fundamental question: “Are you a strategist?” Sometimes it’s spoken, often it’s only implicit, but it’s always there. We talk about the questions strategists ask, about how strategists think, about what strategists do. My intent is not to coach these executives in strategy in the way they might learn finance or marketing. As business heads, they aren’t going to be functional specialists. But they do need to be strategists.
Are you a strategist?
It’s a question all business leaders must answer because strategy is so bedrock crucial to every company. No matter how hard you and your people work, no matter how wonderful your culture, no matter how good your products, or how noble your motives, if you don’t get strategy right, everything else you do is at risk.
My goal in this book is to help you develop the skills and sensibilities this role demands, and to encourage you to answer the question for yourself. It’s a difficult role and it may be tempting to try to sidestep it. It requires a level of courage and openness to ask the fundamental questions about your company and to live with those questions day after day. But little you do as a leader is likely to matter more.
2
ARE YOU A STRATEGIST?
HERE’S A TEST of your strategic thinking. It’s the same one I give my EOPers right at the beginning of the course.
Step into the shoes of Richard Manoogian, CEO of Masco Corporation, a highly successful company on the verge of a momentous decision.1 You’ve got a big pile of money and must decide whether to invest it in a far-reaching new business venture. The stakes are high, and it’s not an easy or obvious decision. If you don’t go ahead, you could be passing up an opportunity for growth in a new direction and hundreds of millions of dollars in future profits. If you take the plunge and turn out to be wrong, you may have wasted $1–2 billion. Either way, you will have to live with the results for many years.
To make the decision, you’ll first need to know something about Masco and its marketplace. The story begins more than two decades ago, but its lessons are timeless, and the intervening years allow us to take a long view on the company and the industry.
FIRST, CONSIDER THE COMPANY
It’s 1986. Masco is a successful $1.15 billion company that has just recorded its twenty-ninth consecutive year of earnings growth. Its ability to wring outsized profits out of industries that are neither high tech nor glamorous has won it the monicker of “Master of the Mundane” on Wall Street. Its portfolio includes faucets, kitchen and bathroom cabinets, locks and building hardware, and a variety of other household products.2 Masco expects the businesses to generate $2 billion in free cash flow over the next few years.
What would you do with all that money? Masco’s leaders want to tackle other mundane businesses where their prowess can “change the game.” They envision becoming the “Procter & Gamble of consumer durables.” In their immediate sights is the U.S. household furniture business, where they see another opportunity to seize profitable dominance of a sleepy industry.
Is Manoogian’s idea a promising one? If so, is Masco the company to lead the charge?
When I raise these questions the first morning in class, the executives don’t immediately jump up. Like you, they enjoy being the decision maker; it’s the role they play in their real-life jobs, but they’re reluctant to put themselves on the line with a group they’ve just met. With some coaxing, though, we’re soon deep into Masco’s situation and the issues Manoogian faces.
The case for Manoogian’s strategy looks compelling. Through a long record of triumphs in durable goods industries, Masco distinguished itself through efficient manufacturing, good management, and innovation. Its biggest success to date was reinventing the faucet business. Prior to Masco’s entry, the industry was highly fragmented and had a general lack of brand recognition, minimal advertising, and a low level of salesperson training. Leveraging the company’s deep metalworking expertise, garnered in its early years as a supplier to the automotive industry, Masco’s founder, Richard’s father Alex, solved an engineering problem that made one-handle faucets workable. When he couldn’t interest faucet companies in his patented innovation, Masco began making and selling the faucets itself.
Homeowners loved them, finding them a big improvement over traditional faucets that forced users to fiddle with hot and cold water separately. This extra functionality was particularly valued in kitchens where utility and maintenance-free operation were important. Not neglecting two-handle faucets, the company introduced a model with a new type of valve. This design, also patented, eliminated rubber washers, the major cause of faucet failure.
Masco went on to innovate in many other aspects of these new products, from basic manufacturing to distribution and marketing. It was the first to create brand recognition for a faucet with its Delta and Peerless brands. It was the first to introduce see-through packaging, to market faucets direct to the consumer through the do-it-yourself channel, and to advertise faucets on TV during the Olympics. In refashioning an industry of “me-too” products and boldly setting itself apart from others, Masco demonstrated that it was creative, able to apply traditional capabilities in new ways, and willing to take risks and make them pay off—abilities Richard Manoogian hoped would enable him to transform the furniture business.
NOW CONSIDER THE INDUSTRY
At the time Manoogian was weighing this decision, household furniture was a $14 billion business in the United States that didn’t make much money. With high transportation costs, low productivity, and eroding prices, it had about 2 percent annual growth, and return on sales, on average, was about 4 percent. There were more than 2,500 manufacturers, but 80 percent of sales came from only four hundred. Not all players were small, but most were, and many were family firms that had stuck it out through thick and thin, reluctant to leave the only livelihood their families had known for generations. Making matters worse, both sales and profits were cyclical and tied to broad economic factors such as new home starts and sales of existing homes.
Management in the industry was generally regarded as unsophisticated, and hadn’t made many significant changes in the previous fifty years. Wesley Collins, a furniture executive and trenchant observer of industry conditions, summed it up dramatically:
When everything else in our lives was changing, furniture stood its ground. While we put a man on the moon … furniture put another steak on the backyard grill and muttered, “My god, the price of oak went up again.”
When videotape put the home movie camera in the trash can forever, and tape cassettes put the plastic record-maker six feet under, and word processors put typewriters in the closet, and microwave popcorn killed the makers of popcorn makers … the furniture industry said, “Thanks, but we’ll stand pat.”
While we sat on our tuffets, the consumer forgot all about us. Our share of consumer expenditures slipped year after year. We lost over 40 percent of the retail furniture space in America, 25 percent of the retailers shut their doors, and department stores discontinued furniture right and left for products that gave them a better ratio of margin and turns per square foot.3
Collins went on to say that “the average tobacco chewer spends more for Levi Garrett Chewing Tobacco every year than he does for furniture.”
Most furniture purchases were discretionary and highly postponable, and, as Collins noted, there were many substitutes and lots of competition for the customer’s dollar. New innovations and designs were quickly knocked off by competitors, eliminating any advantage the innovators might have momentarily enjoyed.
Equally distressing, in the United States, there was little brand recognition in the industry. Customers didn’t know much about furniture and weren’t motivated enough to find out. There was little advertising and consumer research had shown that many American adults could not name a single furniture brand. Think for a minute: “What brand of sofa do you have in your living room?” When I pick an executive in the class at random and ask this question, the response is usually a startled look, a long moment of silence, and then, something like “Brown leather?” Everyone laughs, but when I open the question to the entire