industry, such as textile makers, dominate the vendor relationship because no furniture company buys enough textiles to be an important customer.
Customers in the industry are powerful because furniture purchases are highly postponable, products are long-lived and commodity-like, and customers are not brand sensitive.
Entry barriers are low, meaning that new firms can flood in and pull down prices if industry conditions ever become more attractive. On the other hand, the industry can be difficult to exit, especially for the many family firms that have few alternative options, making excess capacity slow to leave the industry.
Substitute products abound. New furniture must compete for the customer’s dollar with countless alternatives—including used furniture or hand-me-down furniture passed from user to user. Since many customers consider furniture a discretionary purchase, it must also compete with a plethora of products such as televisions and sound systems that customers are more excited about and consider to be a better value for their discretionary dollars. Even when furniture prices lagged increases in the consumer price index, sales did not respond.
How do you react to the existence of these forces?
It isn’t a happy lesson for many executives I teach. It seems to say, “Your prospects are predetermined—the game is up—or, if not up, a big chunk of it is out of your control.” Action-oriented executives, I find, prefer not to think of themselves as in the grip of outside forces. They prefer to believe in free will, not determinism. The possibility that their industries might drive or heavily influence their own performance isn’t near the top of their minds. As proactive leaders and believers in the power of management, they tend to focus on what they can control, while ignoring or underestimating what they cannot.
REJECTING THE MYTH
Ironically, the most successful and admired leaders, the titans of business, understand the profound significance of competitive forces outside their control. They know the crucial importance of picking the right playing field. They don’t buy the management myth that a truly good manager can prevail regardless of the circumstances.
Look at Jack Welch, Fortune magazine’s “Manager of the Century.” You probably don’t remember that when he took over General Electric, Welch sold off more than 200 businesses worth more than $11 billion and used that money to make more than 370 acquisitions. Why? He wanted out of industries where conditions were too negative, where he thought it would be too hard for GE to flourish. “I didn’t like the semiconductor business,” he said. “I thought it was too cyclical and it required too much capital. There were some very big players in it and only one or two were making any money on a sustained basis…. [Exiting that business] allowed us to put our money into things like medical equipment, power generation, all kinds of industries where we changed the game….”8
A comment from the Sage of Omaha himself, Warren Buffett, caps the point:
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.9
Buffett and Welch, two of the strongest managers on record, recognize that industry matters a lot. They understand that a significant measure of a firm’s success depends on competitive forces beyond a manager’s control, and they use that knowledge to their own advantage—by picking playing fields where they can win and, within those fields, carefully positioning their businesses to work with, not against, the forces.
BUT WHAT ABOUT …?
Despite such counsel, the myth of the super-manager lives on for many executives. It’s reinforced in practice just often enough to give it credence. Sometimes, even in the toughest lines of business, there is a plan that works. Individual firms on occasion have not only achieved great success in industries where most others have failed, but they’ve even changed the basic competitive context of the industries.
Such stories receive inordinate attention in business books and media, and executives are always quick to bring them up: Starbucks’s revolution in the coffee house business. Southwest’s triumphs in discount airlines. Cirque du Soleil’s reinvention of the circus business. Even Masco’s coup in faucets. Yes, it does happen.
But none of these strategies appeared out of the blue from the unfettered minds of super-managers. They came from a deep comprehension of the industries involved and the conditions at work in them. The founders of Southwest discovered a way to exploit a hole in the fare and route structures of established competitors. Starbucks succeeded not simply by brewing better coffee and creating an attractive coffee house experience, but by gaining scale and building the unique corporate skills needed to replicate that experience not tens or hundreds but thousands of times.
The founders of Cirque du Soleil, performers themselves, understood the essence of the traditional circus—that it was focused on children and that its economics were badly strained by the expense of transporting and caring for large, wild animals. By focusing on an adult audience, which let them drop many of the animal acts, they skillfully positioned themselves to avoid one of the industry’s greatest drains on profits while targeting customers with the highest willingness to pay.10 That’s not a cavalier disregard for industry forces: It’s surgical precision.
Look, too, at Warren Buffett’s portfolio. Most people don’t know he’s made significant investments in furniture. Like Masco, he also saw potential in the industry. But Buffett chose to invest in furniture retailing, not manufacturing, and bought several successful furniture sellers around the United States. He seems to be experimenting to see if these downstream retailers can benefit from the intensely competitive conditions upstream in furniture manufacturing—the very conditions that brought down Masco, Mengel, and all the others. In the long run, these may not turn out to be Buffett’s most brilliant ventures, but they reveal a real strategist playing his cards carefully with a deep appreciation of the forces at work in the industry.
No one can say that the decision to enter or remain in a tough industry is right or wrong on the face of it. Remaking a difficult business, as Masco set out to do, isn’t easy, but as we’ve seen, it can and has been done. When it works, though, it’s always a two-sided affair: It involves an industry, or part of an industry, that can be changed and a firm with a viable way to do so.
THE MISSING INFORMATION
What does all this tell you about Masco and its failed furniture venture?
For the full answer, we must look more closely at Masco’s actions and at how most of my students—people much like you, I suspect—saw only the upside potential of the opportunity.
After a class has voted for Masco to enter furniture manufacturing (and they always do), I ask the strongest proponents of the move how the firm should proceed. What specific actions should Masco’s managers take that will cause it to perform above the average in its new line of business?
Alongside the bold decision to enter, the proponents’ plans usually look surprisingly lackluster. Nearly all of them start with “Masco should acquire …” and go on to add some grand but vague statements about rationalizing production, improving efficiency, leveraging the company’s professional management, using “power marketing,” and so on. When I want to know what the company would do differently, how “professional management” would work here, or what would set the firm apart from others, the answers get progressively vague and superficial. They haven’t thought about all that.
What becomes clear is that their arguments are propelled by an enthusiasm for the company itself, for what it’s achieved in the past, and for the storehouse of capabilities it could bring to a new venture. What is missing is a specific plan that shows why all of that will matter in this industry, and how it will neutralize the long-lived forces that have broken so many other firms.
These discussions always remind me of how French generals after World War I responded to the fact that, in the previous half century, Germany had twice defeated French armies. The generals took a number of steps, including construction of the now-infamous Maginot Line, but a key reason, they said, that France would not be defeated again was the