The Strategist: Be the Leader Your Business Needs

THE STRATEGIST IN REMORSE

Richard Manoogian, CEO-strategist and son of the company’s founder, took the outcome hard. At stake wasn’t merely a company he ran but the legacy his father had created and passed on to him. Father and son had strung together thirty-one years of consistently superior performance and created a superb reputation on Wall Street. All of that went up in smoke. In a story titled, “The Masco Fiasco,” Financial World observed: “The Masco Corp. was once one of America’s most admired companies; not anymore.” Though Manoogian promised to return the company to “its past glory,” he would have to regain the trust of his shareholders, many of whom felt “stuck in a nine-year nightmare of broken promises.”

It was a case of the overconfident strategist. Along with many other companies that tried to crack the furniture industry, Masco believed a disorganized, competitive, low-profit business offered easy prospects for a disciplined, well-managed company. By some process of optimistic thinking, superficial analysis, and misplaced analogy, serious industry problems began to look like golden opportunities.

The same hopeful thinking reappears every time I teach the Masco case. In their initial analysis of the furniture business, my students—all seasoned executives—duly note how unattractive it is. Yet when the time comes to decide what Masco should do, they prefer to interpret every problem as an opportunity (an “insurmountable opportunity,” as some wag once said). Chaos, cyclicality, fragmentation? Great! No dominant player and low brand recognition? Wonderful! A difficult-to-manage supply chain with large, expensive items, and huge variety? Terrific! Seemingly, there was nothing Masco’s resources and prowess could not overcome or turn to their advantage. It is the myth of the super-manager in full force.

I suspect Masco fell into the same trap. In the face of deeply ingrained, long-lived industry problems, its leaders succumbed to a costly bout of irrational faith in the power of superior management.

THE POWER OF REALISM

Do the lessons of Masco resonate with you?

More than twenty years after the Masco fiasco, my students repeatedly approach me to say, “My industry is just like the furniture business! I’m working really hard and getting nowhere.” For them it’s a eureka moment. The issues they’ve been battling suddenly come into focus, and they understand the larger reasons for their struggles.

They, like Welch, Buffett, and other astute business leaders, grasp the lesson of the industry effect and its profound implications for firm performance. They recognize that, as in the famous serenity prayer, you must accept the things you cannot change, have the courage to change the things you can, and the wisdom to know the difference. It’s a lesson great strategists understand well, but it’s not an easy lesson to accept and master. The myth of the super-manager is hard to let go.

The fundamental lessons here are simple but of paramount importance for the strategist.

First, you must understand the competitive forces in your industry. How you respond to them is your strategy. That means if you don’t understand them, your strategy is based on luck and hope.

Second, even if you understand your industry’s competitive forces, you must find a way to deal with them that is up to the challenge. That may mean skillful positioning, deliberate efforts to counter negative forces or exploit favorable ones, or even a timely exit. But don’t be trapped by the myth into believing that your superior management skills will carry you to success.

Third, whatever you do, don’t underestimate the power of these forces. Their impact on the destiny of your business may well be as great as your own.

The story you will write as a strategist will be set against the backdrop of your industry. It must be true to its realities, while having a difference that’s all its own. It’s to the second of these challenges that we now turn.

4

BEGIN WITH PURPOSE

WE’VE LEARNED SOME painful lessons about the challenges that confront strategists in the face of unattractive industry forces. With this chapter, I begin mapping the path out of the wilderness: specifically, explaining how some astute strategists have managed to distinguish their businesses even in the face of such headwinds.

The journey starts with an individual: Ingvar Kamprad, the founder of IKEA who by all accounts built one of the world’s greatest fortunes. Like Richard Manoogian of Masco, Kamprad was in the furniture business, but his story couldn’t be more different. In 2010, his privately held company, which he started in 1943 at the age of seventeen, had sales of 23.1 billion euro, net profits of 2.5 billion euro, and gross margins of 46 percent.

And the numbers don’t even begin to capture IKEA’s powerful hold on consumers. As BusinessWeek put it, “Perhaps more than any other company in the world, IKEA has become a curator of people’s lifestyles, if not their lives. IKEA World [is] a state of mind that revolves around contemporary design, low prices, wacky promotions, and an enthusiasm that few institutions in or out of business can muster.”

How did Kamprad succeed where Manoogian failed? He built his company by creating what I like to call a difference that matters. (The full meaning of this phrase will become clear as the story unfolds.) He did so, not by ignoring industry forces, as Manoogian did, but by creating a company that could thrive and add value in the midst of them.

If you’re one of the millions who have shopped at IKEA, you’ll likely have indelible memories of vast, bright, modern stores designed so that entering customers follow a winding path through a huge building filled with furnishings and a great miscellany of housewares. When you chose a piece of furniture—a simple Micke desk for 69 euro, or a ten-person Norden dining table for 269 euro—you noted the information on an order slip, continued on the path to a warehouse-like room, wrestled a flat box containing the item onto your shopping trolley, carted it home on the rooftop of your car, and assembled it yourself. If you brought the kids, you may have parked them in the on-site child care center; you may also have stopped at the restaurant to sample tasty and inexpensive food ranging from salmon to Swedish meatballs and lingonberry tarts. It’s almost a theme park: probably not a customer experience you’d relish if you’ve made your fortune, but when you were starting out, there was nothing that could match it.

RURAL ROOTS

One could say that Ingvar Kamprad was a natural-born entrepreneur. “Trading was in my blood” he told his biographer, Bertil Torekull.

Kamprad was about five when his aunt helped him buy a hundred boxes of matches from a store in Stockholm that he then sold individually at a profit in his rural hometown of Agunnaryd, deep in the farmland of Smaland. Soon he was selling all sorts of merchandise: Christmas cards, wall hangings, lingonberries (he picked them himself), fish (which he caught), and more. At eleven, he made enough money to buy a bicycle and typewriter. “From that time on,” he recounted, “selling things became something of an obsession.”

Before going to the School of Commerce in Gothenburg, Kamprad signed the paperwork to start his own trading firm, IKEA Agunnaryd [I for Ingvar, K for Kamprad, E for the family farm Elmtaryd, and A for Agunnaryd]. The mail-order business grew to include everything from fountain pens and picture frames to watches and jewelry. With a keen eye for value, Kamprad ferreted out the lowest-cost sources. Frugality was the norm in Smaland. Its farmers, eking their living from a harsh and spare environment, had to make every penny count.

Noticing that his toughest competitor in the catalog business sold furniture, Kamprad decided to add some to his offerings, supplied by small local furniture makers. Furniture quickly became the biggest part of his business; in the postwar boom, Swedes were buying a lot of it. In 1951, at age twenty-five, he dropped all his other products to focus exclusively on furniture.

Almost immediately he found himself in a crisis. Growing competition from other mail-order firms led to a price war. Across the industry, quality dropped as merchants and manufacturers cut costs. Complaints started to mount. “The mail order trade was risking an increasingly bad reputation,” Kamprad said.

He didn’t want to join the race to the bottom, but how could he persuade customers that his goods were sound when they had only catalog descriptions to rely on? His answer: create a showroom where customers could see the merchandise firsthand. In 1953 he opened one in an old two-story building. The furniture was on the ground floor; upstairs were free coffee and buns. Over a thousand people came to the village for the opening, and a gratifying number wrote out orders. By 1955, IKEA was sending out a half a million catalogs and had sales of 6 million krona.

Kamprad understood his customers on a personal level. As he would later say, in explaining IKEA’s philosophy, “Since IKEA turns to the many people who as a rule have small resources, the company must be not just cheap, nor just cheaper—but very much cheaper … the goods must be such that ordinary people can easily and quickly identify the lowness of the price.”

By following this philosophy, Kamprad became a force to contend with in the Swedish furniture industry—and, not liking his low prices, the industry struck back. Sweden’s National Association of Furniture Dealers began pressuring suppliers to boycott him and, with the support of the Stockholm Chamber of Commerce, banned him from trade fairs. Many of the suppliers stopped selling to him, and those that continued to do business with IKEA resorted to cloak-and-dagger maneuvers: sending goods to fictitious addresses, delivering in unmarked vans, and changing the design of products sold to IKEA so they wouldn’t be recognized. Soon Kamprad was suffering the humiliation of not being able to deliver on orders.

He counterattacked on several fronts—for example, he began paying suppliers within ten days, as opposed to the standard industry practice of three or four months, and he started a flock of little companies to act as intermediaries. These moves helped, but IKEA was growing rapidly and supplies were short. Without a reliable source of supply, Kamprad feared his business would be doomed.

Having heard that Poland’s communist government was hungry for economic development, Kamprad began scouring the Polish countryside. He found many eager and willing small manufacturers laboring in the shadow of the bureaucracy. Their plants were antiquated and the quality of their products was dreadful, so Kamprad located better-quality (though used) machinery in Sweden. He and his staff moved the machinery to Poland and installed it, working hand in hand with the manufacturers to raise productivity and quality. The furniture they turned out ended up costing about half as much as Swedish-made equivalents and Kamprad was able to nail down his costs on a huge new scale.

Thus the boycott turned out to be what I call an “inciting incident,” to borrow a phrase from screenwriter Robert McKee—an event that propelled a critical strategic shift.

“New problems created a dizzying chance,” Kamprad said. “When we were not allowed to buy the same furniture others were, we were forced to design our own, and that came to provide us with a style of our own, a design of our own. And from the necessity to secure our own deliveries, a chance arose that in its turn opened up a whole new world to us.”

To Kamprad, it wasn’t enough to simply source in developing countries. He also brought extraordinary determination and imagination to his drive for lower costs. For example, he wasn’t afraid to draw on unconventional sources. He turned the job of making a particular table over to a ski manufacturer, who could deliver it at an especially low price. He bought headboards from a door factory, and wire-framed sofas and tables from a maker of shopping carts. IKEA was also a pioneer in building “board-on-frame furniture,” comprised of finished wood on a particleboard core, which is both cheaper and lighter than solid wood.

Then, of course, there is the iconic IKEA packaging—the famous flat pack with its do-it-yourself assembly. While the company didn’t invent this approach, it was the first to grasp and systematically exploit its full potential. The flat pack provides huge cost savings by making shipping, distribution, and storage much more efficient and thus much cheaper. It saves manufacturing steps; it saves shipping costs from factory to store; it saves stocking and handling costs in the store; and it eliminates delivery costs for most customers.

IKEA opened its first store in 1958 in Almhult. Five years later it opened one in Norway, and two years after that, a second Swedish store in Stockholm. It became a nascent global player with openings in Switzerland in 1973 and Germany in 1974. It entered the United States in 1985, China in 1998, Russia in 2000, and Japan in 2006. In 2010, IKEA had 280 stores in twenty-six countries, and served 626 million visitors.

BEYOND LOW PRICES

So how do you account for IKEA’s success in this terrible industry?

Most likely your immediate thought is “low prices, low prices, low prices.” Indeed, IKEA’s prices are so low they’re not just a difference in degree from competitors’ but a difference in kind.

Over the past decade, the company has lowered its prices by 2 to 3 percent a year on average. Every aspect of IKEA’s operation is subject to ongoing scrutiny to see where further costs can be taken out. Even flat packs have been repeatedly redesigned to gain small efficiencies in the use of space. Kamprad regarded the customary perks of business leadership as waste, too. Stories are legend of his flying coach class or taking a bus instead of a taxi or limousine. It’s an attitude that’s been adopted wholeheartedly by others in the company who speak of spending money unnecessarily as a “disease, a virus that eats away at otherwise healthy companies.”

But IKEA is not a dollar store: Low prices don’t begin to tell the whole story. Scandinavian design was becoming popular around the world in the 1950s and it suited IKEA’s strategy perfectly. The simplicity of the clean lines made the furnishings particularly appealing; it also made them cheaper to produce than more ornate designs. Kamprad pushed this envelope farther, hiring first-class talent who could design for both style and for frugal manufacturing techniques. Perhaps IKEA’s greatest design achievement has been to make its furniture look and feel more expensive than it is. A turning point came in 1964 when a respected Swedish furniture magazine compared IKEA furniture with more highly regarded brands. IKEA’s, it found, was often as good or better. That shocked the industry and helped to persuade consumers that they had nothing to lose—either financially or in terms of status—by shopping at IKEA.

Unlike so many discount retail stores, IKEA’s are anything but dark and dingy. The company’s vibrant colors (mostly blue and yellow, the colors of the Swedish flag) are everywhere, and except for the weekend crowds, the stores are pleasant places to visit. You can make a day of it: Come with the family, try out the sofas, use the computerized tools to design your own kitchen, and have a full-fledged Swedish meal at the restaurant. If, at the end of the day, you’ve bought too much to load onto your car, you can rent an IKEA van to drive it all home, or even pay to have things delivered, assembled, and set up.

So, what is it that is special about IKEA? I ask you. Low price? Design? Flat pack? Swedish meatballs? What? The answer, of course, is “all of the above.” The centerpiece is low cost—without that, nothing else works—but everything else not only supports low cost but adds its own distinctive attraction.

At this point, you, like many managers, may feel like, “Okay, we’re done—we’ve cracked the case. We know the answer, time to move on.” Maybe so. But what is the real lesson here? What do you take with you to apply to your company? That low cost with some added distinctive features is a winning combination?

Often it is.

But what if I tell you there is a deeper insight here, an insight that applies to all businesses whether you’ve decided to compete on low price or with differentiated, specialty products. It’s something else that was behind everything IKEA did.