Tractor Supply Podcast and Case Study

Thank you to Joe Weisenthal and Tracy Alloway for having me on the Bloomberg Odd Lots podcast to talk about my latest HBS case study co-authored with David Ager.  The podcast episode is titled, "Why Tractor Supply is One of the Most Interesting Retailers on the Planet"

Distinctive Strategic Positioning: Don't Panic and Just Abandon It Amidst the Pandemic

Source: Wikimedia

Suppose your firm has a distinctive strategic positioning and a powerful competitive advantage.  Then along comes COVID.   Some managers may panic and abandon key facets of the unique strategy in an effort to cope with difficult economic and social conditions.   Some firms, though, have prospered despite the pandemic, in part because they have capitalized on the fact that so many people are spending a great deal of time at home.   Stihl is an interesting example of a firm with an unorthodox strategy that has resisted the temptation to abandon distinctive elements of its business model over the years, including during the past six months.  They have demonstrated that personal relationships and interactions still matter to consumers, even in an age of increasing online transactions, curbside pick-up, and home delivery.  

Stihl is one of the world's leading chainsaw manufacturers, headquarted in Germany. A recent Bloomberg story is titled, "Stihl Still Sells Chainsaws the Old-Fashioned Way." The firm is still owned by the descendants of founder Andreas Stihl.  Here's how the article opens:

If a limb falls on your car or you suddenly need to carve a wildfire break around your house, Amazon.com will zip you a Husqvarna 120 Mark II chainsaw in a few days for $180.  It's not so easy with America's top-selling brand, though. On the Stihl website, no prices are shown, and once you select a product, you’ll have to click through to find a nearby dealer – typically a small hardware store – that may or may not offer delivery. It’s an anachronistic, clunky sales machine, seemingly ill-suited to shopping during a pandemic. It’s also working just fine thanks.  Stihl (pronounced 'steel') sales so far this year are up 20 percent over 2019 and in the U.S. it is on pace for the best year in its near century of business, both in terms of revenue and units sold.

The company doesn't sell through big box stores.  In fact, in the past, Stihl has boasted about not selling in these establishments.  They once runs ads saying that you wouldn't find their chainsaws in a box, not even a big box.   The ad referenced the fact that the dealer staff often assembled and taught you how to use the product before you left the small neighborhood store.  The article ends noting the loyalty of its customers:

The strategy might not make for as many transactions, but it makes for a stickier, more lucrative customer. The personal touch, apparently, still works in a digital, distanced world.

Shrink to Grow: Why Don't More Companies Adopt This Strategy?

As we witness the breakup of GE, a thought comes to mind regarding a rarely used corporate strategy - namely, the "shrink to grow" approach.   Many years ago, I went to work for General Dynamics after graduation.  When I began working there, General Dynamics was #44 on the Fortune 500 list of the largest American firms by revenue.  However, the company had been hit by acquisitions scandals and a string of very disappointing financial results.  Then the firm witnessed the fall of the Berlin Wall and the collapse of the Soviet Union, and the US government began to shrink defense spending in key areas affecting the firm's businesses.  The company's leadership knew that consolidation needed to occur in the defense industry.   General Dynamics sold many of its major businesses, including its largest business unit (which manufactured the F-16 fighter jet) as well as smaller units such as its Cessna Aviation division.  

By the mid-1990s, General Dynamics had two major divisions remaining:  one unit produced nuclear submaries, and other manufactured tanks and other armored vehicles.   In 1996, General Dynamics ranked only #350 on the Fortune 500 list.  In the years that followed though, the company began to grow again, building on these two remaining platforms.  It acquired Bath Iron Works, for instance, to expand its shipbuilding business beyond submarines (Bath produced destroyers).   It made a series of other acquisitions as well.  By 2005, General Dynamics had risen to #115 on the Fortune 500 list.   Moreover, the company became highly profitable and delivered strong shareholder returns in this era.   

Why don't more companies adopt a "shrink to grow" approach when experiencing poor financial results and/or other crises/scandals?   Many executives hate the thought of shrinking, of leading a much smaller organization.   They focus on the top line (revenue) and market share, rather than thinking about how to position the organization to thrive in the long run.   As we watch GE shrink now, perhaps we will see that it positions the organization to succeed and grow again over time.  More companies should consider this strategic approach. 

Scanning Your Environment

When organizations fall behind the competition, we often hear people describe how the enterprise had become increasingly insular in recent years. Managers focused on enhancing operational efficiency, and they fixated on internal processes and procedures. As a result, they did not recognize key trends and changes in the marketplace. They did not spend enough time learning about new types of competitors. How can we become better at scanning our external environment? Here are four key steps that can enhance your efforts:

1. Make time for environmental scanning on your agenda. Carve out space on your calendar each week to learn about new technologies, products, or competitors. Dedicate some time each year to attend a conference, speaker, or workshop that falls outside of your normal routine. If you don't make time for scanning, it's easy to allow other duties to crowd out this key activity. 

2. Identify some young people in your organization with whom you can connect on a regular basis. Talk to them about social and technological trends. Compare and contrast how they use their smartphone, computer, television, automobile, and other devices differently than you do. Inquire as to how their consumption patterns might differ from yours (currently or when you were their age). 

3. Make it a habit to read the major SEC filings of your competitors. Don't just read the articles that appear in the Wall Street Journal. Dig into the details found in those financial reports. Read what analysts are saying about the competition as well. Consider listening to a few earnings calls from your rivals. It's amazing how many managers have never actually dug into these types of documents. They rely on journalists to tell them about major events taking place in their industry without studying the competition more closely. 

4. Take a look at what your suppliers are doing. Many environmental scanning efforts focus on customers. That's important, naturally. However, you can also glean a great deal of information from your partners and vendors in the supply chain. How is their business changing? Are they selling to different people? Have their portfolios of products and services changed? Have any of them started to vertically integrate? Suppliers must adapt as they see changes downstream in the value chain. Watching for those adaptations can tip you off to key trends in your market.

Investors vs. Competitors: Disclosing Information Involves Key Tradeoffs

Companies face important tradeoffs when thinking about how much information to disclose about their business.  Investors, of course, want a great deal of information about the nuts and bolts of a business.  They want detailed segment information for diversified firms. They would like to see more detailed operating metrics about performance that might serve as leading indicators of financial performance in upcoming quarters.  They want to understand customer satisfaction, product pipelines, etc.  Companies face a delicate balancing act though. The more they disclose to investors, the more that they are also disclosing to competitors.   For instance, many diversified firms provide frustratingly little segment information in their 10K reports.  Of course, they can get away with this limited disclosure as long as they are performing well overall.  When the numbers decline, investors begin to wonder if the whole is worth less than the sum of the parts.  To complete that analysis, investors push for more detailed information about segment performance.   The diversified company may resist such calls though, not simply because they wish to rebuff activist investors.  They also may not want to offer critical data to competitors.  

The Wall Street Journal's Heard on the Street column demonstrated this conundrum that firms face when describing the situation at Netflix these days.  Investors would like to know how many people are viewing the company's original content.  They are, after all, used to seeing ratings information for broadcast andcable networks. On the other hand, Netflix may have good reason to resist investors' push for more disclosure. In fact, investors should understand that less disclosure may be very good for the bottom line. Here's an excerpt from this week's Heard on the Street column;

As much as Netflix’s investors might also want to know that, there is an important strategic advantage for the company in keeping everyone in the dark. Not only does having all the data allow Netflix to continue to tout the success of its originals, it also means more leverage over media companies in licensing negotiations. If the companies don’t know how many people are watching their shows on Netflix, they don’t know how much to charge for it.