How The Mighty Fall


A Radically Simplified Approach

to Business Strategy

By Bruce Greenwald and Judd Kahn

Portfolio; 399pp; $26.95

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Editor's Review

Four Stars
Star Rating

The Good A compelling argument that big companies face daunting challenges to growth.

The Bad The authors tend to underestimate managers' ability to reinvent their companies.

The Bottom Line Case studies and sharp analysis make this a book worth pondering.

Wal-Mart Stores Inc. (WMT ) has become a beacon for bargain-minded shoppers, even as its daunting market power and controversial management practices have made it a lightning rod for criticism. Investors, though, see a once innovative outfit whose stock has been flatlining for at least five years.

Profitability has slipped since the chain began a national expansion in the mid-1980s. More recent pushes abroad have produced disappointing returns. What could Wal-Mart have done to grow and avoid the disappointments? "Probably not much," argue Columbia Business School professor Bruce Greenwald and investment manager Judd Kahn. Given its competitive landscape, they say, the company's fate was to move "from great to good."

To fans of the still fabulously powerful retailer, that view may seem harsh. But Greenwald and Kahn, authors of Competition Demystified, have seen too many titans rise and inevitably fall to be all that bullish. In this take-no-prisoners look at corporate strategy, the pair dissect such ambitious but ill-fated stumblers as Coors (TAP ) and Coca-Cola Co. (KO ) and warn about the future of such powerhouses as News Corp. (NWS ) They argue that entrenched big companies face daunting challenges to growth, adding that the urge to hammer rivals, instead of simply exploiting their own competitive edges, "has been a continual source of poor performance." They make a compelling case. But they underestimate the possibility that, given the right innovations, savvy managers can reinvent their companies.

The authors use case studies to lay out a theory of competition that, in the end, turns out to be familiar. That's because they are trying to "clarify" a handful of key competitive forces described 25 years ago by management guru Michael Porter in his classic Competitive Strategy. They aim to one-up the master by emphasizing some of his insights more than others and by making them simpler to grasp. Thus their promising subtitle, A Radically Simplified Approach to Business Strategy. Regrettably, their work is anything but elementary. It is burdened by incomprehensible diagrams, equations that will elude general readers, and occasionally dense prose: "Suppose that the error range on the EPV of the firm as a whole is plus or minus $150 million around the mean estimate of $1,500 million. This is plus or minus...."

Still, the case studies and the pair's sharp analyses in this uneven work are worth the cover price. They offer important lessons for managers and investors alike. Take Wal-Mart: Returns have slipped as the company has grown because it has been unable to replicate, outside of the original small and largely rural markets, its most potent advantages -- local economies of scale and customer loyalty that keep competitors at bay. The authors argue persuasively that in retailing and a few other areas -- banking, health care, and even telecom -- dominating a small geographic region is key. That's why companies as disparate as BellSouth Corp. (BLS ), Kroger Co. (KR ), and regional banks tend to outperform national players.

Growth outside one's backyard, they contend, can be deadly. As a niche player in the West, Colorado-based Adolph Coors Co. boasted double-digit margins that made national rival Anheuser-Busch Cos. (BUD ) look pale. But as Coors rolled out its brands nationally, profitability slumped, its once-envied mystique -- that Rocky Mountain spring-water image -- dissipated, and it wound up slipping into a transnational merger with Molson in mid-2004 that so far has done nothing for investors. Coors might have done much better if it had stuck to a dozen or so states, say the authors.

Are there smart ways to grow? Sure. Rupert Murdoch's News Corp. built a fourth TV network, Fox, by exploiting weaknesses in the other three: undercutting them in advertising prices while airing audience-pleasing programming that rivals disdained as downmarket. Still, lately News Corp. has disappointed investors for different reasons, including vulnerability to cable and other alternatives that are hurting all the networks. "The networks are still with us, Fox included, but they are not the cash-generating machines they used to be," the authors say.

It must be stated that the authors' pessimism about mature companies isn't always justified. Many have been able to reinvent themselves. With iPod, Apple Computer Inc. (AAPL ), whose strategic slips the authors scorch, provides a clear example of how managers sometimes have the power to blaze new trails.

As they analyze battles between such diminished warriors as Eastman Kodak Co. (EK ) and Polaroid and comment on the still unresolved Home Depot Inc. (HD ) vs. Lowe's fight, the core lesson from Greenwald and Kahn may be a truism -- that for most companies the glory days almost never last. It's a warning even the most innovative would do well to contemplate.

By Joseph Weber

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