"Companies that have a multifaceted set of capabilities are really hard to replicate" | Outlook Business
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Masterspeak 2015

"Companies that have a multifaceted set of capabilities are really hard to replicate"
Martin Prosperity Institute's director Roger Martin is a champion doer and a practical idealist 

N Mahalakshmi & Rajesh Padmashali

Roger Martin is a practical idealist. During his 15-year stint as Dean of the Rotman School of Management, he transformed it from a non-descript institute to one of the most respected global B-schools through sheer professional will and astute strategy. Interestingly though, he did that magic not just with Rotman but also with the National Tennis Federation of Canada of which he served as the chairman for three years and headed the high performance committee for another six years.

During our interaction, he tells us the story of how he and his director friends transformed the tennis scene in Canada in just about a decade. With a miniscule budget — about a decade ago, Canada spent two million dollars a year on high performance players as against a couple of hundred million for the US and Australia and 150 million by the UK — Martin took a non-democratic, completely different path to push for performance and the result: the youngest top 10 male and female player in the world. With a wide range of research work to boast of, Martin is also the author of eight books including Playing to Win, The Design of Business and The Opposable Mind.

You talk about multi-disciplinary thinking across hierarchy. Everybody in the organisation should think through strategy. But how do you ensure that there is no chaos, that there is cohesion? 

I don’t think it has to be chaotic at all. Nor do I think strategy is particularly democratic. The people at the top have to set the top-level strategy and everybody else has to set strategy that is consistent with that contextual framework. I work with so many big companies, such as Verizon and P&G and HP. For me, the challenge there is having a definition of strategy, a language of strategy, a practice of strategy that is consistent across the various pieces and levels of the organisation so that you can have dialogue wherever the strategy is at odds.

Right now, in most companies, you have such different definitions of strategy in various sections that it is like the Tower of Babel; you can’t talk in a common language. But there is a really interesting acronym. I can’t tell you any more what is the difference between marketing and strategy. If you think about it, marketing’s roots are in understanding the customer. It is the 4Ps and what the customers want and it is saying that we want to pick the customers and then make them really happy. That is marketing. 

Strategy came from the military. Who were the actors there? The answer is competitors and companies. It is about competitors and our capabilities. We didn’t actually think of a customer. As the practice of strategy came along, it evolved. Strategists said we can’t just think about competition. We have to think for what and for whom — which customers and what do they really want. So, strategy started evolving into integrating the customer.

Meanwhile, marketing sort of said, “Well, the only way you can do the 4Ps well for the customer is relative to the competitors, and we have to have a set of capabilities that can do that.” Smart marketers say it isn’t just the 4Ps. You have to think of the competitive context and the capabilities. As both of them evolve, it is about customers and competitors and capabilities and what is strategy and what is marketing. People often say, “Oh Roger, you are just talking about marketing stuff.” I reply that just because I am talking about P&G, is it marketing? No, it is as much about strategy. Even though those two fields are utterly indistinguishable from one another, at this point they are still taught as separate things. I don’t know a single business school on the face of the planet where marketing and strategy are viewed as one discipline. 

Who’s getting it right? You used a term called implicit advantage to explain companies such as Southwest and Ikea. What have these companies done right and, more importantly, how have they stayed right? 

Well, I think the ones that have an advantage have focused on the customer. The customer is at the very heart of their strategy. Then, they create a distinctive system. They don’t tag along with their competitors and say that everybody else is doing this, so we should do it. So, when someone builds the biggest polyethylene plant in the world in the lowest cost jurisdiction and says, “I have got a little cost advantage so I’ll win,” everybody else just looks at it and thinks, “Okay, I get the formula,” builds even bigger polyethylene plants right beside theirs so that they have the same labour and transportation costs, and says, “We will blow them out.” It is not just one thing; it is about making a robust set of choices. The companies that have a multifaceted set of capabilities are the ones that are really hard to replicate. 

For any company to compete with Southwest Airlines, it has to tear up its entire operating model. So, if United Airlines says it is tired of losing to Southwest, what should it do? Well, to even have a chance at competing, it has to sell off all of its non-737 and buy a new fleet of 737s. It has to tear apart its entire route structure and actually sell most of its gates because they are in big airports in the middle of big cities instead of secondary airports in smaller cities. It would have to tear up all its union contracts.

That would be a 10-year battle. It would just have to do too many things. Continental tried to do that with Continental Lite a little bit and United tried to do that with Ted a little bit. But nobody has said we are going to take the main business and compete against Southwest. It is just too hard. I would say the same for Ikea, Vanguard and a bunch of other companies. Michael Porter and I wrote in 1996 that these companies are advantaged. Not only are they advantaged but also nobody has really taken a run at them. I would also say that these companies also modify over time. About 20 years ago, you used to get really cheap stuff at Ikea.

Now, you can go in and get a really expensive $7,000 kitchen set. The Ikea of 2015 is not the Ikea of 1985. It has evolved and grown. However, it has not ever felt the need to tag along with its competitors in terms of its business model. The college kids who bought Ikea bookshelves when they had no money, once they became executives still went and bought from Ikea and have affection for Ikea. But they would have been embarrassed to still own bookshelves  they bought when they were in college. Ikea followed them and said, let’s take advantage of the fact that they have warm fuzzy feelings about us.

Is transitioning along with customers really the best way? The converse would be to steadfastly cater to the segment that you are catering to and do a good job of it, which is what most companies tend to do. If at all you transition, what are the things that you could avoid to ensure that you don’t mess up? 

It is hard to say. I don’t think in strategy there is only one way. I think that there are some companies that stick absolutely assiduously to their customer base and never take advantage of the possibilities for going beyond that. I think it depends upon the customers. There is a life cycle thing. Acquiring a customer is a hard thing to do.

Once you have acquired a customer, I think the extent to which you can grow with them makes it better. I think one of the successes of both Toyota and Honda in the US market is that those young people who bought tiny little Corollas and tiny little Civics were able to migrate up to Camrys and stick with Toyota. They liked Toyota but if Toyota only offered little Corollas, they would say, “Hey man, I have got two kids and the back seat doesn’t really fit well. Corolla isn’t a really upscale vehicle.”

Then they eventually gave them Lexus, too. So, there is a part of me that says, in a number of industries, acquiring a cohort is important and then continuing to grow with those people is important. If you can figure out how to grow with them, great. Ikea was a generational thing. It hit North America, and a segment said, “Wow, we like this.” Some of them were old, not very wealthy people. But some were young, and as they grew old, it could offer them more. It wasn’t grooving with the entire group. 

There would be others where there isn’t a life cycle. A perfect example would be Pampers. Women have a baby or two or three and then they are done. What makes sense there is the strategy of acquisition. You have to make sure that the woman who is in the hospital and just had a baby puts Pampers on from Day 1. Statistics show that you have a really good chance of keeping her as long as you don’t screw up. After the baby comes home and she goes to the supermarket and finds only Huggies there, then good luck to you. But otherwise, there is a battle there, too, and the battle will be about upgrading. 

You are not upgrading to follow the cohort but upgrading to win the next cohort. I would say it is important to invent the future. The generic problem with staying in your comfort zone is that you are not inventing the future. Are people only buying a low-end product because you haven’t provided them something that would make them truly excited about a higher-end product? It is bounded by their disposable income and everything. So, if you start trying to sell $100,000 Teslas in India, it is such a big country that there would be a market for it.

But it sure wouldn’t be a mass-market product. The Nano was, as I understand, simply not aspirational enough. People said, “I don’t want to have a car whose absolutely central feature is that it is cheap as hell. Some people bought it. It was a good utility vehicle for them but they didn’t buy it to say, “I drive a Nano.” Now, my understanding is that they spruced it up and it is now kind of a more good-looking car that young people would say, “Hey, I am driving a cool car,” as opposed to the dirt-cheap car of the past. 

Can you give examples of companies that have lost their intrinsic advantage?

American Airlines. This company used to be a dominant, well-performing airline for a long time. It just lost it. General Motors is a good example. Sony would be another example.  I think the most common thread is that they were not listening to customers, who would have otherwise helped them lean into the future. They didn’t watch their new competitors. I think for most Americans, if you ask do you want a Sony, a Samsung or an LG TV, I think they would probably say Samsung first, LG second, Sony third. Unthinkable 15 years ago.

If Sony wasn’t so supremely confident that it was the only brand that people cared about and instead said, “Why do people care about this brand and how do we make sure that we keep on nurturing this brand,” they could have avoided this scenario. I think it’s about relentlessly attending to your customer, which is organisationally very difficult because customers are incredibly annoying. Even the good ones will complain no matter how hard you try. It is just a human emotion. Any company that cares enough to create a good experience in the first place is going to be hurt by criticism from customers. They will be more inclined to try to listen to things that make you say the customer loves us, instead of hearing the fainter signals that says “They love us but... this is something that is dissatisfying.”

They don’t try to fill up that dissatisfaction. And then some clever competitor comes along and says we are going right after this. That is the thing. We are going to go at that. Then the company wakes up and says, “I didn’t think that that was so important.” That is what most companies that lose their advantage say in retrospect: we saw all that, but we didn’t do anything. 

How do you ensure that the openness to customer feedback stays? Does integrated thinking have a role to play in it?

I think it does. The core central purpose of integrative thinking was to help people understand that an opposing model is like manna from heaven. It is the biggest free lunch in the world. What I try to teach and succeed in integrated thinking is that the person goes from saying an opposing model is a fault to saying it is an opportunity to be exploited. Integrated thinkers, when they hear customers asking why did you do this or that, their first inclination is to ask, “What is their model? We are not doing that because our model says that is not something that is important to do. But the customers have just told me, wow, that is super important. I need to understand that model, so tell me more. Could you help me understand that better?”

They lean into it. There are always nuggets that you can integrate into your model. What people are fearful about is that the other model will crush their model. If I start thinking that maybe you are right, then I have to lose virtually everything I believe in and I will be bereft and feel terrible. But I have got to try and teach them that actually, that rarely ever happens. 

What happens is that you pick a couple of pieces from your model and a couple of pieces from theirs. So, it is not their model. It is a new model that not only is partially made up of stuff from theirs and yours but you are the creator of it. You don’t have to feel alienated from your existing model. Over time, I have come to believe that this is what people fear. People have a strong sense of need to have an identity.

But with integrative thinking, you are not going to become them, you become a better you — somebody who is always searching for the best existing model. I am evangelical about integrative thinking. We teach it now to underprivileged kids in high school. It is transformative for them. So, rather than thinking that you can’t get out of your life and become something better, you realise you have all these either/or choices. There is always a better way. The kids end up feeling much more in control, empowered. 

 Can you give us an example of integrative thinking? 

When Bob Young co-founded Red Hat, the view in the entire Linux world was that we are the cool people. We give software that people can really use and these nasty people selling proprietary software are like auto companies selling cars with the hoods welded shut. The only people who buy their stuff are IT administrators. So, that was the model in the heads of those people. Bob Young, even though he was a part of that movement, said, “Really, is that the best way to think about IT administrators or is there another way to think about them?They are installing something that is going to have to last for 10 or 20 years, so why would they buy software from a little fly-by-night company called Slackware or some weird company they have never even heard of? He thought about what would matter to them. What would matter to them is if we are big and stable. We are going to put our software up for free to achieve scale. We survive by doing free software but exemplary service.”

So, he takes from the proprietary software model the idea of service contracts and develops it into the free software model by putting the software up on the internet and voila — he has built a better model from the pieces of the two models. Young became a multi-millionaire, not the Slackware guys, because they said those guys [IT administrators] are idiots, aren’t interested in the best software and would just do the safest thing even if it was bad for their companies. How can you ever serve a customer when you despise them? 

Which companies are you tracking now in terms of strategy and what excites you about them?

One of my favourite companies of those I work with is Lego. The CEO of Lego, Jørgen Vig Knudstorp, is fantastic. What I love about Lego is that it is so dedicated to children learning through play that nothing will stop it from doing more research and gaining more ethnographic understanding. What it did with girls was so great. It has tried numerous times to get girls to play with Lego bricks.

Historically, 85% of Lego play was by boys. It might have been bought for a girl but 85% ends up by volume and timespend with boys. It is interesting. The company could have said toy guns manufacturers don’t like to sell to girls as girls don’t like to play with them, so that is who we are going to sell it to. But Jørgen said he didn’t believe that, so it tried to figure out how girls like to play and why they don’t like to play with Lego. And they did it. Due to its great ethnographic research, Lego figured out that girls do like to construct. They like to construct actually as much as boys do. It asked, what is so different about dressing up a doll? You are building the final thing.

What it found out is that girls like to build in groups. They like to play in groups where all members of the group who are playing have roles to play. Boys are happy to do it on their own or with their mum or dad or even a helper. The boys are more completion-oriented — they want to build it and say, “I am done.” Then, they will probably smash it up and do it again. Girls have no such desire to be done with something when it is completed. The ‘Friends’ line used to feature these four girls who used to go on an adventure together, building a dude ranch and jungle cruise, and it sold like hot cakes. Girls build but they build differently and they needed a different product. It is not that it had to be soft and have a girlie theme but it had to be that they were involved doing an activity together. Let them fantasise about it just like the boy fantasises about building rocket ships in which he is going to be the astronaut. I like that attitude that says, “We are not stopping. We haven’t figured out that yet. We will figure out the answer if we keep working at it.” I just love that. 

They are also thinking of the future of play in a digital world. How will the physical and the digital interact? Will digital kill physical? Sure doesn’t look like it yet but it might, some time in the future. To me, they are just actively trying to create the future and not letting the future happen to them. Are you just trying to hang on? Whatever happens in the future, can you manage to survive it or are you trying to actually shape the future?

Can you give us some more examples like Lego?

I love Four Seasons, which in my view doesn’t unnecessarily and unhelpfully typecast people. Most luxury hotel chains essentially have a view of rich people that they want to be surrounded by grandeur and obsequiousness. You build the hotel with grand architecture and décor. The money is spilling out of the cracks and then you have obsequious service.

“Yes sir, yes ma’am, whatever you want, right away.” It turns out that there is a reasonably large segment of well-to-do people to whom that is not what luxury means. By talking to guests, you will figure out that most guests in luxury hotels don’t really want to be there. You may ask why? You are in a luxury hotel — isn’t that great? The answer is that they would rather be at home with their loved ones. Interestingly enough, if you delve even deeper, the number two place is the office because these are business travelers. They tend to be busy and they care about productivity. That is where you’re the most productive — your databases, your secretaries, your assistants, they are all there around you. Your business location is a little pod that is supposedly designed to make you productive.

So, Four Seasons said, “We are going to define luxury as a form of service that makes up for what you left at home or at the office.” So, it asked, obsequious service — does that feel like what you get at home? And grandness? Not likely, unless you’re a billionaire. Many of them are billionaires. But most people who stay in Four Seasons maybe have a nice and comfortable home, not a grand one. 

So, they make the hotels beautiful and friendly, not grand. Very business-like and attentive to the fact that you want to be a productive person. So, its average revenue per room night is nearly 33% higher than the next hotel chain. This is simply by saying don’t typecast people. They are a little more subtle than you think. 

You firmly believe that design can be a strategy.

The whole reason why I am interested in design is that too much about business management is about analysing the past and present. Traditional business tools are all for perpetuating the past, honing and refining. But the problem is that the more analytical you are, the more your focus has to be on the past, because all the data comes from the past. Is there any data about the future? There will be soon, when we get past the present.

What has happened over the last 50 years is that as business and business education have got ever more analytical, it is ever more about simply managing the status quo, honing and refining. That is where design comes in. I was always intrigued when I saw my designer friends closely — they are always inventing the future. We could have a better product, a better logo or whatever. Design is all about imagining the future. So, what I have done is take the principles of design and the way designers are trained and fuse that into business. I don’t believe it is an either/or. 

There is a really cool chap in Australia, Tony Golsby-Smith, who is an Aristotle scholar and a strategy consultant. He has alerted me to an interesting schism. Aristotle was the world’s first scientist. He taught the world cause and effect and all science derives from him. He said the purpose of science is to demonstrate that things cannot be other than they are. The purpose of science is to say, if I drop a pen at sea level, it will accelerate at 9.8 m/s2 always. That cannot be any other way. That is gravity. Yes, birds fly, but they do so by generating enough energy to do it. You use science to demonstrate that things cannot be other than the way they are. You do enough experimentation to say we have a theory and a set of empirical facts to demonstrate it is always this way. 

So, a deductive, analytical approach to discovering the answer is the best way. But Aristotle also said that there is another part of the world where things can be other than the way they are. For this part of the world, do not use the method, the deductive, analytical approach. In this case, the job of the thinker, the scientist, is the creation of possibilities and choosing the one that is most persuasive. Think about Steve Jobs. He was imagining possibilities and being persuasive enough to create them. If you’re following Aristotle, would you say people’s needs and desires for their smart devices is just one way and they can never be anything else? Hell, no. It changes every six months from what I can tell. The evidence couldn’t be stronger that things constantly are more different than they are. 

So, I would argue that in a world — especially in a Silicon Valley world — where people misapplied Aristotle’s deductive methodology to both worlds (where things cannot be the other way, and where they can be the other way) and over-applied analysis, Steve Jobs went ahead and dented the universe by imagining the future. I feel strongly about design because design is the way to inoculate our students in this world, which is making mistake after mistake in over-applying Aristotle. Now, what is the hottest topic in business? Big data! What is the presumption behind that? That you are going to apply analytics to everything. It is implicitly making a fundamental mistake. It is actually dialogue that produces the possibilities from which we can imagine the most persuasive line. Your ability to express the arguments will help make them more or less persuasive. That is as much of a skill as creating analytical models. 

How do you embed design thinking across the organisation?

Well, it’s hard. The two most dangerous words to innovation and design are: prove it. You are my boss. I come up to you and say, “I have this great idea and we can make a tonne of money out of it.” You come up to me and say, “Oh yes Roger, but can you prove this?” Done. It is finished. I either give up because I can’t or I make it so watered down that it is similar to the current. So, you need a leader who essentially understands these opposing forces — the force of reliability and validity. They have to be sufficiently validity-oriented to allow it to exist. I am not sure whether it is absolutely true or not but both the iPod and the iMac were fully developed by the time Steve Jobs came to Apple but nobody had the guts to green-light them.

Jonathan Ive created both of them but people said, “Seriously, a tangerine-coloured computer? You are going to do that?” Steve Jobs apparently took one look and said the company was doing it. That is the leader who is able to identify the right idea but who doesn’t say prove it, because it is not provable. Yes, you can do some market research and say well, maybe, but you can’t really. You are never going to be able to say it’s a smash hit. Imagine trying to prove that at three times the price of a perfectly technically equal MP3 player, the iPod is not only going to sell some, it is going to become the dominant player and destroy most of the competition. No chance. You wouldn’t say that unless you were on drugs. 

What I think is that modern managers think of themselves as slothful and irresponsible if they don’t insist on having analysis behind every decision. They think if they are going to be good managers, rigorous and robust, it means that I need analysis before I do anything. It is cultural. It is a moral point now. It is like, “Let me get this straight. You want me to do this now without any proof? What do you think I am? Do you think I am going to throw shareholder money down the toilet?” They would express moral outrage at it. 

It has gone past a logical argument to a moral argument. The analysts have won the day and they are winning it. I think we are in a supernova because of big data. It is bad enough already but now the coolest thing is data analytics. There is going to be this rush into both spending money on data analytics and doing data analytics. That is just going to end up in a huge blowout. 

You have expressed an aversion towards shareholder wealth maximisation. What aspects of it don’t you agree with? Berkshire Hathaway is a great example of a company that has maximised shareholder value and shown how it can be done the right way. 

Yes. In many respects, Warren Buffett is the perfect antidote to everything that is wrong with the stock market. He doesn’t split his stock. He couldn’t care less what the current stock price is and his executives are not compensated with stock options. He says that is stupid. At the heart of it, the problem is the fact that expectations define a stock price. If you think about it, the S&P 500 during its entire time, on average has a PE of about 18-19X.

The way to think about stock prices is to get paid 1X for current earnings and 17-18X for what they think you’re going to make in the future. Because expectations have no bounds, you know that when things go well, expectations will get ahead of reality. So, when you say your job is to increase shareholder value, there will always be times when that is the worst possible thing you could strive to do. That is, your equity is overvalued and you are trying to do things to make it more overvalued because that is the only way you can increase shareholder value. 

One of the best and most obscure business articles ever written was by a guy who has written the most cited article of all time. Mike Jensen’s 1976 article on agency costs is the single most cited business article in history — it’s got about 40,000 cites. He also has an article with 800 cites. It is called the ‘Agency cost of overvalued equity’. It is a brilliant article in an obscure European finance journal. What he says is that the minute your equity is overvalued, you start to do things that are inherently damaging for your company. You will make gigantic acquisitions to try and prove to the market that you can do something more, even though that might be bad. You will go and buy a whole lot of stuff with your overvalued stock and things will crash and burn. That is the big problem. The reason I hate shareholder value maximisation is you cannot keep on making expectations rise, because expectations are out of your control and they have no logical bounds. So, once your stock gets overvalued, you can’t do it. So, I don’t want to have as a goal doing something that you actually can’t do because then you take extreme actions. It is what a finance professor of mine once called the 32 Red Syndrome. What you don’t want is your CEO to take all the corporate money, go to Las Vegas and put it all on 32 Red. Because that is essentially what lots of them do and they blow the companies up. I am into real-based measures not expectation-based measures.

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