During my time in NYC, I had a long conversation with a CEO about the Founder’s MentalitySM framework. We talked about the “default path” of many companies as they move from being insurgents to incumbents, and what they stand to gain by pursuing the path to industry leadership.
The CEO then provided the following challenge: “Do you really think most companies maximize the benefits of scale and scope? My experience is that even companies that gain leadership positions in a market don’t necessarily achieve the full benefits of it.”
His comment sent me scrambling to my C: drive, to my notes from years ago when Chris Zook and I were developing Profit from the Core. Our core argument (pun intended) is that the only way to grow sustainably and profitably is to lead in your core business. So the purpose of growth strategies is to create a path to leadership, and from leadership you should then drive to leadership economics. In the book, we describe what the six common actions of true leaders are.
Because these six characteristics are so central to the goal of moving north on the Founder’s Mentality matrix, and gaining the advantages of scale and scope, it is worth revisiting them:
- Invest to build and extend scale advantages, creating unbeatable cost positions and rates of reinvestment. True leaders continually reinvest in their core businesses to build up unbeatable scale advantage. They aim to maintain cost leadership. They have the best route to consumers. They out-invest in marketing and R&D. They use the advantage of leadership to extend leadership.
- Generate unique consumer insights and anticipate future consumer needs that they can uniquely serve. True leaders use their scale to better understand both the consumer of today and the consumer of the future. They have the best feedback systems, the best research, and the top capabilities to convert company facts into insights and insights into new propositions.
- Make competitors feel the pain of going head-to-head in the most strategic areas of business. True leaders make it very clear through pricing and competitive strategy what the core areas of their businesses are. They make it clear to competitors who wish to compete in those core areas that it will be costly and very challenging to do so. Leaders force the first question in a competitor’s boardroom meeting to be, “What about the 800-pound gorilla?”
- Establish and enforce the rules of the game while moving the profit pool in their favor. True leaders establish the rules of competition in the industry, and they excel in playing the game by the rules they create. They understand how industry profits are distributed between all industry players and the customer, and they work hard to make sure the shifts in the profit pool benefit them and their target consumers.
- Use general and administrative (G&A) costs to build truly differentiated capabilities that improve the business. True leaders make sure that all their spending goes toward better propositions, or differentiated capabilities that develop and deliver superior propositions in the future. They view G&A as “capability currency,” meaning they want to deploy it to create some best-in-class capabilities, rather than spreading it like butter across the organization to create capabilities that are never more than average.
- Establish standards of performance consistent with their leadership position, not with industry averages. True leaders make sure they get leadership economics. They demand far more than the marketplace from their competitively advantaged businesses so they can reinvest superior returns to extend leadership.
This is a high standard of leadership, and I thank the CEO who questioned how many companies truly attain it. Reading through these, you may be inclined to agree with his assessment that few companies achieve true leadership. But those that do reap huge rewards.