The need to focus on soft issues has forced managers to take their eye off the ball and lose sight of the fact that strategy matters more than ever. But these same managers must not only realize that strategy matters, they must develop and deploy tough strategies that will defeat the competition. Today, managers must play to win.
For a time, it seemed that strategy didn’t matter anymore, particularly during the e-commerce boom. The brilliant promise of web-based business temporarily blinded many managers, academics and investors to the fundamentals of strategy. Strategy has always been about allocating resources to stimulate customer demand and create competitive advantage. The greater the advantage, the faster a company can grow, the more profitable it can be, and the greater value it can create. But in the first rush of e-commerce, a lot of investment dollars and management talent went into ventures that did not have competitive advantage from the get-go – like Boo.com, BBQ.com, Lifejacketstore.com — and were doomed.
The bust of e-commerce reminded everyone, all too painfully, that strategy always matters. Today, it matters more than ever. Competitive intensity is at an all-time high as a result of globalization, technology, fragmented consumer groups, and shifting power along the supply/demand chain. But while gaining a competitive advantage is harder than ever, strategy is again being pushed off the management agenda — not by e-commerce, but by “managerially correct” demands. Even when managers want to focus on creating and reinforcing competitive advantage, they are being distracted by a plethora of “soft” issues. Not only must managers cope with the intense scrutiny and burdensome demands of corporate governance, they must deal with the recriminations for outsourcing and off-shoring, demands to motivate employees in times of increased uncertainty, and unceasing pressure to produce quick results or face replacement. The time has come to put strategy back on the agenda again. That is why we wrote Hardball.
The five principles of hardball
Today there are two extremes in business competition. Companies can play softball, relying on weak tactics that look like strategies but do little more than keep the company in the game for the short term. Or they can play hardball, employing tough strategies designed to rout, not simply beat, competitors. Which of today’s companies are playing hardball? What strategies are they using to win? And what will it take for firms to adopt and execute these strategies successfully?
Hardball players live by five principles:
1. Hardball players focus relentlessly on competitive advantage. Competitive advantage is something I have that you don’t. Too bad for you. But too bad for me, too. When I have the advantage, you are forced to accept defeat or find a way around my advantage to build your own. So hardball competitors are never satisfied with today’s competitive advantage — they want tomorrow’s.
2. Hardball competitors strive to convert competitive advantage into decisive advantage. Competitive advantage, as essential as it is, can be fleeting. That’s why hardball players seek to put themselves out of reach of their competitors by building their competitive advantage into decisive, or unassailable, advantage. Decisive advantage is systemically reinforcing. The better you get at it, the harder it is for competitors to compete against it or take it away. And the more likely it is that your competitors will “pick up their marbles” and leave that particular playing field.
3. Hardball players employ the indirect attack. When a company makes a direct attack, it does exactly what its opponent expects and is prepared for. The attacker hopes that superior resources and persistence will carry the day. An indirect attack means that you surprise a competitor with your actions and apply resources where the opponent is least able to defend themselves.
4. Hardball players exploit their employees’ will to win. To achieve competitive advantage, people must be action-oriented, and always impatient with the status quo. The will to win can be fostered; softball players can be transformed into hardball players. But as your competitive advantage grows, it gets harder to exploit your employees’ will to win.
5. Hardball players draw a bright line at the edge of the caution zone. To play hardball means to be aware of when you are entering the “caution zone”-that area so rich in possibility that lies between the place where society clearly says you can play the game of business and the place where society clearly says you can’t.
Generally, hardball strategies do not require entry into the caution zone. Company leaders are responsible for drawing a bright line that defines the boundary, and for letting everybody know when they’re getting close to it.
In rare instances, however, a hardball player will deliberately enter the caution zone. When they do, they must take extra care. Every move must be evaluated in the light of the following questions:
- Will the proposed action break any laws?
- Will the proposed action be bad for the customer?
- Will competitors be directly hurt by an action?
- Will an action hit a nerve with a special interest group in a way that might damage the company?
- Will the action harm the industry or society?
If the answer to any of the questions is “yes,” it means the company has ventured too far into the caution zone. The leader must immediately take corrective action.
Six classic hardball strategies
Any strategy that provides a decisive competitive advantage is a hardball strategy. In our book, we describe six classic hardball strategies that have proved, over the decades, to be particularly effective in generating competitive advantage.
1. Unleash massive and overwhelming force. Although hardball players prefer the indirect attack, they sometimes surprise and overcome their competitors with a full frontal assault. Massive and overwhelming force must be deployed like the blow of a hammer — accurate, direct and swift. It must not be used until the company is ready to put all its energy behind it. The company must also be certain that the competitive advantage it believes it has is ready to be deployed.
When a company chooses the direct attack strategy, it may be necessary for it to completely overhaul its business in order to unleash the force. The process can feel like the turnaround of a successful company, a paradoxical situation that is uncomfortable for entrenched leaders. Only those with vision and courage should engage in this bold, and often very public, hardball strategy. And companies must be careful not to put their competitors out of business and into bankruptcy protection, from which they may emerge stronger than ever.
When the president of Frito-Lay, Roger Enrico, had had enough of Eagle Snack’s incursion into its market for salty snacks, his first response was to slim down and focus the organization, to reduce costs and concentrate investments. He then launched an all-out attack on Eagle’s stronghold, the supermarkets, by increasing promotions and advertising, upping in-store service and, where necessary, reducing prices. He wrote a cheque that was larger than Eagle could afford to match. Eagle crumpled under the assault and withdrew.
2. Exploit anomalies. Sometimes a growth opportunity lies hidden in a phenomenon that, at first glance, seems irrelevant to the business or contradictory to current practice. But anomalies — such as idiosyncratic customer preferences, unexpected employee behaviours, or odd insights from another industry — can show the way to competitive advantage, even decisive advantage.
When Rose Marie Bravo took over Burberry, the English manufacturer of raincoats that was dead in the water, she noticed that Burberry’s sales in Spain were inexplicably strong. Her interested was piqued because, as she pointed out, “It doesn’t rain in Spain.” She learned that the country manager had extended the Burberry brand into many other categories. She took this insight to the United States, Asia and throughout Europe. Burberry’s sales have more than tripled, and its EBITDA has increased sevenfold.
Softball players want to ignore anomalies or to suppress them because they don’t conform to standard practice. Hardball executives relish anomalies because they may conceal opportunities that can be exploited.
3. Threaten your competitor’s profit sanctuaries. Profit sanctuaries are the parts of a business where a company makes the most money and steadily accumulates wealth. In certain circumstances, the hardball player can influence a competitor’s behaviour and gain competitive advantage by attacking the competitor’s profit sanctuaries.
This strategy is risky. It can take you deep into the caution zone, so each use must be considered on its own legal merits. Also, your competitor is likely to retaliate by attacking your profit sanctuaries. And he may have greater financial resources than you thought, or a “sugar daddy” waiting in the wings to save his hide.
Toyota has overrun its opponents’ sanctuaries. The profit sanctuaries of GM, Ford and Chrysler are light trucks and SUVs, where they earn between $10,000 and $15,000 per vehicle. Toyota now offers equivalent vehicles and has enough cash that it could give them away. Instead, it is plowing its earnings back into hybrid vehicles and capacity expansions. Toyota effectively controls the strategies of the Big 3 by occupying their profit sanctuaries.
4. 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 be transplanted 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 endeavoured to reduce its manufacturing costs by transplanting automotive manufacturing techniques to its industry. The impact on Batesville’s less sophisticated competitors was stunning. 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 and faster response times at affordable prices. Batesville Casket accomplished this with remarkable success by transplanting Toyota’s production system.
5. Entice your competitors 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 cost too much to serve. 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 the company’s standard costing system. Federal Mogul re-priced its small OEM business high enough to make money if it won the bid, but low enough to ensure that any competitor who won the bid would not recover its true costs. Over time, the cost position of Federal Mogul’s competitors worsened as they continued to win more business with the smaller OEMs.
Enticing your competitors to focus on a 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.
6. 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 standard industry 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, three times the variety, and 1/20th the minimum-order quantities. Wausau merchants loved the new model, and Wausau grew like a weed; in the past 15 years, it has created more shareholder value than any other paper company.
If compromises can be identified and businesses altered to create a new model the result is often fast and profitable growth. Getting rid of a compromise usually confuses your competitors, because they are still locked in the mindset that generated the compromises.
Despite their high failure rate, mergers and acquisitions can be a powerful means of pursuing a hardball strategy more quickly, 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 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 of pursuing 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. They will change the rules for players who wish to be winners, especially on the global field.
Playing the China Card. Over the next decade, China will be the biggest and most contentious issue 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, who will become a thorn in the side for all Western companies as the Japanese were in the 1980s. Nokia and Motorola know this, and have dramatically intensified their handset investments in China to retain leadership positions there.
Getting stuck in the middle. During the past decade, the U.S. economy has shifted from being producer-driven to consumer-driven. This has become an important issue for companies in virtually every industry and business segment, but many of them have yet to recognize it, or they 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 for 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 delay 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 attempting to do with health-care 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: Lincoln was a marketing brand, then it was a company, and then it was 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 the company has been emboldened to market its vehicles in Europe. Hardball competitors like GM strive to eliminate and, when possible, re-purpose their stranded assets.
Being “Wal-Marted.” Wal-Mart is the largest retailer on the planet. Its sales exceed those of the second-largest retailer, Carrefour, by more than three times. Wal-Mart is the largest retailer — or among the top three largest — of goods in many consumer categories. Wal-Mart continues to push into new categories with catastrophic consequences for traditional competitors. Its cost position is so strong that its competitors’ attempts to match it on “every day low prices” end in failure.
For its suppliers, Wal-Mart is a dilemma. It is the most profitable customer for many suppliers, on an absolute basis and often on the basis of percentage. These suppliers are naturally wary of upsetting Wal-Mart.
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 on-line 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 well, and also their people. 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 in staying at the heart of the matter by keeping their organizations in “perpetual turnaround” mode, no matter how successful they are. 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 deceptive in 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 are we aware of any average lifespan for advantaged companies. It is the leader that usually causes a company 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.