800-CEO-READ Excerpts

Hardball - Part V

WHAT A WINNING ANOMALY LOOKS LIKE

A win is when you can retain and grow the business ofyour anomalous, highly profitable customers when you implement the new strategy. And, even more delightful, when you can capture the business of your competitors’ customers. The majority of Brokaw’s growth, for example, came from new merchants, the ones the company had no prior relationship with. Brokaw enticed these merchants with its improved service offering and hooked them with its ability to manage specialty orders. Not only did most of the existing specialty business come Brokaw’s way, its skill created incremental business. Such incremental business comes from your competitors’ customers and reinforces the basic economics underlying the anomaly. In the case of Brokaw, the more specialty business Brokaw was able to attract through its legacy merchants and its new merchants, the lower was the per customer cost of providing fast service. As more and more of the specialty orders migrated to Brokaw, there was less and less specialty business available to any competitor who might try to challenge the company.

The most successful win is the one that your competitor may not immediately recognize as a win, can’t figure out, or may even see as a loss. It took years for Brokaw’s competitors to realize that the information they had gotten in the press did not tell the whole story of how Brokaw had achieved its win. Besides, because their own core business was barely affected, they asked themselves, “Why make a move if we don’t have to?”

Taking advantage of an anomaly is an opportunity to inject into your company some of the vitality, excitement, and spirit of experimentation that is characteristic of start-ups. Every day, entrepreneurs are working to reinvent your business and carve out a piece of it for themselves. By capitalizing on anomalies, you can harness the same kind of creative energy and put growth back on your company’s agenda.

Reprinted by permission of Harvard Business School Press. Excerpted from Hardball by George Stalk and Rob Lachenauer. Copyright (c) 2004 by The Boston Consulting Group; All Rights Reserved.

Hardball - Part IV

It is management’s job to drive the process. They must create the forum. They must persist in asking “why?” until they gain genuine insight. Business unit personnel may be closest to the details of the anomaly in question, but they are usually too caught up in the day-to-day demands of their jobs to recognize the strategic significance of unusual patterns and practices. It often takes someone who is one step removed to notice and act on anomalies. It also takes an appreciation of differences, a lively sense of curiosity, and a willingness to play with the taken-for-granted rules of the business.

Once an anomaly with likely potential for building strategic advantage has been identified, the work begins. The anomaly must be thoroughly tested and explored before the strategy can be implemented. You must, to start with, understand the economics of the anomaly; the potential sources of growth and increased profitability need to be made explicit.

Before you exploit the anomaly more widely across your system, it may be necessary to change or improve your business systems. You may also need to adjust or refine your organization structure, in order to remove functional barriers and change dysfunctional behaviors that could blunt or prevent the successful exploitation of the anomaly.

You must consider how your customers and competitors will view your strategy and how they might react. To understand your customers’ views, you should test the concept with a subset of customers to prove the viability and value of the strategy.

It will be necessary to prepare a marketing plan. It should include a press and public information strategy that will bring your current customers into the new system by convincing them of its benefits. Your communication activities should keep your competitors guessing or cause them to take inappropriate action and give you as big a lead as possible. Your marketing plan should also include activities that will help you identify and target potential customers, particularly anomalous customers of your competitors.

Anomaly hunting is best done at certain times of the year. The worst time to look for anomalies is during a budget review, when everyone is worried about control numbers. A much better time is in a strategic review, when everyone should be prepared to think creatively about the future. Often, by reflecting on their past—including strategies and business results—companies can find opportunities they can exploit in a systematic way.

Reprinted by permission of Harvard Business School Press. Excerpted from Hardball by George Stalk and Rob Lachenauer. Copyright (c) 2004 by The Boston Consulting Group; All Rights Reserved.

Hardball - Part III

Once the scouting team has identified a few anomalies and analyzed them, the next step is to distinguish between those anomalies that signal a potential business opportunity from those that are one-time events or have no potential for wider application. The key is to examine the pattern of unusual performance over time. The customers who consistently buy high volumes or the market that outperforms the average year after year are, by definition, not random. Is there an underlying cause that can be identified and then replicated elsewhere?

Here are a few examples of the types of anomalies that might catch the eye of a scouting team:

• Medeco, a manufacturer of high-security locks, has average sales per household in major Canadian cities that are twice the average of its sales per household in the United States, even though Canadian cities are generally safer than those in the United States. Why? What drives those sales in Canada?
• MEC, a consumer electronics brand, is considered a commodity in Japan, where their products sell at a discount to Sony and Matsushita. In the United States, MEC products sell at a premium through specialty retailers. Why?
• Steetley Industrial Distributors has a branch in Oshawa, Ontario, whose gross margins are the lowest of all Steetley’s branches, but the branch’s sales per employee and return on investment are the highest. Why?
• Mitsubishi Heavy Industry (MHI) often competes against Combustion Engineering for contracts to design and build steam boilers for electric utilities. MHI’s win rate is on the rise. They, unlike all the other competitors in the industry, start the design work before they have even won the contract. Is that why they win so often?

Finally, the team needs to understand the precise mechanisms that animate the anomalies they have identified. Exactly what is causing the unusual pattern of performance? What specific features of the product, or the local environment, or the customer experience or operations are bringing it about? Don’t accept the usual, too-easy, off-the-top-of the-head explanations. It’s not enough to know, for example, that a particular customer has been loyal for years; you need to know precisely why. (If Radt had accepted that the Chicago merchants had a special relationship with the Brokaw rep, he would not have discovered the real cause of the sales anomaly.) This requires the analysis of internal data and of customer data as well, and may require field interviews with customers, and with their customers.

Reprinted by permission of Harvard Business School Press. Excerpted from Hardball by George Stalk and Rob Lachenauer. Copyright (c) 2004 by The Boston Consulting Group; All Rights Reserved.

Hardball - Part II

WHERE AND HOW TO LOOK FOR ANOMALIES

Brokaw’s growth strategy was based on an insight about their anomalously large market share in Chicago. Such anomalies exist in all businesses, but you are more likely to find them in businesses that are characterized by high complexity—those that have a diverse customer base with many segments, defined by volume, product variety, and customer type. The more diverse your customer base, the more likely it is that the standard process cannot be forced to fit all possibilities and that one or more customers will present an anomaly. The diverse base, however, will also make it more difficult for management to see the anomaly, because so much information is available. There may be many inconsistencies and aberrations, and it will be impossible to investigate all of them. Diversity will be further increased if you have multiple layers of distribution—selling through wholesalers and retailers, chains and independents, online and through catalogs. Multiple levels of distribution increase the number of customers and make it more difficult to identify the nonstandard behaviors that have potential for exploitation.

Mature businesses, complex or not, are also fertile breeding grounds for anomalies. Companies in mature business are often set in their ways, resistant to change, and have become prisoners of existing customer relationships. They have become expert at ignoring or dismissing anomalies and, if they see one, might be unable to exploit it or respond if a competitor did so first. Sometimes you get lucky and stumble across a useful anomaly, but hardball companies go looking for them in an organized way. This is best accomplished by a team whose task is to look for anomalies, analyze their causes, estimate the profit potential they represent, and come up with recommendations for exploiting them. The team should be composed of people from finance, business development, marketing, sales, and operations. They should be given eight weeks or so to identify two or three interesting anomalies. Their specific tasks include:

• Assess the company’s productivity across many parameters,(e.g., sales and margin per employee, territory, account, product,service).
• Investigate the practices and activities ofthe various players in the business: distributors, sales reps, territories, and service techs.
• Develop histograms (bar graphs showing classes and frequencies) of productivity of revenue, cost, and profit drivers.
• Identify and investigate the outliers, such as the customers who buy or sell a great deal more or less than the average. What is their story?
• Spew out ideas about the strategic opportunities that might be embedded in these anomalies.

Reprinted by permission of Harvard Business School Press. Excerpted from Hardball by George Stalk and Rob Lachenauer. Copyright (c) 2004 by The Boston Consulting Group; All Rights Reserved.

Hardball - Part I

Hardball: Are You Playing to Play or Playing to Win?
by George Stalk and Rob Lachenauer
Harvard Business School Press - October 2004
192 Pages - ISBN 1591391679

Summary:

Great companies stumble and fall when they lose it. Highfliers crash when a competitor notices they don’t have it. Start-ups shut down if they can’t develop it.

“It” is a strategy so powerful and an execution-driven mind-set so relentless that companies use it to gain more that just competitive advantage-they achieve an industry dominance that is virtually unassailable and that competitors often try to explain away as unfair. In their hardball “manifesto,” author George Stalk and Rob Lachenauer show how hardball competitors can build or maintain an enviable competitive edge by pursuing more of the class “hardball strategies”: unleash massive and overwhelming force, exploit anomalies, devastate profit sanctuaries, raise competitor’ costs, and break compromises.

Based on twenty-five years of experience advising and observing a range of companies, the authors argue that hardball competitors can gain extreme competitive advantage-neutralizing, marginalizing, or even destroying-without violating their contracts with customers or employees, and without breaking the rules.

A clear-eyed paen to the time timeless strategies that have driven the world’s winning companies, Hardball redefines and reinterprets them meaning of competition for a new generation of business players.

George Stalk is a Director at The Boston Consulting Group and the author of Competing Against Time, the classic work on time-based competition. Rob Lachenauer is CEO of GEO2 Technologies.