Chapter 6
Making the Rules

A strategy based on control
The role of products
Three threats
Sustaining growth


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Typical Rule 



Harvard Business 
challenged by 
and Stanford)




(1920s and '30s)

U.S. Postal Service  
(before Federal Express, 
ubiquitous fax machines 
and the internet)
















Rule Makers 
excel at:

- Determining 
  the rules 
  of competition

- Setting the 
  industry standards

- Controlling the 
  behavior of 
  and employees

- Guiding the 
  evolution of 
  their industry

- Providing a 
  product for 
  every customer










































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Focus of 

Rule Breakers
Products that
embody the 
new vision.

Game Players
that beat 
the competition.

Rule Makers
Creating and 
an organization 
that continues 
to market 
products that 














Rule Makers' 

- Large and growing

- Lead by a publicly
  visible CEO

- Structured around 
  key market segments

- Flexible in 
  new products

- Full of many 
  well thought-out 

- Very deliberate 
  about who they hire

- Indoctrinate 
  "our ways of 
  doing things"

- Rely more on 
  implicit than 
  explicit controls
- Speak a different 
  "language" than do
  their counterparts

- Places of elan 
  and esprit

















The Rule Maker's 

- Strong and 

- Slightly 

- Intense, 

- Disciplined, 
  always in control

- More rigid 
  than flexible

- Always alert

- Slightly 

- Big picture 

- Very turf 

- Needs to 
  lighten up

- Everybody's 
  role model

- Self reliant




















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Rule Makers 
stumble when:

- Their success 
  at market 
  dominance exceeds 
  the bounds of 
  regulatory and 
  societal tolerance

- They are the 
  only clear winners
- Their organization 
  blinds them to 
  changes in the 

- Blind sided by 
  an emerging Rule 

- Their market 
  matures and 

- They come to 
  believe they 
  can make no 

Rule Makers 
sustain growth 

- Sharing their 

- Geographic 

- Avoid becoming 
  prisoners of 
  their organizations

- Keep their 
  gene pool fresh

- Seek out 
  devils advocates, 
  value opinion 

- Cut back 
  on the mechanisms 
  of socialization

- Move into 
  markets where 
  they face 
  tough competition

- Favor competence 
  over loyalty


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Chapter 6

Making the Rules
Dominate the market by controlling its standards

Excerpt from Go For Growth

By Robert M. Tomasko


Some companies are just too good. Maybe it was a matter of luck, being in the right place at the right time. Perhaps they were Rule Breakers whose innovativeness captivated their customers - and frightened-off all competitors. Or they were Game Players so effective at doing all the right things, just the right way, that they came to "own" their industry.

Let's call these businesses Rule Makers. They set the standards for their markets. At times it seems an entire industry revolves around them. Rule Makers are at the center of an intricate business network rich in mutual dependencies. When they prosper, others - even some head-to-head competitors - thrive. But when they stumble, others collapse. These interrelationships are simultaneously resented and appreciated by their competitors. Rule Maker's savviest rivals may grumble, but they are also aware that Rule Makers define the turf in which mutual profitability and growth depend. Rule Makers are watched like hawks.

Walt Disney is a Rule Maker. So is McKinsey in management consulting, Merck in pharmaceuticals, and Microsoft in software. Wal-Mart occupies this position today in mass market retailing. Intel's microprocessor chips run eight out of every ten PC's sold throughout the world - allowing this Silicon Valley giant to call many of the shots in this critical industry.

The view from the top of the marketplace is glorious to behold. But staying at the pinnacle of a slippery slope is a challenge for even the best.

IBM was once a Rule Maker. So was Pan American World Airways. In the first half of this century the top Rule Makers included then-elite companies: A&P Supermarkets, Pennsylvania Railroad (known as "the standard railroad of the world"), United States Steel and Western Union. The luxury travel industry was dominated by the names Cunard, Pullman and Wagon-Lits. The U.S. telecommunications business was defined by three words: The Bell System. The largest package mover - the Railway Express Agency - did not own a single airplane.

All these companies - both contemporary and those now relics of business history - have many common characteristics. And, as with Rule Breakers and Game Players, they share a special set of strengths and weaknesses, as well as a unique persona. Rule Makers commonly have a very strong, and sometimes dominant, competitive position in the markets they serve.

Hallmarks of a Rule Maker
Some Rule Makers, like Microsoft, emerge at an industry's birth, and grow with the market. Most, though, find it too difficult to get their hands around the chaotic uncertainty accompanying most embryonic situations. They usually wait until technologies and buying preferences settle down, then - like some Game Players - they make their move. IBM was not the first computer maker. It watched and bode its time while Sperry Rand's UNIVAC machine pioneered a new market. K-Mart set up a national chain of discount stores before Wal-Mart, and Disney was not the first movie maker or amusement park operator.

A Rule Maker's life cycle
Rule Makers can emerge at any point in an industry's life cycle. But they are usually most profitable in the late growth or early mature stages. This phase is when wise investments usually provide a generous payoff , cash flows most easily and customer requirements are clearly visible. Eventually marketplaces mature - or even start to show early signs of aging - customer needs begin to fragment, the pace of innovation slows, and the Rule Maker with the "one size fits all" product line finds its customer base shrinking.

Rule Makers have had a variety of responses to this inevitable decline. Some exit their position of dominance with a bang, others with a whimper. Pan American Airways, the Pennsylvania Railroad, and Western Union experienced bankruptcies. A&P Supermarkets and Cunard remained in their industries, but became focused niche players rather than dominating juggernauts. A handful, such as AT&T and U.S. Steel adapted to the new order, and found other paths to growth.

To really understand the dynamics of second half of a Rule Maker's life cycle, set aside this book and look over Edward Gibbon's The History of the Decline and Fall of the Roman Empire . This is a great story of how pressures from without combine with decay from within to crumble a once mighty empire. The Decline and Fall should be required reading for all aspiring Rule Makers.

Staying on top
Ruler Makers have a strong, common strategic orientation: stay on top. They organize most of their resources and talents in ways that protect the strong competitive position in which they find themselves.

Rule Makers are like a squad of soldiers in combat who have managed to seize the higher ground. While some may have aspirations to repeat their triumph on an even more challenging hilltop, most quickly realize their primary mission to to protect this hard won gain from other challengers.

Seasoned combat veterans also appreciate that, ironically, the higher the summit they've seized, the harder it will be to descend and move on to a new mountain top. When atop one peak, they have to travel further to reach another than their rivals in the valley below. The pleasant view from where they sit may also contribute to wanting to dig in where they are.

Regardless, this high ground still requires defense.

A strategy based on control
Rule Makers excel at near-total market control. They keenly appreciate the essentials of protecting a strong position and their favorable economics gives them a variety of options; their visibility mandates they not abuse their position of strength. Rule Makers' strategies tend to involve some form of control . Most give near obsessive attention to controlling both their outer and their inner worlds.

Rule Makers work hard to control the business environment in several ways.

1. Standard setters
Rule Makers set standards for their industry - often, but not always, a result of having triumphed in a war for market share. They may provide a "price umbrella" under which their competitors operate - and thrive, as long as they do not drastically lower their price. Rule Makers may operate in ways that lead their customers, and even their competitors, to become dependent on them.

An industry with standards is not necessarily a bad place. Standards provide a baseline from which many types of competitors can emerge. It is hard to be a Game Player when the rules of play have yet to be established. Standards can be a precondition for growth. Specialists thrive in markets with a degree of stability.

It is hard, though, to be a Game Player in a Rule Maker-driven industry and not feel at least a tinge of jealous resentment at what seem to be a disproportionate share of the rewards going to the setter of the ground rules. In some situations, the boundary between just rewards and unfair competition is a very fine line. This boundary requires continual policing and self-regulation, lest its demarcation become the job of the courts and regulators.

2. Always alert
Like Game Players, Rule Makers are heavy users of market research and benchmarking. Like Rule Breakers, they devote hefty percentages of their sales to R&D. Unlike other businesses
Rule Makers aggressively hone these practices as an essentia;l part of their overall strategy of market control.

A Rule Makers greatest fear, although seldom publicly admitted to, is being overtaken. For them, fundamental research is done not so much to destabilize the basis of competition (why destabilize something that you make money dominating?), but to keep ahead of anyone else who may try to break the rules. Their R&D strategies, despite their mega-budgets, are fundamentally driven more by defensive, not offensive, aims.

Likewise the goal behind their extensive use of market research is not so staying attuned to current customers requirements - a topic their sales force is usually well wired into - but anticipating new customer needs. This provides them with the lead time necessary to create new products and services before more short-term oriented Game Playing competitors have an opportunity to wean away customers.

3. Playing the game several moves in advance
Like master chess masters, Rule Makers are skilled in thinking about the future. Rule Makers plan their actions several moves in advance. They develop contingency plans and alternative scenarios to help anticipate and prepare for eventualities outside their immediate control. Rule Makers, more than the other types of growth companies, are adept at following the advice of the popular business professors Gary Hamel and C.K. Prahalad.

Hamel and Prahalad implore companies to set stretch goals based on an exhaustive analysis of trends and technologies. Their favorite strategic objective is "global preemption," a decade-long cultivation of core competences that - if done well - results in unquestioned worldwide market leadership. A worthy goal? Absolutely - as long as your company has the lead time, resources and patience of a Rule Maker to stay focused on the future.

Where does all the money come from: the fly-wheel effect
How do Rule Makers pay for all this defense and foresight? With high profit margins, of course. Rule Makers tend to be profit as well as product leaders. The most prosperous of them take good advantage of the fly-wheel effect - once a wheel is moving rapidly, it takes more energy to slow it down than speed it up.

The best kind of market to be in - if you like profit maximization along with growth - is one that ignores the law of diminishing returns. In some industries, the more you produce, the less money you make. Counter intuitive - and depressing - but true. Ask any American farmer; look at what happens to gasoline prices when a major new oil field is discovered. (This is why the best path to growth for commodity-oriented companies is not that of the Rule Maker.)

Some industries operate under very different rules. Increases in supply stimulate even greater increases in demand. These are sometimes called "network" markets. Telephone service is a network market, so is computer software. The value of these services or products increases as more people use them - what's the point in having a picture phone if few of the people you communicate with also have them? Or of having a cutting edge word processor whose files can't be read by anyone else?

When the number of users of products like these gets beyond a certain critical mass, a snowball effect ensues, and more and more are bought. In the software market, most of the costs are related to developing the program and establishing its reputation. If those tasks are done well, a nearly-free ride results - additional copies of software cost very little to produce. Success leads to greater success, larger market share and higher margins.

What makes Rule Makers so different? High performers in Rule Makers are members of what has the look and feel of an elite corporate cult. Their employers have worked deliberately to institutionalize the corporate philosophy the same way a church propagates a system of beliefs. Working in a Rule Maker is like joining the Jesuits, rather than remaining an ordinary parish priest. It is closer to the Marines, less like the slogging foot soldiers of the Army.

A place to start a career
The commitment, for those willing to buy in, is often expected to be career-long. Rule Makers, like Catholic priests, are expected to spend their entire career there. New recruits arrive at an early stage of their work lives (before they have had a chance to be corrupted by too many other employers). Half of Microsoft's new hires come directly from college - down from 80% in its early years. Even in downsizing-prone times, Rule Makers have higher percentages of long service employees than do Game Players or Rule Breakers.

Learning a new language
The specialness of this new identity is reinforced in many ways. Language can be creatively used to emphasize the differences between this, elite, company and those that are merely playing the game.

Disney doesn't have customers, it has guests . The status of its employees is evaluated by calling them members of the cast , each performing a part , not holding a job. Wearing a uniform can be demeaning, putting on a costume sound more like fun. It's a lot easier to complete a performance than endure an eight hour shift. Job descriptions are dull and confining, but few mind memorizing their lines and movements in a script .

By shifting the vocabulary of the theater and screen to the work life of the amusement park, a different - higher value -experience is created for Disney's customers (oops, "guests"). And a high degree of control is exercised over the individual employees whose encounters with customers can either reinforce or destroy the Disney magic. No surly "carnies" allowed. No tattooed, cigarette-smoking, foul tempered ride operators.

This language, and the special world-view it evokes, is taught in tightly scripted training programs at Disney University. Admission is offered only to those who pass a battery of screening interviews. After orientation training, new hires are assigned peer mentors - also carefully selected for their "role modeling" potential. Contrast this with the typical hit or miss, sink or swim approaches most businesses - especially Game Players - take to selection, training and socialization.

Managing cohesion
With regard to this "bear-hug" approach to employee socialization, Disney operates in the same mode as Microsoft, or IBM in its high growth days. Microsoft has its boot camp for new managers - a three week immersion in "the Microsoft Way." There the metaphors are more software-oriented, less entertainment-biz related (people and projects get "templated" into "master plans" punctuated with "milestones"), but the result is similar. IBM developed a similar IBM-speak decades ago, and even supplemented it with a network of company-managed country clubs to promote IBMers mingling off hours with other IBMers. Recently Microsoft followed suite. Every employee is given an automatic health club membership - in the same club, of course.

Why is all this attention to creating and maintaining a uniquely cohesive organization so important to Rule Makers? To understand this it is helpful to appreciate how this kind of growth company is really different from the other's we have described. A key difference has to do with the role its products play in the scheme of things.

Products exist to perpetuate the Rule Maker
Rule Breakers are primarily vehicles for their products. Rule Breakers are commonly extended shadows of their innovative products and the compelling vision behind them. Think about Ferdinand Porsche's cars, Edwin Land's cameras or Steve Jobs' Macintoshes. Rule Breakers die when their products loose their luster (Studabaker's automobile's, Atari's computers). The relation between a Rule Makers and its products is fundamentally different, though.

For Rule Makers, the product exists more as a vehicle for the company and its perpetuation, not the other way around. Disney does not exist to create new animated movies - the movies exist to perpetuate Disney. Rule Makers seldom fall in love with their products. In Rule Makers, the whole is always more than the sum of the parts - it include's both today's product line and the ability to remain ingrained in the fabric of the market by developing tomorrow's big hits. Microsoft's capability to build and market an ongoing stream of products that control a portion of the marketplace is more important than any individual product.

Critics of the software industry have faulted Microsoft for producing inelegant products, behind schedule, that are often inferior to its competition. They may be right, but they are also, from a strategic perspective, missing the point.

It better serves Microsoft's interests to invest in developing an electronic product registration card (that also reports back to Microsoft all the types of software it finds on its customer's computers) than to put the same effort into adding more features to a word processor or spread sheet Microsoft sells. Having this information about the configuration of its customer's machines - obtained while "speeding up" the product registration process for the customer - provides valuable intelligence about what customers are using what products, and which might be ripest to consider an upgrade to an offering of Microsoft. In this case, Microsoft's product is also a Trojan horse, generating additional information about customer's future needs as well as immediate revenues.

Obsessive attention to organizational architecture
Rule Makers give as much attention to building their unique organization (the source of their future products) as they do to the products themselves. Certainly Game Players, and to a lesser extent, Rule Breakers, are concerned with their organizations. But none plan them with the obsessive degree of attention to detail as do Rule Makers.

For them, the secret of controlling the market is to control themselves.

When a person exaggerates a behavior - such as an extreme need to control the surrounding environment - it is often more useful to ask why the person needs to behave that way, rather than just branding the person as a "control freak" or "obsessive."

The same principle holds for organizations, as well. What is it about Rule Makers that makes them so control-oriented?

The Rule Maker's personality
To answer this, let's imagine as we have done with Rule Breakers and Game Players, what the persona might be of a Rule Maker. If such a company were an individual, what kind of a person would it be?

Tall. Strong. Confident. Bright. A person with a plan.

True ... but more accurately: very tall, very strong, very confident,very bright, a person with a very well thought-out plan. Superlatives seem to naturally flow in descriptions of Rule Makers.

Superlatives provide the clue
The mention of too many superlatives is a good clue, to psychologists, that the opposite of what is being emphasized is also a matter of very serious concern to the individual. Most of us try to keep some measure of balance in our lives. We balance work with play, time with colleagues with family. Our psyches work the same way. When especially bothered by something, the mind can work overtime dwelling on thoughts to counteract what is really bothering us. If this keeps up, we become known by our reactions to the things continually disturb our inner tranquility.

The personality of a Rule Maker exudes control. The flip side of control is frequently fear.

Bright people who need to continually demonstrate how extremely bright they are may well have an inner worry that they are actually not so smart after all. Overly-aggressive bullies may really fear, unconsciously, they are weak. These fears or concerns, ironically, may have no basis in reality. The self proclaimed genius might well be very smart, the tough bully may actually be very strong. But neither of these people are comfortable enough with their abilities to take them for granted. Instead, they exaggerate them.

Mild paranoia
So it is with Rule Makers. Behind their apparent strength, self confidence, and creative ability to control situations to their best advantage, is an underlying, opposite attribute. Many Rule Makers look over their shoulder quite a bit. They seem a little more fearful than they need be. Some might even be described as slightly paranoid.

This aspect of a Rule Maker's persona is worthy of examination. It may provide some clues about why so many stumble, and what can be done to avoid what otherwise seems to be an inevitable decline.

Suspicious executives
Two Canadian business school professors, Manfred Kets de Vries and Danny Miller, have used the tool of psychology to better understand why executives regarded as especially "suspicious" act as they do. They examined leaders such as Henry Ford II, Harold Geneen, J. Edgar Hoover, and the Hunt Brothers of Texas. They found considerable similarity in how they, and other strong but "slightly fearful" executives behaved. Each:

- gave considerable attention to warding off attacks and personal threats - both real and imaginary

- was hypersensitive about minor mistakes and disorderliness

- insisted on unwavering loyalty

- became personally over involved in controlling their businesses through great attention to rules and details

- had unsatiable appetites for more and more information, and

- several were known for their vindictiveness and overreaction.

These traits can apply to organizations as well as individuals. Companies of this sort, like some who thrive on the Rule Making path to growth, are always vigilant, always ready for a fight. They are like a muscle so taut that it springs when only lightly touched. They do not like the unexpected, they are not at home in rough and tumble, go-with-the-flow markets (places that Game Players and Improvisers thrive). They are very intense places to work. All activity is expected to serve some business purpose.

The price of eternal vigilance
Vigilance and focus can be admirable qualities, but they come at a price. Hyper-attention to threats in the marketplace can lead to piecemeal reactions to competitor's advances. Competing products may be imitated, not because they are worthy of copying, but to avoid a gap in the product line. Decisions can take a long time to make (and products a long time to ship), while key decision makers await more information or new analyses. As fear of outside threats turns inward, internal suspiciousness can limit risk taking. If fear of reliance on one key product becomes too strong, the Rule Maker may stretch itself too thinly by over-diversification.

Strong vigilance can help defend a strong competitive position. Unfortunately, it tends to inhibit, not facilitate growth, leading the business away from its customers and the marketplace. Fearful, suspicious companies run the danger of self-delusion.

Internal filters
Some Rule Makers, driven by self confidence bordering on arrogance, can too easily become rigid in their thinking. Superficially they may appear very impressive, big-picture thinkers, but excessive concern about turf-protection can cause them to be very preoccupied. They may take-in a lot of information about what is happening in the marketplace, but they are prone to interpret it according to their internal standards (remember all that socialization). These Rule Makers can be so preoccupied that their perception is highly astute, but their judgment about what they are seeing is completely in error.

Rule Makers are prone to several such "cognitive" errors. They can tend to find what they are looking for when examining market research data - in part because they ignore facts that disconfirm their biases. These Rule Makers miss taking things at face value, because they are too busy searching for some hidden meaning. They can loose a sense of proportion, too easily taking things out of context.

Missing more than fun
Perhaps the most dangerous characteristic of many Rule Makers is their inability to lighten up, to give in. In some business situations, moving two steps forward requires going one step back. This kind of pragmatism eludes most Rule Makers. Unlike Game Players who can submit easily to the will of their customers without feeling humiliated in the process, or Rule Breakers, who sucomb to their playful side on a regular basis, Rule Makers are often so caught up in controlling the market by controlling themselves that they can miss a lot of fun - and a lot of market opportunities.

Successful Rule Makers though, just like successful people, have found a way to make their habits, their personality characteristics, payoff. Intel's former CEO, Andy Grove, is famous for his belief that - no matter how successful - only the paranoid survive. Bill Gates, of Microsoft, is reputed to be driven by fear of the time (which ultimately will come) that sales will slow down. Gates is likely to takes such a downturn personally, not philosophically. He is more prone to attribute the decline to a mistake someone made years earlier that was just not caught quickly enough.

These chief executives may admit to some corporate paranoia, but neither seems crippled by it. At least, not yet.

Few Rule Makers are harmed by their rigidities during times of rapid growth. Their competitive position seems impregnable, too many things are going right Incipient problems are too easy to miss or deny. But during this period, seeds are frequently planted that can accelerate later decline.

Not facing up to failure
Some Rule Makers have a reputation for being a little touchy, a bit arrogant. When his customers complained about a potential for error-proneness in Intel's Pentium chip, Grove's first reaction was to deny the possibility its product was defective. Only when publicity about the problem fueled Intel's competitors' sales, did the company admit the flaw and offer replacements to all concerned.

Becoming the "next" Microsoft
Rule Makers are frequently the role models of American industry. Books are written extolling their virtues, they are cited as critical to national economic competitiveness, and their chief executive's names are common knowledge. When at their peak, their management practices become every businesses' benchmarks. In the 1950s it seemed every business wanted to be "the next General Motors." Its virtues and management practices were documented in a book that brought Peter Drucker great fame. Later the aspirational targets shifted, IBM had a long period in the limelight until supplanted by Microsoft.

All of this "hero worship" can be very puzzling. So many managers go to such great lengths to learn the "secrets" behind the Rule Maker-of-the-moment's great success. But they probably could learn much more by examining the causes of Rule Maker's almost-inevitable decline. While Rule Makers offer many useful ideas, they offer equally as many cautions. Their strong competitive positions are unique. What works for a company with near-domination of its market, may be inappropriate for an aspiring Rule Maker, or a company that would do better on a different growth path.

The triple threat
Some of the most important lessons Rule Makers provide are those best visible in their period of decline. Like the dinosaurs of prehistory, the Rule Makers constantly face a triple threat:

1. Abrupt shifts in the surrounding environment
2. More adaptive predators
3. Self inflicted wounds.

These three often combine to undermine, or even destroy, many once dominant competitive positions.

Dominance lost
External pressures such as the emergence of jet airplanes and the interstate highway system combined with a century-old history of adversarial labor relations and a rigid management hierarchy to end the dominance of the Pennsylvania Railroad. This once proud transportation giant prolonged its inevitable demise for several years by merging with a rival only to declare bankruptcy several years later.

Kodak, a company that was synonymous with the photography industry, lost its ability to control its marketplace after suffering two serious legal defeats many years ago. In 1921 it was kept out of the growing private-label market for photographic film. All Kodak products were required to bear the Kodak name. Later, in the 1950s, Kodak was prohibited by the courts from tying the sale of film to the processing of film. Eventually Kodak was able to convince a federal judge to overturn these rulings, but not until the company's competitive position had seriously eroded.

Throughout this period of decline, Kodak clung to its Japanese-like system of ingrown management. It hired most employees directly out of school and expected them to remain until retirement. It managed to keep them busy by doing internally many things other companies relied on suppliers and business partners for: chemical feed stocks, electric power, and even the yellow cardboard boxes for it film. Not wanting to trust the local municipality, Kodak also created its own fire department to protect its main plant in Rochester, New York.

Letting the organization drive the strategy
The emergence of CD-ROM technology nearly destroyed the 200 year-old reign of Encyclopedia Britannica, long the world's most elite reference source. Its competitors, Compton's, Grolier's, World Book and Funk & Wagnalls (converted by Microsoft into Encarta) rushed to embrace this new, interactive multimedia technology. Britannica was not unaware of this new technology, its managers were among the first to experiment with it. But company executives were very slow to embrace it.

Britannica's problem was not new technology, but its old organization.

The company had become a prisoner of the organization that provided its past successes, its large, commissioned sales force. These sales people quickly realized that putting the contents of Britannica (whose volumes weigh over 100 pounds and require four and a half feet of bookshelf) onto a music album-sized disc would result in a product priced much lower than the traditional hardcopy encyclopedia. This would cut deeply into their sales commissions. It might even eliminate marketing jobs as CD-ROMs are easier to sell in computer stores and by mail than by more costly door-to-door, one-on-one customer calls. Encyclopedias are sold, compact discs are bought.

Britannica was following the well worn path traveled by many once-Rule Makers. Western Union, a one-time communications giant in the age of the telegraph, had no use for the patents a young inventor, Alexander Graham Bell, tried to sell for the telephone. He was forced to go elsewhere. IBM's slow start embracing the new microprocessor technology happened not from technology-blindness, but by the fear of demotivating its powerful mainframe computer sales force. Rule Makers are very adept at accommodating evolutionary change, but their keen ability to map the marketplace into their organization becomes a dangerous millstone when the environment makes an abrupt shift.

Making rules without Rule Makers
Possibly the most serious threat to Rule Makers is the decline in the power of rule making itself. It does not always require a single, dominant company to maintain an industry's standards, especially in many of the hottest technology markets. Virtually all computer modems are now labeled "Hayes-compatable." At one time Hayes Microcomputer Products Inc. dominated the modem market. Now the company is bankrupt, a victim of production problems, slowness in responding to lower-priced rivals, and a corporate culture that valued extreme secrecy. The standard approach that Hayes developed for computer-to-computer communications is alive, and thriving in its competitor's products.

In other situations companies that compete fiercely with each other - like IBM, Sun Microsystems and Hewlett-Packard in the market for computer workstations - also realize the value of using the same underlying software (Unix). They distinguish themselves by the special features they add, while staying uniform enough so their customers are not required to start from scratch each time they buy a new computer terminal. The net result: faster market growth for all by practicing one of the New Rules for Growth: assist your rivals in making the overall market bigger.

The fear of changing a winning formula
Underlying most Rule Maker's self inflicted wounds is an unwillingness to change a winning formula in face of facts that call to question its underlying assumptions. Some times the formula has become too ingrained in the organization to be weeded out. Other times, the Rule Breakers management practices make it too difficult to notice and act on the facts. Today's successes are worth celebration, but they are also the seeds of tomorrow's failures. This occurs in all businesses, but especially in Rule Makers. The "mental blinders" they seem to almost naturally acquire lead to tunnel vision and eventual stunted growth.

Sustaining Growth
Is decline inevitable? Are there actions Rule Makers can take to avoid this fate? What can be done to reduce the threats from both the outside and the internal organization? How can Rule Makers prolong their period of growth?

1. Share the wealth
Rule Makers can sustain their favorable economics by cultivating a willingness to share the wealth. Don't try to win every battle, crush every opponent. When a market is growing rapidly, the rising tide tends to lift all boats. Rule Makers may be envied, but their is still plenty of business to go around. Later, as the market slows this envy converts to resentment and hostility, often not limited to competitors, but sometimes expressed by customers who feel "locked-in." These are the competitors most likely to seek relief in the courts, not the marketplace. These are the customers most susceptible to an up and coming Rule Breaker, or a re-energized Game Player.

Don't give others a compelling reason to destabilize a situation that no longer works for them.

2. Go where others are not
AST Research Inc. is only the fifth ranking maker of IBM personal computer clones in the U.S. But in China AST is number one. Getting there early and building a strong network of personal relations are key to doing business in China, the world's leading growth market of the late 1990s.

Management consulting Rule Maker McKinsey is following a similar strategy to keep its global professional partnership growing. Well over half its revenue, and even more of its profits, are earning outside the U.S. Its managing director is Indian-born, and its growth plan targets the emerging consulting markets of Russia, China, India and Eastern Europe.

These companies constantly keep in mind that increasing revenues in a segment of the market that has stopped growing eventually leads to an dead end.

3. Cultivate humbleness
The key to longevity for many Rule Makers is the ability to fight tendencies to be excessively tough and macho. Not only do these attract unfavorable attention, they also can distort how managers see changes in the market. Personal computers were once written off as mere toys by sellers of "heavy iron." "Real" steel companies once disparaged Nucor and other early minimills, calling them wimps because they made their product from scrap metals, rather than in mile-long blast furnaces and rolling mills.

Cultivating an image of greatness can become another form of a millstone. Eventually everybody in a successful Rule Maker seems to believe everything they do is great because of who they are, rather than what they do. Keep the internal applause and self congratulation to a minimum; a Rule Maker's best cheerleaders are its customers.

4. Bite-the bullet
Hallmark is still the world's largest player in the greeting card industry. But aggressive competitors and changing customer tastes are forcing it to turn its back on what made drove its past success, its network of 9,000 independent Hallmark Shops. Increasingly cards are sold by supermarkets, discounters and drug stores, not in speciality stores. Maintaining its control over half the greeting card market is forcing Hallmark to reverse decades of corporate culture and sell it cards outside of these shops. Although many of its store owners are up in arms at the decision, it is one that can fuel their growth, also. The more aggressive and growth-minded Hallmark Shop owners are starting to sell competing card brands.

Hallmark is mindful of Rule Maker Britannica's stumbles. Hallmark's chairman, Donald Hall, intends to sustain its success. "If the competition's catching up with you," he maintains, "its not that they're getting better, it's because you're not staying ahead. We just have to do what it takes to stay ahead."

5. Loosen-up on the socialization
In the late 1970s, when IBM was still the world's most admired computer maker, I had an opportunity to interview several of their executives at the company's Armonk headquarters. The topic was the results of an internal study they had just completed about IBM's future business environment. I was especially interested in their research about IBM's work force and the attitudes employees had about being part of the company.

Because I was there on a benchmarking assignment for another Fortune 100 company, one of IBM's best customers, they were very willing to share a great deal of detail about this confidential project. One of its conclusions - one the IBM staff executives seemed proudest about - alarmed me when I heard it. Considering IBM's problems since, it explains a key internal driver of that Rule Maker's subsequent market slippage.

IBM wanted to gauge how strong its corporate culture was, how effective its extensive orientation, training and employees communications programs were given its polyglot work force of almost 100 nationalities. The results of the study indicated these culture-building tools were highly effective, maybe even too effective. IBM's research found that their employees were much more willing to believe what they were told through IBM's "official channels" than they were through outside sources, newspapers, government officials or friends who worked for other companies.

The IBM executives I interviewed thought this was a great triumph. They had created a corporate culture with more influence over IBM's employees than did the net impact of all the individual national and regional cultures from which these employees had come. IBM employees trusted their managers more than anyone else for information about markets, technologies and even broader societal trends.

That kind of trust and loyalty may be admirable, but it put an unrealistically high burden on these managers to be right, and be right all the time. This is impossible, but what is very likely in companies with such a high degree of employee alignment is that a minor misperception or faulty estimate is much more likely to be reinforced and amplified than it is to be challenged and corrected.

Rule Makers wanting to stay on that path will do well to monitor the strength of their corporate cultures. They should recognize what IBM seemed to miss, that it is possible to have too strong, as well as too week, a buy-in to the company's core values. Or, in other words, loosen up a bit on the socialization! Cultivating diversity of opinions is as vital as cultivating diversity of demographics.

6. Find honest mirrors
Sometimes, but not often, business people can learn valuable lessons from successful politicians. The political figure with the most credibility, worldwide, today is Nelson Mandela. Soon after becoming President of South Africa, after spending decades in hius country's prisons, he spoke at a journalists luncheon. He noted that history is full of stories about passionate freedom fighters who eventually became part of government and quickly lost sight of the reasons they were elected. Mandela observed that "power can make a person forget their mandate." His solution, for the public sector: a free and vigorous press, one that continually challenges those who govern to carry out their mandate. This is an idea also applicable to the business community, though journalists may not necessarily be the best vehicle for this kind of learning. By the time a problem reaches the cover of Business Week or Fortune it is usually too late for easy corrective actions.

Where are the potential "journalists" in Rule Making corporations? They, if the business is to maintain its position over the long haul, need to be those in middle management. They are closer to outside information about customer needs, market trends and emerging technologies than many of the senior executives to whom they report. First and second level managers also have less at stake in rationalizing past strategic decisions.

What is needed are Rule Maker managers with the courage to tell, when necessary, the emperor that he is not wearing any clothes. Senior managers in intentionally ingrown companies need lots of help facing the truth about customers and competitors. Resist temptation to tell higher ups what they want to hear - important in all businesses, but a matter of long term survival in Rule Makers.

Doing this requires managers with the ability to maintain some "psychological" distance from their employer. This is the ability to be "in," but not "of" the Rule Maker. It is the skill of not checking in your personal "antenna" just because you have logged on to the corporate E-mail system. Discover and maintain independent channels of information, sources that go beyond those officially monitored. And then build networks within the Rule Maker to spread what is learned.

Information-sharing must be a two way street. Senior officers need to carefully audit how they spend their time, keeping interactions with peers and bosses to no more than a quarter of their day . Spend half the remaining time with people outside the company (customers, suppliers, industry gurus, technology oracles), the other half with those inside, several levels below, closer to the firing line. These executives also need the self confidence to seed all levels of the hierarchy with respected, listened-to, devils advocates.

These are habits that executives of evergreen Rule Makers, like Levi Strauss, put into use daily. "I want to maintain a close enough feel for the business so that, when I'm receiving reports, I can validate or challenge them from my own experience," says CEO Robert Haas.

7. Manage peopleflow
Continually seed the Rule Maker's organization with people who don't belong. Break the fatal pattern of organizational self containment so common in Rule Makers. Avoid the IBM/Kodak approach to career advancement:

The chief executive who presided over much of IBM's decline, John Aikers, joined right after college and a stint as a Navy carrier pilot. IBM was the only company he had ever worked for. He worked up its ranks, with promotions almost annually, from sales trainee to marketing rep to branch manager to director of data processing to vice president to the very top jobs. When his old college hockey coach asked him how he made such an impressive climb, Aikers attributed it all to his ability to be very nice to everyone he met on the way up. He was also promoted so frequently that, he was seldom in a position long enough to be held accountable for an organizational unit's long term performance.

Kodak's fall from market dominance occurred during the time its key leaders were Colby Chandler and Kay Whitmore. Both joined, as did IBM's Aikers, the business they were to lead directly upon graduation. Each had almost 30 years experience at Kodak before become chief executive; each had the technical background common to all of Kodak's leaders since George Eastman founded the company. This combination of an inward career orientation - in an inward-looking company - coupled with educational backgrounds more attuned to achieving astute technical perfection than market timing, can almost certainly guarantee difficulty in maintaining a strong market position.

Now, both IBM and Kodak are, slowly, rediscovering growth. Both have been headed by chief executives, Lewis Gerstner and George Fisher, recruited from outside their industries. If a Rule Maker is to remain a top changing markets, it needs to never forget to manage its peopleflow as well as cashflow: keep the gene pool fresh!

Common patterns
Now that three of the five paths to growth have been covered, some patterns are emerging.

Each type of company has its special set of strong and weak points. Each thrives in some industries, languishes in others. Uncharted territory requires one type of vehicle to cross it, a well-worn path, another. No one form of organization is necessarily better or worse than any other. It is more useful to distinguish companies by how closely or not they are adapted to the logic of their particular industry.

The core message is very simple. To the victor belongs many of the the spoils. But not forever. The rewards of rule making can be very sweet. Just keep in mind that they, too, will pass at some point.

Does this imply that decline is inevitable, that growth only leads to no-growth? Sometimes, but not always. Consider two other types of growth companies, sometimes maligned, often overlooked. Both offer fine possibilities for ongoing increases in sales and profits. They can provide welcome respite for a Rule Makers whose times has past. In some markets they are clearly the best choice for growth.

They are the Specialists and the Improvisers.



© Robert M. Tomasko 2002

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