Five Classic Competitive Strategy Mistakes

Based on my experience, here are five business strategy mistakes that organizations often make:

1.  Focusing on market share extensively, while not thinking enough about how to drive product category growth - as a result, they miss chances to grow the pie for all

 2.  Paying too little attention to a maturing core business while focusing effort on growth into new markets, resulting in further erosion of the core

3.  Overestimating economies of scale and scope - and forgetting that diseconomies of scale and scope can become substantial

4.  Benchmarking rivals and then imitating one particular activity or capability, while not realizing that the rival's competitive advantage comes from how that activity fits tightly into a broader, integrated system of activities

5.  Resorting prematurely to price as a competitive weapon - not being creative enough to think about other ways to attract customers, deepen their relationship with existing customers, and grow an entire category

Does Apple Spend Enough on R&D?

Matt Kramer published an article in USA Today this week titled, "7 Companies Outspend Apple on Innovation."  Kramer noted that Apple ranked behind seven other prominent technology companies in terms of R&D spending.  Moreover, Apple ranked 95th  among the S&P 500 in terms of R&D as a percentage of sales.  He found that quite surprising.  Kramer ends the article by saying, "But with the iPad getting stale, and competition in the smartphone arena kicking up, investors might wonder if Apple might need to pick up its R&D game."  The article caught my eye because a great deal of academic research shows that R&D spending is not strongly correlated with successful new product development.  It's not just how much you spend; it's how you spend it!   Kramer's article is thought-provoking, but it would have made for a much stronger piece if he included the research findings about the connection between R&D spending and firm performance.  

Fast Company article: Embracing Failure

Rachel Gillett has written an article for Fast Company titled, "What The Hype Behind Embracing Failure Is Really All About."  She has included several of my comments. The article examines the popularity of the concept of "tolerating failure" - is it overdone? Is it a fad?  What's the true meaning of the concept of embracing failure?  Here is the link to the article. 

Are Smaller Boards More Effective?

The Wall Street Journal reported last week on a new study conducted by GMI Ratings for the newspaper.  The study examined boards of directions, and it took a look at the link between board size and performance.  Here is a summary of the findings:

Among companies with a market capitalization of at least $10 billion, typically those with the smallest boards produced substantially better shareholder returns over a three-year period between the spring of 2011 and 2014 when compared with companies with the biggest boards, the GMI analysis of nearly 400 companies showed.  Companies with small boards outperformed their peers by 8.5 percentage points, while those with large boards underperformed peers by 10.85 percentage points. The smallest board averaged 9.5 members, compared with 14 for the biggest. The average size was 11.2 directors for all companies studied, GMI said.

What are the advantages of smaller boards? Why might they perform more effectively? Here are a few potential reasons cited in the Wall Street Journal article:

• Decisions can be made more quickly with a smaller team. It can be more nimble.
• Each person is more likely to be fully committed, prepared, and engaged. There's less likelihood of free riders on a small board.
• People are more likely to be candid in a more intimate atmosphere than on a large board.
• A small board can dig into an issue in much more depth. On a large board, you may have a tendency to deal superficially with issues rather than really "getting your hands dirty."

I would add one other reason. We already know that teams tend to focus their discussion on information commonly held by all participants, and they don't spend enough time on information held privately by one or a few members. That challenge becomes even more pronounced as a team becomes larger. Therefore, a smaller board benefits from a higher likelihood that information and expertise from all members will be shared and discussed.

Stihl: Making Tradeoffs

Great firms make tradeoffs; they choose what not to do.   One key tradeoff that firms make is about the channels through which they decide to sell their products.  Premium brands often make an explicit choice to restrict distribution of their products, so as to maintain service quality and preserve the reputation of their brand.  As an example, consider Stihl.  They are quite blunt about their strategic choice to only sell their products through licensed dealers and not through big box retailers such as Home Depot, Lowe's, or Wal-Mart.  Here's an except from their Canadian website:

We can give you over 1,000 reasons - our legion of independent STIHL Dealers nationwide. We count on them every day and so can you. To give you product demonstrations, straight talk and genuine advice about STIHL products. To offer fast and expert on-site service. And to stand behind every product we carry, always fully assembled. You see, we won't sell you a STIHL in a box, not even a big one.

In addition, here's an advertisement that they ran several years ago.  

First Movers Don't Always Have the Advantage

Many entrepreneurs fall into the trap of believing that being the first mover always conveys a formidable advantage.  The first mover myth trips up many business people. Who was the first player in social media?  Not Facebook.  It was Friendster.  Who was the first mover in the browser market?  Netscape.  Who was first in search?  Not Google.   According to Kellogg Insights, “One study showed, in fact, that pioneers were more successful than late movers in just 15 of 50 product categories.”  

What are the key sources of first mover advantage?  If substantial economies of scale, network effects, and a powerful learning curve exist, then first movers have an advantage.  However, there's downside to being the first mover.   Being the pioneer in a new market can be expensive and challenging.  You make all the mistakes that a pioneer is likely to make.  Others watch and learn from your errors, and then they leapfrog past you.  At the same time, entrepreneurs who move first can then get stuck in the sunk cost trap.  They can become resistant to adapting their strategy that enabled them to gain some initial traction.  Fast followers then pass them by.   Entrepreneurs need to look carefully at a particular market and understand that simply being the first mover may not convey substantial advantage and protect them from competitive threats.

The Everything Store: Interesting Read

Several weeks ago I finished reading Brad Stone's book, The Everything Store: Jeff Bezos and the Age of Amazon.   The book generated some controversy when MacKenzie Bezos (Jeff's wife) posted a scathing review on the Amazon site.  She claims that the book contains a number of factual inaccuracies.  Her real concern, though, is that the book does not always paint a very flattering picture of Jeff Bezos.  Nevertheless, I found the book to be interesting, and I read it with the understanding that it may not be a completely accurate picture (as is true of many of these types of books).  Here's an interview with the author on CBS: 

A Few Nuggets of Advice for College Students at the Start of the New Year

As students arrive on college campuses throughout the country this time of year, I would like to share a few words of advice.  I hope that students, particularly first-year students, find these comments useful.

1. Ideas don't sink in through the process of re-reading the book and your notes.  You need to actively work with the material.  Writing is much more useful than reading in this regard.  When studying, try writing a synthesis of your notes.  Boil the extensive notes down to a 5-10 page outline of the course, and then to a 1 page outline.   This process will enable you to synthesize and integrate what you have learned.  If applicable, do practice problems as a means of studying.  Practice beats reading notes any day of the week. 
2. Go to class!  It's so easy to skip class when you are tired.  However, going to class is more than half the battle. You will find it so much easier to excel if you aren't trying to make up for absences. 
3. Find a mentor.  I'm not talking about going to office hours just to try to improve your grade.  I'm talking about a true mentor, someone can offer you guidance about your studies as well as your career.  Use that person as a sounding board.   In your early days at college, you should begin trying to identify who that mentor might be.
4. Explore topics beyond your area of specialization.  Take courses in multiple domains, and broaden your knowledge.  Many creative ideas come from the process of reaching outside one's area of expertise.   Thus, building a broad knowledge base is important.  Moreover, you will be much more interesting at dinner if you can have a conversation that spans many topics.  You'll find that ability to be an important life skill!
5. Find opportunities to develop as a leader.  Those opportunities typically come outside the classroom. The primary way to become a better leader is to practice.  Thus, seeking out opportunities to lead groups, student organizations, and the like is crucial. 

Why We Don't Seek Advice, but We Should!

When you face a difficult situation at work, do you seek advice from others?   Do you consult with them before making a decision?   Alison Brooks, Francesca Gino, and Maurice Schweitzer have written a new working paper about the process of seeking advice from others.  These scholars found that many individuals do not seek advice from others, because they do not want to look incompetent or incapable.  They fear that others will perceive advice-seeking as a sign of weakness.  Brooks, Gino, and Schweitzer then asked:  What do others think of you when you seek advice from others?  How do you they actually perceive you?  They found that people tend to view advice-seekers as more competent than those who do not garner input and counsel from others.  The scholars refined these findings further by examining the situations in which people view advice-seekers most favorably.  They found that we have a more favorable view of advice-seekers when the situation is difficult (as opposed to simple), and when people consult with experts (rather than non-experts).  Perhaps most interestingly, an individual has a more favorable view of an advice-seeker when that person came to him or her for that counsel, rather than going to others.  Aha!  So, what really impresses us is when others somehow think we are important/knowledgeable/wise.  That should not surprise us at all!

Social Media and the Reluctance to Speak Up

The New York Times reported this week that Pew Research and scholars at Rutgers University have published a study on the so-called "spiral of silence."  That phrase refers to the tendency people have to not discuss their political views in public because they fear a clash of opinion with close friends, work colleagues, etc.   Keith Hampton and his co-authors examined whether the "spiral of silence" applied in the world of social media.  In other words, does social media help stimulate debates about public policy issues?   They examined the behavior of 1,801 adults with regard to one major news story: National Security Agency contractor Edward Snowden's disclosures about surveillance programs in the United States.   The scholars discovered a discussion about this controversial public policy issue was less likely to occur via social media than in person.  Moreover, the individuals who were reluctant to discuss the issue in-person with others did not view social media sites such as Twitter and Facebook as better places to share their views. They also were reluctant to speak up via social media.  The people who do share their views tended to be those who have a strong belief that their friends and followers on social media are like-minded on these public policy issues.  Of course, the study only examined one public policy issue, but the findings should cause us to think about social media's effect on public debate.  To the extent that discussion occurs via these platforms, is it often simply a dialogue among like-minded people?  

Do We Favor Quick Decisive Leaders and Penalize Slower, Deliberative Thinkers?

Stanford Professor Zakary Tormala, doctoral student Daniella Kupor, HBS Professor Michael Norton, and Kellogg Professor Derek Rucker have conducted some new research about how we react to the decision processes of others.  They asked the question:  Do we favor those who we perceive as quick decisive leaders and form less favorable impressions of those who engage in a slow, deliberative thought process?  Their research suggests that the answer is not black and white. Our impressions depend upon the situation.  If someone faces a very challenging decision, then we look for and are impressed by a thoughtful, comprehensive decision-making process.  On the other hand, if someone faces a very easy choice, then we think less favorably of that person if he or she labors over the decision.  In short, we want to see people match the comprehensiveness of the decision process with the complexity of the situation.   The Stanford story about this research summarizes the main conclusion as follows: "In general, people seem to be less drawn to and less open to being influenced by individuals who overthink small decisions or 'underthink' big ones." 

Should Burger King Acquire Tim Horton's? Does This Deal Make Sense?

The Wall Street Journal reports that Burger King is pondering an acquisition of Canadian coffee/donut chain Tim Horton's.   The newspaper reports that the firms may be pursuing "a so-called tax inversion and move the hamburger seller's base to Canada."   Recently, tax inversions have been on the rise, as firms establish headquarters overseas in an attempt to lower their overall tax burden.   The newspaper reports, "A move by Burger King to seal one is sure to intensify criticism of them, since it is such a well-known and distinctly American brand."  I found that sentence particularly funny, given that Burger King has been owned by a foreign company in the past!  Diageo, the UK-based producer of alcoholic beverages such as Guinness, Smirnoff, and Johnnie Walker, owned Burger King until 2002. 

Putting aside the political debate about tax inversions, let's take a look at whether this deal makes strategic sense.   Are there sufficient synergies to justify a deal between Burger King and Tim Horton's?  I'm skeptical.  Why?  For years, Wendy's - a primary competitor to Burger King - owned the Tim Horton's chain.  Under investor pressure, they ultimately divested the coffee/donut chain.  Why?  Investors argued that the sum of the parts exceeded the whole.  In other words, Tim Horton's was more valuable on its own than as a part of Wendy's.  Given that history, what makes us think that Tim Horton's will now be more valuable as part of Burger King than it is on its own?   I believe that management at Burger King will have to make this case to persuade investors and other analysts/observers that this deal makes sense. 

Do Good, Be Happy... with a Caveat

In this article, Stanford University reports on a stream of scholarly work that shows how acts of kindness toward others enhances personal happiness.  Stanford Professor Jennifer Aaker calls it the "helper's high."  Her recent research, with Melanie Rudd and Michael Norton, examines how to optimize that "helper's high."  Their work shows that setting concrete philanthropic goals works much more effectively than establishing abstract objectives. Aaker explains, "This insight is important because nearly all of us are trying to make other people in our lives happy. Parents often say they just want their kids to be happy. Equally common is a desire to make our partners, family members, and friends happy, but few of us know exactly how to bring happiness to the people in our lives. Our new research sheds light on what we can do.”

The researchers examined this issue of concrete vs. abstract goals with a simple experiment.  They gave experimental subjects $5 Amazon gift cards in exchange for the performance of an act of kindness.  One-half of the subjects were asked to make someone else happy; the others were asked to try to make someone smile.  The former represents an abstract goal; the latter serves as a more concrete objective.  Those asked to make someone else smile indicated they experienced more personal happiness than those instructed to make someone happy. It did not matter what method any of the subjects used to try to make others happy or to make others smile. 

Speaking of how performing acts of kindness can make you happier, check out this story about "paying it forward" at Starbucks:

Adaptation in Global Strategy

We've been discussing different types of globalization strategy with my students here in France.  We read Pankaj Ghemawat's classic article in which he discusses three different types of global strategy: adaptation, aggregation, and arbitrage.  Adaptation is when firms modify their strategies and products/services as they move to different markets around the world.   Aggregation is when firms standardize their products/services, striving to exploit global economies of scale.  Arbitrage is when firms try to take advantage of factor market differences across nations, so that they can achieve cost efficiencies (e.g., outsourcing to low cost labor nations).   Ghemawat argues that firms must choose which of these strategies will be their priority.  He also argues that it's difficult to pursue all three strategies with equal emphasis, as these distinct strategies require quite different organizational structures and processes.  

We compared two interesting case studies this week in class.  On Wednesday we examined L'Oreal, a French company that has expanded successfully across the world.  L'Oreal has pursued an aggregation strategy, selling a product developed in one nation across many markets around the world... while marketing it often quite explicitly with the home nation branding and positioning. For instance, L'Oreal acquired the Maybelline brand and sold it through an "American beauty" positioning in markets around the world.  Likewise, the sold the L'Oreal brand with a positioning of "Parisian or French beauty" across the world.  By contrast, Thursday's case focused on a firm that has emphasized adaptation in its global strategy.  We analyzed how Canadian-based hotel firm Four Seasons came to Paris.  They had to adapt in order to succeed in the French market. 

I see two lessons from this interesting comparison between L'Oreal and Four Seasons.  First, Four Seasons did indeed adapt, yet they were quite explicit about the core practices and values that would remain constant.  That enabled them to protect their brand and their organizational culture.  Before firms embark on global adaptation strategies, I believe that it's quite useful to outline explicitly what the "non-negotiables" are... i.e., what are the core standards and values that will be applied globally.  That helps protect the brand, and it minimizes conflict between the home office and the local country managers, since everyone understands what the core beliefs are.  

Second, I think the L'Oreal case illustrates that certain products are more conducive to an aggregation strategy.  In other words, some products don't need to be adapted substantially when sold around the world.  In fact, global consumers don't want the product to be adapted.   For instance, consumers around the world want to buy French luxury goods, Heineken beer, etc.    The country of origin conveys a premium image that enables the firm to sell their goods globally at a premium price.  Some other goods and services simply are not conducive to such global expansion.  They require adaptation; firms have no choice.  Many food categories, for instance, fall into this category.  

Ice Bucket Challenge

My students and I have taken the Ice Bucket Challenge.   We are here in Aix-en-Provence, and we took the challenge right on the street amidst a number of perplexed folks on the street!   We are very proud to support the ALS Association and encourage others to donate as well.

Does Certain Music Make Us Feel Powerful and Act Differently as a Result?

Dennis Hsu, Li Huang, Loran Nordgren, Derek D. Rucker and Adam D. Galinskyhave conducted some interesting new research regarding the impact that music has on our behavior.  According to Kellogg Insights, the key research question that these scholars asked was: "Could listening to the right kind of music—even in the background—make us feel more powerful and in control?"  The scholars conducted several experimental studies to try to answer this question.  The researchers first had a set of subjects rate different songs with regard to how powerful, dominant, and determined they felt when listening to that particular music.  For instance, the famous Queen song, We Will Rock You, was rated very highly... it made most subjects feel powerful.   Then they conducted studies using the music that subjects had rated as either high-power or low-power songs. 

For instance, Professor Derek Rucker noted, “One thing we know from prior research is that people who feel powerful tend to make the first offer in negotiations. Essentially, power is a propensity to act, to take charge of the situation."   One of these experimental studies indeed showed that people listening to a "high-power playlist" indicated that they would prefer to go first in a debate more often than those who listened to a "low-power playlist."  

In sum, music - even in the background - does affect how we feel, and it may affect how we behave in crucial situations.   It can have a significant effect on our feelings of psychological empowerment.  So, what song do you want to play next time you have to enter a crucial meeting or negotiation at work?  

Do You Understand the Non-Economic Motives of Your Competitors?

Sun Tzu once wrote, "It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle."  Understanding your competitors is crucial to success in business.  Firms rightfully spend a great deal of time analyzing the competition.  In many cases, though, they assume that the competition is completely "rational" i.e. that the firm is purely pursuing profit maximization as its objective.  That's a mistake.   Organizations are not black boxes.  They are made up of people, and those people have a range of motives.  They are not simply motivated by profits.   You have to ask yourself:  Who is the chief executive?  Who are the owners of the firm?  Is a family involved?  How do these people find satisfaction?  What are their goals and aspirations?  In short, you have to probe so as to understand the full range of motivations that may be shaping their behavior.  In so doing, you can better understand how your competition is acting in the marketplace. 

I am reminded of the importance of understanding non-economic motives because my students and I spent the day studying the wine industry.  We discussed my case on Robert Mondavi and the Wine Industry this morning, and then we visited Chateau La Coste here in Provence this afternoon.  In the wine industry, many vineyard owners are clearly motivated by factors beyond profit maximization.  Think about the wealthy people with success in other fields who have entered the wine business (Francis Ford Coppola, Greg Norman, etc.) 

Chateau La Coste offered us a terrific tour; they were wonderful hosts.  The winery is an interesting example of varied motivations.  The winery is hundreds of years old, but a decade ago, it was acquired by an Irish property developer named Patrick McMillen, a friend of U2 lead singer Bono.  He's invested to build an amazing new wine production facility.  He's brought in designers and architects such as Frank Gehry, Tadao Ando, and Jean Nouvel to create an incredible new venue at the vineyard.  He's brought in an amazing art collection.  Is McMillen simply interested in profits?  Perhaps, but it sure seems that he has aspirations of creating something quite special in Provence, with an interest in something other than purely maximizing return on investment.  Other industries exhibit these types of dynamics as well, but wine certainly is a good example.  Wineries can be tough economic propositions, as it takes years to yield a return on your investment in land, vines, equipment, etc.  Yet, people do invest in vineyards and wineries for a variety of reasons.  Know thy enemy - that's the key lesson.  However, knowing your enemy means not just treating that organization as a black box interested in optimizing its bottom line.  Think about the humans leading the enterprise and seek to understand their goals and aspirations. 

The Value of Internships

Students in college often fret over landing that attractive internship over the summer.  Should they worry so much about internships?  Or, should college students be content with a decent job as a waiter or waitress over the summer?   Business Week's data from its undergraduate business school rankings survey indicates that they should be working hard to land that internship.  The magazine reports that, "Overall, 75 percent of students said they had an internship. Of those, 61 percent had a job offer in hand by the winter of their senior year, compared with 28 percent of students without an internship."  It appears that internships matter a great deal in certain industries, such as banking and consulting.   Overall, though, they are valuable regardless of what field you choose.  I know that many firms recruiting here at Bryant University do much of their hiring through their internship program.  Their goal, in fact, is to fill most of their openings through hiring of summer interns who performed very well.   They prefer that mode of hiring to the usual process of interviewing seniors who are approaching commencement. 

The Outcome Bias

Andrew O’Connell's brief blog post on HBR this week highlights research by three BYU professors - Lars Lefgren, Brennan Platt, and Joseph Price.   These three economists have written about the outcome bias, an important cognitive bias that impairs our ability to make good decisions.   According to Jonathan Baron and John Hershey, the outcome bias refers to the tendency of people to "take outcomes into account in a way that is irrelevant to the true quality of the decision."   In other words, you should not judge the quality of a decision simply based on an evaluation of the result, yet people do.  You should examine whether a choice was the best possible course of action given the information available at the time, and given the uncertainty in the situation.  Yet, we don't look back at how the decision was made in many cases.  We simply judge the result.  

Professors Lefgren, Platt, and Price explore the outcome bias by looking at the decision-making processes of professional basketball coaches.  These scholars report, "We find they [basketball coaches] are more likely to revise their strategy after a loss than a win—even for narrow losses, which are uninformative about team effectiveness. This increased strategy revision following a loss occurs even when a loss was expected and even when failure is due to factors beyond the team's control."   

Of course, the outcome bias works the other way as well.  How many times do we conclude that we made a good decision simply because a positive result was achieved?   Perhaps the positive outcome occurred despite the fact that made a poor choice.  Perhaps luck played a role.  We tend to downplay those possibilities, and we attribute the good result to our wise choice.  As a Navy Seal once told me, "The minute we forget that luck may have played a role in our most recent success is the minute when we enhance our risk of dying on the next mission." 

Do You Have Any Questions For Me? Tackling This Key Job Interview Question

You are attending a job interview, and you are asked: "Do you have any questions for me?"  What should you say?   You really should have four objectives in mind when formulating your questions.  First, you should pose inquiries that demonstrate you have done your homework about the company.  Show that you have investigated the company's history, strategy, products, culture, and performance.  Doing your homework means going beyond Google searches and the 10K report.   It means visiting the company's stores, talking to a current employee, and/or testing out a firm's products or services.   Second, you should avoid questions that clearly could be answered through such homework.   Asking a question whose answer can readily be found on the web is a signal that you have not done your homework properly.   Third, ask a question or two that enables the interviewer to talk about their own experiences.   Let's face it... people like to talk about themselves.  Ask them why they chose to join the firm, or how the firm has helped them develop and enhance key skills.  Finally, and perhaps most importantly, you have an opportunity to learn whether this company is truly a fit for you.   Here you want to learn more about the organization's culture, beyond the statement of values that you may have found on the website. 

How can you learn more about a company's culture?  Jason Hanold has posted an article on LinkedIn that articulates two good follow-up questions, beyond simply asking an interviewer to describe the culture in general terms. 

1. “When thinking about your best of the best talent - the most distinctive people at all levels of the organization - are there three or four traits that they share?” (Three to four traits in common well above all other traits)
2. “Has anyone who possessed those most admired traits ever failed, and if so, why?”

With this brief primer, hopefully you are more prepared to tackle the question: "Do you have any questions for me?"   If readers have other ideas as to how to address this interview question, I would love to hear them.