Whistling by the Graveyard: A Cautionary Tale for Businesses

By HPA Senior Advisor Bob Kaplan

While the name evokes pompadours and bobby socks, The Nifty Fifty was a list created for investors in the 1960s. It was comprised of the top (surprise!) fifty companies like Xerox, IBM, Sears and Roebuck, and Polaroid – all big names and all of them considered stable, safe long-term holds. In other words, they were too big to fail. The problem is most of them did.

During the decades since, a good deal of the companies on the list have been merged, acquired or liquidated. The result is that 9 out of 10 companies considered the best of the best in the 1960s and 1970s no longer exist.

These companies didn’t disappear all at once. They gradually lost share at the margin and became more and more irrelevant to their customers and markets. They tried to fight back by revamping their operations, cutting costs, and improving efficiencies, but they succumbed to market shifts and competitive pressures, nonetheless. Eventually, they disappeared. Ask any board or management team today if their business will fall to these same types of forces and the answer will be No ­– and yet, the reality is most of them will.

Is it inevitable that all companies will eventually fade into a distant memory?

Well, if they do any of the following, the answer is, pretty much yeah:

  1. Ignore what is happening at the margin

Harkening back to 1980, General Motors’ share of cars sold in the United States stood at a hefty 44 percent. This was clearly a dominant position in a scale-driven industry, and therefore should have been defensible. The combined market share of Toyota, Honda, and Nissan was a mere 15 percent, which is why they were generally ignored by GM management. Things went pretty well (or so it seemed in the GM boardroom) for the next decade. During this time, GM only lost approximately one percent of its market share per year. But by 1990, GM’s market share had dropped to 35 percent while the combined Japanese competition increased their share to 18 percent.

What difference does a mere percent share drop mean? Well, if you understand that competition always takes place on the margin it means a lot. GM should have been in a full strategic panic, but they continued with the same traditional strategy and continued to lose one percent market share per year. Each year’s strategic discussion focused on the “minimal loss” from the previous year. However, by the year 2000, GM’s share was 22 percent which was then equal to the share of the combined Japanese competitors. GM was no longer a dominant competitor and discovered that they were significantly operationally inferior to the Japanese carmakers. By 2016 GM’s share was 17 percent versus 32 percent for the now dominant Japanese.

And this is not an isolated example. In 1968 Nucor entered the U.S. steel industry and positioned itself against larger competitors. Initially, Nucor used an “inferior technology”(electric arc furnaces to melt scrap steel) to gain minimal share in the “cheapest” part of the market (rebar). Nucor’s moves were ignored by the majors (it was only minimal share loss at the margin, after all). Over time Nucor took control of this part of the market. They also continuously improved their technologies and processes, and moved up the product value chain. They used price to push the majors out of increasingly profitable product segments. Nucor eventually acquired many of these companies, and is now the largest steel company in the U.S.. I suspect the discussions in the Bethlehem and U.S. Steel board rooms mirrored those taking place in the GM boardroom.

  1. Not differentiating signal from noise

“Signal” is the meaningful information you are trying to detect and measure. “Noise” is the random, unwanted variation or fluctuation that interferes with the signal. It is always tempting when the signal looks like it is implying something negative (like share loss) to ignore it as noise using rationalizations like “things vary all the time,” “the pattern is not clear,” or “it is only transitory.” But this is a dangerous course to pursue.

Long before streaming was even a thing, Blockbuster (remember them?) had an 80% share in the movie rental market and thousands of brick-and-mortar stores. When Netflix came along, Blockbuster didn’t even flinch. Netflix was a small player with an odd business model – renting CDs through the mail without any in-person retail. But slowly over time, they took more market share gains. Blockbuster ignored the share loss and never responded to the new business model. Even before Netflix got into streaming and original content, it was game over for Blockbuster. Noise or signal?

Finding a way to objectively confront negative data should be a critical part of strategic reviews. Challenging business reviews is one way to do this but is done in name only by many companies.

Pro tip: Strategy reviews should not be enjoyable.

  1. Cling to outdated beliefs

Many companies have a mythology surrounding the basis of their success: We make the best product, we are close to the customer, we are the low-cost producer are just a few of the beliefs enshrined in company lore.

These were frequently true … at one point in time. The problem is that few companies aggressively challenge these beliefs to see if they are still true and if they do, few use objective data to examine existing conditions. What metrics can be used to define “the best product” and who it’s best for? Why is being “close to the customer” valuable? Do you have better insights into the needs of the customer than your competitors, understand how the customer’s business is evolving better than your competitors? If so, these variables may continue to be of substantial value. But if not tested with real data, they will likely erode over time.

  1. Focus on the short term versus strategic positioning

While much has been written about the tyranny of quarter-to-quarter management for public companies, many continue to fall prey to this approach. Few management teams actually think about the investments required to manage strategically, and the time and complexity involved with implementing major change. When private equity firms take a position in the company, strategic positioning (and thinking) is often the first casualty to hyping earnings and stock price. This is more the case for large public companies where there is heightened stress on showing quarter-to-quarter profits.

One far-too-common example is the classic story of senior management teams not wanting to fund IT infrastructure or migration to cloud – this, despite IT leaders asserting its criticality to sustainable operational and business success. Too many companies have learned the hard way: Pay me now or pay me later.

So, what can you do to avoid this destiny? 

Not enough companies get it right, but a handful do. Netflix nailed it when they entered the original content arena. They were cash negative for years while they built up their content library, which required a major investment. Now look at them. A significant number of financial companies do it right, too. JP Morgan and Bank of America are two examples. They don’t just think about short-term earnings, which is smart because with FinTech on fire, they have a lot happening at the margins. And they’re paying attention.

If your business wants to get it right, here are things to keep top of mind:

  • Differentiate strategies from plans

What passes for strategy in many companies is no more than an operational or tactical plan with a 3- to 5-year horizon. The discipline of strategic analysis has been lost in many organizations because it is hard to do and can lead to disappointing results when done correctly (i.e. We really don’t have a strategy). The challenge is to find and stick to a rigorous framework such as the one developed in the book 7 Powers by Hamilton Helmer1. I highly recommend this approach which defines strategy as a route to continuing power in significant markets.

In his book, power is defined as the set of conditions creating the potential for persistent differential returns. Helmer proposes there are only seven routes to power, namely scale economies, network economies, counter-positioning, switching costs, branding, cornered resources, and process power. If you cannot analyze how your business has one (or more) of these sources of power then you likely do not have a strategy. Doing the work is far from simple.

  • Create an event-based, not a calendar-based strategic review process

Many strategic planning processes are based on creating a large PowerPoint deck with regular frequency – typically yearly. This nicely coincides with the need for a budget, but the calendar has nothing to do with how strategic conditions are changing in your business. One CEO in a high tech firm described his strategy process as “making it up every day” since our “conditions are constantly changing.” Contrast this with the timeline of a materials or mining firm where large capital commitments are made with multiple year or decade payouts. Your strategic review process should be decoupled from the budget and operational planning process, and instead be triggered by changes in strategic conditions ideally monitored on an on-going basis.

  • Use scenario planning and war gaming exercises

Risk and uncertainty are very different concepts yet are routinely confused. Risk involves assessing potential outcomes from a set of known possibilities. Risk can be modeled and simulated. Uncertainty involves dealing with a future set of possibilities that cannot be known, modeled, or simulated. Many companies apply risk models inappropriately to analyze uncertain future states. Amusing but hardly useful.

Scenario planning is a technique that can be used to tackle uncertainty. It is best described in a book from 1991 by Peter Schwartz called The Art of the Long View.2 As Schwartz says in the book, “Scenarios are not predictions. Scenarios are vehicles for helping people learn.” Combined with war gaming exercises, scenario planning makes the future much more real for strategists. War games based on plausible scenarios developed by the management team can be used to pressure test strategies. Do they hold and continue to provide value as competitors take various actions? The biggest challenge is to get managers to take the exercise seriously and not view it as just a game.

How can HPA help?

HPA has significant experience in applying the above techniques and a number of frameworks for helping managers develop real strategies, put event-driven reviews in place, and engage in serious scenario planning and war games. Contact our team of strategy experts to get the conversation started.

Notes:

  1. 7 Powers: The Foundations of Business Strategy by Hamilton Helmer. Published by Deep Strategy LLC. © 2016 by Hamilton Helmer
  2. The Art of the Long View by Peter Schwartz. Published by Doubleday. © 1991 by Peter Schwartz