Strategic Roles for Model
Today's news stories are filled with examples of leaders who have fallen far short of our expectations. Some have made fraudulent financial reports that misled investors. Others have pursued strategies that ensured large bonuses and payoffs for themselves while their companies lurched towards financial disaster. Those are the dishonest leaders.
Other leaders, while honest, have taken their companies in new directions that turned out to be disasters. Shareholders, lenders, employees, customers, vendors, retirees and communities are often left holding the bag for these mistakes.
The press has usually praised these same flawed leaders for years prior to the error of their ways having become obvious.
While I don't know these people well enough to comment on how they saw themselves as CEOs, I cannot help but think that many of those who fell so far from our ideas of successful leadership probably wanted to succeed just as much as we wanted them to succeed. What went wrong? Part of the answer has to be that they didn't know what they needed to do in order to be a model leader.
While the model leader must exhibit many qualities, our focus in this paper will be to examine the strategic responsibilities of the model leader. This information is designed to be valuable to those who are CEOs, those who want to become CEOs, those who recruit CEOs, and the boards of directors who hire, supervise and fire CEOs.
In 1992, I began what I believe is the first long-term tracking study of CEO effectiveness. We selected those companies over a constant dollar size in equity market valuation whose stocks had grown the fastest in North American stock markets over the prior three years. Questionnaires were sent to each CEO and in-depth interviews were held with many of the respondents. Where possible, interviews were also held with other key officers of the company to help understand the CEO's activities and effectiveness. Where a CEO repeatedly appeared on this list, further investigations and interviews were done. The results of this research were summarized annually in Chief Executive Magazine from 1992-2001. You can find free copies of those articles at www.mitchellandco.com (click on the "leading" file folder to find the menu).
In conducting this research, my hypothesis was that either strategic or operational leadership activities would turn out to be important . . . but I had no idea which ones. To help narrow the gap between my ignorance and what practices are important, I asked about every major area I could find about which books and articles had previously been published. In addition, leaders were encouraged to add their own answers which did not echo the literature's focus.
During the research leading up to the publication of The Ultimate Competitive Advantage (Berrett-Koehler, 2003) during 2001 and 2002, the highest performing CEOs and their organizations were also asked to report in detail on their leadership practices in the context of what they thought was most important about how they had outperformed their competitors.
The only statistically significant, continuing factor that distinguished those CEOs and companies that made the list from others who did not was their frequent success with developing and installing new business models that expanded both profits and profitability in serving customers in a sustained way.
Naturally, my curiosity was piqued to learn how this progress was accomplished. In every case we examined, CEO leadership was a key ingredient.
Model CEO leadership included the following strategic roles:
What Is a Business Model?
A business model is the who, what, when, where, why, how and how much a company uses to provide its goods and services and receive value for its efforts.
Let's see how business model changes help create organizational success in the context of EMC's progress around the time when Mr. Michael C. Ruettgers was CEO (1992 to 2000). EMC enjoyed the fastest growing stock price on the New York Stock Exchange during the 1990s. The stock price grew from $0.06 in 1989 to as high as $82.00 in 2001. Revenues grew from $132.3 million in 1989 to over $7 billion in 2001.The company went from a loss of $16.6 million in 1989 to a profit of $183 million in 2001.
During the 1990s, EMC passed long-time industry leaders IBM and Storage Technology by making mass computer storage faster and easier to use through a series of four new business models.
In one of Mr. Ruettgers' first actions as CEO, he focused the company on competing for storage on IBM mainframes using inexpensive, off-the-shelf hardware. Prior to 1992, EMC had a broad product line and market direction. This was a reduction in "what" was offered.
In 1995, the company began to provide mass storage that could connect to almost any kind of computer processor, whether an IBM mainframe or someone else's server, a capability that other manufacturers could not then provide. This change added new "who," "what," "where," "why," "how" and "how much" dimensions to EMC's business model.
Later, the company began to offer proprietary software that made it easier to run a data center. Since the software worked only on EMC hardware, this innovation pulled along hardware sales as well. The software changed the "who," "what," "why," "where" and "how" dimensions of the business model.
More recently, the company has been a leader in helping customers tie together existing storage in their networks to achieve higher capacity utilization with high speed access. This adjustment extended all dimensions of the business model.
Under EMC's newest CEO, Mr. Joseph Tucci, the company has since expanded the scope of what its proprietary software will do to include other applications and extended its applicability for use with other vendors' storage hardware, creating yet another new business model. This shift similarly changed all dimensions of the previous business model.
Role 1: Putting Business Model Innovation on the Company's Agenda
If a CEO doesn't think improving the company's business model is important, little may be done. That is self-evident. But that perspective which is so obvious to us now was rare until the decade of the 1990s. Before then, entrepreneurs would often design new companies to have an advantaged business model, but would then emphasize more efficiency from that model . . . rather than seeking to supersede it.
Perhaps no other CEO was as prescient in this area as was Michael Dell, founder (and until recently CEO) of Dell. While still a college student, he realized that the way that personal computers were made and sold to customers could be improved upon. People wanted machines that were customized to them, at low prices, with fast delivery and as little hassle as possible. While Apple, IBM and others produced large numbers of standard machines for retailers' inventories, at high prices, often slow delivery and a lot of hassle, Mr. Dell found it easy to make headway with his direct sales to customers of his customized machines.
Before expanding his business model to move beyond personal computers, Mr. Dell first made many innovations involving "how" his machines were made and delivered.
At first, he bought unsold IBM machines in bulk, stripped them of standard parts which he resold, added other parts and hand delivered the machines.
When IBM moved in to stop Dell and others like him from that practice, Mr. Dell began designing his own line of computers, again using standard components to create custom machines for each customer.
Later, Dell realized that he had a tremendous cost exposure on the value of these components if he didn't sell them right away. From that painful insight (learned during an industry meltdown), he put in just-in-time inventory sourcing for most of his components. To support this approach, he reduced the lead time from an order being received to being manufactured to less than an hour.
The next breakthrough was to convert most of his customers to self-service ordering, using the Internet. For companies, this meant they could store their system requirements with Dell and anyone who ordered equipment would receive what they needed without the IT department being further involved. For Dell, costs were driven lower, allowing even lower prices.
Along the way, Dell began branching out into other IT equipment, beginning with servers. Now, the company has begun offering consumer electronics along the same lines. This means that "what" is being offered is constantly being extended.
Role 2: Encouraging Experimentation with Business Model Innovation
Innovation of any sort is costly. Business model innovation has the potential to be the most costly because the new model may disrupt other activities as well as require large investments that may not succeed.
Imagine if the Egyptians had tried to build the Great Pyramid without any prior experience. One can hardly imagine all of the problems such an approach would have created.
Yet most CEOs favor coming up with one idea for how to drive the company forward and stubbornly ignore alternative paths . . . many of which could lead to more beneficial business models.
The most successful CEOs encourage lots of inexpensive experimentation and let the new directions flow from a comparison of the results among the experiments. Although that looks like a risky way to go, it's actually less risky than sticking with one business model alteration plan. You may be able to run 100 inexpensive experiment for far less than the cost of single mistake in changing your business model.
Mr. Robert R. McEwen, CEO of Goldcorp, a gold mining firm, reached this conclusion about the importance of experimentation after he correctly answered a key question that he had raised with himself: Would a CEO be better off working on improving the company's business model or the efficiency of the way the company operates itself?
Historically, Goldcorp, like most mining companies, kept its geological information secret. Its own geologists and a few others saw all the information. Goldcorp decided to experiment with abandoning that secretive approach.
In March 2000, the company issued a challenge to the world's geologists to find more gold in its Red Lake mine. That gold mine was already tapping into one of the world's richest ore deposits. Everything the company knew about the mine was shared with the world's geologists through the Internet. Substantial cash prizes were offered for the best ideas about where to explore next. More than 1,400 geologists registered for the challenge.
A year after the contest ended, the company announced that exploration based on the winning submissions had located six million additional ounces of low-cost gold reserves. The ultimate revenue from mining the newly found gold will exceed one billion dollars, and profits will probably be several hundred million dollars. Yet the prizes cost only $575,000, much less than the unproductive exploratory drilling that would otherwise have occurred.
To fully appreciate the power of this experience with low-cost experimentation, you should know that Goldcorp's Red Lake mine had been operating for almost fifty years when the contest began. Most would have assumed before the contest that there was little more gold to find in the mine. Goldcorp's success laid to rest the ore-finding part of the traditional gold mining business model. Competitors now duplicate this experimental approach.
Since then, Goldcorp has launched many other experiments to help it reduce its gold-finding costs. And the search continues for more experiments.
Role 3: Defining and Establishing an On-Going Process to Create Improved Business Models
If a company has to rely on having a super-bright, innovative CEO (like Mr. Ruettgers, Mr. Dell and Mr. McEwen) to succeed with creating better business models, most companies are going to be in trouble. There are only so many such people to go around. CEOs who aren't able to come up with the ideas for innovations themselves can rely instead on insisting that their organizations adopt innovation processes that will generate lots of possible new business models and advocates who want to pursue low-cost experiments to prove those models can be superior.
That's the lesson that Mr. Edward L. Kaplan, CEO and cofounder of Zebra Technologies, has drawn from his experience. His firm was started in 1969 without a deliberate business model. He was one of two engineers working part time to provide custom electromechanical designs. The company was just a job shop until it scored a continuing success with paper tape punches and readers for directing machine tools. After initial growth, Zebra realized that its market potential was limited.
So a search was begun for a new business model. In two years, Zebra had its first bar-code printer. The timing was good. The Universal Product Code (the largest initial use for bar coding) was adopted in 1973 and went into wide-scale use soon after. The company's initial printer was used at meat and produce counters. Zebra innovated again by expanding into industrial markets, prospering when an industry or a large company required its suppliers to use bar codes for supply-chain management.
From there, Zebra extended its business model by acquiring competitors who learned how to make printers and readers less expensively for difficult applications.
New technologies currently threaten the bar-code market, such as radio-frequency-based devices. Zebra was quick to develop such products.
The bar code printer marketplace was maturing in 2001. In response, the company's top management began a formal business model redesign, hoping to create a process that could be used repeatedly in the future. From this investigation involving many people, Zebra launched itself into the business of providing plastic card printers and readers for security applications. This market place seems to be a lot like the one Zebra already knows well and the demand for such products is growing rapidly. Zebra seems to be well on its way to another successful business model innovation, and having proven out its new business-model-innovation process. In the future, the company will be more likely to work on business model innovations before weak business conditions force the focus.
Role 4: Making Business Model Innovation a Priority over Streamlining the Existing Business Models When Conflicts Arise
We've already explored this principle during our discussion of Mr. McEwen's new approach to finding gold. Let's examine now how powerful the role can be when it is magnificently done.
Perhaps no CEO has more consistently hewn to this priority than British billionaire, Sir Richard Branson, who is well known for the continuing business model innovations under his leadership.
In 1966, the dyslexic sixteen-year-old dropped out of school to establish the national English publication, Student. At twenty, he founded Virgin Records as a mail-order retailer by advertising in Student.
Sir Richard saw this as an opportunity to provide more customer value through discount prices. A law had recently changed so that record producers could no longer dictate retail prices.
Sir Richard picked the name while talking to some friends, noting that "since we're complete virgins at business, let's call it just that: 'Virgin.'" The Virgin brand has since become part of more than 100 businesses that Sir Richard has established and is one of the best recognized in the world. These businesses have include many diverse activities such as operating an airline, bridal wear, financial services, cellular telephone services and soft drinks.
Virgin Records went rapidly from exclusively mail order to opening retail stores, the company's first reinvention, in response to a postal union strike.
Within two year of its founding, Virgin built its own recording studio and produced its first record album, Tubular Bells, as the company's second reinvention. That album sold over five million copies, yet was produced with very inexpensive talent. Sir Richard later recruited top recording artists as diverse as the Sex Pistols, Boy George, Paula Abdul, Phil Collins and the Rolling Stones, many from other recording companies, in creating his third reinvention.
Not satisfied, Sir Richard co founded Virgin Atlantic Airways in 1984 to redefine long-distance airline travel from being a drudge into being a pleasure. Business-class travelers were transported by limousine, pampered like royalty in a special club at the airport and given superb service during the flight. Economy customers enjoyed the latest forms of electronic entertainment for free. It was also very easy to earn free flights the highly rated airline.
Severe competition from British Airways almost did him in, however. Due to this pressure, Sir Richard sold the Virgin Records label to EMI. Later, he won an enormous legal award from British Airways for its excessive tactics used against Virgin Atlantic.
Sir Richard's business model innovations give the impression of being single-mindedly focused on providing something better for customers in a way that most people would prefer. When he gets that customer benefit part right, he has usually been able to locate the rest of the business model to deliver the product or service at a profitable cost.
When asked what kind of financial analysis he does before starting a business, the boundless billionaire is reported to have replied that he doesn't do any. As proof, he was said to have pointed out that no sane person who had done any financial analysis would start an airline. Airlines are notoriously capital intensive and unprofitable. But, by having Virgin stand for such recognizable superiority in products and services, Sir Richard can expect customers to eagerly try his latest innovations. That image makes it even easier to maintain the primacy of innovation over efficiency in the Virgin empire.
One reason that I wanted to write this article is that many of the outstanding business model innovators I studied have recently retired from their roles as CEOs. I will continue to track these companies with interest to see how well their new CEOs perform in the four strategic roles.
At the current time, the jury is still out on the results. Most of the CEOs replaced themselves with people from outside the company. That could be positive for business model innovation by making the new CEO less wedded to the status quo. At the same time, choosing an outsider may also mean that the new CEO will feel less confident about pursuing business model innovation without knowing a lot about the current business model.
Ultimately, CEOs will have to see that one of their key strategic roles is to develop a successor who will play the four strategic roles of the model leader even better than they did.
Donald W. Mitchell is a co-author of The Ultimate Competitive Advantage: Secrets of Continually Developing a More Profitable Business Model (Berrett-Koehler, 2003); The Irresistible Growth Enterprise (Stylus, 2000) and The 2,000 Percent Solution (AMACOM Books, 1999). He is chairman and chief executive officer of Mitchell and Company, a Weston, Massachusetts-based strategy consulting firm (see www.mitchellandco.com). He has assisted CEOs for major public companies develop their strategic leadership styles since the 1970s. Mr. Mitchell is currently developing his new book, tentatively titled, Model Leadership.
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