear Daily later declared, it had become a
“cheapened and overexposed brand.”6 Worse, Gucci’s less expensive items
were far easier to counterfeit than its fine leather goods. You could buy Gucci
knockoffs anywhere—from the back alleys of Bangkok to discount stores in
Denver. Now everyone could have a Gucci bag or travel with Gucci luggage,
so long as you didn’t mind carrying fakes—and millions of people did not.
The family sued to stop production of counterfeit Gucci toilet paper but
didn’t bother to go to court when an enterprising shopping bag manufacturer
created a Goochy line of products.
Each family member wanted a piece of the action and pursued it in his own
way. In Aldo’s view, however, it seemed logical to keep everything in the
family—in fact, he boasted about it: “We are like an Italian trattoria,” he said;
“the whole family is in the kitchen.”7 The simile was all too accurate; as a
trattoria, Gucci was no longer at the apex of fashion’s alto cucina, with a
scarce brand that commanded a high price. Without disciplined oversight, the
licensing that seemed such a good idea at the outset—a high-margin, low-
cost business—undermined the company’s long-standing purpose, and Gucci
slid off the profit frontier and joined the morass of underperforming firms in
the market.
How could it ever find its way back? What steps would you take—what
strategy—to resurrect the company and rebuild Gucci’s good name?
Struggling to Restore the Glamor
Aldo was still at war with his sons when his brother Rodolfo died in 1983.
Rodolfo’s son, Maurizio, back from a yearlong exile in Switzerland and now
clear of legal troubles, stepped to the forefront. He enlisted the financial
support of Investcorp, a Bahrain-based private equity fund, and made a bid
for total control of the family business. Making common cause with his
cousin Paolo, Maurizio eventually was able to buy out the rest of the family.
Maurizio called a meeting of top employees in Florence to announce not
just a change in leadership but a new strategic intent as well. Gucci is “like a
fine racing car,” he told the company’s management ranks—“a Ferrari.” But
it had been driven for far too long like “a Cinquecento”—the tiny Fiat 500,
smaller than a VW Beetle, that was the standard utility car of Italy. “As of
today,” Maurizio said, “Gucci has a new driver. And with the right engine,
the right parts, the right mechanics, we are going to win the race!”8
The race the new driver intended to win was a grand prix. “Gucci has to re-
conquer the image it had in its youth,” Maurizio told luxury retail genius
Dawn Mello as he wooed her to Italy as his creative director. “I want to bring
back the glamour . . . to re-create the excitement.”9 Mello followed where
Maurizio led—back in time to the heyday of Gucci’s success. “Style, not
fashion” was the Mello mantra for her new design team, as it sought to create
items “you don’t discard after a season.”10 Instead the company would
consciously re-create its own classics—the products that had originally won
it fame and favor. “Once it was a privilege to own a Gucci bag,” said
Maurizio, “and it can be again.”11
He took drastic actions to achieve his aim, trying to cut away the years of
bad decisions and poor performance. He ruthlessly reduced the 22,000
products bearing the Gucci “name” to 7,000, slashed the number of handbag
styles from 350 to a more manageable 100, closed more than 800 of the
thousand stores, and in January 1990, summarily shut down the Gucci
Accessories Collection. He also jettisoned the wholesale and duty-free
businesses, with no backup or replacement to fill the sudden emptiness.
The drastic actions had a drastic result: From 1991 to 1993 Gucci amassed
losses of approximately $102 million.12 During this period Maurizio was
spending extravagantly. He helped sponsor Italy’s entry into the America’s
Cup sailing competition, designing everything about the boat—including the
crew’s costumes. He rented a five-story palazzo on Piazza San Fedele in
Milan for the head office, and then began a massive, five-month renovation.
He also bought a sixteenth-century villa that had once belonged to Enrico
Caruso, and hoped to establish a training center there—at an estimated cost of
$10 million for refurbishing.
When the new collection finally did hit the stores, Maurizio wept with joy.
“This is what my father worked for,” he said through his tears. “This is what
Gucci used to be.”13
Soon tears of another kind would be shed. Behind the scenes, there were no
cost controls, no inventories, no financial plans in place—only Maurizio’s
charm, which was considerable, and his marketing intuition. With all the
spending, cash was tight for the design team Mello was putting together, and
the company could scarcely pay its bills or meet its payroll. As cash flow
slowed, Maurizio increased his spending and raised product prices to levels
customers were unwilling to pay.
By 1992, when the company lost $50 million on revenue of $200 million,
Investcorp had lost faith in his ability to realize his vision. The following
year, with Maurizio facing both personal and financial troubles, it bought out
his stake.14 For the first time in the company’s history, there was no longer a
Gucci running Gucci, no longer a family member behind the famous name.
A year later, unable to sell the company, Investcorp turned to Domenico
De Sole.
Pragmatism Replaces Intuition
Facing a business on life support, De Sole began to assemble a team. He
promoted Tom Ford, a thirty-two-year-old junior fashion designer, to replace
Dawn Mello as creative director when Mello chose to return to the United
States. He also named a new production chief and a new CFO, and
strengthened the international management team. Crucially, he also secured a
modest cash infusion from Investcorp.
These were necessary but not sufficient steps. Before De Sole could begin
to move the company forward, he and his team had to create a fresh
understanding of Gucci’s purpose. What could the company be? Why might
it matter? What would make it special, unique, and relevant in a world awash
in Hermès, Chanel, Prada, and Louis Vuitton? Should Gucci continue to
strive to be a luxury brand, aimed at the upper-upper end? Or should it be
something else? What could they really afford to do?
This is where the strategist has to step up, where every leader confronted
with disarray, turmoil, a declining business, or surging competition faces the
greatest challenge. What will this revived company be?
When we reach this point in EOP, the class looks at the profit frontier, with
Gucci miles away from a sweet spot. Though Maurizio had sought to return
the company to a high-cost, high-willingness-to-pay position on the frontier,
he succeeded in merely shifting its position in the middle of nowhere to a
high-cost company with prices consumers would not pay.
The class’s instinct is to immediately jump in and take action. They’re fine
with Maurizio’s purpose; what they want to do is a better job implementing
it. I urge them to slow down and look again. “Why have we spent so much
time looking at where Gucci is on this graph?” I ask them. Initially the
answers are broad. “We want to see how far off course Gucci drifted,” one
offers. “We want to understand the past to avoid repeating the same mistakes
again,” offers another. After some discussion, someone finally sees the more
pressing challenge. This is where De Sole must start. Before he can do
anything to rebuild the embattled company, he must zero in on where Gucci
is now, and then decide where he wants to take it. Before he can set out, he
must decide where he is heading.
This is exactly what De Sole did. As Maurizio had, he summoned every
Gucci manager worldwide to a meeting in Florence. But there was a crucial
difference: He didn’t tell them what he thought Gucci should be. Rather, he
asked them to look closely at the business and tell him what was selling and
what wasn’t. He wanted to tackle the question “not by philosophy, but by
data,” by actual experience, not intuition.15
The data from his managers were eye-opening: Some of Gucci’s greatest
recent successes came from its few seasonal items. Trendier fashion, not
style, was where Gucci had been getting traction. The traditional customer for
whom Maurizio was so nostalgic—the woman who cherished style, not
fashion, and who wanted a classic item she would buy once and keep for a
lifetime—had not come back wholeheartedly to Gucci.
De Sole and Ford soberly weighed the evidence. Like Maurizio, they
would have liked to keep Gucci at the top of the designer world, but they felt
it was not in the cards given the reality of the situation. Regaining Gucci’s
elite status would take more marketing money, more design money, and more
time than the company had. “We were broke,” De Sole said later. “We had to
be realistic about what we could do.”16
In the end, they chose a purpose different from Maurizio’s and the
company’s early years. They would not try to recapture Gucci’s old position.
Instead they would place the company in the upper middle of the market—
luxury aimed at the masses, closer to Prada and Louis Vuitton. “The idea was
fairly simple,” De Sole explained. Gucci would be “fashion-forward, high
quality, and good value.” That means “we would need to be leaders in
fashion, deliver products of high quality, and give our customers great value
for what they buy from us,” he said.17
To succeed, Gucci would have to cultivate a new group of customers—
younger and more modern—and let go of the wealthy, conservative, older
women who had traditionally been its mainstay.18 The move would be
challenging, as Ford explained: The fashion conscious “have a short attention
span. They have maybe less brand loyalty than other customers.” By contrast,
he said, “A classic customer will buy the blue blazer, the cashmere twinset,
and replace it when it is worn out. A fashion customer consumes, shops,
buys, and disposes of, and then buys again”—which, he noted, made her a
very good customer to have,19 if you can keep her engaged.
“Good value” would also require big trade-offs. Before the family
entrepreneurial ventures cheapened the brand, Gucci had built its reputation
on delivering the highest quality regardless of cost. By taking apart Hermès’s
handbags and comparing them with Gucci’s, De Sole and his team concluded
that their company was still capable of producing goods of high quality, but
its cost structure was way out of line. To offer good value, that would have to
change. So too would prices.
After rebuilding the entire sourcing network, and lowering Gucci’s costs,
De Sole ordered price cuts of 30 percent pretty much across the board. Often,
EOP executives struggle with that decision. They endorse the principle of
good value, but wonder if a reduction of that size is really necessary for a
company in such dire straits. It would be a huge hit to an already enfeebled
revenue line. “Maybe later,” some say, “when things are better. Or by some
amount less than thirty percent.”
But pricing was key to good value, and important in attracting the
customers Gucci wanted. The real downside, De Sole thought, would be not
cutting prices: Timidity here would have dulled the edge of the strategy.
Ford’s first solo collection in October 1994 generated little heat. In his
view, it took him a season to “shake off Mello’s and Maurizio’s influence
and call up his own design aesthetic.”20 His second collection, however, in
March 1995 brought the company’s new purpose to life. Not your mother’s
Gucci? Not even close. On Tom Ford’s runway, there wasn’t a single floral
scarf, pair of elegant loafers, or classic blazer in sight. Instead, wildly coiffed
supermodels sashayed sensuously down the runway in hip-hugging velvet
jeans, skinny satin shirts with necklines that plunged to the navel, and car-
finish metallic patent boots. Harper’s Bazaar wrote, “The effortless sexuality
of it all had a chill factor that just froze the audience to their seats.”21
By the next day the showroom was mobbed, and the Gucci brand was
reborn.
Consistent with the wishes of Gucci’s owners, De Sole took the company
public in October 1995. Just three years later, in 1998, the European Business
Press federation named Gucci “European Company of the Year” for its
economic and financial performance, strategic vision, and management
quality.22
The financial performance was indeed remarkable. In a report on Gucci in
2001, Credit Suisse dubbed the turnaround “spectacular,” noting “a
compound annual operating profit expansion of 54 percent on average
revenue gains of 36 percent over the five fiscal years to 31 January 2000.
Together with earnings acceleration of 80 percent during this period, Gucci
has delivered returns on capital of roughly 34 percent on average, well above
its 10 percent cost of capital.”23 The media noticed, too. In a cover story,
“Style Wars,” Time magazine opined that “De Sole and Tom Ford . . . pulled
off a brand revival so remarkable that any luxury goods firm attempting a
turnaround is said to be trying to ‘do a Gucci.’ ”24 The Wall Street Journal
Europe declared that Gucci was “the hottest name in luxury goods today for
fashion-victims and fund managers alike.”25
The Big Question
Working with Ford, De Sole successfully rebuilt the company based on the
purpose he set out in 1995: fashion-forward, high quality, good value. But
why was De Sole successful and Maurizio not?
Drawing on the story of IKEA, one might guess that De Sole had a
compelling purpose and Maurizio did not, or that De Sole’s purpose was
somehow better than Maurizio’s. But it’s hard to blame Maurizio’s dream for
his failure. He had what most observers considered a legitimate purpose:
return Gucci to the luxury goods pinnacle it had once occupied. It’s an
approach—called “going back to the core”—that’s often recommended to
companies that have lost their way and may profit by returning to their roots
and what made them successful in the first place.
Further, Maurizio had captured some smart, hard-nosed investors with his
passion. “All the banks loved Maurizio and it was a wonderful vision,” said
Investcorp’s Rick Swanson,26 yet “there were no consolidated financial
statements—at least not at the level we’re used to—no definitive central
management team, no guarantees. But when he started to spin his story of his
vision for Gucci, he charmed other people with his dreams.”27 Even De Sole
thought that the big dreams that Maurizio was pursuing were reasonable
given the context and resources Maurizio had available at the time.
The difference was not so much in the purpose each chose as in what each
man did with the purpose he established. Maurizio’s charm blinded his
investors to the company’s internal disarray and inability to deliver on his
promises. De Sole, by contrast, built and executed his strategy in a tightly
linked series of actions. Consider how each of these supported the redefined
purpose:
Products.
To complement its leather goods, Gucci created a line of original, trendy—
and, above all, exciting—ready-to-wear clothing each year, not as the
company’s mainstay, but as its draw. The idea was that frequent fashion
changes in clothing would help the world forget all those counterfeit bags and
Gucci toilet paper. “Gucci had to get the message out,” De Sole explained,
“the real message that Gucci had changed, that it was more exciting, more
fashion-forward. We couldn’t have gotten that level of excitement around
leather bags.”28
Brand.
One aim of the increased focus on fashion was to propel the company
overnight into a new brand identity, generating the kind of excitement that
would bring new customers into the stores—where they would be sold not
just the latest clothing, but also high-margin handbags and accessories. As a
Credit Suisse analyst put it: “The ready-to-wear collection is a showcase for
the Gucci identity and lifestyle. It unifies Gucci’s various product lines and
generates press and editorial coverage, thus serving as a powerful
communication vehicle for the brand.”29
Stores.
To support the new fashion and brand strategies, De Sole and Ford walked
through the stores, deciding to ditch Maurizio’s clubby “living room,” with
its heavy cabinets and beveled glass, for a clean, modern look. What changed
was more than store décor. As fashion items grew in importance, customer
support in the stores was upgraded, too. “Selling ready-to-wear was a more
involved sale than selling handbags,” De Sole said. “It required a different
kind of salesperson.”30 De Sole and Ford paid particular attention to
company-operated stores, which they refurbished and more than doubled in
number—from 63 in 1994 to 143 in 2000.31
Marketing.
To spread the word, De Sole doubled advertising spending, and by 1999,
advertising and communication constituted 7 percent of sales revenue. He
also made a conscious decision to leverage Tom Ford as a marketing asset:
“Tom is a good-looking man,” he explained. “By making him a force in
fashion we could have a face for the company and accelerate the process of
getting the word out.”32 It was not a decision that was without risk, but De
Sole felt that the company needed the energy a star could bring. (Competitors
in time paid the highest compliment: After Ford became the face and
embodiment of Gucci—both dressing and befriending celebrities like Nicole
Kidman, Gwyneth Paltrow, and Tom and Rita Hanks—Louis Vuitton did the
same with Marc Jacobs and Hermès with Jean Paul Gaultier.33)
Supply chain.
Unlike the many luxury firms that produced the majority of their products
themselves, Gucci relied on a network of suppliers to manufacture most of its
products. But, when cash was tight and payments erratic, many suppliers had
dropped Gucci. De Sole himself drove the hilly back roads of Tuscany, where
most were located, and talked to each one. He recaptured the best and let the
rest go. For the best of the best, some twenty-five in all, he provided financial
support, technical training, and advice on improving productivity. In return
he demanded consistent high quality and faster, more dependable production.
To support these efforts, he built an efficient logistics system and won the
support of Italy’s infamously tough unions with the first system of incentive-
based bonuses in the business.
As a result, fixed costs went down, while efficiency and the flexibility to
scale production went up—the perfect solution for maintaining artisanship
quality while slashing costs.
Management.
At the top of the organization, De Sole and Ford developed a close
partnership. De Sole was responsible for the overall operations of the firm,
and Ford was responsible for anything visual—from product design to the
creative aspects of advertising, public relations, store design, and corporate
communications.34
To obtain the management and workforce he needed to support all of this, De
Sole replaced Gucci’s traditional family-based management system, racked
by politics and infighting, with one that was merit based and performance
focused. After the company sold stock to the public, managers were rewarded
with stock options, a tool unavailable to many of Gucci’s privately held
competitors. “I get all the best people,” De Sole said at the time. “People like
working at Gucci. And we pay them better, too.”35
In effect, everything De Sole did in design, product lineup, pricing,
marketing, distribution, manufacturing, logistics, organizational culture, and
management was tied tightly to purpose. It was all coordinated, internally
consistent, and interlocking, a system of resources and activities that worked
together and reinforced each other, all aimed at producing products that were
fashion-forward, high quality, and good value.
The Big Idea
The essential difference between Maurizio Gucci and De Sole is that a
great purpose is not a great strategy. A great strategy is more than an
aspiration, more than a dream: It’s a system of value creation, a set of
mutually reinforcing parts. Anchored by a compelling purpose, it tells you
where a company will play, how it will play, and what it will accomplish.
It is easy to see the beauty of such a system once it’s constructed—but
constructing isn’t always an easy or a beautiful process. The decisions
embedded in such systems are often gutsy choices. For every moving part in
the Gucci universe, De Sole had to decide what he believed was the choice
that would specifically advance the purpose of the firm. This was strictly
binary management: Either the particular component advanced the purpose of
fashion-forwardness, high quality, and good value, or it was rebuilt.
Strategists call such choices “identity-conferring commitments”—they reflect
what an organization stands for. They are the choices that are central to what
a firm is or wants to be. In De Sole’s case, many of these choices were
spontaneous, but they flowed from a clear understanding of what the firm
was trying to accomplish.
Too many leaders, unwilling to give up any possible advantage, take the
easy route and dodge or defer the tough decisions: “Let’s not give up our
traditional customers while we bring the new ones along.” Not so with De
Sole. He was willing to make trade-offs.36 Each choice he made threatened a
loss even as it promised a gain—focusing on new customers, lowering prices,
letting a lot of suppliers go. But, with each decision, he was asserting that
Gucci was going to be one thing and not another, a formidable responsibility
made more difficult when dealing with a very sick company.
Yet the crisis also made some things easier because all the decisions were
more urgent. “When a company has problems, you have to move forward,”
De Sole said. “The crisis really helped us out. You’re much more likely to
make a lot of changes when things are bad. When you are trying to resurrect
a company, you have to move forward. You can’t keep looking back. You
can’t give people a chance to make excuses. You have to take
responsibility.”37
Systems like the one De Sole put in place answer the question: How are
you going to deliver on your promise? They are the critical first steps in
translating an idea into a strategy and paving the way for its realization. De
Sole’s finely tuned, tailor-made system made it possible for him to carry out
his purpose. Maurizio didn’t have such a system—he had a lot of shoot-from-
the-hip grand actions that didn’t work in concert; inwardly focused, he grew
increasingly out of sync with the reality in which he was operating. Unlike
De Sole with fashion, he had no device, other than his lavish spending, to
change people’s perceptions or boost their willingness to pay. He had no way
to cover the firm’s increasing costs. He had few, if any, scarce resources to
undergird his strategy and stave off competition.
The role of scarcity is particularly easy to overlook in a strategy. But
without it a firm may have an internally consistent system built around an
interesting innovative idea, only to see it quickly imitated at the first signs of
success. Warren Buffett refers to this kind of scarcity as an “economic moat,”
a barrier that keeps other competition away. The bigger and deeper the moat,
the more attractive he finds the company as an investment. For some
companies, that moat might be physically unique assets, such as oil and gas
properties, mineral rights, real estate locations, or patents. Large companies
may have such massive scale that others can’t surpass them. (Think Wal-
Mart or Microsoft.) Others may have intangible resources, such as brands,
that are built over time and difficult to duplicate. (For instance, an adult’s
long-lived associations with the Disney brand or an athlete’s feelings about
Gatorade.) Other distinctive components may be capabilities or routines that
are just too complex for others to disentangle or reconstruct.
When I ask EOP executives which of these kinds of resources tend to shore
up most outstanding strategies, they’re likely to pick the first two—physically
unique assets or those relating to huge economic scale. But, in fact, the
resources that are particularly valuable in most strategies are the last two:
intangible resources such as brands and corporate reputations, and complex
organizational capabilities and routines that are vital to a firm’s
distinctiveness yet relatively scarce and difficult to imitate. De Sole’s Gucci
boasts both: the powerful intangible of the restored Gucci brand, and a high-
performance culture, design capability, network of skilled suppliers, and
international distribution platform anchored by company-run stores. All of
these are valuable in their own right, and boosted Gucci’s competitiveness.
Knitting all these individual components together and driving them toward
a compelling purpose is the finely honed system of value creation. When they
exist, such systems themselves are among a firm’s most important resources.
In the best of cases, they have all the qualities that make a resource valuable:
They are important to competitive advantage; they are uniquely tailored and
in short supply; and they are difficult to imitate because of their complexity
and the way they develop over time.
One revealing measure of the value De Sole created with his system—not
only for the Gucci brand, but also as a platform for expansion—was a
takeover attempt. In the mid-1990s, when Investcorp was trying to sell Gucci,
Bernard Arnault, head of LVMH (Louis Vuitton Moët Hennessy), was
unwilling to pay just $400 million for the company. But in 1999, LVMH
began buying shares in Gucci, and Arnault reportedly offered between $8
billion and $9 billion for total control of the firm, a twentyfold increase in
five years.
De Sole fought back and eventually found a white knight in Pinault
Printemps Redoute (later known as PPR), which paid $3 billion for 40
percent of the company in 1999 and agreed to infuse additional money for
acquisitions and expansions. In the bidding war, Gucci’s business model—its
system of value creation—was arguably the asset valued most. “I like
building things,” said François Pinault, PPR’s founder. “This is the chance to
create a global group.”38 Gucci’s system, so critical to its own competitive
advantage, could serve as a platform for a multibusiness company, enabling
PPR to add value to a host of similar businesses.
Stars and Strategy
But what about the wonderful guys from Gucci? Aren’t they the company’s
most valuable resource? They’re the ones who turned Gucci around. They’re
the ones who put the system in place.
EOPers always give De Sole and Ford credit for much of Gucci’s success,
and well they should. There is no doubt that De Sole and Ford individually
and as a team created enormous amounts of value for the firm. But to identify
a company’s valuable resources, one has to look farther than individuals, no
matter how talented. A company’s story may start with key people or star
players, but there has to be a lot more to it. When PPR invested in the
company, the all-star De Sole–Ford team was no doubt part of the attraction
—but perhaps not as much as you would think. When the company acquired
Gucci’s remaining outstanding shares in 2004, making it a wholly owned
subsidiary, De Sole and Ford asked for “ironclad guarantees for their
managerial freedom” and a pledge to maintain several independent directors
on Gucci’s supervisory board. Though PPR paid them handsomely—making
De Sole an offer that was “above his expectations,” according to the Wall
Street Journal—it refused to guarantee them the independence they
wanted.39 The two men, who had made many millions of dollars from their
Gucci stock, left the company shortly thereafter.
There was an outcry from observers who, like the EOPers, were shocked
and dismayed by the departure. But Gucci didn’t collapse; in fact, since then
the firm has had some resoundingly strong periods of performance, and some
weaker ones as well. Would Gucci’s path have been brighter if De Sole and
Ford had stayed? Many argue that it would have been. But, more than
anything, the firm’s ability to go on without them is testament to the value of
what they built.
The Edge
In an interview, I asked De Sole to comment on what he considered his
most important achievement at Gucci. His answer:
We made fashion a real business. We were tougher. We were more
competitive. We relaunched the company but we also helped to change
the universe of fashion. It used to be dominated by small, private, family-
run companies that often weren’t profitable. It took us several years to
get there, but we showed that you could make a lot of money in
fashion.40
De Sole and Ford didn’t do that through a few grand gestures. They did it
through a thorough understanding of the industry, a coherent idea of what
they wanted Gucci to be, and a frenetic but disciplined march through every
activity that needed to be rebuilt and brought into line. “Like everything in
life,” De Sole said, “it was a lot of little things. We were very aggressive in
establishing priorities, and needed to act decisively, quickly.”
Many people believe a strategist’s primary job is thinking. It isn’t. The
number-one job is setting an agenda and putting in place the organization to
carry it out. “Some companies have great strategies and do a lot of talking,”
said De Sole, “but they don’t get it done. I follow through. I call my
managers all the time to make sure they have executed what they said they
would do.”41
Every year, early in the term, someone in class always wants to engage the
group in a discussion about what’s more important: strategy or execution? In
my view, it’s a false dichotomy, a wrongheaded debate that they themselves
have to resolve, and I let them have their go at it. I always bring that
discussion up again at the end of the Gucci case, asking, “What here is
strategy?” “What is execution?” “Where does one end and the other begin?”
Often there isn’t a clear answer—and maybe that’s as it should be. What
could be more desirable than a well-conceived strategy that flows without a
ripple into execution?
Thinking of strategy as a system of value creation, rich in organizational
detail and driven by purpose, underscores the point. It’s the bridge between
lofty ideas and action. But while it’s easy to see it in companies like Gucci or
IKEA, when all the details are laid out in front of you, I know from working
with thousands of organizations just how rare it is to find a carefully honed
system that really delivers.
The problems often begin right at the start. If leaders lack a clear idea about
what they want their businesses to be, they cannot build coherent systems of
value creation because they don’t know what they should be designed to do
exactly or how their success should be measured. That leaves them to fiddle
at the margins of success with generically good practices such as “state of the
art” sales management approaches or Total Quality Management.42 These
may be helpful, but they’re not what will help you find an edge and live on it.
You and every leader of a company must ask yourself whether your
strategy is a real system of value creation—a clearly defined purpose tightly
backed by a set of mutually reinforcing parts.
If not, it’s time to build one. That’s the job to be tackled next.
Chapter 6
Own Your Strategy
IT’S YOUR TURN.
You’ve studied the successes and setbacks of Masco, IKEA, and Gucci.
You know that every business, every organization, needs a strategy. You
understand the importance of a meaningful purpose and a tightly aligned
system of value creation. Now it’s time to look at your own company. What’s
your strategy?
When I put this question to the entrepreneurs and presidents toward the end
of our program, many of them nod confidently. By this point we have been
talking about strategy for a long time and they have a good grasp of the
principles. And they’ve repeatedly shown their ability to identify the
strengths and weaknesses in the strategies of well-known and celebrated
firms—at a safe distance.
But when I press them to describe their own strategies, many struggle.
Beyond somewhat sweeping statements, they often have trouble articulating
what their businesses actually do or what sets them apart. The ideas come out
vague; the statements they write down tend to be generic and uninspired.
It’s a struggle because analyzing yourself is always harder than analyzing
someone else. The cool objectivity and clarity you enjoy as a spectator often
gives way to uncertainty and doubt when you start to confront the reality of
your own situation.
While the intense class work exposes EOPers to the tools of strategy, for
many there is a chasm between their understanding of how strategy works
and truly being strategists—like the difference between war games and war,
between reading about how to swim and actually swimming.
The reality is that it can be hard to put strategic thinking to work in one’s
own business. Managers often start off on the wrong foot, failing to think
carefully about purpose, or they don’t take the process far enough to see how
all the activities in their businesses support (or don’t support) their intended
direction. Studying other companies’ dilemmas and other managers’ triumphs
is a good start, but it’s not enough. To develop into a successful strategist you
must live the experience. You must wrestle with the specific purpose of your
company, find the differences that matter, define your system of value
creation, and pull it all together into a compelling strategy.
There’s only one way to begin effectively: write all these things down.
Writing imposes a discipline that no amount of talking can match: It gives
structure to your thinking. It forces you to define in carefully considered
words what your business exists to do and how each part of it contributes to
the effort. Once that’s laid out, you can analyze why the whole thing works
or doesn’t and what could make it stronger.
This is not a casual exercise: You will find yourself visiting and revisiting
your work. A winning strategy doesn’t just rise up out of your keyboard in an
afternoon or emerge from a weekend retreat with your team. Rather, for most
leaders, it comes into focus over time, as you analyze and reflect on your
business and work through each step of the process.1
In addition to building your strategic skills, the experience helps you to
clarify your strategy for all of your stakeholders. Many companies never
accomplish this, instead offering up grand statements or euphemisms that
convey very little about the business itself or its particular reason for being.
As we discussed this in class one day, one of the EOPers told the group that
before coming to campus he had looked up the websites for all 170-plus
companies that would be represented in the program. What he found often
wasn’t impressive. Very few, he reported, gave him a credible sense of what
the company was really about—what made it special, or why he should care
about it.
Other hands went up; those people had done the same thing and come to
the same conclusion. There were a lot of sober faces around the room as the
message sank in.
The internal costs of unclear strategies are, arguably, even greater. As
information technology consultant James Champy notes, “few companies are
explicit about the future: in what markets they will operate, how large and
quickly can they grow, how will they differentiate. . . .” This vagueness, he
said, leaves employees feeling completely in the dark, unable to accurately
anticipate the firm’s future needs or do their jobs well. Instead, they must
resort to reading the tea leaves, trying to guess the strategy by analyzing
management’s actions.2
A clearly defined strategy steers the company, providing a compass for
where you want to go. It makes you a better communicator, giving you the
words to articulate what you are doing and why. Your customers and
investors will understand you better. Your employees won’t have to guess
what you’re up to and they will know how their work fits into the whole and
what will be expected of them.
In the EOP program, this strategy development process has led to dramatic
insights: Some executives come to the painful conclusion that they need to
jettison a product line or sell a whole business; others uncover missed
opportunities or stake out new positions. Three cases in brief:
Dr. Richard Ajayi, the head of The Bridge Clinic, Nigeria’s first
focused in-vitro fertilization clinic, took enormous pride in its high
quality standards and differentiated service. But, looking closely at his
experience, he realized that customers who could afford the company’s
prices often went overseas for care, while those in the low to middle end
of the market didn’t understand the value of the science involved and
couldn’t pay the premium price. In response, Ajayi reduced all costs
unrelated to patient outcomes, explicitly benchmarked the clinic’s
outcomes on the highest international standards, and recast it as high
quality but affordable health care with the motto: “We are within your
reach, make the decision and grasp.” The repositioning enabled the
clinic to meet the needs of thousands of patients and generated
unprecedented growth.
Geoff Piceu’s grandfather founded United Paint and Chemical in
1953, and the company grew into a solid player in the automotive
coatings industry. But in the early 2000s, competition in the industry was
cutthroat. The younger Piceu, who had taken over by then, described the
competitive landscape as “a disaster you wouldn’t want to hear about,”
and Michigan-based United was struggling to make a profit. Piceu
concluded that his best chance for survival was to become the low-cost
producer. Having learned that innovation had a short shelf-life in
automotive coatings —it gets commoditized quickly—he abandoned the
expensive basic research that was traditional in the industry, choosing
instead to adopt a “second-to-market” approach by acquiring
innovation and being a fast follower. He also reshaped operations into a
paragon of lean manufacturing. The new strategy roughly doubled
United’s productivity relative to competitors and led to double-digit
sales growth.
Eugene Marchese, the founder of an Australian architecture firm, was
considering expansion to other residential segments and geographies in
his home country. At the time, however, it was not yet clear what the
firm’s unique advantage would be in those new markets. Instead, he
decided to expand to 2nd Tier cities overseas where he could leverage
the firm’s award-winning designs for urban-condominiums and share
personnel and other resources across time zones. Today, Marchese
Partners has offices in cities ranging from Sydney to San Francisco to
Guangzhou, and provides its innovative design services and commercial
sensitivity to leading developers anywhere in the world.
In all these cases, the work began by revisiting the organization’s purpose,
a good place to start the examination of your own business.
STATE YOUR PURPOSE
As we discussed in chapter 4, your company’s purpose describes the
unique value your firm brings to the world. It’s the throbbing heartbeat of
your strategy—the grand pronouncement of who you are and why you
matter. It should be specific and easy to grasp because the rest of your
strategy flows from and supports this beginning.
Too often I see companies describe their purpose as something like, The
best company in XYZ industry, specializing in satisfied customers, or Our
nonprofit is committed to improving the quality of life in our community. Or
this:
We will provide branded products and services of superior quality and
value that improve the lives of the world’s consumers, now and for
generations to come. As a result, consumers will reward us with
leadership sales, profit and value creation, allowing our people, our
shareholders, and the communities in which we live and work to
prosper.3
How could you even guess that the last one is from Procter & Gamble, the
giant consumer products company?
Contrast that with some other companies:
__________: To bring inspiration and innovation to every athlete in
the world.4
__________ is built upon finding ways to do online search better and
faster in an increasing number of new places and in ever more efficient
ways.5
And this:
The ______Group is the only manufacturer of automobiles and
motorcycles worldwide that concentrates entirely on premium standards
and outstanding quality for all its brands and across all relevant
segments.6
Do you recognize Nike, Google, and BMW? They each have a grasp on
why they exist and who they are.
What is your company’s purpose? Is it something everyone in your
company knows?
Sometimes a slogan can begin to capture the purpose—or at least start the
discussion—if it gets to the firm’s unique added value. EOPer H. Kerr
Taylor, founder of a Houston real estate firm called AmREIT, told me where
he got the initial idea for his company. As a young man visiting Florence,
Italy, during a post-graduation tour of Europe, he was impressed by the big,
beautiful, multipurpose buildings on a plaza that housed shops and offices on
the ground floor, and apartments above. He asked an older gentleman sitting
next to him at a café who the owners were. “These buildings are owned by
some of the wealthiest families of Italy,” the man told him, explaining that
they were rarely, if ever, sold. “That is how you pass wealth down from
generation to generation.”
After earning an MBA and a law degree and returning home to Houston,
Taylor set out to try to build a portfolio like the ones that supported those
wealthy Italian families. Because his nascent company was short on capital,
he initially focused on buying and leasing back great corner properties with
one tenant, such as bank branches or restaurants. Eventually he moved up to
entire shopping centers, all situated on prime corners. Along the way his
company latched on to a slogan that described its work: the “Irreplaceable
Corner” Company. It was a powerful moniker: “When people saw that on our
sign, it stuck with them,” he said.
At the time Taylor joined EOP, his business had hit a plateau after more
than two decades of growth. As he began to formulate a strategy statement,
he and his executive team experimented with different ways to tell their story.
This seemingly simple exercise led to major revelations about the nature of
the business, and its difference that matters. When they put together a chart
that mapped their properties and those of their top peers (over 800 properties
in all), it was clear that AmREIT, though relatively small compared with
industry giants, was a leader in focusing on real estate near high numbers of
affluent households, a position that was particularly attractive to big-money
investors. Using 2015 demographic projections, the gap between them and
their peers grew even larger. Only one other major real estate company even
came close.
As Kerr and his team studied the chart and chewed on the language in their
strategy, they began to ask what “The Irreplaceable Corner” really meant.
Their efforts to nail down the firm’s purpose, and to ease its implementation,
drove them much deeper into defining the kind of properties the company
would buy, where they would be located, and how they would be chosen.
This yielded highly specific criteria: the corners would be near large numbers
of households, especially affluent ones; near high-traffic roads, and in areas
with dense daytime and nighttime populations.
Crystallizing the company’s purpose led to a better understanding of what
made its approach different and effective. It created a positive feedback loop.
Not only did the new depth of detail help the company improve its
operations, Taylor says, it also helped fit the firm’s strategy to its purpose,
tell AmREIT’s story to employees and potential tenants, and win the
attention of institutional investors who tend to overlook a company of
AmREIT’s size.
To Taylor’s surprise, a good part of the initial process was about words. “I
didn’t understand how important language was, trying to get the words
correctly so you could communicate to others and, in the process, really
communicate to yourself in a clear way,” he says.
AmREIT’s work fits the definition of corporate purpose that John Browne,
former CEO of British Petroleum, spelled out in an interview with the
Harvard Business Review: “Our purpose is who we are and what makes us
distinctive. It’s what we as a company exist to achieve. . . .” As you work to
identify and define the purpose for your own company, don’t stop with your
first idea, but like Taylor, refine and clarify. The more precisely you can
express it, the better the anchor it will become for developing your strategy—
and, quite possibly, the more new insights you will gain into your business.
DEVELOP YOUR SYSTEM OF VALUE CREATION
By now you know that a company’s purpose is just a beginning. As
discussed in chapter 5, it gives you the right to play, and puts you in the
game. But it doesn’t mean you have the right to win. Just as De Sole made
sure that each component of the Gucci enterprise—design, sourcing, stores,
products, pricing, and so on—aligned with the company’s purpose, so must
all of your activities and resources work in concert to support your own
purpose.
You need to pinpoint who the customer is early in the process. But which
customer? It’s not always the end user. Laura Young joined Leegin, the
predecessor company of Brighton Collectibles, in 1991, when it was
primarily a seller of men’s belts, and the owner, Jerry Kohl, wanted to
expand into ladies’ leather goods. Since then, the company has added
handbags, wallets, jewelry, and shoes, creating a significant niche as a
boutique specializing in women’s moderately priced accessories. But even
now, with over $350 million in annual sales, Brighton remains an
unconventional company. Still owned fully by Kohl, there is no board of
directors, no organization chart, and few formal titles. Kohl and Young work
together as partners managing the company.
When Young began to define the strategy for Brighton, she struggled with
where the company’s focus should be. The question of who the customer was
loomed large: Was it the end consumer, the women who snapped up the
matching pieces and shared their finds with their friends, in what Young calls
“Girlfriend Marketing”? Was it the owners of the several thousand largely
family-owned specialty boutiques that carried Brighton’s accessories or the
sales associates in those boutiques and in Brighton’s company-owned stores?
Or, was it the roughly one hundred dedicated sales representatives who called
on all those stores?
Each group mattered, and each played a role in Brighton’s unique approach
to the market. Ultimately, Young decided that the people who sell its
products—the company’s sales representatives and the stores’ owners and
sales associates—were its customers because they were the ones whose
dedication could most influence the consumer’s purchase decision. Keeping
them happy, and their work profitable, was key to Brighton’s own health.
So how does Young align Brighton’s operations—its system of value
creation—behind these salespeople?
To keep merchandise fresh and interesting for them, the company makes “a
little bit of a lot of things,” rather than huge quantities of a few items. That
means the retailers can vary the choices and give the women who buy its
products a lot of different options to choose from. Brighton also keeps the
sales associates engaged with a steady flow of creative motivational events,
seminars, and other opportunities to learn about the brand. For nearly two
decades, Young and Kohl have taken hundreds of store operators and
employees on trips to Los Angeles, Hong Kong, China, Taiwan, and Italy
where they tour factories, eat meals together, and have continuous time for
collaboration.
“We do things differently from other companies in our industry,” says
Young. “We make sure we reach the sales associates who are the ones
interacting everyday with customers. There is a real passion to what we do. A
real spirit for the brand.” Fostering that spirit is crucial, she continues.
“Without passion the sales associates can’t do what they need to do in their
stores. They have to have a point of difference. The customer has to have a
good experience because she has so many other options.” These days those
options include the Internet. And—all retailers take note—Brighton’s
motivated sales associates provide something you can’t get online. “The
customer needs to feel good every time she goes into the store,” says Young.
“She needs to have a great shopping experience, and a real personal and
warm connection with the sales associate who is helping her.”
Importantly, Brighton also protects the boutiques by refusing to sell to big
department stores such as Macy’s, Dillard’s, and Neiman Marcus. They have
come courting, but Young has turned them all away, sometimes sending
flowers or cookies with her sincere apologies that she won’t do business with
them.
In return, Brighton makes an unusual demand of its retailers: It requires
them to sell at a minimum resale price in order to protect the integrity of the
brand so that customers know they are being treated fairly no matter where
they shop for Brighton. The pricing policy also allows for sufficient margins
for retailers so that they can provide the generous customer service, in-store
ambience, and shopping amenities that are synonymous with the Brighton
brand.7 It is so committed to this approach that when tiny Kay’s Kloset in
suburban Dallas insisted on discounting the line and took Brighton to court,
the company fought back. After the U.S. Court of Appeals for the Fifth
Circuit ruled in Kay’s favor, citing decades of precedents, the company
appealed to the U.S. Supreme Court, which sided with Brighton’s point of
view.
In so doing, Brighton changed the landscape of American retailing: The
decision overturned a ninety-six-year-old piece of the Sherman Antitrust Act
and told courts that manufacturers and distributors sometimes could, in fact,
insist on minimum prices, so long as the effects of such policies, as in
Brighton’s case, are pro-competitive.8 Although the company has grown
considerably since then and now includes more than 160 company-owned
Brighton Collectibles stores, maintaining minimum retail prices on its goods
remains a cornerstone of its strategy.
To begin to capture these decisions and the role they play in Brighton’s
system of value creation, or what Young likes to call “the secret sauce,” we
could make a list of the company’s various operations and how they work in
concert to support the company’s purpose. For instance, the trips with
boutique owners and the full-price policy are key parts of the company’s
marketing efforts. The product range, sales and distribution channels are part
of the system too, as are the company’s information technology systems,
operations, human resources, and finance functions. They all support the
same goals with activities that are consistent and specific to Brighton’s
approach.
THE STRATEGY WHEEL
To visualize and record how a system of value creation backs up a firm’s
purpose, I use a time-honored approach that has come to be known as a
“strategy wheel.”
As we saw in the Gucci case in chapter 5, the strategy wheel provides a
picture of how you will win. The purpose in the center says why you exist—
what you do differently or better than others—and the unique configuration
of activities and resources around the rim shows what will enable you to
deliver on that promise. Brighton’s strategy does this well.
Each system of value creation, and thus each strategy wheel, will be
different, because every organization has its own purpose and unique set of
activities that drive that purpose. Even the headings around the rim will differ
across firms—for example, while R&D will be important in one firm, in
another it wouldn’t even appear on the wheel.
The point of this work isn’t about “checking boxes” or “getting all the way
around the wheel.” It’s about spending time thinking about your business and
challenging yourself to see what’s really there—and even more, envisioning
what could be there. Just penciling in what you do in finance, human
resources, R&D, or any other function in a mechanical way isn’t likely to be
helpful; identifying a bunch of plain-vanilla activities around a plain-vanilla
purpose won’t leave you any better off than you are today.
Rather, when it works best, the process is a lot like putting together a
jigsaw puzzle. Each piece must work with the others, coming together to
create a picture of what your business can be. The real work and the real
payoff come when you’re assertive, when you push the envelope and ask:
What would winning really take? How could this element do more for us?
What could we do differently if we narrowed our focus to one type of target
customer? Gradually, as you define and refine, you should begin to identify
not just what you do better and worse than the other guy, but what aspects of
your company—from your customer base to what you do for them—make
you different, and truly give you an edge, or could do so.
As Philippine entrepreneur Amable “Miguel” Aguiluz IX developed his
strategy wheel, he began to see his business in a holistic way. In 2002,
Aguiluz started Ink for Less to provide a cheaper alternative to OEM printer
cartridges—sorely needed in a country with per-capita income of roughly
$2,600 at the time. Today the company sells a vast variety of ink and toner
cartridges, toners, do-it-yourself refill kits, continuous feed systems, and
related products and services. The dominant supplier in the Philippines, Ink
for Less has more than 600 outlets and an expanding franchise operation.
At the center of Aguiluz’s strategy wheel is this well-crafted and clear
purpose: “Readily available and reliable 100% quality ink refills and service
at competitive prices.” Building the system around it led him to reconsider
how every element of the business could contribute to the whole. Pricing, of
course, is crucial. His customers currently might pay $6 to $8 to refill a $25
or $30 cartridge or about $16 to refill a $75 toner cartridge. So Aguiluz pays
special attention to elements, such as logistics, that affect his costs. His
people scour the region for quality inks at good prices. “When I started, I was
buying bottles of ink,” he says. “Now I am buying fifteen tons of ink per
month. That shows you the power of volume I can command with my
suppliers.” Sales costs are important, too; Aguiluz works hard to keep them
in the single digits. This discipline around costs has given him the flexibility
to drive his prices lower to respond aggressively to competitive threats. When
a franchisee of an Australian chain came into his market, for example, he was
able to respond by dramatically lowering his prices at nearby stores.
Refilling ink cartridges isn’t an especially high-tech operation.
Nevertheless, Aguiluz realized that research and development had to be a
cornerstone of his strategy. Without it he wouldn’t be able to stand up to the
printer manufacturers, or contend with mom-and-pop competitors, who might
charge less than he does. For example, printer manufacturers try to foil ink
refillers by continually redesigning cartridges and changing where they hide
the entry holes. In response, Aguiluz’s R&D crew buys every single printer
and every single cartridge as it comes to market so they can reverse-engineer
them and figure out how they work. When printer makers added a chip that
shuts down the printer if the cartridge isn’t new, his R&D people worked
with their suppliers around Asia to learn how to add a counter-chip so that the
refilled cartridge would work. These efforts not only keep Ink for Less in
business, they enable it to provide better service than less sophisticated
players. Bulletins and videos are sent regularly to the stores, alerting outlet
managers and technicians to new cartridges and new processes, so that
nothing customers bring in will stump them.
Over time, Aguiluz and his staff have built out cascading sets of activities
for every spoke on the wheel (see, for example, Human Resources and
Training). They revisit them frequently to make changes that help Ink for
Less maintain or increase its lead in the market. Aguiluz often returns to the
strategy wheel on his own—sometimes spending a full day working through
the implications of a particular action, such as a pricing change, going from
spoke to spoke to see what adjustments need to be made to keep the wheel in
alignment.
His rigor pays off. In 2008, the Philippines Junior Chamber International
named Aguiluz its “Creative Young Entrepreneur” of the year. Over the last
nine years, Ink for Less’s sales have grown at an average annual rate of 15
percent, and profits have grown even faster. But Ink for Less is not only
capturing value for itself; it is making its customers better off than they
would have been if the firm weren’t there.
REALITY CHECK
You will likely have to make a number of assumptions in building your
wheel. Check them carefully! People in all professions go astray because
they’re operating on untested assumptions. In strategy, these are often a
recipe for disaster. Be ruthless in challenging what you think you know.
It’s particularly easy to make this mistake when it comes to the linkage
between your stated purpose and your system of value creation—is it really
designed to do what you say, and is it working? Too often, I’ve seen
executives claim their companies are high-end, differentiated companies
seeking to make a difference by offering customers not lower prices, but
better-than-average goods. They have everything lined up—except customers
who share that view and are willing to pay a premium for their products or
services. Remember how Maurizio Gucci staked the company’s future on
top-of-the-line products that customers stayed away from in droves? The
linkage simply wasn’t there.
To assess whether what you are doing is working, you need to look for the
data and the facts, and not just rely on intuition. What evidence do you have
that you are the low-cost provider or the premium producer you say you are?
Where, exactly, in the process do you add value? Can you support that view
with facts—internal process measures of key performance drivers, and
outcome measures like sales results, profit margins, market share, or return
on investment?
Consider how Walter de Mattos does this. A longtime Brazilian journalist,
he founded Lance! Sports Group in 1997 to capture his fellow sports fans’
obsession with their favorite soccer teams. Since then it has grown from a
daily sports newspaper in two cities to five more editions plus magazine,
television, mobile, and Web versions that give Lance! a national platform and
make it the largest sports news organization and leading authority in Brazil.
Embedded in de Mattos’s strategy wheel is a self-reinforcing system of
elements: Multitask journalists provide unique content to a variety of
platforms, driving readership. Large readership, in turn, brings in regional
and national advertisers. Both the depth and breadth of soccer coverage and
the size of the circulation serve as barriers to entry, making it harder for
competitors to make inroads. To focus resources on his strengths and manage
costs, he outsources distribution of the print newspaper and works with an
external design firm.
De Mattos assesses whether the individual parts of the system are working,
and in sync, by looking at specific, tangible results: estimated readers per
week (2.3 million in 2011); unique website visitors (750,000 a day, some of
whom check the site more than once); and cost per story (lower than a pure
television producer or newspaper publisher because content is shared across
the Web, print, and video outlets). Over the last five years, these collectively
gave Lance! one of the highest rates of growth and return on investment
among Brazilian media companies.
What do your metrics tell you about your strategy? Are they consistent
with your rhetoric? Do they show that you are winning with your plan?
PULLING IT ALL TOGETHER
After you’ve identified your purpose, aligned your activities and resources,
and tested the results—all internal working steps—you are ready to
summarize your strategy in a statement you can use to communicate that
commitment both inside and outside your firm. You don’t need to use formal
language or any particular format; the most important goal is conveying your
unique aspects and advantages with specific and engaging words.
Here are three examples of memorable strategy statements from well-
known organizations. Can you tell who they are?
A hotelier:
________ is dedicated to perfecting the travel experience through
continuous innovation and the highest standards of hospitality. From
elegant surroundings of the finest quality, to caring, highly personalized
24-hour service, ________ embodies a true home away from home for
those who know and appreciate the best. The deeply instilled ________
culture is personified in its employees—people who share a single focus
and are inspired to offer great service.
Founded in 1960, ________ has followed a targeted course of
expansion, opening hotels in major city centres and desirable resort
destinations around the world. Currently with 75 hotels in 31 countries,
and more than 31 properties under development, ________ will continue
to lead the hospitality industry with innovative enhancements, making
business travel easier and leisure travel more rewarding.9
A magazine:
Edited in London since 1843, ________ is a weekly international news
and business publication, offering clear reporting, commentary and
analysis on world current affairs, business, finance, science and
technology, culture, society, media and the arts. As noted on its contents
page, ________’s goal is to “take part in a severe contest between
intelligence, which presses forward, and an unworthy, timid ignorance
obstructing our progress.” Printed in five countries, worldwide
circulation is now over one million, and ________ is read by more of the
world’s political and business leaders than any other magazine.10
An accompanying document describes its editorial policy, including its
fierce commitment to independence and its practice of being written
anonymously, with no bylines, to make it a paper “whose collective voice
and personality matter more than the identities of individual journalists.”
A nonprofit:
________ is an international medical humanitarian organization created
by doctors and journalists. . . . Today, ________ provides independent,
impartial assistance in more than 60 countries to people whose survival
is threatened by violence, neglect, or catastrophe, primarily due to
armed conflict, epidemics, malnutrition, exclusion from health care, or
natural disasters. . . . ______ also reserves the right to speak out to
bring attention to neglected crises, challenge inadequacies or abuse of
the aid system, and to advocate for improved medical treatments and
protocols.11
You probably recognize the Four Seasons Resorts, the Economist, and
Doctors Without Borders from language that is closely linked with them, like
“highest standards of hospitality,” “contest between intelligence and
ignorance,” and “independent, impartial assistance.” Beyond that, though, are
prescriptive elements that define their advantages, describe what they stand
for, and tell you something important about how that work will be done.
There are plenty of hotels around, for instance, but Four Seasons defines its
service culture as a unique attribute that gives it a strategic difference. There
are plenty of magazines as well, but many are languishing while the
Economist, with its fierce independence, incisive commentary, and timely
reporting, gains ground. The Doctors Without Borders statement makes clear
that the Nobel Peace Prize–winning organization doesn’t just provide
impartial medical assistance; it also advocates for change.
To break the process down further, a good strategy statement articulates a
company’s purpose, its means of competition, and its unique advantages by
answering the most basic questions about what a company does and how it
does it:
• Who we serve
• With what sort of products or services
• What we do that’s different or better
• What enables us to do that
And it has these qualities:
• It is reasonably short and parsimonious.
• It is specific.
• It states what the company does and why it matters in a way that anyone can
summarize without having to quote it literally.
• It avoids jargon, such as “best of breed,” “best in class,” or vague words
such as superior, expert, and empowered.
• It is affirming, but not grandiose or self-important.
• People easily recognize that it’s you.
The statement should be brief because brevity forces you to get to the very
heart of what you want to say without larding up your description with empty
words or superlatives. Make every word real. Make every word count. Long
sentences and vague language can obscure your effort to describe what’s
really important. At best, they’re unhelpful; at worst, they’re potentially
misleading and distracting.
If you feel your company’s strategy is too complex to summarize in one or
two paragraphs, that’s likely a sign that the strategy itself is unclear, or
convoluted in some way.
There is no question that keeping the statement short and to the point is
hard work. When an editor once asked Mark Twain for a two-page short
story in two days, Twain replied with only mild exaggeration: “No can do 2
pages two days. Can do 30 pages 2 days. Need 30 days to do 2 pages.” Even
if you aren’t very wordy, you’ll find that a good brief statement takes
revision and polish.
The goal, moreover, is not to write a statement that sounds good: It’s to
write a statement that is good, that really captures your company’s
distinctiveness. Once you’ve written and rewritten it, shop it around. Don’t
show it just to those who work for you or know the business well; give it to
acquaintances who don’t really know what you do. Ask people to rephrase it
in their own words. And don’t be surprised if what’s mirrored back to you
isn’t what you intended. That’s helpful feedback. Your strategy statement
should be able to travel on its own—without interpretation and without you
there to coach the reader (or the employee, customer, banker, or casual visitor
to your website) on what it “really means.”
Here’s the strategy statement constructed by de Mattos for Lance!
To be the prime source of 24-hour-a-day vibrant sports news targeting
an audience of passionate, young, male Brazilian sports fans by:
• Employing 300 sports multi-task journalists to provide exclusive
content;
• Using the most current technology to deliver content across the widest
number of media platforms (print, web, mobile, WebTV and web radio);
• And using compelling design to enhance all Lance! products;
• All under a powerful core brand, Lance!
• As a means to become one of the most profitable Brazilian media
groups as measured by ROI.
And this, in a very different voice, is how Aguiluz constructed the strategy
statement for Ink for Less:
Ink for Less aspires to be the largest and most profitable professional
ink refilling business by providing
• The best and latest ink refill quality and service
• At reasonable prices
• To our quality conscious but price sensitive individual computer users
and small and medium scale business and government institutions
• Through conveniently-located ink refilling stations throughout the
major cities and key towns in the Philippines and the rest of Asia.
If you’re frustrated with your strategy or with your statement, keep at it.
Writing a bad strategy statement is often the necessary prelude to writing a
good one. Often what’s required is not just wordsmithing—it’s “strategy-
smithing”—because what you want is a strong, meaningful strategy, not just
pretty words. As with many kinds of writing, the words themselves usually
aren’t the problem; the challenge is the thinking that goes behind them.
Hallmarks of Great Strategies
Anchored by a clear and compelling purpose
It is said that “if you don’t know where you’re going, there isn’t a road that can get you
there.” Organizations should exist for a reason. What’s yours?
Add real value
Organizations that have a difference that matters add value. If any of them were to go
away, they would be missed. Would yours?
Clear choices
Excellence comes from well-defined effort. Attempting to do too many things makes it
difficult to do any of them well. What has your business decided to do? To not do?
Tailored system of value creation
The first step in great execution is translating an idea into a system of action, where
efforts are aligned and mutually reinforcing. Does this describe your business? In most
companies, the true answer is no.
Meaningful metrics
Global outcome measures like ROI indicate whether a strategy is working, but key
performance drivers, tailored to your own strategy, are a better indication. They break big
aspirations into specific, measurable goals, and guide behavior toward what matters.
Passion
It’s a soft concept, but it’s at the heart of every great strategy. Even in the most mundane
industries, companies that stand out care deeply about what they do.
THE ROAD AHEAD
This exercise should have clarified your thinking and given you an
objective, hard look at your business.
If you’ve been honest with yourself, your thoughtful analysis will likely
have brought to the surface problems that should be fixed or areas that
require new attention—the bread-and-butter work of a leader-strategist. Some
of the problems may be serious: You may need to reconfigure parts of your
organization, or find new ways to distinguish yourself. In the worst case, you
may have come to the painful realization that you should exit part or all of
your business. This can be especially hard when it’s close to your heart for
one reason or another.
Kerr Taylor had to confront such an issue when he reevaluated his real
estate business in the Great Downturn of 2008. Years before, when the
company was too big to rely on friends and family but still too small to tap
institutional investors, he set up a broker-dealer to help fund real estate
purchases. He got the appropriate securities licenses and sold interests to
investors, funding the first $25 million of the company’s growth. “I couldn’t
find another way to do it,” he says.
Like many companies, AmREIT had to cut back when the economy turned
sour. By then Taylor had successfully raised money from the public and
through big financial companies, and the broker-dealer no longer offered the
company a strategic advantage. Further, the funds needed to operate it could
be put to better use. Even so, he was still emotionally attached, “because it
was what had brought us along.”
The downturn and the experience of clarifying his company’s strategy
finally pushed him to shut the business down. “It was one of the hardest
things I ever did,” he says. “That came out of this journey . . . and it’s still
scary. But it made us grow up.”
The process can also strengthen new strategic thrusts, as Miguel Aguiluz
discovered. After a number of big businesses asked him for an ink refilling
program, he came up with a plan for Ink for Less Professional. Initially he
was tempted to simply tack it on to Ink for Less as a “by-the-way” business.
But on reflection, he concluded that if he didn’t create a whole new system
around it, any competitor who came in after him and focused exclusively on
business customers would quickly undercut him.
Telling Your Story: Mistakes Strategists Make
Carefully honed strategies and the statements that capture them set direction, establish
priorities, and guide activity with a firm. They also help you communicate your story
externally. Weak strategies and weak statements do the opposite. Avoid these pitfalls.
1. Generic statements
Simply saying you are in book publishing, steel fabrication, or sports marketing tells
little. Within that domain, what makes you distinctive? Ask yourself this: If they read
your strategy statement, would your customers recognize you? Would your employees?
Pixar didn’t say it made movies—it said it developed “computer-animated feature films
with memorable characters and heartwarming stories that appeal to audiences of all
ages.”
2. No trade-offs
You can’t be everything to everybody, although a lot of weak strategies and strategy
statements implicitly claim to be. It doesn’t work.
3. Empty clichés
Grand statements unsupported by credible detail are vacuous. Terms such as “Excellent,”
“Leading,” and “Outstanding” don’t say anything specific. Strategy statements gain
credibility when specific statements capture what a firm does particularly well.
4. Forgetting the means
Many weak statements eagerly tell you the what but forget the how—the critical activities
and resources that enable the firm to realize its competitive advantage. It is through the
how that a reader gains confidence about what you’re doing. Which do you find most
convincing: “We’re the low-cost producer,” or “We’re the low-cost producer operating
the world’s largest titanium dioxide plant utilizing DuPont’s proprietary technology”?
5. Leaving out the customer
Who you serve is a crucial part of your story. It not only defines your playing field; it also
says who will ultimately decide whether what you do really matters.
6. Deadly dull
There is no other way to say it: A lot of strategy statements in their initial drafts drone on,
without conviction, without inspiration. Ask yourself: Would you want to work for this
company? Would you want to buy from it?
This insight came to him as he worked his way through an initial strategy
wheel for Ink for Less Pro: The activities in the spokes and some of the
spokes themselves were markedly different from his consumer business.
Employees would have to look more professional, wearing neckties, for
instance. He would need to offer new payment terms, to sync with company
procurement systems. To provide great service (and create a difference), he
determined, each customer should have a “standby refilling technician,” to be
available when needed. As a result, the products and services would be priced
differently. And he wanted to create another market advantage by giving
companies printers for free in exchange for a two-year ink contract, not only
covering his equipment costs but also keeping competitors at bay. The Pro
business is now launched and growing.
This way of thinking has become second nature for Aguiluz. “It’s not just
for books,” he says. “Every time I think of a new business, I really do the
strategy wheel,” to understand “how I can develop my advantage.” As his
businesses change or face new competition or other challenges, he goes back
to the wheel and examines the whole system, recognizing that a significant
change in any part of it is likely to have implications for the rest.
Indeed, when the process works best, a well-defined strategy is like the
North Star, guiding you in the right direction no matter which way the
competitive winds are blowing. At Lance!, Walter de Mattos has found that
strong market share and sizable margins haven’t protected the company from
competition on all sides. The World Cup is heading to Brazil in 2014, and the
country will host the 2016 Olympics, both of which should be a dream
opportunity for Lance!—except that the events have spawned new coverage
from a number of new players, all competing for the same advertising dollars.
Habits are changing, too. His business was built on quality work produced
by a team of specialized journalists. As he watches readers peruse the
Internet, de Mattos said, “people are going to seven or eight media outlets in
the space of ten minutes,” reading so many different short stories that they
can’t remember what they read or where they read them. “When you see
things like that, you have to question your beliefs” about what kinds of
information people want, he said. “I have been questioning my beliefs very
much lately.”
There is “a lot of temptation to change your strategy when something like
that happens,” he said, but he doesn’t think a fundamental change is called
for. Instead he is fine-tuning what he calls “gaps” around the wheel in
finance, human resources, and technology to strengthen Lance!’s capabilities.
The firm remains committed to being the prime source of sports news for
Brazil twenty-four hours a day, over all kinds of media platforms.
Your strategy, too, if it is well conceived and on point, will guide you
through tumultuous markets, competitive challenges, and your push into new
arenas. It will tell you what resources you need to build up and what baggage
you should let go. More fundamentally, as you put purpose in the center of
your strategic thinking, you will see a shift in the way you look at every
opportunity. You will find yourself instinctively asking whether that new
business, customer, or product adds value, whether it really fits with what
you are doing, and whether it benefits from or enhances the business as a
whole. Only then will you truly own your strategy.
Even so, you will continually have to adapt. Shifts in the economy, in your
industry, or in your own shop may force you to reconsider your approach and
maybe even reinvent it. As we will see in the next chapter, that’s why the job
of the strategist is never really finished.
Chapter 7
Keep It Vibrant
WHEN YOUR STRATEGY is on paper, painstakingly crafted, revised, and
polished, you’ll no doubt feel a huge sense of accomplishment. You’ll have a
game plan. You’ll know where you’re going and why. Most managers who
go through this rigorous strategy exercise breathe a sigh of relief at the end.
My sense is that many of them end up thinking, “I’ve figured it out. I’m
through. The only thing left to do is to put it into gear.”
It’s not surprising that you or they might think this way. In most popular
portrayals the strategist’s job would seem to be finished once a carefully
articulated strategy has been made ready for implementation. The idea has
been formed, the next steps specified, the problem solved. But, as I tell the
EOPers, don’t get comfortable yet! Rarely can strategy be so neatly
contained. There will always be some choices that were not obvious. There
will always be countless contingencies, good and bad, that could not have
been fully anticipated. There will always be limits to communication and
mutual understanding. As Oscar Wilde quipped, “Only the shallow know
themselves.” At heart, most strategies, like most people, involve some
mystery.
Interpreting that mystery is an abiding responsibility of a strategist.
Sometimes this entails clarifying a point or helping an organization translate
an idea into practice, such as what “best in class” will really mean in that
company and how it will be measured. Other times it entails much more:
refashioning an element of the strategy, adding a previously missing piece, or
reconsidering a commitment that no longer serves the company well.
It is simplistic—dangerous, even—to think that the bulk of strategy work
can be done at the beginning and that all a strategist has to do is get that
analysis right. Great firms—Nike, Toyota, and Amazon, to name a few—
evolve and change. So too do great strategies. No matter how compelling, or
how clearly defined, no one strategy is likely to be a sufficient guide for a
firm that aspires to a long and prosperous life.
IKEA built a global furniture business not by standing still, but by pushing
the design and consumer value envelope for more than fifty years. Gucci
rediscovered its brand chic after a fumble that nearly brought the company
down. But when I talk to managers about dynamic strategy, I like to delve
into the story of Apple, a company that has evolved and reinvented itself
more dramatically than perhaps any other over the last three decades.
I have followed Apple over most of those years, and have had countless
opportunities to discuss the company’s triumphs and follies with groups of
executives.1 The tenor of those discussions has shifted dramatically over the
years, with periods of ringing endorsements giving way to years of biting
criticism. Either way, the company brings out strong emotions.
There is a lot to learn from Apple’s journey, and from the experiences of its
remarkable and controversial leader Steve Jobs who, sometimes brilliant and
sometimes not, was at the helm long enough (in discontinuous stages) to
shape and reshape the company. Beyond the play-by-play, at its core the
Apple story challenges us to address some of the most basic truisms of
strategy, and, ultimately, to question one of the most foundational: What is
the desired result of a strategy?
Academics, venture capitalists, and many managers often say that the goal
of strategy is a long-run, sustainable competitive advantage, one that
accumulates such a powerful lead over competitors that no one can catch up.
In business school cases, analyst reports, and persuasive business plans, the
question is repeatedly asked: Is the company there yet? Does it have that
killer app, that impermeable edge, that sustainable competitive advantage?
But Steve Jobs’s story, and the story of Apple itself, cast serious doubts on
that aspiration and raise different questions: What does it take for a company
to endure? And what does that mean for the work of a strategist?
A RADICAL LEAP FORWARD
Steve Jobs and Steve Wozniak, Apple’s cofounders, didn’t begin with a
statement of purpose. Indeed, in 1977 their ambitions were small as they tried
to find customers for Wozniak’s all-in-one circuit boards that would
eventually be the Apple’s heart. Don Valentine, a venture capitalist they met
early on, recalls that they imagined selling a couple of thousand boards a
year. “They weren’t thinking anywhere near big enough,” he said.2
Not until three years after Apple got off the ground do we find a semblance
of a purpose statement, in the 1980 annual report: “Bringing technology to
individuals is, we believe, the extraordinary business of this decade.” But
Wozniak and Jobs didn’t want just gee-whiz technology. It had to be special.
It had to be unique. It had to be, Jobs would say in time, “insanely great.”3
I have to remind my classes that the late 1970s were several lifetimes ago
in the computer world: IBM did mainframes, and everything else was for
hobbyists. The Apple II, launched in 1977 (the company’s first real product
after a crude prototype) was intended to be a machine that just about any
individual could use. It was the first standalone computer that worked right
out of the box; with a color display and internal speakers, it could be used for
game-playing as well as word processing. Its rounded plastic case, schlocky
by today’s standards, was a triumph of design compared with hobbyists’
crude metal boxes, and was honed by a detail-obsessed Jobs after he studied
appliances and stereos at a San Francisco Macy’s.4
In a significant update the next year, Apple became the first computer
company to successfully integrate a floppy disk drive into the computer,
replacing the clunky and unreliable cassette drives of the earliest machines.5
Now users could easily save their own creations and real software could be
written and sold. In 1979 that value became crystal clear when Apple added
VisiCalc, the first electronic spreadsheet for a personal computer, giving it a
clear-cut functional advantage over the Adams, Commodores, Texas
Instruments, Radio Shacks, and other newly minted machines.6
In this nascent world of personal computers, Apple had a difference that
mattered. It staked both its core purpose and its strategic advantage on
technology, with the expectation that it was something buyers would always
value.
Consumers jumped on board. Apple began to develop a cultlike following
among users for its clever design and ease of use. By September 1980,
130,000 Apple IIs had been sold.7 Wall Street, too, was completely wowed.
In 1978 venture capitalists had valued the company at about $3 million. But
at the very end of 1980, less than a month after its initial public offering,
Apple had a stock market value of $1.8 billion. That was more than Chase
Manhattan Bank, more than Ford Motor Company, and four times the value
of Lockheed Corporation, where Wozniak’s father worked.8
For all of its technical and design savvy, Apple faced enormous strategic
and operational challenges. Wozniak was a genius at building the boxes and
Jobs had unstoppable energy and a spot-on sense of style. But neither of them
had any management skill or experience. Jobs was known mostly for
“causing a lot of waves. He likes to fly around like a hummingbird at ninety
miles per hour,” one former executive said.9 He had a reputation for being
incredibly difficult—interrupting, failing to listen, missing appointments, and
breaking promises.10 Professional managers were brought in to help manage
the growth, but who was calling the shots and who held the power in the
organization was not always clear.
Meanwhile the fast-growing industry was changing almost by the day, as
one maker after another hurried to bring out new features, more memory,
faster processes, better applications, and more useful computers. Eager to
maintain its momentum, the Apple team rushed out the Apple III in the
summer of 1980 before it had been thoroughly tested—or even really
finished. It had little software to offer and was full of bugs, which an
attentive technology press was eager to publicize.11 It was the company’s
first notable failure.
By then Apple faced its greatest competition yet: The behemoth
International Business Machines was now in the business. IBM had taken its
time in entering the market, waiting until the pieces were in place for the PC
to have genuine business uses. In the rush to catch up, it relied heavily on
outsiders, looking to a young Microsoft for an operating system, Intel for the
computer’s processing brain, and others for memory chips and disk drives.
The company’s products would never be as elegant or cutting-edge as
Apple’s but they were hugely practical and they came from a reliable and
highly regarded company.
Jobs had a powerful proprietary instinct; he was protective of Apple’s still-
unique technology and had no interest in opening it up to others. It was a
mind-set that would separate the company from most of its competitors—and
much of the market—for two decades. IBM, by contrast, made a conscious
decision to keep its system open, encouraging software developers to come
up with all kinds of word-processing, calculating, accounting, and database
software that would make its computers essential to users. The open approach
also invited copycat computer makers, but IBM figured (correctly, at least for
a time) that its name and reputation would continue to differentiate it.
One meeting around that time is particularly telling: In a 1981 visit with
Bill Gates and Paul Allen of Microsoft, Jobs and Gates tangled over where
the personal computer was going. Jobs saw the machines as valuable tools for
students and homeowners with some uses for business. But Gates was
insistent that the PC was a business product first and foremost, a utilitarian
business tool, another practical piece of equipment to make the workplace
run more efficiently.12
These dissimilar approaches would guide the two companies down
different roads for many years. With the benefit of hindsight, you and I know
where these opposing views will lead. But consider how the landscape looked
at that time: Apple was the market share leader in the industry, it had a
proprietary state-of-the-art operating system, and a growing base of zealous
consumers. Given all of this, and a sky-high stock market price, would you
be eager to open your technology to other developers? Would you be
convinced, like Bill Gates and IBM, that what the world wanted was a
practical business machine that did the job well? Or, like the idealist Jobs, the
young leader with a commitment to change the world through technology,
would you want to continue on your course to produce your own elegant and
cutting-edge products?
INSANELY UNSELLABLE TECHNOLOGY
Sticking to its course, one team at Apple was cleaning up the Apple III
while another started on the middle-range Macintosh. Yet another was hard at
work on a top-of-the-line revolutionary machine that it named Lisa
(presumably after Jobs’s daughter). Introduced to great fanfare in 1983, the
Lisa was a technological tour de force. PCs then could work on only one
program and one screen at a time, and users gave them instructions in a form
of code. The Lisa threw all those complexities out the window. It came with
the first point-and-click mouse. It had what the techies called a “graphical
user interface”—a technical term for menus of options—that could be
clicked, making the computer powerful but simple to operate. A user could
open more than one function and work on two or three documents at once.
The huge leap in possibilities was enough to get an aficionado’s heart racing.
As a business proposition, however, the Lisa was a bomb. It cost $50
million and two hundred person-years to develop but it didn’t have a clear
market. Apple itself had written all the software, none of which was
compatible with either the Apple II or IBM machines, and it launched with
just a handful of core programs. Further, all the features made the computer
painfully slow, while they bloated the price to a heartburn-inducing
$10,000.13
It would be hard to change the world with stunning technology that no one
bought. Lisa “was a great machine. We just couldn’t sell any,” said Bruce
Tognazzini, Apple’s human interface guru.14
Jobs himself had been so combative and disruptive during the development
of the Lisa that he was removed from it midstream and banished to the
Macintosh project, which was being developed in an isolated location that
would separate him from the rest of the company. Despite the
disappointment, he “set off with guns blazing to make the Macintosh the
world’s next groundbreaking computer.”15
Before it could be rolled out, however, he had to contend with another
management challenge: finding a replacement for Apple’s president, who had
resigned following the disappointing sales of the Apple III and the round of
downsizing that followed. Jobs, who became chairman during the reshuffling
at the top, personally recruited John Sculley, president of PepsiCo, who had
helped drive Pepsi briefly past Coke as the nation’s top soft drink. Jobs
wooed him for many months, reportedly winning Sculley when he asked,
“Do you want to spend the rest of your life selling sugared water, or do you
want a chance to change the world?”16 In Job’s mind, Apple’s purpose was
clear.
Sculley arrived in time to help launch the Macintosh in 1984. It debuted to
huge fanfare, propelled by a famous Super Bowl ad, pegged to the Orwellian
year, that characterized the new computer as rescuing users from a drone-like
existence. While IBM and its copycats were still using clunky DOS-prompt
commands, the Mac offered elegant and simply designed graphics, a mouse,
and far more flexibility.
But the Macintosh needed work. The reviews—and sales—were decidedly
tepid. At a premium price of $2,495, it was slow, incompatible with the
developing MS-DOS standards, and lacking a range of software at a time
when programs for IBM machines were making them more and more useful.
For the first time in its history, Apple was in serious trouble. Its competitive
advantage—and its poignant purpose—were slipping away. It soon reported
its first quarterly loss and plans to lay off one-fifth of its workforce.
Jobs, the high-energy visionary, was not getting the job done. Moreover, he
and Sculley by then were at irreconcilable odds over Apple’s strategy. In
Jobs’s mind, “Apple was supposed to become a wonderful consumer
products company,” Sculley wrote in his memoir. But the business market,
not the consumer market, was exploding in the mid-1980s and Sculley
thought pursuing the consumer business in that context was “a lunatic
plan.”17
Jobs, the thirty-year-old wunderkind, who had been on the cover of
BusinessWeek, Time, and a host of other magazines, who had brought
cutting-edge products to a host of users, had failed as company leader. True,
his Apple was creative and innovative, but it was increasingly out of sync
with the industry, which was aiming not at consumers but at cost-conscious
businesses in need of more productivity.
With the support of the board, Sculley stripped Jobs of all his operational
responsibilities. It was a huge blow to the charismatic big thinker who was
the public face of Apple Computer. “I feel like somebody punched me in the
stomach and knocked all my wind out,” Jobs told an interviewer. “I know
I’ve got at least one more great computer in me. And Apple is not going to
give me a chance to do that.”18
Before the end of the year, Jobs would leave Apple and form a new
computer maker, NeXT.
THE SUPER-MANAGER ERA
When a company founder flails, an outside manager often steps in. But
would a super-manager read the market better? Could professional executives
do a better job restoring Apple’s onetime competitive edge—or restore or
generate a more meaningful purpose?
Under Sculley, Apple became a more disciplined, if less creative,
company. The Mac’s problems were cleaned up, winning intensely devoted
fans. Capitalizing on its strengths, including an advanced printer, Sculley
helped the company become the leader in the burgeoning field of desktop
publishing, allowing legions of users to create their own fliers, pamphlets,
and professional-looking documents for the first time.
But while Apple had inroads in schools and with graphic artists, IBM
computers and their clones became the de facto machines for the workplace.
They weren’t pretty, they weren’t all that easy to use, and they certainly
weren’t fun. But thanks to a storm of software, they could build intricate
spreadsheets, create complex documents with ease, capture large amounts of
data, and—significantly—easily share it with any other similar computer.
Networks of these relatively powerful computers already were changing
office productivity like nothing seen since the mainframes of the 1960s.
Under Sculley’s watch, more than 12 million Macs were sold as the market
for personal computers began to boom, and the company’s sales grew to
almost $8 billion from a mere $600 million when Sculley joined the firm in
1983.19 But Apple’s market share, which had peaked in mid-1984 at 21.82
percent, was sliding.20 The once-innovative company struggled vainly to
introduce trendsetting products. Its first portable machine—the hot computer
product of the 1990s—was too big, too heavy, and late to the party. A pre-
Palm, pre-BlackBerry personal digital assistant (PDA) called Newton had the
potential to be groundbreaking but turned out to be ahead of its time. With
deteriorating margins, no answers to increasing price competition, and few
successful new products, Sculley himself was pushed out in 1993.21
His successor, Michael Spindler, was a no-nonsense manager who had
tripled the size of Apple’s European business. Spindler set out to cut costs,
declaring that Apple’s products would never be overpriced again. He reduced
R&D spending, improved efficiency, and cut development cycles. He also
broke with the company’s long-standing proprietary philosophy and tried to
license Apple’s technology, but pulled back after clones cannibalized the
company’s sales.
Without a viable purpose and a well-aligned system, Spindler, like Sculley,
failed to stem the tide of buyers who were rapidly defecting to computers
powered by Intel processors and running Windows operating systems. A
1995 Computer World survey of 140 corporate computer system managers
found that none of the Windows users would consider buying a Mac, while
more than half the Apple users expected to buy an Intel-based PC.22 In
apparent desperation, Spindler tried to sell the company. But other computer
makers, struggling themselves with declining margins and wicked global
competition, couldn’t see much future in what Apple had to offer.
Spindler was out in three years, replaced in 1996 by company director Gil
Amelio, whose tenure would be even shorter. When Amelio took over, Apple
was leaking cash and sales were plunging. The Apple operating system was
in need of a major overhaul. The brand, which had mattered so much to
customers in its early days, was now less and less significant. Microsoft had
copied many of its best features and the differences between how IBM and
Apple computers worked had narrowed.
Shortly after he took charge, Amelio shared his perspective on the
company’s challenges at a Silicon Valley cocktail party: “Apple is a boat,” he
told listeners, according to a guest who was there. “There’s a hole in the boat,
and it’s taking on water. But there’s also a treasure on board. And the
problem is, everyone on board is rowing in different directions, so that boat is
just standing still. My job is to get everyone rowing in the same direction so
we can save the treasure.”
After Amelio turned away, the guest turned to the person next to him with
an obvious question: “But what about the hole?”23
Indeed, what about the hole?
Amelio tried to patch it with the skills he’d honed in turning around
semiconductor businesses at Rockwell International and National
Semiconductor. He shrank the product line, slashed payrolls, and rebuilt cash
reserves. His strategy, he said, would be to return Apple to its historical
premium-priced game by aiming at higher-margin segments, such as servers,
Internet access devices, and PDAs.
But no matter how hard Apple rowed, it didn’t work. The company’s
quality had become questionable, and its nearly ten-year-old operating
system was under assault by a worthy competitor, Windows 95. Amelio
decided to cut Apple’s losses by canceling the repeatedly delayed next-
generation Mac OS, which had already cost more than $500 million in R&D.
To replace it, he turned to none other than Steve Jobs for a version of his
NeXTStep software, designed for high-end personal computers and servers.
Paying what many thought was an absurd price, Apple bought NeXT in 1997
for $400 million, bringing Jobs back into the fold as an advisor. But as
Apple’s downhill slide continued, Amelio himself came under fire. By the
end of the first quarter of 1997, the company had lost $1.6 billion during his
tenure. The board sent him packing with a nice golden parachute and named
Jobs interim CEO.24
THE ROTTING CORE
What can strategists learn from Apple’s experience? The fundamental
lesson is the evanescence of a difference that matters. It doesn’t last by itself,
and when it’s gone, no amount of rowing or patching of the hull can fix the
basic problem: The ship has lost its rudder.
The Austrian-American economist Joseph Schumpeter, writing in the
1940s, saw developments like this as part of an economic cycle. Innovators
break new ground and reap what he called “economic rents,” outsized profits
for their innovative endeavors. The most potent of these developments cause,
in his words, “creative destruction,” world-shaking innovations that reorder a
marketplace. These foment a “competition which commands a decisive cost
or quality advantage which strikes not at the margins of the profits and the
outputs of the existing firms but at their foundations and their very lives.”25
Such creative destruction comes with its own cycle. First the idea evolves,
followed by its commercialization—much like the Apple II moved computers
from the hobbyists’ garages into people’s homes. In time, other competitors
see the abundant opportunities and find their way in, pushing up output and
driving down prices, until the economic rents have all but disappeared.
Another round of creative destruction must take place for profits to leap
forward again. This was exactly the kind of erosion Apple sought to avoid as
it rushed the Apple III, Lisa, and Macintosh computers to market.
The creative destruction that beset Apple, though, was not the kind of
product innovation at which the company itself excelled, but a market
innovation: the benefits that IBM’s commitment to open sourcing, and the
ensuing standardization, brought to business users and software developers.
In its initial phases, the strategy produced high growth and profits for IBM,
but in a span of less than twenty years, it drove the industry from an
attractive, profitable business to a viciously competitive, price-driven one.
Thanks to their compatibility and simple off-the-shelf components, PCs
largely became a commodity and sales shifted to the most efficient and
cheapest providers. Among PC manufacturers themselves, there was little
asymmetry to be found. By 2001, 96.5 percent of profit in the industry was
captured by two suppliers who controlled the only scarce resources:
Microsoft, with its industry standard MS-DOS operating system, and Intel,
with branded processors that were the brains of the machines. Dell’s star also
rose during this period, not because it made particularly outstanding
computers, but because it mastered mass customization, electronic
commerce, and supply-chain management.26
Many of the longtime players would disappear over the next decade or so.
Compaq and Gateway were acquired and IBM sold its PC business in 2004,
after losing nearly $1 billion since the turn of the century.27 In this milieu,
Apple was slain, in part, by the same dragon that got Manoogian at Masco:
tenacious and unattractive industry forces. Like Manoogian, many of Apple’s
leaders didn’t fully appreciate or respect the dramatic impact that
deteriorating industry forces would have on Apple’s prospects.
They were, to put it bluntly, arrogant. An observer of the early days
commented: “Everybody at Apple sits around and says, ‘We’re the best. We
know it.’ They have a culture that says it and it starts from Steve Jobs and
works on down.”28 Another noted that the “arrogance seeped right through
the company and came to affect every aspect of the business—the style with
which it treated suppliers, software firms, and dealers, its attitudes toward
competitors, and the way it approached the development of new products.”29
When a firm’s purpose is consistent with the competitive environment and
produces a difference that matters, it’s compelling. When it grows out of sync
and anchors a firm in a past that no longer exists, it’s a liability. Apple was
essentially caught in a trap of its own making, out of sync with a computer
market that had become increasingly connected and commoditized. It
stubbornly stuck to its original strategy of producing expensive and clever
personal computers that used different processors and required different
software (and even printers) than everyone else. The super-managers who
carried on after Jobs scrambled to fix problems with layoffs, restructurings,
and flip-flopping strategies about whether to move to an open system, reduce
prices, or enter segments with higher margins, but most didn’t grapple deeply
enough with the fundamental question you know so well:
Is the very core, the purpose behind it all, working?
Looking back, Apple cofounder Steve Wozniak rued the firm’s refusal to
test its core assumptions, particularly the decision to keep a tight hold on the
operating system to protect what executives thought was Apple’s critical
resource—its hardware. In fact, in the competitive milieu that developed, it
was Apple’s software, not hardware, that would have been the most valuable
to users.
“We had the most beautiful operating system, but to get it you had to buy
our hardware at twice the price. That was a mistake,” Wozniak said. “What
we should have done was calculate an appropriate price to license the
operating system.”30 While the early builders thought that better technology
would always prevail, they learned the hard way that it was just one
dimension the market cared about, and not enough to overcome the
disadvantages of the full package.
“The computer was never the problem,” Wozniak said. “The company’s
strategy was.”31
THE EDUCATION OF A STRATEGIST
The Jobs who left Apple in 1985 was a cocky and brash young manager,
determined to demonstrate that he could win with the Apple strategy of
making cutting edge computers with great technology. At NeXT, Jobs was in
complete control—and by all accounts, he ran rampant, unchecked by the
kinds of professional managers who tempered his energy at Apple or even a
board of directors. His almost impossibly high standards ruled, as Alan
Deutschman described: “It wasn’t enough for the new machine to be
distinguished by one particular breakthrough. For the software he was taking
an entirely new approach, starting from scratch, trying to create the most
elegant lines of software code ever written. The industrial design had to be
like no computer ever created. It had to be as gorgeous and sleek as Steve’s
black Porsche. Even the factory had to be beautiful, and it had to be as fully
automated as any factory in the world.”32
NeXT’s first computer, a gorgeous cube design Jobs described as “five
years ahead of its time,” was aimed at the academic market. But it was late
arriving and—at $10,000 if you bought a laser printer and some necessary
extras—priced closer to a Volkswagen than a PC. Commercially, the
machine was a colossal failure, a caricature writ large of Apple’s failed
strategy, and the responsibility lay fully at Jobs’s own feet. Students and
academics shunned the cube for $1,500 basic PCs. The business world wasn’t
much interested, either. While too expensive to be a personal computer, the
computer was too underpowered to be a workstation.33 As he had at Apple,
Jobs again misread the market and what it wanted. Ultimately, NeXT sold
just 50,000 machines, a pitiful result.34
Jobs’s star fell dramatically in Silicon Valley as his chance to show that he
could “do it” again faded. It was an embarrassing personal debacle. As early
as 1993, top managers had begun to rush for the exits, the contents of the
factory were being auctioned off, and Fortune magazine had dubbed Jobs a
“snake-oil salesman.”35 Reflecting later on the fiasco, Jobs explained: “We
knew we’d either be the last hardware company that made it or the first that
didn’t, and we were the first that didn’t.”36
During the same period, however, Jobs was involved in another venture
that would prove more durable. After leaving Apple, he sold nearly all his
stock, and used some of the proceeds to buy a majority interest in Pixar, a
fledgling animation studio. Though he was more of a venture capitalist there
than an executive, he held the title of chairman and CEO, and bankrolled the
company through a number of downturns. As Toy Story, the first feature-
length computer-generated film, was about to be released in 1995, Jobs
stepped up his involvement and orchestrated Pixar’s enormously successful
initial public offering (which netted him $1.17 billion). Following the IPO, he
negotiated a new five-film deal with Disney, which produced Toy Story 2,
Monsters Inc., and Finding Nemo, films that broke all conventions in
animated storytelling. In 2006, when Disney bought Pixar for $7.5 billion,
Jobs became a Disney director and the entertainment firm’s largest
shareholder.37 For Jobs, Pixar turned out to have a Disney-like ending: It
made him a multibillionaire, helped him rebuild his reputation in the business
community, and gave him contacts and deep insights into the entertainment
industry, which would become important later.
REDISCOVERING DIFFERENCES THAT MATTER
NeXT was barely hanging on when Apple bought it, and the industry had
all but written Apple itself off. When Jobs returned, the company was rapidly
slipping toward bankruptcy. Its stock price was at a ten-year low and its
market share had plummeted to 3 percent. Speaking at an industry
conference, Michael Dell, the chairman and CEO of Dell Computer, had a
sharp answer for what he would do if he woke up suddenly in the form of
Steve Jobs: “I’d shut Apple down and give the money back to
shareholders.”38
But Jobs, educated by his NeXT and Pixar experiences, stepped up to the
challenge. He began the painstaking process of rebuilding his old company,
following advice he himself had given the year before: “If I were running
Apple, I would milk the Macintosh for all it’s worth—and get busy on the
next great thing,” he told Fortune in 1996.39
Jobs began by cutting Apple’s broad product line to four offerings—two
consumer, two business, a portable and a desktop model each—and targeting
research and development on the very best ideas. Of these, the first product
conceived and built after Jobs’s return was the iMac. “The day I left Apple
we had a 10-year lead over Microsoft. In the technology business a 10-year
lead is really hard to come by . . . [but], if you look at the Mac that ships
today, it’s 25 percent different than the day I left. And that’s not enough for
10 years and billions of dollars in R&D,” he said, looking back. “It wasn’t
that Microsoft was so brilliant or clever in copying the Mac, it’s that the Mac
was a sitting duck for 10 years.
“That’s Apple’s problem: their differentiation evaporated.”40
By the following year, Jobs had put a new management team in place,
including several managers who had worked with him at NeXT. This team
would be the core of his brain trust for nearly ten years.41 The new Jobs also
had a new management style. By all accounts, he was still brash, abrasive,
and often arrogant, but this Jobs knew something about executing and had
enough maturity to temper his worst behaviors. During the first meeting with
a product group, Steve reportedly would “listen and absorb. In the second
meeting, he would ask a series of difficult and provocative questions: ‘If you
had to cut half of your products, what would you do?’ he would ask. He
would also take a positive tack: ‘If money were no object, what would you
do?’ ”42
The iMac, introduced in 1998, was a well-designed all-in-one computer
and monitor, with a price tag of $1,299—still higher than popular PCs, but
well below the $2,000-plus of previous models. Its design was a breath of
fresh air in a market that had seen little fundamental innovation in some time,
incorporating the simplicity of the original Mac and an easy way to use the
Internet. It quickly attracted a whole new customer group—nearly 30 percent
of those who bought an iMac had never owned a computer before. In the first
year, Apple sold two million of the machines, which, with cost cutting,
helped it build a much-needed cash cushion.43
In effect, with the iMac, Jobs patched the hole in Apple’s boat.
Jobs put the cash to work with a new strategy, one that combined the firm’s
original purpose with an incisive understanding of what consumers valued.
At a MacWorld gathering in 2001, he spelled out a greater purpose for Apple.
The first golden age of the personal computer, the age of productivity, he
explained, began with the early machines and lasted about fifteen years. That
was followed by a second golden age, the age of the Internet, which brought
new uses to both businesses and consumers.
Now, he said, the computer was entering a third great age, the digital age,
populated by cell phones, DVD players, digital cameras, and digital music. In
that new age, Jobs thought, the “next great thing” would be the computer not
as another gadget, but as the centerpiece of all these devices. It would pull
together information management, communication, and entertainment in a
seamless whole, enhancing how all these other devices could be used. Now
you would be able to both take video and edit it, listen to music and create
your own mixes and sounds, record your pictures and share them in new and
different ways.44
This so-called digital hub strategy became a new purpose, a clear, well-
articulated idea that would guide Apple’s products and strategy for the next
decade. As it began to take shape, Apple introduced the iTunes music
software as a way to organize music on your computer, rolled out a fully
overhauled Mac operating system, and opened its first retail store, selling
Apple products in high-tech, high-touch boutiques, complete with customer-
service “genius bars.”
Piece by piece, Jobs began to remake Apple. It was not always a smooth or
linear process. Perhaps drawing from his Pixar experience, Jobs initially
pushed iMovie, software that would allow Mac users to easily make and edit
movies. But while he focused on that, users were gorging themselves on
services that were providing digital music for free and using burners installed
on many PCs to make their own compact discs. The iMac hadn’t yet offered
CD burners, and without them, sales slowed.
Jobs had a forehead-slapping moment. “I felt like a dope,” he said. “I
thought we had missed it. We had to work hard to catch up.”45
An upgrade to the Mac Operating System addressed the problem, then
Apple designers saw another opportunity: The available digital music players
were awful. They were slow to load and they could hold only a few songs—
an improvement over the Sony Walkman, to be sure, but hardly products for
a digital age. The iPod, introduced in late 2001, was a sea change, a powerful
music player that would fit easily in a pocket thanks to a tiny hard drive and
an Apple software called FireWire that allowed for superfast downloading.
With it and iTunes, Apple revolutionized the music industry. Napster, a
popular file-sharing software, had conditioned users to the idea of
downloading their own music choices for free, a service that was later
declared illegal. Jobs struck a deal with the music industry: Apple would
provide a similar service with iTunes but charge for individual songs and
albums, and the industry would share in the revenues. The iTunes store
opened for Mac users in April 2003 and expanded to Windows users that
October, multiplying its market exponentially. (In another sign of a new age,
Apple developed software explicitly to make something work as elegantly on
a PC as it did on the iMac.) And in a rare economic turnaround, consumers
began to pay for something that had recently been free.
The products and services Apple rolled out capitalized on the company’s
exquisite sense of design and technological wizardry and brought the whole
digital revolution into sharp relief. Jobs told Time in early 2002, “I would
rather compete with Sony than compete in another product category with
Microsoft.”46
There’s another boat story, an ancient Greek paradox that provides a
powerful metaphor for this process. After slaying the Minotaur in Crete, the
hero Theseus sailed back to Athens in a well-worn ship. As each plank
decayed, it was replaced by new and stronger timber, until every plank in the
ship had been changed. Was it then still the same ship? And if not, then at
what point—with which plank—did the ship’s identity shift? It’s a paradox
that Plutarch called “the logical question of things that grow.”47
At Apple, Jobs saw the iPod as a turning point. “If there was ever a product
that catalyzed what’s Apple’s reason for being, it’s this,” he said, “because it
combines Apple’s incredible technology base with Apple’s legendary ease of
use with Apple’s awesome design. Those three things come together in this,
and it’s like, that’s what we do. So if anybody was ever wondering why is
Apple on earth, I would hold up this as a good example.”48
By 2005, a total of 42 million iPods had been sold.49 By 2009, Apple was
selling 60 million a year. Users downloaded more than a billion songs off
iTunes and now bought movies, television shows, and even business school
lectures for their iPods.
If the iMac had helped Jobs stabilize the boat, the iPod and iTunes were
now propelling the whole enterprise forward as a new vessel with a new
purpose and a new destination. And, as with Gucci, it was becoming clear
that Apple’s success was due not to a host of one-off products, but from
honing an idea, an identity, and an intricately woven system of elements that
worked in concert.
Intuitively, Jobs understood Schumpeter’s message about “creative
destruction,” and this time got ahead of the curve. The new Apple, under the
new Jobs, became its own “creative destruction” machine, leaning into the
wind to introduce better and better products that cannibalized themselves,
seemingly before anyone else had a chance to get within half a mile.
In 2007, Apple rolled out the iPhone, leveraging the special design of the
iPod into a credit card–sized package that could take and make calls, talk to
the Internet, and hold vast amounts of music or photos as well. Suddenly a
good bit of the equipment on your desk fit easily into your pocket, and the
company was en route to revolutionizing another industry.
Fittingly, that year, Apple dropped “Computer” from its name and became
simply Apple Inc. By 2010, computers made up just 27 percent of its $65.2
billion in sales for the fiscal year ended September 25, while iPods, music,
and iPhones brought in almost 60 percent of the revenue.50 Apple’s stock
roared to unseen heights. With a market value well over $300 billion, it
became the most valuable technology company in the world, surpassing
Microsoft.
Even as Jobs battled serious health problems, including a 2009 liver
transplant, Apple trumped itself again, introducing the much-anticipated
tablet computer, the iPad. The design, the capabilities, and the software set
new standards for a whole new category of portable consumer devices, which
may, in the not-too-distant future, replace the traditional computer altogether.
The beta version of the much-touted iCloud, announced in the summer of
2011, was a further step, allowing users to keep data in sync between any
Apple or PC with no need to transfer files by email or USB.51
A SUSTAINABLE COMPETITIVE ADVANTAGE?
Given this grand transformation, it’s appropriate to ask: Is Apple there yet?
Despite its late-century troubles, does it now have a sustainable competitive
advantage?
I often ask EOPers this question when teaching the Apple case. It is
tempting to shout, “Yes!,” as classes often do, or maybe even retort, “Do you
have to ask?” Apple has reinvented its innovative purpose and, on the face of
it, seems to be running circles around competitors, even taunting them for
their lack of creativity. Case closed?
I think not.
In 2010, Apple’s computer market share soared to about 11 percent, but
that’s hardly the mark of a dominant industry player. Otherwise normal
people will camp outside an Apple store for the latest iPhone, but
smartphones based on Google Inc.’s Android software substantially outsold
the iPhone in 2010, according to NPD Group, a market research firm.52
Windows-based competitors to the iPad are coming fast and furiously. Such
tablets might well become the fourth golden age, replacing the traditional
personal computer as the center of the digital hub while becoming products
sold largely on price. And there’s no guarantee that the iPad, the iCloud
ecosystem, or their successors will be the ones that head the pack a couple of
years from now.
Conventional wisdom would say that the goal of strategy is a long-term
sustainable competitive advantage. I challenge that view. Such advantages
are rare and for good reason. As Schumpeter showed, peaks in market growth
and profitability often come from change, not stasis. Henry Ford dominated
car sales with a single, affordable model until Alfred Sloan’s General Motors
beat him with a line of differentiated products. Polaroid owned instant
photography until digital imaging shut it out; many broad-service hospitals
were monopolies until low-cost focused providers started chipping away at
their base; colleges with sprawling campuses owned higher education until
community colleges, for-profit organizations, and distance learning
challenged them with different economic models.
Zeroing in on one competitive advantage and expecting it to be sustainable
misrepresents the strategist’s challenge. It encourages managers to see their
strategies as set in concrete and, when spotting trouble ahead, to go into
defensive mode, hunkering down to protect the status quo instead of rising to
meet the needs of a new reality. To be sure, competitive advantage is
essential to strategy, and the longer it lasts, the better. But any one advantage,
even a company’s underlying system of value creation, is only part of a
bigger story, one frame in a motion picture. It is the need to manage across
frames, day by day, year over year, that makes a leader’s role in strategy so
vital.
This organic view of strategy recognizes that whatever constitutes strategic
advantage will eventually change. It underscores the difference between
defending a firm’s added value as established at any given moment and
something far more important: ensuring that a firm continues to add value
over time. This is what endures—not a particular purpose, a particular
advantage, or a particular strategy, but the ongoing need to add value, always.
The ongoing need to guide and develop a company so that it continues to
matter. This is not to say that great resources and great advantages are not
built by businesses that enhance their core differences over time. But the
products and services that embody those differences must evolve and change
and, as Apple learned the hard way, their value has to be measured by the
present environment, not one that once was.
Quite painfully, that may mean that, like the ship of Theseus, the keel may
need to be rebuilt or the ship may need to sail in a very different direction. As
my executive students like to point out, this challenge rarely happens when
you’re sitting at the dock. It’s a hard realization that the planks have to be
changed while you’re sailing, while you’re also straining to navigate and
working hard to keep the ship afloat.
On his return to Apple, Jobs had to remake the computer company plank
by plank while also keeping it from bankruptcy—rebuilding not in a
rainstorm, but in a hurricane on the high seas. He got it right for the most
part, but, as even its archrival—the once undauntable Microsoft— has
discovered, the challenge never ends.
ON BEING A STRATEGIST—EVEN WHEN YOU’RE NOT STEVE
JOBS
“Okay,” you may be thinking about now, “I get that strategy must be
dynamic. I accept that by most measures, Apple is a strategic success. And
Steve Jobs really turned it around. But let’s be fair: He was Steve Jobs—and
I’m not. Nor is my company Apple.” It’s a reaction I often hear from
executives.
You’re right, of course. There was only one Jobs. But among the
remarkable chapters of his story is that he wasn’t a born strategist. He made
huge mistakes. He introduced flawed products. He drove one company into
the ground, and was himself driven from another. He had to learn to be a
strategist, just like the rest of us.
Like De Sole at Gucci, Jobs had to have the energy and motivation to keep
an enterprise moving forward. He had to wrestle with the profound and
terrible paradox many strategists must manage: Stay the course—Reinvent
yourself. This may sound like a choice between continuing on a given path or
choosing another, but for most businesses it’s usually a duality: being one
thing while becoming something else. This points to another advantage for a
firm: the strategist—or, more specifically, you. As a strategist, you’re the
person who must watch over the organization, guiding its course, making the
choices that bring it back to center day after day and year after year even as
you must choose when the center, the purpose, itself should evolve. You must
decide whether to lean into the wind or not, and judge whether your strategy
is dynamic or dead.
Leading strategy is a nonstop responsibility; it can’t be outsourced or
solved in one great brainstorming session. You won’t just wake up one day to
find that your company has a new advantage or that its purpose changed
overnight. Rather, it will change because the industry changes. It will change
because tastes change. It will change because your people change and they
bring new skills and strengths to the enterprise. And ultimately, it will change
because someone made the call to do so—you, the strategist.
Now, having accepted that the only sustainable strategy is one that
anticipates change, you’re ready to embrace becoming the strategist who
takes your company where it needs to go.
Chapter 8
The Essential Strategist
WE’VE TALKED A great deal about what a strategist does, but we’ve touched
only lightly on the person who does it. For all the information available on
strategy, little is devoted to what will make you a successful strategist. What
skills and mind-sets do you need to hone? What unique value could you bring
to your business?
My final task is to address these questions, and to help you be the strategist
you want to be. Unlike so much of the work you’ve done up to here, this last
leap requires putting aside the industry analyses and the strategy statements,
and instead looking deeply into the how of being a strategist.
The most important thing is to understand that you are not a manager of
strategy, or a functional specialist. Others can fill those roles. You are, first
and foremost, a leader. Your goal is to build something that is not already
there. To do so, you must confront the four basic questions you have already
explored:
What does my organization bring to the world?
Does that difference matter?
Is something about it scarce and difficult to imitate?
Are we doing today what we need to do in order to matter tomorrow?
As a leader, you must answer these questions.
Most business practitioners (and most business thinkers, for that matter) are
unaccustomed to facing questions of this kind—at least when put so starkly.
We’re much more comfortable confining ourselves to more tangible business
issues: Is our market shrinking or growing? What are our competitors up to?
To lead, you have to be willing to make room for new challenges and be open
to the unique ways you can add value to your business. Think about this old
Zen story. A powerful and self-assured man goes to a Zen master and asks to
be taught about enlightenment. After sizing up the guest in an initial
conversation, the Zen master invites him to have tea. The master pours. He
goes on pouring even though the tea is flowing over the brim of the cup.
“Stop!” the visitor calls out. “Can’t you see that the cup is overflowing?”
“Yes,” the Zen master replies. “But a cup that is already full cannot take in
anything else.” If one’s mind is already filled to the brim, there is no place for
new ideas.
To be a strategist, one must be willing to explore new ways of leading.
BE A FIRE STARTER
Being a strategist takes drive and initiative, and the willingness and
curiosity to ask questions and venture forward. As bedrock important as
strategy is to the long-term success of a firm, you might think that investors,
boards of advisors, even those working in a firm would keep it uppermost in
a leader’s mind. Unfortunately, the opposite is too often true; parties you’d
think would be clamoring for more settle for less, especially if a business’s
numbers are reasonably good. The commitment and passion—the fire starting
—for this work must come from you.
But leaders themselves, and their own schedules, are often part of the
problem.
Finding the time and courage to address strategy is a constant challenge for
most leaders. Sure, you know you need to work on strategy now and then,
and you recognize that your management team needs it. But you’re the one
who has to make space for it and that rarely is easy. “Managers who get
caught in the trap of overwhelming demands become prisoners of routines,”
wrote Heike Bruch and Sumantra Ghoshal, in A Bias for Action. “They do not
have time to notice opportunities. Their habituated work prevents them from
taking the first necessary step toward harnessing willpower: developing the
capacity to dream an idea into existence and transforming it into a concrete
intention.”1
Stephen Covey’s celebrated distinction between urgent and important
activities helps us understand, in part, why this is so. Too often people are
consumed by activities that are urgent but not important—interruptions,
many day-to-day activities, and common fires every manager faces. What
suffers are endeavors that are important but not urgent: building
organizational capabilities, nurturing long-term relationships, and developing
viable strategies.
Beyond competing demands and the adrenaline rush that comes with
constant activity, there is an even deeper explanation about why many
leaders, and many firms, fail to fully engage with strategy: They’re
comfortable with the status quo even when it isn’t scintillating. Schumpeter
warned long ago that most people are content with keeping things the way
they are. Richard Swedberg, a Schumpeter expert, notes that the conservative
nature of people pushes back against innovation, and many leaders
themselves resist change: “While doing what is familiar is always easy . . .
doing what is new is not.”3 Or, as Schumpeter said, “The whole difference
between swimming with the stream and against the stream is to be found
here.”4
For economic development to flourish, leaders must swim against the
stream. They must step forward and take the initiative, energetically showing
the way. Schumpeter refers to this type of leader as a “Man of Action” (Mann
der Tat), someone who does not accept reality as it is. The Man of Action, in
Swedberg’s interpretation, “does not have the same inner obstacles to change
as static people or people who avoid doing what is new. What then drives the
man of action? In contrast the static person, who goes about his business
because he wants to satisfy his needs and stops once his goal has been
accomplished, the leader has other sources of motivation. He charges ahead
because he wants power and because he wants to accomplish things . . .”5
Behind every pulsating, vibrant successful strategy is a leader who seized
the initiative and made it happen. Developing and executing strategy with all
the necessary dimensions—including the accountability that attends to
making decisions with great consequences—is not a function. It is a
leadership job, and a big one.
IT’S YOUR CHOICE
In a now classic Harvard Business Review article, published in 1963, the
year before the first women were admitted to the MBA program, Seymour
Tilles, a lecturer at the school, wrote about the responsibility leaders have for
setting a course for a company. He proposed that of all the questions a chief
executive is required to answer, one predominates: What kind of company do
you want yours to be? (He raised a similar question for aspiring leaders about
themselves.) Wrote Tilles:
If you ask young men what they want to accomplish by the time they
are 40, the answers you get fall into two distinct categories. There are
those—the great majority—who will respond in terms of what they want
to have. This is especially true of graduate students of business
administration. There are some men, however, who will answer in terms
of the kind of men they hope to be. These are the only ones who have a
clear idea of where they are going.
The same is true of companies. For far too many companies, what
little thinking goes on about the future is done primarily in money terms.
There is nothing wrong with financial planning. Most companies should
do more of it. But there is a basic fallacy in confusing a financial plan
with thinking about the kind of company you want yours to become. It is
like saying, “When I’m 40, I’m going to be rich.” It leaves too many
basic questions unanswered. Rich in what way? Rich doing what?6
In the last three decades, as strategy has moved to become a science, we
have allowed this fundamental insight to slip away. We need to bring it back.
Existentialist philosophers understood the importance of choices. They
recognized that as individuals, who we are is to a large extent an
accumulation of all the choices, large and small, we’ve made through the
years of our lives. External events and influences are important, too, but our
choices are the most powerful lever we have to affect our lives.
So, too, for companies. But who makes the vital choices that determine a
firm’s very identity? Who says, “This is our purpose, not that. This is who we
will be. This is why our customers and clients will prefer a world with us
rather than without us”? These are the questions the strategist must own.
While existence may be given, essence never is. The story, the meaning, the
real significance must be made. As a leader, it is yours to create. Others,
inside and outside the firm, will contribute in meaningful ways, but in the
end, it is the leader who bears responsibility for the choices that are made.
It is this responsibility that gives you a profound opportunity to shape your
business and influence its destiny. Or as Jean-Paul Sartre, a major exponent
of existentialism, put it, “There is a future to be fashioned.”7 Sartre
championed what he called “the possibility of choice,” celebrating the way it
positions people to craft identity and define purpose. In his view, it is this
fundamental aspect—the possibility of choice—that creates the opportunity
to find meaning. “Man first of all exists,” he writes, “encounters himself,
surges up in the world—and defines himself afterwards.”8 Sartre’s is a
universe that creates boundless possibilities for self-definition.
Now consider the meaning this conviction, this faith in the power of
individuals to “surge up in the world,” “invent themselves,” and “fashion a
future” can hold in the business world. Isn’t this what Schumpeter was
saying? Isn’t it what business should be all about? Managers trying to sustain
strategic perspective must be ready to confront this basic challenge.
Organizations have to “surge up,” “invent themselves,” and “fashion” their
futures. They too face what Sartre calls a “possibility of choice” every day
their doors are open. Or rather, their owners and managers do, for just as
Sartre assigns people responsibility for fashioning their futures, the strategic
imperative for organizations falls to those who lead them.
This quest is as relevant for large multibusiness companies as it is for
focused, owner-led ones. As leveraged buy-outs proliferate and supply chains
open up around the world, nothing is more important for any firm than a clear
sense of purpose, a clear sense of why they matter. A board chairman at one
such conglomerate made the point bluntly when he asked, “What hot dish is
this company bringing to the table?” He was issuing the same challenge.
Such work can take enormous courage and fortitude—the way Young and
Kohl at Brighton Collectibles insist on minimum resale prices and refuse to
sell to stores that won’t provide sufficient marketing support for their brand,
or the way Ingvar Kamprad chose to produce furniture for the many, not the
few. These are the decisions that determine not only what a business will do,
but, more fundamentally, what a business will be. Few choices could matter
more.
STAY AGILE
As we saw with Apple, the strategist’s work is never done. Achieving and
maintaining strategic momentum is a challenge that confronts an organization
and its leader every day of their entwined existence. It’s not one choice a
strategist must make, but multiple choices over time.
Helmuth von Moltke, a disciple of the military theorist Clausewitz,
understood this well: “Certainly the commander in chief will keep his great
objective continuously in mind, undisturbed by the vicissitudes of events. But
the path on which he hopes to reach it can never be firmly established in
advance. Through the campaign he must make a series of decisions on the
basis of situations that cannot be foreseen. . . . Everything depends on
penetrating the uncertainty of veiled situations to evaluate facts, to clarify the
unknown, to make decisions rapidly, and then to carry them out with strength
and constancy.”9
No less than for the military commander, this is your job, and it’s a
challenging balancing act. As we learned in previous chapters, great
strategies are systems, with their own integrity and internal harmony among
the elements (think of how De Sole rigorously linked everything he did to his
purpose, from product line on up to management culture). Often, you will be
able to adapt while keeping your purpose intact. But you cannot confuse the
integrity of a system with rigidity. Your system of value creation has to be
flexible and adaptable. Like your strategy, it too has to evolve over time, and
respond to—or better yet, anticipate—changes in the business environment or
within the firm itself that can make its elements obsolete.
Philosopher Martha Nussbaum describes the balance in a system as a
“fragile integrity.” It is “impossible to build water-tight ships that will
withstand all contingencies,” she wrote. “You cannot remove ungoverned
chance from human life.”10 And it is wrong to try.
As a strategist, you need to live with “ungoverned chance.” Nussbaum
talks about this as going from a “more confident to a less confident wisdom,”
cultivating “flexible responsiveness, rather than rigid hardness.”11 This
requires letting go of a “rage for control” and being open to rethinking and
refashioning elements of your strategy.
Even more fundamentally, as a leader you must allow yourself to be open
to reinterpreting what your business is about. Just as it is necessary to stake
out a purpose, a leader must be open to rethinking that purpose in order to
move the business forward. Theseus was willing to change over every part of
his ship to preserve its seaworthiness. As a strategist, you must be willing to
replace virtually every component of your business to extend its relevance
and future.
There is a temptation, I think widespread, to believe that the firm
comprises its parts and their alignment, and that certain parts of the business
are so critical to what a firm is that without them the firm, in an important
sense, ceases to be. You are the one who must resist this temptation and
persuade others when big changes are due. Pablo Picasso put it bluntly:
“Success is dangerous. One begins to copy oneself, and to copy oneself is
more dangerous than to copy others. It leads to sterility.”12
Very rare is the leader who will not, at some point in his or her career, have
to overhaul a company’s strategy in perhaps dramatic ways. Sometimes this
brings moments of epiphany—eureka flashes of insight that ignite dazzling
new ways of thinking about an enterprise, its purpose, its potential. I have
witnessed some of these moments, in small group meetings or even in the
classroom, as managers reconceptualize what their organizations do and are
capable of doing. These episodes are inspiring. They can become catalytic.
Other times these decisions can be wrenching, particularly if you have built
a business that may need to be taken apart and put back together again in a
new way. More than one owner or manager—men and women coming to
grips with what their organizations are and what they want them to become—
has described that retooling as an intense personal struggle. Recall real estate
entrepreneur Kerr Taylor’s anguished decision in chapter 6 to shut down his
original broker-dealer business in the economic downturn. Though it no
longer offered his company a strategic advantage, he was emotionally
attached to it and couldn’t let go. When he finally faced up to reality and
closed it, he said, “It was one of the hardest things I ever did.”
Yet those same people often say that the experience was one of the most
rewarding of their lives. It can be profoundly liberating as a kind of corporate
rebirth or creation. An executive student, the CEO of a large Asian firm, once
described his own experience: “I love our business, our people, the
challenges, the fact that other people get deep benefits from what we sell,” he
said. “Even so, in the coming years, I can see that we will need to go in a new
direction, and that will mean selling off parts of the business. The market has
gotten too competitive, and we don’t make the margins we used to.” He
winced as he admitted this.
Then he lowered his voice and added something surprising. “At a
fundamental level, though, it’s changes like this that keep us fresh, and keep
me going. While it can be painful when it happens, in the long run I wouldn’t
want to lead a company that didn’t reinvent itself.”
Done well, undertaken organically, the exercise of crafting strategy
becomes a journey that can renew both a company and a leader. Those who
shoulder the responsibilities of an owner or top manager likely already know
the satisfaction of building something, creating something that would not
have otherwise existed. Max De Pree, the legendary CEO of Herman Miller,
said it well: “In the end, it is important to remember that we cannot become
what we need to be by remaining what we are.”13
And that, finally, is the point of everything, isn’t it? Making something and
helping it find its way. Continually refining and renewing its reason to exist.
It is the enduring job of a leader. As we saw in Apple, businesses, no less
than people, have to reinvent themselves.
GET YOUR TEAM ON BOARD
Even as you strive for a big-picture view of your business, you need to
become intimate with it at the ground level. After all, you’re leading a group
effort. You need to connect with people throughout the business so that you
can both inspire them and learn from them. If you don’t fill them in on your
thinking, they’re not likely to make strategy part of their agenda. And if you
don’t enlist their knowledge in creating plans, you are wasting an invaluable
resource: As the people who talk with the customers and do a lion’s share of
the work, they possess information you can’t do without.
Thomas Saporito, chairman of RHR International, a management
development firm, believes that many leaders get so locked into their own
vision that they resist hearing when others don’t believe in it. One executive
he coached, a CEO of a Fortune 100 company, set ambitious goals but
focused more on the soundness of his strategy than on others’ acceptance of
it: He “was so blind to how the board and employees really felt about it, that
he couldn’t gauge their low levels of buy-in.” He was eventually asked to
step aside. “Almost every CEO I’ve worked with stumbles at some point
because of this,” Saporito wrote. “When that happens, I remind them that
executives don’t get paid to be right. They get paid to be effective.”14
Max De Pree was eloquent on this subject as well. He believed that
everyone in an organization has a right to understand strategy and a right to
be involved in it. “Good communication is not simply sending and receiving.
Nor is good communication simply an exchange of data,” he wrote. “The best
communication forces you to listen.”15 Throughout, however, De Pree
recognized that leaders have an obligation to provide and maintain
momentum: “It is the feeling among a group of people that their lives and
their work are intertwined and moving toward a recognizable and legitimate
goal.” Such momentum comes from a “clear vision of what the corporation
ought to be, from a well-thought out strategy to achieve that vision, and from
carefully conceived and communicated directions and plans that enable
everyone to participate and be publicly accountable in achieving those
plans.”16
Napoleon put it this way: “Define reality, give hope.”
That great advice acknowledges the importance of facing and interpreting
hard-nosed economic reality (as Manoogian of Masco did not), underscores
the need for a purpose and a plan (as we saw in IKEA and Gucci), and
recognizes the human need of team members to be motivated and assured. In
rallying the Gucci troops around his new purpose, De Sole made it his job to
keep people informed, while also responding to the rapid business changes
around him.
“I was very good at motivating and communicating with people. I used to
give speeches in the cafeteria so that everyone would know what we were
doing,” he said in an interview. “I was very decisive in upgrading personnel
and making very hard decisions. I was disciplined, and under real pressure to
perform. It was a constant process of making changes.”
The hard and the soft, all in one.
Taylor of AmREIT speaks with enthusiasm about working on strategy with
his team. “It starts with a deep dive,” he says, “but then continues as an
ongoing strategic conversation. Discussion is honest, open—which is
particularly important when issues are tough.” It took time and effort to reach
this point, he adds. “Over the last ten years we have had to let go of a lot of
ego and power levels.” Now the team has a common language around
strategy. Today, it’s the glue: “We have conversations that relate to strategy
in some way every week.”
If a leader shortchanges questions of strategy, an organization and
everyone in it will suffer. If a leader shortchanges the team and fails to
clearly communicate that strategy, listen to others, or inspire them to get on
board, the outcome will be equally bad. As a strategist, that means your
ability to communicate—and to connect with others in the organization—is
as vital to your success as anything else you do.
ONCE AGAIN: THE CHOICE IS YOURS
In the closing session of the EOP program, I offer the executives some
advice: “On the way home, if the person sitting next to you on the plane asks
what you do, simply say: ‘I’m a guardian of organizational purpose.’17 After
that, you won’t need to worry about any more questions coming from that
direction!”
The EOPers always laugh, but by this time in the course, it’s a knowing
laugh. They recognize there’s a real truth buried in the humor: If they don’t
embrace the role behind those words, something essential in their businesses
will be missing.
Working with thousands of leaders, I’ve seen that you don’t have to be
Steve Jobs to feel good about the contribution you’ve made, or the business
you’ve helped to build. In my classes, it’s not just the multibillion-dollar steel
and world-class microfinance companies that bring satisfaction, but the
candle company that began in a kitchen and grew to support not only the
couple who started it, but more than one thousand others; the coffee roaster
who stepped out of his family’s business to offer a new value proposition to a
new set of customers; the medical supply company that’s grown with a
family over three generations, each leader weathering his or her own share of
crises and the ongoing need to find new footing, a new reason to matter.
Part of the gratification these leaders experience stems from grappling with
one’s business issues at unexpected depth, and seeing them in a larger
context, such as an executive in a storage business who came to a much more
sophisticated understanding of the impact of the powerful economic forces in
his industry, or the owner of a financial services network who rebuilt his
franchise from the ground up to serve a larger but less wealthy client group.
Whether refining a business’s purpose or direction, or how all of that is
brought to life, leaders say they are grappling with their firm’s future at a
more basic level than they had before.
When pressed, some refer to the transition from understanding the broad
outlines of a leader’s role to a more grounded sense of what the position
demands. Others refer to a newfound belief in the possibility of shaping their
firm’s future in a way that they had not previously considered.
A few individuals mention something else. Before, they say, they thought
about strategy as a set of problems to be solved—the way it is so often
approached in both practice and in school. Now, however, they’re thinking
about strategy as a way of life for themselves as a leader, a set of questions to
be lived.18 Miguel Aguiluz, the founder of Ink for Less, talks about how he
has internalized the process. He wants his businesses to be distinct, not only
when they’re founded, but over time. “I just find ways and means to be
different from the other guys. That’s what I do,” he said. When working a
new idea all the way through a strategy, he sometimes finds himself at
loggerheads with his operations executives, who are reluctant to switch gears
or change a good thing. But, he says, “an internally consistent strategy most
of the time makes a winning company.”
Each of these leaders invested the best of themselves in their work. They
identified compelling purposes, built organizations to achieve them, and
ultimately produced differences that really mattered. In doing so, they gave
meaning to their businesses and also to themselves.
During the last days of the EOP program, I ask the class to read a rather
unusual article by the late Harvard philosophy professor Robert Nozick.19 It
proposes that we substitute the difficulties and potential dreariness of daily
living with an Experience Machine, a kind of virtual reality contraption.
Nozick asks us to contemplate a world where we can achieve anything we
wish, fully formed, simply by programming and stepping into this machine.
With the experience prepared for us, there are no decisions or actions
required other than choosing the experience itself. That means no sleepless
nights, no hand-wringing, no agonizing choices or decisions. Simply step in
and go.
As appealing as this may seem at first, few are tempted to accept the offer.
They recognize that such pretend reality would deprive them of participating
in the very actions that create the experiences. While the process of getting
from here to there is not always enjoyable, and the end is not always
favorable, the undertaking itself is theirs, it’s part of who they are. “Should it
be surprising that what we are is important to us?” asks Nozick. “Why should
we be concerned only with how our time is filled, but not with what we
are?”20
Reflecting on their own lives, EOPers often say that they like the
accountability for their journeys, and their uniqueness. They like the “off-
road,” serendipitous experiences that would be missed in a preprogrammed
existence. Imagine if Ingvar Kamprad had missed the boycott of his goods
and the Polish solution that led to a completely new way to compete. Or if
Domenico De Sole had continued to pursue his Washington law career and
not gotten drawn into the troubled business of a client. Sure, these
experiences could be dialed in, but first someone else would have to imagine
them, and even so, the experiences would not be authentic, the rewards of
lives that were actively lived.21
Nozick’s Experience Machine is a fantasy, of course—at least so far—but
it opens a door to thinking deeply about the meaning of what you do. How
many people have you met who plow through life without a sense of purpose,
who go through the motions, ape the ways of others, and get their rewards
from keeping score? They may be highly accomplished, but there’s little
authentic about them. Sartre captured it with his challenging assertion:
“Everything has been figured out, except how to live.” The poet T. S. Eliot
had another angle: “We had the experience, but we missed the meaning.”
In 2002, Tony Deifell, a photographer and graduating MBA, zeroed in on
this question. He asked some of his classmates to respond to a question in a
poem by American author Mary Oliver: “Tell me, what is it you plan to do
with your one wild and precious life?” Their responses, along with their
photographs, became the basis for the Harvard Business School “Portrait
Project,” a tradition that has continued every year since.
At the close of my EOP course, I share Oliver’s poem with the class, and
urge them to visit the Portrait Project. While the exhibition is focused on
people starting out in their lives, I believe it’s equally important that we keep
asking Oliver’s question of ourselves, in our thirties, our fifties, our seventies.
In raising Oliver’s question, the last thing I would want to do is “lead the
witness” or attempt to equate being a strategist as the central answer to the
query. But, if you’re like the EOPers who respond with deep emotion to the
poem, I suspect that many of you will find the connection. It has to do with
the kind of contribution you want to make.
The Summer Day
Who made the world?
Who made the swan, and the black bear?
Who made the grasshopper?
This grasshopper, I mean—
the one who has flung herself out of the grass,
the one who is eating sugar out of my hand,
who is moving her jaws back and forth instead of up and down—
who is gazing around with her enormous and complicated eyes.
Now she lifts her pale forearms and thoroughly washes her face.
Now she snaps her wings open, and floats away.
I don’t know exactly what a prayer is.
I do know how to pay attention, how to fall down
into the grass, how to kneel in the grass,
how to be idle and blessed, how to stroll through the fields,
which is what I have been doing all day.
Tell me, what else should I have done?
Doesn’t everything die at last, and too soon?
Tell me, what is it you plan to do
With your one wild and precious life?
—Mary Oliver
New and Selected Poems (Boston: Beacon Press, 1992)
(Copyright 1992 by Mary Oliver. Reproduced with Permission.)
WITH AND WITHOUT YOU
You, like the business leaders and MBAs I have taught for more than thirty
years, must ask not just “What would the world be like without my
business?” but also “What would my business be like without a strategist?”22
What if no one in your firm stepped up to the role? No one weighed the
options and chose what the business would be—why and to whom it would
matter? What if no one built a system of advantage that enabled it to do
something in particular, particularly well? What if no one scanned the
horizon with vigilant eyes, watched over the firm, kept it vibrant, and moved
it forward?
I know these companies. You do, too. They’re all over the world. They’re
the lackluster businesses that seem to be waiting for something to happen.
They’re the down-on-their-heels ones, where people are working feverishly,
but not making headway. They’re the ones plodding forward, but never
catching or creating a wave. They’re the ones that don’t cohere, or that work
against themselves, undermining in one part of the business what they’re
doing in another part.
They’re not the kind of companies most of us would be eager to work for,
or, for that matter, to do business with. They aren’t the companies making a
difference.
By contrast, most of the business leaders I have worked with come to
embrace the role of the strategist seriously and with enthusiasm. They like the
inspiration they feel about what they do and why that matters. They like the
feeling that the world with and without them at the helm would be different.
As a leader, if you ignore or underestimate your crucial, ongoing role as a
strategist, something essential in your business will be missing. Answered
well over a lifetime, the questions at the heart of strategy will help a company
prevail. Answered poorly, or not at all, they leave it adrift and vulnerable.
Articulating and tending to a living strategy is a human endeavor in the
deepest sense of the term. Keeping all the parts of a company in balance
while moving an enterprise forward is extraordinarily difficult. Even when
they have substantial talent and a deep appreciation for the job, some leaders
ultimately don’t get it right. Their legacies serve as sobering reminders of the
complexities and responsibilities of stewardship. On the other hand, it is
exactly these challenges that make the triumphs so rewarding.
Frequently Asked Questions
I run a nonprofit. How relevant, really, are these ideas for me?
A great strategy is valuable to any organization. At its heart, the goal is to
give an organization a difference that matters, and enable it to do something
of importance particularly well. Having a strategy to do this is every bit as
important for a nonprofit as for a for-profit business venture.
It would be a huge mistake to think that nonprofits are exempt from the
rigors of competition or to assume that how they perform and what they add
won’t constantly be evaluated relative to alternatives. To the contrary!
Competition in the non-profit sphere is as intense as any, and most nonprofits
operate on even tighter budgets, with scarcer resources and more diffuse
pathways between them, their clients, and those who fund their activities.
This makes the need for clarity and effectiveness all that much greater.
As a nonprofit, you need to have a good understanding of your purpose—
what you will do and what you won’t do—and you must build an
organization that is parsimonious and tightly tailored to that end. That means
you’ll also need the metrics one would demand of any first-class
organization. All of this becomes part of who you are: Hone it carefully.
Doing so will not only make your organization stronger; it will also help you
tell your story to all who need to know.
Is there still a place for SWOT analysis and if so, where?
We absolutely still need SWOT. It’s one of those timeless tools that pull a
lot of information together. It’s a high-level summary of a firm as a player
and of the competitive environment at the same time. It can provide valuable
context as you refine your purpose and develop your strategy.
If you’re not familiar with it, a SWOT analysis looks at a firm’s own
strengths and weaknesses, and the opportunities and threats in its
environment, sometimes using a matrix like the one below.
What’s the difference between a vision, a mission, and a purpose. Do we
need all of them?
A vision is what you want your business to be at some point in the future. It
may be that you want to grow from a regional player to a national player, or
from a national player to a global competitor. Or that you want to develop a
service business alongside your product offerings. Whatever it may be, it is a
picture of where you want to be down the road, and it’s useful. A new CEO
whom I work with was recently given this advice: “Start out with a picture of
where you want to end.”
Mission statements mean different things to different people and have been
used in so many different ways that we’ve lost a clear sense of what they are
or what they should be. Some are very broad, even lofty, and talk in vague
terms about how a business will contribute to its community. Others are more
narrow and closer to what I think of as a purpose, but often fail to connect
with the real economics of a business.
To avoid this confusion, I use purpose to define why a firm will matter in
its competitive context—the value it will add, and why that space will be
different because it exists. That frees up mission to be used as it was
originally intended—as a comment about the “higher” purposes of a firm and
its relationships with society.
How do I go about analyzing my industry?
You can gain a lot of traction by starting with what you know. Gather a
team and talk about each of the five forces in turn, drawing on your own
experience in your industry. After identifying the facts, consider what they
mean. Who has the power in this context? Why? Is it shifting? How? Overall,
do the forces make the industry an attractive place to do business? Are some
parts of the market less/more attractive than others? Are some players
positioned worse/better than others? Could you be better positioned yourself?
There is a lot of relevant data outside your firm that can help you in this
process: Government agencies and industry trade associations can be
excellent sources for facts and statistics; prepackaged industry surveys
produced by consulting firms or investment research services like Standard &
Poor’s often include detailed industry analyses, as do many analyst reports on
key industry players.
A local public or university library should have access to publications and
databases that can aid in your search, providing comparative data, market
research and analyst reports, and recent newspaper and magazine articles.
Factiva, Hoover’s, LexisNexis, OneSource, Standard & Poor’s, Thomson,
and Business Source Complete, among others, provide various kinds of
industry- and company-specific information and are available in many
libraries or by subscription.
For an excellent discussion of these and other sources, see “Finding
Information for Industry Analysis,” by Jan W. Rivkin and Ann Cullen,
Harvard Business Publishing, Note 708481, January 7, 2010.
To succeed, must I be a low-cost player?
No. There are many different ways to add value and many different ways
to compete.
Historically, Michael Porter identified three generic strategies: low-cost
producers; differentiators, who command premium prices for unique
products; and focused firms who compete in very specific market segments,
and could be either high- or low-cost producers. In practice there are an
infinite number of strategies that are variations on these themes, and many
successful strategies are not “pure plays.” Nevertheless, the notion of generic
strategies is a useful insight that forces one to think hard about how a firm is
adding value, and the tradeoffs that may require.
In groups of executives, I’ve found that relatively few claim that their
companies are low-cost producers who compete primarily on price.
Recognizing that, a majority, and some almost by default, claim to be
differentiators. They think of themselves in that vein, describe themselves in
that vein, and some have the evidence to prove it. But a fair number paint
alluring pictures and have everything lined up, except customers who
appreciate their “unique” value and are willing to pay for it. To earn that you
need to have a system of value creation that enables you to produce and
market products or services with a true difference that matters. That generally
leads to higher costs, but higher costs that get you and your customers
something in return.
Many successful small and medium-size players focus on narrow, rather
than wide, groups of customers, and make deliberate choices to tighten the
scope of their businesses. This enables them to zero in on the idiosyncratic
needs of a particular set of customers and build systems of value creation that
meet those needs particularly well. Doing so can distinguish them from more
generic players who compete more broadly, and make customers, whose
idiosyncratic needs are now addressed, better off.
Many firms seem to get by without tightly linked systems of value creation.
Why should I make it a priority for my business?
The intrinsic value of a well-developed system is perhaps easiest to see
when a competitor tries to duplicate a successful firm. If you had the recipe,
you could make Coca-Cola, for instance, but you wouldn’t be able to
duplicate its brand recognition, its supply and distribution lines, or its pricing.
These are resources and activities the firm has honed over decades; the fact
that they work together in a tightly linked system makes them all that much
more difficult to imitate.
Years ago, some American investors tried to copy IKEA with a business
called STØR. (Apparently the line through the O was supposed to hint at a
Scandinavian connection.) STØR mimicked IKEA’s look and products, but,
after some initial success, it couldn’t hold its own.1
STØR and other imitators failed because they could copy only single points
of advantage. As Anders Dahlvig, IKEA’s group president, said: “Many
competitors could try to copy one or two of these things. The difficulty is
when you try to create the totality of what we have. You might be able to
copy our low prices, but you need our volumes and global sourcing presence.
You have to be able to copy our Scandinavian design, which is not easy
without a Scandinavian heritage. You have to be able to copy our distribution
concept with the flat pack. And you have to be able to copy our interior
competence—the way we set out our stores and catalogues.”2
Success comes from a compelling purpose, tightly embedded in an
interlocking system of value creation, and does so in a way that is difficult for
others to imitate.
Should I try to develop a strategy alone or with my team?
Your team should definitely be part of the effort—but many leaders find it
useful to first work alone through the strategy exercise outlined in chapter 6.
You will likely find it a lot harder than you thought, and that experience will
introduce you to the process and help you identify the issues that are likely to
be most challenging in your company. Then, get your team involved.
Teams often begin by attempting to write out a strategy statement for a
business. That’s okay, but don’t spend too much time on it at the start. It
comes much easier once you’ve nailed the strategy. To do that, begin by
developing an initial definition of your business’s purpose (don’t get hung up
on words at this point) and work your way through a strategy wheel, spoke by
spoke. This is an iterative process—refinements will come. As the big
building blocks of what you do fall into place, revisit the purpose, and then
come back to the wheel. As you close in on a purpose, and the activities and
resources to support it, go back to the strategy statement. By then it will be
clear what you need to convey.
How long should we expect to spend on the process?
Several meetings over a two- to three-month window should be sufficient.
If you’re missing pieces of information, give people the responsibility to
locate them and bring them to the next meeting. It’s important to keep up the
momentum and move toward conclusion. Too many companies fall into a
trap of “discussing and discussing and discussing.” In itself that could be a
virtue, but strategy is about choices. Reaching closure is important.
Should it be a democratic process?
Even with your team’s help, as the head of the business you should lead the
effort. It is vital to hear others’ views and get their input and feedback, but if
a clear and compelling direction doesn’t naturally emerge, you must make the
call. Don’t try to create a strategy by committee. Relying on consensus can
produce a less-than-ambitious result and a strategy that is more like a
compromise than an ambitious aspiration.
That said, as we discussed in Chapter 8, it is important to keep in mind
from the start that you will need the commitment and support of other
managers and a wide swath of employees to execute a plan. In his
management development work, Thomas Saporito has seen too many CEOs
fail because they attempted to charge ahead without this level of buy-in: “A
CEO may be 100% correct with his or her strategy, but without deep support
for it from the board, senior team, and employees, it doesn’t matter,” he
wrote.3
Isn’t it risky to put my strategy statement on my website?
This is a common question executives ask: Won’t my competitors find out
what we’re doing?
In reality, if who you are and what you do is clear to your customers, it is
also probably clear to your competitors. As with IKEA and Coca-Cola, if
you’re really good at what you do, there should be other barriers that will
make imitation difficult.
The strategy wheel, with all its detail about your specific activities and
resources, is an internal working document. But who you are as a player and
why you matter should not be a secret; in fact, it is something you should
broadcast. People outside the company as well as inside need to know what
your business brings to the world and why it matters.
How often should we revisit the strategy?
In a relatively stable environment, big changes may not occur often, but the
strategy should be formally revisited on a regular basis, once a year or so.
This might result in minor course adjustments or a refashioning of some
elements, often moving toward greater efficiency, and more effectiveness, in
what you are already doing. In periods of more rapid change—whether
generated internally or externally—these examinations may be less formal,
occur more frequently, and lead to more significant change. In either
scenario, to be worthwhile, these examinations should be fearless, thorough,
and open discussions about exactly how your firm is faring in the
marketplace and opportunities for improvement.
Beyond the formal processes, the leader of a business—the person who
bears the most responsibility for its long-term health and vitality—should
come to see everything that happens to a company through the lens of
strategy: What do these events, activities, opportunities, or threats imply for
us? What do they say about who we are and why we matter? How should we
respond? This kind of engagement doesn’t take place on a scheduled basis—
it is ongoing and requires constant vigilance.
Recommended Reading
Want to learn more about the ideas and companies discussed in this book?
Here are some of my favorite sources, with notes about why I’ve
recommended them.
Industry Analysis
Competitive Strategy: Techniques for Analyzing Industries and
Competitors, by Michael E. Porter. 1980; reprint, New York: Free Press,
1998.
This is Porter’s classic work on industry analysis. It identifies five
economic forces that influence industry profitability and have a great impact
on industry-level profit. He talks about how to analyze these forces in your
industry and how to position your firm vis-à-vis their impact.
“The Five Competitive Forces That Shape Strategy,” by Michael E. Porter.
Harvard Business Review, January 1, 2008.
This article is a short, straightforward presentation of the key ideas that are
developed in more detail in Competitive Strategy. For a high-level survey of
the topic, this is a good place to start. For a deeper dive, go to the book itself.
Strategy
“What is Strategy?” by Michael E. Porter. Harvard Business Review,
November 1, 1996.
Porter discusses strategy as the creation of a unique position involving a
distinct set of activities. It requires one to make trade-offs—to choose what to
do and what not to do—and demands fits across all of a company’s activities.
Managers in my courses find the article both inspiring and practical.
“Creating Competitive Advantage,” by Pankaj Ghemawat and Jan W.
Rivkin. Harvard Business School Note, 9-798-062, Harvard Business School
Publishing, 2006.
This nuts-and-bolts class note, originally written for MBA students, is a
careful, straightforward presentation about several important strategy
frameworks and how to use them in practice. Executive students have found
its quantitative examples of added value and relative cost analysis particularly
helpful.
Co-opetition, by Adam Brandenburger and Barry Nalebuff. New York:
Currency/Doubleday, 1996.
This book shows how game theory can help a strategist think through a
firm’s interactions in a market. It moves beyond a zero-sum perspective on
competition—where one firm’s gains are another firm’s losses—to a
cooperative view, where firms create more value by working with, not
against, customers, vendors, and others. It’s an important contribution that
could change your way of thinking about the goals and intentions of your
strategy.
Blue Ocean Strategy: How to Create Uncontested Market Space and Make
Competition Irrelevant, by W. Chan Kim and Renée Mauborgne. Boston:
Harvard Business School Publishing, 2005.
Being different is one of the distinguishing features of a good strategy. But
how to achieve that and, in particular, how to go about identifying the ways a
firm might position itself apart from the masses is a challenge. Kim and
Mauborgne make headway on this important question.
Creating Competitive Advantage: Creating and Sustaining Superior
Performance, by Michael E. Porter. 1985; reprint, New York: Free Press,
1998.
This book is the companion to Competitive Strategy that focuses on
industry-level analysis (see above). Here Porter zeros in on individual firms
and how to create competitive advantage. Many managers find it heavy
reading, but for those who want to dig deeply into competitive strategy, it has
valuable insights.
Management and Leadership
Good to Great, Why Some Companies Make the Leap . . . and Others
Don’t, by Jim Collins. New York: HarperCollins, 2001.
I often poll business managers in class about their favorite business books.
Hands down, Good to Great tops the list. When asked why they find it so
special, they say they like the balance Collins finds between doing the right
things strategically and getting the right people on the bus to do them.
Leadership Is an Art, by Max De Pree. New York: Currency/Doubleday,
2004.
De Pree writes with great confidence and wisdom about leading a
company, and in particular about involving and inspiring people in the
mission of a business.
Identifying Valuable Firm Resources
“Competing on Resources,” by David J. Collis and Cynthia A.
Montgomery. Harvard Business Review, July 1, 2008 (originally published in
July–August 1995).
When managers try to identify the core competences in their firms, they
often produce long, undifferentiated laundry lists. This article discusses what
makes certain kinds of resources valuable, and why it is important to have
such resources as part of your strategy.
Chasing Stars: The Myth of Talent and the Portability of Performance, by
Boris Groysberg. Princeton, NJ: Princeton University Press, 2010.
Any manager who is tempted to blithely say that “people are our
company’s most valuable resource” should read this book. The research fully
acknowledges the many contributions of individual performers but shows
why that talent must be seen as part of a larger business system, not
something separate from it.
Dealing with Technological Change
“Meeting the Challenge of Disruptive Change,” by Clayton M. Christensen
and Michael Overdorf. Harvard Business Review, March 1, 2000.
Christensen’s research on disruptive technologies counts among the most
influential management ideas of the last twenty-five years. This article is a
good introduction to his work and includes references to his other articles and
books.
IKEA
Leading by Design—The IKEA Story, by Bertil Torekull. New York:
HarperBusiness, 1998.
This is the authoritative biography on Ingvar Kamprad, the founding of
IKEA, and the philosophy behind the firm. It’s a rather rough translation
from Swedish, and hardly objective, but it gives a close-up view of the
entrepreneur, often in his own words, and a lot of information about the role
that purpose plays at IKEA. It includes the document “A Furniture Dealer’s
Testament,” which lays out IKEA’s guiding principles in detail.
Gucci
The House of Gucci: A Sensational Story of Murder, Madness, Glamour,
and Greed, by Sara Gay Forden. New York: Perennial, 2001.
This is the story of a family business and a family saga so strange that it
seems like fiction. Beyond its entertainment value, the book shows how easy
it is for a firm to drift off course over several generations, and why family
dynamics can add another layer of challenge to management.
Apple
Return to the Little Kingdom: Steve Jobs, the Creation of Apple, and How
It Changed the World, by Michael Moritz. New York: Overlook Press, 2009.
There are many terrific books on Apple that cover various products or
periods in the development of the firm. What I like about this one is that it
gives an unvarnished look at Apple’s earliest years—what it was really like—
and what was working and what wasn’t. A foreword puts that in context of
more recent developments (Moritz’s original book on Apple, The Little
Kingdom, was published in 1984). Entrepreneurs who are starting out may
find it inspiring to see how humble it all was at the start.
Steve Jobs’s Stanford University commencement speech, June 14, 2005.
Text: news.stanford.edu/news/2005/june15/jobs-061505.htm.
Video: www.youtube.com/watch?v=D1R-jKKp3NA.
In this speech, titled “Live Before You Die,” Jobs discusses some of the
pivotal points in his life.
Notes
Introduction: What I Learned in Office Hours
1. This line of thinking was inspired by a discussion in Co-opetition by A.M.
Brandenburger and B.J. Nalebuff (New York: Doubleday, 1996, p. 47).
Chapter 1: Strategy and Leadership
1. Ronald A. Heifetz and Marty Linsky, Leadership on the Line (Boston: Harvard Business
School Press, 2002), pp. 53–54.
Chapter 2: Are You a Strategist?
1. This discussion draws from Michael E. Porter, Cynthia A. Montgomery, and Charles W.
Moorman, “The Household Furniture Industry in 1986,” “Masco Corp (A),” and “Masco
Corp (B),” Harvard Business Publishing, Boston, 1989.
2. Besides faucets, Masco made plumbing fittings, bathtubs and whirlpools, builders’
hardware, venting and ventilating equipment, insulation products, water pumps, weight-
distributing hitches, winches, office furniture, brass giftware, and plasticware.
3. Porter, Montgomery, and Moorman, “The Household Furniture Industry in 1986,” pp. 1,
5–6.
4. Wall Street Transcript, August 24, 1987.
5. Masco Annual Report, 2001.
6. Joseph Serwach, “Masco COO Follows Unit,” Crain’s Detroit Business, May 27, 1996,
p. 3.
Chapter 3: The Myth of the Super-Manager
1. Richard Farson, Management of the Absurd (New York: Free Press, 1997), p. 15.
2. Jennifer Reingold, “The Masco Fiasco—The Masco Corp. Was Once One of America’s
Most Admired Companies; Not Anymore,” Financial World, October 24, 1995.
3. “Mengel Company (A),” Harvard Business School, 1946.
4. Michael E. Porter, “Understanding Industry Structure,” Harvard Business School course
note N9-707-493, August 13, 2007.
5. This discussion of industry forces draws heavily on the seminal work of Michael E.
Porter, including Competitive Strategy (New York: Free Press, 1998) and “The Five
Competitive Forces That Shape Strategy,” Harvard Business Review, January 1, 2008.
6. Large sample studies have found that industry effects across the economy on average
account for between 10 and 19 percent of the variance in firm performance. In
manufacturing industries, their effect is often around 10 percent; in some other sectors their
impact is much higher. In wholesale/retail, lodging/entertainment, and services, industry
accounts for over 40 percent of variance in firm profitability. In agriculture/mining and
transportation, industry accounts for 39.50 percent and 29.35 percent, respectively, of
variance. See A. M. McGahan and M. E. Porter, “How Much Does Industry Matter,
Really?” Strategic Management Journal, Summer 1977, pp. 15–30.
7. This framework is due to Porter. See above.
8. Jack Welch, interviewed by Christopher Bartlett on December 16, 1999, Harvard
Business School Media Services, Tape No. 10095.
9. Warren Buffett, Brainy Quote.com, accessed August 15, 2011.
10. W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How to Create
Uncontested Market Space and Make the Competition Irrelevant (Boston: Harvard
Business School Publishing, 2005).
11. Reingold, “The Masco Fiasco.”
Chapter 4: Begin with Purpose
1. “IKEA: How the Swedish Retailer Became a Global Cult Brand,” BusinessWeek,
November 14, 2005.
2. Bertil Torekull, Leading by Design: The IKEA Story (New York: HarperBusiness, 1999),
p. 10. The book was originally published in Sweden as Historien om IKEA (The Story of
IKEA) in 1998.
3. Torekull, Leading by Design, p. 10.
4. Ibid., p. 24.
5. Ibid., pp. 148–49.
6. Robert McKee, Story (New York: HarperCollins, 1997), pp. 181–207.
7. Torekull, Leading by Design, p. 50.
8. IKEA 2010 Annual Report.
9. Ellen Lewis, Great IKEA!, (UK: Marshall Cavendish, 2008) p. 39.
10. Ingvar Kamprad, “A Furniture Dealer’s Testament,” quoted in Torekull, Leading by
Design, p. 228.
11. Ibid., pp. 228, 231.
12. These estimates are for 2004–2009 and come from “IKEA: Flat-pack Accounting,” The
Economist, May 13, 2006 (estimates net profit margin of nearly an 11 percent return for
2004); Kerry Capell, “IKEA: How the Swedish Retailer Became a Global Cult Brand,”
BusinessWeek, November 14, 2005 (estimates net profit margin of 9.6 percent for 2005,
described by an analyst as “among the best in home furnishings”; “Ikea Forecasts ‘Flat’
Profits for 2010,” Local, Swedish edition, February 22, 2010 (estimates net profit margin
of 22.9 percent for 2009).
13. Rodd Wagner and James K. Harter, The Elements of Great Managing (Washington,
DC: Gallup Press, 2006), p. 117.
14. Michael Porter makes a strong argument about the value of trade-offs in strategy. See
“What Is Strategy?” Harvard Business Review, November 1, 1996 (also available as HBR
Reprint 96608).
15. IKEA Vision Statement, quoted in Youngme Moon, “IKEA Invades America,”
Harvard Business School Publishing, September 14, 2004, p. 5.
16. These added-value charts were developed by the strategy teaching group at Harvard
Business School and are based on the pioneering work of Adam Brandenburger, Barry
Nalebuff, and Harborne Stuart. See A. M. Brandenburger and H. W. Stuart, “Value-Based
Business Strategy,” Journal of Economics and Management Strategy 5 (1996), pp. 5–24.
Based on a suggestion by Adam Brandenburger, and to create a parallel with the line
labeled “Willingness to Pay,” I label the bottommost line on the chart “Willingness to
Supply” (not “Opportunity Cost,” as in the Brandenburger and Stuart article). These ideas
are also developed in A. M. Brandenburger and B. J. Nalebuff, Co-opetition (New York:
Doubleday, 1996).
17. Ibid.
18. Moon, “IKEA Invades America.”
19. Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage,” Harvard
Business School course note 798-062, February 25, 2006, p. 7.
20. This wonderful question arises from a discussion in Brandenburger and Nalebuff, Co-
opetition, p. 47ff, where they discuss, among other things, the classic movie It’s a
Wonderful Life and ask “What is your added value?”
Chapter 5: Turn Purpose into Reality
1. I was first introduced to the Gucci story through David Yoffie’s case on the company:
“Gucci Group N.V. (A),” Harvard Business Publishing, Boston, May 10, 2001. He has
since written a second case on the company, “Gucci Group in 2009,” January 14, 2009.
2. Sara Gay Forden, The House of Gucci (New York: Perennial, 2001), p. 251.
3. The idea to illustrate Gucci’s development over time in this way is drawn from David
Yoffie’s original teaching plan for the Gucci case.
4. In “What Is Strategy,” Harvard Business Review, November–December 1996, p. 62,
Porter introduces the idea of a Productivity Frontier to identify firms in an industry that are
best in class. A firm’s particular location on the frontier identifies its positioning in the
industry; if a firm is off the frontier it means either that its costs are too high or its
nonprice-buyer value delivered is too low, relative to other players in the industry. The
charts used in this chapter are inspired by Porter’s work, but the titles and axes have been
modified.
5. Forden, The House of Gucci, p. 119.
6. Luisa Zargani, “True Confessions,” Women’s Wear Daily, June 5, 2006, p. 30.
7. Forden, The House of Gucci, p. 63.
8. Ibid., p. 110.
9. Ibid., p. 155.
10. As quoted in David Yoffie, “Gucci Group N.V. (A),” Harvard Business Publishing,
January 14, 2009, p. 3.
11. Forden, The House of Gucci, p. 142.
12. Yoffie, “Gucci Group N.V. (A),” p. 7.
13. Forden, The House of Gucci, p. 167.
14. It was soon the end of Maurizio, too. A year and a half later he was murdered by a hit
man hired by his ex-wife.
15. Author’s interview with De Sole, August 10, 2010.
16. Ibid.
17. Ibid.
18. Yoffie, “Gucci Group N.V. (A),” p. 9.
19. Ibid.
20. Forden, The House of Gucci, p. 255.
21. Ibid., p. 259.
22. Gucci.com, under Gucci history, 1990s.
23. Credit Suisse First Boston Equity Research, “Gucci Group N.V.,” March 9, 2001, p. 3.
24. Lauren Goldstein, “Style Wars,” Time, April 9, 2001.
25. Amy Barrett, “Fashion Model: Gucci Revival Sets Standard in Managing Trend-Heavy
Sector: Italian House Buffs Brand by Focusing on Quality, Exclusivity and Image—Hidden
Costs of Cachet?” Wall Street Journal Europe, August 25, 1997.
26. Forden, The House of Gucci, p. 185.
27. Ibid., p. 142.
28. Author’s interview with De Sole, August 10, 2010.
29. Credit Suisse, “Gucci Group N.V.,” p. 14.
30. Author’s interview with De Sole, August 10, 2010.
31. Credit Suisse, “Gucci Group N.V.,” p. 10.
32. Author’s interview with De Sole, August 10, 2010.
33. Ibid.
34. Yoffie, “Gucci Group N.V. (A),” p. 8.
35. Author’s interview with De Sole, August 10, 2010.
36. Porter, “What Is Strategy?”
37. Author’s interview with De Sole, August 10, 2010.
38. Forden, The House of Gucci, pp. 322–24.
39. Wall Street Journal, March 6, 2003.
40. Author’s interview with De Sole, August 10, 2010.
41. “The Turnaround Champ of Haute Couture,” Fortune, November 12, 1997, pp. 305–6.
42. Porter makes this point persuasively in “What Is Strategy?”
Chapter 6: Own Your Strategy
1. The strategy exercise described here, in particular the section on developing a strategy
statement, owes a great tribute to the work of my late colleague Michael G. Rukstad. A
posthumous article describing that work, David G. Collis and Michael G. Rukstad’s “Can
You Say What Your Strategy Is?” was published in the Harvard Business Review, April 1,
2008. Michael and I worked together on the first iteration of the strategy exercise in EOP.
2. James Champy, “Three Ways to Define and Implement a Corporate Strategy,” July 13,
2006, column accessed via Searchcio.com, August 31, 2011.
3. http://www.pg.com, accessed August 31, 2011.
4. http://www.nike.com, accessed September 22, 2007.
5. http://www.google.com, accessed September 22, 2007.
6. ttp://www.bmwgroup.com, accessed January 6, 2011.
7. Elzinga, Kenneth G. and David E. Mills, “Leegin and Precompetitive Resale Price
Maintenance,” The Antitrust Bulletin Volume 55, no. 2, summer 2010.
8. Ibid. See also: Stephen Labaton, “Century-Old Ban Lifted on Minimum Retail Pricing,”
New York Times, June 20, 2007.
9. http://www.FourSeasons.com, accessed September 22, 2007.
10. “About the Economist Group,” http://www.Economist.com, accessed August 31, 2011.
11. http://www.Doctorswithoutborders.org, accessed July 12, 2011.
Chapter 7: Keep It Vibrant
1. David Yoffie has developed a series of excellent Apple cases over the years that allow
executives to examine the company and the industry as it was at various points in time.
See, for example, “Apple Inc in 2010,” “Apple Computer, 2006,” “Apple Computer in
2002,” “Apple Computer 1995,” and “Reshaping Apple’s Destiny—1992,” Harvard
Business Publishing, Boston.
2. Michael Moritz, Return to the Little Kingdom (New York: Overlook Press, 2009),
p. 183. In 1984 Moritz published his original history of Apple, The Little Kingdom.
3. Alan Deutschman, The Second Coming of Steve Jobs (New York: Broadway Books,
2000), p. 54.
4. Moritz, Return to the Little Kingdom, p. 194.
5. Ibid., pp. 217–18.
6. Ibid., p. 242.
7. Ibid., p. 257.
8. Ibid., p. 276.
9. Ibid., p. 206.
10. Ibid., p. 268.
11. Ibid., p. 304.
12. Jeffrey S. Young and William L. Simon, iCon (Hoboken, NJ: Wiley, 2005), p. 80.
13. Owen W. Linzmayer, Apple Confidential 2.0 (San Francisco: No Starch Press, 2008),
pp. 77–78.
14. Lee Butcher, Accidental Millionaire: The Rise and Fall of Steve Jobs at Apple
Computer (New York: Knightsbridge, 1990), p. 174.
15. Young and Simon, iCon, p. 70.
16. Linzmayer, Apple Confidential 2.0, p. 154.
17. Moritz, Return to the Little Kingdom, p. 332.
18. Linzmayer, Apple Confidential 2.0, p. 157.
19. Ibid., p. 158.
20. http://Jeremyreimer.com/postman/node/329.
21. Linzmayer, Apple Confidential 2.0, p. 161.
22. Yoffie, “Apple Computer, 2006,” p. 4.
23. Brent Schlender, “Something’s Rotten in Cupertino,” Fortune, March 3, 1997, p. 100.
24. Linzmayer, Apple Confidential 2.0, pp. 263–69.
25. Joseph A. Schumpeter, Capitalism, Socialism and Democracy (1943; reprinted, Taylor
& Francis e-library, 2003), p. 84.
26. Bear Stearns, “Computer Hardware,” Equity Research, July 2002.
27. Peter Rojas, “Why IBM Sold Its PC Business to Lenovo,” Engadget, January 1, 2005.
28. Moritz, Return to the Little Kingdom, p. 299.
29. Ibid.
30. Quoted in Linzmayer, Apple Confidential 2.0, p. 247.
31. Ibid.
32. Deutschman, The Second Coming of Steve Jobs, pp. 54–55.
33. Linzmayer, Apple Confidential 2.0, p. 210.
34. Moritz, Return to the Little Kingdom, p. 14.
35. Quoted in Deutschman, The Second Coming of Steve Jobs, p. 183.
36. Quoted in Linzmayer, Apple Confidential 2.0, p. 212.
37. Adam Lashinsky, “The Decade of Steve,” Fortune, November 23, 2009, p. 95.
38. Quoted in Linzmayer, Apple Confidential 2.0, p. 292.
39. Quoted in ibid., p. 289 (originally appeared in Fortune, February 19, 1996).
40. Quoted in ibid., p. 176.
41. Lashinsky, “The Decade of Steve,” p. 95.
42. Deutschman, The Second Coming of Steve Jobs, p. 249.
43. Linzmayer, Apple Confidential 2.0, pp. 295–98.
44. Leander Kahney, Inside Steve’s Brain (New York: Portfolio, 2008), pp. 185–88.
45. Quoted in Steven Levy, The Perfect Thing (New York: Simon & Schuster, 2007), p. 51.
46. Quoted in Lashinsky, “The Decade of Steve,” p. 96. Original in Time magazine in early
2002.
47. “Ship of Theseus,” Wikipedia, accessed August 19, 2011.
48. Levy, The Perfect Thing, pp. 73–74.
49. Ibid., p. 3.
50. Apple 10-K, filed October 27, 2010, p. 81.
51. Jared Newman, “Apple iCloud: What It Is, and What It Costs,” Today at PC World
blog, posted August 2, 2011.
52. NPD Group Inc., “Windows Phone 7 Off to a Slow Start in Fourth Quarter, as Android
Smartphone Market-Share Lead Increases,” press release, January 31, 2011.
Chapter 8: The Essential Strategist
1. Heike Bruch and Sumantra Ghoshal, A Bias for Action: How Effective Managers
Harness Their Willpower, Achieve Results, and Stop Wasting Time (Boston: Harvard
Business School Press, 2004).
2. Stephen R. Covey, The Seven Habits of Highly Effective People, New York:
Fireside/Simon & Schuster, 1989.
3. Richard Swedberg, “Rebuilding Schumpeter’s Theory of Entrepreneurship,” Cornell
University, March 6, 2007, p. 7.
4. Schumpeter, 1911, as quoted in ibid., p. 7.
5. Swedberg, “Rebuilding Schumpeter’s Theory of Entrepreneurship,” p. 8. These are
Swedberg’s words explaining and summarizing what Schumpeter had written.
6. Seymour Tilles, “How to Evaluate Corporate Strategy,” Harvard Business Review, July–
August, 1963.
7. Jean-Paul Sartre, “Existentialism and Humanism,” Basic Writings, edited by Stephen
Priest (Florence, KY: Routledge, 2001), p. 42.
8. Ibid., p. 29.
9. Helmuth von Moltke, quoted in Clausewitz on Strategy: Inspiration and Insight from a
Master Strategist, edited by Tiha von Ghyczy et al. (New York: Wiley, 2001), p. 55.
10. Martha C. Nussbaum, The Fragility of Goodness: Luck and Ethics in Greek Tragedy
and Philosophy (Cambridge: Cambridge University Press, 2001), p. 59.
11. Ibid., p. 80.
12. http://www.brainyquote.com.
13. Max De Pree, Leadership Is an Art (New York: Currency/Doubleday, 2004), p. 100.
14. Thomas J. Saporito, “Every CEO Needs an Executive Listener,” Forbes Leadership
Forum, July 21, 2011.
15. De Pree, Leadership Is an Art, p. 102.
16. De Pree, Leadership Is an Art, p. 18.
17. C. Roland Christensen, Kenneth R. Andrews, and Joseph L. Bower, in their textbook
on general management, Business Policy: Text and Cases (Homewood, IL: R. D. Irwin,
1973), pp. 16–18, described one of the roles of the CEO as “architect of organizational
purpose.” I prefer the term “guardian of organizational purpose” because it encompasses
both formulation and implementation, and because it implies a more ongoing
responsibility.
18. This is reminiscent of the advice Rainer Maria Rilke gives in his classic Letters to a
Young Poet.
19. Robert Nozick, “The Experience Machine,” in Anarchy, State, and Utopia (New York:
Basic Books, 1974), pp. 42–45.
20. Ibid.
21. David Baggett and Shawn Klein, Harry Potter and Philosophy: If Aristotle Ran
Hogwarts (Chicago: Open Court, 2004), chapter 7, “The Experience Machine: To Plug In
or Not to Plug In.” This essay talks about an authentic life as one that is actively lived.
22. See final endnote in Chapter 4. The first question here—about what the world would be
like without your business—is from Brandenburger and Nalebuff’s book, Co-opetition.
Frequently Asked Questions
1. IKEA was so angered by what it saw as a deliberate attempt to imitate its look and
products that it sued STØR, forcing the firm to change some operations. In time, STØR
was unable to operate profitably and approached IKEA for help. IKEA acquired the firm in
1992.
2. Christopher Brown-Humes, “An Empire Built on a Flat-Pack,” FT.com, November 23,
2003, p. 1.
3. Saporito, ibid., “Every CEO Needs an Executive Listener.”
Index
The pagination of this electronic edition does not match the edition from
which it was created. To locate a specific passage, please use the search
feature of your e-book reader.
A
Aguiluz, IX, Amable “Miguel,” 93–95, 144–45
Ink for Less Professional (business customer division) and, 104, 106
Ink for Less strategy statement and, 102
airline industry
average profitability of, 26
firm effect, 47
How Firms Differ: Firm Effects in Four Different Industries, 48
Ajayi, Richard, 82
Allen, Paul, 113
Altria tobacco, 47
Amazon, 110
Amelio, Gil, 118–19
AmREIT, 85–87
AmREIT Portfolio: Demographic Positioning, 86
broker-dealer business shut-down and, 104, 140
formulating a strategy statement, 85
Irreplaceable Corner Criteria, 86, 87
metrics (data) over intuition and, 85–86
slogan of (“Irreplaceable Corner Company”), 85, 86
team approach and implementing management strategies, 143
Apple, 110–31, 170–71n 1
Amelio leads, 118–19
Apple II, 111–12, 120
Apple III as first failure, 113, 120
arrogance of, 121
competition and, 129
creative destruction and, 120, 127
customers and, 112, 114, 125
“difference that mattered” and, 112, 124
digital hub strategy, 125
evolution of industry and change in strategy, 129, 130–31, 141
FireWire, 126
functional advantages over other early computer makers, 112
iCloud, 128, 129
iMac, 124–25
iMovie, 126
iPad, 128, 129
iPhone, 127–28, 129
iPod, 126, 127, 128
iTunes, 125, 127
Jobs leaves company, 116
Jobs returns, 119, 124, 130–31
Jobs revives and recreates company, 124–31
Lisa, technology advances and marketing problems, 114–15, 120
loss of a difference that mattered, 119–22
Macintosh, 114, 115–16, 117, 120
Mac OS, 119, 125, 126
management style change, 124
market share slide, 117
market value (1980), 112
market value (2010), 128
name change and shrinking computer business, 128
Newton PDA, 117
NeXT purchased by, 119, 123–24
proprietary technology and, 113, 114, 118
purpose change at (2001), 125, 127
purpose out of sync with industry forces, 121–22
purpose statement (1980), 111
recommended reading, 163
retail stores, 125
Sculley leads, 115–16, 117
Spindler leads, 117–18
Stock Price chart, 128
super-manager era, 116–19, 121
Arnault, Bernard, 75
B
Beatrice Foods, 25
Bias for Action, A (Bruch and Ghoshal), 135
BMW
statement of purpose, 84
value creation and, 55
BP (British Petroleum), 87
Brandenburger, Adam,165n 1; 168n 16, 17, 20; 174n 22
Bridge Clinic, The (Nigeria), 82
Brighton Collectibles (formerly Leegin), 88–92, 138
identifying the customer, 88–90
legal battle to protect pricing, 90
system of value creation, 90–91, 92
Browne, John, 87
Bruch, Heike, 135
Buffett, Warren
competitive forces and, 30–31, 36
“economic moat,” 74
maxim, 24
myth of the super-manager and, 30
portfolio, furniture investments, 32
Burlington Industries, 25
BusinessWeek: on IKEA, 39
C
Champion International, 25
Champy, James, 81–82, 170n 2,
Chanel, 60
Cirque du Soleil, 31
strategy of, 31–32
colleges, changing economic models for, 129
Collins, Wesley, 18
Collis, David J., 161, 170n 1
competition. See also specific businesses
analyzing rivalry among firms, high to low, 28
Apple and, 113, 117, 118, 119, 120, 121, 129
Buffett’s economic moat and, 74–75
creative destruction and, 119, 120
furniture industry, 18, 29, 53
Gucci and, 59–60, 60, 71, 72, 74
IKEA and, 41, 44, 53, 155–56
Ink for Less and, 94, 104, 106
industry forces and, 2, 27, 28
Lance! and, 96, 106
leadership and, 134
purpose and, 11, 65
Southwest Airlines and, 31, 47
strategy statement, 99, 157–58
competitive advantage, 4, 47
company’s purpose and, 4, 46–47
intangibles and, 74–75
Masco’s in faucets, 34
nonprofits and, 151
role of scarcity, 74
strategy as long-run, sustainable competitive advantage, 111, 129, 130
computer industry, 128. See also Apple; IBM
creative destruction and, 120
Dell and, 120
deteriorating of, 121
disappearance of long-time players in, 120
pricing and, 122
two suppliers dominate, 120
Consolidated Foods, 25
core competencies, 162
Covey, Stephen, 135
creative destruction, 119–20, 127
Credit Suisse, 68, 70
Cullen, Ann, 154
customers
Apple and, 111, 118, 125
Brighton Collectibles and, 88–90, 92
differentiators and, 52, 155
furniture industry, 18–19, 29, 34, 55
Gucci and, 57, 59, 60, 60, 61, 64, 65, 65, 66, 67, 67, 68, 70, 73, 73, 96
identifying, 88–89
identifying new, 70, 73, 104, 106
identity of company, purpose, and, 11, 49, 50, 51, 56, 96, 137, 157–58
IKEA and, 40, 41, 43, 46, 52, 53, 55
industry forces and, 27, 28, 32
Ink for Less and, 93, 94, 95, 95, 104, 106
Masco failure and, 34, 46
power of, analyzing, 28
profit frontier and, 59–60, 60, 65, 65, 67
strategy and, 53, 82, 93, 96, 101, 105, 107, 137
strategy wheel and, 73, 92
Strategy and Added Value chart, 53
team contact with, 141–42
willingness to pay and value creation, 54, 54, 55, 59, 60, 64, 65, 67
D
Dahlvig, Anders, 156
Deifell, Tony, 146
Dell, Michael, 124
Dell Computer, 120
de Mattos, Walter, 96–97, 106–7
strategy statement for Lance!, 101–2
De Pree, Max, ix, 141, 142, 161, 173n 13,15,16
De Sole, Domenico, 57, 64–77, 88, 131, 139, 142–43, 146
Deutschman, Alan, 122
differentiation
IKEA and, 51–52, 55
innovation to create, 52
purpose and, 4, 39, 51–52
strategy and, 47
differentiators, 154–55
Disney
intangibles and, 75
Pixar and, 123
value creation and, 55
Doctors Without Borders, 98–99
E
economic rents, 119
Economist magazine, 98, 99
Eliot, T. S., 146
Entrepreneur, Owner, President program (EOP), Harvard Business School, 7,
149
article by Robert Nozick and, 145
changing view of strategy and, 1, 4
closing session, 143
company leader as strategist and, 3–4
competition for best strategy, 11, 12
dramatic insights about participants’ businesses, 82–83
identifying purpose and, 11
motivation of participants, 9–10
Oliver’s poem and Portrait Project, 146, 147
orientation, 7–9, 14
overview of program, 9
participants, 8–9
strategy course, 10–11
strategy vs. execution discussion, 77–78
as transformative, 14
website, 149
writing down clear statement of purpose for the company and, 81
existentialism, 137–38
F
fashion industry, 58. See also Gucci
Designer Fashion Industry: Gucci 1975, 60
Designer Fashion Industry: Gucci 1995, 65
Designer Fashion Industry: Repositioning Gucci, 67
positioning company in, 64–66
profit frontier, 59–60
“Finding Information for Industry Analysis” (Rivkin and Cullen), 154
firm effect, 47
How Firms Differ: Firm Effects in Four Different Industries, 48
purpose and creation of, 49
focused firms, 154–55
Ford, Henry, 129
Ford, Tom, 64, 66, 68, 69, 71, 72, 76
Four Seasons Resorts, 97–98
furniture industry, 16, 17–19. See also Masco Corporation
Buffett’s investments in, 32
companies that tried and failed in, 25
Furniture Retailing: Net Profit Margin 2003–2010, 48
IKEA and, 39–46, 55
industry forces, analyzing, 28–29
industry forces in, 17–18, 29, 34, 40
management in, 18
Masco’s acquisitions of existing companies, 20
Masco’s expansion into, 15–22, 24
Mengel Company case and, 24–25
price-points and, 33–34
problems in, as opportunities or red flags, 19
Relative Industry Profitability: 1990–2010 graph, 26
scale economies and, 34
G
Gates, Bill, 113–14
Gatorade, 75
General Electric (GE), 30
General Housewares, 25
Georgia Pacific, 25
Ghemawat, Pankaj, 160, 168n 19
Ghoshal, Sumantra, 135
“going back to the core,” 69
Google
Android software, 129
statement of purpose, 84
Gucci, 57–78
Aldo’s credo, 59
brand identity and repositioning of, 70
choices that involved trade-offs, 73–74
company history, 58–61
customers and, 57, 59, 60, 60, 61, 64, 65, 65, 66, 67, 67, 68, 70, 73, 73, 96
Designer Fashion Industry: Gucci 1975, 60
Designer Fashion Industry: Gucci 1995, 65
Designer Fashion Industry: Repositioning Gucci, 67
De Sole and Ford leave, 76
De Sole at helm, 64–76, 77, 131, 139
De Sole’s statement of strategy, 77
family turmoil and overexposure of brand, 61–62
implementing redefined purpose, 70–72, 139
intangible assets and, 75
Investcorp and, 62, 64, 69
management change (under De Sole), 72, 76–77
marketing, 71
Maurizio Gucci buyout and leadership, 62–64, 69, 70, 74
PPR buyout, 75–76
pricing, 68
product and repositioning of, 70
as publicly traded company, 68
purpose clarified, reinvented, 64–66, 69, 73, 110, 127, 142
rallying team to support purpose, 66, 142–43
recommended reading, 163
restoration of brand, 62–64
stores, 70–71
strategy and, 78
strategy as system of value creation and, 72–77, 73, 88
suppliers and, 67–68, 71
takeover attempt, 75
turnaround of, 68–69
Gucci, Aldo, 59, 60–61, 62
Gucci, Guccio, 58–59
Gucci, Maurizio, 62–64, 65, 69, 70, 74, 96
Gucci, Paolo, 61, 62
Gucci, Roberto, 61
Gucci, Rudolfo, 59, 60, 62
Gucci, Vasco, 59, 60
Guimaraes, Pedro, 50–51
Gulf + Western, 25
H
health care sector, 129
Hermès, 60, 67, 71
I
IBM, 111, 113, 117, 118
market innovation and, 120
sale of PC business, 120
IKEA, 69, 142, 167n 12
BusinessWeek on, 39
customers, 53
a difference that matters and, 40
differentiation and, 51–52, 55
evolution and change in strategy and, 110
furniture design and, 44
Furniture Retailing: Net Profit Margin 2003–2010, 48, 167n 13
growth of, 43
imitators of (STØR), 155–56, 174n 1
“inciting incident” of boycott, 42–43
industry forces and, 40
innovation and, 52
Kamprad’s philosophy, 41–42
lean manufacturing, 53
marketing and, 52
name recognition and, 55
origins of, 41
packaging, 43, 52, 53, 55
pricing, 43–44, 46, 53
purpose: a concept company, 45–46, 57
purpose as core organizing principle, 53
purpose as ennobling and, 49
recommended reading, 162
store design, 40, 44–45, 53
strategy and, 78
suppliers, 42–43, 55
value creation at, 52, 55
Imperial Tobacco, 47
“inciting incident,” 42–43
industry analysis, 153–54
recommended reading, 159–60
industry effect, 27, 36–37, 47, 166n 6
industry forces, 2, 26–30, 39, 144
analyzing, 153–54
Apple hurt by, 120–21
availability of substitute products, 28
average profitability of different industries, 26–27, 47
barriers to entry and exit, 28
Cirque du Soleil and, 31–32
continuum of, from “Unattractive” to “Attractive,” 27–29
factors to consider, 28–29
firm effect, 47
furniture business, 17–20
lesson of industry effect, 36–37
opportunities or red flags, 19, 35
power of customers, 28
power of suppliers, 28
Relative Industry Profitability: 1990–2010 graph, 26
rivalry among firms, 28
Southwest Airlines and, 31–32
Starbucks and, 31–32
Ink for Less, 93–95, 144–45
customers, 93, 94, 95, 95, 104, 106
Human Resources and Training at Ink for Less, 95
Professional, 104, 106
R&D, 94
statement of purpose, 93
strategy statement, 102
innovation, 83
Apple and, 125
being a fire starter and, 134–36
creative destruction and, 119–20
differentiation and, 52
“economic rents” and, 119
fighting the status quo and, 135–36
Four Seasons Hotel and, 97
furniture industry and, 18, 29
IKEA and, 52
industry forces and, 28
Masco and, 16–17
Nike and, 84
resistance to, 135
Intel, 118, 120
Intermark, 25
Investcorp, 62, 64, 69
J
Jobs, Steve, 110–31
Apple’s purpose and, 115
arrogance of, 121
“difficult” reputation, 112–13
Disney and, 123
education of, as strategist, 122–23, 124
failure as company leader, 116
“insanely great” technology and, 111
Lisa development and, 115
as multibillionaire, 123
NeXT and, 116, 119, 122–24
Pixar and, 123
proprietary technology and, 113
return to Apple, 119, 130–31
revival and recreation of Apple, 124–31
Sculley removes from Apple, 116
K
Kamprad, Ingvar, 39–46, 54, 138, 146
“A Furniture Dealer’s Testament,” 46
philosophy of, 41–42
statement of purpose, 45–46
Kay’s Kloset, 90
Kohl, Jerry, 88, 138
L
Lance! Sports Group, 96–97, 106–7
strategy statement, 101–2
leadership. See also strategist
being a “Man of Action,” 136
CEO as “guardian of organizational purpose,” 143, 173n 17
commitment and passion in, 135
communication and, 142, 143
companies that lack leaders as strategists, 147–48
corporate rebirth or renewal and, 140–41
developing a system of strategy and, 141–43, 156, 157
EOP program and new understanding of, 144
executing strategy and, 136
facing and interpreting economic reality and, 142–43
fighting the status quo, 135–36
fire starting and, 134–36, 142
flexability, adaptability and, 139
four basic questions confronted by, 133–34
frequency of strategy review, 158
getting a team on board, 141–43, 156, 157
maintaining strategic momentum and, 138–41
Mary Oliver poem and, 146, 147
meaning of what a leader does, 146–47
motivation, 136
openness to new ideas, 134, 139
prioritizing time and activities, 135
recommended reading, 161
setting a course for a company and choices, 136–38
strategist as leader, 12–14, 133–48
strategy as a way of life and, 143–47, 174n 18
Zen story and, 134
Louis Vuitton company, 64, 66, 71
low-cost producers, 154–55
Ludlow, 25
LVMH (Louis Vuitton Moët Hennessy), 75
M
Manoogian, Alex, 16–17
Manoogian, Richard, 15–22, 35, 39, 120, 142
Marchese, Eugene, 83
Marchese Partners, 83
Masco Corporation, 15–22, 31, 32, 120
about the company, 16–17, 165n 2
acquisitions of furniture companies, 20
competitive advantage in faucets, 34
exiting furniture business, 22
expansion of business into furniture decision, 16
failure of expansion, 21–22, 24
failure to consider industry forces, 17–20, 29, 40
myth of the super-manager and, 23–24, 33–36
purpose in furniture lacking, 46
strategic plan for expansion and, 32–35
successful brands, 17
“Masco Fiasco, The” (Financial World), 35
McGahan, A.M., 166n 4
McKee, Robert, 42
Mead, 25
Mello, Dawn, 63, 64
Mengel Company, 24–25, 32
Microsoft, 74, 113, 120, 126, 128, 131
Windows, 118, 119
mission statement, 153
Moltke, Helmuth von, 138
music industry, 126. See also Apple
N
Nalebuff, Barry, 165n 1; 168n 16, 17, 20; 174n 22
Napoleon Bonaparte, 142
National Semiconductor, 118–19
Nike, 110
statement of purpose, 84
nonprofits, 151
Nozick, Robert, 145, 146
Nussbaum, Martha, 139
O
Oliver, Mary, 146, 147
P
pharmaceutical industry
How Firms Differ: Firm Effects in Four Different Industries, 48
Piceu, Geoff, 82–83
Pinault, François, 76
Pixar, 123
Disney and, 123
IPO, 123
Jobs and, 123, 124, 126
strategy statement of, 105
Toy Story and, 123
Plutarch, 127
Polaroid, 129
Porter, Michael E., 2, 27-28, 50, 59–60, 159, 160, 161, 165n 1; 166n
3,4,5,6,7; 167n 12; 170n 36, 42
Productivity Frontier, 59–60, 168n 4
three generic strategies and, 154–55
“Portrait Project,” Harvard Business School, 146
PPR (Pinault Printemps Redoute), 75–76
Procter & Gamble, 84
profit frontier, 59–60, 60
best in class and, 60, 168n 16
purpose, 49–56
AmREIT, purpose as steering strategy, 85–87, 86, 87
articulation of, basic questions to answer, 99
BP’s definition of, 87
care and commitment to a business and, 50
CEO as “guardian of organizational purpose,” 143, 173n 17
choices that involve trade-offs and, 50–51, 67, 73–74, 103
clarity of, 83–84, 103
competitive advantage and, 4, 46–47
as core organizing principle, 52, 121
difference of business vs. others, 34, 56
differentiation and, 4, 39, 51–52, 85, 133
differentiation that matters and, 53, 54, 155
“does your company matter” question, 7, 40, 56, 103, 121, 127, 133
effective purposes, 49–52
elements of, 46
as ennobling, 49–50
evolution and change of, 121–22, 134
examples of good statements, 84
existentialism and, 137–38
firm effect and, 49
“going back to the core,” 69
Gucci and, 64–66
identifying, 11
identifying valuable firm resources and, 161–62
“identity-conferring commitments and,” 73
IKEA and, 45–46, 49, 53, 57
implementing, 57–78, 80, 80–81, 96 (see also strategy wheel)
importance of, 138
Ink for Less, 93
meaningful life and, 145–46
nonprofits and, 151
out of sync with industry forces problem, 121
putting a stake in the ground with, 50–51
refining and clarifying, 87–88
reinventing, 4
Sartre’s “possibility of choice” and, 137–38
serving an unmet need and, 47, 49
slogan that captures, 85, 87
staying with original, 4
strategy and clear statement of, 33
strategy wheel and, 73, 92, 96
success as result of a compelling purpose, 156
Theseus’s boat as metaphor for changing, 127, 130
value creation and, 52–55
vision or mission statement vs., 153
writing down, 81, 87, 99
R
Relative Industry Profitability: 1990–2010 graph, 26
Reynolds American, 47
RHR International, 142
Rilke, Rainer Maria, 174n 18
Rivkin, Jan W., 154, 160, 168n 19
Rockwell International, 118
Rukstad, Michael G., 170n 1
Ryanair, 47
S
Saporito, Thomas, 142, 157
Sartre, Jean-Paul, 137, 146
scarcity, role of, 74, 133
as “economic moat,” 74
Schumpeter, Joseph, 119, 127, 129, 135, 136, 138, 173n 5
Scott Paper, 25
Sculley, John, 115–16, 117
Sloan, Alfred, 129
soft drink industry
How Firms Differ: Firm Effects in Four Different Industries, 48
Sony, 126
Southwest Airlines, 47
strategy of, 31
Spindler, Michael, 117–18
Starbucks, 31
strategy of, 31
strategist, 3
adapting to change, 107, 110–11, 130, 131–32, 134, 139–40 (see also Jobs,
Steve)
adapting to change, recommended reading, 162
building stategic skills, 81
companies that lack leaders as strategists, 147–48
corporate rebirth or renewal and, 140–41
daily decisions and, 11
“does your company matter” question, 7
economic factors to consider, 28–29
economic forces, predetermination of industry conditions as, 29–30, 36–37
economic forces, understanding of, 27–30
effect on lower tiers in company, 11
exercise, applying tools of strategy to one’s own business, 79–107, 170n 1
firm effect and, 47
four basic questions confronted by, 133–34
the future as concern of, 134
“identity-conferring commitments and,” 73
implementing strategic thinking, 80, 80
as key to company, 4
leadership and role of, 3–4, 5, 12–14, 133–48 (see also leadership)
lessons from Apple’s experience, 119–22
number-one job of setting an agenda and implementing strategy, 77
on-going role in implementation of strategy, 109
overconfidence and myth of the super-manager, 23–24, 35
power of realism and, 36–37
purpose and, 56, 78, 80–81
role to make a business matter, 56
Steve Jobs as, 110–31
test of strategic thinking, 15–22
“what does it take for the company to endure?” and, 111
strategy
Brighton Collectibles and, 88–92
change, not stasis, and, 129, 131–32
choices, unanticipated, 109
choices that involve trade-offs and, 50–51, 131, 167n 12
clear choices and, 103
clearly defined, 81–82
as a company’s campaign in the marketplace, 10
competitive advantage and, 47
confronting problems and, 103–4
costs of unclear strategies, 81–82
customer identification and, 88
defining moment, 24
as democratic process, 157
developing, duration of process, 157
developing, steps in, 156
differentiation and, 47
discovering where the company is now and, 65
“does your company matter” question and, 103
as duty of company leader, 2, 3, 5, 12 (see also strategist)
as dynamic, 13, 131–32
EOP program and, 4, 10–11
evolution and change, Apple and, 110–31
evolution and change in, 110–11
exercise, applying tools of strategy to one’s own business, 79–107, 170n 1
formulation vs. implementation, 3
frequency of review, 158
generic good practices and, 78
as group effort, 141–43
Gucci, De Sole, and, 57–78
Gucci’s and redefined purpose, 70–72
hallmarks of great strategies, 103
Ink for Less and, 93–95
intangibles as particularly valuable, 75
internal working steps of, 97
as job of specialists, 2–3, 13
as a journey not a destination, 13
management and, 76–77
Masco Corporation example, 16–22, 32–35
metrics (data) over intuition and, 66, 85–86, 95–97, 103, 142–43
mystery inherent in, 109–10
new perception of, 1, 2
Nussbaum’s “fragile integrity” and, 139
old view of: as long-run, sustainable competitive advantage, 47, 111, 129,
130
as organic, 4, 130
origins of word, 10
passion and, 103, 135
picking a winning playing field, 31 (see also industry forces)
Porter’s innovations, 2
Porter’s three generic, 154–55
positioning and, 47
purpose, clarity needed in, 4, 78, 103
purpose, reinventing and changing the company, 4, 64–66
purpose, starting with statement of, 83–88
recommended reading, 160–61
role of scarcity, 74, 133
serving an unmet need and, 47, 49
statement of, 97–102
stay the course or move away, 4, 131
Strategy and Added Value chart, 53, 168n 16
strategy wheel: Brighton Collectibles, 92
strategy wheel: Gucci, 73
SWOT model, 2,
152
, 152
team support for, 141–43, 156, 157
as traditionally taught, 1–2
value creation and, 4, 49, 72–77, 73, 78, 88–91, 103, 130, 139, 155
as way of life, 144, 174n 18
World War I generals, 33
writing down, 81, 109 (see also strategy statement; strategy wheel)
strategy statement, 97–102
articulation of company’s purpose and, 99
Doctors Without Borders, 98–99
Economist magazine, 98
Four Seasons Resorts, 97–98, 99
Lance! Sports Group, 101–2
mistakes in creating, 105
as public document, 157–58
qualities of, 100–101, 101
strategy wheel, 92–93
Brighton Collectibles, 92
format, 91
Gucci, 73
implementing purpose and, 74
Ink for Less, 93–94, 106
as internal company document only, 158
Lance! Sports Group, 96, 107
purpose at center, 73
reality check for, 95–97
unique to specific business, 92
“Style Wars” (Time), 69
“Summer Day, The” (Oliver), 147
super-manager myth, 23–24, 29–30, 36
Apple and, 116–19
economic forces and, 27, 30–31
Masco Corporation and, 23–24, 33–38
Mengel Company and, 24–25
military equivalent, 33
why it lives on, 31–32
Stuart, H.W., 168n 16
suppliers
Apple and, 121
availability of substitute products, 28
computers, two suppliers dominate, 120
“does your business matter” question and, 56
furniture industry, 29
Gucci and, 67–68, 71, 73, 75
IKEA and, 42–43, 55
Ink for Less and, 94
Porter on, 27
power of, analyzing, 28
Strategy and Added Value chart, 53, 53
willingness to supply and value creation, 54, 54, 55
Swanson, Rick, 69
Swedberg, Richard, 135, 136, 173n 3, , 1615
SWOT (Strengths, Weaknesses, Opportunities, and Threats) model, 2, 152,
152
T
Taylor, H. Kerr, 85–87, 104, 140, 143
teams
AmREIT and implementing management strategies, 86, 143
analyzing industry and, 153
Gucci, rallying team to support purpose, 66, 142–43
on board with leader’s strategy, 62, 141–43
developing strategy and, 81, 156, 157
Theseus’s boat story, 127, 130, 139–40
Tilles, Seymour, 136–37
tobacco industry
average profitability of, 26
firm effect, 47
How Firms Differ: Firm Effects in Four Different Industries, 48
Tognazzini, Bruce, 115
Torekull, Bertil, 40
Toyota, 110
Twain, Mark, 100
U
United Paint and Chemical, 82–83
V
Valentine, Don, 111
value creation, 4, 49, 52–55
BMW and, 55
Brighton Collectibles and, 91, 92
De Sole and Gucci, 58
developing a system of, 88–91
Disney, 55
Gucci’s strategy and, 72–77, 73
how to do it, 55
IKEA and, 52, 55
Ink for Less and, 93–95
intangibles and, 75
as priority for a business, 155–56
purpose and linkage with, 96
“the secret sauce,” 90
Strategy and Added Value chart, 53, 168n 16
strategy and, 4, 49, 72–77, 73, 78, 88–91, 103, 130, 139, 155
strategy wheel and, 91, 91–93
unique to specific business, 92
Value Creation: Expanding the Pie, 54
Wal-Mart, 54
vision statement, 153
IKEA, 51–52
W
Wal-Mart, 74
value creation and, 54
Walton, Sam, 54
Welch, Jack, 30, 31, 36
Wilde, Oscar, 109
World War I, 33
Wozniak, Steve, 111, 112, 121–22
Y
Yoffie, David, vi, 168n 1, 3; 169n 10,12,18, 19, 34; 170–71n 1; 171n 22
Young, Laura, 88, 138
Z
Zen story (openness to new ideas), 134
Acknowledgments
A CLOSING LINE FROM Huckleberry Finn often came to mind as I worked on
this manuscript: “If I’d a knowed what a trouble it was to make a book I
wouldn’t a tackled it.” Looking back on the process from this side of the
finish line, I’m more impressed by the communal aspect of the project, and
the good people it has brought my way.
I am grateful for financial support from the Division of Research at
Harvard Business School, and for permission from Harvard Business Review
to use parts of an article I had previously published there. I am grateful, too,
for the opportunity to work with Lynda Applegate, Jackie Baugher, and
Kathleen Mara in Executive Education; Cathyjean Gustafson in Morgan Hall;
Imelda Dundas in Faculty Development; and Chris Allen and others at the
Baker Library. One of my most rewarding collaborations was with Sharon
Johnson and David Kiron as we batted around early ideas for the book.
My colleague David Yoffie’s cases on Gucci and Apple are mainstays in
my executive education courses and jumping off points for two chapters in
this book. More generally, the intellectual community at HBS and in
particular in the Strategy group has had an enormous influence on how I see
the world and what I teach.
Once the book was under way, a whole new community emerged: Jim
Levine, who showed me the many ways good literary agencies create value;
my editor at HarperCollins, Hollis Heimbouch, whose judgment I counted
on; Charles Burke, whose adept way with words bettered many rough
paragraphs; and Karen Blumenthal, Kent Lineback, Susanna Margolis, and
Lisa Baker who helped with various drafts of the proposal and manuscript.
It has been a privilege to work with the business owners and managers
from around the world who inspired this book and made me see how much
they as strategists add to their businesses. I thank them for sharing their
stories and encouraging me to share mine.
On the home front, I thank my husband, Birger, who kept the candles
burning when the lights went out.
About the Author
CYNTHIA A. MONTGOMERY is the Timken Professor of Business
Administration and immediate former head of the Strategy Unit at Harvard
Business School, where she’s taught for twenty years. For the past six years,
she has led the strategy track in the school’s highly regarded executive
program for owner-managers, attend by business leaders of midsized
companies from around the globe. She has received the Greenhill Award for
her outstanding contributions to the Harward Business School’s core MBA
strategy course. Montgomery is a top-selling Harvard Business Review
author, and her work has appeared in the Financial Times, American
Economic Review, Rand Journal of Economics, Strategic Management
Journal, Management Science, and others. She has served on the boards of
directors of two Fortune 500 companies and a number of mutual funds
managed by BlackRock, Inc.
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- Title Page
- Chapter 8 – The Essential Strategist1
Dedication
Epigraph
Contents
Introduction – What I Learned in Office Hours
Chapter 1 – Strategy and Leadership
Chapter 2 – Are You a Strategist?
Chapter 3 – The Myth of the Super-Manager
Chapter 4 – Begin with Purpose
Chapter 5 – Turn Purpose into Reality
Chapter 6 – Own Your Strategy
Chapter 7 – Keep It Vibrant
Author’s Note
Frequently Asked Questions
Recommended Reading
Notes
Index
Acknowledgments
About the Author
Credits
Copyright
About the Publisher