P66 Innovation Hardball Case Study Two

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  • This series of podcasts is inspired by case studies in a book titled Hardball, Are You Planning to Play or Playing to Win?, published by the Harvard Business School Press.
  • These case studies include a mix of innovation, strategy, tactics, and attitude. While I will focus on the innovation part, the other parts are also critical to the success of the examples in the case studies.
  • While some people may react positively or negatively to the word hardball, for the most part I like it. In many podcasts, I’ve told you how difficult it is for innovative ideas to succeed. The biggest challenge I’ve shared with you is that the innovative idea does not have a dramatic enough improvement of a critically important customers benefit. Even if you have this level of difference, execution plays a significant role in your success.
  • The authors articulate five principles that hardball players live by.
    • First, they focus relentlessly on competitive advantage. In many podcasts, I point out the great importance of having competitive advantages in the benefit areas your customers need the most.
    • Second, they strive to convert competitive advantage into decisive advantage. They say, “Decisive advantage is systemically reinforcing. The better you get at it, the harder it is for competitors to compete against it or take it away.” Another way of looking at decisive advantage is that it is a dramatic sustainable advantage.
    • Third, they employ the indirect attack. When a major competitive player first sees your innovative initiative, their first inclination is to ignore it or see it as a small annoyance. Only later did they wake up to find out it’s an attack coming right at them.
    • Fourth, they exploit their employees’ will to win. You have also heard me refer to the importance of company culture – the values and beliefs that drive behaviors. This is about creating a company culture with a competitive spirit dedicated to winning.
    • Fifth, they draw a bright line in the caution zone. The authors say, “before you enter the caution zone, you have to know where the unacceptable area is and draw a bright line for your company that marks the edge, the limit beyond which you will not venture. It is the leader’s responsibility to draw the line and make it very bright and clear.” This guards against the downside risk of some versions of hardball that are win at any cost and a willingness to do anything to win. This version of hardball can lead to wearing pinstripes behind bars.
  • Let’s start by taking a look at the second case study. This involves a paper company called Brokaw that was the most profitable division within Wausau Papers. Brokaw was especially known for high quality paper and their ability to produce them in a wide range of colors.
  • Wausau hired a new president who was committed to making the overall company far more modern and competitive.
  • As he examined Brokaw, he found a company that almost exclusively focused on one major retailer in each market and supplemented this with smaller retailers. The exclusive relationship with one major retailer in each market was thought to develop loyalty and retailer personnel who were skilled at selling their specialty products.
  • He became intrigued by the company’s Chicago market that had strongly outperformed other company markets for years. The conventional wisdom had been their salespeople were better. But a closer examination revealed other, far more intriguing reasons. First, in Chicago they did business with many major retailers, abandoning the exclusive relationships that they had in other markets. Second, they delivered products to retailers far faster than they did in other markets. In fact, many of their deliveries were next day deliveries. Upon closer examination, they discovered that their delivery trucks to other markets frequently went through Chicago so it was easy to stop there and make deliveries before going on to other markets.
  • The new president wondered if they could replicate Chicago in other geographical areas. When he looked more broadly, he discovered that customers in other markets would often have to wait 1 to 2 weeks for delivery of their paper order and even then 20% of the ordered items might be out of stock and backordered. Compared to Chicago, these other markets had horrendous customer service. In addition, these long delivery times and unshipped items created customer discontent and significant additional administrative costs because of follow-ups, customer notifications, and making sure they had accurate accounting.
  • In examining the industry he discovered that the specialty papers that Brokaw focused on were a distant secondary priority for many of their direct competitors. They didn’t like the relatively small orders. They didn’t like the changeovers required in production. Compounding this situation was that many competitors required full truckload order quantities for the specialty products – something their customers really disliked. Thus, if they focused on these products it would be an indirect attack on their competitors.
  • From a manufacturing perspective, their competitors’ equipment was ideally suited to standard paper while the Brokaw plant was ideally suited to specialty papers. From a customer perspective, they did not like ordering large, truckload quantities that significantly exceeded their immediate needs. They would inventory the slower moving items and even though they typically have higher profit margins, the low turnover made the overall profit picture far less rosy.
  • The new president decided that they would run a test of a new way of doing business in Minneapolis. They would promise customers next day delivery. Specifically, if an order came in by 4 PM, it would arrive on the customer’s loading dock by 8 AM the next morning. In addition, they wanted orders to be at least 96% complete. On products that were really low volume specialty products, they reduced the average delivery time from 4 to 6 weeks down to two weeks. In addition, they removed the requirement for truckload quantity orders.
  • They also made some significant pricing changes. They offered their specialty products at the same price as their competitors specialty products which were usually 35% higher-priced than standard products. In addition, they announced a 10% price increase for their standard products in an effort to discourage customers from ordering large quantities of these products. They wanted their manufacturing and sales focus to be on the specialty products.
  • The other big change they made was to end the exclusive retailer selling relationships. They knew that they could not make next day delivery cost efficient with only one customer in a market. They were now going to sell anyone that wanted to buy.
  • These big changes to how they marketed their products required equally big changes within the company to make these changes possible.
  • While Brokaw was good at specialty papers, they needed to get even better. Rapid changeovers needed to be even quicker. Managing color quality and reducing waste also needed major improvements. They added new computerized equipment and new finishing lines. At the end, it was one of the smallest paper plants to have such high technology. The result of all this was they could now offer 235 product variations to its customers – this really defines specialty.
  • When it came to the systems and policies necessary to make the next day delivery system work, the first change was abandoning the requirement that no truck leaves half full. Trucks now departed when they had to to deliver next day orders. To meet surge capacity they initiated leasing trucks instead of permanent increases to their fleet. They put together a special two driver teams for long-haul orders. And when no trucks were available, they had the option of shipping via FedEx and UPS. All of this change required long-term veterans to dramatically change the way they thought about the business. A culture that values efficiency was now going to have to be a culture that valued customer service.
  • To be clear, not everyone was happy. The customers who had an exclusive relationship were the most unhappy. They now found themselves having many more competitors for Brokaw’s products – not a fun outcome. On the other hand, the salespeople could now open up many more major new volume customers.
  • Not surprisingly, the next day delivery system was well received. Customers no longer needed to plan so far ahead and take on so much slow turning inventory.
  • Not surprisingly in the first ten months of the Minneapolis test, market share increased in every month. When they expanded it to a few more markets, they found that they could double their market share in two years. This is major business improvement from major changes.
  • Here are several lessons I think you can take from this case study that can help you.
    • First, it takes major changes to get major business benefits. You know from the very early podcasts on Merwyn Technology that I repeatedly stressed the importance of dramatic improvements if you wanted to increase your chances for success.
    • Second, if you have some big business improvement ideas, I strongly urge you to consider test markets. Test markets have gone a bit out of vogue in recent decades, but they can serve a very valuable function. Big ideas often can involve big business and financial risk. Test markets give you a real-world environment to evaluate those risks. Concerns about competitors learning about your innovative ideas and having greater lead time to respond, is a real risk. Unfortunately, sometimes this gets greater weight than the value of learning and improvements to the original idea that they can come from test markets.
    • Third, you can find anomalies in a wide range of places in your business. It can be in the types of products to the types of customers to geographical areas. What is your company especially good at that your bigger competitors may find as secondary priorities? How can you leverage those areas that you are best at in an indirect attack on your competitors? The value of indirect attacks is that major competitors first consider your innovations to be pesky annoyances and not major threats to their overall profitability.
    • Fourth, recognize that when making major internal changes that you need to account for the difficulty many people will have been changing their values. In this Brokaw case study, people needed to change from an efficiency culture to a customer service culture. Do not underestimate how difficult this can be and the fact that you will encounter resistance.
  • I think the insights from this podcast can help many businesses in their efforts to become more innovative and successful in the marketplace. Just remember it takes a balance of boldness, thoroughness, and vision to achieve success.

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