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Why do some companies within an industry grow continually while others grow haltingly — or even lag? What are the latter missing? Companies, big or small, must innovate constantly and be customer-centric to differentiate themselves, realizing that product life cycles do not go on forever, says Leonard Sherman, an adjunct professor of marketing and management at Columbia University.
That means companies that try to compete with me-too products are like dogs “that scratch and claw for territorial dominance,” and it ultimately does not work out, says Sherman, the author of If You’re In A Dogfight, Become A Cat!: Strategies for Long-Term Growth. Instead, companies should act more like cats, which “change the rules and fundamentally create entirely new value propositions that are rewarded by their customers.”
A former senior partner at Accenture, Sherman discussed the ideas in his book on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111
An edited transcript of the conversation appears below.
Knowledge@Wharton: I guess I have to start with title because that’s what draws people in right off the bat.
Leonard Sherman: Well, it was never supposed to be the title. It was a working title and it comes from a metaphor I’ve used in my class over the years. When we got near publication my publisher said, “We love the title.” I said, “No, no, no, I’m going to give it some boring, serious, business kind of title.” And they said, “No, we think this is the one and you should do it.”
Knowledge@Wharton: You link the fact that cats have certain characteristics that businesses should probably think about.
Sherman: The title, which is the premise of the book behind it, is [based on the experiences I’ve had in] most of my career as a management consultant. As a management consultant, you most often work with troubled firms that are struggling with growth or profitability, or both. I got to see over many decades some common problems that led to stalled growth or worse.
“Tit-for-tat replication of functions and features … is a non-winnable arms race.”
As for the metaphor I use with the dog and dog fights, way too often I found my clients more concerned with looking over their shoulders at their competitors and getting involved in tit-for-tat replication of functions and features. That’s a non-winnable arms race where everyone’s just matching each other and you wind up with this competitive blur.
United Airlines is not viewed and perceived as being different than American or Delta. [It’s the same with] Crest or Colgate toothpaste. Everyone adds a feature that quickly gets matched. That’s the way dogs scratch and claw for territorial dominance.
Cats are these solitary hunters who go off and change the rules on their own and find their own space. The most successful firms, at least in achieving what I call the holy grail of business — long term profitable growth — act more like cats, which is they change the rules and fundamentally create entirely new value propositions that are valued and rewarded by their customers.
Knowledge@Wharton: You talk about innovation being a key ingredient to this. A lot of companies say that they are great innovators and look to innovate. But I guess there are times when they’re not. That ends up becoming a differentiating point.
Sherman: Sure. The basic prescription in my book is that firms that have achieved long-term profitable growth, like Kia, FedEx, Starbucks, Netflix, Amazon and Apple, have [some] common traits. One is continuous innovation, not for its own sake, but to drive meaningful differentiation. This cat-like behavior says we’re not going to be a me-too product. That is supported by a business alignment where their culture and incentives and mindset are all oriented towards this continuous renewal of their product line.
Now it sounds almost common-sensical. Who wouldn’t want to innovate and do meaningfully different products? But it’s much more difficult to do than the prescription might sound.
Knowledge@Wharton: I guess there are common themes for companies that do find growth but are not able to sustain it.
Sherman: That’s correct. That’s because large corporations are heavily inclined and incentivized to protect their current core business. It is very hard to overcome this fear of cannibalization and this sense of “If it’s not broken don’t fix it,” and “You can’t argue with success.”
Far too many companies ride the classic product lifecycle curve that we’ve all seen in business school. Go through high growth and then maturity. But hey, on that right-hand side of that product lifecycle is decline. Too often, by the time companies realize that they’ve gone even beyond maturity into the decline stage, it’s too late because others have seen the opportunities that your company wasn’t willing to pursue.
Knowledge@Wharton: Of the companies you bring up, I wanted to delve into some that have struggled. One is BlackBerry, which was very popular, but has fallen off of that spectrum and is now more of a software entity. The other is JCPenney, which is struggling, especially as a big-box retailer.
Sherman: There are slightly different characteristics with each of those companies. With BlackBerry, you only have to go back to 2006, which is the year before the iPhone was introduced. From the turn of the current century to 2006, BlackBerry was a phenomenal company and the envy of the world, including Steve Jobs. It was earning return on assets of over 30%.
“Cats are these solitary hunters who go off and change the rules on their own and find their own space.”
Who wouldn’t want to get into that business? Unfortunately they, for some of the reasons I mentioned before, just couldn’t get beyond sitting on what had made them so great for so long. You had this ultra-secure keyboard oriented [product that was] great for enterprises. They missed the whole consumer market and the potential that Steve Jobs saw in a computer in your pocket. It’s scary how fast you can fall off the back in the technology space. That’s certainly what happened to them.
With JCPenney, it’s almost the opposite. When Ron Johnson came over (as CEO in 2011) from Apple’s retail [store division] where he had done such a great job, he made this classic management mistake of thinking he knew better than his customers. It was the Apple thing — “We know what our customers want even before they do.” He thought he knew what JCPenney’s customers wanted other than what they had been given for the last 100 years.
So he did this radical transformation where everything [JCPenney] stood for, for over a century, was gone. This is the new JCPenney, fair and square. Unfortunately he learned the hard way that it might have been a great idea in his mind, but not for his consumers. You have to find the right balance and vet your ideas. Making up your own rules is one thing, but you better make sure that they’re appealing.
Knowledge@Wharton: What do you think is the future for those two? BlackBerry has made the shift into being more of a software company now, so there’s room for growth in that area for them. JCPenney cannot remake who they are anymore. The only option is probably a bankruptcy filing down the road.
Sherman: Yes, and they won’t be the first or last. It may be too little too late. The whole brick-and-mortar retail sector, particularly the mall-oriented part of that, like JCPenney, is in a world of hurt right now. There are opportunities for some companies to continually refresh and renew themselves, but in their case they may have to go outside of that space and create some new forms of retailing that are very different than what they are today.
Knowledge@Wharton: How much of an effect for sustainable growth are the startup industry and small businesses, because they are feeders to these companies? Also, what is the role of government in regulation and its impact on these companies?
Sherman: Too often we’ve seen the Davids come in and slay Goliath. That is yet another example of what can and often does happen to companies that get complacent and sit on their current products. It’s an upstart newcomer that comes in and shakes it up. … It doesn’t have to be that way.
In the famous book by Malcolm Gladwell, David and Goliath, where he presents this alternative view that actually it was Goliath who was the underdog and David should have been the favorite because Goliaths are ponderous and they’re oafs and they don’t move very fast. But large corporations don’t have to be ponderous oafs. They can be agile. They can continue to innovate. It’s not only the startups that own that space.
Probably the greatest growth company of our lifetime is Amazon, which set the all-time record of zero to $100 billion faster than anyone. They’re still growing at 27% to 30% a year. They have constant experimentation going on for all phases of their business. Near term, [Amazon does] continuous improvement, longer-term, on fundamentally changing the business. They’re the role model of a large company that can continue to innovate.
It’s an internally feasible and often desirable way to continue to grow through innovation for large companies to selectively acquire startups that have great ideas. But it would be great to scale those inside a larger enterprise with lots of resources.
All of the above would clearly benefit from having less restrictive regulation. We’ll see over the next few years whether the regulation reform that we’ve been hearing about is as helpful as our current president hopes it can be.
Knowledge@Wharton: You are a believer in the customer-centric path that companies have to take. If you’re not doing that, you’re doing an unbelievable disservice to your company and your consumers.
Sherman: This notion often gets short shrift in the business community — that a company that genuinely has a customer-centric purpose [asks itself], “What is our purpose? Why are we in business? What are we trying to accomplish?” If you read the mission statements of just about any company, they always say, “Oh, our customer satisfaction is our highest priority and we love our employees” and all this kind of good stuff.
But if you look at the companies that have been posting the most impressive and profitable growth track records over the last 20 years, they are those that walk the talk, that do embrace this obsession with delivering superior customer service at the heart of who they are and why they’re in business. They put in policies that make that come alive, whether it’s Amazon or Jet Blue or Costco or FedEx, you name it.
Too often companies confuse what their purpose is with what [they want] their outcome to be. So companies that get totally obsessed with maximizing shareholder value as the No. 1 priority or becoming the biggest, strongest company in the world, start to lose sight of their business priorities and maybe even their moral compass.
When the CEO of Volkswagen says, “We are going to be the biggest, most profitable car company in the world. And no matter what, that’s what we’re going to achieve,” that sets the trap for letting the ends justify the means. And we saw what happened to Volkswagen. I’ve never heard Steve Jobs or Tim Cook say “I am going to [create] the most valuable company in the world.” It just happened to work out that way.
“Large corporations don’t have to be ponderous oafs. They can be agile. They can continue to innovate.”
Knowledge@Wharton: Among the companies that you say have done a good job is Ikea. Why is it that you think that they have done such a good job?
Sherman: They’re a $40 billion, 75-year company that has been consistently profitable and self-funding, and privately owned with a squeaky clean balance sheet. It is one of the strongest and most beloved brands around the world, and one of the few brands that can operate in a consistent fashion whether you’re in Singapore or Conshohocken, Penna., where their U.S. headquarters are. They have a lot to feel awfully proud about.
This is an example of a company that set forth a crystal clear, customer-centric corporate purpose, which is to say, “It’s very easy to build beautiful furniture that costs a lot of money. It’s a lot harder to build very functional and stylish furniture that is affordable by virtually everyone. We will commit ourselves — 75 years ago and today and everything in between — to that purpose.” For those people who find that value proposition very appealing, they have been a consistent, reliable, go-to corporation for a long time. I have some issues with their future growth potential. But that’s a story for another day, maybe.
Knowledge@Wharton: One of the companies you mentioned is Yellow Tail. What is it about them that they have done so well?
Sherman: They did something that’s very smart and very cat like, to use the title of my book, in that they entered a terrible business. Imagine trying to enter a business as a totally unknown small little vineyard that operates out of southeastern Australia, [and has] never sold in the U.S. before. They’re entering a market with almost 10,000 distinct labels that no one could tell apart, and no one knows the brand names. There’s no brand allegiance. And no one can tell the taste difference between most of the wines that are on the shelf. How do you break into that market?
The brilliant thing that Yellow Tail did, the cat-like thing, is to say, “Hey, 85% of American drinking age adults don’t drink wine….” We’re just going to ignore the 15% of the market that is already [made up] of wine snobs who have their behavioral patterns in place and we’re going to go after every man and every woman who is more interested in drinking soda pop than they are wine, and make a fun, approachable, non-pretentious affordable casual everyday wine, and we’re not going to take ourselves too seriously.” It’s just amazing.
The wine industry is one of the oldest industries in the world, it goes back to biblical times, and no one had figured out that there is this huge latent demand of folks that said, “Hey, just make it easy and fun.” [Yellow Tail] set the all-time record to go from zero to 8 million cases of wine in the U.S. market in about four years, which was astonishing.
Knowledge@Wharton: I guess when you’re talking about a great idea, somehow it will get pooh-poohed by somebody else or they hit a wall of some kind. It’s about fighting through that wall to try and bring that forward, correct?
Sherman: As [Amazon CEO] Jeff Bezos said, “I’ve made billions and billions of dollars on businesses that everyone told me I was crazy to enter.” So “Don’t listen to them” is his advice, and I think it’s sound advice.