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Robert Abbott
Robert Abbott
Articles (711)  | Author's Website |

Competition Demystified: The Importance of Management and Operational Excellence

Even companies without competitive advantages can thrive if they have strong management

February 12, 2020 | About:

How to identify and secure competitive advantages has been the theme of “Competition Demystified: A Radically Simplified Approach to Business Strategy.”

Yet, in chapter 18, the book’s final chapter, authors Bruce Greenwald and Judd Kahn focused on management and operational excellence. Why?

Because few companies enjoy solid competitive advantages, forcing most to compete every day with “a large and frequently elastic set of competitors.” Still, these companies without advantages can survive and even thrive by being as efficient and effective as possible in their business operations.

The rewards from excellent management, in both operational and administrative areas, can be as rich as those from structural competitive advantages.

Productivity

Productivity traditionally refers to a phenomenon in which the amount of output for each unit of input goes up. For example, a farmer with a horse and a plow can till only a few acres a day, but a farmer with a big tractor and modern cultivator can till hundreds of acres a day. The latter farmer is obviously more productive than the former. As the authors pointed out, thanks to productivity, people of modest means today live longer, healthier and more comfortable lives than the elite in 1600.

But they also wanted to point to an alternative view on productivity in business. This other perspective is based on the idea that companies can best improve their productivity by staying within the “productivity frontier.” By that they mean the boundaries of the possible, given the limits of capital available, the quality of labor and the state of current technology.

While we might expect the big productivity gains to come from discoveries beyond the frontiers, the best results come from using current resources to, in their words, “close the gap between what is possible and what is actually achieved.” In turn, that depends on good management that focuses on efficiency. This, they say, is the main source of economic progress.

In addition, this also suggests that operating efficiency can be as important as “structural economic conditions” when assessing one company’s performance with its peers. Evidence for this idea can be found in several areas:

  • Some companies do better than others: For example, one study looked at the cost of processing life insurance premiums for three life insurers from 1988 through 1991. Results were much the same in 2002, when the costs of the most efficient company, Northwestern Mutual, were less than half of the least efficient company. Similar results have been noted in other industries.
  • Things can change in a hurry: The drivers of productivity improvement—technology, capital investment and the quality of the labor force—change slowly and steadily. Yet, performance can fluctuate a great deal because of management actions, whether good or bad.
  • Transformation of manufacturing productivity: The authors cited changes in manufacturing productivity over several decades. Between the end of World War II and 1970, productivity increased by about 3% per year. However, between 1970 and 1980, it dropped to less than 1% per year. Then, it rebounded, going up to about 2% per year between 1986 and 1991, and even more in the latter years of the 1990s. The authors attributed the latter improvement to the attitude, training and focus of managers.
  • Case studies: Detailed case studies provide a consistent message, which is that productivity differences among companies and their plants are large and persistent, due to differences in management performance. One of those cases involved Connecticut Mutual, an insurance company that aimed to increase administrative support productivity by 35% in two years. Progress was excellent during the first year and a half, but then the CEO announced he planned to retire. Management attention drifted to succession and away from productivity, and the productivity improvement exercise went backward during the final six months of the program.

Greenwald and Kahn also found evidence of the importance of management focus in the book “Good to Great” by Jim Collins. He discovered all the companies that did well started by adopting a simple and clear strategic focus. For example, Kimberly-Clark (NYSE:KMB) got out of the milling business and gave all its attention to the marketing of paper products. Wells Fargo (NYSE:WFC) did it by focusing on basic banking on the West Coast. These and other companies went on to enjoy success because they focused their attention on a key aspect of their businesses.

In that group, there were companies that did focus for a time, but had managers who could not resist the urge to expand without an appropriate strategy. Gillette (NYSE:PG), the razor company, got into the battery business and Walgreens (NASDAQ:WBA), which had a regional competitive advantage, decided to expand across the country.

The authors noted that most companies with outstanding records were narrowly focused on industries or portions of industries. One exception to that was General Electric (NYSE:GE) under the leadership of Jack Welch. He reinstated a previous company strategy of only being in businesses where it was first or second in the market, or exiting all together. And every business had to focus on operational efficiency.

The chapter ended with Greenwald and Kahn arguing that there are three “underlying” goals for strategy formulation:

  1. Analyze a company’s competitive universe and determine where it fits, based on competitive advantages and barriers to entry.
  2. Should competitive advantages exist, a company should recognize and manage its competitive interactions with other companies in its universe or market.
  3. Whether they have competitive advantages or not, all companies should put together “a clear, simple, and accurate vision of where the company should be headed.”

Conclusion

In this final chapter of “Competition Demystified: A Radically Simplified Approach to Business Strategy,” Greenwald and Kahn made the point that most companies do not have any competitive advantages. But they can keep up with those that do if they focus on operational excellence or efficiency, and that depends on the talent of their managers or management teams.

One of the key measures of efficiency is productivity, the ability to generate higher returns from a fixed amount of investment. Productivity is driven by efficiency and effectiveness and they are driven by a focus on a clear and simple path forward.

For investors, I would say the key message is that companies need not have a competitive advantage if they are the most efficient in their industry. According to the authors, a company operating at peak efficiency could produce returns as good as those from a company with a clear competitive advantage.

Disclaimer: This review is based on the book, “Competition Demystified: A Radically Simplified Approach to Business Strategy” by Bruce Greenwald and Judd Kahn, published in 2005 by Portfolio/Penguin Group. Unless otherwise noted, all ideas and opinions in these reviews are those of the authors. 

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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Comments

Robert Abbott
Robert Abbott premium member - 2 days ago

Thank you for your comments. I agree that great management and great leadership are very important, especially if they can be combined in one person or one team. Best wishes! Bob

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