Book Review: Breakthrough - How Great Companies Set Outrageous Objectives—and Achieve Them - by Bill Davidson
Introduction
Author Bill Davidson, a former USC management professor, and now a management and corporate leadership consultant, bases his 2004 book, Breakthrough on classic examples of high-profile, turnaround businesses such as IBM, Caterpillar, and American Standard. These companies illustrate successful breakthroughs. No matter how strong the performance, all corporate success cycles do, eventually, end—unless a company’s leadership has the foresight to plan for further innovation.
The breakthrough principle—and its potential for either success or failure—is, surprisingly, not based on a company’s size, resources, market position, or age. The secret that breakthrough companies share is the determined pursuit of what Davidson describes as “outrageous” objectives. Because most firms go through a success cycle only once, it can be to a company’s advantage to look at other organizations for lessons that will make an inevitable process more efficient and more effective.
MANAGEMENT CAN HAVE ITS CAKE, AND EAT IT TOO
Breakthrough is, according to Davidson, an innovation that triggers superior performance and provides the transition from one success cycle to the next. It is a bridge to higher market positions, in terms of value share and market share. It is innovation that has to occur on an enterprise-scale, significant enough to shape an emerging company, or to re-invent and redefine an established player. The result is a completely new business model that exhibits, according to Davidson, “superior operating and profit performance, leading to both a new corporate profile and a new market position for the breakthrough company.” Although breakthrough can occur anywhere within an industry’s structure, from start-up to market leader, the most common place for a company to “break through” is at the entry point to the market.
An alternative to using breakthrough as a bridge to higher market positions is to use it to establish a company in the position of “niche master”: to focus on “securing and defending” a specialized success zone in which the company can compete successfully, thereby avoiding head-to-head competition with the larger primary players in an industry. A “niche market master” supplies a distinct market need, and serves a distinct customer set with a distinct supply and value chain. A number of companies, however, have also used breakthrough to make the “niche switch.” Progressive Insurance, for example, which was the niche leader in substandard (high risk) auto insurance coverage, not only successfully defended a foray by Allstate, a strong number two inner-circle competitor in the standard auto insurance market, into its niche, but subsequently, as a result of employing a breakthrough strategy, turned the tables on Allstate by breaking out of its niche and “storming” into the standard auto insurance market. “Many of the most spectacular examples of breakthrough innovation and subsequent success cycles originate in the niche master zone,” says Davidson. “Allstate’s foray into Progressive’s segment had triggered a series of forces that would reshape much of the insurance sector. Progressive’s innovative response to invasion by a larger inner-circle competitor provides a classic example of the breakout niche strategy. A number of the most successful insurgents in our research sample are breakout niche players—established, secondary competitors who use innovation and industry experience to seize market leadership.”
Within a market or industry, breakthrough innovations must fundamentally alter customer service standards, cost positions, cycle times, and value propositions. In doing so, they lead to “differentiated, disruptive offerings” that “shatter the competitive equilibrium, creating space for the breakthrough company.” To accomplish this, breakthrough innovations must come from large-scale, long-term initiatives that make use of advanced technologies and radical process innovations to achieve leaps—not just advances—in operating performance, financial results, and market position. It is the nature of breakthrough innovations that often results in multi-dimensional competitive advantages—cost leadership, superior customer service, and increased market and value share. Countrywide Credit, for example, in its breakthrough in the home loan market became a cost leader by reducing the average transaction cost to $748, from an industry average of $2,357. It became a service leader by achieving dramatic improvements in customer service, and by reducing loan approval cycle times by 90 percent or more. It became a product leader, as well, by adding product enhancements, such as the ability to lock in interest rates at any point in the cycle. Improvements in quality, service, and product features, according to Davidson, offer superior value to the customers while cost and cycle time reductions drive improved margins.
Market leadership comes to firms who can achieve these kinds of breakthroughs. The first step is to focus on a breakthrough strategy. “Reality tends to favor new entrants,” says Davidson, “yet agile incumbents can seize sources of innovation . . . by thinking about their business from the perspective of a new entrant.” First and foremost, breakthrough strategies focus on “outrageous goals,” goals that force companies to consider alternative processes and technology platforms. Breakthrough companies are “early adopters” of new technology, and are often involved in the developmental stage of new technologies, though they typically, according to Davidson, do not invest more than the average company; they concentrate their investments on leading-edge solutions that support a focused strategy. In addition, they focus on great leaps forward, rather than on incremental improvements. “Breakthroughs focus on creating tomorrow’s processes, not on improving today’s.” Breakthrough companies emphasize customer care over cost reduction, and they make creative use of their human resources by providing the flexibility to fundamentally redefine job descriptions and roles to make the best use of employees’ talents and skills. Breakthrough strategies create new business growth opportunities as a result of the technologies and processes the company develops. Progressive Insurance, for example, with its original innovation in claims settlement methods, not only repositioned itself in the market, it also dramatically redefined the auto insurance industry.
It is Davidson’s philosophy that “breakthroughs smash traditional trade-off logic by offering radical gains in multiple dimensions in operating performance.” Pursuing operating excellence in existing core areas leads, he predicts, to growth in new areas. And, the investment in infrastructure is paid back quickly from immediate operating gains, which then provides free platforms for new business development. Progressive Insurance’s investment in the automated claims management system (PACMAN), developed at a cost of $30 million, paid for itself in less than two years because it did, in fact, streamline the claims process so well, and then served as a springboard for next-generation services for Progressive. Finally, breakthrough strategies drive increased benefits to all stakeholder groups—at the same time.
To make these breakthrough innovations possible, an enterprise principle that both underlies and connects a strategic mindset and a leadership philosophy has to be at work. For large-scale initiatives to be implemented across an entire company, there must be a commitment to a single, integrated plan, or strategy, which is focused on innovation and outrageous objectives. Breakthroughs cannot be achieved in business environments where entrepreneurship, independence, autonomy, and decentralization are the defining core concepts of the company. This was the task before Lou Gerstner when he took over IBM in 1993: he had to change the company’s strategic direction, business model, culture, and management mindset.
Gerstner approached the company from the customer’s standpoint, and he focused on integrating business units rather than dismembering them, as many IBMers advocated when Gerstner took over the company. He created a Strategic Leadership Council, in which senior leaders met to develop, and then execute, a core strategy for the company, a strategy that would focus on solutions and services. IBM’s “mainframe mindset” had to change to a solutions-and-service centered approach. By 1995, IBM was reinforcing its integrated business model with innovations built around the power and reach of the Internet. By 2000, “Old Blue” was once again “Big Blue” by virtue of being “Breakthrough Blue.”
IS YOUR COMPANY A CANDIDATE FOR BREAKTHROUGH?
A thorough knowledge of your company—its resources, current profile, core competencies, and core identity—as well as knowledge of the external environment in which your company operates, are essential considerations before launching breakthrough strategy planning. Firms that have a decentralized management structure are poor candidates for breakthrough strategies, says Davidson. Key factors in pursuing a breakthrough strategy are the capacity to focus on a single, core strategy for three to five years, or longer, along with continuity in senior leadership. “The fundamental question is who has the insight and gumption to shape and launch a breakthrough strategy in any market and the persistence to stay focused as a team to execute it.”
Breakthrough strategies are not for all companies. Competitive considerations are extremely important. Companies considering initiating breakthrough strategies must consider the core competitive positions, roles, structures, and dynamics, beginning with the role played by the market leader vis-à-vis a particular company’s position, as well as trend lines for other competitors. In addition, it is also important to understand market scope and boundaries. Is a business its own universe, or is it part of a larger market structure? Precise market definition depends upon three factors: supply side differentiation, demand side differentiation, and competitive strategies. “Focused pursuit of a narrow market becomes hazardous,” Davidson says, “if the market in question will be subsumed into a broader business model.” Understanding the dynamics of globalization and shifts in market boundaries are also essential to planning strategy.
THE PROCESS UNDERTAKEN
Once an organization determines that an outrageous goal or objective is appropriate for growth, for renewal, or for continued existence, planning a breakthrough strategy is the next step. Whatever the goal, says Davidson, profile initiatives and operating performance provide the key engines for reaching it. Gains in competitive position and financial results come from these two key drivers. “Radical innovation in operating performance—process innovations—appears to be the single best driver of breakthroughs,” according to Davidson. Toyota, for example, achieved great success with the introduction of Lexus—a profile innovation—that allowed Toyota to expand the company’s profile by entering the upscale, luxury auto market. However, the success of that breakthrough was due to Toyota’s manufacturing system, including its Just-in-Time (JIT) inventory. Dell Computer is another powerful example of how innovations in operating performance carried what was once a marginal competitor to worldwide market leadership in PC sales. Breakthrough for Dell came in 1995 when founder Michael Dell focused his company’s sales on the Internet. But, says, Davidson, Dell’s breakthrough was more than just a sales channel innovation. Dell was the first to embrace mass customization of PCs. “Dell was the first company to perfect a now-generic breakthrough strategy that combines mass customization; customer-specific product design; just-in-time supply chain solutions; and rapid, remote fulfillment and service. The result was typical of successful breakthroughs—rapid sales growth and rising margins.”
Struggles often arise between insurgent companies (new entrants) and incumbents for market leadership. To win these struggles, insurgent companies must have a breakthrough strategy that delivers results in the marketplace. Incumbents, on the other hand, can innovate as well. “Established market leaders can make the leap to next-generation business models, reshaping themselves and their markets in the process,” says Davidson.
MARKET LEADERS ARE NOT ALWAYS AGILE INCUMBENTS
However, many incumbents find themselves unable to keep pace with the changes that will inevitably take place in their market. For Davidson, the “source of paralysis” for market leaders is, generally, allowing existing processes and practices to become so deeply embedded that they limit the company’s ability to adapt to newer, more effective models. This trend includes the inability to embrace new information systems technology. In addition, says Davidson, dedication to existing channels of distribution can also create resistance to innovation. “To successfully innovate, an industry incumbent . . . must abandon its commitment to legacy channels, processes, practices, products, technologies, business models, and mindsets.”
Incumbents often have a choice to make: continue with a market model and profit generator that will eventually become passé (while slowly allowing market share to go to insurgent companies), or convert to the new order of business in the industry. The challenge for incumbents is to abandon their comfort zones, and their obsession with day-to-day operations and short-term financial results, and move into the new order of business. There is an interesting psychological underpinning to executives’ reluctance in moving forward with innovation—a fear that the very practices and success strategies that built a company’s success will in turn render it obsolete or relegate it to the role of a less powerful entity. It may, in fact, take a crisis to shake leaders out of their complacency.
Market leaders who are agile incumbents must remain on the offensive against insurgent competitors. Market leaders must develop a mindset that is quick to embrace, and to introduce, innovations, and go even further by setting the vision and direction for change and innovation in the industry. They must always take the high road to “ensure industry peace and prosperity,” define the industry’s borders and establish relationships with related industries. They must do all in their power to increase “generic” demand for the product or service. They must also look to the future, Davidson says, by continuously modernizing their offerings, and improving the customer value proposition. Market leaders—incumbents—in short, must revolutionize, or be revolutionized. Optimization strategies, such as those practiced by GE, says Davidson, are unlikely to support sustained leadership. Nor should incumbents rely on acquisition to renew themselves. Acquisitions, if entered into, says Davidson, should be “component” or “point” acquisitions, “where specific elements of a future business model or market profile are brought into the organization” and integrated into the core business of the organization. Strategy should lead to acquisition, not the other way around. Internally generated endogenic growth has more potential than “out-of-body” exogenic growth (growth by merger, spin-off, joint venture, etc.). Endogenic growth will create and nurture next-generation business.
AIM, READY, FIRE
From his study of seventy plus companies, Davidson identifies a generic pattern for successful breakthroughs: enterprise leaders establish a clear, actionable agenda and focus the company’s resources on an outrageous objective and a specific set of implementation priorities. “The modus operandi practiced by successful breakthrough companies can be described as aim, ready, fire. They establish a clear target and specific initiatives, align the organization, provide implementation structure and resources, and manage execution in a focused and systematic manner.”
Davidson highlights one variation of this process. Occasionally, he says, breakthrough strategies emerge after an innovation has occurred. At that time, leadership can seize on a broader strategic potential that has resulted from the innovation to renew the company’s business model and subsequently move toward more ambitious goals. This Davidson calls “leveraging a discrete innovation into a broader breakthrough in profile, market position, and financial performance.” He offers as example, Vons, a Southern California grocery chain, that pioneered point of sale (POS) scanners at checkout counters in the 1970s, introducing the technology years before other retailers. Investing in advanced technology not only led to multiple operating benefits (speed, efficiency, service level, and accuracy of the checkout process), it also created new business growth opportunities. The card readers captured valuable customer information, for example, that was used to support a sophisticated mailing list business for the store’s private-label products. Charles Schwab, another of Davidson’s breakthrough companies, was the first in the brokerage business to discover the power of the Internet and to combine online technology with the company’s hallmark dedication to customer service.
More typically, the breakthrough cycle begins of necessity when the survival of the company is at stake, as in the examples of American Standard, Caterpillar, IBM, and Mervyns. In these cases, as with most breakthrough companies, the search for a core strategy that would not only renew, but in reality, save the company started the new success cycle. Virtually all breakthroughs by incumbents are in this category. It is not absolutely necessary for the company to be facing disintegration, but leaders will need to find the weakest link—usually an emerging market crisis—and “magnify it to create an atmosphere of crisis,” as ADP’s John Gaulding did with the company’s automated claim service, transforming the company before the crisis hit.
The aim, ready, fire process needed to transform a company—and its industry—must follow a highly structured framework in order to manage the transformation. The aim phase allows the organization to collect, synthesize, and focus market knowledge and self-knowledge. The outcome of Phase I, Aim, must be a single, integrated strategy with specific, actionable initiatives supported by the senior management team. In Phase II, Ready, the senior team bonds together in support of the strategy, and then engages the rest of the organization with a message that says, “We are changing, here is why, here is what we are aiming to achieve, here is how we plan to do it, and here is your role and our expectations.” Phase III, Fire, is the execution of the strategy. To assist in the successful execution, it is desirable for the organization to prioritize its portfolio of projects and clearly establish the projects critical to successful implementation of the breakthrough strategy. Likewise, an organization should establish a program and project management (PPM) function to structure, staff, start, support, and secure the projects as prioritized by the senior team.
THE LEADERSHIP FACTOR
No other single factor carries as much weight in determining the success of a breakthrough strategy as the senior leader’s role. Davidson goes so far as to say: “The question is not so much the quality of the individuals in the team: rather, it is a question of their ability to work together as a team.” Working as a team requires a senior leader who has the personal capacity to oversee what often may seem like a superhuman effort. A part of this personal capacity is in-depth operating experience in the company, and in the industry. The senior leader must be multi-talented; he or she “must play the combined role of general manager, coach, and quarterback of a professional football team.” The senior leader must have a combination of what Davidson refers to as “humanism and directiveness,” a combination of boldness and humility, innovation and groundedness. “The best breakthrough leaders are grounded visionaries,” says Davidson.
And, if senior leadership deserves the credit for a successful breakthrough, they must also answer for the failure. Davidson points to one single, deadly—but, as he says, quite common—“failure factor”: an inability to align core members of the senior team around a common strategy. Other failure factors can include a lack of hands-on ownership and management of the strategy once the organization is into the implementation phase. Ironically, companies are often acquired during their breakthroughs, which often result in a loss, or transition of leadership, an effective death sentence for breakthrough. Failure can also result from poor strategy, but strategy is ultimately the responsibility of the CEO. “Any grand goal,” says Davidson, “especially those of a financial nature, are pipe dreams without grounded performance and profile innovations that convert into growth, improved margins, and enhanced market position.”
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Endnotes by chapter and a subject index are provided.
Remarks
Davidson’s greatest contribution in this readable, well-paced book based on his observation and study of more than 70 companies is to stimulate, even provoke, thought about a company’s readiness—and commitment—to moving to the next level of corporate success. Davidson wants readers to ask—and be able to answer—“Is my company ready for breakthrough?”
Davidson defines and outlines what breakthrough is—and is not. He balances the theory, and the practice, of breakthrough planning and strategy with specific case studies, so that the reader is not bored with too much theoretical text, nor overwhelmed with too much statistical data in support of the theoretical text. The book can also be used as a primer or checklist for would-be breakthrough companies and CEOs. It is important to note, however, that Davidson’s focus throughout the book is on incumbents, rather than on start-up companies at the entry point to the market.
Some of Davidson’s most insightful comments involve the paradoxes inherent in breakthrough strategy. An obsession with core operations and markets—seemingly to the exclusion of diversification activity—provides powerful platforms for growth in new areas (chapter 1). “Dig down deep enough into the details of your operations, apply radical approaches, and perhaps you will break through to the equivalent of China—a vast new market opportunity.” Likewise, in chapter 6, Davidson shatters the almost universally accepted mantra that “no revolution was ever led by the establishment.” To illustrate this, he cites American Standard, “the oldest, stodgiest company we could find,” as perhaps the single best example of breakthrough, a company that, according to Davidson, “set world speed records in corporate transformation.” To achieve breakthrough—and this is a key concept—a company does not necessarily have to be the initiator of change, or innovation, within the industry, but it does have to embrace innovation, and integrate it into its core business. A breakthrough company is a leader, not a follower.
Davidson has organized Breakthrough with an inductive approach. His outline of the specific components of breakthrough strategy planning and implementation, along with the accompanying case studies, are concluded in chapter 8 by reflection on the nature of senior leadership in breakthrough companies, which he has identified as the single most important factor in the success or failure of breakthrough. He contrasts his choice for best breakthrough leader, American Standard’s Mano Kampouris, with Ford Motor Company’s Jac Nasser, whom he also describes as a superb breakthrough leader.
What was the difference between American Standard’s spectacular success, and Ford’s potential transformation, which, in Davidson’s words, “slowed to a crawl?” Nasser seemed to be doing everything right in terms of breakthrough planning. He had an in-depth knowledge of the company’s operations, and he created an ambitious vision for the company, which he converted into a series of key initiatives to modernize and globalize Ford’s operations. He communicated with, prepared, and trained the organization. High-priority projects were launched with the appropriate staffing, resources, and senior support. At the same time, according to Davidson, Nasser also launched a performance culture program that called for forced performance rankings and mandatory retirement for the bottom 10 percent of the company. Ford’s traditional corporate culture began to view the transformation efforts as too harsh in their handling of people, thereby allowing an “us and them” schism to form, which led, ultimately, to Nasser’s replacement.
Davidson’s careful research over 10 years, and with more than 70 companies, has led him to believe that although directiveness (command and control) is essential, and that both high executive and high employee turnover are to be expected in the implementation of breakthrough strategies, humanism (as evidenced by CEOs like Mano Kampouris and Lou Gerstner with their respect for the individual, and their investment in the development of human capital) is a significant accelerator of breakthrough. A number of Davidson’s benchmark success stories (ADP’s ACS group and Progressive Insurance, for example), employed high directiveness without a corresponding high humanism. But for a successful, sure, and swift execution of breakthrough, there seems to be no substitute for a combination of directiveness and humanism. Successful breakthrough, and the resulting market or niche leadership it brings will, eventually, bring a company once again to the need for yet another breakthrough. If a company has built a success cycle based on directiveness and humanism, it should be well positioned for the next breakthrough effort.
Reading Suggestions
Reading Time: 6-7 hours, 238 pages in book
The author develops his basic premises and instructional guidance on creating a breakthrough strategy in four chapters: chapters 1, 2, 3, and 7. If you are not familiar with the concept of breakthrough, these are the essential, must read chapters. If you are familiar with the concept of breakthrough and with market definition, it is possible to read only chapters 1 and 7—chapter 1 because it gives an overview, particularly of the success cycle and of breakthrough strategy principles, and the power of breakthrough as evidenced by four companies, Countrywide, Progressive, NBtel, and C.R. England, and chapter 7 because it details the process—the three important phases in the development of breakthrough.
Chapter 4 provides moderately detailed examples of successful breakthrough companies. Appendix I also contains bite-size summaries of the core strategies of 50 companies, including those highlighted in the book. Davidson does not develop new concepts in chapter 4, but uses this chapter to highlight well-known corporate examples. Chapters 5 and 6 discuss market leaders/industry incumbents and their characteristics, and are recommended if your company is in that category. Chapter 8 contains the characteristics of a successful senior manager or CEO, as well as characteristics of those who will not be successful.
CONTENTS
Chapter 1: Breakthrough Dynamics
Chapter 2: The Enterprise Principle
Chapter 3: The Strategic Setting
Chapter 4: Champions of Breakthrough
Chapter 5: The Mindset of a Market Leader
Chapter 6: Advice to Incumbents
Chapter 7: Aim, Ready, Fire
Chapter 8: The Leadership Factor
Followed by two appendices
About the Author
Bill Davidson was a tenured professor of management at the Marshall School of Business at the University of Southern California from 1985 to 1998. He is the author of several other books on management, including The Amazing Race and 2020 Vision (with Stan Davis), which was selected as Best Business Book of the Year by Fortune magazine in 1992. He is currently chairman of MESA Research, a strategy and leadership services group.
For more information, please visit: www.mesaresearchgroup.com
Author Bill Davidson, a former USC management professor, and now a management and corporate leadership consultant, bases his 2004 book, Breakthrough on classic examples of high-profile, turnaround businesses such as IBM, Caterpillar, and American Standard. These companies illustrate successful breakthroughs. No matter how strong the performance, all corporate success cycles do, eventually, end—unless a company’s leadership has the foresight to plan for further innovation.
The breakthrough principle—and its potential for either success or failure—is, surprisingly, not based on a company’s size, resources, market position, or age. The secret that breakthrough companies share is the determined pursuit of what Davidson describes as “outrageous” objectives. Because most firms go through a success cycle only once, it can be to a company’s advantage to look at other organizations for lessons that will make an inevitable process more efficient and more effective.
MANAGEMENT CAN HAVE ITS CAKE, AND EAT IT TOO
The lofty positions of market and sector champions mark the peak of the success cycle. These orbits, once achieved, are not sustainable without further rocket thrusts.
Progressive Insurance provides customer service that is profoundly superior to its peers while cutting the cost of auto repair at the same time. USAA’s customer satisfaction and loyalty levels are the envy of its industry, as are its costs.
Breakthrough is, according to Davidson, an innovation that triggers superior performance and provides the transition from one success cycle to the next. It is a bridge to higher market positions, in terms of value share and market share. It is innovation that has to occur on an enterprise-scale, significant enough to shape an emerging company, or to re-invent and redefine an established player. The result is a completely new business model that exhibits, according to Davidson, “superior operating and profit performance, leading to both a new corporate profile and a new market position for the breakthrough company.” Although breakthrough can occur anywhere within an industry’s structure, from start-up to market leader, the most common place for a company to “break through” is at the entry point to the market.
An alternative to using breakthrough as a bridge to higher market positions is to use it to establish a company in the position of “niche master”: to focus on “securing and defending” a specialized success zone in which the company can compete successfully, thereby avoiding head-to-head competition with the larger primary players in an industry. A “niche market master” supplies a distinct market need, and serves a distinct customer set with a distinct supply and value chain. A number of companies, however, have also used breakthrough to make the “niche switch.” Progressive Insurance, for example, which was the niche leader in substandard (high risk) auto insurance coverage, not only successfully defended a foray by Allstate, a strong number two inner-circle competitor in the standard auto insurance market, into its niche, but subsequently, as a result of employing a breakthrough strategy, turned the tables on Allstate by breaking out of its niche and “storming” into the standard auto insurance market. “Many of the most spectacular examples of breakthrough innovation and subsequent success cycles originate in the niche master zone,” says Davidson. “Allstate’s foray into Progressive’s segment had triggered a series of forces that would reshape much of the insurance sector. Progressive’s innovative response to invasion by a larger inner-circle competitor provides a classic example of the breakout niche strategy. A number of the most successful insurgents in our research sample are breakout niche players—established, secondary competitors who use innovation and industry experience to seize market leadership.”
Within a market or industry, breakthrough innovations must fundamentally alter customer service standards, cost positions, cycle times, and value propositions. In doing so, they lead to “differentiated, disruptive offerings” that “shatter the competitive equilibrium, creating space for the breakthrough company.” To accomplish this, breakthrough innovations must come from large-scale, long-term initiatives that make use of advanced technologies and radical process innovations to achieve leaps—not just advances—in operating performance, financial results, and market position. It is the nature of breakthrough innovations that often results in multi-dimensional competitive advantages—cost leadership, superior customer service, and increased market and value share. Countrywide Credit, for example, in its breakthrough in the home loan market became a cost leader by reducing the average transaction cost to $748, from an industry average of $2,357. It became a service leader by achieving dramatic improvements in customer service, and by reducing loan approval cycle times by 90 percent or more. It became a product leader, as well, by adding product enhancements, such as the ability to lock in interest rates at any point in the cycle. Improvements in quality, service, and product features, according to Davidson, offer superior value to the customers while cost and cycle time reductions drive improved margins.
Market leadership comes to firms who can achieve these kinds of breakthroughs. The first step is to focus on a breakthrough strategy. “Reality tends to favor new entrants,” says Davidson, “yet agile incumbents can seize sources of innovation . . . by thinking about their business from the perspective of a new entrant.” First and foremost, breakthrough strategies focus on “outrageous goals,” goals that force companies to consider alternative processes and technology platforms. Breakthrough companies are “early adopters” of new technology, and are often involved in the developmental stage of new technologies, though they typically, according to Davidson, do not invest more than the average company; they concentrate their investments on leading-edge solutions that support a focused strategy. In addition, they focus on great leaps forward, rather than on incremental improvements. “Breakthroughs focus on creating tomorrow’s processes, not on improving today’s.” Breakthrough companies emphasize customer care over cost reduction, and they make creative use of their human resources by providing the flexibility to fundamentally redefine job descriptions and roles to make the best use of employees’ talents and skills. Breakthrough strategies create new business growth opportunities as a result of the technologies and processes the company develops. Progressive Insurance, for example, with its original innovation in claims settlement methods, not only repositioned itself in the market, it also dramatically redefined the auto insurance industry.
It is Davidson’s philosophy that “breakthroughs smash traditional trade-off logic by offering radical gains in multiple dimensions in operating performance.” Pursuing operating excellence in existing core areas leads, he predicts, to growth in new areas. And, the investment in infrastructure is paid back quickly from immediate operating gains, which then provides free platforms for new business development. Progressive Insurance’s investment in the automated claims management system (PACMAN), developed at a cost of $30 million, paid for itself in less than two years because it did, in fact, streamline the claims process so well, and then served as a springboard for next-generation services for Progressive. Finally, breakthrough strategies drive increased benefits to all stakeholder groups—at the same time.
To make these breakthrough innovations possible, an enterprise principle that both underlies and connects a strategic mindset and a leadership philosophy has to be at work. For large-scale initiatives to be implemented across an entire company, there must be a commitment to a single, integrated plan, or strategy, which is focused on innovation and outrageous objectives. Breakthroughs cannot be achieved in business environments where entrepreneurship, independence, autonomy, and decentralization are the defining core concepts of the company. This was the task before Lou Gerstner when he took over IBM in 1993: he had to change the company’s strategic direction, business model, culture, and management mindset.
Gerstner approached the company from the customer’s standpoint, and he focused on integrating business units rather than dismembering them, as many IBMers advocated when Gerstner took over the company. He created a Strategic Leadership Council, in which senior leaders met to develop, and then execute, a core strategy for the company, a strategy that would focus on solutions and services. IBM’s “mainframe mindset” had to change to a solutions-and-service centered approach. By 1995, IBM was reinforcing its integrated business model with innovations built around the power and reach of the Internet. By 2000, “Old Blue” was once again “Big Blue” by virtue of being “Breakthrough Blue.”
IS YOUR COMPANY A CANDIDATE FOR BREAKTHROUGH?
A thorough knowledge of your company—its resources, current profile, core competencies, and core identity—as well as knowledge of the external environment in which your company operates, are essential considerations before launching breakthrough strategy planning. Firms that have a decentralized management structure are poor candidates for breakthrough strategies, says Davidson. Key factors in pursuing a breakthrough strategy are the capacity to focus on a single, core strategy for three to five years, or longer, along with continuity in senior leadership. “The fundamental question is who has the insight and gumption to shape and launch a breakthrough strategy in any market and the persistence to stay focused as a team to execute it.”
Breakthrough strategies are not for all companies. Competitive considerations are extremely important. Companies considering initiating breakthrough strategies must consider the core competitive positions, roles, structures, and dynamics, beginning with the role played by the market leader vis-à-vis a particular company’s position, as well as trend lines for other competitors. In addition, it is also important to understand market scope and boundaries. Is a business its own universe, or is it part of a larger market structure? Precise market definition depends upon three factors: supply side differentiation, demand side differentiation, and competitive strategies. “Focused pursuit of a narrow market becomes hazardous,” Davidson says, “if the market in question will be subsumed into a broader business model.” Understanding the dynamics of globalization and shifts in market boundaries are also essential to planning strategy.
THE PROCESS UNDERTAKEN
Few firms enjoy the luxury of being able to choose a maintenance strategy. In most settings, market trends will erode the effectiveness of even the most successful strategy foundations sooner rather than later.
Once an organization determines that an outrageous goal or objective is appropriate for growth, for renewal, or for continued existence, planning a breakthrough strategy is the next step. Whatever the goal, says Davidson, profile initiatives and operating performance provide the key engines for reaching it. Gains in competitive position and financial results come from these two key drivers. “Radical innovation in operating performance—process innovations—appears to be the single best driver of breakthroughs,” according to Davidson. Toyota, for example, achieved great success with the introduction of Lexus—a profile innovation—that allowed Toyota to expand the company’s profile by entering the upscale, luxury auto market. However, the success of that breakthrough was due to Toyota’s manufacturing system, including its Just-in-Time (JIT) inventory. Dell Computer is another powerful example of how innovations in operating performance carried what was once a marginal competitor to worldwide market leadership in PC sales. Breakthrough for Dell came in 1995 when founder Michael Dell focused his company’s sales on the Internet. But, says, Davidson, Dell’s breakthrough was more than just a sales channel innovation. Dell was the first to embrace mass customization of PCs. “Dell was the first company to perfect a now-generic breakthrough strategy that combines mass customization; customer-specific product design; just-in-time supply chain solutions; and rapid, remote fulfillment and service. The result was typical of successful breakthroughs—rapid sales growth and rising margins.”
Struggles often arise between insurgent companies (new entrants) and incumbents for market leadership. To win these struggles, insurgent companies must have a breakthrough strategy that delivers results in the marketplace. Incumbents, on the other hand, can innovate as well. “Established market leaders can make the leap to next-generation business models, reshaping themselves and their markets in the process,” says Davidson.
MARKET LEADERS ARE NOT ALWAYS AGILE INCUMBENTS
Business engineering lies at the heart of breakthrough. Corporate and market transformation requires a critical mass of design and engineering effort.
However, many incumbents find themselves unable to keep pace with the changes that will inevitably take place in their market. For Davidson, the “source of paralysis” for market leaders is, generally, allowing existing processes and practices to become so deeply embedded that they limit the company’s ability to adapt to newer, more effective models. This trend includes the inability to embrace new information systems technology. In addition, says Davidson, dedication to existing channels of distribution can also create resistance to innovation. “To successfully innovate, an industry incumbent . . . must abandon its commitment to legacy channels, processes, practices, products, technologies, business models, and mindsets.”
Incumbents often have a choice to make: continue with a market model and profit generator that will eventually become passé (while slowly allowing market share to go to insurgent companies), or convert to the new order of business in the industry. The challenge for incumbents is to abandon their comfort zones, and their obsession with day-to-day operations and short-term financial results, and move into the new order of business. There is an interesting psychological underpinning to executives’ reluctance in moving forward with innovation—a fear that the very practices and success strategies that built a company’s success will in turn render it obsolete or relegate it to the role of a less powerful entity. It may, in fact, take a crisis to shake leaders out of their complacency.
Market leaders who are agile incumbents must remain on the offensive against insurgent competitors. Market leaders must develop a mindset that is quick to embrace, and to introduce, innovations, and go even further by setting the vision and direction for change and innovation in the industry. They must always take the high road to “ensure industry peace and prosperity,” define the industry’s borders and establish relationships with related industries. They must do all in their power to increase “generic” demand for the product or service. They must also look to the future, Davidson says, by continuously modernizing their offerings, and improving the customer value proposition. Market leaders—incumbents—in short, must revolutionize, or be revolutionized. Optimization strategies, such as those practiced by GE, says Davidson, are unlikely to support sustained leadership. Nor should incumbents rely on acquisition to renew themselves. Acquisitions, if entered into, says Davidson, should be “component” or “point” acquisitions, “where specific elements of a future business model or market profile are brought into the organization” and integrated into the core business of the organization. Strategy should lead to acquisition, not the other way around. Internally generated endogenic growth has more potential than “out-of-body” exogenic growth (growth by merger, spin-off, joint venture, etc.). Endogenic growth will create and nurture next-generation business.
AIM, READY, FIRE
From his study of seventy plus companies, Davidson identifies a generic pattern for successful breakthroughs: enterprise leaders establish a clear, actionable agenda and focus the company’s resources on an outrageous objective and a specific set of implementation priorities. “The modus operandi practiced by successful breakthrough companies can be described as aim, ready, fire. They establish a clear target and specific initiatives, align the organization, provide implementation structure and resources, and manage execution in a focused and systematic manner.”
Davidson highlights one variation of this process. Occasionally, he says, breakthrough strategies emerge after an innovation has occurred. At that time, leadership can seize on a broader strategic potential that has resulted from the innovation to renew the company’s business model and subsequently move toward more ambitious goals. This Davidson calls “leveraging a discrete innovation into a broader breakthrough in profile, market position, and financial performance.” He offers as example, Vons, a Southern California grocery chain, that pioneered point of sale (POS) scanners at checkout counters in the 1970s, introducing the technology years before other retailers. Investing in advanced technology not only led to multiple operating benefits (speed, efficiency, service level, and accuracy of the checkout process), it also created new business growth opportunities. The card readers captured valuable customer information, for example, that was used to support a sophisticated mailing list business for the store’s private-label products. Charles Schwab, another of Davidson’s breakthrough companies, was the first in the brokerage business to discover the power of the Internet and to combine online technology with the company’s hallmark dedication to customer service.
More typically, the breakthrough cycle begins of necessity when the survival of the company is at stake, as in the examples of American Standard, Caterpillar, IBM, and Mervyns. In these cases, as with most breakthrough companies, the search for a core strategy that would not only renew, but in reality, save the company started the new success cycle. Virtually all breakthroughs by incumbents are in this category. It is not absolutely necessary for the company to be facing disintegration, but leaders will need to find the weakest link—usually an emerging market crisis—and “magnify it to create an atmosphere of crisis,” as ADP’s John Gaulding did with the company’s automated claim service, transforming the company before the crisis hit.
The aim, ready, fire process needed to transform a company—and its industry—must follow a highly structured framework in order to manage the transformation. The aim phase allows the organization to collect, synthesize, and focus market knowledge and self-knowledge. The outcome of Phase I, Aim, must be a single, integrated strategy with specific, actionable initiatives supported by the senior management team. In Phase II, Ready, the senior team bonds together in support of the strategy, and then engages the rest of the organization with a message that says, “We are changing, here is why, here is what we are aiming to achieve, here is how we plan to do it, and here is your role and our expectations.” Phase III, Fire, is the execution of the strategy. To assist in the successful execution, it is desirable for the organization to prioritize its portfolio of projects and clearly establish the projects critical to successful implementation of the breakthrough strategy. Likewise, an organization should establish a program and project management (PPM) function to structure, staff, start, support, and secure the projects as prioritized by the senior team.
THE LEADERSHIP FACTOR
No other single factor carries as much weight in determining the success of a breakthrough strategy as the senior leader’s role. Davidson goes so far as to say: “The question is not so much the quality of the individuals in the team: rather, it is a question of their ability to work together as a team.” Working as a team requires a senior leader who has the personal capacity to oversee what often may seem like a superhuman effort. A part of this personal capacity is in-depth operating experience in the company, and in the industry. The senior leader must be multi-talented; he or she “must play the combined role of general manager, coach, and quarterback of a professional football team.” The senior leader must have a combination of what Davidson refers to as “humanism and directiveness,” a combination of boldness and humility, innovation and groundedness. “The best breakthrough leaders are grounded visionaries,” says Davidson.
And, if senior leadership deserves the credit for a successful breakthrough, they must also answer for the failure. Davidson points to one single, deadly—but, as he says, quite common—“failure factor”: an inability to align core members of the senior team around a common strategy. Other failure factors can include a lack of hands-on ownership and management of the strategy once the organization is into the implementation phase. Ironically, companies are often acquired during their breakthroughs, which often result in a loss, or transition of leadership, an effective death sentence for breakthrough. Failure can also result from poor strategy, but strategy is ultimately the responsibility of the CEO. “Any grand goal,” says Davidson, “especially those of a financial nature, are pipe dreams without grounded performance and profile innovations that convert into growth, improved margins, and enhanced market position.”
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Endnotes by chapter and a subject index are provided.
Remarks
Davidson’s greatest contribution in this readable, well-paced book based on his observation and study of more than 70 companies is to stimulate, even provoke, thought about a company’s readiness—and commitment—to moving to the next level of corporate success. Davidson wants readers to ask—and be able to answer—“Is my company ready for breakthrough?”
Davidson defines and outlines what breakthrough is—and is not. He balances the theory, and the practice, of breakthrough planning and strategy with specific case studies, so that the reader is not bored with too much theoretical text, nor overwhelmed with too much statistical data in support of the theoretical text. The book can also be used as a primer or checklist for would-be breakthrough companies and CEOs. It is important to note, however, that Davidson’s focus throughout the book is on incumbents, rather than on start-up companies at the entry point to the market.
Some of Davidson’s most insightful comments involve the paradoxes inherent in breakthrough strategy. An obsession with core operations and markets—seemingly to the exclusion of diversification activity—provides powerful platforms for growth in new areas (chapter 1). “Dig down deep enough into the details of your operations, apply radical approaches, and perhaps you will break through to the equivalent of China—a vast new market opportunity.” Likewise, in chapter 6, Davidson shatters the almost universally accepted mantra that “no revolution was ever led by the establishment.” To illustrate this, he cites American Standard, “the oldest, stodgiest company we could find,” as perhaps the single best example of breakthrough, a company that, according to Davidson, “set world speed records in corporate transformation.” To achieve breakthrough—and this is a key concept—a company does not necessarily have to be the initiator of change, or innovation, within the industry, but it does have to embrace innovation, and integrate it into its core business. A breakthrough company is a leader, not a follower.
Davidson has organized Breakthrough with an inductive approach. His outline of the specific components of breakthrough strategy planning and implementation, along with the accompanying case studies, are concluded in chapter 8 by reflection on the nature of senior leadership in breakthrough companies, which he has identified as the single most important factor in the success or failure of breakthrough. He contrasts his choice for best breakthrough leader, American Standard’s Mano Kampouris, with Ford Motor Company’s Jac Nasser, whom he also describes as a superb breakthrough leader.
What was the difference between American Standard’s spectacular success, and Ford’s potential transformation, which, in Davidson’s words, “slowed to a crawl?” Nasser seemed to be doing everything right in terms of breakthrough planning. He had an in-depth knowledge of the company’s operations, and he created an ambitious vision for the company, which he converted into a series of key initiatives to modernize and globalize Ford’s operations. He communicated with, prepared, and trained the organization. High-priority projects were launched with the appropriate staffing, resources, and senior support. At the same time, according to Davidson, Nasser also launched a performance culture program that called for forced performance rankings and mandatory retirement for the bottom 10 percent of the company. Ford’s traditional corporate culture began to view the transformation efforts as too harsh in their handling of people, thereby allowing an “us and them” schism to form, which led, ultimately, to Nasser’s replacement.
Davidson’s careful research over 10 years, and with more than 70 companies, has led him to believe that although directiveness (command and control) is essential, and that both high executive and high employee turnover are to be expected in the implementation of breakthrough strategies, humanism (as evidenced by CEOs like Mano Kampouris and Lou Gerstner with their respect for the individual, and their investment in the development of human capital) is a significant accelerator of breakthrough. A number of Davidson’s benchmark success stories (ADP’s ACS group and Progressive Insurance, for example), employed high directiveness without a corresponding high humanism. But for a successful, sure, and swift execution of breakthrough, there seems to be no substitute for a combination of directiveness and humanism. Successful breakthrough, and the resulting market or niche leadership it brings will, eventually, bring a company once again to the need for yet another breakthrough. If a company has built a success cycle based on directiveness and humanism, it should be well positioned for the next breakthrough effort.
Reading Suggestions
Reading Time: 6-7 hours, 238 pages in book
The author develops his basic premises and instructional guidance on creating a breakthrough strategy in four chapters: chapters 1, 2, 3, and 7. If you are not familiar with the concept of breakthrough, these are the essential, must read chapters. If you are familiar with the concept of breakthrough and with market definition, it is possible to read only chapters 1 and 7—chapter 1 because it gives an overview, particularly of the success cycle and of breakthrough strategy principles, and the power of breakthrough as evidenced by four companies, Countrywide, Progressive, NBtel, and C.R. England, and chapter 7 because it details the process—the three important phases in the development of breakthrough.
Chapter 4 provides moderately detailed examples of successful breakthrough companies. Appendix I also contains bite-size summaries of the core strategies of 50 companies, including those highlighted in the book. Davidson does not develop new concepts in chapter 4, but uses this chapter to highlight well-known corporate examples. Chapters 5 and 6 discuss market leaders/industry incumbents and their characteristics, and are recommended if your company is in that category. Chapter 8 contains the characteristics of a successful senior manager or CEO, as well as characteristics of those who will not be successful.
CONTENTS
Chapter 1: Breakthrough Dynamics
Chapter 2: The Enterprise Principle
Chapter 3: The Strategic Setting
Chapter 4: Champions of Breakthrough
Chapter 5: The Mindset of a Market Leader
Chapter 6: Advice to Incumbents
Chapter 7: Aim, Ready, Fire
Chapter 8: The Leadership Factor
Followed by two appendices
About the Author
Bill Davidson was a tenured professor of management at the Marshall School of Business at the University of Southern California from 1985 to 1998. He is the author of several other books on management, including The Amazing Race and 2020 Vision (with Stan Davis), which was selected as Best Business Book of the Year by Fortune magazine in 1992. He is currently chairman of MESA Research, a strategy and leadership services group.
For more information, please visit: www.mesaresearchgroup.com
posted by Amanda Jenkins at
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