Chapter 6 Making the Rules Hallmarks A strategy based on control The role of products Personality Three threats Sustaining growth
Typical Rule Makers AT&T (until divestiture) Disney Harvard Business School(until challenged by Northwestern and Stanford) Intel Merck Microsoft Pennsylvania Railroad (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 customers, competitors, suppliers and employees - Guiding the evolution of their industry - Providing a product for every customer
Focus of attention Rule Breakers Products that embody the new vision. Game Players Products that beat the competition. Rule Makers Creating and maintaining an organization that continues to market products that dominate markets.
Rule Makers' organizations: - Large and growing - Lead by a publicly visible CEO - Structured around key market segments - Flexible in accommodating new products - Full of many well thought-out procedures - 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 persona - Strong and self-confident - Slightly arrogant - Intense, preoccupied - Disciplined, always in control - More rigid than flexible - Always alert - Slightly suspicious - Big picture thinker - Very turf protective - Needs to lighten up - Everybody's role model - Self reliant
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 market - Blind sided by an emerging Rule Breaker - Their market matures and fragments - They come to believe they can make no mistakes Rule Makers sustain growth by: - Sharing their wealth - Geographic diversification - Avoid becoming prisoners of their organizations - Keep their gene pool fresh - Seek out devils advocates, value opinion diversity - Cut back on the mechanisms of socialization - Move into markets where they face tough competition - Favor competence over loyalty
Making the Rules
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
A Rule Maker's life cycle
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
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 work hard to control the business environment in several ways.
1. Standard setters
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
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
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
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
Learning a new language
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.
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
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
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
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 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.
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.
- 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
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.
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
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
Becoming the "next" 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
1. Abrupt shifts in the surrounding environment
These three often combine to undermine, or even destroy, many once dominant competitive positions.
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
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
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
1. Share the wealth
Don't give others a compelling reason to destabilize a situation that no longer works for them.
2. Go where others are not
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
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 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
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
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
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!
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