“Excerpt from Choose Your Customer: How to Compete Against the Digital Giants and Thrive by Jonathan L.S. Byrnes and John S. Wass, pp. 55-59 (McGraw Hill, May 2021).”
Navigate The Currents Of Change
Sunday, December 7, 1941. Admiral Chester Nimitz was attending a concert in Washington, DC. He was paged and told there was a phone call for him. When he answered, he heard the voice of President Franklin Delano Roosevelt on the phone.
Third Point's Dan Loeb discusses their new positions in a letter to investor reviewed by ValueWalk. Stay tuned for more coverage. Loeb notes some new purchases as follows: Third Point’s investment in Grab is an excellent example of our ability to “lifecycle invest” by being a thought and financial partner from growth capital stages to Read More
He told Admiral Nimitz that he (Nimitz) would now be commander of the Pacific Fleet. Admiral Nimitz flew to Hawaii to assume command of the Pacific Fleet. He landed at Pearl Harbor on Christmas Eve, 1941. There was a spirit of despair, dejection, and defeat, as if the United States had already lost the war.
On Christmas Day, 1941, Admiral Nimitz was given a boat tour of the destruction wrought on Pearl Harbor. Big sunken battleships and navy vessels cluttered the waters. As the tour boat returned to dock, the young helmsman of the boat asked, “Well, Admiral, what do you think after seeing all this destruction?”
Admiral Nimitz’s reply shocked everyone. “The Japanese made three of the biggest mistakes an attack force could ever make, or God was taking care of America. Which do you think it was?”
Shocked and surprised, the helmsman asked, “What do you mean by saying the Japanese made three of the biggest mistakes an attack force could ever make?”
The Biggest Mistakes An Attack Force Could Make
Mistake 1: “The Japanese attacked on Sunday morning. Nine out of ten crewmen of those ships were ashore on leave. If those same ships had been lured to sea and been sunk, we would have lost 38,000 men, instead of 3,800.”
Mistake 2: “When the Japanese saw all those battleships lined up in a row, they got so carried away sinking those battleships that they never once bombed our dry docks opposite those ships. If they had destroyed our dry docks, we would have had to tow every one of those ships to the mainland to be repaired.
“As it is now, they are in shallow water, and they can be raised. One tug can pull them over to the dry docks, and we can have them repaired and at sea by the time we could have towed them to the mainland. And I already have crews ashore anxious to man those ships.”
Mistake 3: “Every drop of fuel in the Pacific theater of war is on top of the ground in storage tanks five miles away over that hill. One attack plane could have strafed those tanks and destroyed our fuel supply.
“That’s why I say the Japanese made three of the biggest mistakes an attack force could make, or God was taking care of America.”
Today’s Age Of Diverse Markets
Whether this story is factual or merely a very compelling urban legend, it offers important strategic lessons that are critically relevant in today’s Age of Diverse Markets.
We thought about this anecdote during a recent meeting when we were reviewing a company’s situation with its CEO.
A competitor had signed an agreement with a digital giant to resell its products on the giant’s website. The company’s VP of marketing argued that signing a similar agreement with a digital giant would give the company a powerful new channel to reach more customers and it would lower its cost of sales—which in turn would enable it to lower its prices. What should the company do?
The seemingly obvious answer was to match the competitor so as not to lose any market share. The market had been changing rapidly, with powerful new competitors and changing customer behavior. The competitor had indeed made tactical gains that raised concerns. But it was not at all clear that simply following the competitor would produce a long-term strategic win.
The real question was whether this potential move would win the battle at the expense of losing the war. Would it provide a long-term strategic advantage, or would it merely embed the company in a never-ending series of price wars? What would Admiral Nimitz do?
In our discussion, three problems became clear: (1) At best, by signing on with a digital reseller, the company would only achieve parity with the competitor. (2) At worst, the digital giant would gain a deep understanding of the company’s products and customers, potentially setting up the reseller as a voracious competitor that could offer the company’s best products directly to its best customers—cutting the company out of the process. (3) The company didn’t have the scale and experience to make its own digital capabilities world-class.
Strategic Dominance And Long-Term Profitability
Instead, the CEO decided to explore other strategic directions that would position the company for strategic dominance and long-term profitability. As the hockey great Wayne Gretsky famously said, “Skate to where the puck is going, not where it has been.”
In the course of the discussion, we developed several potentially viable strategic alternatives. The CEO assigned a small team the task of spending a few weeks with several customers to investigate how the company could create a new value footprint that would be meaningful and defensible against the digital giants and other new competitors.
Working with their customer counterparts, the team developed a set of services to help the customers set and dynamically manage their branch inventories. This was an especially critical issue for their customers in this fast-changing industry. At the beginning of the product life cycle, it was important to quickly determine what was selling strongly in particular branches, and at the end of the life cycle, it was necessary to avoid inventory markdowns.
The management team had the insight and discipline to step back and make a strategic assessment of the currents of change, and not just make tactical changes to respond to immediate competitive threats. Admiral Nimitz would have been proud!
What’s especially important about this situation, and so many others like it, is that the rush of events—whether it’s concerns about keeping up with a competitor’s tactics or, conversely, enjoying the satisfaction of tactical gains—can essentially blind a company’s management team to the broader, more subtle opportunities to develop a creative strategy that will position it to win in its transformed industry.
The Opportunity To Win Big
Paradoxically, the broader the industry change taking place, the greater the opportunity to win big by positioning into the new environment—in other words, skating to where the puck will be. Conversely, companies that focus on tuning up their long-standing tactics and business processes will quickly fall further and further behind. In today’s Age of Diverse Markets, winning the war is the top management imperative.
Managers often feel they don’t have time to concentrate systematically on their deeper, more value-laden opportunities because they are so busy trying to keep up in the tactical battles. They are frustrated that they do not have the right metrics and analytics to identify, prioritize, and harvest their most important strategic opportunities, so they are left with the task of choosing among fragmented and often function-specific projects that bubble up from departmental managers.
In short, most managers instinctively focus on how to win the battle, rather than how to win the war of staying on top as their industry transforms. They are so focused on their near-term Age of Mass Markets key performance indicators (KPIs), like broad-based sales growth and cost reductions, that they lose the opportunity to build a lasting, winning position in their industry.
Companies now are at a crucial pivot point. The time frame for paradigmatic change is three to five years, from conception to development to implementation to fruition. Today, managers have time to rebuild their strategies and operations to succeed in their changing industries. For most companies, next year will almost be too late to start the process.