Planning a Breakout

Tuck management prof Sydney Finkelstein talks about his new book on how to leave your competitors in the dust

Good managers are always looking for ways to be one step ahead of the competition. Whether launching a startup or taking the reins of an established firm, leaders have to find ways to innovate and maintain their product or service's value proposition. Developing a flexible, easy-to-understand strategy is the foundation for breaking out in the market.

Those who want a refresher course in the basics of strategy can check out the new book Breakout Strategy: Meeting the Challenge of Double Digit Growth (McGraw-Hill, 2006), by Sydney Finkelstein, Charles Harvey, and Thomas Lawton. The consultants and educators spent years researching real companies, some of whom were their clients, to offer first-hand knowledge and hands-on, in-the-field testing of the advice put forth in the book.

With examples that include companies in Europe, Mexico, Canada, the U.S., Australia, and India, the book is more international than most other strategy books published in the U.S., notes Finkelstein, who is also the Steven Roth Professor of Management at the Tuck School of BusinessTuck School of Business at Dartmouth College. Finkelstein recently talked with reporter Francesca Di Meglio. Here are edited excerpts of their conversation:

What do many companies get wrong about strategy, in your opinion?

The biggest problem, I would say, is overly complicated analysis—those big thick strategy planning books that go on for hundreds of pages. No one is going to read it because it's just too much.

That was one of our motivations to cut to the chase [in this book]. Sometimes strategy can get overwhelmingly complex. I understand that when you get to highly detailed execution, you don't want to leave much to chance. On the other hand, the core strategy has to be one that everyone understands and can convey to the next level down in the organization.

What would your advice be to General Motors (GM) management right now?

In the case of GM, it has some endemic problems that are less strategy-related and more about years and years of delaying the inevitable. The cost of a car is made up fixed costs that can't be changed. The cost of retirement benefits offered to former employees is in the thousands. That's not a strategy problem. It's a legacy of years and years of making incredibly generous arrangements with the workforce.

But if I were to think about GM's strategy, I'd say value proposition should be the key. What is it that GM offers to customers that they really care about? Its brand could be one of high-quality, reasonably efficient cars at a reasonable cost (see, 05/08/06, "General Motors Is Still Living Large").

If I were advising GM, I would be working with the management team to go through the six value proposition characteristics—features, quality, support, price, availability, and reputation—and ask, "Where are you now? Is that a defensible position that you can win relative to competitors?"

What is the key to staying ahead of the competition?

Staying out in front takes two or three critical factors. One is that you have to continue to be innovative in whatever aspect of your value proposition has been attractive to customers in the past.

Innovation does not just mean technology. It could also mean the types of support you offer to customers. BMW, for example, will deliver the car to you when you buy it. When it comes time for service, BMW will come and get the car if you want. The loaner is right there.

Another way to stay in front is power regeneration in a company. It doesn't matter who you are, how long you've been there, or even how successful the company, it's critical to have a regular rotation of new and expanding talent coming in. It brings in new ideas and approaches, and it shakes things up a little bit.

Some of the related research we did has to do with what happens to senior executives when they've been on the job for a long time. Almost always what you see is less experimentation, less innovation, more conservatism, becoming more risk adverse. The reason is they have more to lose, but that's not the right answer for a company. The company has more to lose by staying put, not adjusting, and not being flexible.

Strategies are simply a set of ideas and initiatives on how you hope to win in a competitive marketplace. They need to be consistently updated and adjusted, and you need to make sure the assumptions you have behind those strategic ideas are still the right ones.

There are a lot of companies that adopted a particular way of doing things, and then the world changed and they didn't adjust with it. Rubbermaid (NWL) is a classic example of a company that fell apart in the late '90s because of that. A tremendously innovative company for the number of new products it created, it never innovated on the cost, process, or efficiency sides.

In the late '90s, Wal-Mart (WMT), Kmart (SHLD) and all the rest of the big-box retailers started demanding innovation on the cost and process side, too. They said, "Lower your price and deliver in a time consistent with our warehouse and distribution system." Rubbermaid was unable to do that. It allowed its competencies to get stale. The key words are rejuvenation and refreshment and reenergizing.

What characteristics must a company have to successfully break out?

It depends where you start. For companies just starting out, I think breaking out is all about breaking the rules, coming up with new ways of competing. One of my favorite examples is Cirque du Soleil (see, 6/25/02, "Cirque du Soleil's Expanding Big Top").

What did the circus look like before? For one, the elephants and lions were there, which was a huge cost factor. Cirque du Soleil changed the definition of what a circus is as a form of entertainment. Instead of playing in a high-cost arena in a declining market, they came up with a different business model and a different way to compete in the circus business.

They were revolutionaries, and they broke all the rules. What's good about examples like that is not that they're ideal examples, but that they help people think differently. Looking at a different type of world in a different way helps trigger new ideas in your own world.

What are the pitfalls that companies should avoid when trying to break out?

The first is rushing to judgment, making the decision that it's all about one thing like cost and focusing only on that. Actually, GM is one of the best examples.

Back in the 1980s when Toyota (TM) was just gaining a presence in the U.S., they were coming in with a little Corolla, a very small, low-priced car. GM wasn't close in terms of its cost. GM decided to develop a breakout strategy. Management decided in their analysis that the problem was people—their costs were too high because people were not as efficient as they used to be, and the unions, and all the rest.

The solution was to focus on the cost side and replace as many people as possible with robotics and automated systems. Every car company does this to some extent, but the guys at GM—senior executives and then-CEO Roger Smith—spent over $30 billion over a seven- or eight-year period, with the goal being to remove the people. The problem was that they took this really narrow slice of what you need to be successful in the marketplace. The slice was wrong.

The reason Toyota does well—and this is true even today—is because of the people. It trains people at a level much greater than Ford or GM. And it develops processes that rely on people.

GM got it incredibly wrong in the 1980s, and it cost them a tremendous amount of money. The point is that settling on one quick fix for your breakout is a dangerous thing. Breaking out is not just about figuring out what you're good at, it's also about how that stacks up against competitors. In any tough marketplace, which is most of them, the pace of change is dramatic.

Companies sometimes develop a strategy that is based on a static model of the world. The problem is that the competitors haven't sat still. They have moved. Strategy is like a multiperiod game or challenge. You can win in one round, but there's always a new round starting.

A while back, a company called Body Shop (LORLY) came up with a different business model, which was all about social responsibility and the green movement, for the cosmetics industry. Body Shop used no advertising and relied on word of mouth. It came up with a value proposition and business model for the marketplace.

So Body Shop won that round. The problem was that the next round was beginning even as Body Shop was winning. It turns out that it was not too difficult to replicate that Body Shop strategy, so the next round went to copycats—Bath & Body Works (LTD), H2O, Origins (EL) (see, 05/18/05, "Toning Up The Body Shop"). L'Oreal recently acquired Body Shop, and it's going to expand that brand further. The point is that strategy is not static. You have to constantly update, adjust, and consider competitors.

What role does the customer play in a company's breakout strategy?

The customer's role is as critical as anything else. There are a couple of dimensions. One, who is your customer today, and what is it that they care about or might care about? Two, how is that customer base and potential customer base changing?

Again, we spend a lot of time looking at breakout as a dynamic process, and there are many cases where businesses are good at satisfying a whole group of customers. But that group might be shrinking, and there's a whole new customer base that requires something different.

Analytics is all about coming up with something for customers that they're really going to care about, that they'll see as value-creating and as a result, they'll be willing to pay for it. You can do a lot of things for customers, but if they don't want to pay for them, it's a good formula for failure.

Are breakout leaders born or can they be made?

I think breakout leaders absolutely can be made. Clearly, there are differences between people that are inherent and genetic. I'm not a believer in the idea that if you weren't born with a certain skill set that you don't have a chance.

To me that's a depressing view of the world. It means that at birth or 15 or whenever your personality is developed, you're done. Your destiny is predetermined, and that's it. There are lots of examples of people who started with very little and have done amazing things.

There are people who started with a lot, and it destroyed them. Breakout leadership can be taught, developed, enhanced. It can be taught, not only in the classroom but also through experience in the form of management development, reading books like this, or studying other breakout leaders.

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