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Good to Great…Strategy
by Richard Horwath Strategy per se did not separate the good-to-great companies from the comparison companies. Both sets of companies had well-defined strategies… —Jim Collins, Author, Good to Great There’s no arguing with the success of the best-selling book Good to Great and the meticulous data generated during the study. It presents a number of important concepts involving buses (hire the right people), hedgehogs (singular focus to be the best in the world) and flywheels (building momentum for a breakthrough) that provide memorable business metaphors. So far be it for the author of several strategy books that his wife claims are more effective sedatives than any drug on the market to disagree with Mr. Collins conclusion—but I will. The very concepts that propelled the good-to-great companies to the heights of success are at the foundation of great strategy—a direct contradiction to the statement that strategy didn’t separate the good-to-great companies. In fact, the examples used in the book clearly show that there is a huge difference between having a strategy and having a strategy that meets the criteria for being a great strategy. Nucor created differentiation versus Bethlehem steel through its use of mini-mills and a thin slab casting process for producing flat-rolled steel; Kimberly-Clarke had extreme focus that came from making the tough but brilliant trade-off of selling their mills and exiting the paper business and putting all their resources into the consumer business; and Walgreens pioneered a system of satellite communications and technology linked to its convenient corner drugstores that gave them a ten-year lead on the competition. The question isn’t “Do you have a strategy?” because everyone purports to. The question should be, “Is it a great strategy?” Great strategy has three criteria:
Differentiation for competitive advantage in business has its roots in science. In 1934 a Moscow University researcher named G.F. Gause, known as the “father of mathematical biology,” published the results of a set of experiments. In those experiments, he placed two small animals (protozoans) of the same genus in a bottle with an ample supply of food. If the animals were of the same genus and a different species, they could survive and persist together. If the animals were of the same genus and the same species, they could not survive and persist together. These results led to the Principle of Competitive Exclusion which states, “No two species can coexist that make their living in the identical way.” Open the newspaper and read about the companies that are struggling and it’s a good bet that one of the reasons for their struggles is their failure to pay heed to the Principle of Competitive Exclusion. They are stuck doing the same things in the same way as their competition. Jeffrey Immelt, Chairman and CEO of GE, has said, “GE must look different…, act different…, be different…to excel in the years ahead.” Notice that he didn’t say GE must be “better.” He specifically chose the word “different” and used it three times to emphasize his company’s understanding that the road to success in business is paved by differentiation from the competition. Focus Focus demands that we have the discipline to allocate resources to specific areas and activities and not spread them evenly across the business. Focus comes from the ability and willingness to make trade-offs. Trade-offs are about choosing one path and not the other. Trade-offs involve incompatible activities—more of one thing necessitates less of another. In the pharmaceutical industry, one can choose to be the leader in research and development or the leading provider of low-cost drugs, but cannot do both without bearing major inefficiencies. Making trade-offs is one of the most difficult tasks for most managers, and the result is that they never do make the necessary trade-offs. Instead, they hedge their bets and abide by the adage of “trying to be everything to everyone.” Harvard Business School professor Michael Porter has said, “The essence of strategy is in choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated.” Two groups of questions can help us begin the process of identifying the trade-offs for our business:
Most managers do a relatively good job of answering these questions. What most of us don’t do often enough is stop and carefully consider our answers to the second group of questions:
Meg Whitman, CEO of eBay, explains the crucial role focus played in the successful development of the company: The key decisions can all be characterized by focus, focus, focus. Back in March 1998, we were faced with a decision on what categories we wanted to focus on. We decided to really be a collectibles company. The heaviest users were collectors, the heaviest sellers were collectors. It was a very explicit strategic decision, because part of the group wanted to go into consumer electronics and all of these other categories we are in today. And we answered, “We have only a limited number of resources. What is the best focus that we can have?” Ms. Whitman realized early on that good strategy involves the discipline to focus one’s limited resources on the key areas that will fuel success. System While a strategy can be made up of only one activity, there are compelling reasons for building an activity system to drive your strategy. As the number of activities comprising your strategy increases, it becomes more and more difficult for competitors to emulate the entire system of strategy. This premise is evident in Figure 1: Figure 1 Arithmetic Support of System of Activities In this figure, we can see that the probability of a competitor successfully copying a strategy involving only one activity is relatively high at 90% or .9. With three activities comprising our strategy, the probability of a competitor successfully emulating the strategy drops to 73%. Creating a system of strategy involving ten activities significantly diminishes the competitor’s ability to follow our lead. While our aim is not to have dozens of activities simply for numerical sake, thoughtfully creating an interconnected web of complementary activities is of great value in maintaining a differentiated strategy from the competition. From Mediocrity to Mastery Perhaps the best indicator of the importance of great strategy is a lousy industry. If you analyze the airline or automobile industries, it doesn’t take long to figure out that they are brutal to be in if you’re trying to make a profit. However, Southwest Airlines and Toyota have used great strategies to fuel their tremendous success in these shark-infested waters. Great strategy requires differentiation, focus and a system of activities. Without great strategy, there’s a good chance the bus will turn the hedgehog into roadkill.¨ Rich Horwath helps managers develop the skills and expertise to create great strategy and fulfill their leadership potential. He is the president of the Strategic Thinking Institute, a former Chief Strategy Officer and professor of strategy at the Lake Forest Graduate School of Management. Rich is the author of Sculpting Air: The Executive’s Guide to Shaping Strategy and Storm Rider: Becoming a Strategic Thinker. Copyright Rich Horwath. All Rights Reserved. END | |||||||||
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