Big Winners and Big Losers : The 4 Secrets of Long-Term

Business Success and Failure

by Alfie Marcus

Presented by David Keenan

to the Minnesota Futurists

27 May 2005

ISBN 0131451324 Hardcover Wharton School Publishing Oct 2005, 400 pages

Author Alfred A. Marcus

• BS, MS at Univ. of Chicago. Ph.D at Harvard

•Edson Spencer Chair of Strategic Management and Technological Leadership at the U of M, Carlson School of Management

•On Faculty since 1984.

•Teaches and conducts research in strategic management, macroeconomics, business ethics, and business and the natural environment.

•Visiting Professor at MIT's Sloan School of Management. Marcus is author or coeditor of 11 books

•Consulted and worked with many companies including 3M, Corning, Excel Energy, General Mills, and IBM.

Criteria

• 10, 3, & 1-year ave. annual market return– Winners = exceed industry average– Losers = below industry average

• 5-year ave. annual return– Winners = more than double the ind. ave.– Losers = less than half the ind. ave.

The Population Studied

• Wall Street Journal Shareholder scorecard

• 1000 companies from 1992 – 2002

• 41 of 78 industry groups had “winners” or “losers”

• 32 winners – $3.5 bil revenues, 14,500 employees ave.

• 64 losers– $10.5 bil revenues, 48,000 employees ave.

1992 – 2002 Winners & Losers

Winners• Southwest• Johnson Controls• Harley Davidson• Best Buy• Alliant Tech• Amphenol• Ball• Brown & Brown• Forest Labs• SPX• Cabot• Donaldson

Losers• Goodrich• Delta• Disney• Conagra• ADM• Merck• Readers Digest• Kodak• McDonalds• Nordstrom• Halliburton• Kmart

Losers• Mattel• Honeywell• Pharmacia• Saks• Snap On• Parametric• LSI Logic

Another Cut - Criteria

• Companies analyzed had to outperform or under perform their industries in the 6 months following Jan 1, 2002

• About half the winners and losers dropped out

9 ComparisonsSector Winner 5 yr ave annual Loser 5 yr ave annual

mkt return % mkt return %

Technology Amphenol 34.0 LSI Logic 3.4

Mfg/Appliance SPX 28.8 Snap-On 1.7

Software FIServ 31.2 Parametric -21.2

Food Dreyers 22.4 Campbell Soup -1.8

Drugs/Chem Forest Labs 58.5 IMC Global -18.7

Mfg/Industrial Ball 23.9 Goodyear -11.5

Fin’l/Insurance Brown&Brown 48.7 Safeco -1.0

Retail Family Dollar 36.1 Gap 9.8

Ent./Toys Activision 24.1 Hasbro -0.1

Analysis Methodology

• 45 analyses – 5 replicates per company pair– Groups of 6 managers compiled reports– More than 500 managers contributed– Asked to explain reasons for sustained

advantage or disadvantage

Report Outline• Executive Summary

– why is one so much better

• Brief Description of the companies

• Relevant Performance

• Critical competitive challenges

• Key internal strengths and weaknesses

• Main moves – response to challenges

• Why one performed better

• References

Findings

Attributes Success Failure

1.Position“Sweet spot” Being in an uncontested space

“Sour spot” Being in a contested space

2. MovementAgilityGetting into uncontested space

RigidityNot getting to uncontested space

3. Hard to imitate capabilities

DisciplineProtecting uncontested space

IneptnessInability to protect an uncontested space

4. ConcentrationFocusExploiting uncontested space

DiffusenessInability to exploit an uncontested space

Exploration

Exploitation

Necessary but not sufficient

Position ExamplesWinner /

Sweet Spot

Loser /

Sour Spot

Amphenol

Co-create

Close to mkts

Hi perf mil specs

Harsh env

Error free

Design w/cust

Shares R&D

Forecast need

Single source

Snap-on

Too costly

Commodities

Tools to sophisticated

Little room to differentiate

Fixated on patents, premium brand, tech. leader

Dreyer’s

Embed

Low margin

Private label

Substitutes

Runs local freezers

Unique intimacy

Safeco

Too cheap

Little loyalty to cust.

Generic policies

Missed actuarial risks, disasters

WS tanked

Activision

Broker

12-28 yr old males

Sequels

Outsource development

License brands

Own distribution

Gap

Too complex

3 niches

Fashion mistakes

Too trendy

Too many kinds of cust

Design / timing

Movement ExamplesWinner /

Agile

Loser /

Rigid

Fiserv Consolidate financial services

Large data processing needs

Outsource

From smaller banks

Infrastructure, software, hardware, service on or offsite

Enhancements, seamless

110 acquisitions – best of breed

LSI Logic Custom chips for mil

Slow to move to generic chips for consumer electronics

Found hard to compete on price

Bought into storage area network bus. but ended up competing with customers

Forest Labs From vitamin/candy to proprietary delivery system

Celexa for Lunbeck,

Zoloft/Paxil/Prozac for Pfizer/Lilly/Glaxo

Lexapro – patent

Pipeline incl. hypertension, alcohol, Alzheimers

Generics to hedge risk

Campbells Many brands from V8 Franco-Am, Swanson, Pep Farm, Godiva

Failed to win w/ V8Splash

66% earning from soup

Missed Progresso challenge

Slow to chunky and cold blending

Capabilities ExamplesWinner /

Discipline

Loser /

Inept

Ball Mfg process control

Exits antiquate plants

Reduce material/retain integrity

Specialty containers

Monitors acqs and divests

No union – training, particip, very selective, loyal

Recycling leader

Goodyear Failed turnarounds

Revolving door CEOs

Alienated dealers – took away access to deals to sell through WalMart

Failed to win post Firestone

Poor relationship with union, aging workforce, pension laiabilities

Family Dollar Low overhead, open all time

No credit, self service

Expansion financed by cash flow, no debt

No sales

Brand names

Hard goods

Supply chain, IT efficiencies

Accurate forecasting

Hasbro Repeated restructurings, layoffs, plant closings, streamlining fails to deliver

British price fixing scandal

Failed against computer game growth

Concentration ExampleWinner /

Focused

Loser /

Diffuse

Brown & Brown

(D&O insurance)

No underwriting just broker

Distribution only, low ohead

Specific profitable niches

Mid size businesses

Professionals and Prof Associations

Auto dealers, dentists, lawyers, top level company officers

Parametric

(Pro E CAD software)

Numerous indirect distributors, 3rd parties, resellers

Indirect sales alliances, not completely loyal as sell competitor products

Out of touch with cust.

Customers complain (globally) about need to invest own time and money to train and integrate

W/out customer contact unable to do good R&D or product updates

Best Selling Business Books Divided

Agility

• Innovators Dilemma– Christensen

• Why Smart Executives Fail– Finkelstein

• Creative Destruction– Foster & Kaplan

• Transform Your Business– Godin

• Value Migration– Slywotzky

• Revival of the Fitest– Sull

Discipline & Focus

• Execution– Bossidy & Charan

• Good to Great– Collins

• Balanced Scorecard– Kaplan & Norton

• What Really Works– Nohria & Joyce

• Discipline of Market Leaders– Treacy & Wiersman

• Profits from the Core– Zook

Alfie says ‘Winners do both well’

Implications: Manage the Tension

Sweet spot Agility (Move) Discipline (Protect)

Focus (Extend)

Goal Achieve Growth Enhance Profits Profits and Growth

Innovation Efficiency Reform and Refinement

Reinvention Operational Excellence

Fine-tuning

Actions Explore Exploit Explore and Exploit

Prospect Defend Analyze

Implications: Manage the TensionSweet spot Agility (Move) Discipline

(Protect)Focus (Extend)

Strategies Vision Mission Mission-vision

Conditions Disequilibrium Equilibrium Equilibrium-disequilibrium

Technologies Disruptive Sustaining Sustaining-disruptive

Industries Dynamic Static Dynamic-static

Image of the future

Unpredictable Like today Gradually evolving

People Revolutionaries (break the rules)

Controllers (enforce the rules)

Improvers (Fix the rules)

SummaryBig winners:

1. Occupied sweet spots. 2. Possessed the ability to move into these spots. 3. Disciplined themselves to defend their spots. 4. Exploited and extended their positions.

Big losers:

1. Occupied sour spots. 2. Were rigid. 3. Could not defend their positions. 4. Could take advantage of their positions.

Discussion• Understanding the critical

importance of unleashing creativity with Bill Peter

• Excerpts from The Change Makers: From Carnegie to Gates, How the Great Entrepreneurs Transformed Ideas into Industries by Maury Klein 2003