Questioning the Leadership Style

A key question for many organizations very much related to that of their value proposition is whether they will lead change or follow change. Each approach has had its share of significant debate on its relative merits and risks. Especially in the new economy, Wall Street has changed its mind more than once. As the promise of new ventures with new ideas fails to live up to the IPO hype, value-based companies have come into favor again. Earlier dot-com companies with little in the way of profit—or hope of achieving it—soared to incredible valuation heights, only to crash back to earth after the reality that they might never make a profit sunk in. Some seemed to have made the grade, but many haven’t. Many traditional, established companies that took a go-slow approach and are now adopting newer tactics seemed to do better, but not all. So what’s the right strategy? Is there even a right or wrong way, or is it more about execution than strategy? These are all good questions that each organization has to ask itself.

A good question is whether there really is anything new about this in the new economy. E-business is just business but at a faster pace with new channels. Organizations, especially successful ones, have always had to deal with the question of when to change, not whether to change. Should they risk their current market leadership with something new? Historically, their branding might have provided something that delivers superior margins. Should they compete with themselves with a lower-cost product or service? Where is the business case and what’s the risk?

There might not be a right or wrong way, but you have to pick a way. McDonald’s carefully researches new sites, and then Burger King locates a new restaurant nearby. Both ways seem to work. Pfizer will pour billions into drug R&D. In time, when the patents expire or licensing agreements are reached, the generic manufacturers will make cheaper alternatives to Pfizer’s best sellers. Neither is wrong. It’s just a choice of strategy, but you have to have one.

There is a risk, however, in becoming too complacent when it might be time to try something new. Legendary companies such as Nordstrom and Federal Express are hard to match because they are moving targets, always learning from their loyal customers. At the right times, this is a good strategy. But what do Apple, IBM, DEC, Compaq, and Barnes and Noble have in common? They all missed huge marketplace opportunities. They listened to their customers at a time when their customers were unaware of a fundamental shift occurring in products or services and, as a result, didn’t ask for the new product or service.

This thinking, brought to the surface by Clayton Christensen,^[6] has shown us the “dilemma” that comes with success and the importance of not blindly clinging to one strategy at all times. In the case of Apple, IBM, and the four other previously mentioned companies, some new product, service strategy, or channel appeared in the marketplace. The firms considered the new offering novel but not a threat because it wasn’t “relevant” to their most profitable customers. The initial market was relatively small with unattractive margins and typically comprised different customers with different needs. It also involved a product or approach that existing high-end customers and owners would deem inferior by all existing measures of value. The emerging market was easy to dismiss, hard to support from a cost benefit and risk perspective, and consequently ignored until it matured elsewhere and threatened the status quo.

^[6] See note 4 earlier in chapter.

Apple Computers is a fascinating study in the ups and downs of new versus existing strategies. The Apple II appealed to a market segment ready for a small, inexpensive personal machine to support educational objectives. This was an unrecognized market, and the Apple II didn’t threaten existing computer companies, which didn’t want such a poor performer by existing standards compared to their mainframe business. In the first two years, Apple sold 43,000 units—a huge success for a startup then but a revenue-rounding error to the more established computer manufacturers. Likewise, the Macintosh was introduced based on technology developed but not commercialized by Xerox, whose existing customers didn’t see the value. Xerox couldn’t make a compelling business case for a personal computer with a user-friendly graphic interface. Again, Apple scooped a large win with a disruptive technology that its competitors were slow to value in a marketplace they saw as being too limited. The strategy to do this didn’t come from existing customers but from an internal vision and an open mind.

The success that Apple had with the Mac moved it to more upscale markets with competitive products for customers of the traditional firms. The upwardly mobile Apple became a threat and, in the process of growing larger, started to assume many of same decision-making criteria that paralyzed its competitors early on. The idea for a new pocket-computing product took form with the Newton, but, unlike in its prior initiatives, Apple adopted a different set of criteria for judging the Newton’s success. Despite sales of 140,000 in its first two years, the Newton was considered a failure and abandoned because it contributed only a miniscule percentage of revenue, as compared to existing customer income. This decision left 3Com with a huge opportunity for the Palm Pilot.

Paradoxically, Apple’s later crisis of survival—along with its vision, which was reignited with the return of Steve Jobs—opened the door for the iMac, G3 Power Mac, and G4. This return to a value proposition of leadership and innovation was appropriate for Apple. The iMac exhibited what can go right by not asking existing sophisticated product or service users what to do. By introducing a product with less functionality than existing ones and targeting a different market, a new leadership business model was created. In the process, a new market emerged.

Similar examples abound in almost every industry, proving that there isn’t necessarily a right choice but sometimes it’s a matter of the appropriate strategy for the right time. Just ask the competitors of Southwest Airlines, Amazon.com, Autobuytel.com, Progressive Insurance, Dell Computers, and the like. None of them saw a serious threat coming, and, when they did, they still didn’t act in time. They were too busy looking backward at existing competitors and today’s customers when it was time to transition.

Consider what others have done. General Motors couldn’t have made the Saturn line work inside GM proper, so it set up shop in Spring Hill, Tennessee, and moved its best assembly line employees there. Hewlett-Packard chose to compete with its own LaserJets by also marketing ink-jet printers. 3M gives researchers untethered R&D time and money for anything they want to work on. But also consider what Microsoft has done by being second in learning from the pioneers and building evolving solutions in word processing, graphics, browsers, and operating systems or, if that fails, buying out the competition.