The LEADERSHIP Issue: Adapting Modern Business Strategies

Economic competition is remarkably powerful. To the point that much economic research simply assumes that profits will be driven to zero by competition and goes on to derive “more controversial” results.

Firms experience this power in two ways. First, because they use inputs that can be traded in competitive markets – not just raw materials, but intellectual property, patents, labor, and capital – they must find uniquely valuable uses for combinations of inputs, such that they can generate revenue above the price (or opportunity cost) of those inputs, determined by the profits other firms could generate with the inputs. And second, once they find such uniquely valuable uses, other firms are generally free to observe, learn, and imitate the firm’s successful practices.

Business Strategy is about overcoming this competition. How is it that some firms manage to buck economic wisdom, generating sustainable profits by finding uniquely valuable activities that competitors can not mimic? As such, the core questions of business strategy are all about competition. Yet in the course of day to day activities, successful businesses can not constantly dwell on the competition. Firms that are perpetually looking over their shoulders at the competition are generally firms that end up with serious morale problems. They are also firms that often end up as second fiddle — imperfect copies of more successful market leaders. And they leave themselves open to manipulation, as they are lured into bidding on acquisitions that market leaders had no real interest in, but left out of those opportunities that market leaders truly commit to.

This defines a core tension that sits at the heart of business strategy. Good business strategies must be concerned, above all, with competition, but good businesses can not be overly concerned with the competition. So, we see Michael Porter’s Five Forces, which is about nothing but competition, replaced over time by ideas of core competence that look entirely inside an organization.

Viewing modern business strategy as the resolution of this tension explains all the recent attention paid to focus as the key to firms’ success. Firms that succeed have a core mission – a set of activities, using particular resources in particular ways in particular markets, which at its very essence describes not just what the firm does but what it does not do, and in particular, how it is different from the competition. Think of the most common examples of extremely successful firms – Southwest Airlines is explicitly not serving mainstream business travel at mainstream airports; Enterprise Rent-A-Car is explicitly not serving the travel market; Dell Computers is explicitly not innovating or producing the latest technology. In order to relieve employees of the burden of worrying about the competition on a daily basis, these business models inherently contain answers to the question of how the firm uniquely creates value in a way that competitors can not match.

With such focus in place, firms do not fall victim to the typical problems faced by their less focused counterparts. Morale becomes much easier to maintain, as employees are not reacting to the competition, but are proactively carrying out the company’s mission and thus automatically dealing with the competition. This focus on a clear mission gives real meaning to clichés like “living your brand” and also suggests that the great morale at companies like SWA, Enterprise, and Dell is an effect, rather than the cause, of great business strategy. All companies know morale matters, but precious few can clearly articulate a business model that answers the core competitive question “how are we unique”?

The problem of imitation is also greatly mitigated. Firms with clear focus are generally also those with “strategic fit.” By its very nature, the business model at these firms indicates why established firms can not mimic them – United can not abandon business travel; Hertz can not leave the airport market; and IBM can not forego innovation. And new firms are often induced to look elsewhere – why exert the effort to learn Dell’s model as well as Dell, only to face them in brutal competition at the end? So, rather than being manipulated by the competition, focused firms generally do the manipulating, convincing other firms to stay out of their turf by demonstrating a clear commitment to it – “this business is all we’ve got and we’re good at it, so you won’t get us to leave and you won’t beat us at our own game, and thus you’re better off looking elsewhere to answer your own competitive challenges.”

From this vantage point, the role of leaders in a successful business is also clear. The firm’s leaders (and the CEO in particular) are the architects, evangelists, and guardians of the business model. This involves three tasks. First, early leaders are primarily architects, designing and building the strategy. Few firms successfully shift gears from an initially failed strategy, so this step lays the critical foundation. This is where the lessons of classes like Kellogg’s MGMT 431 are most directly brought to bear – leaders must identify underserved consumers, under-provided products, or undervalued resources and use them to build a business model that clearly defines value-creating differences from the competition.

Second, all successful leaders must be evangelists of the business model. Employee morale and effort is best sustained in an environment where employees understand their own role in the firm’s larger model. So, not only must the firm’s hiring and organizational decisions reflect its focused business model, but equally importantly the leaders must constantly communicate that model, so that employees see the value of their own role and understand the basis for decisions. Not all focused firms maintain good employee morale – clearly it depends broadly on how employees are treated – but it is nearly impossible to maintain morale without focus.

Finally, successful leaders must be guardians of the strategy. Very few firms successfully pull off fundamental strategy shifts in mid-course. Clearly there are times when major changes are called for, but in the vast majority of cases, major changes are made by CEO’s who want to leave their mark on an organization, and are ultimately unsuccessful. The model contains the recipe for beating the competition and defines all employees’ understanding of the firms unique role. Successful leaders tweak the model in response to market changes – making the “adjacency moves” that have been popularized in recent business writing– but ultimately protect the core sources of competitive advantage. Its very hard to resist the temptation to grow for growth’s sake or change for change’s sake, especially for leaders concerned about their own legacies, but ultimately those that stay the course are generally the most successful. The ability to steadfastly protect the core strategy may be the defining hallmark of leadership and the rarest, most inimitable resource of all.