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CYNTHIA A. MONTGOMERY BE THE LEADER YOUR BUSINESS NEEDS THE 0512 USA $27.99 Based on an a\f\flaimed \brofessor’s legendary strategy \fourse at Harvard Business S\fhool, The Strategist offers a radi\fally new \bers\be\ftive on a leader’s most vital role. \fA RE Y OU A S TRATEGIST ?” That’s the first question Cynthia Montgo\fery asks the busi - ness o\bners and senior executives fro\f all over the \borld \bho participate in her highly regarded executive education course. It’s not a question they anticipate or care \fuch about on opening day. But by the ti\fe the progra\f ends, they can- not i\fagine leading their co\fpanies to success \bithout being —and living the role of —a strategist.

O v e r a s e r i e s o f \b e e k s a n d \f o n t h s , M o n t g o \f e r y puts these acco\fplished executives through their paces. Using case discussions, after-hours talks, and participants’ o\bn strategy dile\f\fas, she illu- \finates \bhat strategy is, \bhy it’s i\fportant, and \bhat it takes to lead the effort. En route, she equips the\f to confront the \fost essential question facing every business leader: Does this co\fpany truly \fatter? In doing so, she sho\bs that strategy is not just a tool for out\bitting the co\fpetition; it is the \fost po\berful \feans a leader has for shaping a co\fpany itself. The Strategist exposes all business leaders — \bhether they run a global enterprise or a s\fall business —to the invaluable insights Montgo\fery shares \bith these privileged executives. By distilling the experiences and insights gleaned in the class- roo\f, Montgo\fery helps leaders develop the skills and sensibilities they need to beco\fe strategists the\fselves. It is a difficult role, but little else one does as a leader is likely to \fatter \fore. T he S trate g ist T HE S TRATE G I S T Become the Leader Your Business Needs C ynthia A. Mont g omery THE STRATE GIST.Copyrig ht © 2012 by Cynt hiaA. Mont gomer y. All rights reserve d. Printe d in the United States of America. No part of this book may be used or re produced in any manner whatsoever without written permission exce pt in the case of brief quotations embodied in critical artic les an d reviews. For in formation, a ddress HarperCollins Pu blishers, 10 East 53rd Street, New Yor k, N Y 10022. HarperCollins books may be purc hase d for e ducationa l, business, or sa les promotiona l use. For in formation, please write: Specia l Mar kets De partment, HarperCollins Pu blishers, 10 East 53rd Street , New York , N Y 10022 . “The Summer Day” by Mary Oliver, published by Beacon Press Boston © 1990 by Mary Oliver, reprinted by permission of The Charlotte Sheedy Literar y Agenc y Inc. Tottering-TT by- Gent ly cartoon, ©Annie Tempest at The O’TT Shea Gallery, Lon don. LICTextbook cartoon © Danny TT Shanahan, The New Yorker Collection, w w w.cartoonbank. com. “Putting Lea dership Bac k into Strate gy,” by Cynthia A. Mont gomer y, H arvard Business Review , Januar y 2008, is used by permission of the Harvar d Business Review . FIRST E DITION Desi gned b y Lisa Stokes Librar y of Con gress Catalo ging-in-Publication Data has been a pplied for . ISBN: 978 -0-06-20 7101 -9 12 13 14 15 16 ov/qw 10 987654321 To Anneke, Mathea, and Nils Th at you may find places where you can make a difference that matter s And to B jørn, forevermore ACKNOWLEDGMENTS A CLOS ING LINE FR OM Huckleberry Fin noften came to min d as I worked on this manuscript: “If I’d a knowed what a trouble it was A A to ma ke a boo k I wou ldn’t a tac kled it. ” Loo king back on t he process from this side of the finish line, I’m more impressed by the communal as pect of the project, and the good peo ple it has brought my way.

I am grate ful for financia l support from t he Division o f Researc h at Harvard Business School, and for permission from H arva rd Business Review to use parts o f an artic le I had previous ly published there. I am grateful, too, for the opportunity to work with Lynda Applegate, Jackie Bau gher, and Kathleen Mara in Executive Education; Cath yjean Gus - tafson in Morgan Hall; Imelda Dundas in Faculty Develo pment; 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 aroun d ear ly i deas for t he boo k. My colleague David Yoffie’s cases on Gucci and Apple are mai n- stays in my executive education courses and jumping off points for two ch apters in t his boo k. More genera lly, t he inte llectua l community at HB S an d in particu lar in t he Strategy group has had an enormous in \bu- ence on ho w I see the world and what I teach. | viii | Acknowled gments Once t he boo k was un der way, a w hole new community emerge d:

Jim Levine, w ho s howe d me t he man y wa ys goo d literar y agencies create value; my editor at Har per Collins, Hollis Heimbouch, whose ju dgment I counte d on; Ch arles Bur ke, w hose a dept way wit h wor ds bettere d many roug h paragrap hs; an d Karen B lument hal, Kent Lin e- back, Susanna Margolis, and Lisa Baker who hel ped with various drafts o f the proposa l an d manuscri pt. It has been a privi lege to wor k wit h the business owners an d ma n- agers from around the world who ins pired this book and made me see how muc h they as strategists a dd to t heir businesses. I t han k them for sharin g their stories an d encoura ging me to s hare mine . On the home front, I thank my husband, Birger, who ke pt the ca n- dles burning w hen t he lights went out. In t he en d, it is im portant to remem ber t hat we cannot become w hat we need to be b y remainin g what we are. — Max De Pree , CEO of Herman Mi ller, in Leadershi p Is an Ar t CONTENTS Acknowledgments vii Introduction: What I Learned in Office Hours 1 1 Strategy and Leadership 7 2 Are You a Strategist? 15 3 The Myth of the Super- Manager 23 4 Begin with Purpose 39 5 Turn Purpose into Reality 57 6 Own Your Strategy 79 7 Keep It Vibrant 109 8 The Essential Strategist 133 Author’s Note 149 Frequently Asked Questions 151 Recommended Reading 159 Notes 165 Index 175 T he S trate g ist INTRODUCTION WHAT I LEARNED IN OFFICE HOURS Y OU’RE AB OUT T O get a revisionist view of strate gy . It’s not tha t what you’ve learned is incorrect. It’s that it’s incomplete. YY Strategy is a fun damenta l course at near ly every business sc hoo l in t he wor ld. I have been privi lege d to teac h variations o f it for more t han thirt y years— first at the Universit y of Michi gan, then at the Kello gg Schoo l at Nort hwestern, an d for t he last twenty- plus years at t he Ha r- vard Business School. For most of that time I worked with MBA students, until the cente r of my teac hing s hifted to executive e ducation. It was t his ex perience, particu larly a five- year stint in Harvar d’s Entrepreneur, Owner, Pres i- dent program (EOP ), that ins pired this book .1Wor king intimate ly wit h leaders from nearl y ever y industr y and nation as the y confronted thei r own real- world strategic issues changed not only how I teach strategy, but, more fundamentally, how I think about it. Th e experience led me to challenge some of strategy’s basic precepts, and ultimately to question both the cu lture an d min d- set t hat have grown u p aroun d it. Even more important, teac hing in E OP force d me to con front how strategy is rea lly made in most businesses, and b y whom. | 2 | THE STRATE GIST All of this convinced me that it is time for a change. Time to approac h strategy in a different way an d time to trans form t he process from a mechanical, analytical activity to something dee per, more mea n- ing ful, an d far more rewar ding for a leader. THE R OAD T O HERE Fi fty years ago strategy was taug ht as part o f the genera l manage - ment curricu lum in most business sc hoo ls. In t he aca demy as we ll as in practice, it was identified as the most im portant dut y of the president— the person wit h overarc hing res ponsi bilit y for setting a com pany ’s course and seeing the journey through. This vital role encompassed both formulation and implementation: thinking and doing combined . Although strategy had considerable de pth then, it didn’t have much rigor. Heuristically, managers used the ubiquitous SWOT model (Strengths, Weaknesses, O pp ortunities, and Threats ) to assess their businesses an d identi fy attractive com petitive positions. How best to do t hat, t houg h, was far from c lear. Other t han ma king lists o f various factors to consider, managers had few tools to hel p them make these judgments. In t he 1980s an d ’90s, my co lleague Mic hael E. Porter broke impo r- tant new ground in the field. His watershed came in firming u p the Opp ortunities and Th r e at s s id e of t h e a n a l y s i s b y br i n g i n g mu c h- needed economic t heory an d empirica l evi dence to strategy ’s un derpinnings, providing a far more so phisticated way to assess a firm’s com petitive environment. Th is led to a revolution in both the practice and teaching o f strategy. In particu lar, managers came to un derstan d the pro foun d impact industry forces could have on the success of their businesses and how t hey cou ld use t hat in formation to position t heir firms propitious ly. Advances over the next few decades not only refined the tools bu t s pawned a whole new industry. Strategy in many ways became the bai - liwick of s pecialists— legions of MBAs and strategy consultants, armed wit h framewor ks, tec hniques, an d data— eager to help managers an a- What I Learned in Office Hour s | 3 | lyze t heir in dustries or position t heir firms for strategic a dvantage. In trut h, they had a lot to o ffer. M y own aca demic trainin g an d researc h in this period re\bected this intellectual environment, and what I did in t he c lassroom for many years t herea fter was a living em bodiment o f this “new ” field of strate gy .

In time, though, a host of unintended conse quences develo ped from wh at in its own rig ht was a very goo d thing. Most nota bly, strateg y became more a bout formu lation t han imp lementation, an d more a bout gettin g the anal ysis ri ght at the outset than livin g with a strate gy ove r time. E qua lly problematic, t he leader’s uni que ro le as ar biter an d stew- ard of strategy had been ec lipse d. W hile count less boo ks have been written about strate gy in the last thirt y years, virtuall y nothin g has been written a bout t hestrategist and what this vital role requires of the persont wh o s hou lders it.

It wasn’t until years into this shift that I full y realized what had happ ened. It was classic Shakes peare: As a field, we had hoisted ou r- selves on our own petard. We had demoted strategy from the top o f the organization to a s pecialist function. Chasing a new ideal, we had lost sig ht o f the va lue o f w hat we had— t he ric hness o f ju dgment, t he continuity o f purpose, t he wi ll to com m it a n org a n i z at ion to a pa r t ic u lar path. With all good intentions, we had backed strategy into a narro w corner an d re duce d it to a left- brain exercise. In doing so, we lost muc h of its vitalit y and much of its connection to the da y- to- da y life of a com - pany, and we lost sight of what it takes to lead the effort . Teaching in the EOP program drove these insights home for me . W hen I first starte d wor king wit h the group, I use d a curricu lum that was much like one I would use in any executive program. Through a series o f class discussions an d presentations, we discusse d the en durin g princip les o f strategy, t he framewor ks t hat capture t hem, an d a series o f case studies that brought the conce pts and tensions alive. We still do that— an d it’s a va lua ble part o f w hat we do. But in between c lass sessions, t he E OP stu dents— a ll accomp lished executives and entre preneurs— started to ask if they could meet me | 4 | THE STRATE GIST in my o ffice to ta lk about various situations t hey were facing in t heir companies. These conversations often took place at unusual hours, and sometimes lasted far into the evening. Most started out predict - abl y enoug h: We ta lked about t he con ditions in t heir in dustries, t he strengt hs an d wea knesses o f their own companies, an d their e fforts to build or extend a com petitive advantage. Some discussions ended t here, an d a t houg htful appl ication o f whatever we ’d been doing in c lass see med to m eet the need. Often, thou gh, these conversations took a different turn. Alon gside all the conventiona l questions were ones a bout w hat to do w hen t he limits o f ana lysis had been reac hed an d the wa y for war d was sti ll not clear; questions about when to move away from an existing com petitive ad vantage an d w hen to try to stay t he course; questions a bout reinvent - ing a business or i denti fying a new purpose, a new reason to matter.

Even though many of the com panies at issue were remarkably succes s- ful (one had grown from a start- u p to $2 billion in revenue in just nine years ), almost none had the kind of long- run sustainable competitive advanta ge that strate gy books tout as the Hol y Grail.

Wor king wit h these managers, ty pica lly over t hree years, an d hear- ing the stories wit hin t he stories, I came to see t hat we cannot a fford to think of strategy as something fixed, a problem that is solved and sett led. Strategy— t he system o f va lue creation t hat un derlies a com pa - ny’s competitive position and uniqueness— has to be embraced as som e- thing o pen, not something closed. It is a system that evolves, moves, an d changes . In t hese late- ni gh t one- on- one conversations, I a lso saw somet hing else: I saw the strategist, the human being, the leader. I saw how res pon - sible t hese executives feel for getting t hings rig ht. I saw how investe d they are in t hese c hoices, an d how muc h is at sta ke. I saw t he ener gy and commitment the y brin g to this endeavor. I saw their confidential concerns, too: “Am I doing this job well? Am I providing the leadershi p my company nee ds?” And, more than an ythin g, I saw in these conversations the tr e- What I Learned in Office Hour s | 5 | men dous potentia l these leaders hold in t heir han ds, an d the profoun d opportunity t hey have to ma ke a difference in t he life o f a company. In those moments to gether, we both came to understand that if their bus i- nesses were going to pull away from t he pack, to create a difference t hat mattere d, it had to start wit h them.

A NEW UNDER STA NDIN G In a ll our lives t here are times o f learning t hat trans form us, t hat distance us from the familiar, and make us see it in new wa ys. For me, t he E OP ex perience was one o f those times. It not on ly c hange d some of my most centra l views a bout strategy; it gave me a new perspective on the strategist, and on the power and promise of that role . In t hese pages I wi ll share wit h you w hat I have learne d. In doin g so, I hope t hat you wi ll gain a new un derstan ding a bout w hat strategy is, why it matters, and what you must do to lead the effort. I also ho pe tha t you wi ll come to see t hat beyon d the ana lytics an d insig hts o f highly skilled advisors an d the ex hortations o f “h ow- to ” gui des, t here is a nee d for judgment, for continuity, for res ponsibility that rests s quarely with you— as a leader. Because t his ro le rests wit h you, Th e Strategis t is a persona l ca ll to action. It reinstates an essential com ponent of the strategy- making pro- cess that has been ignored for decades: You. Th e leader. Th e person who must live t he questions t hat matter most . Th at’s wh y m y ultimate goal here is not to “teach strate gy ,” but to eq uip an d ins pire you to be a strategist, a leader w hose time at t he helm cou ld have a pro foun d effect on t he fortunes o f your organization . CHAPTER 1 STRATEGY AND LEADERSHIP Does your company matter ? Th at’s the most im portant question every business leader mus t answer. If you closed its doors toda y, would your customers su ffer an y real loss ?1How lon g would it take, and how di fficult would it be, for them to find another firm that could meet those needs as well as you did ? M ost likely, you don’t think about your com pany and what i t does in quite this way. Even i f you ’ve hired strategy consultants, o r spent weeks developing a strategic plan, the question probably stil l gives you pause . If it does or i f you ’re not sure how to res pond, you ’re not alone.

I know this because I ’ve spent the better part o f my li fe workin g with leaders on their business strate gies. A gain and a gain, I’ve seen them struggle to ex plain why their com panies truly matter. It ’s a difficult question . Can you answer it?

I f you cannot, or i f you ’re uncertain o f your answer, join me as I explore this question with a group o f executives now gathering. It is evening on the cam pus of the Harvard Business School. The kickoff orientation to the Entre preneur, Owner, President program (“EOP ” for | 8 | THE STRATE GIST short), one of the \bagshi p executive programs at the school, is about to be gin. Alon g with five of m y fellow facult y, I sit in the “sk y deck,” the last and highest row of seats, in Aldrich 112, an am phitheater- style c lassroom c haracteristic o f the sc hoo l, an d watc h as t he newest grou p of executives stream into t he room.

I see that there are considerabl y more men than women, and tha t t he majority a pp ear to be in t heir late t hirties to mi d- forties. Most exu de an air of seasoned self- confidence. That’s no surprise— they’re all ow n- ers, CEOs, or COOs of privately held com panies with annual revenues of $10 mi llion to $2 billion— t he kind of sma ll- to me dium- size ente r- prises t hat drive muc h of the g lobal economy. Most arrive d on campus within the last few hours and have had just enou gh time to find thei r dorm rooms an d meet t he mem bers o f their living grou ps before head- ing here to Aldrich.

The information they provided in their a pp lications tells part o f t heir stories: Ric hard, a t hird- generation U. S. stee l fabricator; Drazen, CEO of a media firm in Croatia ; Anna , founder and head of one of the largest private e quity grou ps in South America; and Praveen, the scion of a fami ly cong lomerate in In dia. But t his is just a taste o f their dive r- sity and accomplishments. The richer details and the breadth of the class will emer ge 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 o f concern about being late. Most of these peo ple hail from worlds where meetings don’t start until they arrive. Th at will change in the coming days, as t hey ma ke t he a djustment from t he top- o f- the- line leat her chairs in their offices back home to the standard- issue seats that line the c lassrooms. In deed, for t heir time here, t hey wi ll be wit hout man y of the supports t hey re ly on in t heir daily lives, suc h as a dministrative assistants and subordinates to whom they can delegate work and prob- lems. Fami lies are strong ly discourage d from living near cam pus an d are prohibite d from dorms once c lasses begin. B lackBerrys an d ce ll phones are allowed, but never in class . Strategy and Leadershi p | 9 | A fi n a l hu sh s et t le s a s t he prog r a m b eg i ns w it h a n ov er v ie w of who’s here: 164 participants from t hirty- five countries, wit h a co llective 2,922 years of ex perience. Two- thirds of their businesses are in ser vice indu s- tries, t he remain der in manu facturing . They are here to participate in an intensive management boot camp for ex perienced business leaders. It s pans to pics in finance, marketing, organizationa l behavior, accounting, negotiations, an d strategy, an d runs for nine wee ks in tota l, divi ded into t hree t hree- wee k sessions spread over three years. Between sessions, students return to their bus i- nesses an d start to a ppl y w hat t hey have learne d. De brie fs t he following year are an opportunity for feedb ack an d re \bection on w hat has wor ked and what hasn’t. This structure has given the faculty an exce ptional opp ortunit y to deve lop a han ds- on curricu lum t hat brings t heory an d practice muc h closer toget her, even for a sc hoo l that has a lways c ham- pioned the connection . Wh y do t hese ta lente d, seasone d managers from every major wor ld culture come to this program? As heads of their companies, why do the y elect to s pend tens of thousands of dollars to send themselves to school?s THE VIEW FR OM THE BAL CO NY If past partici pants are any indication, these executives have not come to seek s pecific answers to narrow questions. Th ey have come to learn how to be more e ffective leaders an d to find ways to ma ke t heir businesses more successful. Successful in what wa ys, and throu gh what means, for most, is still an o pen question. Th ey are here to throw the m- selves into t he program, to be c hallenge d, to discover w hat t hey mig ht learn in this en vironment. Th is ex perience will be an im portant juncture for many, in thei r careers an d even t heir lives. W hat t hey learn here wi ll lead them to think in broader, more far- reaching ways. To ex plain how this ha pp ens, I’ve a lways liked the meta ph or o f a dance ta king place in a great hall. M ost dancers spen d all their time on t he dance \boor, move d by t he | 10 | THE STRATE GIST music, jost led by dancers aroun d them, com plete ly a bsor bed in t he \bow. But it ’s not unti l they extricate t hemse lves from t he crow d an d move to the balcony above that the larger picture becomes clear. It is then tha t overa ll patterns become a pp arent an d new pers pectives emerge. Of ten t hese revea l opportunities for better c hoices a bout w hat to do down on the dance \boor. Many E OPers have s pent years wit hout ever leaving t he dance \boor. Absorbed b y the da y- to- da y challen ges of runnin g a business, the y’ve never gone to the balcony. On one level, our job is to hel p them under - stan d the va lue o f going to t he balcony in t he first place. On anot her, it is to equip t hem wit h the too ls to see t heir dances in new ways, ways that reveal o ptions they may never have considered before . THE STRATE GY COU RSE W hen it’s time for the facult y to introduce their courses, I stand and give a quic k summary o f the wor k we ’ll be doing in strategy. Li ke mos t business peop le, t hese managers are likely to be fami liar wit h at least a va gue definition of strate gy . The word itself comes from the ancient Gree k for “genera l”— s peci fically for t he genera l on cam paign in t he field. In business, strategy is a company ’s campaign in t he mar ketp lace:

the domain in which it com petes, how it com petes, and what it wants to accom plish. W e wi ll begin our journey wit h the fun damenta ls— w hat strategy is, how to craft it, and how to evaluate it. We’ll then push the envelo pe on current practice by c hallenging strategy ’s e lusive goa l— t he long- run sustaina ble competitive a dvantage— an d intro duce a dynamic mo del of strategy that is better grounded and better suited for the competitive rea lities most managers face . All of this material is prelude to the last and most challenging tas k the y will face here, when ever y member of the class will be asked to a ppl y t he conce pts an d framewor ks we ’ve been stu dying to t heir own companies an d present t heir own strategies for critiquing by t heir E OP Strategy and Leadershi p | 11 | colleagues. Th e exercise takes many days and, in the end, the class votes on a winner, w hat t hey consi der t he “b est strategy ” in t he group . This ste p from the general to the highly particular, from the obje c- tive to t he su bjective, is w here t hings become profoun dly rea l for most executives. This is when the appraisals of cases— no w their cases— get deadly serious and the discussions es pecially heartfelt. These are co m- petitive peo ple. A s pirit of intense rivalry prevails. Most refine thei r strategies t hroug h mu ltip le iterations, o ften wor king t hroug h the nig ht for one more iteration. These weeks are arduous for some, exhilaratin g for ot hers, an d, for most, a healthy mix o f both. GETTIN G TO THE REALITY OF Y OU R STRATE GY Having seen hun dreds i f not t housan ds o f suc h strategies in t heir initia l form, w hat is c lear to me is t his: Many leaders haven ’t t houg ht about their own strategies in a very dee p way. Often, there is a curious ga p between t heir inte llectua l un derstan ding o f strategy an d their a bil- ity to drive t hose insig hts home in t heir own businesses.

Some EOPers find it extremel y difficult to identif y wh y their co m- panies exist. Accustomed to describing their businesses by the industries t hey’re in or t he pro ducts t hey ma ke, t hey can ’t articu late t he speci fic needs their businesses fill, or the uni que points that distinguish them from com petitors on anyt hing beyon d a su perficia l leve l. Nor have t hey spent muc h time t hinking concrete ly a bout w here t hey want t heir co m- panies to be in ten years and the forces, internal and external, that will get t hem t here . If leaders aren ’t c lear a bout t his, imagine t he con fusion in their businesses three or four levels lower. Yet, people throughout a business— in mar keting, production, ser vice, as we ll as near t he to p of t he organization— must ma ke decisions every day t hat cou ld an d shou ld be based on some shared sense of what the com pany is trying to be and do. I f they disagree a bout t hat, or sim ply don ’t un derstan d it, how can t hey ma ke consistent decisions t hat move t he company for war d? Simi - | 12 | THE STRATE GIST larly, how can leaders ex pect customers, provi ders o f ca pita l, or ot her sta keholders to un derstan d w hat is rea lly important a bout t heir compa - nies if the y themselves can’t identif y it? This is trul y basic— there is no way a business can t hrive unti l these questions are answere d. Even so, t he exercises in E OP are desi gne d to do more t han set high standards, communicate conce pts, and im prove partici pants’ exist - ing strategies. Th e overarching goal is something different, somethin g deeper an d more persona l. It is to ma ke c lear to t hese executives t hat strategy is the heart of the ongoing leadershi p their com panies need from them. Th at’s why com petition for “ best strategy” is so hard fought an d generates so muc h energy. CEOs, accustome d to as king questions and being deferred to, are challenged by their peers and encouraged to t hink an d ret hink parts o f their strategies t hey’d ta ken for grante d.

Most o f them descri be it as a pivota l experience t hat fun damenta lly chan ges their views of their own businesses.

Behind the scenes, t houg h, t he rea l contest is c loser in: It ’s eac h of these leaders pushing their own ideas to the increasingly high stan - dards the y themselves have come to demand of excellent strate gies and o f themse lves as leaders. It ’s t hat process, more t han any s hort- term answers t hey mi gh t find here, t hat wi ll serve t hem we ll in t he lon g run.

LEADER SHIP AND STRATE GY ARE IN SEPARABLE M any leaders to day do not un derstan d the ongoing, intimate con - nection between leadershi p and strategy. These two as pects of wha t leaders do, once tig htly linked, have grown a part. Now s pecia lists help managers ana lyze t heir in dustries an d position t heir businesses for co m- petitive advantage, and strategy has become largely a job for experts, or somet hing con fine d to an annua l planning process. In t his view, once a strategy has been i denti fied, an d the next steps speci fied, the jo b of the strategist is finished. All that remains to be done is to im plement the plan an d defen d the sustaina ble com petitive a dvantage it has wroug ht. Or at least t hat’s t he positive ta ke on t he story . Strategy and Leadershi p | 13 | But, i f this were so, t he process o f cra fting a strategy wou ld be easy to separate from the day- to- day management of a firm. All a leade r would have to do is fi gure it out once, or hire a consultin g firm to fi g- ure it out, an d ma ke sure it ’s brilliant. I f this were so, t he strategist wou ldn’t have to be concerne d wit h how t he or ganization gets from here to there— the great execution challenge— or how it will ca pitalize on the learning it accumu lates a long t he way.

B ut this is not so. What’s been for gotten is that strate gy is not a destination or a solu - tion. It ’s not a problem to be so lved an d sett led. It ’s a journey. It nee ds continuous, not intermittent, leaders hip. It needs a strate gist. Goo d strategies are never frozen— signe d, sea led, an d delivere d. No matter how care fully conceive d, or how we ll imp lemente d, any strategy put into place in a com pany today will eventually fail if leaders see it as a finished product. Th ere will always be as pects of the plan that need to be clarified. There will alwa ys be countless contin gencies, good and bad, that could not have been fully antici pated. There will always be o pp ortunities to ca pita lize on t he learning a business has accumu late d a lon g the wa y. Th e strategist is the one who must she pherd this ongoing process, w ho must stan d watc h, identi fy an d weig h, deci de an d move, time an d time again. The strategist is the one who must decline certain opportuni - ties and pursue others. Consultants’ ex pertise and considered judgments can help, as can pers pectives an d in formation from peo ple t hroug h- out an or ganization. But, in t he en d, it is t he strate gist w ho bears t he res ponsibility for setting a firm’s course and making the choices day a fter day t hat continuous ly re fine t hat course . Th at is why strategy and leadership must be reunited at the high - est level of an or ganization. All leaders— not just those who are here tonig ht— must acce pt an d own strategy as t he heart o f their res ponsi - bilities.

I sa y little of this toni ght in the classroom. But it is on m y mind as I | 14 | THE STRATE GIST return to my seat in t he s ky deck an d re \bect on a ll the wou ld- be strate - gists I ’ve wor ked wit h over t he years as we ll as t hose o f you w ho are just starting out. My ho pe is that you will come not only to understand the vita l ro le o f the strategist, but a lso to em brace it for yourse lf. Five years a go, w hen I first starte d teac hing in E OP, I hear d the program described as challenging and transformative. At the time, “challenging ” struc k me as rig ht, but “trans formative ” seeme d closer to hype. Having seen it happen again an d again, I now s hare t he optimism . As our orientation session draws to a close, I join the executives and fellow facu lty as we head en masse to Kresge Ha ll for coc ktai ls an d din- ner. Our wor k is a bout to begin in earnest.

In all my classes, I pose one fundamental question: “Are you a strategist ?” Sometimes it ’s spoken, o ften it ’s only im plicit, but it ’s always there. We talk about the questions strategists ask, about how strate gists think, about what strate gists do. M y intent is not to coach these executives in strategy in the way they might learn finance or marketin g. As business heads, the y aren ’t goin g to be functiona l 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 com pany. No matter how hard you and your people work, no matter how wonder ful your culture, no matte r how good your products, or how noble your motives, i f you don ’t get strate gy right, ever ythin g else you do is at risk. M y goa l in t his book is to help you deve lop the skills an d sensibilities this role demands, and to encoura ge you to answer the question for yourself. It’s a difficult role and it may be tem pting to try to sideste p it. It re quires a level o f courage and o penness 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 matte r mo re. CHAPTER 2 ARE YOU A STRATEGIST? H ERE’ S A TE ST of your strate gic think in g. It’s the same one I give my E OPers r ig ht at t he beginning o f the course . Step into the shoes of Richard Manoogian, CEO of Masco Corp o- ration, a highly successful com pany on the verge of a momentous deci - sion.1 You’ve got a big pile of money and must decide whether to invest i t in a far- reaching new business venture. Th e stakes are high, and it’s not an easy or obvious decision. If you don’t go ahead, you could be passin g up an o pp ortunity for growth in a new direction and hundreds of mil - lions o f dollars in future pro fits. I f you ta ke t he p lunge an d turn out to be wron g, you ma y have wasted $1–2 billion. Either wa y, you will have to live with the results for many years . To make the decision, you’ll first need to know something abou t 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 t he company an d the in dustry. | 16 | THE STRATE GIST FIR ST, CO NSIDER THE CO MPAN Y It’s 1986. Masco is a successful $1.1 5 billion com pany that has just recor ded its twent y- nint h consecutive year o f earnin gs growt h. Its a bil- ity to wring outsized profits out of industries that are neither high tech nor g lamorous has won it t he monic ker o f “Master o f the Mun dane ” on Wall Street. Its portfolio includes faucets, kitchen and bathroom cabinets, locks and buildin g hardware, and a variet y of other household products. 2Masco expects the businesses to generate $2 billion in free cash \bow over the next few years . W hat wou ld you do wit h all that money? Masco ’s leaders want to tackle other mundane businesses where their prowess can “change the game.” Th ey envision becoming the “Procter & Gamble of consumer dura bles. ” In t heir imme diate sig hts is t he U. S. house hold furniture business, where they see another opportunity to seize profitable domi - nance of a slee py industry . Is Manoogian ’s idea a promising one? I f so, is Masco t he compan y to lead the char ge? When I raise these questions the first morning in class, the execu - tives don ’t imme diate ly jump up. Li ke you, t hey enjoy being t he 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 grou p they’ve just met. With some coaxing, t houg h, we ’re soon deep into Masco ’s situation an d the issues Manoo gian faces. Th e case for Manoogian’s strategy looks com pelling. Th rough a lon g recor d of triump hs in dura ble goo ds in dustries, Masco distinguis hed itself throu gh efficient manufacturin g, good mana gement, and innov a- tion. Its biggest success to date was reinventing the faucet business. Prio r to Masco ’s entry, t he in dustry was highly fragmente d an d had a genera l lack of brand reco gnition, minimal advertisin g, and a low level of sales - person training. Leveraging the com pany’s dee p metalworking ex per- tise, garnere d in its ear ly years as a supp lier to t he automotive in dustry, Masco’s founder, Richard ’s father Alex, solved an engineering problem Are You a Strategist ? | 17 | that ma de one- han dle faucets wor kable. W hen he cou ldn’t interest fau- cet companies in his patente d innovation, Masco began ma king an d sellin g the faucets itself. Homeowners love d them, finding t hem a big im provement over tra - ditiona l faucets t hat force d users to fiddl e wit h hot an d co ld water sepa - rately. This extra functionality was particularly valued in kitchens where utilit y an d maintenance- free o peration were im portant. Not neg lectin g two- han dle faucets, t he company intro duce d a mo del wit h a new type o f valve. This design, also patented, eliminated rubber washers, the majo r cause of faucet failure. M asco went on to innovate in many ot her aspects o f these new products, from basic manufacturing to distribution and marketing. It was t he first to create bran d recognition for a faucet wit h its De lta an d Peer less bran ds. It was t he first to intro duce see- t hroug h pac kaging, to market faucets direct to the consumer throu gh the do- it- yourself chan - nel, and to advertise faucets on TV during the Olym pics. In refas h- ioning an industry of “me- too” products and boldly setting itself apar t from others, Masco demonstrated that it was creative, able to a pp ly tr a- ditiona l ca pabilities in new ways, an d wi lling to ta ke ris ks an d ma ke them pay o ff— a bilities Ric hard Manoogian hope d wou ld ena ble him to transform the furniture business . NO W CO NSIDER THE IND US TRY At the time Manoo gian was wei ghin g this decision, household fu r- niture was a $14 billion business in t he Unite d States t hat didn’t ma ke muc h money. Wit h high transportation costs, low pro ductivity, an d eroding prices, it had about 2 percent annual growth, and return on sales, on average, was about 4 percent. Th ere were more than 2,500 manu facturers, but 80 percent o f sa les came from on ly four hun dred.

Not all players were small, but most were, and many were family firms that had stuc k it out t hroug h thick an d thin, re luctant to leave t he on ly live lihoo d their fami lies had known for generations. Ma king matters | 18 | THE STRATE GIST worse, both sa les an d profits were cyc lica l an d tie d to broa d economic factors suc h as new home starts an d sa les o f existin g homes . Management in the industry was generally regarded as unso phisti - cate d, an d hadn’t ma de many signi ficant c hanges in t he previous fifty years. Wes ley Collins, a furniture executive an d trenc hant o bserver o f industry conditions, summed it u p dramatically: When ever ythin g else in our lives was chan ging, furniture stood its ground. While we put a man on the moon . . . furnitur e put another steak on the backyard grill and muttered, “My god, the price of oak went u p again. ” Wh en vi deota pe put t he home movie camera in t he tras h can forever, and tape cassettes put the plastic record- maker si x feet under, and word processors put ty pewriters in the closet, an d microwave popcorn killed the makers o f popcorn makers . . . the furniture industry said, “ Th anks, but we’ ll stand pat. ” While we sat on our tu ffets, the consumer forgot all about us. Our share o f consumer ex penditures sli pp ed year a fter year. We lost over 40 percent o f the retail furniture space in America, 25 percen t of the retailers shut their doors, and de partment stores discontinued furniture right and le ft for products that gave them a better ratio o f margin and turns per square foot. 3 Collins went on to say that “the average tobacco chewer s pends more for Levi Garrett Chewing Tobacco every year than he does for furni ture.” M ost furniture purchases were discretionary and highly post pon - abl e, an d, as Collins note d, t here were many su bstitutes an d lots o f competition for t he customer ’s dollar. New innovations an d designs were quickly knocked off by com petitors, eliminating any advantage the innovators mig ht have momentari ly enjoye d.

Equally distressing, in the United States, there was little brand Are You a Strategist ? | 19 | recognition in t he in dustry. Customers didn’t know muc h about furni - ture and weren’t motivated enou gh to find out. There was little adver - tisin g and consumer research had shown that man y American adults could not name a single furniture brand. Th ink for a minute: “Wha t bran d of so fa do you have in your living room? ” W hen I pic k an exec u- tive in the class at random and ask this question, the res ponse is usu - all y a start led loo k, a long moment o f si lence, an d then, somet hing like “Brown leat her? ” Ever yone laug hs, but w hen I open t he question to the entire class, only a few hands go u p and they’re inevitably execu - tives from Euro pe. Yet w hen I as k how many o f them know t he bran d of car t heir neig hb ors drive, virtua lly a ll han ds go up. Yours pro bably would, too . On to p of its mar keting c hallenges, t he in dustry was ri ddl ed wit h ine fficiencies, extreme pro duct variety, an d long lead times t hat frus- trated customers. Buyers often received partial shi pments; for exam ple, a dining ta ble mig ht arrive wee ks or mont hs before t he c hairs t hat went with it. Th e real issue, though, is not whether there are problems in the industry but what they mean. Are all these problems an o pp ortunit y for a courageous company wit h the rig ht s kills? Or are t hey re d \bags warn - ing outsiders to sta y awa y? Wh en I as k my executives w hether t hey wou ld ta ke t he plunge, most respond with a resounding “Yes!” They’re energized, not intimi - dated, b y the challen ges. Most sa y, in effect, “Where there’s challen ge, there ’s o pp ortunit y. ” If it were an easy business, t hey say, some com pan y wou ld alrea dy have seize d the opportunity: It wou ld be muc h toug her to dislod ge a stron g leader than to gain ground in an industr y like this wh ere t here are no big players, no Microso fts a lrea dy esta blished. “It’s a horse race ,” someone once sai d, “an d all the ot her horses are s low. ” Further, the y note, the furniture industr y is much like the fa u- cet industry before Masco entered. Th e o pp ortunity is a great fit with M asco ’s manu facturin g skills, its mar ketin g sav v y, an d its stron g ma n- agement ca pabilities. It’s another chance for Masco to bring money, | 20 | THE STRATE GIST soph istication, an d disci pline to a fragmente d, unso ph isticate d, an d chaotic in dustr y. Opp onents can’t get past how awful the furniture business is. The y can ’t imagine any com pany overcoming suc h huge hurdles. So t he argu- ments go back an d fort h. Ent husiasm an d a gung- ho spirit on one si de stru gg le a gainst caution and concern on the other. In one discussion, an exas perate d proponent blurte d out, “Loo k, t his isn ’t a bout bein g passive investors in some yet- to- be- invente d furniture in dustry in dex fund. We’re going to be players in this game. We can make things ha p- pen. If Starbucks or Under Armour had listened to you naysayers, the y wou ldn’t have done an ything!” W hat’s your inclination at this point?

Usua lly w hen t he time comes for a decision in my c lasses, “Do it ” wins definitive ly, by at least a 2- to- 1 mar gin. So what, in fact, ha pp ened? M asco did enter an d in a bold way. Over two years, it boug ht Henredon (high- end furniture ) for $300 million, Drexel Herita ge (mid- price) for $275 million, and Lexington Furniture (low–middle) for $2 50 million. Combined, the revenues from the three made Masco t he secon d- largest p layer in t he U. S. furniture in dustry. It followe d up by s pending $500 million for Universal Furniture Limited (low end), wh ich had manu facturing o perations in ten countries on t hree conti- nents and followed a ready- to- assemble concept— component parts were manufactured in low- cost countries and shi pp ed in containers to five U. S. locations for assem bly. Now Masco was both the largest fur- niture company in t he wor ld an d one o f the on ly firms wit h pro ducts 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 u pgrading their manufacturing facilities and investing in new mar keting programs.

Presentin g Manoo gian with its Gold Award in the Buildin g Mate - rials Industr y, the Wall Street Transcrip t cited hi s Are You a Strategist ? | 21 | ima gination, foresi ght and strate gic sense. . . . Manoo gian has acquire d low growt h, mature products an d become t he dominant player in those product categories. . . . [H]is most recent set o f 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 Wit h this historica l up date, t he c lassroom crac kles wit h energy. Executi ves who had ad vocated for bold action nod their heads to one anot her or give eac h ot her high- fives an d thum bs- u p, please d that they’ve nai led their first Harvar d case. I hear litt le “told- you- so ” co m- ments directed at the na ysayers, who sit in grim silence. Someone once even ca lled across t he room: “Don ’t worry, Bo b. One bad decision won ’t ruin your reputation. We won ’t hold it against you t he rest o f the pr o- gram. ” But it doesn ’t ta ke long for t hose w ho o pp ose d entry to s peak up. “But how did Masco do?” “The y bou ght great brand names,” sa ys someone . “But how did they do?” “They’re number one in market share. What more do you want? ” “But did the y make mone y?” Th ere, as it’s said, is the rub.

W hen I post Masco ’s financia l resu lts, si lence falls as peop le a bsor b the numbers. In a few seconds, there are whis pered ex pletives around the room.

After thirty- two years of consecutive earnings growth, Masco’s ne t income fell 30 percent. Two years later, o perating earnings from furn i- ture came to $80 mi llion on sa les o f $1.4 billion, an o perating margin of 6 percent, versus 14 percent for the rest of the company. After man y years of stru gg le, Masco announced its intentions to sell its furniture businesses, leading one ana lyst to comment: | 22 | THE STRATE GIST In the spring, management will go on the road with restate d financials illustrating their “core” earnings growth as if they never entered the furniture business. Th ey hope to rebuild investo r confidence in the old [pre- furniture ] Masco . . . as a growth com pany by s howing t heir trac k recor d an d pros pects in t he building materials arena. Given the $2 billion furniture “mistake,” this won’t be eas y.

In a sad postscri pt, Masco discovered that exiting the furniture business was much harder than entering it. After a number of deals fell throu gh, it eventuall y succeeded in sellin g its furniture firms, at a loss of some $650 million .5 W hen it was a ll over, CEO Manoo gian a dmitte d, “The decision to go into the home furnishings business was probably one of the worst decisions I’ve made in 3 5 years. ”6 It’s a soberin g moment in the classroom. The executives there didn’ t inten d to o pen t heir careers at t he Harvar d Business Schoo l by losin g hundreds of millions of dollars their first mornin g. So, let me ask you a gain, as I do the mana gers in m y class: “Are you t he strategist your business nee ds?” CHAPTER 3 THE MYTH OF THE SUPER- MANAGER A S A STRATE GIST, what can you learn from Masco’s fora y into fu r- niture an d the su pp ort most executives give t hat i ll- fate d decision ? Even if you were undecided or skeptical about the furniture indus - try, I’m willing to bet that some part of you su pp orted Masco’s move. No one res pects timi d, passive managers. Bo ld, visionary leaders w ho have t he con fid ence to ta ke t heir firms in excitin g new directions are widely admired. Isn’t that a key part of strategy and leadershi p? In trut h, it is. But t he con fid ence every goo d strategist nee ds can readily balloon into overconfidence. A belief that is unspoken bu t implied in much management thinking and writing today is that a highly com petent manager can produce success in virtua lly any situ- ation. One writer ca lls t his “the sense o f omnipotence t hat p lagues American mana gement, the belief that no event or situation is too com - plex or too un predicta ble to be broug ht un der management contro l.”1 I call this belief, when taken to its extreme, the myth of the super- manager. It seems to come natura lly to many success ful entre preneurs an d senior managers w ho see t hemse lves as action- oriente d pro blem solvers, confident doers for whom difficulties are dauntin g but solvable ch allenges. I see it behind Masco ’s leap into furniture manu facturin g | 24 | THE STRATE GIST and behind executives ’ choice o f the same path every time I teac h the case. Con fid ence matters. But t here ’s muc h more to strate gy an d leader- shi p than a steadfast belief that a daring vision backed by good manag e- ment can overcome virtua lly a ll obstac les. Wit hout t he rest o f it, “b old ” too ofte n beco mes “reckless.” Look at what such thinking did to Masco. O perating profitability dropp ed to half its historica l average, an d the firm ’s stoc k price was lower w hen it left t he furniture in dustr y than w hen it entere d ten years earlier. And money was only part of the cost. Where Wall Street had s poken o f Masco as a “Master o f the Mun dane, ” it began to s peak of t he company ’s “past g lor y ” an d “bitter s hare holders. ”2 Th e com pany lost momentum as its leaders spent years distracte d by a massive venture t hat ultimatel y 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 twent y years to build a re putation and five minutes to ruin it.” All because the strategist go t t his one c hoice wrong . W hat happened ? Your instinct, like most managers’, is probably to seek the answer by loo king at Masco itse lf an d its leaders. Sure ly, t he u ltimate fau lt 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. Th is 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 i t was ty ped on onionskin paper. Set in 1946, t he Menge l case descri bes t he firm ’s p lans to revo lu- tionize the hi ghly fra gmented furniture industr y. Men gel ’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 The Myth of the Super-Manage r | 25 | spend $ 500,000 on national advertising to “make the average consume r st yle- conscious ” an d build its “Permaniz e d” bran d name. 3I had ne ver hear d of Menge l, but wit h an eerie sense o f déjà vu, I won dere d if Ma s- co’s leaders had kno wn about them . My own research in the industry led to the following list. What do you t hink these seeming ly disparate companies have in common? Consolidated Foods Cham pion International Mead Genera l Houseware s Lu dlow Intermark Georgia Pacifi c Beatrice Foo ds Scott Paper Burlin gton Industries Gulf + Western Like Mengel and Masco, these are all com panies that tried and failed to find fortune in furniture manu facturing . M ost were regarded as well- run companies. Like Masco, they co n- sidered a fragmented, chaotic industry to be an o pp ortunity for good managers to app ly t heir s kills. Wit h great expectations an d high hopes of success, they all jumped in with the intention of reshaping the indus - try through the infusion of “ professional management.” Years later, they all left. UNDER STA NDIN G THE F ORCES M ost executives find this list both revea ling an d disconcerting. Th ese were companies with considerable track records, yet they all failed in the same endeavor. Was there something problematic abou t | 26 | THE STRATE GIST the en deavor itse lf? Was somet hing at wor k in t he furniture in dustry t hat was outsi de t he contro l of these companies an d their leaders?

Here’s another clue.

Loo k at t he c hart on Re lative In dustry Pro fitabilit y. It s hows t he average return on equity for t went y in dustries over t he twenty- year period from 1990 to 2010. The chart was com piled from Standard & Poor ’s an d Com pustat data bases t hat inc lude data on a ll com panies t hat tra ded on U. S. stoc k exc han ges. -20% - 10% 0% 10% 20% 30% 40% TobaccoTobacco Fruit Ve g Product s Toilet ry Cosmeticsy Pharmaceutica ls Clothing Stores Oil Refinin g FootwearFF Aerospace Def ense ff Retailing Softwarett Secur ities Brokers Commercial Banks House hold Furnitur e AutomobilesSoftDrinkstInsurance Computers & Peri pherals Paper & Forest Products Comm. Equip. Airlin es Relative Industr y Profitabilit y:tt 1990 –2010 R eturn on E quit y Are you sur prised by how much profitability varies by industry?

Com pare Tobacco com panies at 36.1 percent avera ge annual retu rn on equity— w hich means leading firms in t he in dustry do even better — with Airlines at - 10 percent or Commercial E quipment at - 2 percent . In my ex perience, most executives un derstan d that average profit- ab ility wi ll differ from in dustr y to in dustr y, but t he sca le o f variation often comes as a sur prise. Annual average returns in the most profitable in dustries are we ll more t han dou ble t hose in me dian in dustries, an d more than four or fi ve times those at the bottom of the distribution. The Myth of the Super-Manage r | 27 | Researc hers have foun d simi lar differences in ot her countries, in both ad vance d an d emer ging economies .4 Are these vast differences from industr y to industr y caused b y ra n- dom variation? It ’s not likely— t hey’re too large an d too consistent. Do some types o f businesses attract great managers w hile ot hers attract on ly poor ones? Sometimes, but not enough to account for the differences . In fact, t hese variations are cause d by economic forces t hat s hape eac h in dustry ’s competitive lan dscape different ly.5As Mi chael P or- ter has shown, some of these relate to the nature of rivalry within the in dustry itse lf; ot hers have to do wit h the balance o f power between the industry and its suppliers and customers, substitute products, and potential new entrants. Sometimes the forces are fierce and lead to low leve ls o f in dustry pro fitabilit y; ot her times t hey’re re lative ly benign an d set the scene for much more profitable outcomes. Th e collective im pact of these forces on the profitability of indi - vidua l firms, an d, in turn, on in dustries in w hich they operate, is ca lled the industry effect. You may be surprised to learn that some and perhaps much of your com pany’s performance is determined by such forces .6 Th ese com petitive forces are beyond the control of most individual companies and their managers. They’re what you inherit, a reality tha t you have to deal with. It’s not that a firm can never chan ge them, but in most cases it’s very difficult to do. Th e strategist’s first job is to understand them and how they affect the playing field where competition takes place . MAKIN G THE DI STIN CTIONS As suggested by the above chart, industries can be arrayed along a continuum extendin g from “Unattractive” to “ Attractive,” where attractiveness re fers to t he degree to w hich in dustry com petitive forces restrict, allow, or even foster firm profitability. The table below iden - tifies the most important of these economic forces and characterizes w hat t hey probably wou ld be like in in dustries at t he boun ds o f suc h a co ntinuu m.7 | 28 | THE STRATE GIST Unattracti ve . . . . . . . . . .. . . . . . . . . . to Attracti ve Hi gh. Man y homogeneous com petitors and homo geneous products. Innovations quickly co pied. Slo w growth. Excess ca pacity.

Price com petition.

Hi gh. Industr y is de pendent on a few, concentrated su ppliers producing uni que products, and Industry is not im portant source o f profitability to su ppliers.

Hi gh.Customers ha ve lots of choice amon g simila r products. Low levels o f brand a wareness. Lo w switchin g costs. Low levels of emotional in volvement with purchase.

Lo w. Industr y is eas y to enter and sometimes difficult to exit, creatin g excess ca pacity. Strategies of existing com petitors can be easily re plicated or sur passed. Entr y re quires low levels o f ca pital, modest scale, and no scarce or s pecialized r esou rces. Hi gh. Wide variet y of com pelling substitute products are available that m eet custo mers’ needs at attractive relative prices. R ivalr y am on g fir m s Power of su pplier s Po wer of custo mer s Barriers to entr y and exit Availabilit y of substitute product s Lo w.One or a fe w dominant , differentiated players. Uni que products. Stron g brand identities.

Ra pid industry growth. Shortage of ca pacity . Lo w. Many su ppliers producing homogeneous products. Price com petition and plentiful supply make it eas y to procure su pplies at r easo nable cost. Lo w. Products are scarce , highly differentiated, and im portant to customers’ well- bein g. Customers ha ve limited choice.

Brands are stron g. Hi gh. I t is diffi cult or n ot eco nomical for new firms to enter your industry. Entry re quires economies of scale , product differentiation, high ca pital investment, regulatory a pproval, o r accumulation of s pecial ex pertise or ex perience . Lo w.Customers ha ve fe w or no choices o f alternative products that cou ld meet their n eeds at com parable prices . The Myth of the Super-Manage r | 29 | Note how c lose ly many o f the com petitive con ditions in furniture manu facturin g mirror t hose in t he left- han d “Unattractive ” co lumn . R 5 # 0 & , 3 5 ' ) ( ! 5 / , ( # . / , 5 @ , ' - 5 # - 5 # ( . ( - 6 5 - 5 - " ) 1 ( 5 3 5 . " 5 " # ! " num ber o f firms ma king simi lar furniture an d by t he a bility o f firms to copy innovations made by competitors. R 5 / * * & # , - 5 . ) 5 . " 5 / , ( # . / , 5 # ( / - . , 3 6 5 - / " 5 - 5 . 2 . # & 5 ' % , - 6 5 ) ' # ( . 5 the ven dor re lations hip because no furniture company buys enoug h textiles to be an im portant customer. R 5 / - . ) ' , - 5 # ( 5 . " 5 # ( / - . , 3 5 , 5 * ) 1 , / & 5 / - 5 / , ( # . / , 5 * / , " - - 5 are highly postpona ble, pro ducts are long- live d an d commo dit y- like, and customers are not brand sensiti ve. R 5 ( . , 3 5 , , # , - 5 , 5 & ) 1 6 5 ' ( # ( ! 5 . " . 5 ( 1 5 @ , ' - 5 ( 5 B ) ) 5 # ( 5 ( 5 * / & & down prices if industry conditions ever become more attractive. On the other hand, the industry can be difficult to exit, es pecially for the many fami ly firms t hat have few a lternative options, ma king excess capacity slow to leave the industry. R 5 / - . # . / . 5 * , ) / . - 5 ) / ( 8 5 1 5 / , ( # . / , 5 ' / - . 5 ) ' * . 5 ) , 5 the customer ’s dollar wit h count less a lternatives— inc luding use d furniture or hand- me- down furniture passed from user to user. Since many customers consi der furniture a discretionary purc hase, it mus t also compete wit h a p lethora o f pro ducts suc h as te levisions an d soun d s ystems that customers are more excited about and consider to be a better va lue for t heir discretionary dollars. Even w hen furniture prices lagge d increases in t he consumer price in dex, sa les did not respon d.

How do you react to the existence of these forces? It isn ’t a happ y lesson for many executives I teac h. It seems to say, “Your prospects are predetermined— the game is up— or, if not up, a | 30 | THE STRATE GIST big chunk of it is out of your control.” Action- oriented executives, I find, pre fer not to t hink of themse lves as in t he grip o f outsi de forces. Th ey prefer to believe in free will, not determinism. The possibility that t heir in dustries mig ht drive or heavi ly in \buence t heir 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, wh ile ignoring or un derestimating w hat t hey cannot.

RE JECTIN G THE MYT H Ironica lly, t he most success ful an d admire d leaders, t he titans o f business, un derstan d the pro foun d signi ficance o f competitive forces outside their control. They know the crucial importance of picking the right playing field. Th ey don’t buy the management myth that a truly goo d manager can prevai l regar dless o f the circumstances.

Look at Jack Welch, F ortune magazine’s “Manager of the Century.”e Yo u probably don ’t remem ber t hat w hen he too k over Genera l E lec- tric , We lch so ld off more t han 200 businesses wort h more t han $11 billion and used that money to make more than 370 ac quisitions. W hy? He wante d out o f in dustries w here con ditions were too negative, w here he t houg ht it wou ld be too hard for GE to \bouris h. “I didn’t like t he semiconductor business,” he said. “I thou ght it was too c yclical and i t re quired too much ca pital. Th ere were some very big players in it and only one or two were making any money on a sustained basis. . . . [Exit - ing that business ] allowed us to put our money into things like medical eq uipment, power generation, a ll kinds o f in dustries w here we c hange d the game. . . . ”8 A comment from the Sage of Omaha himself, Warren Buffett, ca ps the point:

When a management with a reputation for brilliance tackles a business with a re putation for bad economics, it is the re putation of t he business t hat remains intact. 9 The Myth of the Super-Manage r | 31 | Buffett an d We lch, two o f the strongest managers on recor d, re c- ognize that industr y matters a lot. The y understand that a si gnifican t measure of a firm’s success de pends on com petitive forces beyond a man - ager ’s contro l, an d they use t hat know ledge to t heir own a dvantage— by picking p laying fields w here t hey can win an d, wit hin t hose fields, care - fully positioning their businesses to work with, not against, the forces . BU T WHAT AB OU T . . . ? Des pite such counsel, the myth of the su per- manager lives on for many executives. It ’s rein force d in practice just o ften enoug h to give i t credence. Sometimes, even in t he toug hest lines o f business, t here is as plan that works. Individual firms on occasion have not only achieved great success in in dustries w here most ot hers have failed, but t hey’ve even c hange d the basic competitive context o f the in dustries . Such stories recei ve inordinate attention in business books and me dia, an d executives are a lways quic k to bring t hem u p: Star buc ks’s revo lution in t he co ffee house business. Sout hwest ’s triump hs in dis- count airlines. Cir que du Soleil ’s reinvention of the circus business.

Even Masco ’s cou p in faucets. Yes, it does happ en. But none o f these strategies appeare d out o f the blue from t he un fet- tered minds of su per- managers. They came from a dee p com prehension of the industries involved and the conditions at work in them.

Th e found - ers o f Sout hwest discovere d a way to exp loit a hole in t he fare an d route structures of established com petitors. Starbucks succeeded not sim ply by brewing better co ffee an d creating an attractive co ffee house ex perience, but by gaining sca le an d building t he unique corporate s kills nee ded to replicate that experience not tens or hundreds but thousands of times . Th e founders of Cir que du Soleil, performers themselves, under - stoo d the essence o f the tra ditiona l circus— t hat it was focuse d on children and that its economics were badly strained by the ex pense of trans porting an d caring for large, wi ld anima ls. By focusing on an adult audience, w hich let t hem drop many o f the anima l acts, t hey s killfully | 32 | THE STRATE GIST positione d themse lves to avoi d one o f the in dustry ’s greatest drains on pro fits w hile targeting customers wit h the highest wi llingness to pay .10 Th at’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 sa w potentia l in t he in dustr y. But Bu ffett c hose to invest in furniture retai l- ing, not manufacturin g, and bou ght several successful furniture sellers around the United States. He seems to be ex perimenting to see if these downstream retai lers can bene fit from t he intense ly competitive con di- tions 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 Bu ffett ’s most brilliant ventures, but t hey revea l a real strategist playing his cards carefully with a deep appreciation o f the forces at work in the industry. No one can say t hat t he decision to enter or remain in a toug h in dus- try is ri ght or w ron g on the face of it. Remakin g a difficult business, as Masco set out to do, isn’t easy, but as we’ve seen, it can and has been done. W hen it wor ks, t houg h, it ’s a lways a two- si ded affair: It invo lves an industry, or part of an industry, that can be changed and a firm with a viable way to do so.

THE MI SS ING INF ORMATI ON What does all this tell you about Masco and its failed furniture venture ? For t he full answer, we must loo k more c lose ly at Masco ’s actions and at how most of my students— peo ple much like you, I sus pect— sa w on ly t he u pside potentia l of the o pp ortunit y. After a class has voted for Masco to enter furniture manufacturin g (and they always do), I ask the strongest proponents of the move ho w the firm s hou ld procee d. W hat s peci fic actions s hou ld Masco ’s mana g- ers ta ke t hat wi ll cause it to per form a bove t he average in its new line of business ? The Myth of the Super-Manage r | 33 | Alongside the bold decision to enter, the proponents’ plans usually loo k surprising ly lackluster. Near ly a ll of them start wit h “Masco s hou ld acquire .  .  .” and go on to add some grand but vague statements abou t rationa lizing production, im proving e fficiency, leveraging t he com pany ’s pro fessiona l management, using “power mar keting, ” an d so on. W hen I want to know what the com pany would do differently, how “ professional management ” wou ld wor k here, or w hat wou ld set t he firm a part from others, the answers get progressively vague and superficial. They haven’t thou ght about all that . W hat becomes c lear is t hat t heir arguments are propelled by an ent husiasm for t he company itse lf, for w hat it ’s ac hieve d in t he past, an d for the storehouse of ca pabilities it could bring to a new venture. Wha t is missing is a s peci fic plan t hat s hows w hy a ll of that wi ll matter in t his in dustr y, an d how it wi ll neutra lize t he lon g- live d forces t hat have broken so man y other firms. Th ese discussions always remind me of how French generals afte r World War I responded to the fact that, in the previous half century, German y had twice defeated French armies. The generals took a num - ber o f ste ps, inc luding construction o f the now- in famous Maginot Line, but a key reason, t hey sai d, t hat France wou ld not be defeate d again was the élan vital of the French soldier. Élan vital means “vital s pirit” and the gist o f Frenc h thinking was t hat t he su perior determination or attitude of the French arm y would defeat whatever the Germans thre w at it. Of course, we know how well that worked. It was the militar y e quiva lent o f the myt h of the su per- manager. M asco ’s vita l spirit wasn ’t enoug h, eit her. Its leaders hope d its supe - rior mana gement and manufacturin g skills would lead it to victor y on a new front, an d that t he same strategy t hat had broug ht it great success in faucets wou ld do t he same in furniture. But , w hile simi lar in some wa ys, the two industries were different in other wa ys that Masco either failed to notice or a pp reciate . M asco ’s purc hases o f furniture companies at t hree price points — low, middle, and high— re\bected its belief that significant sco pe econo - | 34 | THE STRATE GIST mies, or savings t hat come from producing a wi de range o f 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 c hanne ls, insta lled by t he same plum ber, an d often boug ht by t he same customer for use in different locations in a house. In furniture , however, manufacturin g, distribution, retailin g, and customers differ dramatica lly from t he to p en d of the mar ket to t he bottom, ma king scope economies muc h more difficu lt to ac hieve. Discount furniture is mass- produced and mass- marketed, while ex pensive furniture is largel y han dma de an d distri bute d throug h specia lty retai l shops. Few custo m- ers buy furniture at both en ds o f the price an d qua lity spectrum, an d the products are almost never found at the same retailer . Simi larly, s c a le economies were difficu lt to come by in furniture. Even a fter it purc hase d its way to mar ket leaders hip, Masco held on ly a paltry 7 percent of the market, com pared with its 30 percent in faucets. Seven percent was un likely to con fer muc h, if any, economic a dvantage, particularly when spread across so many styles, so many manufacturing plants, so many channels, and so many price points . Li ke ot her furniture manu facturers, Masco ’s fortunes were hin- dere d by t he in dustry ’s extreme pro duct variety, high shipping costs, and c yclicalit y, which in combination make it extraordinaril y difficult to manage a su ppl y c hain e fficient ly, or profitably su bstitute ca pita l equip- ment for labor. Without a compelling way to address these issues, a manufacturer will alwa ys be at their merc y.

Above all, Masco failed to learn the biggest lesson of its success in faucets. Its one- han dle an d was herless pro ducts gave it unique a dvan- tages that addressed im portant customer needs. Everything else it did in t hat in dustry \bowe d from t hose key differences. In a mar ket w here functiona lity was crucia l, Masco had a demonstra ble pro duct e dge.

In furniture, an industr y ruled more b y fashion than function, Masco had no suc h core a dvantage, nothin g that was stron g enou gh to counter th e gravitational pull of the industry’s unattractive com petitive forces . Like those French generals, Masco failed to access its own battle The Myth of the Super-Manage r | 35 | rea diness. It place d unwarrante d fait h in its su perior management é lan vita land underestimated the forces it was u p against. One executive use d a different but similar meta phor to describe what the com pany did: “Masco wa lked into a lion ’s den an d was un prepare d to meet a lion. ” THE STRATE GIST IN REM ORSE Ric hard Manoogian, CEO- strategist an d son o f the com pany ’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. Fathe r an d son had strung toget her t hirty- one years o f consistent ly su perio r performance and created a superb reputation on Wall Street. All of tha t went up in smoke. In a story titled, “The Masco Fiasco,” Financial World observed: “ Th e Masco Cor p. was once one of America’s most admired companies; not anymore.” Though Manoogian promised to return the com pany to “its past glory,” he would have to regain the trust of his share holders, many o f w hom felt “stuc k in a nine- year nig htmare o f broken promises. ”11 It was a case of the overconfident strategist. Along with many other companies t hat trie d to crac k the furniture in dustry, Masco believe d a disorganized, com petitive, low- profit business offered easy pros pects for a disci pline d, we ll- manage d com pany. By some process o f optimistic thinking, superficial analysis, and misplaced analogy, serious industr y problems began to look like golden o pp ortunities . Th e same ho peful thinking rea pp ears every time I teach the Masco case. In t heir initia l ana lysis o f the furniture business, m y stu dents— all seasoned executives— dul y note how unattractive it is. Yet when the time comes to deci de w hat Masco s hou ld do, t hey prefer to inter pret every problem as an opportunity (an “insurmountable opportunity,” as some wa g once said). Chaos, c yclicalit y, fra gmentation? Great! No dominant player and low brand recognition? Wonderful! A difficult- to- manage supp ly c hain wit h large, expensive items, an d huge variety? Terrific! Seemingly, there was nothing Masco’s resources and prowess | 36 | THE STRATE GIST cou ld not overcome or turn to t heir a dvantage. It is t he myt h of the super- manager in full force . I sus pect Masco fell into the same tra p. In the face of dee ply ingraine d, long- live d in dustry problems, its leaders succum bed to a cost ly bout o f irrationa l fait h in t he power o f superior management. THE P OWER OF REALI SM Do t he lessons o f Masco resonate wit h you? More than twenty years after the Masco fiasco, my students repeat -tt edly a pp roac h me to say, “My in dustry is just like t he furniture business!

I ’m wor king rea lly hard an d getting now here. ” For t hem it ’s a eure ka moment. The issues the y’ve been battlin g suddenl y come into focus, and t hey un derstan d the larger reasons for t heir strugg les. They, like Welch, Buffett, and other astute business leaders, grasp the lesson of the industry effect and its profound im plications for firm performance. Th ey recognize that, as in the famous serenity prayer, you must accept t he t hings you cannot c hange, have t he courage to c hange the thin gs you can, and the wisdom to know the difference. It’s a lesson great strategists un derstan d we ll, but it ’s not an easy lesson to acce pt an d master. The myth of the super- manager is hard to let go . The fundamental lessons here are sim ple but of paramount im por- tance for t he strategist. First, you must un derstan d the competitive forces in your in dus- try. How you res pond to them is your strategy. That means if you don’ t understan d them, your strategy is base d on luc k an d hope. Secon d, even i f you un derstan d your in dustry ’s competitive forces, you must find a way to deal with them that is up to the challenge. Th at may mean skillful positioning, deliberate efforts to counter neg a- tive forces or exp loit favora ble ones, or even a time ly exit. But don ’t be tra pp ed by the myth into believing that your su perior management s kills wi ll carry you to success.

Third, whatever you do, don’t underestimate the power of these The Myth of the Super-Manage r | 37 | forces. Th eir im pact on the destiny of your business may well be as grea t as you r own . The story you will write as a strategist will be set against the back -kk drop of your in dustry. It must be true to its rea lities, w hile having a difference t hat’s a ll its own. It ’s to t he secon d of these c hallen ges t hat we no w turn . CHAPTER 4 BEGIN WITH PURPOSE W E’VE LEARNED SO ME painful lessons about the challenges that con front strategists in t he face o f unattractive in dustry forces. W ith this chapter, I begin mapping the path out of the wilderness: sp e- cifically, ex plaining how some astute strategists have managed to distin - guis h their businesses even in t he face o f suc h headwin ds. Th e journey starts with an individual: Ingvar Kamprad, the founder of IKEA who b y all accounts built one of the world ’s greatest fortunes.

Li ke Ric hard Manoogian o f Masco, Kam prad was in t he furniture business, but his story couldn’t be more different. In 2010, his privately held com pany, 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 ma r- gins o f 46 percent . And the numbers don’t even begin to ca pture IKEA’s powerful hold on consumers. As BusinessWeek put it, “Per haps more t han any ot her company in the world, IKE A has become a curator of people’s lifestyles, if not their lives. IKEA World [is] a state of mind that revolves around contem porar y design, low prices, wac ky promotions, an d an ent husiasm that few institutions in or out o f business can muster. ”1 | 40 | THE STRATE GIST How did Kam prad succee d w here Manoogian failed? He built his company by creating w hat I like to ca ll a difference that matters . (The full meaning of this phrase will become clear as the story unfolds.) He did so, not by ignoring in dustry forces, as Manoogian did, but by creating a company t hat cou ld thrive an d add va lue in t he mi dst o f them . If you’re one of the millions who have sho pp ed at IKEA, you’ ll likely have in delible memories o f vast, brig ht, mo dern stores designe d so t hat entering customers follow a win ding pat h throug h a huge building filled with furnishin gs and a great miscellan y of housewares. When you c hose a piece o f furniture— a sim ple Mic ke desk for 69 euro, or a ten- person Nor den dining ta ble for 269 euro— you note d the in formation on an order sli p, continued on the path to a warehouse- like room, wrestled a \bat box containing t he item onto your s hopp ing tro lley, carte d it home on t he roo ftop o f your car, an d assem bled it yourse lf. If you broug ht the kids, you may have parked them in the on- site child care center; you may a lso have sto pp ed at t he restaurant to sam ple tasty an d inex pensive food ran ging from salmon to Swedish meatballs and lin gonberr y tarts. It’s almost a theme park: probably not a customer ex perience you’d re l- ish if you ’ve ma de your fortune, but w hen you were starting out, t here was not hing that cou ld matc h it. RURAL R OO TS One cou ld say t hat Ing var Kampra d was a natura l- born entrepr e- neur. “ Tr a d i n g w a s i n my blo o d ” he told h i s bio g r a pher, Bertil Torekull. 2 Kam prad was a bout five w hen his aunt helped him buy a hun dred boxes o f matc hes from a store in Stoc kh olm t hat he t hen so ld in divi dua lly at a profit in his rural hometown of Agunnaryd, dee p in the farmland of Sma lan d. Soon he was se lling a ll sorts o f merc han dise: Ch ristmas car ds, wall hangings, lingonberries (he picked them himself ), fish (which he cau ght), and more. At eleven, he made enou gh mone y to bu y a bic y- cle an d ty pewriter. “From t hat time on, ” he recounte d, “selling t hings became somethin g of an obsession. ”3 Beg in w ith Purpos e | 41 | Before going to t he Schoo l of Commerce in Gothen burg, Kam prad signed the paperwork to start his own trading firm, IKE A Agunnaryd [I for Ingvar, K for Kam prad, E for the family farm Elmtaryd, and A for Agunnaryd]. The mail- order business grew to include everything from fountain pens an d picture frames to watc hes an d jewe lry. Wit h a keen eye for value, Kam prad ferreted out the lowest- cost sources. Frugality was the norm in Sma lan d. Its farmers, e king t heir living from a hars h an d spare environment, had to ma ke every penny count . Noticing that his toughest com petitor in the catalog business sold furniture, Kam prad deci ded to a dd some to his o fferings, su ppl ied by sma ll loca l furniture ma kers. Furniture quic kly became t he biggest part of his business; in the postwar boom, Swedes were buying a lot of it. In 19 51, at age t went y- five, he dro pp ed all his other products to focus exc lusive ly on furniture . Almost immediately he found himself in a crisis. Growing com peti- tion 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 riskin g an increasin gly bad re putation, ” Kam prad sai d.4 He didn’t want to join t he race to t he bot- tom, but how cou ld he persua de customers t hat his goo ds were soun d when they had only catalog descri ptions to rely on? His answer: create a showroom w here customers cou ld see t he merc han dise first han d. In 1953 he opened one in an old two- story building. The furniture was on the ground \boor; u pstairs were free coffee and buns. Over a thousand peo ple came to t he vi llage for t he o pening, an d a grati fying num ber wrote out orders. B y 1955, IKE A was sendin g out a half a million cat a- logs and had sales of 6 million krona. Kam prad understood his customers on a personal level. As he would later say, in explaining IKE A’s philosophy, “Since IKE A turns to the many peo ple who as a rule have small resources, the com pany must be not just c heap, nor just c heaper— but ver y muc h cheaper . . . t he goo ds must be suc h that or dinary peop le can easi ly an d quic kly i denti fy t he lowness of the price.” 5 | 42 | THE STRATE GIST By following t his ph iloso ph y, K a m prad became a force to conten d wit h in t he Swe dish furniture in dustry— an d, not liking his low prices, the industr y struck back. Sweden’s National Association of Furniture Dealers began pressuring su ppl iers to boycott him an d, wit h the su p- port o f the Stoc kh olm Ch am ber o f Commerce, banne d him from tra de fairs. Many of the su pp liers sto pp ed selling to him, and those that co n- tinued to do business with IKEA resorted to cloak- and- dagger mane u- vers: sen ding goo ds to fictitious a dd resses, deliverin g in unmar ked vans, and changing the design of products sold to IKEA so they wouldn’t be recognize d. Soon Kam prad was su ffering t he humi liation o f not being a ble to deliver on or ders. He counterattacked on several fronts— for exam ple, he began pay- ing su ppl iers wit hin ten days, as o pp ose d to t he stan dard in dustry prac - tice o f three or four mont hs, an d he starte d a \boc k of litt le companies to act as intermediaries. These moves hel ped, but IKEA was growin g ra pidly an d su ppl ies were s hort. Wit hout a re liable source o f su ppl y, Kamprad feared his business would be doomed . Havin g heard that Poland ’s communist government was hun gry for economic deve lopment, Kam prad began scouring t he Po lish cou n- tryside. He foun d man y ea ger an d wi lling sma ll manu facturers labor- ing in the shadow of the bureaucracy. Their plants were anti quated an d the qua lit y o f their products was drea dful, so Kam prad locate d better- quality (though used ) machinery in Sweden. He and his sta ff moved the machiner y to Poland and installed it, workin g hand in hand with the manufacturers to raise productivity and quality. Th e furniture they turne d out en ded up costing a bout half as muc h as Swe dish- ma de eq uivalents and Kam prad was able to nail down his costs on a huge new sca le. Th us the bo ycott turned out to be what I call an “ incitin g incident,” to borrow a phrase from screenwriter Robert McKee— an event that propelled a critica l strategic s hift.6“New pro blems create d a dizzyin g chance,” Kam prad said. “When we were not allowed to buy the same furniture ot hers were, we were force d to design our own, an d that came Beg in w ith Purpos e | 43 | to provide us with a style of our own, a design of our own. And from t he necessit y to secure our own deliveries, a c hance arose t hat in its turn op ened u p a whole new world to us. ”7 To K a mpr a d , it w a sn’t enou gh to si mply s ou rc e i n de v e lopi n g cou n- tries. He also brou ght extraordinar y determination and ima gination to his drive for lower costs. For exam ple, he wasn ’t a frai d 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 es pecially lo w price. He boug ht headb oar ds from a door factory, an d wire- frame d sofas and tables from a maker of shopping carts. IKE A was also a pi o- neer in building “ board- on- frame furniture,” com prised of finished woo d on a partic leboar d core, w hich is both cheaper an d lighter t han solid wood. Then, of course, there is the iconic IKEA packaging— the famous \bat pack wit h its do- it- yourse lf assem bly. W hile t he com pany didn’t invent t his approac h, it was t he first to grasp an d systematica lly exp loit its full potential. The \bat pack provides huge cost savings by makin g s hipp ing, distri bution, an d storage muc h more e fficient an d thus muc h cheaper. It saves manufacturing steps; it saves shipping costs from fa c- tor y to store; it saves stockin g and handlin g costs in the store; and i t eliminates delivery costs for most customers.

IKE A opened its first store in 1958 in Almhult. Five years late r it o pened one in Norway, and two years after that, a second Swedish store in Stoc kh olm. It became a nascent g lobal player wit h openings in Switzer lan d in 1973 an d German y in 1974. It entere d the Unite d States in 1985, China in 1998, Russia in 2000, and Ja pan 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 IKE A’s success in this terrible industr y?

Most likely your immediate thought is “low prices, low prices, low | 44 | THE STRATE GIST 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 com pany has lowered its prices by 2 to 3 percent a year on average. Every as pect of IKEA’s o peration is subject to ongoin g scrutin y to see w here furt her costs can be ta ken out. Even \bat packs have been re peatedly redesigned to gain small efficiencies in the use o f space. Kam prad regar ded the customary perks o f business leader- s hip as waste, too. Stories are legen d of his \bying coac h class or ta king a bus instead of a taxi or limousine. It’s an attitude that’s been ado pted wh olehearte dly by ot hers in t he com pany w ho s peak of spen ding money unnecessari ly as a “d isease, a virus t hat eats awa y at ot herwise healthy com panies.” 9 But IKE A 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. Th e si m- plicity of the clean lines made the furnishings particularly appealing; i t a lso made them chea per to produce than more ornate designs. Kam prad pushed this enve lope fart her, hiring first- c lass ta lent w ho cou ld design for both style and for frugal manufacturing techniques. Perhaps IKE A’s greatest desi gn achievement has been to make its furniture look and feel more ex pensive than it is. A turning point came in 1964 when a respected Swedish furniture magazine compared IKE A furniture with more hi ghly re garded brands. IKEA’s, it found, was often as good or better. Th at shocked the industry and hel ped to persuade consumers that they had not hing to lose— eit her financia lly or in terms o f status— by sho pp ing at IKEA . Unlike so many discount retail stores, IKEA’s are anything but dar k and dingy. The company’s vibrant colors (mostly blue and yellow, the colors of the Swedish \bag ) are every where, and exce pt for the weekend crow ds, t he stores are pleasant places to visit. You can ma ke a day o f it: Come wit h the fami ly, try out t he so fas, use t he computerize d too ls to desi gn your own kitchen, and have a full- \bed ged Swedish meal at the restaurant. I f, at t he en d of the day, you ’ve boug ht too muc h to loa d onto Beg in w ith Purpos e | 45 | your car, you can rent an IKEA van to drive it all home, or even pay to have t hings delivere d, assem bled, an d set up.

So, what is it that is s pecial about IKEA? I ask you. Low price?

Design? Flat pack? Swedish meatballs? What? Th e answer, of course, is “all of the above.” The centerpiece is low cost— without that, nothing else works— but everything else not only su pp orts 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.” M aybe so. But w hat is t he rea l lesson here? W hat do you ta ke wit h you to apply to your company? That low cost with some added distinctive features is a winnin g combination ? Of ten it is . But w hat i f I te ll you t here is a deeper insig ht here, an insig ht t hat a pp lies to all businesses whether you’ve decided to com pete on low price or wit h differentiate d, s pecia lty products. It ’s somet hing e lse t hat was be hin deveryt hing IKE A did. A CO NCEPT CO MPANY I f Ingvar d Kampra d were here an d we as ked him to descri be t he essence of what IKE A was doin g, what would he sa y? His own wor ds are instructive: “We are a conce pt com pany. ” He goes on to describe the idea that guides the firm. IKE A offers “a wide range o f 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 Th ese words weren’t said by Kam prad 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 em ployees. All new em ployees are in doctrinate d wit h these i deas, an d they’re prom i- nent in t he company ’s annua l report to day. Although IKEA calls this statement its “conce pt,” the word I prefer | 46 | THE STRATE GIST ispurpose.Purpose is the way IKEA or any other company describese itse lf in t he most fun damenta l terms possi ble— w hy it exists, t he unique value it brings to the world, what sets it a part, and why and to whom it matters. Notice how IKEA’s purpose as ex pressed above answers all these questions.

I sus pect, though, that some of you, like some EOPers, are leery of lofty prose. Per haps you consi der Kam prad’s wor ds most ly P R \buff— fancy wor ds to dress up a hard- nose d, cost- cutting approac h.

But these words don’t just “dress u p” low prices. On the contrary, they are what drive IKEA’s low prices and all the other features that make i t sta nd out. To underline the point, consider something else Kam prad wrote in “A Furniture Dealer’s Testament,” a document he prepared to kee p the growing company focuse d on w hat it was a ll about: We have decided once and for all to side with the man y. . . . The man y usuall y have limited financial resources. It is the man y whom we aim to serve. Th e first rule is to maintain an extremely low leve l of prices. But they must be low prices with a meaning. We must not com promise either functionality or technical quality. 11 So it wasn’t low prices alone that drove IKE A. 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. Wh at was Masco ’s purpose in furniture? It didn’t rea lly have one, did it— other than a va gue belief that it would have some sort of scale advantage and would bring professional management skills and ca pa- bilities to an industry that sorely lacked them. In contrast, IKE A’s c le a r 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 Beg in w ith Purpos e | 47 | terms purposean d competitive advantag ecou ld be use d in conjun c- tion wit h eac h ot her, but competitive a dvantage p laces t he focus on a firm’s com petition. That’s im portant, but it’s not enough. Leaders too often t hink the heart o f strategy is beating t he com petition. Not so. Strategy is a bout serving an unmet nee d, doing somet hing unique o r uni quely well for some set of stakeholders. Beating the com petition is critica l, to be sure, but it ’s t he resu lt o f finding an d fill ing t hat nee d, not t he goa l. Consider the power of purpose and the differences it s pawns across firms. In the last chapter we looked at the average profitability of dif -ff ferent in dustries as a w hole. We treate d eac h in dustr y as i f it were a sin gle entit y, and showed the average profit abi l it y of fi r ms i n e ac h i ndu se - try, t he industr y effect . Here we consi der t he variation in profitabilit y wit hinan industry, across players. This is the firm effect — the diffe rence between an individual firm’s profitability and the average profitabilit y in its in dustry. Positive or negative, large or sma ll, it ’s t he sum o f the impact of all a firm’s actions . Firm effects are directl y tied to the work of a strate gist, and over t he long run are one o f the best in dicators o f success or failure on t he job. Wit hin an in dustr y, they can var y wi dely, even t hou gh most o f the players work in a similar context and face largely the same com peti- tive forces (See Exhibit 4-1, below). In tobacco, for exam ple, Im perial Tobacco and Altria have returns that are even hi gher than the indu s- try average, giving them positive firm effects. Reynolds American and others, in contrast, have negative firm e ffects. In air lines, Ryanair an d Sout hwest buc k the ne gative in dustr y return w hile man y of their com - petitors fare far, far worse. | 48 | THE STRATE GIST Tobacco: Avera ge ROE, 1990-201 0 50%45%40%35%30%25%20%15%10%5%0% Reynolds AmericanStandardCommercial UniversalCorp. British AM Corp. Altria Group Inc .Imperial Tobacco y g Industr y Average = 36.1 Pharmaceuticals: Avera ge ROE, 1990-2010 35%30%25%20%15%10%5%0% Astra-zeneca Merck AbbottLabs Roche Novartis Pfizer Bayer y g Industr y Avera ge = 19. 0 Soft Drinks: Avera ge ROE, 1990-2010 40%30%20%10%0% −10% − 20%−30% Coca-Col a Pepsico Emb.Andina Pepsi- americas CottCorp. Coca-ColaEntprs.

Clearl y Canadia n y gyg Industry Averag e = 9.3 Airlines: Avera ge ROE, 1990-201 0 15% 5%0−5%−10%−15%−20%−25%−30%−35% USAirways JapanAirlines H ow Fir ms Differ: Fir m Effects in Four Industrie s AlaskaAir KLM SouthwestR yanair y g g Industry Averag e = −10.0% Continenta l Delta and others Cost Plu s(US) Pier 1(US) Haverty Furniturey (US) Laura Ashley (UK)yy Otsuka Kagua(Japan)g Ethan Alle n(US) Fantastic Holdings (Australia) gg AA BMTC Group (Cana da)pp Nitori Holdings (Japan)g Leon’s Furniture’(Canada ) Nick Scali Lt d (Australia)AA Furniture Mart(Botswana ) IKEA Furniture Retailing: Net Profit Margin, 2003 –2010 16% 12% 8% 4% 0% -4% Indus try AyveAArage = 4.9 % IKEA estimates: 9.6– 22.9% Th e 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 ave r- age, and IKEA (whole returns are estimates ) is at or near the top of the pack. 12 Beg in w ith Purpos e | 49 | Th e key question: What ex plains the firm effect that creates such differences among p layers in an in dustry? W hat can lead a company like IKEA to excel even in a business as tou gh as this ? Th e answer, I believe, begins with purpose. Pur pose is where per- formance differences start. Not hing e lse is more important to t he sur - vival and success of a firm than wh y it exists, and what otherwise unme t nee ds it inten ds to fill . It is t he first an d most im portant question a strategist must answer. Every concept o f strategy t hat has entere d the conversation of business managers— sustainable com petitive advantage, positioning, differentiation, a dd ed va lue, even t he firm e ffect— \bows from purpose . EFFE CTIVE PURP OS ES 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 com petition an d hars h rea lity. Most o f them want to feel that w hat t hey do mat - ters in some context larger t han t hemse lves an d larger even t han t heir com panies. They want to play their roles on as large a stage as possible.

And so they embrace the idea of purpose because it feels ins piring. And, as we ’ll see, t hat’s part o f it. But to be a serious gui de for a company, a purpose needs to do much more.

A good purpose is ennobling. It ma kes a firm ’s en deavors no ble o r more dignified. In addition to its other merits, a good purpose can sat - isfy this need. It is ins piring to all involved, to the em ployees pursuing it, to customers, and to others in your value chain. Th e people at IKEA don’t believe they’re \bogging cheap furniture. They believe they’re creat - ing “a better everyday life” for the many peo ple who can’t afford to p- end furnis hings . In a Gallup poll nearly all respondents said it is “very important” or “fairly im portant” to them to “believe life is meaningful or has a pur- pose, ” but less t han half of the wor kers in any in dustry felt strong ly co n- nected to their organization’s purpose. Equally interesting, a number | 50 | THE STRATE GIST of peo ple in less than life- and- death careers (for exam ple, se ptic tank pumping, retail trades, chemical manufacturing ) felt a strong conne c- tion to the goals of their or ganizations, while others in some traditional “hel ping” fields (for exam ple, hos pital workers) felt far less connection. An anal ysis of the work concluded: Th ere is no such thin g as an inherentl y meanin gless job. There are conditions that make the seemingly most im portant roles trivia l and conditions that make ostensibly aw ful work rewarding. . . . Th e least engaged group sees their work as simply a job: a necessar y inconvenience and a wa y of earnin g mone y with which the y can accom plish personal goals and enjoy themselves outside o f work .13 Don ’t over loo k the ro le o f pur pose in fostering t he care an d com - mitment t hat lead peop le to pro duce goo d resu lts. Consi der a business forms com pany that sells its ser vices to small businesses. You can’ t get muc h more mun dane t han invoices an d sa les s lips, but t he peo ple there sai d: “W hat we do isn ’t glamorous, but it ’s essentia l. W hen 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 sa ys “We do X, not Y. ” “We will be this, not that .” It’s a commitment . Ch oosing to be one t hing means not being somet hing e lse. Mic hael Por ter reco gnized that such choices involve trade-offs — lettin g some thin gs go in order to be bet ter at somet h in g else .14Companies that don’ t choose, for whatever reason, run the risk of ending u p in no- man’s- land, being not hing o f distinction to anyone. I f your purpose does not pr e- clude you from undertakin g certain kinds of work, then it’s not a good purpose. Pur pose, like strategy, is about choice, and a real choice con - tains, 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 Guim a- Beg in w ith Purpos e | 51 | raes, a CEO of a sma ll but growing movie production com pany, dis- covere d this on ly a fter he c lari fied his purpose. His firm was primari ly backed b y an an gel investor, a woman who had become ver y wealth y from her own business ventures an d now, t hroug h this com pany, 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 com pany, descri bing how it wou ld ma ke money t hroug h the production of advertisin g an d movies t hat were commercia l successes . W hen he showed the purpose to his investor, he discovered what had on ly been simmering un der t he sur face o f their re lations hip. He wante d to pro duce top- grossing box- o ffice hits an d ma ke pro fits. Sh e had little interest in those and instead, primarily wanted to produce ar t films, t he kind once ma de by Ingmar Bergman in Swe den or Fe derico Fellini in Ital y. At that moment he finall y understood wh y the investor had balked at a number of projects he had proposed. From the outse t t hey had been on different pages, but had never dug deeply enoug h into their respective purposes to see the incompatibility. They parted co m- pany amicably, and each went on to ventures that were more consistent wit h their different aims. A good pur pose sets you a part; it makes you distinct .If you can only descri be your business generica lly— “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 s pecific customers you’ve chosen to serve, t he mar ket nee ds you fill , must set you apart from ot hers w ho genericall y do what you do. Genericall y, IKE A is a furniture retailer, but that descri ption doesn’t begin to say why it matters or what di s- tinguishes it from others in the industry. Here is how IKE A describes its difference: From the beginning, IKEA has taken a different path. . . . It’ s not difficult to manufacture ex pensive fine furniture. Just s pend the money and let the customers pay. To manufacture beautiful, durable furniture at low prices is not so easy. It requires a di fferen t | 52 | THE STRATE GIST approach. Finding simple solutions, scrimping and saving in every direction. Exce pt on i deas .15 Where do differences come from? Th ey arise from innovation, ne w ideas, and deep insights about how things are and how they could be better in some conse quential way. Th ese can be anything from a new production tec hno logy t hat en hances e fficiency, to new, different, an d more appealing products, to a change in the way products or ser vices are sold or delivered. Sometimes what matters is not just one innovation, but a c luster o f innovations t hat \bow from a new concept, a new way of doin g business. This was the case for IKEA. Its greatest innovations were not in original furniture designs, or even in the technical invention o f the \bat pac k, but in a new i dea o f how to go to mar ket an d how to provide a set of customers with products and a shopping experience that met their needs resoundingly well . IKE A’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 princi ple around which a whole set of innovations and distinctive features can coa lesce. Above all, a good pur pose sets the stage for value creation an d capture. Good economics are not the onl y reason your business exists, bu t wit hout t hem, it ’s un likely t hat any o f your ot her goa ls wi ll be rea lize d.

Whatever your purpose, it must mean something to others in ways that produce good economic outcomes for you. What made IKEA’s pur pose so powerful was not just that it was distinctive or well-defined, or that it made people feel part of something bigge r and more im portant. It also drove IKEA’s su perior performance in its in dustry. Beg in w ith Purpos e | 53 | ADDIN G VALUE F OR EVERY ONE Th e acid test, then, of a purpose is this: Will it give you a difference that mattersin your industry?s Not all differences are e qual. You need a difference with real conse - quences. I o ften see com panies c laim differences t hat in fact are sim ply points of distinction without much consequence in their industries— “one- sto p sho pp ing,” “oldest continually o perated,” “largest inde pendent su ppl ier. ” Even a legitimate difference suc h as “b est- in- c lass qua lit y ” is often rendered meaningless by companies that trumpet the words but don’t make the investments or tough trade- offs such a goal re quires . IKEA’s purpose set it u p to deal with the industry forces that scu t- tled Masco and many others in the furniture business. The compan y took two of the industry’s biggest problems— price com petition and customers ’ low wi llingness to pay— an d ma de t hem a virtue t hroug h specific techniques such as lean manufacturing, the \bat pack, and store design. It dealt with the industry’s costly practice of manufacturing a huge variety o f furnis hings by se lling a limite d se lection o f furniture pieces wit hin one sty le. M any peo ple think about strategy as a zero- sum game between a firm an d its com petitors, su ppl iers, an d customers: How do we win?

How do we get what’s best for us? In doin g so, the y lar gely focus on the s phere that’s closest to home: increasing their own profits— through higher prices or lower costs. On the Added Value chart, it’s the region ca lled “Va lue capture d by firm. ”16 Strate gy and Added Valuey Supplie r Firm Custome r Willingness to Payaa Value ca ptured by customer Value captured by fir m Value captured by supplier Pr ice Cost Willingness to Su pply | 54 | THE STRATE GIST A trio of economists 17 —Adam Brandenburger, Barry Nalebuff, and Harborne Stuart—who study game theory suggest a wider angle. The y remind us that mana gers need to think not onl y about what’s best for their own firms, but also about how what they do affects others. Th is involves the two outer lines: Customers’ Willingness to Pay (essentiall y customers’ satisfaction with a good or ser vice ) and Su pp liers’ Willin g- ness to Su pp ly (essentially their o pp ortunity cost— the lowest price at which they would be willing to sell to a particular firm ). It’s when a com pany drives a wider wedge between these lines— ex panding the tota l va lue create d— t hat its existence matters in an in dustry. W hen it does so, it is muc h more likely to be a ble to c laim some o f the va lue for itself—i.e., increase its own profitabilit y—without mak ing its partners in tra de less we ll off. Value Creatio n Expan ding t he Pi e Willingness to Payaa Price Cost Willingness to Supply Willingness to Payaa Price Cost Willingness to Supply Wa l- Mart is a c lassic examp le. It o ffers its customers goo d qua lity products at considerably lower prices, increasing the value customers ca pture from the relationshi p. At the same time, Wal- Mart lowers its own costs by lowering t he costs o f its supp liers. It does t his by buying in scale, sharin g information, and takin g costs out of their systems.r Th ere are interesting parallels between Sam Walton and Ingvar Kampra d— for examp le, t hey both nurture d their vision o f low- cos t retailin g in backwaters, where the y learned how to court customers without much money. Th e most im portant parallel, though, from the stan dpoint o f strategy, is t hat t hey both un derstoo d the bene fits o f add - ing value throu gh one’s existence, not just fi ghtin g over who gets the biggest s hare o f the pie. Beg in w ith Purpos e | 55 | As it was growing into the com pany it has become, IKEA hel ped its supp liers save money. It designe d furniture to be less expensive to manufacture. Its \bat- pack a pp roach eliminated significant shi pp ing and assem bly costs. It or dere d in vo lume an d provi ded data t hat ma de its supp liers more e fficient. For supp liers, a ll of these drove down t he costs of doing business with IKEA, and, in turn, reduced the price at which they were wi lling to se ll to t he firm . Th ere’s still more to IKEA’s difference that matters. Throu gh desi gn and the distinctiveness of its a pp roach, it created name recognition in a business not known for strong bran ds. It broke an ancient tra dition o f furniture as a long- term investment, an d promote d the view o f furniture as fashion. And it countered customers’ general reluctance to sho p for furniture by provi ding free c hild care an d low- price d restaurants wit h goo d foo d, both of w hich increase d the lengt h of time peop le spent in the store. 18 So IKEA created value all around: Vendors could produce and se ll for less, customers were p lease d wit h the experience yet a ble to pay less, and IKE A was able to ca pture some of that value itself . Success ful premium- price d players, like BMW or Disney, create value differently. Their goal is to provide uncommonly good products or ser vices that command high prices and generate particularly high levels of customer satisfaction. To do so, they ty pically incur higher- t han- average costs t hat are more t han compensate d for by increases in customers’ willingness to pay.

For any firm, however, t he logic is t he same: You create va lue by driving t he wi dest we dge you can between t he satis faction o f your cu s- tomers and the all- in costs of your su pp liers .19That means not onl y moving your own costs or prices relative to others in the industry, but moving one or both of those outer lines as we ll.

Viable purposes, worthy of guiding everything else that happens in a com pany, must matter not only to you but also to those with whom you do business. Creating va lue for ot hers is t he surest way to capture some yourself. | 56 | THE STRATE GIST DO ES YOUR BUSINESS MATTER?R It’s not as easy as you mig ht think to know w hether your business has a via ble purpose, or w hether it tru ly a dd s va lue in your in dustry. Fina n- cial success at any given moment is an indication, but may prove \beet -tt ing. However, t here is one sim ple questio n20 that— i f you can answer i t honestl y— will give you a good idea. In essence, it’s the one I asked you at the start of this book: I f your com pany disa pp eared today, would the world be di fferen t tomo rrow? Despite our long discussions about purpose, and their gen? - eral buy- in to the idea, this question always catches EOP executives by surprise. Fran kly, it ’s not a question most have been as ked or as ked themselves. It’s a real soul- searcher. But it’s one I hope you recognize that you need to answer . Here ’s w hat it means to be different in a way t hat matters in you r 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 supp liers won ’t be a ble to go out an d imme diate ly find someone else to take your place . If you don’t have that difference, nobody will mourn you when you ’re gone.

And if the y won’t miss you then, how muc h do the y need you now ? One more question: Whose job is it to find an answer, to make sure t here ’s an answer ? It’s your job, the job of the strategist, the leader who’s responsible for the success and sur vival of the firm. It may not be t he jo b of the strategist to invent a firm ’s purpose on the lonely mountaintop and then come down and deliver it. Many peo ple may be involved in its creation. But whether there is a purpose an d w hether t hat purpose is via ble is a leader’s first responsi bilit y . Th is is the strate gist’s job.

Are you a strategist ? CHAPTER 5 TURN PURPOSE INTO REALITY A S THE IKEA stor y demonstrates, definin g a sound and distinctive purpose for your business is essential. It is a strategist’s way to AA stake a claim. With it, you have earned the right to play, to take part in the game . But winning the game? Th at takes more . Consi der t he experience o f Domenico De Sole, an Ita lian- born, Harvard- trained tax attorney who in 1994-95 was thrust into the to p job at Gucci. 1 Th ough he had previously led the company’s North Amer i- can operations, he was stunned by what he discovered when he saw the entirety of the once- admired com pany. Sales were plummeting, cus - tomers were in different, an d re d in k was \bowing. Interna lly, Gucci had reached a state of paralysis: Management was balkanized and people were scared to make im portant decisions, even about such basic issues as guaranteeing a supp ly o f bam boo han dles for Gucci ’s signature han d- bag. “There was no merchandise, no pricing, no word processors, no bamboo handles. It was crazy!” he said later. Th ough there were im pres- sive han db ag designs, “the company cou ldn’t pro duce t hem or delive r them.”2 | 58 | THE STRATE GIST Gucci, once a sym bol of high fashion an d ins pire d design, had lost its wa y so badl y that the investors who owned it wanted out. An effor t to sell the com pany had failed after the bids were deemed too paltry to acce pt, so t he investment grou p as ked De Sole to put t he house in or der and se ll the company ’s s hares to t he pu blic— as soon as possi ble.

De Sole somehow had to create value in a failing com pany that was o perating in a notorious ly difficu lt in dustry. Cl ear ly a strong purpose alone, no matter how we ll cra fted, was not goin g to so lve his man y pressing problems. He needed a broader range of tools to sto p the blee d- ing an d restore Gucci ’s luster.

W hen I intro duce De Sole an d the Gucci c hallen ge to t he E OP executives, some of them are alwa ys disma yed. E yebrows raise. The y look to one another and to me, as if to ask: “Gucci? Th e designer fashion industr y? Are you sure that’s relevant to us?” I understand their co n- cerns. For one thin g, man y of these mana gers view the world of fashion as a lmost an out lier, so muc h about g lamor an d ce lebrity t hat it is no t subject to the laws of real markets. But in a high- profile, high- margin industry that has grown over the decades des pite its sensitivit y to eco - nomic downturns, Gucci ’s reviva l is a story o f trium ph an d outstan ding mana gement. It didn’t justcome back, it soared back in what is widely t regarded as a s pectacular business turnaround. Th e lessons it offers for strategists are timeless. Sooner or later, nearl y all leaders will wrestle with at least some of De Sole’s challen ges. And the tools he used to navi gate his wa y toward winnin g were just as valua ble an d meaning ful w hen Gucci was once again c licking on a ll cylinders as t hey were w hen t he business was foun derin g. A BELLMAN’ S LE GACY To understand the crossroads where De Sole stood, it helps to understand the com pany’s history. Guccio Gucci o pene d his first leat her goo ds wor kshop- cum- store in F lorence, Ita ly, in 1923, focusing on fine artisans hip an d a stan dard Turn Purpose Into Real ity | 59 | of qua lity s haped by his years wor king as a bellman in Lon don ’s Savoy Hote l, w here he a bsor bed the impecca ble taste o f the very ric h an d very famous. The formula proved successful, and as his business grew, he built a re putation 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 . W ith Aldo at the helm, brother Rodolfo in charge of the successful M ilan operation, an d brot her Vasco running t he factory in F lorence, t he com pany’s growth was nothing short of phenomenal. The post–World W ar II perio d saw a new a pp etite for luxury goo ds in t he deve loped world, a long wit h the economic growt h to pay for t hem, an d Gucci products re presented classic style “handmade” for a sav v y elite.

“Quality is remembered long after price is forgotten” was how Aldo put it, em bossing t he statement in go ld letters on pigs kin p laques dis- played in Gucci stores. The great movie star beauties of the day, like Soph ia Loren an d Grace Ke lly, w e r e ph otogra ph ed carrying Gucci bags. Eleanor Roosevelt and the queen of England were known to favo r Gucci umbrellas. The label conferred the status of belon ging in the same com pany as t hese women an d showe d that you had the means to buy somet hing exquisite. Women from Bever ly Hi lls to Lon don, from Paris to Tokyo packed the stores, an enthusiasm that lasted through much of the 1970s.

So, I ask m y students and you, where was Gucci fittin g into its co m- petitive landscape? How was it drawing in customers and keeping prof -ff its u p?

For t he answer, it ’s instructive to loo k at w hat can be t hou gh t o f as aprofit frontier ,rr3a visua l map t hat weig hs a customer ’s wi llingness to pay a high or low price for particular products against a company’s ab ility to produce t hose products at a high or low cost. For instance, a company t hat se lls pro ducts at t he lowest prices in an in dustry must, by necessity, keep its costs extremely low, or it’s off the frontier. A compan y like Gucci can a fford higher costs on ly i f its customers are wi lling to pay generous prices. According to Michael Porter, the frontier can be | 60 | THE STRATE GIST thoug ht o f “as t he maximum va lue t hat a com pany delivering a particu - lar pro duct or ser vice can create at a given cost, using t he best avai lable technologies, skills, management techniques, and purchased inputs.” 4”” Designer Fashion Indus try:Gucci 1975 Customers ’ Willingness to Payaa Profit Frontier Best in Class Pla yers Relati ve Cost Positio n Gucci highl o w Hermès low high Companies actually on the profit frontier represent best in class; fo r every price, they are the most efficient producers. Th ose off the frontie r are less e fficient an d less a ble to differentiate t heir pro ducts or ser vices.

They are at sea in an industry defined and dominated by companies on the frontier. Th rough the 1970s, Gucci was on the upper left- hand corner o f the frontier; it stood with Hermès and Chanel in a hi gh- cost, hi gh- willingness- to- pay position, its brand resonating with elegance, wealth, and success. But t he company began unrave ling a fter t he deat h of Va s c o Gucci in 1975. Aldo and Rodolfo then each held 50 percent of the com - pany. Aldo, however, believed that he had put far more into building the fami ly business t han his brot her had an d resente d that t he two s hare d ownership equally. He wanted more, and to get it, he developed anothe r com pany under the Gucci umbrella.

Th e 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 stri ped webbing. Th e Gucci Access o- Turn Purpose Into Real ity | 61 | ries Collection, as t he business was ca lled, wou ld reac h a wi der range o f consumers, deve lop an d license new pro duct lines distri bute d throug h 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 collec- tion turne d out to be a surprising ly lucrative venture, rea lizing a bun dan t revenue for virtually no ex pense, primarily via licensing arrangements. TOO MANY COO KS This seemingly sim ple solution would turn into a fiasco— and soon a ven detta wort hy o f a Sopranos episode. “All happy families are alike,”s wrote Tolstoy; “every unhappy family is unhappy in its own way.” He could have added a whole other cate gory of famil y dynamics— that of a fami ly- owne d com pany, a situation t hat o ften c hallenges both com pa - nies and fami lies. The new accessories collection s purred another of Aldo’s sons, Pao lo, to deve lop his own line o f cheaper products for younger custo m- ers, an initiative his father too k extreme measures to stop. In reta liation, Paolo contacted the U.S. Internal Revenue Ser vice, informin g it t hat h is father, t hen on t he brin k of becoming a U. S. citizen, had been c heatin g on his taxes, w hich helpe d sen d the eig hty- one- year- o ld man to prison. Paolo also tried to tar his cousin Maurizio , Rodolfo’s son , with the same charge, and Maurizio \bed to Switzerland. Th e Italian news paper La Repubbl ica wrote: “G isn ’t for Gucci , but for Guerra, ” the wor d for war in Italian .5 With the Gucci famil y now in turmoil and ver y often in court, items with the Gucci name proliferated like some kind of illness- inducin g bacteria. Un bridled licensing p lastere d the name, a long wit h the re d- 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 y declare d, it had become a “cheapene d an d overexpose d bran d.”6W orse , Gucci’s less ex pensive items were far easier to counterfeit than its fine leat her goo ds. You cou ld buy Gucci knoc koffs any w here— from t he | 62 | THE STRATE GIST back alleys o f Bang kok to discount stores in Denver. Now everyone cou ld have a Gucci bag or trave l wit h Gucci lugg age, so lon g as you didn’t mind carrying fakes— and millions of peo ple did not. The fa m- ily sue d to sto p production o f counter feit Gucci toi let paper but didn’t bother to go to court w hen an enterprising s hopping bag manu facturer created a Goochy line of products.

Eac h fami ly mem ber wante d a piece o f the action an d pursue d it in his own way. In Aldo’s view, however, it seemed logical to keep ever y- thin g in the famil y— in fact, he boasted about it: “We are like an Ital - ian trattoria, ” he sai d; “the w hole fami ly is in t he kitc hen. ”7The simil e was all too accurate; as a trattoria, Gucci was no longer at the apex o f fashion’s alto cucina , with a scarce brand that commanded a high price. W ithout disci pline d oversig ht, t he licensing t hat seeme d suc h a goo d idea at t he outset— a high - mar gin, low- cost business— un dermine d the com pany’s long-standing purpose, and Gucci slid off the profit frontie r an d joine d the morass o f un derperforming firms in t he mar ket. How cou ld it ever find its way back? W hat steps wou ld you ta ke— what strategy— to resurrect the com pany and rebuild Gucci’s good name ? STR UGG LIN G TO RE STORE THE GLAM OR Aldo was still at war with his sons when his brother Rodolfo died in 1983. Ro dolfo’s son, Maurizio, back from a year long exi le in Swit - zerlan d an d now c lear o f lega l trou bles, steppe d to t he fore front. He enlisted the financial support of Investcorp, a Bahrain- based private eq uity fun d, an d ma de a bid for tota l contro l of the fami ly business. M aking common cause wit h his cousin Pao lo, Maurizio eventua lly was able to bu y out the rest of the famil y.

Maurizio ca lled a meeting o f to p em ployees in F lorence to announce not just a c hange in leaders hip but a new strategic intent as we ll. Gucci is “like a fine racing car,” he told the com pany’s management ranks— “a Ferrari. ” But it had been driven for far too long like “a Cinquecento ”— the tin y Fiat 500, smaller than a V W Beetle, that was the standard Turn Purpose Into Real ity | 63 | 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 goin g to win the race!” 8 Th e race the new driver intended to win was a grand prix. “Gucci has to re- con quer the image it had in its youth,” Maurizio told lux - ury retai l genius Dawn Me llo as he wooe d her to Ita ly as his creative director. “I want to brin g back the glamour . . . to re- create the excite - ment. ”9 Mello followed where Maurizio led— back in time to the he y- day of Gucci’s success. “Style, not fashion” was the Mello mantra fo r her new design team, as it soug ht to create items “you don ’t discar d after a seaso n.”10Instead the com pany would consciously re- create its own c lassics— t he pro ducts t hat had origina lly won it fame an d favor. “Once it was a privilege to own a Gucci bag,” said Maurizio, “and i t can be again.” 11 He too k drastic actions to ac hieve his aim, trying to cut away t he years o f bad decisions an d poor per formance. He rut hless ly re duce d the 22,000 products bearing the Gucci “name” to 7,000, slashed the nu m- ber of handbag styles from 350 to a more manageable 100, closed more than 800 o f the t housan d stores, an d in Januar y 1990, summari ly shut down the Gucci Accessories Collection. He also jettisoned the whole - sale an d dut y- free businesses, wit h no backup or re placement to fill the sudd en emptiness . Th e drastic actions had a drastic result: From 1 99 1 to 1 993 Gucci amasse d losses o f app roximate ly $102 mi llion .12 During t his perio d Maurizio was spen ding extravagant ly. He helpe d sponsor Ita ly’s entr y into the America’s Cu p sailing com petition, designing everythin g a bout t he boat— inc luding t he crew ’s costumes. He rente d a five- story palazzo on Piazza San Fe dele in Mi lan for t he head office, an d then be gan a massive, five- month renovation. He also bou ght a si xteenth- century vi lla t hat had once belonge d to Enrico Caruso, an d hoped to esta blish a trainin g center t here— at an estimate d cost o f $10 mi llion for refurbishin g. Wh en t he new co llection fina lly did hit t he stores, Maurizio we pt | 64 | THE STRATE GIST with joy. “ Th is 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 contro ls, no inventories, no financia l plans in place— on ly M aurizio ’s c harm, w hich was consi dera ble, an d his mar keting intuition.

With all the spending, cash was tight for the design team Mello was putting toget her, an d the com pany cou ld scarce ly pay its bills or meet its payroll. As cash \bow slowed, Maurizio increased his spending and raised product prices to levels customers were unwilling to pay. By 1992, when the com pany 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 tro u- bles, it boug ht out his sta ke.14For t he first time in t he company ’s history, there was no lon ger a Gucci runnin g Gucci, no lon ger a famil y member beh ind the famous name. A year later, unable to sell the company, Investcorp turned to Domenico De Sole . PRA GMATI SM REPLA CES INT UITI ON Fac i ng a busi ne s s on l i fe supp or t , D e S ole beg a n to a s semble a tea m.

He promoted Tom Ford, a thirt y- two- year- old junior fashion designer, to rep lace Dawn Me llo as creative director w hen Me llo c hose to return to the United States. He also named a new production chief and a new CFO, an d strengt hene d the internationa l management team. Crucia lly, he a lso secure d a mo dest cas h in fusion from Investcorp . Th ese were necessary but not sufficient ste ps. Before De Sole could begin to move t he com pany for war d, he an d his team had to create a fres h un derstan ding o f Gucci ’s purpose. W hat cou ld the company be? W hy might it matter? What would make it s pecial, uni que, and relevan t in a wor ld awas h in Hermès, Ch ane l, Pra da, an d Louis Vuitton? Sh ou ld Gucci continue to strive to be a luxury bran d, aime d at t he upper- uppe r end? Or should it be somethin g else? What could the y reall y afford to do? Turn Purpose Into Real ity | 65 | Th is is where the strategist has to ste p u p, where every leade r con fronte d wit h disarra y, turmoi l, a declinin g business, or sur ging com petition faces the greatest challenge. What will this revived com - pany be? W hen we reac h this point in E OP, t he c lass loo ks at t he pro fit fron- tier, with Gucci miles away from a sweet s pot. Though Maurizio had soug ht to return t he com pany to a high- cost, high- wi llingness- to- pay position on t he frontier, he succee ded in mere ly s hifting its position in the middle of nowhere to a high- cost com pany with prices consumers wou ld not pay. Desi gner Fas hion In dust ry :G ucci 1 995 Customers ’ Willingnessto Payaa Mass Relative Cost Positio n Gucci1995 Gucci 1984 high high low low Hermès Ralph Lauren Polo Mass Luxur y Luxur y Th e class’s instinct is to immediately jump in and take action. Th ey’re fine w ith Mau r izio’s pu r pose; what they want to do is a bet ter job imple - menting it. I urge them to slow down and look again. “Why have we spent so muc h time loo king at w here Guc c i i s on t his grap h?” I as k them. Initiall y the answers are broad. “We want to see how far off course Gucci drifted,” one offers. “We want to understand the past to avoid re peatin g the same mistakes again,” offers another. After some discussion, some - one finally sees the more pressing challenge. Th is is where De Sole must sta rt.Before he can do anything to rebuild the embattled com pany, he must zero in on w here Gucci is now, an d then deci de w here he wants to take it. Before he can set out, he must decide where he is headin g. | 66 | THE STRATE GIST Th is is exactly what De Sole did. As Maurizio had, he summoned ever y Gucci mana ger wor ldwi de to a meetin g in F lorence. But t here was a crucial difference: He didn’t tell them what he thou ght Gucci shou ld be. Rat her, he as ked them to loo k close ly at t he business an d tell him w hat was se lling an d w hat wasn ’t. He wante d to tac kle t he question “not by philoso phy, but by data,” by actual ex perience, not in tuition.15 Th e data from his managers were eye- opening: Some of Gucci’s greatest recent successes came from its few seasonal items. Trendie r fashion, not style, was where Gucci had been getting traction. Th e tr a- ditional customer for whom Maurizio was so nostal gic— the woman who cherished style, not fashion, and who wanted a classic item she wou ld buy once an d keep for a lifetime— had not come back w hole- heartedl y to Gucci . De Sole and Ford soberly weighed the evidence. Like Maurizio, t hey wou ld have liked to keep Gucci at t he top o f the designer wor ld, but the y felt it was not in the cards given the realit y of the situation. Regaining Gucci’s elite status would take more marketing money, more design money, an d more time t han t he company had. “We w e r e broke ,” De Sole said later. “We had to be realistic about what we could do. ”16 In t he en d, t hey c hose a purpose different from Maurizio ’s an d the com pany’s early years. They would not try to reca pture Gucci’s old position. Instea d they wou ld place t he com pany in t he u pp er mi ddl e of the market— lu xur y aimed at the masses, closer to Prada and Louis Vuitton. “The idea was fairly sim ple,” De Sole ex plained. Gucci would be “ fashion- for ward, high quality, and good value.” Th at means “we would need to be leaders in fashion, deliver products of high quality, and give our customers great value for what the y bu y from us,” he said.17 Turn Purpose Into Real ity | 67 | Designer Fashion Indus try : Repositioning Guc ci Customers ’ Willingness to Payaa Relati ve Cost Positio n Gucci 1995 high high low low Hermè s Prada RalphLaurenPolo LVMH Mass Mass Luxury Luxury To succeed, Gucci would have to cultivate a new grou p of customers — youn ger an d more mo dern— an d let go o f the wea lthy , conservative, older women who had traditionall y been its mainsta y.18The mo ve would be challenging, as Ford ex plained: Th e fashion conscious “have a shor t attention span. They have maybe less brand loyalty than other custom - ers.” B y contrast, he said, “ A classic customer will bu y the blue blazer, the cashmere t winset, and re place it when it is worn out. A fashion cus - tomer consumes, s hops, buys, an d disposes o f, an d then buys again ”— which, he noted, made her a ver y good customer to have ,19if you can keep her engaged. “G oo d va lue ” wou ld also re quire big tra de- o ffs. Be fore t he fam - ily entrepreneuria l ventures c heapene d the bran d, Gucci had built its reputation on delivering the highest quality regardless of cost. By takin g a part Hermès ’s han db ags an d com paring t hem wit h Gucci ’s, De Sole an d his team conc luded that t heir company was sti ll capa ble o f pro duc- ing goods of high quality, but its cost structure was way out of line. To o ffer goo d va lue, t hat wou ld have to c hange. So too wou ld prices . After rebuildin g the entire sourcin g network, and lowerin g Gucci’s costs, De Sole ordered price cuts of 30 percent pretty much across the board. Often, EOP executives struggle with that decision. Th ey endorse | 68 | THE STRATE GIST the princi ple o f goo d va lue, but won der i f a re duction o f that size is rea lly necessary for a company in suc h dire straits. It wou ld be a huge hit to an alread y enfeebled revenue line. “Ma ybe later,” some sa y, “when t hings are better. Or by some amount less t han t hirty percent. ” But pricing was key to goo d va lue, an d important in attracting t he customers Gucci wanted. The real downside, De Sole thou ght, would be not cutting prices: Timidity here would have dulled the edge of the s trategy.

Ford ’s first solo collection in October 1994 generated little heat.

In his view, it too k him a season to “shake o ff Me llo’s an d Maurizio ’s in\buence an d ca ll up his own design aest hetic. ”20 His second collection, however, in March 199 5 brought the company’s new purpose to life.

Not your mother’s Gucci? Not even close. On Tom Ford ’s r unwa y, there wasn’t a single \boral scarf, pair of elegant loafers, or classic blazer in sig ht. Instea d, wi ldl y coi ffed supermo dels sas haye d sensuous ly down t he runway in hip- hugging velvet jeans, skinny satin shirts with necklines that plunged to the navel, and car- finish metallic patent boots.Harper ’s Bazaa rwrote, “The effortless sexuality of it all had a chill factor that just r froze the aud ience to their seats.” 21 By the next day the showroom was mobbed, and the Gucci brand was re born . Consistent with the wishes of Gucci’s owners , De Sole took the com pany public in October 1995. Just three years later, in 1998, the European Business Press federation name d Gucci “European Compan y of the Year” for its economic and financial performance, strategic vision, and management quality .22 Th e financial performance was indeed remarkable. In a report on Gucci in 20 01, Credit Suisse dubbed the t urnaround “spectacular,” no t- ing “a com pound annual o perating profit ex pansion of 54 percent on average revenue gains o f 36 percent over t he five fisca l years to 31 Jan u- ary 2000. Together with earnings acceleration of 80 percent during this perio d, Gucci has delivere d returns on ca pita l of roug hly 34 percent on average, we ll above its 10 percent cost o f capita l.”23 Th e media noticed, Turn Purpose Into Real ity | 69 | too. In a cover story, “S tyle Wars, ” Time magazine o pine d that “De Sole and Tom Ford .  .  . pulled off a brand revival so remarkable that any luxury goods firm attem pting a turnaround is said to be trying to ‘do a Gucci. ’ ”24 Th eWall Street Journal Europe declared that Gucci was “thee hottest name in luxur y goods toda y for fashion- victims and fund ma n- agers a like.”25 THE BI G QUE STION Wor king wit h For d, De Sole success fully re built the company base d on the purpose he set out in 199 5: fashion- forward, high quality, good value. But w hy was De Sole success ful an d Maurizio not? Drawing on the story of IKE A, one might guess that De Sole had a com pelling purpose and Maurizio did not, or that De Sole’s purpose was some how better t han Maurizio ’s. But it ’s hard to blame Maurizio ’s dream for his failure. He had w hat most o bservers consi dere d a legit i- mate purpose: return Gucci to the luxury goods pinnacle it had once occu pied. It ’s an a pp roac h— ca lled “going back to t he core ”— t hat’s o ften recommen ded to companies t hat have lost t heir way an d may pro fit by returning to their roots and what made them successful in the first place . Furt her, Maurizio had ca pture d some smart, hard- nose d investors with his passion. “ All the banks loved Maurizio and it was a wonderful vision,” said Investcor p’s R ic k Sw a n s on ,26 yet “there were no conso li- dated financial statements— at least not at the le vel we’re used to— no definitive central management team, no guarantees. But when he started to spin his story o f his vision for Gucci, he c harme d ot her peop le wit h his dreams.” 27Even De Sole t houg ht that t he big dreams t hat Maurizio was pursuing were reasonable given the context and resources Maurizio had avai lable at t he time. Th e 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 t he com pany ’s interna l disarray an d ina bility to deliver on his promises. De Sole, by contrast, built an d execute d his | 70 | THE STRATE GIST strategy in a tig htly linked series o f actions. Consi der how eac h of these supporte d the re define d purpose:

Pr oducts. To complement its leather goods, Gucci created a line of original, trend y— and, above all, excitin g— read y- to- wear clothin g each year, not as the com pany’s mainstay, but as its draw. Th e idea was that frequent fashion c hanges in c lothing wou ld help t he wor ld forget a ll those counterfeit bags and Gucci toilet paper. “Gucci had to get the message out,” De Sole ex plained, “the real message that Gucci had ch ange d, that it was more exciting, more fashion- for war d. We cou ldn’t have gotten that level of excitement around leather ba gs.”28 Bran d. One aim of the increased focus on fashion was to propel the company overnight into a new brand identity, generating the kind of excitemen t t hat wou ld bring new customers into t he stores— w here t hey wou ld be sold not just the latest clothin g, but also hi gh- mar gin handba gs and accessories. As a Credit Suisse analyst put it: “ Th e ready- to- wear co llection is a s howcase for t he Gucci i dentity an d lifesty le. I t 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 su pp ort the new fashion and brand strategies, De Sole and Ford walked throu gh the stores, deci ding to ditc h Maurizio ’s c lubby “livin g room,” with its heav y 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 t he stores was upgra ded, too. “Sellin g read y- to- wear was a more involved sale than sellin g han db ags, ” De Sole sai d. “It re quire d a different kind of sa lesperson. ”30 De Sole and Ford paid particular attention to company- operated Turn Purpose Into Real ity | 71 | stores, w hich they re furbished an d more t han dou bled in num ber— from 63 in 1994 to 143 in 2000. 31 Mar ketin g. To s pread the word, De Sole doubled advertising s pending, and b y 1999, a dvertising an d communication constitute d 7 percent o f sa les revenue. He also made a conscious decision to levera ge Tom Ford as a marketing asset: “ Tom is a good- looking man,” he ex plained. “B y ma king him a force in fashion we cou ld have a face for t he com pany 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. (Com petitors in time paid the highest com pliment: After Ford became the face and embodiment o f Gucci— both dressin g an d befrien ding ce lebrities like Nico le Ki dman, Gwyneth Paltrow, and Tom and Rita Hanks— Louis Vuitton did the same wit h Marc Jaco bs an d Hermès wit h Jean Pau l Gau ltier. 33) Supp ly c hain . Unlike the many luxury firms that produced the majority of thei r products themselves, Gucci relied on a network of su pp liers to manu facture most o f its pro ducts. But, w hen cas h was tig ht an d payments erratic, many suppliers had dropped Gucci. De Sole himself drove the hilly back roads of Tuscany, where most were located, and ta lked to eac h one. He recapture d the best an d let t he rest go. For t he best of the best, some twenty- five in all, he provided financial support, technical training, and advice on im proving productivity. In return he deman ded consistent high qua lit y an d faster, more depen dable production. To support these efforts, he built an efficient logistics system and won the su pp ort of Italy’s infamously tough unions with t he first system o f incentive- base d bonuses in t he business. As a result, fixed costs went down, while efficienc y and the \bexibilit y to scale production went u p— the perfect solution for maintainin g artisans hip qua lity w hile s lashing costs . | 72 | THE STRATE GIST Managem ent.

At the top of the organization, De Sole and Ford developed a close partnershi p. De Sole was res ponsible for the overall o perations of the firm, an d For d was res ponsi ble for anyt hing visua l— from produc t design to t he creative aspects o f advertising, pu blic re lations, store design, and cor porate communications. 34 To obtain the management and workforce he needed to su pp ort all o f t his, De Sole re place d Gucci ’s tra ditiona l fami ly- base d management system, racked by politics and infighting, with one that was merit based and performance focused. After the com pany sold stock to the public, managers were rewar ded wit h stoc k options, a too l unavai lable to many of Gucci’s privately held competitors. “I get all the bes t peo ple,” De Sole said at the time. “Peo ple like working at Gucci. And we pay t hem better, too. ”35 In e ffect, everyt hing De Sole did in design, product lineu p, pricing, mar keting, distri bution, manu facturing, logistics, organizationa l culture, and management was tied tightly to pur pose. It was all coor dinate d, interna lly consistent, an d inter loc king, a system o f resources an d activities t hat wor ked to gether an d rein force d eac h other, all aimed at producing products that were fashion- for ward, high qua lit y, an d goo d va lue. THE BI G IDEA Th e essential difference bet ween 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 o f value creation, a set o f mutually rein forcing parts. Anchored by a com pelling purpose, i t te lls you w here a company wi ll play, how it wi ll play, an d w hat it wi ll accomplish. Turn Purpose Into Real ity | 73 | G ucc i’s Strateg y:gg A Sy ste m of Value CreationVV Customers: Local custo mers world-wide: fashion conscious , urban, young inoutlook Human Resources:De Sole– Ford tea m High Performance cultur e Merit-based bonuses Finance and Control: l Publicly tra ded; managers rewar ded with stoc k options ; disciplined working capital management t Supply Chain: Quality craftsmanship; pp ypp y virtual integration model with flexible manufacturin g; broad network of Italian suppliers, n 25 select partners 2 Products: Symbols of contem porary fashion an d goo d quality— leather goods, ready-to-wearclothing, and accesso riesd Design: -to-wear Rejuvenate image; d g focus on fashion—modern , lean , and sex y;xx Ford in c harge of everything visua l Prices: 30% lower than luxu ry Marketing:Reposition brand; make g Ford a sta r; increase adver tising to 7% o f sales; unify brand through s ready-to-wear Stores: Refurbish and update stores to reflect new concept; anchor international distributionplatform with directly-operate d stores; upgrade servic e Fash ion Forwar d, High Qualit y,tt Good Value Center o f the Wheel De fines Company’sPur poser It is eas y to see t he beaut y of suc h a s ystem once it ’s constructe d— but c on s t r uc t i n g i sn’t a l w ay s a n e a s y or a b e aut i f u l pro c e s s . Th e de c i sion s em bedd ed in suc h systems are o ften gutsy c hoices. For every movin g part in t he Gucci universe, De Sole had to deci de w hat he believe d was the choice that would s pecifically advance the purpose of the firm. Th is was strictly binary management: Either the particular com ponent ad vance d the purpose o f fashion- for war dness, high qua lit y, an d goo d value, or it was rebuilt. Strate gists call such choices “identit y- conferrin g commitments”— they re\bect what an organization stands for. Th ey are t he c hoices t hat are centra l to w hat a firm is or wants to be. In De Sole’s case, many of these choices were s pontaneous, but they \bowed from a clear un derstan ding o f w hat t he firm was trying to accom plish. Too many leaders, unwilling to give up any possible advantage, take the eas y route and dod ge or defer the tou gh decisions: “Let’s not give up our tra ditiona l customers w hile we bring t he new ones a long. ” No t so wit h De Sole. He was wi lling to ma ke tra de- o ffs.36Eac h choice he made t hreatene d a loss even as it promise d a gain— focusing on new customers, lowering prices, letting a lot of su pp liers go. But, with each | 74 | THE STRATE GIST decision, he was asserting t hat Gucci was going to be one t hing an d not anot her, a formi dable responsi bility ma de more difficu lt w hen dealing with a very sick com pany.

Yet t he crisis a lso ma de some t hings easier because a ll the decisions were more urgent. “W hen a company has pro blems, you have to move for ward,” De Sole said. “The crisis really hel ped us out. You’re much more likely to ma ke a lot o f changes w hen t hings are bad. W hen you are trying to resurrect a company, you have to move for war d. You can ’t keep looking back. You can’t give peo ple a chance to make excuses. You have to ta ke res ponsi bilit y. ”37 Systems like the one De Sole put in place answer the question: Ho w are you going to deliver on your promise? Th ey are the critical first steps in translating an idea into a strategy and paving the way for its realiza - tion. De Sole’s finely tuned, tailor- made system made it possible for him to carry out his purpose. Maurizio didn’t have suc h 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 wh ich he was operating. Un like De Sole wit h fashion, he had no device, other than his lavish spending, to change people’s perceptions or boos t their willingness to pay. He had no way to cover the firm’s increasin g costs. He had few, i f any, scarce resources to un dergir d his strategy an d stave off competition . Th e role of scarcity is particularly easy to overlook in a strategy. But wit hout it a firm may have an interna lly consistent system built around an interesting innovative idea, only to see it quickly imitated a t the first signs of success. Warren Buffett refers to this kind of scarcit y as an “economic moat,” a barrier that keeps other competition away. Th e bigger and deeper the moat, the more attractive he finds the compan y as an investment. For some com panies, that moat might be physically unique assets, suc h as oi l an d gas properties, minera l rig hts, rea l estate locations, or patents. Large companies may have such massive scale that others can’t sur pass them. (Think Wal- Mart or Microsoft.) Others may have intangi ble resources, suc h as bran ds, t hat are built over time an d Turn Purpose Into Real ity | 75 | difficult to du plicate. (For instance, an adult’s long- lived associations with the Disne y brand or an athlete’s feelin gs about Gatorade. ) Other distinctive com ponents may be ca pabilities or routines that are just too com plex for ot hers to disentang le or reconstruct. Wh en I as k E OP executives w hich of these kinds o f resources ten d to shore u p most outstanding strategies, they’re likely to pick the first two— ph ysica lly uni que assets or t hose re lating to huge economic sca le. But, in fact, t he resources t hat are particu larly va lua ble in most strate - gies are the last two: intangible resources such as brands and cor porate re putations, an d com plex organizationa l ca pabilities an d routines t hat are vita l to a firm ’s distinctiveness yet re lative ly scarce an d difficu lt to imitate. De Sole’s Gucci boasts both: the powerful intangible of the restore d Gucci bran d, an d a high- performance cu lture, design ca pabil- ity, networ k of skilled supp liers, an d internationa l distri bution p latform anchored by com pany- run stores. All of these are valuable in their own rig ht, an d booste d Gucci ’s com petitiveness. Knitting all these individual components together and driving them toward a com pelling purpose is the finely honed system of value cr e- ation. W hen t hey exist, suc h systems t hemse lves are among a firm ’s most important resources. In t he best o f cases, t hey have a ll the qua lities t hat make a resource valuable: They are im portant to com petitive advantage; they are uni que ly tai lore d an d in s hort su ppl y; an d they are difficu lt to imitate because of their complexity and the way they develop over time . One revealin g measure of the value De Sole created with his system— not on ly for t he Gucci bran d, but a lso as a platform for expansion— was a ta keover attempt. In t he mi d- 199 0 s, w hen Invest - cor p was trying to sell Gucci, Bernard Arnault, head of LVMH (Louis Vuitton Moët Hennessy), was unwilling to pay just $400 million for t he company. But in 1999, LVMH began buying s hares in Gucci, an d Arnault re portedly offered between $8 billion and $9 billion for total contro l of the firm, a twenty fold increase in five years . De Sole fou gh t back an d eventua lly foun d a w hite knigh t in Pinau lt Printem ps Redoute (later known as PPR), which paid $3 billion for 40 | 76 | THE STRATE GIST percent o f the com pany in 1999 an d agree d to in fuse a dd itiona l money for acquisitions an d expansions. In t he bidd ing war, Gucci ’s business model— its s ystem of value creation— was ar guabl y the asset valued most. “I like building t hings, ” sai d François Pinau lt, PPR ’s foun der. “This is the chance to create a global group.” 38Gucci ’s system, so criti- cal to its own competitive advantage, could serve as a platform for a multibusiness com pany, enabling PPR to add value to a host of simila r bus inesses. STA R S AND STRATE GY But what about the wonderful guys from Gucci? Aren’t they they company’s most valuable resource? They’re the ones who turned Gucci around. They’re the ones who put the system in place.

E OPers a lways give De Sole an d For d cre dit for muc h of Gucci ’s success, and well the y should. There is no doubt that De Sole and Ford individuall y and as a team created enormous amounts of value for the firm. But to i denti fy a company’s valuable resources, one has to look fars - ther than individuals, no matter how talented. A company’s story ma y start with key peo ple or star players, but there has to be a lot more to it. Wh en PPR investe d in t he com pany, t he a ll- star De Sole–For d team was no dou bt part o f the attraction— but per haps not as muc h as you would think. When the com pany ac quired Gucci’s remaining outstand - ing s hares in 2004, ma king it a w holly owne d su bsidiary, De Sole an d Ford asked for “ironclad guarantees for their mana gerial freedom” and a pledge to maintain several inde pendent directors on Gucci’s su per- visory board. Th ough PPR paid them handsomely— making De Sole an o ffer t hat was “above his expectations, ” accor ding to t he Wall Stree t Journa l— it refused to guarantee them the independence they wanted.ll 39 Th e two men, who had made many millions of dollars from their Gucci stock, left the company shortly thereafter. Th ere was an outcry from observers who, like the EOPers, were shoc ked an d dismaye d by t he departure. But Gucci didn’t co llapse; in Turn Purpose Into Real ity | 77 | fact, since t hen t he firm has had some resoun ding ly strong perio ds o f per formance, an d some wea ker ones as we ll. Wou ld Gucci ’s pat h have been bri ghter if De Sole and Ford had sta yed? Man y ar gue that it wou ld have been. But, more t han anyt hing, t he firm ’s a bility to go on wit hout t hem is testament to t he va lue o f w hat t hey built. THE ED GE In an interview , I as ked De Sole to comment on w hat he consi dere d his most im portant achievement at Gucci. His answer : We made fashion a real business. We were tou gher. We were mor e com petitive. We re launc hed the com pany but we a lso helped to change the universe o f fashion. It used to be dominated by small, private, family- run com panies that often weren’t profitable. It took us severa l years to get t here, but we s howe d that you cou ld ma ke a lot o f mone y in fashion. 40 De Sole and Ford didn’t do that through a few grand gestures. Th ey did it t hroug h a t horoug h un derstan ding o f the in dustry, a co herent i dea 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.

“Li ke everyt hing in life,” De Sole sai d, “it was a lot o f litt le t hings. We were very aggressive in establishing priorities, and needed to act deci - sively, quickly.” M any peop le believe a strategist ’s primary jo b is t hinking. It isn ’t.

The number- one job is setting an agenda and putting in place the orga- nization to carr y it out. “Some com panies have great strategies and do a lot o f ta lking, ” sai d De Sole, “b ut t hey don ’t get it done. I follow t hroug h. I call m y mana gers all the time to make sure the y have executed what they said they would do.” 41”” Every year, ear ly in t he term, someone in c lass a lways wants to | 78 | THE STRATE GIST engage t he grou p in a discussion a bout w hat’s more im portant: strategy or execution? In m y view, it ’s a false dichotom y, a wron gh eaded debate that the y themselves have to resolve, and I let them have their go at it.

I a lways bring t hat discussion u p again at t he en d of the Gucci case, asking, “W hat here is strate gy ?” “W hat is execution? ” “W here does one end and the other be gin?” Often there isn’t a clear answer— and may be t hat’s as it s hou ld be. W hat cou ld be more desira ble t han a we ll- conceive d strategy t hat \bows wit hout a ripp le into execution?

Thinkin g of strate gy as a system o f value creation , rich in or gani - zationa l detai l an d driven by purpose, un derscores t he point. It ’s t he bridg e between lofty ideas an d action. But w hile it ’s eas y to see it in com panies like Gucci or IKEA, when all the details are laid out in fron t of you, I know from wor king wit h thousan ds o f organizations just how rare it is to find a care fully hone d system t hat rea lly delivers . The problems often begin right at the start. If leaders lack a clear idea ab out w hat t hey want t heir businesses to be, t hey cannot build co herent s ystems of value creation because the y don’t know what the y should be desi gned to do exactl y or how their success should be measured. That leaves t hem to fiddl e at t he margins o f success wit h generica lly goo d practices such as “state of the art” sales management approaches or Total Qualit y Mana gement .42 These may be hel pful, but they’re not what will help you find an e dge an d live on it . Yo u a n d every leader o f a company must as k yourse lf w hether your strategy is a real system of value creation— a clearly defined purpose tig htly backed by a set o f mutua lly rein forcing parts . If not, it’s time to build one. That’s the job to be tackled next . CHAPTER 6 OWN YOUR STRATEGY I T’S YOUR TURN. You’ve studied the successes and setbacks of Masco , IKE A, and Gucci. You know that every business, every organization, needs a stra t- egy. You un derstan d the importance o f a meaning ful purpose an d a ti ghtl y ali gned s ystem of value creation. Now it’s time to look at your own com pany. What’s your strategy ? W hen I put t his question to t he entrepreneurs an d presi dents towar d 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 identif y the stren gths and weaknesses in the strate gies of well- known and celebrated firms— at a safe distance. But w hen I press t hem to descri be t heir own strategies, many strug - gle. Beyond somewhat sweeping statements, they often have trouble articulating what their businesses actually do or what sets them a part. Th e 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 | 80 | THE STRATE GIST analyzing someone else. Th e cool objectivity and clarity you enjoy as a spectator o ften gives way to uncertainty an d dou bt w hen you start to confront the realit y of your own situation. While the intense class work exposes EOPers to the tools of strat -tt egy , for man y there is a c hasm between t heir un derstan ding of how strate gy works and trul y bein g strate gists— like the difference between war games an d war, between rea ding a bout how to swim an d actua lly sw imm ing. Th e 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, fai l- ing to t hink care fully a bout purpose, or t hey don ’t ta ke t he process far enough to see how all the activities in their businesses support (or don’t supp ort) their intended direction. Studying other com panies’ 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 dif -ff Own Your Strateg y | 81 | ferences t hat matter, define your system o f va lue creation, an d pull it a ll toget her into a compe lling strategy.

There’s onl y one wa y to be gin effectivel y: write all these thin gs down . W riting im poses a disci pline t hat no amount o f ta lking can matc h:

It gives structure to your t hinking. It forces you to define in care fully considered words what your business exists to do and how each part of it contri butes to t he e ffort. Once t hat’s laid out, you can ana lyze w hy t he wh ole t hing wor ks or doesn ’t an d w hat cou ld ma ke it stron ger. Th is is not a casual exercise: You will find yourself visitin g and revisit - ing your work. A winning strategy doesn’t just rise u p out of your ke y- boar d in an a fternoon or emer ge from a wee ken d retreat wit h you r team. Rather, for most leaders, it comes into focus over time, as you ana lyze an d re \bect on your business an d wor k throug h eac h ste p of the process. 1 In a dd ition to building your strategic s kills, t he ex perience helps you to c lari fy your strategy for a ll of your sta keholders. Many companies never accom plish this, instead offering u p grand statements or eu phe- misms t hat convey very litt le a bout t he business itse lf or its particu lar reason for bein g. As we discussed this in class one da y, one of the EO P- ers told the group that before coming to campus he had looked up the websites for a ll 170 - plus com panies t hat wou ld be re presente d in t he program. W hat he foun d often wasn ’t impressive. Very few, he reporte d, gave him a credible sense of what the com pany was really about— wha t made it s pecia l, or w hy he s hou ld care a bout it . Other han ds went up; t hose peop le had done t he same t hing an d come to the same conclusion. There were a lot of sober faces around the room as t he message san k in. Th e internal costs of unclear strate gies are, ar guabl y, even greater. As information technolog y consultant James Champy notes, “ few co m- panies are ex plicit a bout t he future: in w hat mar kets t hey wi ll operate, how large an d quic kly can t hey grow, how wi ll they differentiate. . . . ” Th is vagueness, he said, leaves employees feeling completely in the dark, una ble to accurate ly antici pate t he firm ’s future nee ds or do t heir jo bs | 82 | THE STRATE GIST well. Instea d, they must resort to rea ding t he tea leaves, trying to guess t he strate gy by ana lyzin g mana gement ’s actions .2 A clearly defined strategy steers the company, providing a compass for w here you want to go. It ma kes you a better communicator, givin g you t he wor ds to articu late w hat you are doing an d w hy. Your customers and investors will understand you better. Your employees won’t have to guess w hat you ’re u p to an d they wi ll know how t heir wor k fits into t he w hole an d w hat wi ll be expecte d of them . In the EOP program, this strategy develo pment process has led to dramatic insig hts: Some executives come to t he pain ful conc lusion t hat they nee d to jettison a pro duct line or se ll a w hole business; ot hers uncove r missed o pp ortunities or stake out new positions. Three cases in brief:

Dr. Richard Aja yi, the head o f The Brid ge Clinic, Ni geria’ s first focused in-vitro fertilization clinic, took enormous pride in its high quality standards and di fferentiated ser vice. But, looking closely at his experience, he realized that customers who could afford the com pany’s prices often went overseas for care, while those in the low to middle end o f the market didn ’t understand the value o f th e science involved and couldn’t pay the premium price. In response, Ajayi reduced all costs unrelated to patient outcomes, ex plicitly benchmarked the clinic ’s outcomes on the hi ghest international standards, and recast it as high quality but affordable health care with the motto: “We are within your reach, make the decision an d grasp.” Th e repositioning enabled the clinic to meet the needs of thousands of patients and generated unprecedented growth . Geoff Piceu ’s grand father founded United Paint and Chemical in 1953, and the company grew into a solid player in the automotiv e coatings industry. But in the early 2000s, com petition in the industry was cutthroat. Th e younger Piceu, who had taken over b y then, described the competitive landscape as “a disaster you wouldn ’t want to hear about,” and Michi gan- based United was stru gglin g to Own Your Strateg y | 83 | make a profit. Piceu concluded that his best chance for survival wa s to become t he low- cost producer. Having learne d that innovation had a short shel f- li fe in automotive coatings —it gets commoditize d quickly— he abandoned the expensive basic research that was traditional in the industry, choosing instead to ado pt a “second- to- market ” approach by acquiring innovation and being a fast follower. He also resha ped o perations into a paragon of lean manufacturing. Th e new strategy roughly doubled United ’s productivity relative to competitors and led to double- digit sales growth . Eu gene Marchese, the founder o f an Australian architectur e firm, was considering ex pansion to other residential segments an d geographies in his home country. At the time, however, it was no t yet clear what the firm’s uni que advantage would be in those new markets. Instea d, he deci ded to ex pan d to 2 nd Tier cities overseas d where he could levera ge the firm’s award- winnin g desi gns for urban- con dominiums an d share personne l an d ot her resources across time zones. Toda y, Marchese Partners has o ffices in cities ran ging from Sydney to San Francisco to Guangzhou, and provides it s innovative design ser vices an d commercia l sensitivity to leading developers anywhere in the world.

In a ll these cases, t he wor k began by revisiting t he organization ’s purpose, a good place to start the examination of your own business . STAT E Y OUR PURP OSE As we discussed in chapter 4, your company’s purpose describes the uni que value your firm brings to the world. It’s the throbbing heartbeat of your strategy— t he gran d pronouncement o f w ho you are an d w hy you matter. It should be specific and easy to grasp because the rest o f your strategy \bows from and su pp orts this beginning.

Too often I see com panies describe their purpose as something like, | 84 | THE STRATE GIST The best company in X YZ industry, specializing in satisfied customers, o r Our non profit is committed to im proving the quality of life in our communit y. Or this:

We will provide branded products and ser vices of su perior qualit y and value that im prove the lives o f the world ’s consumers, now an d for generations to come. As a result, consumers will reward us with leadershi p sales, profit and value creation, allowing our people, ou r s hare holders , an d the communities in w hich we live an d wor k to pros per. 3 How cou ld you even guess t hat t he last one is from Procter & Gam- ble, the giant consumer products com pany? Contrast t hat wit h some ot her com panies: __________: To bring ins piration and innovation to every athlete in t he 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 an d motorcyc les wor ldwi de that concentrates entire ly on premium standards and outstanding quality for all its brands and across al l relevant se gments. 6 Do you reco gnize Nike, Goo gle, and BMW? Th ey each have a gras p on w hy t hey exist an d w ho t hey are . Own Your Strateg y | 85 | W hat is your com pany ’s purpose? Is it somet hing everyone in your company knows?

Sometimes a slogan can begin to ca pture the pur pose— or at leas t start t he discussion— i f it gets to t he firm ’s uni que a dd ed va lue. E OPer H. Kerr Ta ylor, founder of a Houston real estate firm called AmREIT, told me where he got the initial idea for his com pany. As a young man visiting F lorence, Ita ly, during a post-gra duation tour o f Euro pe, he was impresse d by t he big, beauti ful, mu ltipurpose buildings on a p laza that housed sho ps and offices on the ground \boor, and a partments ab ove. He as ked an o lder gent leman sitting next to him at a ca fé w ho the owners were. “These buildin gs are owned b y some of the wealth i- est families of Italy,” the man told him, ex plaining that they were rarely, if ever, sold. “ Th at is how you pass wealth down from genera - tion to generation. ” After earnin g an MBA and a law de gree and returnin g home to Houston, Taylor set out to try to build a portfolio like the ones that supported those wealthy Italian families. Because his nascent compan y was short on ca pital, he initially focused on buying and leasing bac k great corner properties wit h one tenant, suc h as ban k branc hes or res - taurants. Eventua lly he move d up to ent i re s hopping centers, a ll situate d on prime corners. Along the way his com pany latched on to a slogan t hat descri bed its wor k: the “Irre placea ble Corner ” Com pany. 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 be gan to formulate a stra t- egy statement, he and his executive team ex perimented with different ways to tell their story. Th is seemingly sim ple exercise led to majo r reve lations a bout t he nature o f the business , an d its difference t hat matters. When they put together a chart that ma pp ed their properties and those of their to p peers (over 800 properties in all), it was clea r that AmREIT, though relatively small compared with industry giants, was a leader in focusin g on real estate near hi gh numbers of affluent | 86 | THE STRATE GIST house holds, a position t hat was particu larly attractive to big- money investors. Using 201 5 demographic projections, the gap between them and their peers grew even larger. Only one other major real estate com pany even came c lose . A m R E IT Portfolio: D emog raphic Pos ition ing $130,000 $120,000 $110,000 $100,000 $90,000 $80,000 $70,000 $60,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,00 0 Households in a 3-mile Radiu s Average HH Income in a 1-mile Radiusvv Shopping CenterCenter AvAvgg.vv AmREIT 2015 AmRAmR EIEIT 2010T 2010 Other Other REREITITs 2015s 2015TTTT Other REITs 2010TT Peer A Peer C Peer F Peer G Peer H Peer E Peer D Peer B AmREIT 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. Th eir efforts to nail down the firm’s purpose, and to ease its imp lementation, drove t hem muc h deeper into defining t he kind of properties the company would buy, where they would be located, and how they would be chosen. Th is yielded highly s pecific criteria: the corners wou ld be near large num bers o f house holds, especia lly a fflu - ent ones; near hi gh- traffic roads, and in areas with dense da ytime and nighttime populations. Own Your Strateg y | 87 | Irre pl acea bl e Corne r™ C riteri a CornerLocatio n Hig h Barriers to Entr y High House hold Income Dense Daytim e Populatio n High Traffic Count Dense Nig httim e Populatio n Crystallizing the company’s purpose led to a better understandin g of what made its a pp roach different and effective. It created a positive feedb ack loop. Not on ly did the new dept h of detai l help t he company improve its operations, Taylor says, it also helped fit the firm’s strategy to its purpose, tell AmREI T’s story to em ployees and potential tenants, and win t he attention o f institutiona l investors w ho ten d to over loo k a company of AmREIT’s size . To Taylor’s sur prise, a good part of the initial process was about wor ds. “I didn’t un derstan d how important language was, trying to ge t the words correctly so you could communicate to others and, in the pr o- cess, 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 intervie w with the H arva rd 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 sto p with your first idea, but like Taylor, refine and clarify. Th e | 88 | THE STRATE GIST more precise ly you can ex press it, t he better t he anc hor it wi ll become for deve loping your strategy— an d, quite possi bly, t he more new insig hts you will gain into your business . DEVEL OP Y OU R SYSTEM OF VAL UE CREATI ON By now you know that a com pany’s purpose is just a beginning. As discussed in chapter 5, it gives you the right to play ,yyan d puts you in t he game. But it doesn ’t mean you have t he rig ht to w in. Just as De Sole made sure that each com ponent of the Gucci enter prise— design, sour c- ing, stores, products, pricing, an d so on— a ligne d wit h the com pany ’s purpose, so must a ll of your activities an d resources wor k in concert to suppor t your own purpose.

Yo u n e e d to pinpoint w ho t he customer is ear ly in t he process.

But w hich customer? It ’s not a lways t he en d user. Lau ra Young joine d Leegin, the predecessor com pany of Brighton Collectibles, in 1991, w hen it was primari ly a se ller o f men ’s belts, an d the owner, Jerry Kohl, wante d to expan d into ladies ’ leat her goo ds. Since t hen, t he com pany has added handbags, wallets, jewelry, and shoes, creating a signi ficant nic he as a bouti que s pecia lizing in women ’s mo derate ly priced accessories. But even now, with over $3 50 million in annual sales, Brighton remains an unconventional com pany. Still owned fully by Ko hl, t here is no boar d of directors, no organization c hart, an d few forma l tit les. Ko hl an d Young wor k toget her as partners manag - ing the com pany.

W hen Young began to define t he strategy for Brig hton, s he strug - gled with where the company’s focus should be. The question of who the customer was loomed lar ge: Was it the end consumer, the women w ho sna pp ed up the matc hing pieces an d share d their finds wit h their frien ds, in w hat Young ca lls “G irlfrien d Mar keting ”? Was it t he owners of the several thousand largely family- owned s pecialty bouti ques tha t carrie d Brig hton ’s accessories or t he sa les associates in t hose bouti ques and in Brig hton ’s company- owne d stores? Or, was it t he roug hly one Own Your Strateg y | 89 | hun dred dedicate d sa les re presentatives w ho ca lled on a ll those stores ? Each group mattere d, an d eac h playe d a ro le in Brig hton ’s unique app roach to the market. Ultimately, Young decided that the peo ple who se ll its products— t he com pany ’s sa les re presentatives an d the stores ’ owners an d sa les associates— were its customers because t hey were t he ones whose dedication could most in\buence the consumer’s purchase decision. Kee ping t hem happ y, a n d their wor k profitable, was key to Brigh ton ’s own health. So how does Young align Brighton’s o perations— its system of value creation— behind these sa les peo ple?

To keep merchandise fresh and interesting for them, the compan y makes “a little bit of a lot of things,” rather than huge quantities of a fe w items. Th at means the retailers can vary the choices and give the women w ho buy its pro ducts a lot o f different options to c hoose from. Brig hton also kee ps the sales associates engaged with a steady \bow of creative motivationa l events, seminars, an d ot her o pp ortunities to learn a bout the brand. For nearl y two decades, Youn g and Kohl have taken hu n- dreds of store o perators and em ployees on tri ps to Los Angeles, Hon g Kong, China, Taiwan, and Italy where they tour factories, eat meals to gether, an d have continuous time for co llaboration.

“We do things differently from other com panies in our industry,” says Young. “We m a ke sure we reac h the sa les associates w ho are t he ones interacting everyday with customers. There is a real passion to what we do. A real s pirit for the brand.” Fostering that s pirit is crucial, she continues. “Wit hout passion t he sa les associates can ’t do w hat t hey nee d to do in their stores. They have to have a point of difference. The cus - tomer has to have a good ex perience because she has so many othe r op tions.” Th ese days those o ptions include the Internet. And— all retail - ers ta ke note— Brig hton ’s motivate d sa les associates provi de somet hing you can’t get online. “The customer needs to feel good ever y time she goes into t he store, ” says Young. “Sh e nee ds to have a great s hopp ing experience, an d a rea l persona l an d warm connection wit h the sa les associate who is hel ping her.” | 90 | THE STRATE GIST Im portant ly, Br i g hton a lso protects t he bouti ques by re fusing to se ll to big department stores suc h as Macy ’s, Di llard’s, an d Neiman Ma r- cus. The y have come courtin g, but Youn g has turned them all awa y, sometimes sen ding \bowers or coo kies wit h her sincere a pologies t hat s he won ’t do business wit h them.

In return, Bri ghton makes an unusual demand of its retailers: It re quires t hem to se ll at a minimum resa le price in or der to pro- tect t he inte grit y of the bran d so t hat customers know t hey are bein g treated fairly no matter where they sho p for Brighton. The pricing policy a lso a llows for su fficient margins for retai lers so t hat t hey can provi de t he generous customer ser vice, in- store am bience, an d shop- ping amenities that are synonymous with the Brighton brand. 7 It is so committe d to t his a pp roac h that w hen tiny Kay ’s K loset in su b- urban Da llas insiste d on discounting t he line an d too k Brig hton to court, the company fought back. After the U.S. Court of Appeals fo r the Fi fth Circuit ru led in Kay ’s favor, citing deca des o f prece dents, the company appea led to t he U. S. Supreme Court, w hich si ded wit h Brighton’s point of view . In so doing, Brighton changed the landsca pe of American retai l- ing: The decision overturned a ninety- six- year- old piece of the Sher - man Antitrust Act and told courts that manufacturers and distributors sometimes cou ld, in fact, insist on minimum prices, so long as t he eff ects o f suc h po licies, as in Brig hton ’s case, are pro- competitive. 8 Although the company has grown considerably since then and now includes more than 160 com pany- owned Brighton Collectibles stores, maintaining minimum retai l pr ices on its goo ds remains a cornerstone of its strate gy. To begin to ca pture these decisions and the role they play in Brig hton ’s system o f va lue creation, or w hat Young likes to ca ll “the secret sauce,” we could make a list of the company’s various operations and how they work in concert to su pp ort the com pany’s purpose. For instance, t he trips wit h boutique owners an d the full- price po licy are key parts of the company’s marketing efforts. The product range, sales Own Your Strateg y | 91 | and distri bution c hanne ls are part o f the system too, as are t he com pa- ny’s in formation tec hno logy systems, operations, human resources, an d finance functions. They all su pp ort the same goals with activities that are consistent an d speci fic to Brig hton ’s a pp roac h. THE STRATE GY WHEEL To visualize and record how a system of value creation backs u p a firm ’s purpose, I use a time- honore d approac h that has come to be known as a “strate gy wheel. ” Finance R &D InfoSystems Human Resources Products & Target MarketTT s Marketing & Service Sales & Distri butio n Manufacturin g Procu rement Purpos e As we saw in the Gucci case in cha pter 5, the strategy wheel pro- vides a picture o f how you will win. The purpose in the center says wh y you exist— what you do differentl y or bet ter t ha n ot hers— and the unique con figuration o f activities an d resources aroun d the rim s hows w hat wi ll ena ble you to deliver on t hat promise. Brig hton ’s strateg y does this well . | 92 | THE STRATE GIST Desig n • Original custom-designed product s • Classic st yle • Fashion, functionalit y and attention to detail • De fend trademar ks, copyrig hts an d trade dress vigorous ly • Designers travel all over the world for ins piration Products • Wide ran ge of retail from $20–$ 550 •Affordable luxurie s Jewe lry, Han dbags, Wa llets, Be lts, Footwear, Luggage, Gifts, Home Goods, Fragrance, Watc hes, Small Leat her Goods, E yewear Marketin g & Service • Creative motivation , events , contests, t hank you notes, rewar ds, gifts, seminar s • Direct to consumer via mailers, web - site, drivin g traffic to stores, not sellin g • Ins pire word-of-mouth marketin g • Pricing policy to build brand integrity • Account specialists focus on 360° service • 30-60-90 day field service Sales & Distributio n • 100+ field salespeop le • Nearly 5000 independent specialt y stores; 160+ company owne d store s • High service environment s • Controlled distribution; ri gorous a pproval process for each store Info System s • Proprietary I T syste m • Real-time sales results • Field inventor y mana gement system for sales people • Tools to analyze stores’ profitability and measure and track sales assoc iates’ performance Financ e • Full margin retai l selling • Hig h profit retai l stores $1100/ s q. ft. • No wholesale discounts or allowance s • Inventory managemen t to increase turn s Operation s • U.S. factory o f our own for fulfillment, distribution and limited production. 350 workers.

• Long stan ding proprietary manu facturing arran gements in China & Taiwan that produce small quantities of a vas t product line . . . but just a fe w contractors so we get fai r prices & mean a lot to them. • Global procuremen t Hu man R esou rces • Legen dary spirit an d culture • Peop le business: retai lers an d family of emp loyees w ho are customer-focused and passionate.

• Hire people with a future, longevity • Educational journe y of learnin g leads to advocate s • Hig h stan dards and process of hiring Create exceptiona l custome r loyalty an d retai l profitability for specialty retailers t hroug h our leadership in design, marketing, motivation and mana gement and a brand of inte grity that doesn ’t se ll the big department stores and mass chains . B ri gh ton Co llecti bl es, In c Eac h system o f va lue creation, an d thus eac h strate gy w heel, wi ll be different, because every organization has its own purpose and uni que set o f activities t hat drive t hat purpose. Even t he headings aroun d the rim will differ across firms— for example, while R& D will be important in one firm, in another it wouldn’t even a pp ear on the wheel . Th e 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 challen ging yourself to see what’s reall y there— and even more, envisioning w hat cou ld be t here. Just penci ling in w hat you do in finance, human resources, R& D, or an y other function in a mechanical Own Your Strateg y | 93 | way isn ’t likely to be helpf ul; identi fying a bunc h of plain- vani lla activ i- ties aroun d a p lain- vani lla purpose won ’t leave you any better o ff than you are toda y. Rat her, w hen it wor ks best, t he process is a lot like putting toget her a jigsaw puzz le. Eac h piece must wor k wit h the ot hers, coming toget her to create a picture of what your business can be. The real work and the rea l payo ff come w hen you ’re assertive, w hen you push the enve lope an d ask: W hat wou ld winnin g rea lly ta ke? How cou ld this e lement do more for us? What could we do differentl y if we narrowed our focus to one ty pe o f target customer? Gradua lly, a s y ou define an d re fine, you s hou ld begin to i denti fy not just w hat you do better an d worse t han t he ot her guy, but what as pects of your com pany— from your customer base to wh at you do for t hem— ma ke you different, an d tru ly give you an e dge, or could do so. As Phili pp ine entre preneur Amable “Miguel” Aguiluz IX deve l- oped his strategy w heel, 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- ca pita income of roughly $2,600 at the time. Today the com pany sells a vas t variet y of in k an d toner cartri dg es, toners, do- it- yourse lf re fill kits, con - tinuous feed systems, and related products and ser vices. The dominant suppl ier in t he P hilipp ines, In k for Less has more t han 600 out lets an d an expanding franchise operation. At the center of A guiluz’s strate gy wheel is this well- crafted and c lear pur pose: “Rea dily avai lable an d re liable 100% qua lit y in k re fill s and ser vice at competitive prices. ” Bui lding t he system aroun d it led him to reconsider how ever y element of the business could contribute to t he w hole. Pricing, o f course, is crucia l. His customers current ly might pay $6 to $8 to refill a $2 5 or $30 cartridge or about $16 to refill a $75 toner cartridge. So Aguiluz pays s pecial attention to elements, suc h as logistics, t hat a ffect his costs. His peo ple scour t he region for qua lit y in ks at goo d prices. “W hen I starte d, I was buying bott les o f ink,” he says. “Now I am buying fifteen tons of ink per month. Tha t | 94 | THE STRATE GIST shows you t he power o f vo lume I can comman d wit h my su ppl iers. ” Sales costs are important, too; Ag u i luz work s ha rd to keep t hem in t he single digits. This disci pline around costs has given him the \bexibilit y to drive his prices lower to res pon d aggressive ly to com petitive t hreats.

When a franchisee of an Australian chain came into his market , fo r exam ple, he was able to res pond by dramatically lowering his prices at near by stores.

Re fill ing in k cartri dges isn ’t an especia lly high- tec h operation. Nev - ertheless, Aguiluz realized that research and develo pment had to be a cornerstone o f his strategy. Wit hout it he wou ldn’t be a ble to stan d up to t he printer manu facturers, or conten d wit h mom- an d- pop competitors, who might charge less than he does. For exam ple, printer manufacturers try to foil in k re fill ers by continua lly re designing cartri dges an d chang - ing 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 ma r- ket so t hey can reverse- engineer t hem an d figure out how t hey wor k.

When printer makers added a chip that shuts down the printer if the cartridge isn’t new, his R& D peo ple worked with their su pp liers around Asia to learn how to add a counter- chi p so that the refilled cartridge would work. These efforts not only keep Ink for Less in business, the y enable it to provide better ser vice than less so phisticated players. Bulle - tins an d vi deos are sent regu larly to t he stores, a lerting out let managers and technicians to new cartridges and new processes, so that nothing customers bring in will stum p 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 fre quently to make ch anges t hat help In k for Less maintain or increase its lead in t he market. Ag uiluz often returns to the strate gy wheel on his own — sometimes s pending a full day working through the im plications o f a particu lar action, suc h as a pricing c hange, going from s poke to spo ke to see w hat a djustments nee d to be ma de to keep t he w heel in ali gnment. Own Your Strateg y | 95 | r Pr n Pr Q QQ y % V % VV e & * ' & $ ( * ( % ' * - ' % ' * $ * ' . & ) ' ( ! P * + % ' ' % * & % $ ) ' ( * ( ' , % ee ( g ' n ' * Human Resources an d Tr ainin g at In k for Less r # Pr * His rigor pays off. In 2008, the Phili pp ines Junior Chamber Inter - national named Aguiluz its “Creative Young Entre preneur” of the year. Over t he last nine years, In k for Less ’s sa les have grown at an average annual rate of 15 percent, and profits have grown even faster. But Ink for Less is not on ly ca pturing va lue for itse lf; it is ma king its customers better o ff than t hey wou ld have been i f the firm weren ’t t here. REALITY CHE CK You wi ll likely have to ma ke a num ber o f assumptions in building you r wheel. Check them carefully! People in all professions go astray because they’re o perating on untested assum ptions. In strategy, these are often a recipe for disaster. Be rut hless in c hallenging w hat you thin k you know. | 96 | THE STRATE GIST It’s particularly easy to make this mistake when it comes to the link -kk age between your state d purpose an d your system o f va lue creation— is it reall y desi gned to do what you sa y, and is it workin g? Too often, I’ve seen executives c laim t heir com panies are high- en d, differentiate d co m- panies see king to ma ke a difference by o ffering customers not lowe r prices, but better- than- average goods. They have everything lined u p— exce pt customers w ho s hare t hat view an d are wi lling to pay a premium for t heir pro ducts or ser vices. Remem ber how Maurizio Gucci sta ked the com pany’s future on to p- of- the- line products that customers stayed away from in droves? Th e linkage sim ply wasn’t there.

To assess whether what you are doin g is workin g, you need to look for the data and the facts, and not just rel y on intuition. What evidence do you have t hat you are t he low- cost provi der or t he premium producer you say you are? W here, exact ly, i n t he process do you a dd va lue? Can you su pp ort that view with facts— internal process measures of key per- formance drivers, an d outcome measures like sa les resu lts, profit ma r- gins, market share, or return on investment ? Consider how Walter de Mattos does this. A lon gtime Brazilian journa list, he foun ded Lance! Sp orts Grou p in 1997 to ca pture his fel- low sports fans ’ obsession wit h their favorite soccer teams. Since t hen it has grown from a daily s ports news paper in two cities to five more e ditions plus magazine, te levision, mo bile, an d We b versions t hat give Lance! a national platform and make it the largest sports news organ i- zation and leadin g authorit y in Brazil. Embedd ed in de Mattos ’s strategy w heel is a se lf- rein forcing system of elements: Mu ltitas k journa lists provi de unique content to a variet y of platforms, driving readershi p. Large readershi p, in turn, brings in regiona l an d nationa l advertisers. Bot h the depth an d brea dth of socce r coverage and the size of the circulation serve as barriers to entry, mak -kk ing it harder for com petitors to make inroads. To focus resources on his strengt hs an d manage costs, he outsources distri bution o f the prin t newspaper an d wor ks wit h an externa l design firm . De Mattos assesses whether the individual parts of the system Own Your Strateg y | 97 | are wor king, an d in sync, by loo king at s peci fic, tangi ble resu lts: esti - mated readers per week (2.3 million in 2011 ); unique website visi - tors (750,000 a da y, some of whom check the site more than once); and cost per story (lower than a pure television producer or news paper pu blisher because content is s hare d across t he We b, print, an d vi deo outlets). Over the last five years, these collectivel y gave Lance! one of t he highest rates o f growt h an d return on investment among Brazi lian me dia companies.

W hat do your metrics tell you about your strate gy ? Are the y co n- sistent wit h your r hetoric? Do t hey s how t hat you are winning wit h your p lan ? PULLIN G IT ALL T OG ETHER After you’ve identified your purpose, aligned your activities and resources, and tested the results— all internal working ste ps— you are ready to summarize your strategy in a statement you can use to com - municate t hat commitment both insi de an d outsi de your firm. You don ’t need to use formal language or any particular format; the most im por- tant goa l is conveying your uni que as pects an d advantages wit h speci fic and engaging wor ds. Here are three exam ples of memorable strategy statements from we ll- known organizations. Can you te ll w ho t hey are? A hote lier: ________ is dedicated to per fecting the travel experience throu gh continuous innovation and the hi ghest standards o f hos pitality. From elegant surroundings of the finest quality, to caring, highly personalized 24- hour ser vice, ________ em bodies a true home away from home for those who know and appreciate the best. Th e dee ply instilled ________ culture is personified in it s employees— people who share a single focus and are inspired to o ffer great ser vice. | 98 | THE STRATE GIST Founded in 1960, ________ has followed a tar geted course of ex pansion, o pening hotels in major city centres and desirabl e resort destinations around the world. Currently with 75 hotels in 31 countries, and more than 31 properties under development, ________ wi ll continue to lead the hospita lity in dustry wit h innovative enhancements, making business travel easier and leisur e travel more rewardin g.9 A magazine : Ed ite d in Lon don since 1843, ________ is a wee kly internationa l news and business publication, o ffering clear reporting, commentary and anal ysis on world current a ffairs, 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 ________ i s read by more of the world ’s political and business leaders than an y other magazine. 10 An accom panying document describes its editorial policy, includ - ing its fierce commitment to in depen dence an d its practice o f being written anonymously, with no bylines, to make it a paper “whose col - lective voice an d persona lity matter more t han t he i dentities o f in di- vidua l journa lists. ” A nonprofit : ________ is an international medical humanitarian or ganization created by doctors and journalists. . . . Today, ________ provides independent, impartial assistance in more than 60 countries Own Your Strateg y | 99 | to people whose survival is threatened by violence, neglect, or catastro phe, primarily due to armed conflict, e pidemics, malnutrition, exclusion from health care, or natural disasters. . . .

______ also reserves the right to speak out to bring attention to neglected crises, challenge inade quacies or abuse of the aid system, and to advocate for improved medical treatments and protocols. 11 You pro bably recognize t he Four Seasons Resorts, t he Economis t, and Doctors Without Borders from lan gua ge that is closel y linked with them, like “h ighest stan dards o f hospita lit y, ” “contest between inte lli- gence an d ignorance, ” an d “indepen dent, impartia l assistance. ” Beyon d that, though, are prescri ptive elements that define their advantages, descri be w hat t hey stan d for, an d te ll you somet hing im portant a bout how t hat wor k wi ll be done. Th ere are plenty of hotels around, for instance, but Four Seasons defines its ser vice cu lture as a uni que attri bute t hat gives it a strategic difference. There are plenty of magazines as well, but many are la n- guishin g while the E conomist , with its fierce inde pendence, incisive commentary, and timely re porting, gains ground. Th e Doctors Wit h- out Bor ders statement ma kes c lear t hat t he No bel Peace Prize–winnin g organization doesn’t just provide im partial medical assistance; it also ad vocates for c hange.

To break the process down further, a good strategy statement artic - ulates a com pany’s purpose, its means of com petition, and its uni que ad vantages by answering t he most basic questions a bout w hat a co m- pany does an d how it does it: R 5 " ) 5 1 5 - , 0 R 5 # . " 5 1 " . 5 - ) , . 5 ) 5 * , ) / . - 5 ) , 5 - , 5 0 # - R 5 " . 5 1 5 ) 5 . " . ] - 5 # ? , ( . 5 ) , 5 . . , R 5 " . 5 ( & - 5 / - 5 . ) 5 ) 5 . " . | 10 0 | THE STRATE GIST And it has these qualities: R 5 . 5 # - 5 , - ) ( & 3 5 - " ) , . 5 ( 5 * , - # ' ) ( # ) / - 8 R 5 . 5 # - 5 - * # @ 8 R 5 5 . 5 - . . - 5 1 " . 5 . " 5 ) ' * ( 3 5 ) - 5 ( 5 1 " 3 5 # . 5 ' . . , - 5 # ( 5 5 1 3 5 . " . 5 anyone can summarize without having to quote it literally . R 5 5 . 5 0 ) # - 5 $ , ! ) ( 6 5 - / " 5 - 5 ^ - . 5 ) 5 , 6 _ 5 ^ - . 5 # ( 5 & - - 6 _ 5 ) , 5 0 ! / 5 wor ds suc h as superior ,rrexpert,and empowered .dd R 5 . 5 # - 5 C , ' # ( ! 6 5 / . 5 ( ) . 5 ! , ( # ) - 5 ) , 5 - & 7 5 # ' * ) , . ( . 8 R 5 5 ) * & 5 - # & 3 5 , ) ! ( # 4 5 . " . 5 # . ] - 5 3 ) / 8 Th e statement should be brief because brevity forces you to get to the very heart of what you want to say without larding up your descrip - tion wit h em pty wor ds or su perlatives. Ma ke every wor d rea l. Ma ke every wor d count. Long sentences an d vague language can o bscure you r effort to describe what’s really im portant. At best, they’re unhel pful; at worst, t hey’re potentia lly mis leading an d distracting.

I f you feel your company ’s strategy is too comp lex to summarize in one or two paragra phs, that’s likely a sign that the strategy itself is unc lear, or convo lute d in some way . Th ere 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 re plied with only mild exaggera - tion: “No can do 2 pages two days. Can do 30 pages 2 days. Nee d 30 days to do 2 pages.” Even i f you a ren’t ver y wordy, you’ l l fi nd t hat a good brie f statement ta kes revision an d polish. Th e goal, moreover, is not to write a statement that sounds good: It’s to write a statement that is good, that really captures your coms - pany ’s distinctiveness. Once you ’ve written an d rewritten it, s hop it aroun d. Don ’t s how it just to t hose w ho wor k for you or know t he busi- ness well; give it to ac quaintances who don’t really know what you do.

Ask peo ple to re phrase it in their own words. And don’t be sur prised if what’s mirrored back to you isn’t what you intended. That’s helpful Own Your Strateg y | 101 | feedb ack. Your strategy statement s hou ld be a ble to trave l on its own— without interpretation and without you there to coach the reader (or the em ployee, customer, banker, or casual visitor to your website) on wh at it “rea lly means. ” Here ’s t he strategy statement constructe d by de Mattos for Lance ! To be the prime source of 24- hour- a- day vibrant s ports new s targeting an audience o f passionate, young, male Brazilian sport s fans b y: R 5 5 ' * & ) 3 # ( ! 5 i f f 5 - * ) , . - 5 ' / & . # 7 5 . - % 5 $ ) / , ( & # - . - 5 . ) 5 * , ) 0 # 5 2 & / - # 0 5 content ; R 5 5 - # ( ! 5 . " 5 ' ) - . 5 / , , ( . 5 . " ( ) & ) ! 3 5 . ) 5 & # 0 , 5 ) ( . ( . 5 , ) - - 5 . " 5 widest number of media platforms ( print, web, mobile, WebTV and web radio ); | 102 | THE STRATE GIST R 5 ( 5 / - # ( ! 5 ) ' * & & # ( ! 5 - # ! ( 5 . ) 5 ( " ( 5 & & 5 ( < 5 * , ) / . - : R 5 & & 5 / ( , 5 5 * ) 1 , / & 5 ) , 5 , ( 6 5 ( < R 5 5 - 5 5 ' ( - 5 . ) 5 ) ' 5 ) ( 5 ) 5 . " 5 ' ) - . 5 * , ) @ . & 5 , 4 # & # ( 5 ' # 5 groups as measured by ROI . And this, in a ver y different voice, is how Ag uiluz constructed the strategy statement for Ink for Less : Ink for Less as pires to be the largest and most profitable pro fessional ink re filling business by providin g R 5 ; 5 - . 5 ( 5 & . - . 5 # ( % 5 , @ & & 5 + / & # . 3 5 ( 5 - , 5 0 # R 5 . 5 , - ) ( & 5 * , # - R 5 5 ) 5 ) / , 5 + / & # . 3 5 ) ( - # ) / - 5 / . 5 * , # 5 - ( - # . # 0 5 # ( # 0 # / & 5 ) ' * / . , 5 users and small and medium scale business and government inst itut ion s R 5 5 ; , ) / ! " 5 ) ( 0 ( # ( . & 3 7 5 & ) . 5 # ( % 5 , @ & & # ( ! 5 - . . # ) ( - 5 . " , ) / ! " ) / . 5 . " 5 major cities and key towns in the Philippines and the rest of Asia . If you ’re frustrate d wit h your strategy or wit h your statement, keep at it. Writing a bad strategy statement is often the necessary prelude to writing a goo d one. Of ten w hat’s re quire d is not just wor dsmit hing— it’s “strate gy - smithin g”— because what you want is a stron g, meanin g- ful strategy, not just pretty words. As with many kinds of writing, the words themselves usually aren’t the problem; the challenge is the think -kk ing that goes behind them . Own Your Strateg y | 103 | THE R OAD AHEAD This exercise should have clarified your thinkin g and given you an ob jective, hard look at your business.

I f you ’ve been honest wit h yourse lf, your t houg htful ana lysis wi ll likely have broug ht to t he sur face pro blems t hat s hou ld be fixed or areas that require new attention— the bread- and- butter work of a leader- strategist. Some o f the problems may be serious: You may nee d to HALLMARK S OF GREAT STRATE GIES Anchored by a clear and com pelling purpose It is said that “if you don’t know where you’re goin g, there isn’t a road tha t can get you there.” Or ganizations should exist for a reason. What’s yours? Add real value Organizations that have a difference that matters add value. If an y of them were to go awa y, the y would be missed. Would yours? Clear choices Excellence comes from well- defined effort. Attem pting to do too many thin gs makes it difficult to do an y of them well. What has your business dec ided to do? To not do? Ta i l o r e d s ystem of value creation The first ste p in great execution is translating an idea into a system of action, where efforts are ali gned and mutuall y reinforcin g. Does this describe your business? In most com panies, the true answer is no. Meanin gful metrics Global outcome measures like ROI indicate whether a strate gy is workin g, but key performance drivers, tailored to your own strateg y, are a better indication. They break big as pirations into s pecific, measurable goals, and guide behavior toward what matters.

Pass ion It’s a soft conce pt, but it’s at the heart of every great strateg y. Even in the most mundane industries, com panies that stand out care dee ply about wha t they do. | 10 4 | THE STRATE GIST recon figure parts o f your organization, or find new ways to distinguis h yourse lf. In t he worst case, you may have come to t he pain ful rea lization that you should exit part or all of your business. This can be es peciall y hard w hen it ’s c lose to your heart for one reason or anot her.

Kerr Ta ylor had to confront such an issue when he reevaluated his real estate business in the Great Downturn of 2008. Years before, when the com pany was too big to re ly on frien ds an d fami ly but sti ll too sma ll to tap institutiona l investors, he set up a broker- dealer to help fun d rea l estate purchases. He got the a pp ropriate securities licenses and sold interests to investors, funding the first $2 5 million of the com pany’s growt h. “I cou ldn’t find anot her wa y to do it, ” he sa ys.

Like many com panies, AmREI T had to cut back when the econ - omy turned sour. By then Taylor had successfully raised money from the pu blic an d throug h big financia l companies, an d the broker- dealer no longer offered the com pany a strategic advantage. Further, the funds nee ded to o perate it cou ld be put to better use. Even so, he was sti ll emotionall y attached, “ because it was what had brou ght us alon g.” Th e downturn and the ex perience of clarifying his com pany’s strat - egy fina lly pushed him to s hut t he business down. “It was one o f the hardest thin gs I ever did,” he sa ys. “That came out of this journe y .  .  .

and it’s still scary. But it made us grow u p.” Th e process can also strengthen new strategic thrusts, as Miguel Ag uiluz discovered. After a number of bi g businesses asked him for an ink refilling program, he came u p with a plan for Ink for Less Pr o- fessiona l. Initia lly he was tem pted to sim ply tac k it on to In k for Less as a “by - the- wa y” business. But on re flection, he conc luded that i f he didn’t create a whole new system around it, any com petitor who came in a fter him an d focuse d exc lusive ly on business customers wou ld quic kly unde rcut him . Own Your Strateg y | 105 | TELLIN G YOUR STORY: MI STA K E S STRATE GISTS MAKE Care fully hone d strategies an d the statements t hat capture t hem se t direction, establish priorities, and guide activity with a firm. They also help you communicate your story externa lly. We a k strategies an d wea k statements do the opposite. Avoid these pitfalls. 1. Generic statements Simp ly saying you are in book pu blishing, stee l fabrication, or sports marketing tells little. Within that domain, what makes you distinctive? Ask yourse lf this: I f they rea d your strategy statement, wou ld your customers recognize you? Wou ld your emp loyees? Pixar didn’t say it ma de movies— it sai d it deve lope d “computer- animate d feature films wit h memora ble characters an d heart warming stories t hat appea l to au diences o f all ages. ” 2. No tra de- o ffs You can ’t be everyt hing to every body, a lthoug h a lot o f wea k strategies an d strategy statements imp licit ly c laim to be. It doesn ’t wor k. 3. Empty c lichés Grand statements unsupported by credible detail are vacuous. Terms such as “Exce llent, ” “Lea ding, ” an d “O utstan ding ” don’t say anyt hing speci fic. Strategy statements gain cre dibility w hen speci fic statements capture w hat a firm does particu larly we ll. 4. Forgetting t he means Many wea k statements eager ly te ll you t he wh atbut forget the t how — the critica l activities an d resources t hat ena ble the firm to rea lize its competitive advantage. It is t hroug h the how that a rea der gains con fidence a bout w hat you’re doing. W hich do you find most convincing: “We ’re t he low- cos t producer, ” or “We ’re t he low- cost pro ducer operating t he wor ld ’s larges t titanium dioxi de p lant uti lizing DuPont ’s proprietary tec hnology ”? 5. Leaving out the customer Wh o you serve is a crucia l part o f your stor y. It not on ly defines your playing field; it a lso says w ho wi ll ultimate ly deci de w hether w hat you do really matters. 6. Dea dly dull There is no other way to say it: A lot of strateg y statements in their initial drafts drone on, without conviction, without inspiration. Ask yourself: Would you want to wor k for t his company? Wou ld you want to buy from it? | 10 6 | THE STRATE GIST Th is 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 s pokes themselves were markedly different from his con - sumer business. Em ployees wou ld have to loo k more professiona l, wea r- ing nec kties, for instance. He wou ld nee d to o ffer new payment terms, to sync with com pany procurement systems. To provide great ser vice (and create a difference), he determined, each customer should have a “standb y refillin g technician,” to be available when needed. As a result, the products and ser vices would be priced differently. And he wanted to create anot her mar ket a dvantage by giving com panies printers for free in exc hange for a two- year in k contract, not on ly covering his equip - ment costs but also kee ping com petitors at bay. The Pro business is no w launc hed an d growing. Th is wa y of think in g has become second nature for A guiluz. “It’s not just for books,” he sa ys. “Ever y time I think of a new business, I really do t he strategy w heel,” to un derstan d “h ow I can deve lop m y advantage.” As his businesses change or face new competition or othe r challen ges, he goes back to the wheel and examines the whole s ystem, recognizing t hat a signi ficant c hange in any part o f it is likely to have imp lications for t he rest.

Indeed, when the process works best, a well- defined strategy is like t he Nort h Star, gui ding you in t he rig ht direction no matter w hich wa y the competitive winds are blowing. At Lance!, Walter de Mattos has found that strong market share and sizable margins haven’t protected the com pany from com petition on all sides. Th e World Cu p is headin g to Brazi l in 2014, an d the country wi ll host t he 2016 Ol ympics, both of which should be a dream o pp ortunit y for Lance!— exce pt that the events have s pawne d new coverage from a num ber o f new players, a ll competing for t he same a dvertising dollars . Habits are changing, too. His business was built on quality work produced by a team of s pecialized journalists. As he watches readers peruse t he Internet, de Mattos sai d, “peop le are going to seven or eig ht media outlets in the s pace of ten minutes,” reading so many differen t Own Your Strateg y | 107 | short stories t hat t hey can ’t remem ber w hat t hey rea d or w here t hey rea d them. “W hen you see t hings like t hat, you have to question you r beliefs” about what kinds of information peo ple want, he said. “I have been questioning my beliefs very muc h late ly.” There is “a lot of temptation to change your strategy when som e- thing like that ha pp ens,” he said, but he doesn’t think a fundamental c hange is ca lled for. Instea d he is fine- tuning w hat he ca lls “ga ps” aroun d t he w heel in finance, human resources, an d tec hno logy to stren gthen Lance!’s ca pabilities. The firm remains committed to being the prime source o f sports news for Brazi l twenty- four hours a day, over a ll kinds o f me dia p latforms.

Your strategy, too, if it is well conceived and on point, will guide you t hroug h tumu ltuous mar kets, com petitive c hallenges, an d your push into new arenas. It wi ll te ll you w hat resources you nee d to build up an d what baggage you should let go. More fundamentally, as you put pur- pose in t he center o f your strategic t hinking, you wi ll see a s hift in t he way you look at every opportunity. You will find yourself instinctivel y asking whether that new business, customer, or product adds value, w hether it rea lly fits wit h w hat you are doing, an d w hether it bene fits from or en hances t he business as a w hole. Only then wi ll you tru ly own your strate gy. Even so, you wi ll continua lly have to a dapt. Sh ifts in t he economy, in your industry, or in your own shop may force you to reconsider you r app roach and maybe even reinvent it. As we will see in the next cha pter, t hat’s w hy t he jo b of the strategist is never rea lly finis hed. CHAPTER 7 KEEP IT VIBRANT W HEN Y OUR STRATE GY is on paper, painstakingly crafted, revised, an d polished, you ’ll no dou bt feel a huge sense o f accom plish- ment. You’ll have a game plan. You’ll know where you’re going and why.

M ost mana gers who go throu gh this ri gorous strate gy exercise breathe a sigh of relief at the end. My sense is that many of them end up think -kk ing, “I’ve figured it out. I’m through. The only thing left to do is to put it into gear.” It’s not sur prising t hat you or t hey mig ht t hink this way. In mos t popular portrayals the strategist’s job would seem to be finished once a carefully articulated strategy has been made ready for im plementation. Th e idea has been formed, the next ste ps s pecified, the problem solved.

But, as I te ll the E OPers, don ’t get com forta ble yet! Rare ly can strate gy be so neatl y contained. There will alwa ys be some choices that were no t obvious. Th ere 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 quipp ed, “Only the shallow know themselves.” At heart, most strategies, like most peop le, invo lve some mystery . Inter preting that mystery is an abiding res ponsibility of a strate - | 110 | THE STRATE GIST gist. Sometimes t his entai ls c lari fying a point or helping an organiza - tion trans late an i dea into practice, suc h as w hat “b est in c lass ” wi ll really mean in that com pany and how it will be measured. Other times it entai ls muc h more: re fashioning an e lement o f the strategy, a dd ing a previous ly missing piece, or reconsi dering a commitment t hat no longe r serves the com pany well . It is sim plistic— dangerous, even— to t hink that t he bulk of strateg y work can be done at t he beginnin g an d that a ll a strate gist has to do is get that anal ysis ri ght. Great firms— Nike, Toyota, and Amazon, to name a few— evo lve an d change. So too do great strategies. No matter how compe lling, or how c lear ly define d, no one strategy is likely to be a sufficient guide for a firm that as pires to a long and pros perous life.

IKEA built a global furniture business not by standing still, bu t by pus hing t he design an d consumer va lue enve lope for more t han fifty years. Gucci rediscovered its brand chic after a fumble that nearl y broug ht the com pany down. But w hen I ta lk to m a n a g e r s a bout dynamic strategy, I like to delve into the story of Apple, a company that has evolved and reinvented itself more dramatically than perha ps any othe r over t he last t hree deca des.

I have followed Apple over most of those years, and have had coun t- less o pp ortunities to discuss the com pany’s trium phs and follies with grou ps o f executives .1 Th e tenor of those discuss ions h as shif ted dra- matically over the years, with periods of ringing endorsements giving way to years o f biting criticism. Eit her way, t he com pany brings out stron g emot ions. Th ere is a lot to learn from A pp le’s journey, and from the ex peri- ences o f its remar kable an d controversia l leader Steve Jo bs w ho, some- times brilliant and sometimes not, was at the helm lon g enou gh (in discontinuous stages) to sha pe and resha pe the com pany. Beyond the play- by- play, at its core the A pp le story challenges us to address some o f the most basic truisms of strategy, and, ultimately, to question one of the most foundational: What is the desired result of a strate gy? Academics, venture ca pitalists, and many managers often say that Keep It V ibran t | 111 | the goa l of strategy is a long- run, sustaina ble com petitive a dvantage, one t hat accumu lates suc h a power ful lead over competitors t hat no one can catch u p. In business school cases, analyst re ports, and persuasive bus i- ness plans, t he question is re peate dly as ked: Is t he com pany t here yet?

Does it have t hat killer app, t hat impermea ble e dge, t hat sustaina ble com petitive advantage? But Steve Jobs’s story, and the story of A pp le itse lf, cast serious dou bts on t hat as piration an d raise different questions:

What does it take for a company to endure? And what does that mean for the work of a strate gist ? A RADI CAL LEAP F ORWARD Steve Jobs and Steve Wozniak, Apple’s cofounders, didn’t begin with a statement o f purpose. In deed, in 1977 t heir am bitions were sma ll as t hey trie d to find customers for Woznia k’s a ll- in- one circuit boar ds that would eventually be the App le’s heart. Don Valentine, a venture capita list t hey met ear ly on, reca lls t hat t hey imagine d se lling a cou ple of thousand boards a year. “They weren’t thinking any where near big enou gh,” he said .2 Not until three years after A pp le got off the ground do we find a sem blance o f a purpose statement, in t he 1980 annua l report: “Bringing technolo gy to individuals is, we believe, the extraordinar y business of this decade.” But Wozniak and Jobs didn’t want just gee- whiz techno l- ogy. It had to be specia l. It had to be unique. It had to be, Jo bs wou ld say in time, “insanel y great.” 3 I have to remind m y classes that the late 1970s were several lifetimes ago in the com puter world: IBM did mainframes, and everything else was for hobbyists. The Apple II, launched in 1977 (the company’s firs t real product after a crude prototype ) was intended to be a machine tha t just about any individual could use. It was the first standalone com - puter t hat wor ked rig ht out o f the box; wit h a co lor disp lay an d interna l speakers, it could be used for game- playing as well as word processing.

Its rounded plastic case, schlocky by today’s standards, was a trium ph o f | 112 | THE STRATE GIST design com pare d wit h hobb yists ’ cru de meta l boxes, an d was hone d by a detai l- obsesse d Jo bs a fter he stu died app liances an d stereos at a San Francisco Mac y’s.4 In a significant update the next year, Apple became the first com - puter com pany to successfully integrate a flo pp y disk drive into the com - puter, re placing t he c lun ky an d unre liable cassette drives o f the ear lies t m achin es. 5 Now users could easil y save their own creations and real software cou ld be written an d so ld. In 1979 t hat va lue became crysta l clear when Apple added VisiCalc, the first electronic spreadsheet for a personal com puter, giving it a clear- cut functional advantage over the Adams, Commodores, Texas Instruments, Radio Shacks, and other newl y 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 tec hno logy, wit h the ex pectation t hat it was somet hing buyers wou ld alwa ys value . Consumers jum ped on board. A pp le began to develo p a cultlike following among users for its c lever design an d ease o f use. By Sep- tember 1980, 130,000 Apple IIs had been sold .7 Wa ll Street, too, was comp lete ly wowe d. In 1978 venture capita lists had va lue d the company at about $3 million. But at the ver y end of 1980, less than a month afte r its initial public offering, A pp le had a stock market value of $1.8 billio n.

That was more than Chase Manhattan Bank , more than Ford Moto r Com pany, and four times the value of Lockheed Cor poration, where W oznia k’s father wor ked.8 For all of its technical and design sav v y, Apple faced enormous stra - tegic and o perational challenges. Wozniak was a genius at building the boxes an d Jo bs had unstoppa ble energy an d a spot- on sense o f sty le.

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 humming bird at ninety mi les per hour, ” one former executive sai d.9 He had a re putation for being incredibly difficult— interru pting, failing to listen, missing a pp ointments, an d brea king promises .10 Pro fessiona l Keep It V ibran t | 113 | managers were broug ht in to help manage t he growt h, but w ho was ca lling t he s hots an d w ho held the power in t he organization was no t alwa ys clear.

Meanw hile t he fast- growing in dustry was c hanging a lmost by t he day, as one ma ker a fter anot her hurrie d to brin g out new features, more memory, faster processes, better a pp lications, and more useful com - puters. Eager to maintain its momentum, the A pp le team rushed ou t the Apple III in the summer of 1980 before it had been thoroughl y tested— or even reall y finished. It had little software to offer and was full of bugs, w hich an attentive tec hno logy press was eager to publi- cize. 11 It was the com pany’s first notable failure. By then Apple faced its greatest competition yet: Th e behemoth International Business Machines was no w in the business. IBM had taken its time in entering the market, waiting until the pieces were in p lace for t he P C to have genuine business uses. In t he rus h to catc h up, it relied heavily on outsiders, looking to a young Microsoft for an oper - ating system, Intel for the com puter’s processing brain, and others for memory chips and disk drives. Th e 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 com pany.

Jo bs had a power ful proprietary instinct; he was protective o f Apple’s still- unique technology and had no interest in opening it up to others. It was a mind- set that would se parate the com pany from mos t of its competitors— an d muc h of the mar ket— for t wo deca des. IBM, by contrast, made a conscious decision to keep its system open, encoura g- ing software develo pers to come u p with all kinds of word- processing, ca lcu lating, accounting, an d data base so ftware t hat wou ld ma ke its computers essential to users. The open approach also invited copyca t com puter makers, but IBM figured (correctly, at least for a time) that its name an d reputation wou ld continue to differentiate it . One meeting around that time is particularly telling: In a 1981 visi t with Bill Gates and Paul Allen of Microsoft, Jobs and Gates tangled over w here t he persona l computer was going. Jo bs saw t he mac hines as | 114 | THE STRATE GIST valua ble too ls for stu dents an d homeowners wit h some uses for business. But Gates was insistent t hat t he P C was a business pro duct first an d foremost, a utilitarian business tool, another practical piece of e quip- ment to ma ke t he wor kpl ace run more e fficient ly.12 Th ese dissimilar approaches would guide the two companies down different roads for man y years. With the benefit of hindsi ght, you and I know where these o pp osing 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 stoc k mar ket price, wou ld you be eager to open your tec hno l- ogy 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 jo b we ll? Or, like t he i dealist Jo bs, t he young leader wit h a commitment to chan ge the world throu gh technolo gy , would you want to continue on your course to produce your own elegant and cutting- ed ge pro ducts ? INSANELY UN SELLABLE TE CHN OLOGY Sticking to its course, one team at A pp le was cleaning u p the A pp le III w hile anot her starte d on t he mi ddl e- ran ge Macintos h. Yet anot her was hard at work on a to p- of- the- line revolutionary machine that i t named Lisa ( presumably after Jobs’s daughter). Introduced to great fan- fare in 1983, the Lisa was a technolo gical 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. Th e Lisa threw all those com plexities out t he win dow. It came wit h the first point- an d- click mouse. It had what the techies called a “gra phical user interface”— a technical term fo r menus o f options— t hat cou ld be c licked, ma king t he com puter powe r- ful but simple to operate. A user could open more than one function and work on two or three documents at once. The huge lea p in possibilities was enoug h to get an a ficiona do’s heart racing. Keep It V ibran t | 115 | As a business proposition, however, the Lisa was a bomb. It cost $5 0 million and two hundred person- years to develop but it didn’ t have a clear market. A pp le itself had written all the software, none o f which was com patible with either the A pp le II or IBM machines, and it launc hed wit h just a han dful of core programs. Furt her, a ll the features made the com puter painfully slow, while they bloated the price to a heart burn- in ducing $10,000. 13 It wou ld be ha rd to c ha n ge the world with stunnin g technolo gy tha t 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 disru ptive during the deve lopment o f the Lisa t hat he was remove d from it mi dstream an d banished to the Macintosh project, which was being developed in an isolated location that would se parate him from the rest of the com pany. Despite t he disappointment, he “set o ff wit h guns blazing to ma ke t he 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 re placement for A pp le’s presi - dent, who had resigned following the disappointing sales of the Apple III and the round of downsizin g that followed. Jobs, who became chai r- man during the reshu\bing at the to p, personally recruited John Sculley, presi dent o f Pepsi Co, w ho had helpe d drive Pepsi brie fly past Coke as the nation’s top soft drink. Jobs wooed him for many months, report -tt edly winning Sculley when he asked, “Do you want to s pend the rest of your life se lling sugare d water, or do you want a c hance to c hange t he world?” 16 In Job’s mind, Apple’s purpose was clear.

Sculley arrived in time to hel p launch the Macintosh in 1984. It debute d to huge fan fare, prope lled by a famous Super Bow l ad, pegge d to the Orwellian year, that characterized the new computer as rescuing users from a drone- like existence. While IBM and its co pycats were still using c lun ky D OS - prompt comman ds, t he Mac o ffere d elegant an d simply designed graphics, a mouse, and far more flexibility . But the Macintosh needed work. Th e re views— and sales— were | 116 | THE STRATE GIST decidedly te pid. At a premium price of $2,495, it was slow, incom patible with the deve loping M S- D OS stan dards, an d lacking a range o f so ft- ware at a time when programs for IBM machines were making them more and more useful. For the first time in its history, A pp le was in serious trou ble. Its competitive a dvantage— an d its poignant purpose— were sli pp ing away. It soon re ported its first quarterly loss and plans to lay o ff one- fifth of its wor kforce. Jobs, t he high - ener gy visionar y, was not gettin g the job done. More - over, he and Sculley by then were at irreconcilable odds over A pp le’s strategy. In Jobs’s mind, “A pp le was su pp osed to become a wonderful consumer pro ducts company, ” Scu lley wrote in his memoir. But t he business market, not the consumer market, was ex ploding in the mid- 1980s an d Scu lley t houg ht pursuing t he consumer business in t hat con - text was “a lunatic p lan. ”17 Jobs, t he t hirty- year- o ld wun derkind, w ho had been on t he cove r of BusinessWee k,Time , an d a host o f ot her magazines, w ho had broug ht cutting- edge products to a host of users, had failed as com pany leader. True, his A pp le was creative and innovative, but it was increasingly ou t o f sync wit h the in dustr y, w hich was aimin g not at consumers but at cost- conscious businesses in need of more productivity . Wit h the su pp ort o f the boar d, Scu lley stri pp ed Jo bs o f all his operationa l responsi bilities. It was a huge blow to t he c harismatic big thinker who was the public face of App le Com puter. “I feel like som e- body punc hed me in t he stomac h an d knoc ked all my win d out, ” Jo bs told an interviewer. “I know I ’ve got at least one more great computer in me. And A pp le 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 ne w computer maker, NeX T. THE SU PER- MANA GER ERA W hen a company founder flails, an outside manager often steps in. But would a su per- manager read the market better? Could profe s- Keep It V ibran t | 117 | sional executives do a better job restoring A pp le’s onetime com petitive e dge— or restore or generate a more meaning ful purpose ? Under Scul ley, A pp le became a more disci plined, if less creative, co m- pany. Th e Mac’s problems were cleaned u p, winning intensely devoted fans. Capita lizing on its strengt hs, inc luding an a dvance d printer, Scu l- ley hel ped the com pany become the leader in the burgeoning field of desktop publishing, a llowing legions o f users to create t heir own fliers, pamp hlets, an d pro fessiona l- loo king documents for t he first time.

But while A pp le had inroads in schools and with gra phic artists, IBM com puters an d their c lones became t he de facto mac hines for t he workplace. They weren’t pretty, they weren’t all that easy to use, and the y certainl y weren’t fun. But thanks to a storm of software, the y could build intricate s prea dsheets, create com plex documents wit h ease, ca p- ture large amounts o f data, an d— si gnificant ly— easi ly share it wit h an y other similar computer. Networks of these relatively powerful comput -tt ers a lrea dy were c hanging o ffice productivity like not hing seen since t he mainframes of the 1 960 s. Under Sculle y’s watch, more than 12 million Macs were sold as the mar ket for persona l com puters began to boom, an d the com pany ’s sales grew to a lmost $8 billion from a mere $600 mi llion w hen Scu lley joined the firm in 1983. 19 But App le’s market share, which had peaked in mi d- 198 4 at 21.82 percent, was s liding. 20 The once- innovative co m- pany struggled vainly to introduce trendsetting products. Its first por- table mac hine— t he hot com puter product o f the 1990s— was too big, too heav y, and late to the party. A pre- Palm, pre- BlackBerry personal digital assistant (PDA) called Newton had the potential to be groun d- brea king but turne d out to be a head of its time. Wit h deteriorating mar - gins, no answers to increasing price competition, and few successful ne w products, Sculley himself was pushed out in 1993. 21 His successor, Michael S pindler, was a no- nonsense manager who had tri pled the size of A pp le’s Euro pean business. S pindler set out to cu t costs, declaring that Apple’s products would never be overpriced again.

He reduced R& D spending, improved efficiency, and cut developmen t | 118 | THE STRATE GIST cyc les. He a lso broke wit h the com pany ’s long- stan ding proprietary philosophy and tried to license Apple’s technology, but pulled back afte r clones cannibalized the com pany’s sales. W ithout a via ble purpose an d a we ll- aligne d system, Sp indler, like Scu lley, failed to stem t he ti de o f buyers w ho were rapi dly defecting to com puters powered by Intel processors and running Windows o pera t- ing systems. A 1995 Com puter World survey o f 140 cor porate com puter system mana gers foun d that none o f the Win dows users wou ld co n- sider buying a Mac, while more than half the A pp le users ex pected to buy an Inte l- base d PC. 22In a pp arent desperation, Sp indler trie d to se ll the company. But other computer makers, struggling themselves with declining margins and wicked global com petition, couldn’t see much future in what A pp le had to offer. Spin dler was out in t hree years, rep lace d in 1996 by compan y director Gil Amelio, whose tenure would be even shorter. When Am e- lio took over, A pp le was leaking cash and sales were plunging. Th e Apple operating system was in need of a major overhaul. The brand, which had mattered so much to customers in its earl y da ys, was no w less an d less signi ficant. Microso ft had co pied many o f its best features and the differences between how IBM and Apple computers worked had narro wed . Shortly after he took charge, Amelio shared his pers pective on the company’s challenges at a Silicon Valley cocktail party: “ Apple is a boat,” he told listeners, accordin g to a guest who was there. “There’s a hole in t he boat, an d it’s ta king on water. But t here ’s a lso a treasure on boar d. And the problem is, everyone on board is rowing in different directions, so that boat is just standin g still. M y job is to get ever yone rowin g in the same direction so we can save t he 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, w hat a bout t he hole? Amelio tried to pat c h it w it h t h e s k i l l s h e ’ d h on e d i n t u r n i n g a r o u n d semicon ductor businesses at Roc kwe ll Internationa l an d Nationa l Sem i- Keep It V ibran t | 119 | con ductor. He s hran k the product line, s lashed payro lls, an d re built cas h 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 o peratin g system was under assault by a worthy com petitor, Windows 95. Amelio decided to cut Apple’s losses by canceling the repeatedly delayed next- generation Mac OS, which had alread y cost more than $500 million in R& D. To re place it, he turned to none other than Steve Jobs for a version of his NeXTStep software, designed for high- end personal com puters and servers. Paying what many thought was an absurd price, A pp le bought NeX T 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 com pany had lost $1.6 billion during his tenure. Th e board sent him packing with a nice golden parachute and named Jobs interim CEO .24 THE R OTTIN G CO RE What can strategists learn from A pp le’s ex perience? Th e fundame n- tal lesson is t he evanescence o f a difference t hat 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: Th e shi p has lost its rudder . Th e Austrian- American economist Joseph Schumpeter, writing in the 1940s, saw developments like this as part of an economic cycle.

Innovators break new ground and rea p what he called “economic rents,” outsized profits for their innovative endeavors. Th e most potent of these developments cause, in his words, “creative destruction,” world- shaking innovations that reorder a market place. Th ese foment a “com petition wh ich comman ds a decisive cost or qua lity a dvantage w hich stri kes no t at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. ”25 | 120 | THE STRATE GIST Suc h creative destruction comes wit h its own cyc le. First t he i dea evolves, followed by its commercialization— much like the Apple II moved com puters from the hobbyists’ garages into peo ple’s homes. In time, ot her com petitors see t he a bun dant o pp ortunities an d find their way in, pus hing up output an d driving down prices, unti l the economic rents have all but disa pp eared. Another round of creative destruction must take place for profits to lea p for ward again. Th is was exactly the kind of erosion Apple sought to avoid as it rushed the Apple III, Lisa, and Macintosh com puters to market . Th e creative destruction that beset A pp le, though, was not the kind o f pro duct innovation at w hich the company itse lf exce lled, but a ma r- ket innovation: the benefits that IBM’s commitment to o pen sourcing, and the ensuing stan dardization, broug ht to business users an d so ftware deve lopers. In its initia l phases, t he strategy pro duce d high growt h an d profits for IBM, but in a s pan of less than twenty years, it drove the in dustry from an attractive, profitable business to a vicious ly com peti- tive, price- driven one. Thanks to their compatibility and simple off- the- shelf com ponents, PCs largely became a commodity and sales shifted to the most efficient and chea pest providers. Among PC manufacturers themselves, there was little asymmetry to be found. By 2001, 96. 5 pe r- cent of profit in the industry was ca ptured by two su pp liers who con - trolled the on ly scarce resources: Microso ft, wit h its in dustry stan dard 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 ma de particu larly outstan ding com puters, but because i t mastere d mass customization, e lectronic commerce, an d supp ly- c hain mana gement. 26 M any o f the longtime players wou ld disa pp ear over t he next deca de or so. Compaq and Gateway were acquired and IBM sold its PC bus i- ness in 2004, after losin g nearl y $1 billion since the turn of the centur y.27 In this milieu, A pp le was slain, in part, by the same dragon that got Manoogian at Masco: tenacious an d unattractive in dustry forces. Li ke Manoogian, many of Apple’s leaders didn’t fully appreciate or respec t Keep It V ibran t | 121 | the dramatic im pact t hat deteriorating in dustry forces wou ld have on Apple’s prospects . They were, to put it bluntly, arrogant. An observer of the early days commented: “Everybody at A pp le sits around and says, ‘We’re the best. W e k now it.’ The y have a culture that sa ys it and it starts from Steve Jobs and works on do wn.”28 Another noted that the “arrogance see ped right t hroug h the company an d came to a ffect every aspect o f the business— the style with which it treated su pp liers, software firms, and dealers, its attitu des towar d com petitors, an d the way it a pp roac hed the deve lop- ment o f new pro ducts. ”29 When a firm’s purpose is consistent with the com petitive enviro n- ment an d pro duces a difference t hat matters, it ’s compe lling. W hen i t grows out of sync and anchors a firm in a past that no longer exists, it’s a liability. A pp le was essentially caught in a tra p of its own making, out o f sync wit h a computer mar ket t hat had become increasing ly co n- nected and commoditized. It stubbornl y stuck to its ori ginal strate gy of producing ex pensive and clever personal com puters that used diffe r- ent 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 fli p- flo pp ing strategies a bout w hether to move to an open system, re duce prices, or enter se g- ments 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 assum ptions, particularly the decision to kee p a tig ht hold on t he operating system to protect w hat executives t houg ht was Apple’s critical resource— its hardware. In fact, in the competi - tive milieu that develo ped, it was A pp le’s software, not hardware, tha t wou ld have been t he most va lua ble to users . “We had the most beautiful operating system, but to get it you had to buy our hardware at twice the price. Th at was a mistake,” Wozniak said. “W hat we s hou ld have done was ca lcu late an appropriate price to | 122 | THE STRATE GIST license t he o perating system. ”30 W hile t he ear ly builders t houg ht t hat better tec hno logy wou ld always prevai l, they learne d the hard way t hat it was just one dimension the market cared about, and not enou gh to overcome t he disa dvantages o f the full package . “The computer was never the problem,” Wozniak said. “The com - pany’s strategy was. ”31 THE EDU CATI ON OF A STRATE GIST The Jobs who left Apple in 1985 was a cocky and brash young man - ager, determined to demonstrate that he could win with the Apple strat - egy of making cutting edge com puters with great technology. At NeX T, Jo bs was in comp lete contro l— an d by a ll accounts, he ran rampant, unchecked by the kinds of professional managers who tem pered his energy at A pp le or even a board of directors. His almost im possibly high standards ruled, as Alan Deutschman described: “It wasn’t enough fo r the new machine to be distinguished by one particular breakthrough.

For t he so ftware he was ta king an entire ly new a pp roac h, starting from scratc h, trying to create t he most e legant lines o f so ftware co de eve r w r it ten. The i ndu st r ia l de sig n had to b e l i k e no com puter ever created. It had to be as gorgeous an d sleek as Steve ’s black Porsc he. Even t he factor y had to be beauti ful, an d it had to be as fully automate d as any factory in the world. ”32 NeX T’s first com puter, a gorgeous cube design Jobs described as “five years a head of its time, ” was aime d at t he aca demic mar ket. But it was late arriving and— at $10,000 if you bought a laser printer and some necessary extras— price d closer to a Vo lkswagen t han a P C. Com - mercia lly , the mac hine was a co lossa l failure, a caricature writ large o f 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. Th e business wor ld wasn ’t muc h intereste d, eit her. W hile too expensive to be a personal computer, the computer was too underpowered to be a work -kk station .33 A s he had at A pp le, Jobs again misread the market and what i t Keep It V ibran t | 123 | wanted. Ultimately, NeX T sold just 50,000 machines, a pitiful result. 34 Jobs’s star fell dramatically in Silicon Valley as his chance to sho w that he cou ld “d o it ” again faded. It was an em barrassing persona l deba- cle. As early as 1993, top managers had begun to rush for the exits, the contents of the factory were being auctioned off, and Fo rtune magazine had dubb ed Jobs a “sna ke- oi l sa lesman. ”35 Re flecting later on t he fiasco, Jo bs exp laine d: “We knew we ’d eit her be t he last hardware compan y that made it or the first that didn’t , and we were the first that didn’t. ”36 During t he same perio d, however, Jo bs was invo lved in anot her venture that would prove more durable. After leaving Apple, he sold near ly a ll his stoc k, an d use d some o f the procee ds to buy a majorit y interest in Pixar, a fled glin g animation studio. Thou gh he was more of a venture ca pitalist there than an executive, he held the title of chairman an d CEO, an d ban krolled the com pany t hroug h a num ber o f dow n- turns. As Toy Story , the first feature- lengt h computer- generate d film, was about to be released in 1995, Jobs ste pp ed u p 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 , M onste rs Inc., and Findin g Nem o, films t hat broke a ll conventions in animate d storyte ll- ing. In 2006, when Disney bought Pixar for $7. 5 billion, Jobs became a Disne y director and the entertainment firm’s lar gest shareholder .37 For Jobs, Pixar turned out to have a Disne y- like endin g: It made him a multibillionaire, helped him re build his re putation in t he business co m- munity, and gave him contacts and deep insights into the entertainment industry, which would become im portant later. REDI SCO VERIN G DIFFEREN CES THAT MATTER NeX T was barely hanging on when A pp le bought it, and the indus - try had all but written A pp le itself off. When Jobs returned, the co m- pany was rapi dly s lipping towar d ban kruptcy. Its stoc k price was at a ten- year low and its market share had plummeted to 3 percent. Speak -kk | 124 | THE STRATE GIST ing at an in dustry con ference, Mic hael De ll, the c hairman an d CEO of De ll Computer, had a s harp answer for w hat he wou ld do i f he wo ke up suddenly in the form of Steve Jobs: “I’d shut A pp le down and give the money back to s hare holders. ”38 But Jobs, educated by his NeXT and Pixar experiences, stepped up to the challenge. He began the painstaking process of rebuilding his old com pany, 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 bus y on the next great thin g,” he told Fortune in 1996.e 39 Jobs began by cutting A pp le’s broad product line to four offerings — two consumer, two business, a portable and a desktop model each— and targeting research and develo pment on t he ver y best ideas. Of t hese, t he first product conceived and built after Jobs’s return was the iMac. “ Th e day I left Apple we had a 10- year lead over Microsoft. In the technolog y business a 10- year lead is reall y hard to come b y .  .  . [but ], if you loo k at the Mac that shi ps today, it’s 2 5 percent different than the day I left. And that’s not enou gh for 10 years and billions of dollars in R& D,” he said, lookin g back. “It wasn’t that Microsoft was so brilliant or clever in co pying t he Mac, it ’s t hat t he Mac was a sitting duc k 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 NeX T.

This team would be the core of his brain trust for nearly ten years .41 The new Jobs also had a new mana gement st yle. B y all accounts, he was still brash, abrasive, and often arrogant, but this Jobs knew something about executing an d had enoug h maturity to temper his worst behaviors. Du r- ing the first meeting with a product group, Steve reportedly would “li s- ten and absorb. In the second meeting, he would ask a series of difficul t an d provocative questions: ‘If you had to cut half of your pro ducts, w hat would you do?’ he would ask. He would also take a positive tack: ‘If money were no object, what would you do?’ ” 42”” Th e iMac, introduced in 1998, was a well- designed all- in- one co m- puter and monitor, with a price tag of $1,299— still higher than popula r Keep It V ibran t | 125 | PC s, but we ll below t he $2,0 0 0- plus o f previous mo dels. Its design was a breat h of fres h air in a mar ket t hat had seen litt le fun damenta l innov a- tion in some time, incor porating the sim plicity of the original Mac and an easy way to use t he Internet. It quic kly attracte d a w hole new cu s- tomer group— near ly 30 percent o f those w ho boug ht an iMac had never owned a com puter before. In the first year, A pp le sold t wo million o f t he mac hines, w hich, wit h cost cutting, helped it build a muc h- nee ded cash cush ion.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 origina l purpose wit h an incisive un derstan ding o f w hat consu m- ers valued. At a MacWorld gathering in 2001, he spelled out a greater purpose for A pp le. The first golden age of the personal com puter, the age o f productivity, he ex plaine d, began wit h the ear ly mac hines an d laste d about fifteen years. That was followed by a second golden age, the age o f the Internet, which brou ght new uses to both businesses and consumers . Now, he sai d, t he com puter was entering a t hird great age, t he digita l age, popu late d by ce ll phones, DVD p layers, digita l cameras, and di gital music. In that new a ge, Jobs thou ght, the “next great thin g” wou ld be t he com puter not as anot her ga dget, but as t he center piece o f a ll these devices. It wou ld pu ll toget her in formation management, co m- munication, and entertainment in a seamless whole, enhancin g how all these ot her devices cou ld be use d. Now you wou ld be a ble to both ta ke vi deo an d edit it, listen to music an d create your own mixes an d soun ds, record your pictures and share them in new and different ways .44 Th is so- called digital hub strategy became a new purpose, a clear, well- articulated idea that would guide A pp le’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 o perating system, and o pened its first retail store, selling Apple products in high- tech, high- touch boutiques, com - plete with customer- ser vice “genius bars. ” Piece by piece, Jobs began to remake A pp le. It was not always a | 126 | THE STRATE GIST smoot h or linear process. Per haps drawing from his Pixar ex perience, Jobs initia lly pus hed iMovie, so ftware t hat wou ld allow Mac users to easil y make and edit movies. But while he focused on that, users were gorging t hemse lves on ser vices t hat were provi ding digita l music for free an d usin g burners insta lled on man y P Cs to ma ke t heir own com pact discs. The iMac hadn’t yet offered CD burners, and withou t t hem, sa les s lowe d.

Jo bs had a fore head- slapping moment. “I felt like a dope, ” he sai d. “I thought we had missed it. We had to work hard to catch up.” 45”” An u pgrade to the Mac O perating System addressed the problem, then Apple designers saw another opportunity: The available digi - tal music players were awful. They were slow to load and they could hold on ly a few songs— an im provement over t he Sony Wa lkman, 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 eas - ily in a pocket thanks to a tiny hard drive and an A pp le software called FireWire t hat a llowe d for super fast down loa ding.

With it and i Tunes, A pp le revolutionized the music industry. Na p- ster, a popular file- s haring so ftware, had con ditione d users to t he i dea of downloadin g their own music choices for free, a ser vice that was late r declared illegal. Jobs struck a deal with the music industry: A pp le would provide a similar ser vice with i Tunes but charge for individual songs and albums, and the industr y would share in the revenues. The iTunes store o pened for Mac users in A pril 2003 and ex panded to Windows users tha t October, multi plying its market ex ponentially. (In another sign of a ne w age, Apple developed software explicitly to make something work as el e- gantl y on a PC as it did on the iMac.) And in a rare economic turnaround, consumers began to pay for somet hing t hat had recent ly been free. Th e products and ser vices Apple rolled out capitalized on the com - pany’s ex quisite sense of design and technological wizardry and brough t the w hole digita l revo lution into s harp re lief. Jo bs to ld Tim ein early e 2002, “I wou ld rat her compete wit h Sony t han compete in anot her product category with Microsoft.” 46”” Keep It V ibran t | 127 | Th ere’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 shi p. As each plan k decaye d, it was re place d by new an d stronger tim ber, unti l every p lan k in t he s hip had been c hange d. Was it t hen sti ll the same ship? And if not, then at what point— with which plank— did the shi p’s i dentity s hift? It ’s a para dox t hat P lutarc h ca lled “the logica l question o f 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 A pp le’s incredible technology base with A pp le’s legendary ease of use with Apple’s awesome design. Those three things come to gether in this, and it’s like, t hat’s w hat we do. So if an ybod y was ever wondering why is A pp le on earth, I would hold u p this as a good example.” 48”” By 2005, a total of 42 million iPods had been sold .49 By 2009, A pp le was se lling 60 mi llion a year . Users downloaded more than a billion rr son gs off iTunes and now bou ght movies, television shows, and even business school lectures for their iPods. If the iMac had hel ped Jobs stabilize the boat, the iPod and iTunes were now prope lling t he w hole enterprise for war d as a new vesse l wit h a new purpose and a new destination. And, as with Gucci, it was beco m- ing clear that A pp le’s success was due not to a host of one- off products, but from honin g an i dea, an i dentit y, an d an intricate ly woven s ystem o f elements that worked in concert.

Intuitively, Jobs understood Schumpeter’s message about “creative destruction,” and this time got ahead of the curve. Th e new A pp le, unde r the new Jo bs, became its own “creative destruction ” mac hine, leaning into the wind to introduce better and better products that cannibalized them - selve s , seem i ngly before a nyone el se had a c ha nce to get w it h i n ha l f a m i le . In 2007, Apple rolled out the iPhone, leveraging the special design | 128 | THE STRATE GIST of the iPo d into a cre dit car d–size d package t hat cou ld ta ke an d ma ke ca lls, ta lk to t he Internet, an d hold vast amounts o f music or p hotos as well. Suddenly a good bit of the e quipment on your desk fit easily into your poc ket, an d the com pany was en route to revo lutionizing anot her industr y. Fittingly, that year, A pp le dro pp ed “Com puter” from its name and became sim ply A pp le Inc. By 2010, com puters made u p just 27 per- cent of its $6 5.2 billion in sales for the fiscal year ended September 2 5, while iPods, music, and iPhones brought in almost 60 percent of the revenue. 50App le’s stock roared to unseen heights. With a market value well over $300 billion, it became the most valuable technology compan y in the world, sur passing Microsoft . Even as Jo bs batt led serious health problems, inc luding a 2009 liver transplant, Apple trumped itself again, introducing the much- antici pated tablet com puter, the iPad. The design, the ca pabilities, and t he so ftware set new stan dards for a w hole new category o f porta ble consumer devices, w hich may, in t he not- too- distant future, rep lace t he traditional com puter altogether. The beta version of the much- touted iCl ou d, announce d in t he summer o f 2011, was a furt her ste p, a llowin g users to keep data in sync between any Apple or PC with no need to transfer files b y email or USB. 51 S&P 500 0 50 100 150 200 250 300 350 400 450 Dec-9 9 Apr-0 0 Aug-00 Dec- 00 Apr-0 1 Aug-0 1 Dec-0 1 Apr-02 Aug-02 Dec-0 2 Apr-0 3 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04Apr-05Aug-05 Dec-05 Apr-06Aug-06Dec-06 Apr-0 7 Aug-0 7 Dec-0 7 Apr-08Aug-08 Dec-08 Apr-0 9 Aug-09 Dec-09 Apr-10 Aug-1 0 Dec-1 0 Apr-11 Aug-11 A pple Stock Price Jobs moves from interimto permanen t CEO iTunes Ap p introduced OS X operatin g system released iTunes Stor e opens. Offers 99¢ son gs Power Mac G 5, world's fastestpersona l com puter introduced iPod Shuffleintroduced Jobsundergoes cance r surgery iPhone announced MacBook Air, world’s thinnes t notebook introduced Rumors circulate abou t Job’s health iPhone 3 G intro duced Apple T V introduced iPadintroduced Jobs Retire s Jobs returns t o work after livertransplant Jobs announcesleave of absence Keep It V ibran t | 129 | A SUSTAINABLE CO MPETITIVE ADVANTA GE?

Given this grand transformation, it’s a pp ropriate to ask: Is A pp le t here yet? Despite its late- century trou bles, does it now have a sustain - able com petitive advantage ? I often ask EOPers this question when teaching the A pp le case. I t is tempting to shout, ^ - < 6 _as classes often do, or maybe even retort, _ “Do you have to ask?” A pp le has reinvented its innovative purpose and, on t he face o f it, seems to be running circ les aroun d com petitors, even tauntin g them for their lack of creativit y. Case closed?

I think not . In 2010, A pp le’s com puter market share soared to about 11 percent, but that’s hardly the mark of a dominant industry player. Otherwise normal peo ple will cam p outside an A pp le store for the latest iPhone, but smart phones based on Google Inc.’s Android software substa n- tially outsold the iPhone in 2010, according to NPD Group, a marke t research firm. 52Windows- based com petitors to the iPad are coming fas t an d furious ly. Suc h ta blets mig ht we ll become t he fourt h go lden age, rep lacing t he tra ditiona l persona l computer as t he center o f the digita l hub while becoming products sold largely on price. And there’s no gua r- antee t hat t he iPa d, the iCl ou d ecos y stem, or t heir successors wi ll be t he ones t hat head the pac k a coup le o f years from now. Conventional wisdom would sa y that the goal of strate gy is a lon g- term sustaina ble com petitive a dvantage. I c hallenge t hat view. Such advantages are rare and for good reason. As Schumpeter showed, peaks in marke t growth and profitability often come from change, not stasis. Henry Ford dominated car sales with a single, affordable model until Alfred Sloan’s Genera l Motors beat him wit h a line o f differentiate d pro ducts. Po laroi d owned instant photogra phy until digital imaging shut it out; many broad- ser vice hospita ls were mono polies unti l low- cost focuse d provi ders starte d ch ipping away at t heir base; co lleges wit h spraw ling campuses owne d higher education until community colleges, for- profit organizations, and distance learning c hallenge d them wit h different economic mo dels. | 130 | THE STRATE GIST Zeroing in on one com petitive a dvantage an d ex pecting it to be sustaina ble misrepresents t he strategist ’s c hallenge. It encourages ma n- agers to see their strategies as set in concrete and, when s potting trouble ah ead, to go into defensive mo de, hun kering down to protect t he status quo instead of rising to meet the needs of a new reality. To be sure, com petitive advantage is essential to strategy, and the longer it lasts, t he better. But any one a dvantage, even a com pany ’s un derlying system o f va lue creation, is on ly part o f a bigger story, one frame in a motion picture. It is the need to manage across frames, day by day, year over year, s that ma kes a leader’s ro le in strategy so vita l.

This or ganic view of strate gy reco gnizes that whatever constitutes strate gic advanta ge will eventuall y chan ge. It underscores the differ - ence between defen ding a firm ’s a dd ed va lue as esta blished at any given moment an d somet hing far more important: ensuring t hat a firm co n- tinues to add value o ver time. Th is is what endures— not a particular s purpose, a particu lar a dvantage, or a particu lar strategy, but t he ongo - ing need to add value, always. The ongoing need to guide and develop a com pany so that it continues to matter. This is not to say that great resources an d great a dvantages are not built by businesses t hat en hance t heir core differences over time. But t he pro ducts an d ser vices t hat embody those differences must evolve and change and, as A pp le learned t he hard way, t heir va lue has to be measure d by t he present environ - ment , not one that once was . Quite painfully, that may mean that, like the shi p of Theseus, the keel may nee d to be re built or t he s hip may nee d to sai l in a ver y different direction. As my executive students like to point out, this challenge rarely ha pp ens when you’re sitting at the dock. It’s a hard realization t hat t he plan ks have to be c hange d w hile you ’re sai ling, w hile you ’re a lso straining to navigate an d wor king hard to keep t he shi p afloat.

On his return to A pp le, Jobs had to remake the com puter com pan y p lan k by p lan k w hile a lso keeping it from ban kruptcy— re building no t in a rainstorm, but in a hurricane on the hi gh seas. He got it ri ght for the Keep It V ibran t | 131 | most part, but, as even its arc hriva l—t he once un daunta ble Microso ft— has discovere d, the c hallen ge never en ds. ON BEIN G A STRATE GIST— EVEN WHEN Y OU’RE N OT STEVE J OBS “Ok ay, ” you may be t hinking a bout now, “I get t hat strategy mus t be dynamic. I acce pt that by most measures, A pp le 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 executi ves. You’re right, of course. Th ere was only one Jobs. But among the remar kable c hapters o f his story is t hat he wasn ’t a born strategist. He made huge mistakes. He introduced flawed products. He drove one com pany into t he groun d, an d was himse lf driven from anot her. He had to learn to be a strategist, just like t he rest o f us . Like De Sole at Gucci, Jobs had to have the ener gy and motiva - tion to keep an enter prise moving for war d. He had to wrest le wit h the profoun d an d terri ble para dox many strategists must manage: Stay t he cours e— Reinvent yourself. This ma y sound like a choice between con - tinuing on a given path or c hoosing anot her, 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 s pecifi - cally, you. As a strategist, you’re the person who must watch over the organization, gui ding its course, ma king t he c hoices t hat bring it back to center da y after da y and year after year even as you must choose when the center, t he purpose, itse lf shou ld evo lve. You must deci de w hether to lean into t he win d or not, a n d ju dge w hether your strategy is dynamic or dead . Lea ding strategy is a nonsto p res ponsi bilit y; it can ’t be outsource d or so lved in one great brainstorming session. You won ’t just wa ke up one day to find that your com pany has a new advantage or that its purpose ch ange d overnig ht. Rat her, it wi ll change because t he in dustry c hanges.

It w i ll change because tastes c hange. It wi ll change because your peop le | 132 | THE STRATE GIST change and they bring new skills and strengths to the enter prise. And u ltimate ly, it wi ll chan ge because someone ma de t he ca ll to do so— you, the strate gist . Now, having acce pted that t he on ly sustaina ble strategy is one t hat anticipates c hange, you ’re rea dy to em brace becoming t he strategist w ho takes your com pany where it needs to go. CHAPTER 8 THE ESSENTIAL STRATEGIST W E’VE TA L K E D A great deal about what a strate gist does, but we’ve touc hed on ly lightly on t he personw ho does it. For a ll the in for- mation available on strate gy , little is devoted to what will make you a successful strate gist. What skills and mind- sets do you need to hone? Wh at uni que va lue cou ld you bring to your business ? M y fina l tas k is to a dd ress t hese questions, an d to help you be t he strategist you want to be. Unlike so much of the work you’ve done u p to here, t his last leap re quires putting asi de t he in dustry ana lyses an d the strategy statements, and instead looking deeply into the how of bein g a strate gist. Th e most im portant thing is to understand that you are not a ma n- ager o f strategy, or a functiona l specia list. Others can fill those ro les.

You are, first and foremost, a leader. Your goal is to build somethin g tha t is not already there. To do so, you must confront the four basic questions you have a lrea dy exp lore d: What does my organization bring to the world ? Does that di fference matter? Is something about it scarce and difficult to imitate? | 134 | THE STRATE GIST Are we doin g toda y what we need to do in order to matter tomorrow ? As a leader, you must answer these questions . M ost business practitioners (and most business thinkers, for that matter) are unaccustomed to facing questions of this kind— at least w hen put so star kly. We ’re muc h more com forta ble con fining ourse lves to more tan gible business issues: Is our market shrinkin g or growin g? W hat are our com petitors u p to? To lead, you have to be willing to ma ke room for new c hallenges an d be open to t he unique ways you can add value to your business. Think about this old Zen story. A powerful and se lf- assure d man goes to a Zen master an d as ks to be taug ht a bou t enlightenment. After sizing up the guest in an initial conversation, the Zen master invites him to have tea. The master pours. He goes on pour - ing even t houg h the tea is flowing over t he brim o f the cu p. “Stop! ” the visitor ca lls out. “C an ’t you see t hat t he cup is over flowing? ” “Yes,” the Zen master re plies. “But a cu p that is already full canno t take in anyt hing e lse. ” If one ’s min d is a lrea dy fill ed to t he brim, t here is no place for new ideas . To be a strategist, one must be willing to ex plore new ways of leading. BE A FIRE STA RT ER Being a strategist ta kes drive an d initiative, an d the wi llingness and curiosity to ask questions and venture forward. As bedrock impo r- tant as strate gy is to the lon g- term success of a firm, you mi ght thin k t hat investors, boar ds o f advisors, even t hose wor king in a firm wou ld keep it uppermost in a leader’s min d. Un fortunate ly, t he opposite is too often true; parties you’d think would be clamoring for more settle for less, es pecially if a business’s numbers are reasonably good. Th e commitment an d passion— t he fire starting— for t his wor k must come from  you. But leaders t hemse lves, an d their own sc hedules, are o ften part o f t he pro blem. The Essential Strategis t | 135 | Fin ding t he time an d courage to a dd ress strategy is a constant ch allen ge for most leaders. Sure, you know you nee d to wor k on strat - egy now and then, and you reco gnize that your mana gement team nee ds it. But you ’re t he one w ho has to ma ke s pace for it an d that rare ly is easy. “Managers w ho get caug ht in t he trap o f overw helm- ing demands become prisoners of routines,” wrote Heike Bruch and Sumantra Gh oshal, in A Bias for Actio n. “ Th ey do not have time to notice opportunities. Their habituated work prevents them from tak -kk ing the first necessary ste p toward harnessing will power: develo ping the ca pacity to dream an i dea into existence an d trans forming it into a co ncrete in tention.”1 Ste phen Covey’s celebrated distinction between urgent and im por- tant activities hel ps us understand, in part, why this is so. Too often peop le are consume d by activities t hat are urgent but not important — interruptions, many day-to-day activities, and common fires every ma n- ager faces. W hat su ffers are en deavors t hat are im portant but not urgent: building organizationa l capa bilities, nurturing long-term re lations hips, and developing viable strategies. Beyon d com peting deman ds an d the a drena line rus h that comes wit h constant activity, t here is an even deeper exp lanation a bout w hy man y leaders, and man y firms, fail to full y en gage with strate gy : The y’re com forta ble wit h the status quo even w hen it isn ’t scinti llating. Schum- peter warne d long ago t hat most peop le are content wit h keeping t hings the way they are. Richard Swedberg, a Schumpeter expert, notes tha t the conservative nature o f peo ple pushes back against innovation, an d many leaders t hemse lves resist c hange: “W hile doing w hat is fami liar is alwa ys eas y . . . doin g what is new is not. ”3 Or, as Schumpeter said, “The whole difference between swimmin g with the stream and a gainst the stream is to be found here.” 4”” For economic develo pment to flourish, leaders must swim agains t the stream. Th ey must ste p forward and take the initiative, energetically showing t he way. Schumpeter re fers to t his type o f leader as a “Man o f Action” (Mann der Tat ), someone who does not accept reality as it is. | 136 | THE STRATE GIST Th e Man of Action, in Swedberg’s inter pretation, “does not have the same inner o bstac les to c hange as static peop le or peop le w ho avoi d doin g what is new. What then drives the man of action? In contrast the static person, w ho goes a bout his business because he wants to satis fy his nee ds an d stops once his goa l has been accomp lished, the leader has other sources of motivation. He charges ahead because he wants powe r an d because he wants to accom plish things . . . ”5 Behind every pulsating, vibrant successful strategy is a leader who seized the initiative and made it ha pp en. Develo ping and executing strategy wit h all the necessary dimensions— inc luding t he accounta bil- ity that attends to making decisions with great consequences— is not a function. It is a leadershi p job, and a big one. IT’S YOU R CHOICE In a no w classic Ha rva rd B usiness R eview article ,published in 1963, the year before the first women were admitted to the MB A program, Seymour Tilles, a lecturer at the school, wrote about the res ponsibility leaders have for setting a course for a com pany. He pro- pose d that o f all the questions a c hief executive is re quire d to answer, one predominates: What kind of company do you want yours to be?

(He raised a similar question for as piring leaders about themselves.) Wrote Tilles:

I f you ask young men what they want to accom plish by the time they are 40, the answers you get fall into two distinct cate gories. Th ere are those— the great majority— who will res pond in terms o f what they want to have. Th is is es pecially true of graduate students o f business administration. Th ere are some men, however, who wil l answer in terms of the kind of men they ho pe to be. These are th e only ones who have a clear idea o f where they are going . Th e same is true of companies. For far too many companies, what little thinking goes on about the future is done primarily in The Essential Strategis t | 137 | money terms. There is nothing wrong with financial planning.

Most com panies should do more of it. But there is a basic fallacy in con fusing a financial plan with thinking about the kind o f company you want yours to become. It is like sa ying, “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 t he last t hree deca des, as strate gy has move d to become a sci - ence, we have allowed this fundamental insight to slip away. We need to bring it back. Existentia list ph iloso ph ers un derstoo d the im portance of choices. The y reco gnized that as individuals, who we are is to a lar ge extent an accumulation of all the choices, lar ge and small, we’ve made throug h the years o f our lives. Externa l events an d in fluences are im por- tant, too, but our c hoices are t he most power ful lever we have to a ffect our li ves. So, too, for com panies. But w ho ma kes t he vita l choices t hat dete r- mine a firm ’s very i dentity? W ho says, “Th is is our purpose, not that. s Th is is who we will be. Th is is why our customers and clients will prefer s a world with us rather than without us”? Th ese are the questions the strategist must own. While existence may be given, essence never is. The stor y, the meanin g, the real si gnificance must be made. As a leader, it is yours to create. Others, insi de an d outsi de t he firm, wi ll contri bute in meaning ful ways, but in t he en d, it is t he leader w ho bears responsi bilit y for the choices that are made . It is t his res ponsi bility t hat gives you a profoun d opp ortunit y to shape your business an d in fluence its destiny. Or as Jean- Pau l Sartre, a major ex ponent of existentialism, put it, “There is a future to be fas h- ione d.”7 Sartre cham pioned what he called “the possibility of choice,” celebrating t he way it positions peop le to cra ft i dentity an d define purpose. In his view, it is this fundamental aspect— the possibility o f choice— that creates the o pp ortunity to find meaning. “Man first o f a ll exists, ” he writes, “encounters himse lf, surges up in t he wor ld— an d | 138 | THE STRATE GIST defines himse lf afterwar ds.”8Sartre ’s is a universe t hat creates boun dless possi bilities for se lf- definition . Now consider the meaning this conviction, this faith in the power of in divi dua ls to “surge u p in t he wor ld,” “invent t hemse lves, ” an d “fashion a future ” can hold in t he business wor ld. Isn ’t this w hat Schumpeter was saying? Isn’t it what business should be all about? Mana gers tr ying to sustain strategic pers pective must be rea dy to con front t his basic c hal- lenge. Organizations have to “surge up, ” “invent t hemse lves, ” an d “fash- ion” their futures. They too face what Sartre calls a “ possibility of choice” every day t heir doors are o pen. Or rat her, t heir owners an d managers do, for just as Sartre assigns peop le responsi bilit y for fashioning t heir futures, the strategic im perative for organizations falls to those who lead them . Th is quest is as relevant for large multibusiness com panies as it is for focused, owner- led ones. As leveraged buy- outs proliferate and suppl y chains o pen u p around the world, nothing is more im portant for an y 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 com pany bringing to the table?” He was issuing t he same c hallenge . Suc h wor k can ta ke enormous coura ge an d fortitu de— t he wa y Yo u n g and Kohl at Bri ghton Collectibles insist on minimum resale prices an d re fuse to se ll to stores t hat won ’t provi de su fficient mar ketin g support for their brand, or the way Ingvar Kamprad chose to produce furniture for the man y, not the few. These are the decisions that dete r- mine not on ly w hat a business wi ll do, but, more fun damenta lly, w hat a business wi ll be. Few c hoices cou ld matter more . STAY A GILE As we saw with Apple, the strategist’s work is never done. Achiev - ing and maintainin g strate gic momentum is a challen ge that confronts an organization an d its leader every day o f their entwine d existence. It ’s not one c hoice a strategist must ma ke, but mu ltip le c hoices over time . The Essential Strategis t | 139 | Helmut h von Mo ltke, a disci ple o f the mi litary t heorist Cl ausewitz, understoo d this we ll: “C ertain ly t he comman der in c hief wi ll keep his great ob jective continuousl y in mind, undisturbed b y the vicissitudes of events. But t he path on w hich he hopes to reac h it can never be firm ly established in advance. Through the campaign he must make a series of decisions on the basis of situations that cannot be foreseen. . . . Ever y- thing depen ds on penetrating t he uncertainty o f vei led situations to evaluate facts, to c lari fy t he un known, to ma ke decisions rapi dly, a n d then to carr y them out with stren gth and constanc y.”9 No less t han for t he mi litary comman der, t his is your jo b, an d it ’s a challenging balancing act. As we learned in previous chapters, grea t strate gies are s ystems, with their own inte grit y and internal harmon y 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 ada pt while kee ping your purpose intact. Bu t you cannot con fuse t he integrity o f a system wit h rigi dity. Your system o f va lue creation has to be flexi ble an d adapta ble. Li ke your strategy, it too has to evolve over time, and res pond to— or better yet, antici pate — ch anges in t he business environment or wit hin t he firm itse lf that can m ake its elements obso lete. Philoso pher Martha Nussbaum describes the balance in a system as a “fragi le integrity. ” It is “im possi ble to build water- tig ht s hips t hat wi ll withstan d all contin gencies, ” she wrote. “Yo u c a n n o t r e m o v e u n gov - erned chance from human life. ”10 And it is wrong to try. As a strategist, you need to live with “ungoverned chance.” Nuss - baum talks about this as goin g from a “more confident to a less confident wis dom, ” cu ltivating “flexi ble res ponsiveness, rat her t han rigi d hard- ness.” 11 Th is re quires letting go of a “rage for control ” and being o pen to rethinkin g and refashionin g elements of your strate gy. Even more fundamentall y, as a leader you must allow yourself to be o pen to reinter preting w hat your business is a bout. Just as it is necessar y to sta ke out a purpose, a leader must be open to ret hinking t hat purpose in order to move the business forward. Theseus was willin g to chan ge | 14 0 | THE STRATE GIST over every part of his shi p to preserve its seaworthiness. As a strategist, you must be wi lling to rep lace virtua lly every component o f your busi- ness to extend its rele vance and future . Th ere is a tem ptation, I think wides pread, to believe that the firm comprises its parts an d their a lignment, an d that certain parts o f the business are so critical to what a firm is that without them the firm, in an im portant sense, ceases to be. You are t he one w ho must resis t t his temptation an d persua de ot hers w hen big c hanges are due. Pa blo Picasso put it bluntly: “Success is dangerous. One begins to co py one - self, an d to co py onese lf is more dangerous t han to co py ot hers. It leads to steri lity.”12 Very rare is the leader who will not, at some point in his or he r career, have to over hau l a com pany ’s strategy in perhaps dramatic ways. Sometimes t his brings moments o f epip hany— eure ka flashes o f insig ht that ignite dazzling new ways of thinking about an enterprise, its pu r- pose, its potentia l. I have witnesse d some o f these moments, in sma ll group meetings or even in t he c lassroom, as managers reconceptua lize what their organizations do and are capable of doing. These episodes are ins piring. Th ey can become catalytic . Other times t hese decisions can be wrenc hing, particu larly i f you have built a business that may need to be taken a part and put bac k toget her again in a new way. More t han one owner or manager— men and women coming to grips wit h w hat t heir organizations are an d what the y want them to become— has described that retoolin g as an intense personal struggle. Recall real estate entre preneur Kerr Taylor’s anguis hed decision in c hapter 6 to s hut down his origina l broker- dealer business in the economic downturn. Thou gh it no lon ger offered his com pany a strategic a dvantage, he was emotiona lly attac hed to it an d cou ldn’t let go. W hen he fina lly face d up to rea lit y an d close d it, he sai d, “It was one of the hardest thin gs I ever did.” Ye t t hose same peo ple o ften say t hat t he ex perience was one o f t he most rewar ding o f their lives. It can be pro foun dly liberating as a kind of corporate rebirth or creation. An executive student, the CEO The Essential Strategis t | 141 | of a large Asian firm, once described his own ex perience: “I love ou r business, our peop le, t he c hallenges, t he fact t hat ot her peop le ge t dee p benefits from what we sell,” he said. “Even so, in the comin g years, I can see t hat we wi ll nee d to go in a new direction, an d that will mean selling off parts of the business. The market has gotten too com petitive, and we don’t make the margins we used to.” He winced as he ad mi tted th is. Then he lowered his voice and added something surprising. “At a fundamental level, though, it’s changes like this that kee p us fresh, and keep me going. W hile it can be pain ful when it happ ens, in t he long run I wou ldn’t want to lead a company t hat didn’t reinvent itse lf.” Done well, undertaken or ganicall y, the exercise of craftin g strate gy becomes a journey that can renew both a com pany and a leader. Th ose wh o s hou lder t he responsi bilities o f an owner or top manager likely alread y know the satisfaction of buildin g somethin g, creatin g som e- thing t hat wou ld not have ot herwise existe d. Max De Pree, t he legen d- ary CEO of Herman Miller, said it well: “In the end, it is important to remember that we cannot become what we need to be b y remainin g wh at we are. ”13 And that, finally, is the point of everything, isn’t it? Making som e- thing an d helping it find its way. Continua lly re fining an d renewing its reason to exist. It is the enduring job of a leader. As we saw in Apple, businesses, no less than peo ple, have to reinvent themselves . GET Y OU R TEAM ON B OAR D 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 e ffort. You nee d to connect wit h peop le t hroug hout t he business so that you can both ins pire them and learn from them. If you don’t fill t hem in on your t hinking, t hey’re not likely to ma ke strategy part o f their agenda. And if you don’t enlist their knowledge in creating plans, you are wasting an invaluable resource: As the peo ple who talk with the | 142 | THE STRATE GIST customers an d do a lion ’s s hare o f the wor k, t hey possess in formation you can ’t do wit hout.

Thomas Sa porito, chairman of RHR International, a managemen t deve lopment firm, believes t hat many leaders get so loc ked into t heir own vision t hat t hey resist hearin g w hen ot hers don ’t believe in it. One executive he coached, a CEO of a Fortune 100 com pany, set ambitious goa ls but focuse d more on t he soun dness o f his strategy t han on ot hers ’ acceptance o f it: He “was so blind to how t he boar d an d emp loyees rea lly felt about it, that he couldn’t gau ge their low levels of bu y- in.” He was eventually asked to ste p aside. “Almost every CEO I’ve worked with stum bles at some point because o f this,” Saporito wrote. “W hen t hat ha pp ens, I remind them that executives don’t get paid to be right. They get paid to be e ffective. ”14 M ax De Pree was e loquent on t his su bject as we ll. He believe d that ever yone in an or ganization has a ri ght to u nder s t a nd s t r ate gy and a right to be involved in it. “Good communication is not sim ply send - ing an d receiving. Nor is goo d communication simp ly an exc hange of data ,” he wrote. “The best communication forces you to listen.” 15 Throu ghout, however, De Pree reco gnized that leaders have an obl i- gation to provi de an d maintain momentum: “It is t he feeling among a group o f peop le t hat t heir lives an d their wor k are intertwine d an d movin g toward a reco gnizable and le gitimate goal.” Such momentum comes from a “clear vision o f w hat t he cor poration oug ht to be, from a we ll- thoug ht out strategy to ac hieve t hat vision, an d from car e- fully conceived and communicated directions and plans that enable ever yone to partici pate an d be publicly accounta ble in ac hieving t hose plans. ”16 Napoleon put it t his way: “De fine rea lit y, give hope.” Th at great advice acknowledges the importance of facing and inte r- preting 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 reco gnizes the human n eed of tea m m embe rs to be m oti - vated and assured. In rallying the Gucci troo ps around his new purpose, The Essential Strategis t | 143 | De Sole ma de it his jo b to keep peo ple in forme d, w hile a lso res pon ding to t he rapi d business c hanges aroun d him . “I was very good at motivating and communicating with peo ple.

I use d to give s peec hes in t he ca feteria so t hat ever yone wou ld know wh at we were doin g,” he sai d in an interview. “I was ver y decisive in u pgrading personnel and making very hard decisions. I was disci plined, and un der rea l pressure to perform. It was a constant process o f ma king c han ges. ” The hard and the soft, all in one.

Taylor of AmREIT s peaks with enthusiasm about working on strategy wit h his team. “It starts wit h a deep dive, ” he says, “b ut t hen continues as an on goin g strate gic conversation. Discussion is honest, op en— w hich is particu larly im portant w hen issues are toug h.” It too k time an d effort to reac h this point, he a dd s. “O ver t he 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 con- versations that relate to strate gy in some wa y ever y week.” If a leader shortchanges questions of strategy, an organization and everyone in it wi ll su ffer. I f a leader s hortc hanges t he team an d fails to c lear ly communicate t hat strategy, listen to ot hers, or inspire t hem to get on board, the outcome will be e qually bad. As a strategist, that means your a bility to communicate— an d to connect wit h ot hers in t he organization— is as vital to your success as an ythin g else you do. ONCE A GAIN: THE CHOICE I S YOUR S In t he c losing session o f the E OP program, I o ffer t he executives some advice: “On the way home, if the person sitting next to you on the plane as ks w hat you do, sim ply say: ‘I’m a guar dian o f organizationa l purpose. ’17After that, you won’t need to worry about any more questions coming from t hat direction! ” The EOPers always laugh, but by this time in the course, it’s a knowin g lau gh. The y reco gnize there’s a real truth buried in the humor: | 14 4 | THE STRATE GIST If they don ’t em brace t he ro le behind those wor ds, somet hing essentia l in t heir businesses wi ll be missin g. W orkin g with thousands of leaders, I’ve seen that you don’t have to be Steve Jo bs to feel goo d about t he contri bution you ’ve ma de, or t he business you ’ve helpe d to build. In my c lasses, it ’s not just t he multibillion- dollar steel and world- class microfinance com panies tha t bring satis faction, but t he can dle com pany t hat began in a kitc hen an d grew to support not on ly t he coup le w ho starte d it, but more t han one thousand others; the coffee roaster who ste pp ed out of his family’s bus i- ness to o ffer a new va lue proposition to a new set o f customers; t he me d- ical supp ly company t hat’s grown wit h a fami ly over t hree generations, each leader weatherin g his or her own share of crises and the on goin g need to find new footing, a new reason to matter . Par t o f the grati fication t hese leaders experience stems from grap - pling with one’s business issues at unex pected de pth, and seeing them in a larger context, suc h as an executive in a storage business w ho came to a much more sophisticated understanding of the impact of the po w- erful economic forces in his industr y, or the owner of a financial ser- vices net wor k w ho re built his franc hise from t he groun d up to ser ve a larger but less wea lthy c lient group. W hether re fining a business ’s purpose or direction, or how all of that is brought to life, leaders say t hey are gra ppl ing wit h their firm ’s future at a more basic leve l than the y had before.

W hen pressed, some refer to the transition from understanding the broa d out lines o f a leader’s ro le to a more groun ded sense o f w hat t he position deman ds. Others re fer to a new foun d belief in t he possi bil- ity of sha ping their firm’s future in a way that they had not previousl y conside red. A few individuals mention somethin g else. Before, the y sa y, the y thought about strategy as a set of problems to be solved— the way i t is so o ften a pp roac hed in both practice an d in sc hoo l. Now, however, t hey’re t hinking about strate gy as a wa y of life for t hemse lves as a leader, a set of questions to be lived. 18Miguel Aguiluz, the founder of Ink for The Essential Strategis t | 145 | Less, ta lks a bout how he has interna lize d the process. He wants his businesses to be distinct, not on ly w hen t hey’re foun ded, but over time. “I just find wa ys and means to be different from the other guys. That’s wh at I do,” he sai d. W hen wor king a new i dea a ll the way t hroug h a strategy, he sometimes finds himse lf at logger heads wit h his operations executives, who are reluctant to switch gears or chan ge a good thin g. But, he says, “an interna lly consistent strategy most o f the time ma kes a winning company. ” Each of these leaders in vested the best of themsel ves in their work. Th ey identified com pelling purposes, built organizations to achieve t hem, an d u ltimate ly pro duce d differences t hat rea lly mattere d. In doin g so, the y gave meanin g to their businesses and also to themselves.

During t he last days o f the E OP program, I as k the c lass to rea d a rat her unusua l artic le by t he late Har var d philosop hy pro fessor Ro bert Nozick .19 It proposes t hat we su bstitute t he difficu lties an d potentia l dreariness o f daily living wit h an Experience Mac hine, a kind of virtua l reality contra ption. Nozick ask s us to contem plate a world where we can achieve anyt hing we wis h, fully forme d, sim ply by programming an d stepping into t his mac hine. Wit h the experience prepare d for us, t here are no decisions or actions required other than choosing the experience itself. Th at means no slee pless nights, no hand- wringing, no agonizin g ch oices or decisions. Simp ly step in an d go . As a pp ealing as this may seem at first, few are tem pted to acce pt the offer. Th ey recognize that such pretend reality would de prive them of participating in t he very actions t hat create t he experiences. W hile t he process of getting from here to there is not always enjoyable, and the end is not a lways favora ble, t he un derta king itse lf is t heirs, it ’s part o f w ho t hey are. “Sh ou ld it be surprising t hat w hat we are is important to us? ” asks Nozick. “Wh y should we be concerned onl y with how our time is fill ed, but not wit h w hat we are? ”20 Reflectin g on t heir own lives, E OPers o ften sa y that t hey like t he accountabilit y for their journe ys, and thei r uniqueness . The y like the “off- roa d,” seren dipitous ex periences t hat wou ld be misse d in a prepro- | 14 6 | THE STRATE GIST gramme d existence. Imagine i f Ingvar Kam prad had misse d the boycot t of his goo ds an d the Po lish so lution t hat led to a comp lete ly new way to com pete. Or if Domenico De Sole had continued to pursue his Wash - ington law career an d not gotten drawn into t he trou bled business o f a c lient. Sure, t hese experiences cou ld be dialed in, but first someone e lse would have to imagine them, and even so, the ex periences would not be authentic, t he rewar ds o f lives t hat were active ly live d.21 Nozick ’s Experience Machine is a fantasy, of course— at least so far— but it o pens a door to thinking dee ply about the meaning of wha t you do. How many peop le have you met w ho p low t hroug h life wit hou t a sense of purpose, who go through the motions, ape the ways of others, and get their rewards from kee ping score? Th ey may be highly accom - plished, but t here ’s litt le aut hentic a bout t hem. Sartre capture d it wit h his challenging assertion: “Everything has been figured out, except how to live.” Th e poet T. S. Eliot had another angle: “We had the ex perience, but we misse d the meaning. ” In 2002, Tony Deifell, a photographer and graduating MBA, zeroed in on this question. He asked some of his classmates to res pond 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?” Thei r responses, along with their photogra phs, became the basis for the Har - vard Business Schoo l “Por t ra it Projec t, ” a tra dition t hat has continue d ever y year s ince. At the close of my EOP course, I share Oliver’s poem with the c lass, an d urge t hem to visit t he Portrait Project. W hile t he ex hibition is focused on people starting out in their lives, I believe it’s equally impor - tant that we kee p 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 attem pt to e quate being a strategist as the central answer to t he query. But, i f you ’re like t he E OPers w ho respon d wit h deep emotion to the poem, I suspect that many of you will find the co n- nection. It has to do with the kind of contribution you want to make . The Essential Strategis t | 147 | THE SU MMER DAY Who made the world?

Who made the swan, and the black bear ? Who made the grassho pper? This grasshopper, I mean — the one who has flung hersel f out o f the grass , the one who is eating sugar out o f my hand, who is moving her jaws back and forth instead of up and down— wh o is gazing aroun d wit h her enormous an d comp licate d eyes . Now she li fts 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 d o With your one wild and precious life? — Mary Oliver New and Selected Poem s(Boston: Beacon Press, 1992)s (Copyright 1992 by Mary Oliver. Reproduced with Permission. ) WITH AND WITH OU T Y OU You, like the business leaders and MBAs I have taught for more t han t hirty years, must as k not just “W hat wou ld the wor ld be like wit h- out m y business?” but also “What would m y business be like without a strategist?” 22W hat i f no one in you r firm ste pp ed up to t he ro le? No one weig hed the options an d chose w hat t he business wou ld be— w hy an d to whom it would matter? What if no one built a s ystem of advanta ge that ena bled it to do somet hing in particu lar, particu larly we ll? W hat i f no one scanne d the horizon wit h vigi lant eyes, watc hed over t he firm, kept it vibrant , and moved it forward ? I know these com panies. You do, too. Th ey’re all over the world. | 14 8 | THE STRATE GIST Th ey’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. Th ey’re the ones tha t don ’t co here, or t hat wor k against t hemse lves, un dermining in one par t of the business what they’re doing in another part. Th ey’re not the kind of com panies most of us would be eager to work for, or, for that matter, to do business with. They aren’t the comp a- nies makin g a difference.

By contrast, most o f the business leaders I have wor ked wit h come to embrace the role of the strate gist seriousl y and with enthusiasm. The y like the ins piration they feel about what they do and why that matters. Th ey like the feeling that the world with and without them at the helm wou ld be different.

As a leader, if you i gnore or underestimate your crucial, on goin g ro le as a strategist, somet hing essentia l in your business wi ll be missing. Answered well over a lifetime, the questions at the heart of strateg y will hel p a com pany prevail. Answered poorly, or not at all, they leave i t a drift an d vu lnera ble. Articulatin g and tendin g to a livin g strate gy is a human endeavo r in the dee pest sense of the term. Kee ping all the parts of a com pany in balance w hile moving an enter prise for war d is extraor dinari ly difficu lt. Even when they have substantial talent and a deep appreciation for the job, some leaders ultimatel y don’t get it ri ght. Their le gacies serve as sobering remin ders o f the com plexities an d res ponsi bilities o f stewar d- ship. On t he ot her han d, it is exact ly t hese c hallenges t hat ma ke t he trium phs so rewarding. AUTHOR’S NOTE Th e exam ples and stories in this book are based largely on five years’ teac hing in one o f the com prehensive executive programs at Har var d Business Schoo l. In t he pages o f this boo k, I re fer to t his program as t he Entre preneurs, Owners, Presidents program (EOP), though the actual name o f the program is different. You can find more in formation a bou t various executive programs t he sc hoo l offers at w w w.exe d.hb s.e du. In some cases, com panies’ locations or certain details about them or in divi dua ls have been c hange d or com posites o f stu dent ex periences have been created so as not to violate the privacy of former students.

Where names of com panies or individuals are disclosed, it is done with ex press permission, an d the detai ls in t he accom panying discussions have been approve d for re lease by t he firms.

In some instances, I have presented cases in class in a different wa y t han t hey are descri bed here or use d ot her cases t han t he ones in t his boo k to ma ke t he same important points. FREQUENTLY ASKED QUESTIONS I run a non profit. 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 or ganization a di fference that matter s, and enable it to do somet hing o f im portance particu larly we ll. Having a strategy to do t his is every bit as important for a nonpro fit as for a for-pro fit business ven ture . It wou ld be a huge mista ke to t hink that non profits are exem pt from t he rigors o f competition or to assume t hat how t hey per form an d what the y add won’t constantl y be evaluated relative to alternatives. To the contrary! Com petition in the non- profit s phere is as intense as any, an d most nonpro fits operate on even tig hter budgets, wit h scarcer resources and more diffuse pathways between them, their clients, and those who fund their activities. Th is makes the need for clarity and e ffectiveness a ll that muc h greater. As a nonprofit, you need to have a good understanding of you r purpose— w hat you wi ll do an d w hat you won ’t do— an d you mus t build an organization t hat is parsimonious an d tig htly tai lore d to t hat end. That means you’ ll also need the metrics one would demand of an y first- class organization. All of this becomes part of who you are: Hone it care fully. Doing so wi ll not on ly ma ke your organization stronger; i t will also help you tell your story to all who need to know . | 152 | Frequentl y Asked Questions Is there still a place for SWOT analysis and if so, where ? W e absolutely still need SWO T. It’s one of those timeless tools that pu ll a lot o f in formation toget her. It ’s a high- leve l summary o f a firm as a player and of the com petitive environment at the same time.

It can provi de va lua ble context as you re fine your purpose an d deve lop your s trategy. If you’re not familiar with it, a SWO T anal ysis looks at a firm’s own strengt hs an d wea knesses, an d the o pp ortunities an d threats in its environment, sometimes using a matrix like t he one below . SW OT Anal ysis Strengt hs W ea knesse s Helpful Hurtful External Interna l Opportunitie s Th reats Frequently Asked Question s | 153 | What’s the difference between a vision, a mission, and a purpose. Do we need all o f 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 nationa l player, or from a nationa l player to a g lobal com petitor. Or that you want to deve lop a ser vice business a longsi de your pro duct o fferings.

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 t his a dvice: “Start out wit h a picture o f w here you want to en d.” Mission statements mean different things to different peo ple and have been use d in so many different ways t hat we ’ve lost a c lear sense of w hat t hey are or w hat t hey s hou ld be. Some are very broa d, even loft y, and talk in va gue terms about how a business will contribute to its community. Others are more narrow an d closer to w hat I t hink of as a purpose, but o ften fail to connect wit h the rea l economics o f a business. To avoid this confusion, I use purpose to define why a firm wille matter in its competitive context— t he va lue it wi ll add , an d w hy t hat s pace will be different because it exists. That frees u pmission to be use d as it was origina lly inten ded— as a comment a bout t he “h igher” purposes o f a firm an d its re lations hips wit h society.

How do I go about analyzing my industry? You can gain a lot o f traction by starting wit h w hat you know. Gather a team and talk about each of the five forces in turn, drawin g on your own ex perience in your industry. After identifying the facts, consi der w hat t hey mean. W ho has t he power in t his context? W hy?

Is it shiftin g? How? Overall, do the forces make the industr y 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 ? | 154 | Frequentl y Asked Questions Th ere is a lot of relevant data outside your firm that can hel p you in t his process: Government agencies an d in dustry tra de associations can be excellent sources for facts and statistics; prepackaged industry surveys produce d by consu lting firms or investment researc h ser vices like Stan dard & Poor ’s o ften inc lude detai led in dustr y ana lyses, as do many analyst re ports on key industry players. A local public or university library should have access to publications an d data bases t hat can ai d in your searc h, provi ding com parative data, market research and analyst re ports, and recen t news paper an d magazine artic les. Factiva, Hoover ’s, LexisNexis, OneSource , Standard & Poor’s , Thomson , and Business Source Com plete, among others, provide various kinds of industry- and com pany- s peci fic in formation an d are avai lable in many libraries or by subscription.

For an excellent discussion of these and other sources, see “Findin g Information for Industry Analysis,” by Jan W. Rivkin and Ann Cullen, Har vard Business Publishin g, Note 708481, Januar y 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 com pete. Historica lly, M ic hael Porter i denti fied three generic strategies: low- cost pro ducers; differentiators, w ho comman d premium prices for uni que products; and focused firms who com pete in very s pecific mar ket segments, an d cou ld be eit her high- or low- cost producers. In practice t here are an in finite num ber o f strategies t hat are variations on these themes, and many successful strategies are not “pure plays.” Nevert heless, t he notion o f generic strategies is a use ful insig ht t hat forces one to t hink hard about how a firm is a dd ing va lue, an d the tradeoffs that may re quire.

In grou ps o f executives, I ’ve foun d that re lative ly few c laim t hat t heir companies are low- cost pro ducers w ho compete primari ly on Frequently Asked Question s | 155 | price. Recognizing t hat, a majority, an d some a lmost by defau lt, c laim to be differentiators. The y think of themselves in that vein, describe themselves in that vein, and some have the evidence to prove it. But a fair num ber paint a lluring pictures an d have everyt hing line d up, except customers w ho appreciate t heir “unique ” va lue an d are wi lling to pay for it. To earn that you need to have a system of value creation t hat ena bles you to produce an d mar ket products or ser vices wit h a true difference that matters. Th at generall y leads to hi gher costs, but hi gher costs that get you and your customers somethin g in return . Many success ful sma ll an d me dium- size players focus on narrow, rat her t han wi de, groups o f customers, an d ma ke deliberate c hoices to tighten the sco pe of their businesses. This enables them to zero in on t he i diosyncratic nee ds o f a particu lar set o f customers an d build systems o f va lue creation t hat meet t hose nee ds particu larly well. Doing so can distinguish them from more generic players who com pete more broa dly, a n d ma ke customers, w hose i diosyncratic nee ds are now addressed , better off . M any firms seem to get by without tightly linked systems o f valu e creation. Why should I make it a priority for my business?

The intrinsic value of a well- develo ped system is perha ps easiest to see w hen a com petitor tries to duplicate a success ful firm. I f you had the recipe, you cou ld ma ke Coca- Cola, for instance, but you wou ldn’t be able to du plicate its brand recognition, its su pp ly and distribution lines, or its pricing. Th ese are resources and activities the firm has hone d over deca des; t he fact t hat t hey wor k toget her in a tig htly linked system makes them all that much more difficult to imitate. Years ago, some American investors tried to co py IKEA with a business called STØR. (Apparently the line through the O was O supp osed 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 | 156 | Frequentl y Asked Questions STØR and other imitators failed because they could co py onl y single points of advantage. As Anders Dahlvig, IKE A’s g roup president, said: “Many com petitors could try to co py one or two of these things. Th e difficulty is when you try to create the totality o f w hat we have. You mig ht be a ble to copy our low prices, but you nee d our volumes and global sourcing presence. You have to be able to co py our Scan dinavian design, w hich is not easy wit hout a Scan dinavian heritage. You have to be a ble to copy our distri bution concept wit h the flat pack. And you have to be able to co py our interior com petence — the way we set out our stores an d cata logues. ”2 Success comes from a com pelling purpose, tightly embedded in an inter loc king system o f va lue creation, an d does so in a way t hat is diffi cu lt for others to imi tate. Should I try to develo p a strategy alone or with my team ? Your team s hou ld definite ly be part o f the e ffort— but many leaders find it useful to first work alone throu gh the strate gy exercise outlined in c hapter 6. You wi ll likely find it a lot harder t han you t houg ht, an d that experience will introduce you to the process and help you identif y the issues that are likely to be most challenging in your com pany. Th en, get your team involved . Teams often begin by attempting to write out a strategy statemen t for a business. That’s okay, but don’t s pend too much time on it a t 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 u p on words at this point) and work your wa y through a strategy wheel, s poke by s poke. Th is is an iterative process — refinements will come. As the bi g buildin g blocks of what you do fall into place, revisit the purpose, and then come back to the wheel. As you c lose in on a purpose, an d the activities an d resources to su pp ort it, go back to t he strate gy statement. B y then it wi ll be c lear w hat you need to conve y. Frequently Asked Question s | 157 | How long should we expect to spend on the process? Severa l meetings over a two- to t hree- mont h win dow s hou ld be su fficient. I f you ’re missing pieces o f in formation, give peop le t he res ponsibility to locate them and bring them to the next meeting. It’s important to keep up the momentum an d move towar d conc lusion. Too many companies fall into a trap of “discussing and discussing and discussin g.” In itself that could be a virtue, but strate gy is abou t c hoices. Reac hing c losure is im portant. Should it be a democratic process ? Even with your team’s hel p, as the head of the business you should lead the e ffort. It is vita l to hear ot hers ’ views an d get t heir input an d 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. Re lying on consensus can pro duce a less- t han- am bitious result and a strategy that is more like a compromise than an ambitious aspiration . Th at said, as we discussed in Chapter 8, it is important to keep in mind from the start that you will need the commitment and suppor t of other managers and a wide swath of em ployees to execute a plan.

In his management development work, Th omas 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 wit hout deep support for it from t he boar d, senior team, an d 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 com petitors find out w hat we ’re doing?

In rea lity, if w ho you are an d w hat you do is c lear to you r | 158 | Frequentl y Asked Questions customers, it is also probably clear to your com petitors. As with IKEA and Coca- Cola, i f you ’re rea lly goo d at w hat you do, t here s hou ld be other barriers that will make imitation difficult. Th e strategy wheel, with all its detail about your s pecific activities and resources, is an interna l wor king document. But w ho you are as a player and why you matter should not be a secret; in fact, it is somet hing you s hou ld broa dcast. Peo ple outsi de t he com pany as we ll as insi de nee d to know w hat your business brin gs to t he wor ld an d w hy it matters.

How often should we revisit the strategy ? In a relativel y stable environment, bi g chan ges ma y not occur often, but t he strategy s hou ld be forma lly revisite d on a regu lar basis, once a year or so. This might result in minor course adjustments or a refashionin g of some elements, often movin g toward greater efficienc y, and more e ffectiveness, in w hat you are a lrea dy doing. In perio ds o f more rapi d change— w hether generate d interna lly or externa lly— t hese examinations may be less formal, occur more fre quently, and lead to more signi ficant c hange. In eit her scenario, to be wort hwhile, t hese examinations s hou ld be fear less, t horoug h, an d open discussions a bou t exactly how your firm is faring in the market place and o pp ortunities for im provement . Beyon d the forma l processes, t he leader o f a business— t he person who bears the most res ponsibility for its long- term health and vita lit y— s hou ld come to see everyt hing t hat happ ens to a com pany throug h the lens o f strategy: W hat do t hese events, activities, opportunities, or threats imply for us? What do they say about who we are and why we matter? How should we res pond? Th is kind o f engagement doesn ’t ta ke p lace on a sc heduled basis—it is ongoing an d re quires constant vigilance. RECOMMENDED READING Wa nt to learn more a bout t he ideas an d com panies discusse d in t his book? Here are some of m y favorite sources, with notes about wh y I’ve recommended them . Industr y Anal ysis Competitive Strategy: Techniques for Analyzing Industries and Compet i- tors, by Mic hael E. Porter. 1980; reprint, New Yor k: Free Press, 1998. Th is is Porter’s classic work on industr y anal ysis. It identifies five economic forces t hat in fluence in dustry profitabilit y an d have a great impact on industr y- 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.

Por ter. Ha rva rd Business R eview , January 1, 2008. Th is article is a short, straightforward presentation of the key ideas that are developed in more detail in Com petitive Strategy. For a hi gh- | 160 | Recommended Readin g leve l survey o f the to pic, t his is a goo d place to start. For a deeper dive, go to t he boo k itse lf.

Strate gy “What is Strate gy ?” b y Michael E. Porter. Ha rva rd Business Review , Novem ber 1, 1996 . Porter discusses strategy as the creation of a unique position invol v- ing a distinct set of activities. It re quires one to make trade- offs— to c hoose w hat to do an d w hat not to do— an d deman ds fits across a ll of a company’s activities. Managers in my courses find the article both inspiring and practical . “Creating Competitive Advantage ,” by Pan kaj Gh emawat an d Jan W. Rivkin. Har vard Business School Note , 9- 798- 062 , Harvard Busi - ness School Publishing, 2006. Th is nuts- and- bolts class note, originally written for MBA students, is a careful, straightforward presentation about several important strat - egy frameworks and how to use them in practice. Executive students have foun d its quantitative examp les o f add ed va lue an d re lative 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 mar ket. It moves beyon d a zero- sum pers pective on competition— w here one firm ’s gains are anot her firm ’s losses— to a coop - erative view, where firms create more value b y workin g with, not a gainst, customers, ven dors, an d ot hers. It ’s an im portant contri bution t hat cou ld c hange your way o f thinking a bout t he goa ls an d intentions o f your strategy. Blue Ocean Strategy: How to Create Uncontested Market Space an d Make Competition Irrelevant , by W. Ch an Kim an d Renée Mau borgne. Boston: Harvard Business School Publishin g, 200 5. Recommended Read ing | 161 | Being different is one o f the distinguis hing features o f a goo d strat - egy. But how to ac hieve t hat an d, in particu lar, how to go a bout i den- tifying the ways a firm might position itself a part from the masses is a c hallenge. Kim an d Mau borgne ma ke headway on t his im portant quest ion . Creating Competitive Advantage: Creating and Sustaining Superior Per -rr formance , by Michael E. Porter. 198 5; reprint, New York: Free Press, 1998 . Th is book is the companion to Competitive Strategy that focuses on y industr y- level analysis (see above). Here Porter zeros in on individual firms an d how to create competitive a dvantage. Many managers find it heav y reading, but for those who want to dig deeply into competitive strategy, it has valuable insights.

M anagement and Leadershi p Good to Great, Why Some Com panies Make the Lea p .  .  . and Other s Don ’t, by Jim Collins. New York: Harper Collins, 2001 . I often poll business managers in class about their favorite business boo ks. Han ds down , Good to Grea ttops the list. When asked why they t find it so special, they say they like the balance Collins finds between doing the right things strategically and getting the right peo ple on the bus to do the m. Leadership Is an Art, b y Max De Pree. New York: Currenc y/Do u- bleday, 2004.

De Pree writes wit h great con fid ence an d wis dom a bout leading a com pany, and in particular about involving and ins piring peo ple in the mission o f a business.

Identif ying Valuable Firm Resource s “Competing on Resources,” by David J. Collis and Cynthia A. M ont gomer y.Ha rva rd B usiness R eview , July 1, 2008 (originally pub - lished in July–August 1995). | 162 | Recommended Readin g W hen managers try to i denti fy t he core com petences in t heir firms, they often produce long, undifferentiated laundry lists. This article dis - cusses what makes certain kinds of resources valuable, and wh y it is im portant to have suc h resources as part o f your strategy . Chasing Stars: Th e Myth of Talent and the Portability of Performance , by Boris Groysberg. Prince ton, NJ: Prince ton University Press, 2010. Any manager who is tempted to blithely say that “people are ou r company’s most valuable resource” should read this book. The research fully acknowledges the many contributions of individual performers but shows w hy t hat ta lent must be seen as part o f a larger business system, not something separate from it . Dealin g with Technolo gical Chan ge “Meeting the Challenge of Disru ptive Change,” by Clayton M. Ch ristensen an d Mic hael Over dorf. Harvard Business Review , Marc h 1, 2000 . Christensen’s research on disru ptive technologies counts among the most influential management ideas of the last twenty- five years. Th is article is a good introduction to his work and includes references to his other articles and books.

IKEA Leadin g by Desi gn— The IKEA Stor y, by Bertil Torekull. New York: Harper Business, 1998 . Th is is the authoritative biogra phy on Ingvar Kam prad, the foun d- ing of IKE A, 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 entre preneur, often in his own words, and a lot of informa - tion about the role that purpose plays at IKE A. It includes the doc u- ment “A Furniture Dealer’s Testament,” which la ys out IKEA’s guidin g princi ples in detail. Recommended Read ing | 163 | Gucci Th e House of Gucci: A Sensational Story of Murder, Madness, Glamour, and Gree d, by Sara Gay Forden. New York: Perennial, 2001.dd Th is is the story of a family business and a family saga so strange t hat it seems like fiction. Be yon d its entertainment va lue, t he boo k shows how eas y it is for a firm to drift off course over several gener a- tions, an d w hy fami ly dynamics can a dd anot her layer o f challenge to mana gemen t. Apple Return to the Little Kingdom: Steve Jobs, the Creation o f Apple, and How It Changed the World , by Michael Moritz. New York: Overlook dd Press , 2009 . There are many terrific books on A pp le that cover various products or perio ds in t he deve lopment o f the firm. W hat I like a bout t his one is that it gives an unvarnished look at Apple’s earliest years— what i t was reall y like— and what was workin g and what wasn’t. A foreword puts that in context of more recent develo pments (Moritz’s original book on Apple, Th e Little Kingdom , was published in 1984 ). Entrepre - neurs who are starting out may find it ins piring to see how humble i t all was at t he start. Steve Jobs’s Stanford University commencement speech, June 14, 2005.

Text: news.stanford.edu/news/2005/june15/jobs- 061505.htm. Video: w w w.youtube.com/watch?v=D1R- jKKp3N A.

In this s peech, titled “Live Before You Die,” Jobs discusses some of t he pivota l points in his life. ENDNOTES Intro duction: Wh at I Learne d in Offi ce Hour s 1. Th is 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). Ch apter 1: Strategy an d Lea ders hip 1. Ronald A. Heifetz and Marty Linsky, Leadership on the Line (Boston:e Harvard Business School Press, 2002), pp. 53–54 . Chapter 2: Are You a Strategist ? 1. This discussion draws from Michael E. Porter, C ynthia A. Mont gomer y, and Charles W. Moorman, “ Th e Household Furniture Industry in 1986,” “Masco Corp (A),” and “Masco Corp (B),” Harvard Business Publishing, Boston , 1989.

2. Besi des faucets, Masco ma de p lum bing fittings, bathtubs an d whirlpoo ls, builders’ hardware, venting and ventilating e quipment, insulation pro ducts, water pumps, weig ht- distri buting hitches, winc hes, o ffice furniture, brass giftware, and plasticware . 3. Porter, Montgomery, and Moorman, “ Th e Household Furniture Industry in 1986,” pp . 1, 5–6 . | 166 | Endnotes 4.Wall Street Transcript, August 24, 1987.

5. Masco Annual Report, 2001 . 6. Jose ph Serwach, “Masco COO Follows Unit,” Crain ’s Detroit Busines s, May 27, 1996, p. 3 . Chapter 3: The Myth of the Super- Manage r 1 .Richard Farson, Management o f 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 Com panies; Not Anymore,” Financia l Worl d, October 24, 1995.dd 3. “Mengel Com pany (A),” Harvard Business School, 1946.

4. M ichael E. Porter, “Understanding Industry Structure,” Harvard Business School course note N9- 707- 493, Au gust 13, 2007 . 5. Th is discussion of industry forces draws heavily on the seminal work of M ichael E. Porter, inc luding Competitive Strategy (New York: Free Press,y 1998 ) and “The Five Com petitive Forces That Sha pe Strategy,” Harvar d B usiness Review , Januar y 1, 20 08 . 6. Large sam ple studies have found that industry effects across the economy on average account for between 10 an d 19 percent o f 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, lod ging/entertainment, and ser vices, industr y accounts for ove r 40 percent of variance in firm profitability. In agriculture/mining and transportation, industry accounts for 39. 50 percent and 29.3 5 percent, respectively, of variance. See A. M. McGahan and M. E. Porter, “Ho w Much Does In dustr y Matter, Rea lly?”Strategic Management Journal ,ll Summer 1977, pp . 15–30.

7. This framework is due to Porter. See above . 8. Jack Welch, interviewed by Christo pher Bartlett on December 16, 1999, Harvard Business School Media Ser vices, Tape No. 10095.

9. Warren Buffett, Brain y Quote.com, accessed Au gust 15, 2011. 10.W. Chan Kim and Renée Mauborgne, Blue Ocean Strate gy: How to Create Uncontested Market Space and Make the Com petition Irrelevan t (Boston: Harvard Business School Publishing, 2005 ). 11. Rein gold, “The Masco Fiasco. ” Endnote s | 167 | Cha pter 4: Begin with Pur pose 1. “IKE A: How the Swedish Retailer Became a Global Cult Brand,” BusinessWee k, November 14, 2005.

2. Bertil Torekull ,Leading by Design: The IKE A Story (New York:y HarperBusiness, 1999 ), p. 10. The book was originally published in Sw eden as Historien om IKE A (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: Harper Collins, 1997), pp. 181–207.y 7. Torekull,Leadin g by Desi gn, p.  50. 8. IKEA 2010 Annual Re port.

9. Ellen Lewis , , . 5 <, (UK: Marshall Cavendish, 2008) p. 39. < < 10. Ingvar Kam prad, “A Furniture Dealer’s Testament,” quoted in Torekull, Leadin g by Desi gn, p.  228 .

11. I bid., pp. 228, 231. 12 . Th ese estimates are for 2004–2009 and come from “IKEA: Flat- pack Accountin g,”The Economist , May 13, 2006 (estimates net profit margin of nearly an 11 percent return for 2004 ); Kerry Ca pell, “IKEA: How the Swe dish Retai ler Became a Gl obal Cult Bran d,” Business Week, Novem ber 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’ Pro fits for 2010, ” Loca l, Swedish edition, February 22, 2010ll (estimates net profit margin of 22.9 percent for 2009).

13.

Rodd Wa gner an d James K. Harter, The Elements of Great Managing (Washington, DC: Gallu p Press, 2006 ), p. 117 . 14. Mic hael Por ter ma kes a stron g ar gument a bout t he va lue o f tra de- o ffs in strategy. See “What Is Strategy?” Harvar d Business Revie w, 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 Har var d Business School an d are base d on t he pioneering wor k of Adam Brandenburger, Barry Nalebuff, and Harborne Stuart. See A.

M. Bran denburger an d H. W. Stuart, “Va lue- Base d Business Strate gy,” Journal o f Economics and Management Strateg y 5 (1996 ), pp . 5–24. Based | 168 | Endnotes on a suggestion by Adam Brandenburger, and to create a parallel with the line labeled “Wi llingness to Pa y,” I label the bottommost line on the chart “Willingness to Su pp ly” (not “O pp ortunity Cost,” as in the Brandenburger and Stuart article). These ideas are also developed in A. M. Brandenbur ger and B. J. Nalebuff, Co- o petition (New York:

Doubleday, 1996) . 17. Ibid. 18. Moon , “IKEA Invades America.” 19. Pa n kaj Gh emawat an d Jan W. Riv kin, “C reating Competitive Advantage,” Harvard Business School course note 798- 062, Februar y 25, 2006, p. 7. 20 .Th is wonderful question arises from a discussion in Brandenburger and Nalebuff , Co- opetition , p. 47ff, where they discuss, among other things, the c lassic movie It’s a Wonderful Life and ask “What is your added value?”e 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, “G ucci Group in 2009, ” January 14, 2009 . 2.Sara Gay Forden, The House of Gucc i (New York: Perennial, 2001 ), p. 251.

3. The idea to illustrate Gucci’s development over time in this way is drawn from Davi d Yo ffie’s origina l teac hing plan for t he Gucci case.

4. In “What Is Strategy,” Harvard Business Revie w, November–December 1996, p. 62, Porter intro duces t he idea o f a Pro ductivity Frontier to identify firms in an industry that are best in class. A firm’s particula r location on t he frontier i denti fies its positioning in t he in dustry; i f a firm is off the frontier it means either that its costs are too high or its nonprice- buyer va lue delivere d is too low, re lative to ot her p layers in t he industry. Th e charts used in this cha pter are ins pired by Porter’s work, but the titles and axes ha ve been modified . 5. Forden, The House of Gucci , p. 119 . 6. Luisa Zargani, “ True Confessions,” Women’s Wear Dail y, June 5, 2006, p. 30.

7. Forden ,The House of Gucci , p. 63. 8. I bid., p. 110 . 9. Ibid., p. 155 . Endnote s | 169 | 10. As quoted in David Yoffie, “Gucci Grou p N.V. (A),” Harvard Business Pu blishing, January 14, 2009, p. 3. 11. Forden, The House of Gucc i, p. 142 . 12. Yoffie, “Gucci Group N.V. (A),” p. 7 . 13. Forden, The House of Gucci , p. 16 7.

14. It was soon the end of Maurizio, too. A year and a half later he was murdere d by a hit man hire d by his ex- wi fe. 15. Author’s interview with De Sole, August 10, 2010.

16. I bid. 17. Ibi d.

18. Yoffie, “Gucci Group N.V. (A),” p. 9 . 19. Ibid. 20. Forden ,The House o f Gucci , p. 2 55.

21. Ibid., p. 2 59.

22 . Gucci.com, under Gucci history, 1990s.

23.

Credit Suisse First Boston Equity Researc h, “G ucci Group N.V., ” Marc h 9, 2001 , p. 3.

24. Lauren Goldstein, “Style Wars, ” Time , April 9, 2001.

25. Amy Barrett, “Fashion Model: Gucci Revival Sets Standard in Mana ging Trend- Heav y Sector: Italian House Buffs Brand b y Foc usi n g on Quality, Exclusivity and Image— Hidden Costs of Cachet?” Wall Street Journal Europ e, August 25, 1997.

26. For den, The House of Gucci , p. 18 5.

27. Ibid., p. 142.

28. Author’s interview with De Sole, August 10, 2010 . 29. Credit Suisse, “Gucci Grou p N.V.,” p. 14 . 30. Author’s interview with De Sole, August 10, 2010.

31. Credit Suisse, “Gucci Grou p 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, Au gust 10, 2010 . 36. Porter, “What Is Strategy?” 37. Author’s interview with De Sole, August 10, 2010 . 38. Forden ,The House of Gucc i, pp . 322 –24. 39. Wall Street Journal , March 6, 2003.ll 40 . Author’s interview with De Sole, August 10, 2010. | 170 | Endnotes 41.“Th e Turnaround Cham p of Haute Couture,” Fortun e, November 12 , 1997, pp. 30 5–6.

42. Porter makes this point persuasively in “What Is Strategy? ” Ch apter 6: Own Your Strateg y 1.Th e strategy exercise described here, in particular the section on deve loping a strategy statement, owes a great tri bute to t he wor k of my late colleague Michael G. Rukstad. A posthumous article describing that wor k, Davi d G. Collis an d Mic hael G. Ru ksta d’s “C an You Say What Your Strategy Is?” was published in the Harvar d 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 Strate gy,” Ju l y 13, 2006, column accessed via Searchcio.com, Au gust 31, 2011 .

3. http://w w w.pg.com, accessed August 31, 2011 . 4. htt p://w w w.nike.com, accessed Se ptember 22, 2007 . 5. http: //w w w.google.com, accessed September 22, 2007 . 6. tt p://w w w.bmwgrou p.com, accessed January 6, 2011 . 7. E lzinga, Kennet h G. an d Davi d E. Mi lls, “Leegin an d Precompetitive Resale Price Maintenance,” The Antitrust Bulletin Volume 55, no. 2, summer 2010 . 8. I bid. See also: Steph en La baton, “C entury- Old Ban Li fted on Minimum Retail Pricing,” New York Time s, June 20, 2007 . 9. ht t p: //w w w.FourSeasons.com, accessed September 22, 2007 . 10. “About the Economist Grou p,” ht t p://w w w.Economist.com, accessed August 31, 2011 . 11. htt p://w w w.Doctorswithoutborders.org, accessed July 12, 2011 . Chapter 7: Kee p It Vibrant 1. David Yoffie has developed a series of excellent Apple cases over the years t hat a llow executives to examine t he com pany an d the in dustry as it was at various points in time. See, for exam ple, “ App le Inc in 2010,” “ Apple Computer, 2006,” “ Apple Computer in 2002,” “ Apple Compute r 1995,” and “Resha ping A pp le’s Destiny— 1992,” Harvard Business Pu blishing, Boston . Endnote s | 171 | 2.Michael Moritz , Return to t he Litt le King dom (New York: Overlook Press, 2009), p. 183. In 1984 Moritz published his original history o f A pp le, The Little Kingdom . 3. Alan Deutschman ,The Second Comin g of Steve Job s (New York: Broadway Books, 2000 ), p. 54.

4. Moritz , Return to the Little Kin gdom , p. 194 .

5. Ibid., pp. 217–18.

6. Ibid., p. 242.

7. Ibid., p. 2 57.

8. Ibid., p. 276.

9. I bid., p. 206.

10. Ibid., p. 268 . 11. Ibid., p. 304.

12. Je ffrey S. Youn g an d Wi lliam L. Simon, i Con (Hoboken, NJ: Wile y, 2005), p. 80 . 13. Owen W. Linzma yer, App le Confidential 2. 0 (San Francisco: No Starch Press, 2008 ), pp . 77–78 . 14 .Lee Butc her, Accidental Millionaire: The Rise and Fall of Steve Jobs at A pple Computer (New York: Knightsbridge, 1990), p. 174.r 15. Youn g and Simon, iCon, p.  70. 16. Linzmayer, App le Confidential 2.0 , p. 154 . 17. Mor it z ,Return to the Little Kin gdom, p. 332 . 18. Linzma yer, App le Confidential 2.0 , p. 1 57.

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 Cu pertino,” Fortune , March 3 , 199 7, p. 100 . 24. Linzmayer, App le Confidential 2.0 , pp . 263 –69. 25.Joseph A. Schumpeter, Capitalism, Socialism and Democracy (1943;y reprinted, Taylor & Francis e- library, 2003 ), p. 84 . 26. Bear Stearns, “Com puter Hardware,” E quity Research, July 2002 . 27.Peter Ro jas, “W hy IBM Sold Its P C Business to Lenovo, ”Engadge t, January 1, 2005.

28. Moritz, Return to the Little Kin gdom , p. 299.

29. I bid . | 172 | Endnotes 30. Quoted in Linzmayer, Apple Confidential 2.0, p. 247.

31. I bid.

32. Deutschman, The Second Coming of Steve Jobs , pp . 54–55 . 33. Linzmayer,Apple Confidential 2.0 , p. 210.

34. Moritz, Return to t he Litt le King dom , p. 14.

35. Quoted in Deutschman, The Second Comin g of Steve Job s, p.  183 .

36. Quote d in Linzma yer, App le Confidential 2.0 , p. 212 . 37. Adam Lashinsky, “ Th e Decade of Steve,” Fortun e, 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 ,Februar y 19, 1996 ). 40. Quoted in ibid., p. 176 . 41 .Lashinsky, “The Decade of Steve,” p. 95.

42 . Deutschman , The Second Comin g of Steve Job s, p.  249. 43. Linzma yer, App le Confidential 2.0 , pp. 29 5–98.

44 .Leander Kahney, Inside Steve’s Brain (New York: Portfolio , 2008 ), pp. 18 5–88.

4 5.Quoted in Steven Lev y, The Perfect Thing (New York: Simon & Schuster , 2007), p. 51 . 46 . Quoted in Lashinsky, “ Th e Decade of Steve,” p. 96. Original in Time magazine in early 2002 . 47. “Shi p of Theseus,” Wikipedia, accessed Au gust 19, 2011.

48 .Levy, The Per fect Thing, pp. 73–74 . 49. I bid., p. 3 . 50 .App le 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., “Win dows P hone 7 Off to a Slow Start in Fourt h Quarter, as Android Smart phone Market- Share Lead Increases,” press release, January 31, 2011 . Chapter 8: The Essential Strategis t 1 .Heike Bruc h an d Sumantra Gh oshal, A Bias for Action: How E ffectiv e Managers Harness Their Willpower, Achieve Results, and Stop Wasting Tim e (Boston: Harvard Business School Press, 2004) . Endnote s | 173 | 2. Ste phen R. Covey, The Seven Habits of Highly Effective People, New Yo r k : Fireside /Simon & Schuster, 1989 . 3. Richard Swedberg, “Rebuilding Schum peter’s Th eory o f Entrepreneurship,” Cornell University, March 6, 2007, p. 7.

4. Schum peter, 1911, as quote d in i bid., p. 7. 5. Swedberg, “Rebuilding Schumpeter’s Th eory of Entrepreneurship,” p. 8. These are Swedberg’s words explaining and summarizing wha t Schum peter had written . 6. Seymour Tilles, “How to Evaluate Corporate Strategy,” H arvard Business Revie w, July–August, 1963.

7. Jean- Pau l Sartre, “Existentia lism an d Humanism, ”Basic Writin gs, edite d by Ste phen Priest (Florence, KY: Routledge, 2001 ), p. 42 . 8. Ibid., p. 29.

9. He lmut h von Mo ltke, quote d in Clausewitz on Strategy: Ins piration an d Insi ght from a Master Strate gist, edited by Tiha von Ghyczy et al. (Ne w York: Wiley, 2001), p. 55.

10. Martha C. Nussbaum ,The Fragility of Goodness: Luck and Ethics in Greek Tragedy and Philoso phy (Cambrid ge: Cambrid ge Universit y Press, 2001), p. 59 . 11. Ibid., p. 80.

12. htt p://www.brainy quote.com . 13. Max De Pree , Leadership Is an Ar t (New York: Currency/Doubleday, 2004 ), p. 100 . 14. Th omas J. Saporito, “Every CEO Needs an Executive Listener,” Forbes Lea ders hip Forum, Ju ly 21, 2011 . 15. De Pree , Leadership Is an Ar t, p. 102 . 16. De Pree, Leadershi p Is an Art, p. 18.

17. C. Roland Christensen, Kenneth R. Andrews, and Jose ph L. Bower, in t heir text book on genera l mana gement, Business Polic y: Text and Case s (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 “guar dian o f organizationa l purpose ” because it encom passes both formulation and im plementation, and because it im plies a more ongoin g responsi bilit y . 18. Th is is reminiscent of the advice Rainer Maria Rilke gives in his classic Letters to a Youn g Poet . | 174 | Endnotes 19. Robert Nozick, “ Th e Ex perience Machine,” in Anarchy, State, and Utopi a (New York: Basic Books, 1974), pp. 42–45.

20. Ibid.

21. David Baggett and Shawn Klein, Harry Potter and Philosophy: If Aristotl e Ran Hogwart s (Chicago: O pen Court, 2004 ), cha pter 7, “The Ex perience Machine: To Plug In or Not to Plug In.” Th is essay talks about an authentic life as one t hat is active ly live d. 22. See final endnote in Cha pter 4. Th e first question here— about what the wor ld wou ld be like wit hout your business— is from Bran denburger an d Nalebuff ’s book , Co- opetition.

Fre quently Asked Question s 1. IKE A 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, S TØR was unable to operate profitably and approached IKE A for help. IKE A acquired the firm in 1992.

2.Christo pher Brown- Humes, “An Em pire Built on a Flat- Pack ,” FT. c o m , Novem ber 23, 2003, p. 1 . 3. Sa porito, ibid., “Every CEO Needs an Executive Listener.” INDEX A Ag uiluz, IX, Amable “Mi guel,” 93–9 5, 14 4 – 4 5 Ink for Less Professional (busi- ness customer division ) and , 10 4 , 10 6 Ink for Less strategy statemen t an d, 102 airline industr y average profitability of, 2 6 firm effect , 47 Ho w Firms Differ: Firm Effects in Four Di fferent In dustries , 48 Ajayi, Richard, 82 Allen, Paul, 11 3 Altria tobacco, 47 Amazon, 110 Amelio, Gil, 118–19 AmREI T, 85–87 AmREIT P ortfolio: D emo- graphic Positioning, 86 broke r- deale r bus iness shut - down an d, 10 4 , 14 0 formu lating a strategy state - ment, 8 5 Irre placeable Corner Criteria, 86, 87 metrics (data ) over intuition and , 85 –86 slogan of (“Irreplaceable Corner Company” ), 85, 8 6 team approac h an d imp lement - ing management strategies, 143 App le, 110 –31, 170 –71n 1 Amelio leads, 118–19 App le II, 111–12, 120 Apple III as first failure, 113, 12 0 arro gance of, 121 competition an d, 12 9 creative destruction an d, 120 , 127 customers and, 112, 114, 125 “difference that mattered ” and, 112, 12 4 digital hub strate gy , 125 evolution of industr y and chan ge in strate gy , 129 , 130 –31 , 141 FireWire , 126 functiona l advantages over ot her early com puter ma kers, 112 iCl ou d, 128, 12 9 iMac, 124–2 5 iM ovie, 126 iPad , 128 , 129 iPhone , 127–28 , 12 9 iPo d, 126 , 127 , 12 8 iTu n e s , 125 , 127 | 176 | Index App le (cont. ), Jo bs leaves com - pany, 116 Jobs returns, 119, 124, 130–31 Jobs revives and recreates com - pany, 124–31 Lisa, technolo gy advances and marketing problems, 114–1 5, 120 loss o f a difference t hat mat- tere d, 119–22 Macintosh, 114, 115–16, 117, 1 20 Mac OS , 119 , 125 , 12 6 mana gement st yle chan ge, 124 market share slide , 11 7 market value (198 0 ), 112 market value (2010) , 128 name c hange an d shrin king com puter business, 128 Newton PDA, 11 7 NeX T purchased by, 119, 12 3– 24 proprietary technolog y and, 113, 114, 118 purpose change at (2001 ), 125, 127 purpose out o f sync wit h in dus- try forces, 121–2 2 purpose statement (1980), 111 recommended readin g, 163 retail stores , 125 Sculle y leads, 11 5–16 , 117 Spindler leads, 117–18 Stoc k Price c hart , 128 super- manager era, 116 –19 , 121 Arnault, Bernard, 7 5 B Beatrice Foods, 2 5 Bias for Action, A (Bruch and Ghoshal), 13 5 BMW statement of purpose, 84 value creation and , 55 BP (British Petroleum ), 87 Brandenburger, Adam,165n 1; 168n 16, 1 7, 20; 1 74n 2 2 Bridge Clinic, The (Nigeria), 82 Brighton Collectibles (formerl y Leegin), 88–92, 13 8 identif ying the customer, 88–90 legal battle to protect pricing, 90 system of value creation, 90–91, 9 2 Browne, John, 8 7 Bruch , Heike , 13 5 Bu ffett, Warre n com petitive forces an d, 30–31, 36 “economic moat,” 74 maxim , 24 myth of the super- manager and, 30 port folio, furniture investments, 32 Burlington Industries, 2 5 BusinessWee k: on IKEA, 39 C Champion International, 2 5 Ch ampy, James, 81–82, 170n 2 , Ch ane l, 6 0 Cirque du Soleil, 31 strategy o f, 31–3 2 Index | 17 7 | colleges, c hanging economic mo dels for, 12 9 Collins, Wesley, 18 Collis, David J., 161, 170n 1 com petition. See also speci fic busi - nesses anal yzin g rivalr y amon g firms, high to low, 28 Apple a nd, 113, 117, 118, 119, 120 , 121 , 129 Bu ffett ’s economic moat an d, 74– 75 creative destruction and, 119, 1 20 furniture industr y, 18, 29, 53 Gucci and , 59–60 , 60 , 71 , 72 , 74 IKE A and , 41 , 44 , 53 , 155–56 Ink for Less an d, 94, 104, 106 in dustry forces an d, 2, 27, 2 8 Lance! an d, 96, 10 6 leadershi p and, 134 purpose and, 11, 65 Southwest Airlines and , 31 , 47 strate gy statement, 99, 1 57– 58 competitive advantage, 4, 4 7 company ’s purpose an d, 4, 46–4 7 intangibles and, 74–75 M asco ’s in faucets, 34 non profits and, 15 1 role of scarcit y, 7 4 strate gy as lon g- run, sustainable competitive advantage, 111, 129, 130 computer in dustry, 128. See also App le; IBM creative destruction an d, 120 Dell an d, 12 0 deteriorating o f, 121 disa pp earance o f long- time play- ers in, 120 pricing and, 12 2 two su pp liers dominate, 12 0 Consolidated Foods , 25 core competencies, 162 Covey, Stephen, 13 5 creative destruction, 119–20, 12 7 Credit Suisse, 68, 70 Cullen, Ann, 154 customer s App le and, 111, 118, 125 Bri ghton Collectibles and, 88–90 , 92 differentiators and , 52, 155 furniture in dustry, 18–19, 29, 34 , 55 Gucci and, 57, 59, 60, 60 , 61 , 64, 65, 65 , 66, 6 7,6 7, 68, 70, 77 73, 73 , 96 identif ying, 88–8 9 identif ying new, 70, 73, 104, 10 6 identity o f company, purpose, and , 11 , 49 , 50, 51, 56, 96 , 137, 1 57– 58 IKEA and, 40, 41, 43, 46, 52, 53, 55 industry forces and, 27, 28, 32 Ink for Less and, 93, 94, 95, 95 , 10 4 , 10 6 Masco failure and , 34 , 46 power o f, ana lyzing, 28 profit frontier and, 59–60, 60 , 65 , 65 ,67 | 178 | Index customers (cont. ), strategy and, 53, 82, 93, 96, 101, 105, 107, 137 strategy wheel and, 73 ,92 Strate gy and Added Value chart, 53 team contact with , 141– 4 2 willingness to pay and value creation , 54,54 , 55, 59, 60 , 64 , 65 ,67 D Dahlvi g, Anders, 15 6 Deifell, Ton y, 146 Dell, Mic hael, 124 Dell Computer, 12 0 de Mattos , Wa lter , 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, 14 6 Deutschman , Alan , 122 diffe rentiation IKEA and, 51–52, 55 innovation to create, 5 2 purpose and, 4, 39, 51–5 2 strate gy and, 4 7 differentiators , 154–5 5 Disne y intan gibles and, 7 5 Pixar an d, 123 value creation and, 55 Doctors Wit hout Bor ders , 98–99 E economic rents, 119 Economist ma gazine, 98, 9 9 Eliot , T. S. , 14 6 Entre preneur, Owner, President program (EOP ), Harvard Business School , 7, 14 9 artic le by Ro bert Nozic k an d, 14 5 ch anging view o f strategy an d, 1, 4 closin g session, 143 company leader as strategist and, 3–4 competition for best strategy, 11, 12 dramatic insig hts a bou t partici pants ’ businesses, 82–8 3 identifying purpose and, 1 1 motivation of partici pants , 9–1 0 Oliver’s poem and Portrait Proj - ect , 14 6 , 147 orientation , 7–9 , 14 overview o f program, 9 partici pants, 8–9 strategy course, 10–1 1 strategy vs. execution discussion, 77 –78 as transformative , 14 website , 149 writin g down c lear statemen t of purpose for t he company an d, 81 existentia lism, 137–3 8 Index | 179 | F fashion industry, 58. See also Gucci Desi gner Fashion Industr y:

Gucci 1975 , 60 Desi gner Fashion Industr y:

Gucci 199 5, 65 Designer Fas hion In dustry:

Repositioning Gucci, 6 7 positioning com pany in, 64 –66 profit frontier, 59–6 0 “Finding Information for In - dustr y Anal ysis” (Rivkin and Cullen ), 15 4 firm effect , 47 How Firms Differ: Firm Effects in Four Di fferent In dustries , 48 purpose an d creation o f, 49 focused firms, 154–55 Ford, Henr y, 129 Ford , Tom , 64 , 66 , 68 , 69 , 71 , 72 , 76 Four Seasons Resorts , 97–98 furniture industr y, 16, 17–19. See a lso M asco Corporatio n Bu ffett ’s investments in, 32 com panies t hat trie d an d failed in, 25 Furniture Retailin g: Net Profi t M argin 2003–2010, 48 IKE A and , 39– 46 , 55 industr y forces, anal yzin g, 28 –29 industry forces in, 17–18, 29, 34, 40 management in, 18 Masco ’s acquisitions o f existing com panies, 20 Masco’s ex pansion into, 15–22, 24 Mengel Com pany case and, 24– 25 price- points and, 33–3 4 problems in, as opportunities o r re d flags, 1 9 Re lative In dustry Pro fitabilit y:

1990–2010 gra ph , 2 6 scale economies an d, 3 4 G Gates , Bill , 113 –1 4 Gatorade , 75 General Electric (GE), 30 General Housewares, 2 5 Georgia Pacific, 25 Ghemawat, Pankaj, 160, 168n 1 9 Ghoshal, Sumantra, 135 “ goin g back to the core,” 69 Goo gle Android soft ware , 129 statement o f purpose, 84 Gucci, 57–7 8 Aldo’s credo, 59 bran d identity an d re positioning of, 7 0 choices that involved trade- offs, 73 –74 company histor y, 58–6 1 customers and , 57, 59, 60 , 60, 61, 64 , 65, 65, 66 , 67, 67, 68,77 70, 73, 73 , 96 Designer Fas hion In dustry: Gucci 1975, 60 | 18 0 | Index Designer Fas hion In dustry: 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 o f strategy, 77 fami ly turmoi l an d overex posure o f bran d, 61–6 2 implementing redefined pur- pose, 70–72, 13 9 intan gible assets and, 75 Investcorp and, 62, 64, 69 mana gement chan ge (under De Sole ), 72 , 76 –7 7 marketing, 71 M aurizio Gucci buyout an d leaders hip, 62–64, 69, 70, 7 4 PPR bu yout, 75–76 pricing, 68 product and re positioning of, 7 0 as publicly traded company, 6 8 purpose clarified, reinvented, 64–66 , 69 , 73, 110 , 12 7, 14 2 rallying team to su pp ort pur- pose, 66 , 142 –43 recommen ded rea ding, 163 restoration of brand, 62–64 stores , 70 –7 1 strate gy and, 78 strate gy as s ystem of value cre - ation and , 72–77 ,73 , 88 supp liers an d, 67–68, 71 takeover attem pt, 7 5 turnaroun d 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 , Va s c o , 59, 60 Guimaraes , Ped ro , 50– 51 Gulf + Western, 2 5 H health care sector , 12 9 Hermès , 60 , 67 , 71 I IBM, 111, 113, 117, 118 market innovation an d, 120 sale of PC business, 12 0 IKEA , 69 , 142 , 167n 1 2 Business Weekon, 39 customers , 53 a difference t hat matters an d, 40 differentiation and, 51– 52, 55 evo lution an d change in strateg y an d, 110 furniture design and, 44 Furniture Retailin g: Net Profi t M argin 2003–2010, 48 , 167n 1 3 growth of, 43 imitators of (STØR ), 155–56 , 174n 1 “inciting inci dent ” of boycott, 42–4 3 industry forces and, 4 0 innovation and, 5 2 Index | 181 | Kam prad’s ph iloso ph y, 41– 42 lean manufacturing, 5 3 marketing and, 5 2 name reco gnition and, 5 5 ori gins of, 41 packaging, 43, 52, 53, 55 pricing, 43–44, 46, 53 purpose: a concep t company, 4 5–46, 57 purpose as core organizing prin- ci ple, 53 purpose as ennobling and, 4 9 recommended readin g, 16 2 store desi gn, 40, 44–45, 53 strate gy and, 78 suppliers, 42–43, 55 value creation at , 52, 55 Imperial Tobacco, 47 “inciting inci dent, ” 42–43 industry analysis, 153–5 4 recommended readin g, 159–6 0 industr y effect, 27, 36–37, 47, 1 66 n 6 industr y forces, 2, 26–30, 39, 14 4 anal yzin g, 1 53– 54 Apple hurt by, 120 –2 1 avai lability o f su bstitute prod- ucts, 28 average profitability o f different industries, 26–27, 4 7 barriers to entr y and exit, 28 Cirque du Soleil and, 31–3 2 continuum of , from “Unattract- ive” to “ Attractive ,” 27–29 factors to consi der, 28–29 firm e ffect, 4 7 furniture business, 17–20 lesson o f in dustry e ffect, 36–3 7 opp ortunities or red flags, 19, 3 5 power o f customers, 2 8 power o f su ppl iers, 28 Relative Industr y Profitabilit y: 1990–2010 gra ph, 26 rivalr y amon g firms, 2 8 Southwest Airlines and , 31–32 Star buc ks an d, 31–3 2 Ink for Less, 93–9 5, 144–4 5 customers, 93, 94, 9 5, 9 5, 10 4 , 10 6 Human Resources and Training at Ink for Less, 95 Professional , 10 4 , 10 6 R&D, 94 statement o f purpose, 9 3 strategy statement, 102 innovation , 83 App le and, 12 5 being a fire starter an d, 134–3 6 creative destruction and, 119–20 differentiation and, 5 2 “economic rents” and , 11 9 fighting the status quo and, 1 35 –36 Four Seasons Hote l an d, 97 furniture in dustry an d, 18, 29 IKEA and, 5 2 industry forces an d, 2 8 M asco and, 16–17 Nike and, 8 4 resistance to , 13 5 Intel , 118 , 12 0 Intermark , 25 Investcorp, 62, 64, 69 | 182 | Index J Jobs, Steve, 110–3 1 App le’s purpose and, 11 5 arro gance of, 12 1 “difficult” re putation, 112–1 3 Disne y and, 123 education of, as strate gist, 122 –23, 124 failure as company leader, 116 “insane ly great ” tec hno logy an d, 111 Lisa develo pment and, 11 5 as multibillionaire, 123 NeX T and , 116 , 119 , 122–24 Pixar and , 123 proprietary technolog y and, 113 return to Apple, 119, 130 –3 1 revival and recreation of Apple, 124 –31 Sculley removes from A pp le, 116 K Kamprad, Ingvar, 39–46, 54, 138 , 14 6 “A Furniture Dealer’s Testa- ment, ” 46 philoso phy of, 41–4 2 statement of purpose, 45–46 Kay’s Kloset, 9 0 Kohl, Jerr y, 88, 13 8 L Lance! Sp orts Grou p, 96–97, 10 6 –7 strate gy statement, 101–2 leadershi p. See also strate gist bein g a “Man of Action,” 13 6 CEO as “ guardian of or ganiza - tional purpose,” 143, 173n 17 commitment and passion in, 13 5 communication and , 142 , 143 companies t hat lack leaders as strategists, 14 7–4 8 corporate re birt h or renewa l an d, 140–4 1 develo ping a system of strategy and , 141– 43 , 156 , 15 7 EOP program and new under - stan ding of, 14 4 executing strategy an d, 13 6 facing an d interpreting econom- ic rea lit y an d, 142–4 3 fighting the status quo, 135–36 fire starting an d, 134–36, 14 2 flexability, ada ptability and , 139 four basic questions confronted by, 133–3 4 frequency of strategy review, 1 58 getting a team on boar d, 141 – 43, 1 56, 1 57 maintaining strategic momen- tum and, 138–41 M ary Oliver po e m a nd , 14 6 , 147 meanin g of what a leader does, 14 6–4 7 motivation , 136 openness to new i deas, 134, 13 9 prioritizing time an d activities, 13 5 recommen ded rea ding, 161 setting a course for a com pany and choices, 136–3 8 Index | 183 | strategist as leader, 12–14, 133–48 strategy as a way of life and, 143–47, 174n 18 Zen stor y and, 13 4 Louis Vuitton company, 64, 66, 71 low- cost producers, 1 54– 55 Ludlow, 2 5 LVMH (Louis Vuitton Moët Hennessy), 75 M Manoo gian, Alex, 16–1 7 Manoogian, Richard, 1 5–22, 3 5, 39, 120, 142 Marc hese, Eugene, 83 Marc hese Partners, 8 3 Masco Cor poration, 15–22, 31, 32, 12 0 about the com pa ny, 16 –17, 165n 2 acquisitions o f furniture compa - nies , 20 com petitive a dvantage in fau- cets, 34 exiting furniture business, 22 expansion of business into furni - ture decision , 16 failure of ex pansion, 21–22, 2 4 failure to consider industr y forces , 17–2 0 , 29 , 40 myth of the super- manager an d, 23 –24 , 33 –36 purpose in furniture lacking, 46 strategic plan for ex pansion an d, 32 –35 success ful bran ds, 1 7 “Masco Fiasco, The” ( Financial Worl d), 35d McGahan , A.M. , 166n 4 McKee , Robert , 42 Mead , 25 Mello , Dawn , 63 , 64 Mengel Company, 24 –2 5, 32 Microso ft, 74, 113, 120, 126, 128 , 131 Win dow s, 118, 119 mission statement, 153 Moltke , Helmuth von , 138 music industr y, 126. See also Appl e N Nalebuff, Barry, 165n 1; 168n 16, 17, 20; 174n 2 2 Napoleon Bona parte, 14 2 National Semiconductor , 118 –1 9 Nike, 11 0 statement o f purpose, 8 4 nonprofits, 1 51 Nozick, Robert, 14 5, 146 Nuss baum, Mart ha, 13 9 O Ol iver, Mar y, 14 6 , 147 P pharmaceutical industry How Firms Differ: Firm Effects in Four Different Industries , 48 Piceu , Geoff , 82–8 3 Pinau lt, François, 7 6 | 184 | Index Pixar, 12 3 Disney an d, 12 3 IPO, 12 3 Jobs and, 123, 124, 126 strate gy statement of, 10 5 Toy Story and , 123 Plutarch , 127 Polaroi d, 12 9 Porter, Michael E., 2, 27- 28, 50, 59–60, 1 59, 16 0, 161, 16 5n 1; 166n 3,4,5,6,7; 167n 12; 170n 36, 4 2 Productivit y Frontier, 59–60, 1 68 n 4 three generic strate gies and, 1 54– 55 “Por t ra it Projec t, ” Harvar d Busi- ness Schoo l, 146 PPR (Pinault Printem ps Red - oute), 75–76 Procter & Gamble, 8 4 profit frontier, 59–60, 60 best in class and , 60 , 168n 1 6 purpose, 49– 56 AmREIT, purpose as steering strategy, 8 5–87, 86 ,87 articu lation o f, basic questions to answer, 99 BP ’s definition o f, 8 7 care and commitment to a busi- ness and , 50 CEO as “ guardian of or ganiza - tional purpose,” 143 , 173 n 1 7 ch oices t hat invo lve tra de- o ffs and, 50– 51, 67, 73–74, 103 clarity o f, 83–84, 10 3 competitive a dvantage an d, 4, 46–4 7 as core organizing princi ple, 52, 1 21 difference of business vs. others, 34, 56 differentiation and , 4, 39 , 51–52 , 8 5, 133 differentiation t hat matters an d, 53, 54, 1 55 “d oes your com pany matter ” question, 7, 40, 56, 103, 121, 12 7, 13 3 effective purposes, 49–5 2 elements of , 46 as ennoblin g, 49– 50 evo lution an d chan ge o f, 121 – 22, 134 examp les o f goo d statements, 84 existentia lism an d, 137–3 8 firm effect and, 49 “goin g back to the core,” 69 Gucci and , 64–6 6 identif ying, 11 i denti fying va lua ble firm re - sources an d, 161– 62 “identity- conferring commit -tt ments an d,” 73 IKEA and, 45–46, 49, 53, 57 im plementing, 57–78, 80 , 80–81, 96 (see also strategy wheel ) importance of, 13 8 Ink for Less , 93 meanin gful life and, 14 5–4 6 nonprofits and, 1 51 Index | 185 | out o f sync wit h in dustry forces problem, 12 1 putting a stake in the groundwith, 50–5 1 refinin g and clarif ying, 87–88 reinventin g, 4 Sartre’s “possibility of choice” and, 137–3 8 serving an unmet nee d an d, 47, 49 slogan that ca ptures, 85, 8 7 staying with original, 4 strate gy and clear statement of, 33 strate gy wheel and, 73 ,92, 96 success as result of a compelling purpose, 1 56 Th eseus’s boat as metaphor for c hanging, 127, 13 0 value creation and, 52–5 5 vision or mission statement vs., 1 53 writin g down, 81, 87, 9 9 R Re lative In dustry Pro fitabilit y:

1990–2010 gra ph ,26 Re ynolds American, 4 7 RHR International , 142 Rilke , Rainer Maria , 174 n 18 Rivkin, Jan W., 1 54, 160, 168n 1 9 Roc kwe ll Internationa l, 118 Ru ksta d, Mic hael G., 170 n 1 Ryanair, 47 S Sa porito, Thomas, 142, 15 7 Sartre, Jean- Paul, 137, 14 6 scarcit y, role of, 74, 133 as “economic moat ,” 74 Schumpeter, Joseph, 119, 127, 129 , 13 5, 136 , 138 , 173n 5 Scott Paper, 2 5 Sculley, John, 11 5–16 , 11 7 Sloan, Alfred, 129 soft drin k in dustr y Ho w Firms Differ: Firm Effects in Four Different Industries , 48 Son y, 126 Southwest Airlines , 47 strategy o f, 31 Sp indler, Mic hael, 117–1 8 Star buc ks, 3 1 strategy o f, 31 strate gist, 3 ada pt ing to change, 107, 110 –11, 130 , 131–32 , 134 , 139–40 (see also Jobs, Steve ) adapting to c hange, recom - men ded rea ding, 162 building stategic s kills, 81 com panies t hat lack leaders as strategists, 147–48 corporate rebirth or renewal and , 14 0 – 4 1 dail y decisions and, 1 1 “does your company matter” question, 7 economic factors to consi der, 28 –29 economic forces, predetermin a- tion of industry conditions as, 29–30, 36 –37 | 186 | Index strategist (cont. ), economic forces, understan ding o f, 27–3 0 effect on lower tiers in com pany, 11 exercise, a pp lying tools of strat - egy to one’s own business, 79–10 7, 170n 1 firm e ffect an d, 47 four basic questions con fronte d by, 133 –3 4 t he future as concern o f, 13 4 “identity- conferring commi t- ments and,” 73 implementing strategic think- ing, 80 , 80 as key to company, 4 leadership and role of, 3–4, 5, 12–14, 133–48 (see also lead - ershi p) lessons from A pp le’s ex perience, 119 – 22 number- one job of settin g an agenda and im plementing strate gy , 77 on- going role in implementation of strategy, 10 9 overcon fid ence an d myt h of the su per- manager, 23–24, 35 power o f rea lism an d, 36 –37 purpose and, 56, 78, 80–8 1 role to make a business matter , 56 Steve Jobs as, 110–3 1 test of strate gic think in g, 1 5–2 2 “what does it ta ke for t he com- pany to en dure? ” an d, 111 strategy Brig hton Collecti bles an d, 88 –92 ch ange, not stasis, an d, 129, 131–3 2 choices, unantici pated, 10 9 choices that in volve trade- offs and , 50– 51, 131 , 167n 1 2 clear c hoices an d, 103 clear ly define d, 81–8 2 as a com pany ’s cam paign in t he mar ketplace, 10 com petitive a dvantage an d, 4 7 confronting problems and, 1 03 –4 costs of unclear strate gies, 81–8 2 customer i denti fication an d, 88 defining moment, 2 4 as democratic process, 1 57 deve loping, duration o f process, 157 develo ping, ste ps in, 15 6 differentiation and, 4 7 discovering where the com pan y is now and , 65 “d oes your company matter ” question an d, 103 as duty o f company leader, 2, 3, 5, 12 (see also strategist) as dynamic, 13, 131–32 EOP program and, 4, 10–11 evolution and change, A pp le and , 110 –31 evolution and chan ge in, 110–11 exercise, app lying too ls o f strat- e gy to one ’s own business, 79–10 7, 1 70n 1 Index | 187 | formu lation vs. im plementation, 3 fre quency of review, 15 8 generic good practices and, 7 8 as grou p effort, 141–4 3 Gucci , De Sole , and , 57–7 8 Gucci’s and redefined purpose, 70– 72 hallmar ks o f great strategies, 103 Ink for Less and, 93–9 5 intangibles as particularly valu - able, 7 5 internal working ste ps of, 9 7 as job of specialists, 2–3, 13 as a journe y not a destination, 13 management an d, 76–7 7 Masco Corporation exam ple, 16 –22 , 32 –35 metrics (data ) over intuition and , 66 , 85–86 , 95–97 , 103 , 14 2–43 my ster y inherent in, 109–10 new perception of, 1, 2 Nuss baum ’s “fragi le integrity ” and, 139 o ld view o f: as long- run, sustain- abl e com petitive a dvantage, 47, 111, 129, 13 0 as or ganic, 4, 130 ori gins of word, 1 0 passion and, 103, 13 5 picking a winning playing field, 31 (see a lso industr y forces ) Porter ’s innovations, 2 Porter’s three generic, 154–5 5 positioning an d, 4 7 purpose, c larity nee ded in, 4, 78, 103 purpose, reinventing an d chang - ing the com pany, 4, 64–6 6 purpose, starting with statement of, 83–8 8 recommended readin g, 160–6 1 role o f scarcit y, 74, 133 serving an unmet nee d an d, 47, 49 statement o f, 97–10 2 stay t he course or move away, 4, 1 31 Strate gy and Added Value chart, 53 , 168n 16 strate gy w heel: Bri gh ton Col- lecti bles,92 strategy w heel: Gucci, 73 SWOT model, 2, 152, 15 2 team su pp ort for, 141–43, 156, 1 57 as traditionall y tau ght, 1–2 value creation and , 4, 49 , 72–77 , 73 , 78 , 88–91 , 103 , 130 , 139 , 155 as way o f life, 144, 174n 18 W orld War I genera ls, 3 3 writing down, 81, 109 ( see also strategy statement; strateg y wheel) strate gy statement, 97–102 articulation of company’s pur - pose and, 9 9 Doctors Wit hout Bor ders , 98 –99 Economist magazine, 98 | 188 | Index strategy statemen t (cont. ), Four Seasons Resorts, 97–98, 9 9 Lance! S ports Grou p, 101–2 mistakes in creatin g, 105 as public document, 157–5 8 qualities of, 100–101, 1 01 strate gy wheel, 92–93 Brig hton Collecti bles, 9 2 format, 91 Gucci, 73 implementing purpose an d, 7 4 Ink for Less, 93–94, 10 6 as internal com pany document onl y, 158 Lance! Sports Group, 96, 10 7 purpose a t cen ter, 73 reality check for, 9 5–97 unique to speci fic business, 92 “Style Wars” (Tim e), 69e “Summer Day, The” (Oliver), 147 super- manager myth, 23–24, 29–30 , 36 Apple and, 116–19 economic forces and , 27 , 30–3 1 M asco Corporation an d, 23–24, 33 –38 M engel Com pany and, 24–25 mi litary e quiva lent, 33 why it lives on, 31–32 Stuart , H.W. , 168n 16 suppliers Apple and, 121 availability of substitute prod - ucts , 28 com puters, two su ppl iers dom i- nate, 120 “d oes your business matter ” question and, 56 furniture in dustry, 2 9 Gucci and, 67–68, 71, 73, 7 5 IKEA and, 42–43, 55 Ink for Less and , 94 Porter on , 27 power of, analyzing, 28 Strate gy and Added Value chart, 53, 53 wi llingness to su ppl y an d va lue creation, 54 , 54, 5 5 Swanson, Ric k, 69 Swedber g, Richard, 135, 136, 173n 3 , , 1615 SWOT (Stren gths, Weaknesses, Opportunities, and Threats ) model, 2, 152 , 152 T Taylor, H. Kerr, 85–87, 104, 140, 14 3 tea ms AmREIT and implementing management strategies, 86 , 143 analyzing industry and, 1 53 Gucci, ra llying team to su pp ort purpose, 66, 142–43 on board with leader’s strate gy , 62, 141– 43 developing strategy and, 81, 1 56, 157 Th eseus’s boat story, 127, 130, 139 –40 Tilles, Seymour, 136–37 to bacco in dustr y Index | 189 | average profitability o f, 26 firm e ffect, 4 7 Ho w Firms Differ: Firm Effects in Four Different Industries, 48 To gnazzini, Bruce, 11 5 To r e k u l l , Bertil , 40 Toyota, 110 Twain, Mark, 100 U United Paint and Chemical , 82 –83 V Valentine, Don, 111 value creation, 4, 49, 52–5 5 BMW and, 5 5 Brighton Collectibles and, 91, 92 De Sole and Gucci , 58 deve loping a system o f, 88–91 Disney, 55 Gucci ’s strategy an d, 72–77, 73 how to do it, 5 5 IKEA and, 52, 55 Ink for Less and , 93–9 5 intan gibles and, 75 as priority for a business, 1 55 –56 purpose an d linkage wit h, 9 6 “the secret sauce ,” 90 Strate gy and Added Value chart, 53, 168 n 16 strategy an d, 4, 49, 72–77, 73, 78, 88–91, 103, 130, 139, 155 strate gy wheel and, 91 , 91–93 unique to s pecific business, 92 Value Creation: Expanding the Pie, 54 W al- Mart , 54 vision statement, 1 53 IKE A, 51–52 W W al- Mart , 74 value creation and , 54 W alton , Sam , 54 W elch, Jack, 30, 31, 3 6 W ilde, Oscar, 10 9 W orld War I, 3 3 W ozniak, Steve, 111, 112, 121–2 2 Y Yo ffie, Davi d, vi , 168n 1 , 3; 169n 10,12,18, 19, 34; 1 70– 71n 1; 1 71n 22 Young, Laura, 88, 138 Z Zen story (openness to new ideas ), 134 Visit www.AuthorTracker.com for exclusive information on your favorite HarperCollins authors.

Available from HarperAudio and HarperCollins e-books JaC k E T I l l U s T r a T IOn © a r C h Man/s h UTTEr s T OCk a UT h O r Ph O TOG r a P h © PETE r sI l v I a J a C k E T DEs I G n BY rOBI n BIlar D E l l O CYNTHIA A. MONTGOMERY is the Ti\fken Professor of Business ad\finistration and i\f\fediate for\fer head of the strategy Unit at harvard Busi- ness school, \bhere she’s taught for t\benty years.

For the past six years, she has led the strategy track in the school’s highly regarded executive progra\f for o\bner-\fanagers, attended by business leaders of \fidsized co\fpanies fro\f around the globe. sh e has received the Greenhill a\bard for her outstanding contributions to the harvard Business sc hool’s core MB a strategy course. Montgo\fery is a top-selling Harvard Business Review author, and her \bork has appeared in the \financial Times, \bmerican Economic Review , Rand Journal of Economics , S t r a t e g i c Management Journal , Management Science , and others. she has served on the boards of directors of t\bo Fortune 500 co\fpanies and a nu\fber of \futual funds \fanaged by Blackrock, Inc.

cynthia\fontgo\fery.co\f An Imprint of HarperCollinsPublishers www.harpercollins.com 9780062 071019 ISBN 978-0-06-2071\ 01-9 52799 A D v ANCE \bRAISE fOR “Cynthia Montgo\fery sti\fulates you as a business leader to be o\bner, creator, and ongoing ste\bard of your co\fpany’s strategy. I thoroughly enjoyed and highly reco\f\fend this book.” —Dr. Tom Cl Arke, pre SiDenT of new BUSine SS Ven TUreS , nike, inC.

“ Many of us \bill never get the chance to attend harvard Business school, \fuch less have the privilege of hearing a Montgo\fery lecture. But the full effect of Montgo\fery’s teaching style co\fes through loud and clear in The Strategist. But be\bare. Once you read this book, you too \bill beco\fe a strategy evangelist.” —miSS y pArk, fo UnDe r AnD Ceo of Ti Tle ni ne “ The Strategist d e b u n k s t h e \f y t h o f t h e su per-Manager, capable of overco\fing any and all co\fpetitive forces. Instead, it prescribes a clear road \fap to develop successful, custo\fized strategies for organizations and the people \bho lead the\f.” — Cr Aigie Zil DjiAn, Ceo of A VeDiS ZilDjiA n Comp Any “Full of \bisdo\f, intelligence, and —rare in this field —\foral purpose. The Strategist calls the business leader to his necessary duty as strategist-in-chief for the enterprise. Montgo\fery drives ho\fe the \bays strategy can give \feaning to \bhat co\fpanies do and to the lives of those \bho forge their corporate future.” —wA lTe r kieCHe l iii, AUTH or of The Lord S of S TraTe \fy “In this refreshing book, Montgo\fery brings out the strategist in each of us. Wher- ever you are in the \borld, as a student, teacher, or practitioner of strategy, you \bill find this book a joyful co\fpanion as you reinvent yourself and the \borld around you.” —A SH ok V ASUD eVAn , Co-foUnDe r AnD Ceo of T AST y B iTe “Montgo\fery’s approach to de\fystifying strategy is revolutionary. This book \bill \fake you sit up and take actions that \bill have a lasting and positive effect on your co\fpany. If you are ready for a life-changing journey, read on.” —peTe r Hen DerSon, CHA irm An of inDi go TeleCom CYNTHIA A.

MONTGOMERY