BUSINESS
Warm and Fuzzy Doesn't Cut It
By George Stalk
The Wall Street Journal
MORE THAN EVER before, corporate CEOs are being distracted by the demands of management experts and government officials to do "what's right" rather than what good business sense suggests is best. Being pushed into the background are such priorities as serving customers and beating competitors.
Advocates of such "management correctness" harangue corporate executives to be leaders in diversity, ecology, "good governance," corporate social responsibility and other such areas. As Tom Peters's Web site explains, "We care about passion, leadership, communication, branding, creative destruction, re-imaging, off-shoring, women, boomers, design, education, technology, cool products, cooler people, and work that makes a difference." Nothing, alas, about profits and growth.
There is nothing wrong with such concerns except they miss the point: Only the most successful companies can afford to be passionate, cool and correct. In the 1970s, Bruce Henderson coined what's known as the "Rule of 3 and 4." For structural reasons, Mr. Henderson observed, every functioning market must have at least three strong competitors: the first twice as large and profitable as the second, and the second twice the third.
Today, management theorists would unleash a legion of graduate students to prove Mr. Henderson wrong. What they would find, however, is that instead of having twice the profits as the next-best competitor, today's leader is four to eight times as profitable because it pursues and exploits its competitive advantage.
Assume two companies both play by the rules. One company is highly focused on dominating the market; the other company is focused on increasing its market share by some marginal percentage, while being the kind of "good corporate citizen" that will win favor with the popular business press.
You can be certain of this: First, the company focused on creating and exploiting its competitive advantage will grow, prosper and create more profits and jobs than the company worried about its image. Second, the employees, customers and shareholders of the first company will benefit from its dominance in the marketplace. And, third, in the long run the dominant company will be the one that can afford to be socially responsible and managerially correct.
This is not an argument for ruthlessness first and philanthropy second. Playing strategic hardball doesn't necessarily mean moving offshore to exploit cheap labor or take advantage of lax pollution regimes. Customers have consciences and companies that cut ethical corners or cheat eventually will pay the price. But winners play to win.
Suppose, for example, that Wal-Mart, America's No. 1 retailer, increases the salaries of all its employees to whatever average the rest of the retail industry sets as an appropriate benchmark. This would make some of its critics happy. But would it "level the playing field"? Hardly. Wal-Mart would still be dominant because its competitive advantage is based on superior logistics and purchasing power, not on the supposed "low wages" its critics decry. That's what makes its "everyday low prices" possible.
Business leaders today face the kind of intensely competitive environment unknown to past generations. Globalization, technological change, fragmenting consumers and consumer interests, and increased complexity all along the production and supply chain have made the business of doing business more difficult than ever.
Only the companies that stay focused on strategy -- on identifying and exploiting their competitive advantage -- will prosper.
Just as we have come to realize that economic growth, rather than foreign aid, is the engine that improves living conditions in the underdeveloped world, we must recognize that competitive advantage is the engine that produces success in business. It is this success -- not good intentions and warm-and-fuzzy management -- that generates the profits and growth that enable Western companies and economies to do the "good things" advocated by the managerially correct.
In business, winning really matters. Everything else is a distraction.
---
Mr. Stalk, a Toronto-based senior vice president and director of The Boston Consulting Group, is co-author of "Hardball: Are You Playing to Play or Playing to Win?" (Harvard Business School Press, 2004)
On George Stalk.
Warm and Fuzzy Doesn't Cut It
By George Stalk
The Wall Street Journal
MORE THAN EVER before, corporate CEOs are being distracted by the demands of management experts and government officials to do "what's right" rather than what good business sense suggests is best. Being pushed into the background are such priorities as serving customers and beating competitors.
Advocates of such "management correctness" harangue corporate executives to be leaders in diversity, ecology, "good governance," corporate social responsibility and other such areas. As Tom Peters's Web site explains, "We care about passion, leadership, communication, branding, creative destruction, re-imaging, off-shoring, women, boomers, design, education, technology, cool products, cooler people, and work that makes a difference." Nothing, alas, about profits and growth.
There is nothing wrong with such concerns except they miss the point: Only the most successful companies can afford to be passionate, cool and correct. In the 1970s, Bruce Henderson coined what's known as the "Rule of 3 and 4." For structural reasons, Mr. Henderson observed, every functioning market must have at least three strong competitors: the first twice as large and profitable as the second, and the second twice the third.
Today, management theorists would unleash a legion of graduate students to prove Mr. Henderson wrong. What they would find, however, is that instead of having twice the profits as the next-best competitor, today's leader is four to eight times as profitable because it pursues and exploits its competitive advantage.
Assume two companies both play by the rules. One company is highly focused on dominating the market; the other company is focused on increasing its market share by some marginal percentage, while being the kind of "good corporate citizen" that will win favor with the popular business press.
You can be certain of this: First, the company focused on creating and exploiting its competitive advantage will grow, prosper and create more profits and jobs than the company worried about its image. Second, the employees, customers and shareholders of the first company will benefit from its dominance in the marketplace. And, third, in the long run the dominant company will be the one that can afford to be socially responsible and managerially correct.
This is not an argument for ruthlessness first and philanthropy second. Playing strategic hardball doesn't necessarily mean moving offshore to exploit cheap labor or take advantage of lax pollution regimes. Customers have consciences and companies that cut ethical corners or cheat eventually will pay the price. But winners play to win.
Suppose, for example, that Wal-Mart, America's No. 1 retailer, increases the salaries of all its employees to whatever average the rest of the retail industry sets as an appropriate benchmark. This would make some of its critics happy. But would it "level the playing field"? Hardly. Wal-Mart would still be dominant because its competitive advantage is based on superior logistics and purchasing power, not on the supposed "low wages" its critics decry. That's what makes its "everyday low prices" possible.
Business leaders today face the kind of intensely competitive environment unknown to past generations. Globalization, technological change, fragmenting consumers and consumer interests, and increased complexity all along the production and supply chain have made the business of doing business more difficult than ever.
Only the companies that stay focused on strategy -- on identifying and exploiting their competitive advantage -- will prosper.
Just as we have come to realize that economic growth, rather than foreign aid, is the engine that improves living conditions in the underdeveloped world, we must recognize that competitive advantage is the engine that produces success in business. It is this success -- not good intentions and warm-and-fuzzy management -- that generates the profits and growth that enable Western companies and economies to do the "good things" advocated by the managerially correct.
In business, winning really matters. Everything else is a distraction.
---
Mr. Stalk, a Toronto-based senior vice president and director of The Boston Consulting Group, is co-author of "Hardball: Are You Playing to Play or Playing to Win?" (Harvard Business School Press, 2004)
On George Stalk.
posted by D @ 5:50 AM
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