by George Stalk and Rob Lachenauer, Harvard Business School Press, 2004.
This is a book with many useful insights into how to run your business to gain a decisive competitive advantage. However it is to be used with caution, because many of its strategies tend to breach moral principles and are devoid of social responsibility. It is recommended to readers for the sound elements in it, and it could even prove useful in alerting ethical businesses to the tricks others get up to. The book could be a spoof!
(Summarised by Edgar Wille in November 2006)
(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge, nor the reviewers, necessarily agree with the authors’ views and the authors are not responsible for any errors that may have crept in. We aim to give enough information to enable readers to decide whether a book fits their particular concerns, and if it does, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and, inevitably, miss much its richness in illustrative stories and cases, together with depth of argument.)
The title of this book is taken from the strategy of the pitcher in baseball who faces an aggressive batter and sends down a 98 mile an hour ball to disrupt his opponent’s game. English readers may be more familiar with cricket and the bowler who sends down a ball at more than 90 miles an hour to intimidate the batsman.
Our authors have used the hardball in baseball to illustrate the attitude of mind which they believe successful companies must adopt toward their competitors. They should be using every move possible to defeat them, short of being illegal, and even then they should go as close to the line of illegality as they dare.
They set out a number of strategies to achieve this dominance over their competitors. Many of them are sensible actions to ensure that they attract profitable customers, which, after all, is the purpose of their business. However some of the actions proposed appear to be the negation of a decent positive attitude to business life, though of course competition can’t be ignored.
Nevertheless, an attitude of unremitting hostility toward your competitors could be detrimental to sound human relationships upon which society needs to be based. So the authors use such language as "using every legitimate resource and strategy to gain advantage over their competitors"; they seek "to weaken their competitors’ position"; "put their competitors into a reactive position".
They do not work only to be the best and thus attract customers, but actively to harm their competitors. They are distinguished by an attitude and a behaviour pattern to which we have referred in other reviews as exhibited by the slogans of certain Japanese companies such as "Beat Benz" and "Kill Kodak". W. Edwards Deming, the quality guru, criticised such attitudes and recommended a positive concentration on creating unsurpassable quality of goods and related services. Concentrating on hostility toward competitors he saw as a waste of energy and a diversion from the purpose of a business to exceed the highest customer expectations. This contrasts with our authors who consider that it may even be necessary to "create an opponent against whom the organisation can focus its efforts".
Stalk and Lachenauer describe the hardball players in business in these terms: "They play with a total commitment to the game, such a fierceness of execution, and such a relentless drive to maximise their strengths that they look very different from other companies that have admirable performance and sound business skills." They believe that the fundamental purpose of companies is to compete as hard as they can against one another. This is their interpretation of Milton Friedmann’s dictum, which they quote, that the only purpose of a business is to make profits for the shareholder "by open and free competition without deception or fraud".
The authors add that "as self centred as playing hardball and seeking to win may appear, it is, in fact, essential to the health and strength of the larger economy and our society". They consider it the duty of hardball leaders to push their advantage "to the point where competitors are squeezed and even feel pain". They admit that the hardballers seem "not quite kosher and certainly not very nice" in the way they go about winning.
They accompany this by a caveat that they do not think we should discard all we have learned about how to create good relationships both inside and outside the organisation. They don’t appear to see the contradiction here. They praise the fact that "sometimes hardball players have to play a little rough and, when they do, they don’t apologise for it".
Good practice is presented as if it were the sole prerogative of hardball companies to "cut costs, improve systems, and introduce new products and services to draw new customers in". Quite a lot of what the authors say in the book provides examples of good businesses doing what any business should do, in cutting costs, building volume, maintaining quality, improving all the manufacturing and servicing processes and managing distribution effectively.
The positive benefits of this book are that it gives some telling examples of companies paying attention to these issues. But always in the background, even when not in the foreground, there is this aggressive attitude which one might regard as detrimental to society. Readers who might be put off by the authors’ theme are supposed to be reassured by the affirmation that they are not writing in praise of robber barons. They follow this with the statement that hardball is about "creating discomfort for others and tolerating it yourself".
After laying the foundation for a ruthless attitude toward competitors they proceed to lay down five principles by which business hardplayers live. Some of them seem to be maxims of any innovative business and do not need to be put in the context of unremitting hostility to competitors.
The central part of the book is devoted to a selection of six strategies for gaining and maintaining competitive advantage. It is recognised that there are many acceptable ways for achieving this, but these are presented as a handful of hardball strategies which best fit their overall theme. They are approaches to enable the units of a company to "perform decisively in battle". Notice it’s all a battle, which fits in with another book reviewed in Ashridge VLRC about the war strategies of Alexander the Great's Art of Strategy.
Each maxim is well illustrated with interesting and instructive cases, which stand up even if one disregards the war and hostility themes. This reviewer found value in reading them, even in spite of his rejection of the mood of the book.
Hardball players prefer indirect attacks on their competitors, but sometimes if the company is sure of its position it must deploy hammer blows of overwhelming power, if necessary overhauling its whole business in readiness for the attack. They should however not completely demolish the competitors. It can be better to keep them weak and struggling, rather than forcing them into bankruptcy, from which they could emerge in a fitter and leaner condition – eager for revenge.
The story is told of the way in which by springing zero cost financing on the car industry, General Motors stole a march on the other big American automobile companies. It was essential that they actually had the resources to do this, even though current trade had been slack, and they had to be prepared to use them, with no holding back. They had built up their cash position by selling or closing 35 plants in the preceding 20 years, while Ford tried to keep the peace with organised labour. The authors comment that keeping the peace is not a hardball strategy.
The next case is of the battle between Frito-Lay and Eagle for the salty snack trade (crisps, corn chips etc). Frito-Lay had better logistics in their store delivery system, backed up by a massive sales force. Introducing cookies and crackers was not an unqualified success and their growth began to slow. Then the beer people, Anheuser-Busch, entered with Eagle in the same market. They did not fight Frito-Lay in the supermarkets, but used their bar trade as the entry point. They did not attack directly. They hired many people from Frito-Lay and did a lot of copying. Then they made a fatal error. They attacked Frito-Lay frontally with an alternative to one of the Frito-Lay main successes in the supermarkets. However, this was Frito-Lay’s main profit area (its profit sanctuary).
Appointing a new CEO, they took serious steps to combat Eagle on issues like quality, refocusing their selling efforts on their main areas of competitive advantage, reorganising marketing and simplifying the approach to innovation. Then the CEO cut prices and put vastly expanded effort into supporting the supermarket effort. Eventually Eagle had to surrender. It was a case of Frito-Lay deploying massive strength to win. After reading all this I began to wonder why the early part of the book had made such a play on borderline ethics. This was normal business well done, so perhaps, after all, hardball is not just playing almost dirty, perhaps it is just about relentless determination to retain your position in the market. However, the way the story is told suggests that the philosophy our authors advocate had at least a covert bearing on the way things went.
If a hardball company discovers unexpected results from any of their activities they will focus on learning lessons from these anomalies and then applying them as surprise tools of battle. By anomaly the authors mean anything that happens in a process that is out of the ordinary, which may be regarded as an aberration, but it may be pointing the way to a new way of doing things or a new need of customers. There may be an insight buried there that can move the business to a new level.
Examples are given. For example it was discovered that a paper company had a bigger market share in Chicago than anywhere else. They looked into it, as there were no obvious business reasons. It turned out that as the trucks had to go through Chicago to deliver in many other places they often slipped in a small load for a Chicago company, an unofficial facility valuable to users of the product. This led to a complete reorganisation of the logistics, which enhanced the competitive advantage of the company.
The same company discovered that their speciality papers had scope for much increase of sales in this profitable business. So they let more of their standard paper business go to competitors and concentrated on the expensive stuff, at the same time ceasing to insist on delivery only when a truck was full. In fact the company didn’t lose the standard business either, because the merchants buying the paper were hooked by the service they received on speciality papers.
The company’s strategy is commended by the authors because it did not imperil the competitors. This is another example of the case not supporting the nasty image given at the beginning of the book. The main thing to look for in order to notice anomalies is which customers are buying more or less than usual; also the activities of employees, especially salesmen – how they operate. One firm found that it had a branch in a Canadian town with the lowest of the company’s gross margins, yet the highest sales per employee and return on investment. The example is not worked out in full. We are just left with the question why.
Profit sanctuaries are the key areas where a company makes most of its money and sees it as the basis of a certain future. If a competitor is making inroads on you territory then you attack this soft underbelly.
This can be a risky strategy, because you may be near the limits of legality, comment the authors. Also the competitor is likely to retaliate by attacking your profit sanctuaries. And he may have more financial resources than you thought. Also you might be accused of anti-competitive behaviour. Of course one could say that every company likes to be anti-competitor, which is only a short distance from anti-competitive. Most companies actually hate competition; they would prefer to be monopolies if they could get away with it. They can’t; so most of them proclaim their belief in competition.
We have already seen the example of Eagle making the mistake of attacking a company’s profit sanctuary without sufficient resources to make a go of it. This approach has more of the attitude that seeks to damage a competitor. The profit sanctuary is that part of the business where he makes the most money, and is able to use some of it to support other less immediately profitable efforts to make progress. You can suck volume away from a competitor by improving the terms offered to customers in a relatively minor part of your business, which is a major part of his. By law in America this cannot include predatory pricing, however that can be really defined.
Sometimes this method of attack may begin with small skirmishes at the edges, gradually moving to the core. But we have to remember Eagle. Also price cuts in a particular area may force a competitor away from harming one of your business areas because he has to adjust to protect his main area. Such adjustment may be simply to refrain from minor raids on your profit sanctuary.
Before launching a full attack on a competitor’s profit centre you need to understand fully your own costs, prices and profitability by product category, geography and customer accounts, and as much as you can of theirs. You need to understand their management structures and approaches, their financial strengths and weaknesses, their supply base and the costs of serving the market. Without such knowledge you are vulnerable.
Remember that your competitor may have read this book too. Also be aware that if there is even whiff of a case against you for anti-competitive behaviour, even if you win, you will have lost, time, money and reputation. This attacking the profit sanctuary approach is not for the faint of heart, according to the authors.
Hardball players, we are told, are not too proud to steal ideas from others. They do not deride copycatting, but they do it surreptitiously. They should not just copy, but should understand what they are borrowing and graft it into their own organisation. Ideas can also be transplanted from other industries, where they operate on similar principles. It is not enough to just replicate the details of other companies’ approaches, but you have to go on and strengthen your hold and apply them more widely.
The authors suggest that you should copy only if it will enable you to gain leadership. If it will just put you into the "me too" bracket, leave it alone.
The next maxim is to borrow ideas to facilitate an indirect attack, as when Ricoh borrowed ideas from Xerox, but initially sold the outcomes through small distributors to small businesses. Xerox disregarded them as irrelevant to their vast business, but in the end they suffered through this neglect to take Ricoh seriously.
Another failure is to copy only part of someone else’s ideas, missing out vital elements and so in the end vitiate the whole attempt. A company which copied South West Airlines' no frill service, didn’t do it thoroughly. For example they still assigned seats, which had a serious delaying effect, which infected the whole process when compared with the originators.
Then it is necessary to absorb what you have copied into your own company culture and processes, so that it ceases to look like a copy. In the airline business Ryanair successfully copied South West. Michael O’Leary of Ryanair copied the South West model completely and with absolute commitment and made it part of his airline’s culture to the point where people don’t realise it has been copied, and see it as innovation.
Just when I was beginning to think that perhaps I had been hard in my earlier comments on this book, I came to this chapter and all my misgivings about the book’s dubious morality were resurrected.
The very word "entice" does not resonate with an ethical approach. You confuse your competitors about your own actions; you trick them to into actions they think will thwart you from doing what they believed you were going to do. If you deceive them well, they may go down into avenues which are distinctly disadvantageous to them. The authors comment approvingly "Enticing your competitors toward business that drives up their costs is one of the most complex and devilish strategies of hardball competition."
You make them think you are going down a certain avenue; they go to a lot of expense to counter you, only to discover that you weren’t going that way after all. You lure them into a different business area, where you may both compete, but which is not so important to you as it is to them. While the competitor is spending management time and money on countering what he though you were doing, you are getting on with the areas where your serious profitability lies. They, however, may find their costs go up, their margins shrink and market share dip. Our authors cynically remark "you have in effect led your competitor to a business that it convinced itself is the entrance to a gold mine but, is, in fact, a rabbit hole".
Examples are given of a number of Japanese companies who entered Western markets for ball bearings, motorcycles, machine tools and copiers at the low price end, which the Western companies vacated as of little consequence, but the Japanese took them up at the next stage until they were competing successfully across the whole range. It is suggested that the Japanese did this as a policy of enticement, but it could be that the European firms lost out by sticking to their well worn ways. The Japanese took the opportunity and moved in and up. Honda did this almost accidentally in America, starting with their little run-about motor cycles.
Federal-Mogul in America learned how to price their wares in a way that would hide from their principal competitor their true intents. Understanding the true costs which had been masked by blanket apportionment of overheads they were able to adjust their pricing in a way that caused the competitors to move toward a business that Federal-Mogul didn’t want and to stay away from the business they did want. The authors use words like delicious and wicked (presumably in the American colloquial way) to describe this deception. If you think business is war then you would say that Federal-Mogul were only doing what armies have always done.
The key in the Federal-Mogul case was the recognition that overheads needed to be disaggregated and related to the actual activities. (Activity Based Costing.) This was legitimately the basis of decisions about prices, which were then used to do the more dubious work of deceiving the competitor. Anyway the advice given on the aims of customer relationships are beyond reproach. We are told to strengthen our grip on customers that purchase in high volumes at prices that result in low margins and shed customers that purchase low volumes at low prices. The latter are undesirable customers, but they may seem desirable to competitors with a poor understanding of their costs and those who have a culture of winning above everything else. Perhaps you could call it manipulative, but not unethical, to set your prices high enough so that you shed this category of customer, while the competitor takes most of the business in relation to them, but not at so high a price that they make a substantial profit. Then while they are not looking you strengthen your hold on the more profitable customer territory.
A company or industry forces conditions or limitations of choice on customers, who accept them "because that’s the way it is". They have to make a compromise between what they would really like and what they can have. You move in a new direction and they discover that there are, after all, choices that they didn’t think would be available. Stalk and Lachenauer define compromises as "what results when the limitless desires of customers to be satisfied, collide with the constraints encountered by businesses in meeting these customer desires." The authors illustrate this by pointing out that most compromises are not really necessary. It is not a law that hotels can’t be ready before 3 pm or that cars cannot be serviced at weekends.
CarMax is given as an example of breaking the need for compromises of this kind. They set up selling centres which could hold many times more cars than any other used car selling company had ever put on offer at one time. They made life easier for customers by a computer inventory system which enabled them to identify the car they wanted and go and look at it. The sales process was also simplified and within 50 minutes the customer could drive away with the car. All because a company had the resources and the vision to do what no one thought was possible. This was hardball in the sense of thinking big, but it had no whiff of unacceptable behaviour.
The side effect of such behaviour is that competitors lose out. But that does not have to be the result of deception or greedy scheming by the successful company. The losers should have thought of it themselves and not have been left with the option of being copiers – second in the market. Their suffering is a by – product of the other’s legitimate success.
Breaking the compromises that customers are forced into is part of the company’s role of putting the customer first. You are freeing them from "the tyranny of your industry". By so doing in several areas of your activity you may redraw the rules of a whole industry as others feel compelled to copy you.
M&A is to be used as support to a strategy, rather than as the strategy itself. Often it is used to address a range of unrelated issues, for example to make people think it is growing, to raise share prices, chase supposed synergies, avoid solving certain problems and even to satisfy the CEO’s ego.
An example of strategic M&A is given. Two faltering hospitals in Massachusetts merged and by so doing they gained increased bargaining power with health maintenance organisations, they were able to cut costs, they could offer more treatments and capabilities, and in the end better financial performance. The merger was a way to redefine the newly integrated business in a way that would enhance competitive advantage, through economies of scale, economies of scope and lower cost of capital. It forced other healthcare providers to follow suit and enter into alliances or mergers, but the initial merged hospital company had the first entrant benefit.
Successful M&As require a thorough search for partners, high skill in the acquiring team, speed to execute the strategy and readiness to dump unsatisfactory elements. An example is given of a company that grew by making more than a hundred acquisitions over time, enlarging the customer choice and diminishing the compromises they had to make. Each acquisition was chosen with a careful strategy to widen the appeal of the whole.
The chapter so headed deals with the effect of changing circumstances such as the rise of China as a business force. This involves many factors, including driving costs down before entering that market to get a good start in using the lower costs; then establishing a Chinese domestic market and using the supply chain sensibly, avoiding excessive stretch.
So far, perfectly ethical and sound business principles. But then back come the lower moral standards of this book in the form of a "smart bluff". I give it in the authors’ words: "Announce your intention of moving your sourcing to China and pursue some activities that make your competitors believe it, such as starting a small pilot there or engaging a firm to look for a site on which to build a facility. Then, take your time, do just enough to convince your competitors you’re serious (but not enough to actually accomplish anything or waste any resources) and watch as your competitors dash to China and muck up their businesses."
This is followed by some perfectly acceptable approaches on how to avoid getting stuck in the middle, not being able to make up your mind whether you are in a producer market or a consumer market. They are hardball in the sense that they require decisiveness in peeling off elements which have long been favoured, but are no longer effective, in understanding new customer attitudes, even ditching brands that have lost appeal.
Similarly hardball business players do what is necessary to survive and grow in relation to physical assets, parting with old facilities which have only emotional value, being alert to what anomalies might be saying, and being ready to downsize. On downsizing, a CEO is commended for scrapping high cost employee contracts, firing many of them and then rehiring them for new jobs at lower rates. However a note of humanity is allowed to peep through. This CEO didn’t like doing it, because if the problem had been attacked earlier it would have needed less painful medicine.
A final chapter brings together many of the issues the book has discussed. It says little about the doubtfully moral aspects of the hardball approach, which, at times, it has highlighted as good and beneficial to the company, though bad or even unfair for its competitors, and sometimes even dishonest. I was happy with many of the maxims in this last chapter: calling for intellectual toughness; willingness to change radically, getting to the heart of the matter and staying there; the courage to ask simple questions; making all efforts fast, focused and fundamental; insisting that obstacle raising shall be accompanied by solution options; saying yes or no but never maybe. I could understand "don’t tolerate failure more than once", though I wondered whether the arithmetic was too inflexible.
But then I exploded when I read the maxim to "build a truth telling network". I understood that it was saying that people should be encouraged to avoid the Abilene factor and within the company tell it how it is. But when much of your policy outside the firm in dealing with competitors is based on deception, tricks, feints and downright lies, how can you expect a culture within the firm that is based on honesty, truthfulness and the common good?
The reader may feel that I am na?ve in expecting honesty and the absence of trickery in business, and that I should accept that things have always been like this in business, which is essentially based on self interest, rather than the general benefit of straight dealing. However, in spite of many useful ideas in this book I have to give it the thumbs down for its lack of moral fibre and its encouragement of devious behaviour.
In fact, if I were to learn some of the more unethical lessons of the book, I could be forgiven for thinking that the book is a spoof, seeking to expose the bad habits of business at its worst, so that when leaders and managers fully understand each others’ tricks they will desist from such behaviour and tread a path of ethical behaviour with a sense of social responsibility. By giving the game away perhaps the authors were deliberately seeking to create a more honest climate. Perhaps!