Good to Great…Strategy
by Rich H orw ath
Strategy per se did not separate the good-to-great
companies from the comparison companies. Both sets
of companies had well-defined strategies…
—Jim Collins
Author, Good to Great
There’s no arguing w ith the success of the bestselling book Good to Great and the meticulous
d ata generated d uring the stud y. It presents a
num ber of im portant concepts involving buses
(hire the right people), hed gehogs (singular
focus to be the best in the w orld ) and flyw heels
(build ing m om entum for a breakthrough) that
provid e m em orable business m etaphors.
So far be it for the author of several strategy
books that his w ife claims are m ore effective
sed atives than any d rug on the m arket to
d isagree w ith Mr. Collins conclusion—but I w ill.
The very concepts that propelled the good-togreat com panies to the heights of success are at
the found ation of great strategy—a d irect
contrad iction to the statem ent that strategy
d id n’t separate the good-to-great com panies. In
fact, the exam ples used in the book clearly show
that there is a huge difference betw een having a
strategy and having a strategy that m eets the
criteria for being a great strategy. N ucor created
d ifferentiation versus Bethlehem steel through
its use of mini-m ills and a thin slab casting
process for prod ucing flat-rolled steel; Kim berlyClarke had extrem e focus that cam e from
m aking the tough but brilliant trad e-off of selling
their m ills and exiting the paper business and
putting all their resources into the consum er
business; and Walgreens pioneered a system of
satellite com m unications and technology linked
to its convenient corner d rugstores that gave
them a ten-year lead on the com petition.
The question isn’t “Do you have a strategy?”
because everyone purports to. The question
should be, “Is it a great strategy?”
Great strategy has three criteria:
1. Differentiation—d istinction from the
com petition.
2. Focus—m aking trad e-offs to allocate
resources to specific areas and not to others.
3. System —creating an interconnected and
com plem entary activity netw ork.
D ifferentiation
Differentiation for com petitive advantage in
business has its roots in science. In 1934 a
Moscow University researcher nam ed G.F.
Gause, know n as the “father of m athem atical
biology,” published the results of a set of
experim ents. In those experim ents, he placed
tw o sm all anim als (protozoans) of the same
genus in a bottle w ith an am ple supply of food . If
the anim als w ere of the sam e genus and a
d ifferent species, they could survive and persist
together. If the anim als w ere of the sam e genus
and the sam e species, they could not survive and
persist together. These results led to the Principle
of Com petitive Exclusion w hich states, “N o tw o
species can coexist that m ake their living in the
id entical w ay.”
Open the new spaper and read about the
com panies that are struggling and it’s a good bet
that one of the reasons for their struggles is their
failure to pay heed to the Principle of
Com petitive Exclusion. They are stuck d oing the
sam e things in the sam e w ay as their
Copyright © 2006. Strategic Thinking Institute. All rights reserved.
com petition. Jeffrey Im melt, Chairm an and CEO
of GE, has said , “ GE m ust look d ifferent…, act
d ifferent…, be d ifferent…to excel in the years
ahead .” N otice that he d id n’ t say GE m ust be
“ better.” H e specifically chose the w ord
“ d ifferent” and used it three tim es to em phasize
his com pany’ s und erstand ing that the road to
success in business is paved by d ifferentiation
from the com petition.
Focus
Focus d em and s that w e have the d iscipline to
allocate resources to specific areas and activities
and not spread them evenly across the business.
Focus com es from the ability and w illingness to
m ake trad e-offs. Trad e-offs are about choosing
one path and not the other. Trad e-offs involve
incom patible activities— m ore of one thing
necessitates less of another. In the
pharm aceutical ind ustry, one can choose to be
the leader in research and d evelopm ent or the
lead ing provid er of low -cost d rugs, but cannot
d o both w ithout bearing m ajor inefficiencies.
Making trad e-offs is one of the m ost d ifficult
tasks for m ost managers, and the result is that
they never d o m ake the necessary trad e-offs.
Instead , they hed ge their bets and abide by the
ad age of “ trying to be everything to everyone.”
H arvard Business School professor Michael
Porter has said , “ The essence of strategy is in
choosing w hat not to d o. Without trad e-offs,
there w ould be no need for choice and thus no
need for strategy. Any good id ea could and
w ould be quickly im itated .”
Tw o groups of questions can help us begin the
process of id entifying the trad e-offs for our
business:
1. Who are w e serving?
2. What are w e offering?
3. H ow are w e offering it?
Most m anagers d o a relatively good job of
answ ering these questions. What m ost of us
d on’ t d o often enough is stop and carefully
consid er our answ ers to the second group of
questions:
1. Who are w e not serving?
2. What are w e not offering?
3. H ow w ill it not be offered ?
Taking the time to answ er these questions— the
ones that d eterm ine the “ nots,” the things w e are
not going to d o— is a crucial step in d eveloping
great strategy. As strategy involves “ the
intelligent allocation of limited resources…,”
saying “ no” to potential opportunities and a
d efined set of prospective custom ers is a m ust.
Meg Whitm an, CEO of eBay, explains the crucial
role focus played in the successful d evelopm ent
of the com pany:
The key decisions can all be characterized by focus,
focus, focus. Back in M arch 1998, we were faced with
a decision on what categories we wanted to focus on.
W e decided to really be a collectibles company. The
heaviest users were collectors, the heaviest sellers were
collectors. It was a very explicit strategic decision,
because part of the group wanted to go into consumer
electronics and all of these other categories we are in
today. A nd we answered, “W e have only a limited
number of resources. W hat is the best focus that we
can have?”
Ms. Whitm an realized early on that good
strategy involves the discipline to focus one’ s
lim ited resources on the key areas that w ill fuel
success.
System
While a strategy can be m ad e up of only one
activity, there are com pelling reasons for
build ing an activity system to d rive your
strategy. As the num ber of activities com prising
your strategy increases, it becom es m ore and
m ore d ifficult for com petitors to em ulate the
entire system of strategy. This prem ise is evid ent
in Figure 1:
Copyright © 2006. Strategic Thinking Institute. All rights reserved.
2
Figure 1 Arithmetic Support of System of
Activities
In this figure, w e can see that the probability of a
com petitor successfully copying a strategy
involving only one activity is relatively high at
90% or .9. With three activities com prising our
strategy, the probability of a com petitor
successfully em ulating the strategy d rops to 73%.
Creating a system of strategy involving ten
activities significantly d im inishes the
com petitor’ s ability to follow our lead . While our
aim is not to have d ozens of activities sim ply for
num erical sake, thoughtfully creating an
interconnected w eb of com plem entary activities
is of great value in m aintaining a differentiated
strategy from the com petition.
From Mediocrity to Mastery
Perhaps the best ind icator of the im portance of
great strategy is a lousy ind ustry. If you analyze
the airline or autom obile ind ustries, it d oesn’ t
take long to figure out that they are brutal to be
in if you’ re trying to m ake a profit. H ow ever,
Southw est Airlines and Toyota have used great
strategies to fuel their trem end ous success in
these shark-infested w aters. Great strategy
requires d ifferentiation, focus and a system of
activities. Without great strategy, there’ s a good
chance the bus w ill turn the hed gehog into
road kill.…
Rich Horwath helps managers develop the skills and expertise to create great strategy and fulfill their
leadership potential. He is the president of the Strategic Thinking Institute, a former Chief Strategy Officer and
professor of strategy at the Lake Forest Graduate School of Management. Rich is the author of Sculpting Air:
The Executive’s Guide to Shaping Strategy and Storm Rider: Becoming a Strategic Thinker. Please contact
Rich at (847) 756-4707, email [email protected] or visit www.strategyskills.com
Copyright © 2006. Strategic Thinking Institute. All rights reserved.
3