Dare to Be Different Great companies can thrive in lousy industries by tapping their own insights--and saying no to conventional wisdom and management gurus.
(Business 2.0) – To anyone who has dabbled in the stock market, this bit of trivia comes as no surprise: Herb Kelleher's Southwest Airlines and Sam Walton's Wal-Mart rank first and second as America's best-performing stocks during the past 30 years. But here's the fact that blows me away: Both compete in what management gurus have long considered lousy industries--markets crowded with rivals and hamstrung by ruinous margins. Major airlines have hovered in and out of bankruptcy in recent years, and retailing is a fiercely competitive industry just as familiar with Chapter 11.
According to Michael Porter's classic Competitive Strategy, still the gospel in most business schools, companies operating in the right industry--one with limited rivalry, clout over suppliers and customers, and high barriers to entry--enjoy a big edge over those in industries that don't fit the same profile. Porter's view of success, in fact, has led companies through the years to do all sorts of things: merge with competitors to reduce interfirm rivalry and gain more power over suppliers, pursue patents and technologies that can be protected as barriers to entry, and seek out high-margin niches and businesses.
Like a lot of conventional wisdom in management, however, Porter's view is partly right--and largely wrong. Sure, it's true that his market attributes can help predict industry profit margins. But studies by consulting firms and academics consistently find that industry growth rates do not predict the growth rates of individual companies and that industry "location" doesn't predict a firm's ability to create shareholder value over a 10-year period.
What's all that claptrap mean? It's better to be a great company in a crummy business than a poorly managed one in a great business.
Even more empowering is the notion that the keys to success rest solely with company leadership, not industry dynamics. Take Whole Foods, the enormously successful natural-foods grocery chain. Conventional wisdom in the grocery business holds that only endless cost cuts will keep fierce competitors at bay. Yet Whole Foods CEO John Mackey hews to a radical but obvious insight--that people will pay more for better and more attractively displayed food and that what people want to eat varies by region and even by store location within a region. The company also hires workers educated enough to explain what all those local organic foods are. Costs go up, of course, but margins go up even more, since Whole Foods customers don't shop merely on the basis of price.
Southwest staked its model on another set of contrarian but commonsense beliefs: that people pay to get from one place to another as quickly as possible, not to sit in seat 14A eating soggy, lukewarm broccoli, and that planes don't make any money when they're sitting idle at the gate. Les Schwab Tire Centers, the billion-dollar, privately owned tire and auto repair chain in the Pacific Northwest, understood that men aren't the only people who have cars and need repairs, and that women would flock to a shop that offered outstanding customer service and a pleasant environment.
So why don't more companies take the road less traveled and use common sense to change their fortunes? And why did it take 24 years for someone to copy the Southwest model? One answer is the tyranny of benchmarking, consulting firms, and analysts. Each seeks to get companies to do what everyone else is doing, partly by transferring knowledge of what those others are doing and partly by setting expectations according to how a typical player operates.
Simple logic suggests that if you do what everyone else does, you'll get pretty much the same results. But great successes--and spectacular failures, to be sure--come from daring to be different. And there's the second part of the answer: Being different often means coming up with the obvious insights that turn industries upside down and create the competitive edge that others toil for decades trying to copy.
Business 2.0 columnist Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business.