Читать книгу The Strategist: Be the Leader Your Business Needs - Cynthia Montgomery, Cynthia Montgomery - Страница 9

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.

Relative Industry Profitability: 1990–2010 Return on Equity

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 with purchase.	Power of customers	Low. Products are scarce, highly differentiated, and important to customers’ well-being. Customers have 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.