Chapter 7: Competitive Advantages

Chapter 7

Competitive Advantages

Competitive advantage is based not on doing what others already do well,

but on doing what others cannot do well.

— John Kay

Learning from the Masters

You must look into people, as well as at them.

— Lord Chesterfield

When I started my tracking study of CEO best practices in 1992, I was interested in seeing which characteristics of successful leaders best stood the test of time. That approach goes against the grain. Most people focus on what worked best last week, hoping to copy it for use this week and next. The typical short-term approach is exciting because you are always charging off in a new direction. Many organizational leaders seem to be afflicted with some kind of adult ADD (attention deficit disorder) that causes them to flit from one thing to another almost as fast as a butterfly does. Organizations, meanwhile, have a hard time adjusting to change. Most of the flitting leads to action without consequences as last week’s orders are countermanded by this week’s new directives.

My study defined success in a very extreme way: You had to outperform virtually every other medium- and large-size company publicly traded in the United States in terms of stock-price growth over a three year period while you were CEO … and keep up that level of success for at least a decade. Wall Street is traditionally fickle, so this was a tough test. In addition, such high-profile success was bound to attract tough competitors who wanted to ride the same gravy train. To last for a long time at the top in such an environment would require leadership skills in overcoming competitors that few have.

My study was unique in my spending time with the executives while they achieved the success. CEOs told me what they were trying to do, what they expected to happen next, and later filled me in on how the results turned out differently than they expected. Every other study of CEOs’ long-term effectiveness that I’m aware of was done after the fact, drawing on interviews of people who provided their opinions afterwards about what had happened. Those backward-looking studies were suspect because memory is selective and credit is often appropriated for things that were the result of chance or the actions of others.

Another great benefit of following these CEOs as they and their companies achieved was that I could measure more things. Surveys and in-depth questions probed both for what the CEOs thought worked for them as well as what else they were doing that they didn’t normally talk about.

Publishing the results in Chief Executive Magazine helped me to get much better access to the CEOs. Almost all of the CEOs seemed to hope I would write a profile in the magazine about them. I let them know that to be considered for a profile, they had to fill out my latest survey and be available for an interview.

Where I sensed that something special might be going on in a company, I arranged for a personal visit to meet the CEO and his staff (all of the CEO top performers during those years were men). During those visits, unscheduled activities would often be more revealing than what was planned. For instance, during one visit to Rochester, New York, to interview Tom Golisano, CEO of Paychex, I received an impromptu invitation to an employment anniversary party for one of the first three people in the company. During the party, I had a chance to talk to employees at all levels within Paychex about their relationships, how the company had evolved, and what they felt about Tom. The party was quite revealing in ways that I didn’t expect about how Tom had gathered top people together to do hard tasks and helped everyone be eager to succeed.

Moving from the Specific to Share the General Lesson

The lessons taught in great books are misleading.

The commerce in life is rarely so simple and never so just.

— Anita Brookner

By 2002, it was clear to me that the most adept CEOs shared one common element: They had prospered by repeatedly upgrading their business models (these seven elements of their commerce: who, what, when, why, where, how, and how much) every three to five years. With increased global competition, the correct frequency of such business model innovations would undoubtedly increase. Since some types of business model improvements can be much less disruptive than others (such as adding complementary offerings), I saw no obvious limit to such increased frequency.

This observation about continuing business model innovation was also significant for the 400 Year Project. If organizations began to focus on rapid business model innovations, performance improvements could be added more rapidly. Without this improved leadership capability, the sources of many prospective benefits from the 400 Year Project might lie fallow, waiting for leaders to get around to working on them.

The real barrier to continuing business model innovation was that most organizations did not have this most important task on their agendas. Instead, leaders and the rank and file focus on doing the old tasks better and better. The fact that these old tasks were obsolete didn’t seem to occur to anyone (if it did, they kept quiet lest someone would shoot the messenger). The time had come to issue a clarion call to make continuing business model innovation job one. I decided to write a book to do just that.

Being rich in information rather than rich in theories and stories before writing a book was a new experience for Carol Coles and me. We also realized that our message would be stronger if we could make what we had to say more universal. What other dimensions of continuing business model innovation success should we explore? Three applications occurred to us: small companies (including one-person operations), nonprofit organizations, and organizations that had passed along business model innovation as a core task to a new generation of leaders.

We next focused on what we could hope to accomplish in these additional applications. Clearly, we didn’t have the time or the resources to conduct exhaustive studies of best practices in each application. But our clarion call could include memorable, thought-provoking examples that would help CEOs see more ways to apply continuing business model innovation into their organizations.

Our subsequent research caused us to look around the world and also more closely at the small businesses that we came into contact with every day. One-by-one, the examples were located, explored, validated, and described. I spent weeks traveling around interviewing people and learning many great lessons. I was pleasantly surprised to find that one-person businesses provided some of the most powerful and helpful cases: Anyone can relate to examples like these. Part of the advantage that one-person companies have is that the path from strategy development to implementation is just a few inches of grey matter apart in the brain. The spread in education and experience in the one-person businesses was quite impressive as well, ranging from a golf caddy who grew up on the Isle of Man to Peter Drucker.

With each new example, the picture of how successful business model innovation occurs became clearer. There was only one problem: We found so many ways to succeed with this important task that it would take dozens of books to do each approach justice. We decided to focus on the simplest, most available, and most productive opportunities — increasing value without raising prices or costs; adjusting prices to increase sales profitably; and eliminating costs that reduce customer and end-user benefits — and to provide a process for continuing innovation.

Increase Value without Raising Prices or Costs. Less than five miles from our home, we found a memorable inspiration for improving a business by adding value without increasing prices or costs at Jordan’s Furniture, a discount retailer. Jordan’s had first drawn customer attention by being open late on Saturday nights at its sole store in blue-collar Waltham, Massachusetts. Before or after the movies or a dinner out, you could shop for furniture while all the other stores were closed. The owners, Barry and Eliot Tatelman, kept the radio waves filled with humorous ads to remind everyone to come “where underprices begin.”

Eventually, the tiny company opened a sprawling store on a green field site in another suburb, Avon, Massachusetts. Something else was new besides size and location, an entertainment attraction. The appeal of this new store was so strong that the owners had to get on the air to ask customers not to come for a few days after the opening. In subsequent stores, the Tatelmans did more with entertainment, adding restaurants, IMAX theaters, Disney-type attractions, and entertaining shows. People came from hundreds of miles away to see the stores … and some bought furniture. Soon, Jordan’s became the most successful furniture retailer in the United States as measured by sales per square foot. The secret was no secret: Its “shoppertainment” concept of providing free and reasonably priced entertainment to shoppers attracted buyers better than the traditional approach. 

The entertainment appeal was so strong in attracting customers that costs to serve customers as measured by percentages of sales dollars decreased dramatically due to the investment in shoppertainment. For example, Jordan’s could now commission special factory runs to meet its specifications at lower cost and spend much less than the national average on advertising as a percentage of sales. In the process, profits soared, the company grew from 15 to more than 1,000 employees in less than 25 years, and the owners sold out for a fortune in Berkshire Hathaway stock. Despite their wealth, the Tatelmans continue to run the company and look to add even more value to customers without raising prices or costs.

Adjust Prices to Increase Sales Profitably. For our next example, we turned to an amusement park that I have visited dozens of time since the age of nine. Disneyland in Anaheim, California, found that it could greatly increase attendance and profits on days when the park wasn’t crowded by offering annual passes at a fixed price. Tourists might spend a fortune each day to visit while they were in the area. A low-income Californian who lived down the street could come almost every day for little more a year than the tourist spent for a three-day visit.

This was a great deal for families with young children. For the same cost as a walk in the park, the family could take an additional trip to Disneyland after paying the annual fee. Even if the family only bought some milk while inside, Disneyland’s profits were higher than if the family did not attend that day. To the family, it seemed like an amazing bargain: The entry cost per visit could become less than a dollar a day.

What’s more, Disney had a chance to expose the family to advertising for its many other offerings. In the Main Street stores and in kiosks throughout the park, Disney merchandise was on sale. Attractions featured tie-ins to ABC television programs (a Disney-owned company), the Disney Channel cable television channel, and promotions for upcoming movies. People were paying to see the advertising more frequently! What a deal for Disney.

Disney liked this approach so much that it built a second amusement park next to Disneyland, California Adventure. This additional park permitted Disney to sell a higher priced annual pass and attract annual pass holders to return even more often. If one park was jammed on a given day, there was always room at the other park. After the kids outgrew Disneyland’s tamer rides, they could give themselves an adrenaline charge on the more daunting attractions at California Adventure. When grandchildren arrived, grandparents could take the youngsters to Disneyland. And the process continues thus through the generations of California’s annual pass holders.

Eliminate Harmful Costs. Many organizations act as though costs that customers and beneficiaries experience aren’t real costs. Our dry cleaner, Marc Rosenthal, knew better. He was the first in his town to install a VIP service at no extra cost to customers. VIP customers could drop off their cleaning anytime by using a special key that provided access to a chute into which they could toss personally labeled laundry bags provided by Marc. When it was time to pick up the clothes and linens, you were served in a special line and you found that your credit card had already been charged. You could usually leave with your cleaning within three minutes of arriving. There was no extra charge for this service. Marc knew that VIP service also cut his costs: He was paid sooner, could serve his best customers in less time, and fill up slack time with handling the VIP orders. He probably lost fewer customers, too, to competitors with lower prices or who were open later at night.

Impressed by the example, we were floored to find out that the VIP service idea didn’t originate with Marc. In fact, another friend of ours, Doug Ross, was the innovator. Doug was one of Marc’s providers for dry cleaning supplies. Realizing that most of his customers could buy supplies less expensively from catalog vendors, Doug began developing all kinds of programs to make his dry cleaner customers more profitable by cutting their costs in other ways and attracting more dry cleaning customers. In the process, Doug saw his market share climb while he helped his customers and their customers eliminate harmful costs.

Develop a Process of Continuing Business Model Innovation. Some organizations are blessed with geniuses who can continue to find more successful business model innovations. That blessing, however, turns into a curse if the genius stops delivering or leaves. While one person does all the thinking, others daydream about what they will do after work rather than coming up with their own business model innovations.

A better approach is to install a process that engages lots of people in proposing and testing potential business model innovations. We found a few examples where continuing business model innovation had been made into day-to-day work. Typically, however, when the leader left who had organized the innovation process, business model innovation for that organization ended.

Naturally, we were thrilled to find a few companies where the business model innovation process had been continued and improved on by a second generation of management. From those limited examples, we proposed a general process for doing this task across many generations of CEOs that you can read about in The Ultimate Competitive Advantage (Berrett-Koehler, 2003).

Seeking a Publisher

When you publish a book, it’s the world’s book.

The world edits it.

— Philip Roth

Although five years hadn’t passed since either The 2,000 Percent Solution or The Irresistible Growth Enterprise, Carol and I felt that 2003 was going to be the right year to produce another major book, one focused on continual business model innovation. We knew that Peter Drucker wouldn’t approve, but Peter had never tried to demonstrate how the whole world could move forward at 20 times the normal rate. At least we waited longer to go back to the market than we had with The Irresistible Growth Enterprise; that longer pause represented progress in our becoming more patient.

Publisher interest in a third book wasn’t very good, however. Perhaps such interest never is very strong for business books unless you are Peter Drucker, Tom Peters, or Jack Welch. Eventually, we were fortunate to find a publisher who piqued our interest, Berrett-Koehler of San Francisco. This firm specialized in business books and promised to try to apply what its writers wrote about to the publisher’s own operations. That promise sounded to us like it reflected people who would appreciate continuing business model innovation.

After our proposal was accepted, two contract provisions surprised us. First, we had the right to fire the publisher. Berrett-Koehler’s management used that sword of Damocles hanging over its own head to be sure the firm’s staff kept their authors happy. Second, our book would not see print until it had been reviewed by five ordinary readers and we considered their suggestions. That sounded okay. We liked to have people read our books in advance to gain feedback for improvements.

As before, our enthusiasm built as the writing proceeded. Clearly, this book was going to be the masterpiece of all masterpieces. We were encouraged when we came to an agreement on a title fairly soon: The Ultimate Competitive Advantage (Berrett-Koehler, 2003). Then edited copies of the type-set text went off to the five readers. Their reactions were quite unenthusiastic: This was a book so dull that people said they wouldn’t have read it without the fees that the publisher was paying them. Of course one person’s masterpiece is another person’s cellular slime mold stuck to the bottom of a shoe. The five did, however, love the stories we had put in the book … once they got to the stories. Their advice was that if we could get those stories up front, the book wouldn’t be so boring.

We struggled with various solutions and eventually decided to do a major rewrite. One of our reviewers kindly offered to check out the rewrite to see if we had met her needs. We were excited again … until she told us that the rewritten book was just as boring as before.

Picking ourselves up off the pavement for a second time, we selected a different strategy: The book would open with an introduction and prologue filled with our best stories. Instead of putting the stories where they belonged in the text, readers would find those cases early on. Then, they were referred back to those stories at the appropriate places in the later chapters. Was a book ever organized in a stranger fashion? No, but we finally broke through the readers’ boredom barrier.

To make the book more accessible, we developed a parable about a child’s lemonade stand as a continuing analogy throughout the book’s contents. That parable subject was selected based on our belief that most readers had either operated such a lemonade stand as youngsters or had been customers of such stands as adults. Our publisher validated that thought by sharing with us a story we included in the book about how he had sold candy door-to-door as a child until he learned that selling lemonade in front of his father’s gas station was a better opportunity. As revised, the book was finally accepted for publication by Berrett-Koehler, and we focused on sharing the message.

Promotional Plans

A true good read is surely an act of innovative creation

in which we, the readers, become conspirators.

— Malcolm Bradbury

We decided to put our knowledge of 2,000 percent solution processes to good use to ensure that The Ultimate Competitive Advantage would reach best-seller reading levels. At the time of its publication, sales of 50,000 copies normally constituted a best seller. Based on Peter Drucker’s information, about 5,000 people would read some part of those 50,000 copies. About 500 people would read the book cover to cover.

Carol and I had always been impressed by books that contained impressive testimonials by leading authorities. Seeing those endorsements made you feel like you had stumbled onto a special book, one that the experts and successful people admired. If the book had so many testimonials that pages needed to be added to the front of the book to accommodate all of the praise, that was even more impressive. That’s the kind of book we wanted to read and hoped others would, too.

We set out to obtain a lot of testimonials. Our publisher wasn’t as enthusiastic as we were; he was only willing to offer four pages for quotes in the book’s beginning. He would put whatever quotes we had into those pages, even if he had to use 2-point (miniscule-sized) type to make everything fit. In the interest of helping our readers avoid the need for a microscope, we stopped at 35 endorsements. But that’s quite a lot of testimonials for a business book, so our publisher probably saved us from investing too much effort into this area.

The endorsements were magnificent to our eyes and mellifluous to our ears. Ronald L. Sargent, President and CEO of Staples said, “This book … can help drive a start-up to industry leadership.” Rosabeth Moss Kanter, a world-renowned professor at Harvard Business School and best-selling author of World Class and Evolve: Succeeding in the Digital Culture of Tomorrow, said, “The Ultimate Competitive Advantage goes to the heart of why great companies enjoy sustained success while others remain one-shot wonders. This book’s practical lessons will be welcomed by fad-weary companies.” Best-selling business and investing authors like Norman R. Augustine, John C. Bogle, Bill Jensen, Robert S. Kaplan, David P. Norton, Emanuel Rosen, and Richard Whiteley also made great comments. CEOs of more than a dozen major companies also praised the book.

Quoted endorsements are one thing, but forewords are even better. We ended up with two wonderful forewords, thoughtfully written by Tom Golisano, CEO of Paychex, and Bob Knutson, CEO of Education Management, two of our model leaders in the book. Tom wrote, “Every decade or so, businesses have to master an essential new task in order to prosper. Today, business model innovation is that task, and you need to become good at it before your competitors do. The Ultimate Competitive Advantage is the template you need to master this critical challenge.” Bob said, “The Ultimate Competitive Advantage provides a valuable roadmap for leaders to maximize the potential of their organizations through continuous learning and innovation that pays off.… Organizations do better when they concentrate on refining their effectiveness through continuous learning. This book helps you establish a continual process of business model improvement, something few companies have today.”

We also knew that Amazon.com reviews could make a difference. We offered review copies to the best business book reviewers we could find on that Web site. We were honored when over 120 readers added reviews on Amazon.com in our first year that averaged a five-star rating. That approval level had never been reached before by a new business book in that amount of time.

Carol and I contacted editors of several leading publications who requested articles based on the book, and those writings were well received and helped attract more book readers. A number of publications reviewed our book. One prominent journal even reviewed the book twice!

We planned a large launch event in New York where reporters and model CEOs could discuss the book and continuing business model innovation. Here is where our plans went awry. Just days before our launch, U.S. forces invaded Iraq looking to destroy weapons of mass destruction. On the day of our launch, Americans were glued to their television sets watching the first U.S. tanks roll through Baghdad. The CEOs came to our launch event; the reporters did not. War coverage filled the business channels for weeks thereafter. For months thereafter, eyes were on the color coding of the terrorism risk index rather than on how to build better companies. It was a terrible year for new business books.

But all was not lost. Amazon.com had developed a new feature: guides. In these sections, you could write a brief essay (a few hundred words in those days) and point out books that were related to your subject. In this way, readers could learn about a subject while finding other resources to help them. Everyone gained: Readers found better books; Amazon.com sold more books; other authors mentioned in the guides sold more books; and Carol and I sold more books, as well.

We quickly adapted some of our essays about business model innovation into segments that could be inserted into sequentially numbered guides. Readers could use directions in the segments to find the rest of the essays. Because we published over 4,000 of these guides, that improved the odds of someone finding part of an essay on this subject. We estimate that the bulk of our readers found out about the subject through these guides. Over time, we estimate that several hundred thousand people will read this material and learn about continuing business model innovation. Yet this impressive readership was developed with less than 1 percent of the time we spent on writing and promoting the book.

This was an important lesson: We could exceed best-seller reading levels anytime we wanted to by using these guides. Clearly, promoting readership of our work aside from publishing books needed to be a focus of future communications for the 400 Year Project.

Copyright © 2007. 2012 by Donald Mitchell.