Editor's note: All information in this article attributed to Harvard Business School Professor Cynthia Montgomery is from her new book "The Strategist," HarperCollins 2012, 189 pages, $27.99
"Many leaders today do not understand the ongoing, intimate connection between leadership and strategy," writes Harvard Business School Professor Cynthia Montgomery, in her book "The Strategist."
The book, published May 8 by HarperBusiness, addresses how over time leaders have lost sight of the strategy process and how to effectively execute it.
"Strategy became more about formulation than implementation, and more about getting the analysis right at the outset than living with a strategy over time," Montgomery writes in "The Strategist."
Strategy should be viewed as a continuous journey that requires calculated, focused decisions that differentiate a company from its competitors, Montgomery concludes in her book.
Otherwise, a company could face similar struggles that building products manufacturer Masco Corp. (IW 500/12) endured after the company launched an acquisition blitz in the late 1980s.
'Myth of the Super Manager'
Montgomery recounts how Masco had a vision in 1986 to transform itself into the "Procter & Gamble of consumer durables." Current company Chairman Richard Manoogian, who was also CEO at the time, made the bold move to acquire 10 furniture manufacturers that positioned the company as the largest furniture company in the world. Its diversified product line touched on almost every price point in the industry.
But by 1989, Masco's net income fell 30%, and the company eventually decided to sell its furniture business at a loss of $650 million.
Masco's downfall "was a case of the overconfident strategist," Montgomery says. That overconfidence is what Montgomery calls the "myth of the super-manager," or the belief that "daring vision backed by good management can overcome virtually all obstacles."
Masco's purchases of low, middle and high-end furniture companies put Masco at a disadvantage because the furniture industry's manufacturing, distribution and retail operations differ dramatically from the high end to the low end of the market, according to Montgomery. Customers rarely purchase both ends of the spectrum, and the products are not typically available at the same retailer.
"Like other furniture manufacturers, Masco's fortunes were hindered by the industry's extreme product variety, high shipping costs and cyclicality, which in combination make it extraordinarily difficult to manage a supply chain efficiently or profitably substitute capital equipment for labor," Montgomery says.
Differentiate By Adding Value
Masco's struggles point to at least three key strategy lessons, says Montgomery:
- Understand the competitive pressures in your industry, using your response as the strategy.
- Know how to confront competitive forces. "Don't be trapped by the myth into believing that your superior management skills will carry you to success."
- Don't underestimate the power of competitive pressures because their impact on your business can be as great as your own.
While Masco struggled, Swedish furniture manufacturer Ikea continuously sought ways to take cost out of the manufacturing process and create a unique buying experience for consumers. The company's retail stores don't resemble a typical discount furniture environment.
"You can make a day of it: Come with the family, try out the sofas, use the computerized tools to design your own kitchen and have a full-fledged Swedish meal at the restaurant," Montgomery says. "If, at the end of the day, you've bought too much to load onto your car, you can rent an Ikea van to drive it all home or even pay to have things delivered, assembled and set up."
By 2010, the privately held company founded by Ingvar Kamprad in 1943 had sales of 23.1 billion euros, about $29 billion, and gross margins of 46%, Montgomery notes. She attributes the company's success to having a sense of purpose.
Montgomery identifies purpose as a company's ability to define "why it exists, the unique value it brings to the world, what sets it apart and why and to whom it matters." She characterizes effective purposes as ennobling (inspiring to all involved), a commitment, distinctive and value-adding for all stakeholders.
Ikea extended value beyond its four walls, and it paid off for the company.
"Its flat-pack approach eliminated significant shipping and assembly costs," Montgomery says. "It ordered in volume and provided data that made its suppliers more efficient. For suppliers, all of these drove down the costs of doing business with Ikea and, in turn, reduced the price at which they were willing to sell the item."