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Playing Hardball: Why Strategy Still Matters
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Take it and make it your own. Softball competitors like to think their bright ideas are sacred. Hardball players know better. They're willing to take any good idea they see (any one that isn't nailed down by a patent or other legal protection) and use it to create competitive advantage for themselves.
This needn't be restricted to borrowing from competitors. You can pick up ideas from one geographic market and transplant them to another. Ideas can also transplant between industries. But the "making it your own" part is just as important as the "taking it." Every hardball company finds a way to build on, improve, and customize the borrowed idea so that it's not just a me-too copy.
Batesville Casket is the world-leading manufacturer of welded steel caskets. In the 1970s, Batesville transplanted automotive manufacturing techniques to its industry to reduce manufacturing costs with stunning effects on its less sophisticated competitors. In the 1990s, Batesville set its sights on those competitors with positions in major metropolitan markets. To get at them, Batesville had to offer greater variety, faster response times at affordable prices. Batesville casket transplanted the Toyota production System to accomplish this with remarkable success.
Entice your competitor into retreat. Sometimes, through a superior understanding of your business and your industry, you can take actions that confuse your competitors and entice them to behave in ways that they believe will be beneficial to them but that actually will weaken them. This opportunity hinges on the existence of certain customers that are not worth having because they are high cost to serve. These customers may be willing to pay a premium for your offering, but it usually is not enough to be truly worth the effort. These are the customers you want your competitors to have.
Federal Mogul discovered that smaller engine manufacturers were not as profitable as large OEMs despite having higher gross margins. The cost impact of smaller production runs and higher service needs were hidden from management by its standard costing system. Federal Mogul repriced its small OEM business high enough to make money if it won the bid but low enough that if a competitor won the bid it would not, in the end, earn enough to recover the true higher costs of the business. Over time, as competitors won more business with smaller OEMs the worst became their cost position.
Enticing your competitors toward business that drives up their costs is one of the most complex strategies of hardball competition. You must have a superb understanding of your own costs and how customers make purchase decisions. For example, you can set prices so your competitors respond by seeking business that they think will be profitable for them, but that will, in fact, drive up their costs and depress their profits. This is a risky, bet-the-company strategy. It works best in complex businesses where costs may be misallocated. There is lots of potential for error. Your analysis of the actual versus apparent costs associated with a product, service, or customer-and the strategy that grows out of that analysis-has to be right.
Break compromises. When a hardball player wants to achieve explosive growth, he looks for a compromise to break. A compromise is a concession that an industry forces on its customers, who often accept it because they have come to believe it is endemic-"just the way things work"?like the never-changing 3 P.M. check-in time at hotels.
Wausau Paper bet that the industry standard practice of requiring its paper merchants to accept long and unreliable deliveries and large minimum order quantities was a huge compromise resulting in higher inventories and greater costs for the merchants. Wausau 'retooled" its business to provide merchants with 10 times faster delivery times, 3 times the variety and 1/20 the minimum order quantities. Wausau merchants loved the new model and Wausau grew like a weed and in the last 15 years created more shareholder value than any paper company.
If compromises can be identified and the business altered to break them the result is often fast and profitable growth. A broken compromise usually confuses your competitors because they remain locked in the business mindset that generated the compromises to begin with.
Hardball M&A
Despite their high failure rate, mergers and acquisitions can be a powerful means of pursuing a hardball strategy much faster, or on a much larger scale, than could be done organically. Mergers made without a strategic rationale and acquisitions pursued on the whim of the CEO are softball moves. A good M&A deal creates competitive advantage; a great deal can help a company achieve decisive advantage, enabling it to lock up critical assets or build superior economics.
Companies often pursue M&A activity to rapidly expand, nationally or globally, or annex a rival and reduce competition. There can be so much strategic benefit in merging or acquiring companies that some hardball players become serial acquirers. Hardball serial acquirers have a clear idea of how to build competitive advantage, and have the capabilities to consummate deals and digest acquisitions for maximum strategic benefit. Companies often begin their M&A activity as a way to pursue a modest strategic goal, but end up achieving decisive advantage.
The lessons from serial acquirers that use M&A to carry out their hardball strategies are straightforward in concept but difficult to execute:
- Acquire only if the opportunity fits with the strategy
- Do not be tempted to step outside your proven process
- Build an internal M&A capability
- Seek outside advice and assistance
- Take a rigorous approach to valuation
- Invest in post merger integration capabilities
Changes in the Field of Play
The strategies in Hardball are classics, but "classic" should not be interpreted to mean "static." The game of hardball is dynamic and always evolving. New barriers to achieving competitive advantage emerge and new roadblocks to building decisive advantage are erected. Several issues will affect the way hardball must be played in the future and will change the rules for players who wish to be winners, especially on the global field.
Playing the China Card. China will be the biggest and most contentious issue in the next decade for hardball players, even if they are not global companies themselves. The most important China issue is not that it is a source of low-cost production or even that it is a huge market for companies. The critical China issue today is that this country will be the source of tomorrow's toughest new competitors, and as thorny an issue for all western companies as the Japanese were in the 1980s. Nokia and Motorola know this and have dramatically intensified their investments in China to retain leadership positions there in handsets.
Getting Stuck in the Middle. During the past decade, the shift from a producer-driven economy to a consumer-driven economy in the United States has become an important issue for companies in virtually every industry and business segment. Many of them have yet to recognize it, however, or have leaders that refuse to believe it.
As a result of changes in consumer demographics and behaviour, in combination with changes in retailing, the market for consumer goods has become polarized. At the very high end, some luxury brands continue to succeed by selling super-expensive goods at very high margins and in very small quantities.
At the low end, a wide variety of brands of commodities and utilitarian items-including household and office products, food staples, home electronics, toys, and hardware-compete with each other on price and minor product differentiations. These brands, including private label or generic brands, may grow in volume but must fight ferociously to retain or grow profits.
And then there is the middle, where no consumer or manufacturer wants to be, the territory where hundreds of companies and brands have gotten stuck. Companies like Kmart, Mitsubishi Motors, General Electric appliances and Samsonite are frozen in the headlights of competitors who are stealing customers at the low and high price points.
The fastest-growing segment in the market is in premium goods that are still affordable to middle-market consumers. These are goods and services, priced from 20 to 200 percent above mid-priced offerings, which offer enough technical differences and performance improvements, along with emotional engagement, that consumers are willing to pay extra for them. These new luxury brands include small, low-priced items such as Aveda personal care, Grey Goose and Belvedere vodka, and Starbucks coffee. They also include more expensive items such as a Viking stove or a set of Callaway golf clubs and go all the way up to big-ticket purchases, such as a premium sea cruise or a Mercedes C-class sedan.
Dealing with Stranded Assets. A nasty side effect of gaining competitive advantage and creating a virtuous cycle that builds into decisive advantage is the stranding of assets. This happens when an asset that was once a contributor to competitive advantage becomes irrelevant or, worse, a drag on competitiveness. Forces such as globalization, technological change, and corporate self-interest continuously intensify competition and strand many kinds of assets?including plants and facilities, as well as customers and suppliers.
Softball competitors rally around stranded assets attempting to push off the day of reckoning when the assets will have to be written off. They seek government aid. They try to push the problem onto the public, as the auto industry is trying to do with healthcare costs. The longer the delay the greater the pain will be in the long run.
As early as the 1970s, both Cadillac and Lincoln faced the problems of an aging and shrinking customer base. Ford flip-flopped from Lincoln as a marketing brand, to Lincoln as a company to Lincoln as part of Ford Division.
In contrast, GM invested in bold, risky new product designs and higher quality in an attempt to woo new customers and revive the Cadillac customer base. Cadillac's new models have gotten a lot of media attention and are selling well enough that Cadillac is emboldened to make a stab at marketing its vehicles in Europe.
Hardball competitors strive to eliminate, and when possible, re-purpose their stranded assets.
Being "Wal-Marted." Wal-Mart is the largest retailer on the planet. It is more than three times larger, when measured in sales, than the next largest retailer, Carrefour. Wal-Mart is the largest seller, or among the top three largest, of goods in many consumer categories. Wal-Mart continues to push into new categories with catastrophic consequences to traditional competitors. Its cost position is so strong that its competitors" attempts to match it on "every day low prices" end in failure.
Wal-Mart presents a dilemma to its suppliers. It is the most profitable customer for many suppliers on an absolute basis and often on the basis of percentage. For those suppliers where Wal-Mart represents a very large share of business, upsetting Wal-Mart risks being hurt badly if it dumps the supplier.
But there are chinks in the monolith's armour. While customers find great value at Wal-Mart they are also forced into a compromise when they shop there. They usually have to travel a long distance to get to a store. They have to park in a large, crowded lot. They must roam through acres of retail space, through aisles designed to take them ever deeper into the store. Sales help is scarce and not always knowledgeable. The prices are dramatically low, but the shopping experience is mediocre at best and unpleasant at worst.
Internet retailers such as Tesco and grocerygateway.com are tapping into the willingness of some customers to pay higher prices for a better experience. Internet-savvy consumers who value their time and want competitive prices, but don't need the very lowest prices, find shopping online to be a perfectly acceptable substitute for shopping at Wal-Mart and other big box retailers. At grocerygateway.com, shoppers can get groceries at competitive prices, hardware from The Home Depot, liquor, and more, at the click of a mouse. The goods are delivered within an agreed-upon time and unloaded into the house. No driving. No parking. No crowds. No wandering the endless aisles. No lugging packages. No Wal-Mart.
The Hardball Mindset
To play the game of hardball to its fullest requires a hardball state of mind. Hardball players possess a number of admirable characteristics. They have an intellectual toughness that enables them to face facts and see reality. They are emotionally aware, which means they know themselves, and their people, well. They are always dissatisfied with the status quo, no matter how fine things may seem. They have the will to catalyze change. They're tough, but not bullies. They're serious about their business. They have such an intense passion for winning that it rubs off on others.
The hardball player needs all of these qualities, and more, in order to accomplish his most important task: to get to the heart of the matter and stay there. The heart-of-the-matter is that set of fundamental, often systemic, issues that is limiting the growth and success of the business. These issues are often so challenging in so many ways that no one in the organization has the guts to take them on or the ability to actually solve them.
Getting to the heart of the matter is not easy. Organizations do not like addressing heart of the matter issues. These issues are hard, time consuming, fraught with risks and prone to defeat individual efforts.
An organization that is unwilling or not ready to face the heart of the matter is one doomed to inaction. It will be like a sitting duck in comparison to competitors that are able to face the heart of the matter. It is the job of the hardball leader to compel his organization to face those fundamental issues and then plunge into addressing them.
Hardball leaders succeed at staying at the heart of the matter by keeping their organizations, no matter how successful they are, in "perpetual turnaround" mode. They make themselves, and their people, believe that they are in constant danger of losing their advantage. Because, in fact, they are. A management team in turnaround mode cannot allow itself to be distracted from the central objectives of the turnaround.
Hardball players are often deceiving in their appearance and demeanour. They are brave, but not necessarily boastful. They are bold, but never bullying. They may not be flashy; sometimes they may even seem rather bland. But the ones that achieve strong competitive advantage, and especially those that go on to create decisive advantage, tend to have much longer successful runs than their competitors. There is no limit to the duration of advantage, nor is there any average lifespan we know of for advantaged companies. It is the leader that usually causes itself to lose decisive advantage, sometimes as the result of a serious mistake, but most often through complacency and failure to adapt. If a company is aggressive at renewing its competitive advantage, it may enjoy a very long run indeed, and watch as the softball players limp away from the playing field, never to return.
George Stalk is a Senior Vice President based in the Toronto office of The Boston Consulting Group. In addition to extensive on-the-ground experience in North America helping numerous corporations set, remake and refine strategy, George spent years in Japan learning why and how companies there were beating their American competitors. He later ran a factory to prove his theories and methodologies. His best-selling book Competing Against Time defined the importance of time-based competition. He is also the co-author of Hardball. George can be reached for article feedback at: Stalk.George@BCG.com
 
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