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2
HOWTO LOSE:
TEN COMPULSIONS
GUARANTEEDTO KEEP
YOU MIREDINTHE PACK
Before we get to what we can do to break from the pack, we need to
confront the things that keep us stuck in it. Faced with the twin
plagues of commoditization and imitation, business leaders reflex-
ively resort to ten courses of action that create a false, seductive, and
temporary illusion of securityÑand plunge their companies further
into the spiral of Commodity Hell. In this chapter, we explore ten
compulsions that keep businesses trapped in the pack. I call these
courses of action compulsions because even though they are counter-
productive and dysfunctional, we persist in clinging to them anyway,
perhaps because they worked in the past or perhaps because they
reflect conventional wisdom. Either way, they wonÕt do the trick for
us in a Copycat Economy. As you read this chapter, ask yourselfÑ
does this compulsion describe how we do things in our organization?
1. The Compulsion to Cut Costs
Trying to stave off decline and beef up margins, many companies
reflexively cut departmental budgets, sell off assets, lay off employ-
ees, and embrace any cheaper supplier. To be sure, cost-cutting
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38 BREAK FROMTHE PACK
efforts are useful and necessary, but only when part of a well-exe-
cuted growth strategy. By itself, the frenzy of cost cutting is often a
self-defeating compulsion, for several reasons.
¥ You canÕt shrink your way to success. After your budgets are
slashed and the plants are closed and the bodies are hauled
away, what exactly are you going to do to grow the business?
¥ YouÕre not alone in your compulsion: Your competitors are also
cutting costs for their own survival, and your company remains
undifferentiated from others in the pack.
¥ Compulsive cost cutting often degenerates into intramural
combat and backbiting. People scurry to salvage scraps of bud-
get regardless of whether their actions create value, or they do
whatever it takes to protect themselves from further cuts.
¥ Because your company still has no disciplined vision to break
from the pack, your cost-cutting decisions can be strategically
counterproductive: Some cuts might be grossly inefficient,
leaving lots of fat, and others saw away your companyÕs muscle
and bone.
¥ If cost cutting gives your financials a temporary reprieve, you
can be seduced into believing you donÕt need to make radical
and truly efficacious changes.
¥ The cost-cutting compulsion is intermittent and unpredictable,
like a smokerÕs resolution to quit. After the company discovers
thatÑsurprise!Ñthe first cost cut didnÕt yield salvation, it cuts
more, then more, then more, until it becomes a Chinese water
torture for employees and investors.
¥ Employees (especially your best ones) become demoralized,
catching on to the reality that the company lacks a coherent or
inspiring alternative to the steady chop-chop-chop.
In early 2006, FordÑmired in deteriorating market share and
Òjunk bondÓ statusÑannounced another big restructuring plan. This
one would slash 30,000 jobs, close 14 plants in the U.S. and Canada,
and reduce capacity by 26 percent. These moves would generate $6
billion in savings through 2010. ThatÕs great. But will these steps
unleash a fresh wave of capital, innovation, and employee commit-
ment necessary to design, manufacture, and deliver sexy, high-quality,
Ògotta-haveÓ cars with superb after-sale service? If the answer is yes,Harari_02.qxd 7/26/06 2:01 PM Page 39
CHAPTER 2¥HOWTO LOSE 39
Ford will rock. If the answer is no, the savings will be illusory. TheyÕll
be sucked up fast.
The ripple effects of a Òcut-costÓ compulsion are sad. IÕve spoken
to disheartened employees of major airlines that are facing bank-
ruptcy or are already in bankruptcy. TheyÕve got nothing to look for-
ward to other than more slashes to assets, budgets, salaries, and
pensions, with no exciting prospects for real growth. It reminds me of
the story of the guy visiting a friend who lives on a farm and notices a
pig with one wooden peg leg. He asks his friend about it.
ÒOh, that pig is remarkable,Ó the farmer replies. ÒHeÕs friendly
and obedient, and once while we were sleeping, he saved our lives by
tapping on the bedroom window when he saw a fire start outside.Ó
ÒBut what about the peg leg?Ó asks the visitor.
ÒCome on now,Ó admonishes the farmer. ÒA pig that special you
donÕt eat all at once.Ó
In 2005, Northwest Airlines mechanics went on strike and Delta
pilots threatened to, even as the airlines continued their relentless
southward slide. Perhaps even a peg-leg pig will eventually fight back.
After all, what does he have to lose?
Of course, some argue that the solution is to cut costs rapidly and
savagely. Forget the peg leg, they sayÑkill the pig right away. Use
slash-and-burn tactics to eliminate as much cost and overhead debris
as quickly as possible. Of course, the basic commodity product line,
business model, and organization itself all remain intact: Everything
is just Òleaner.Ó But itÕs ÒleanerÓ in a way that guarantees that perfor-
mance will drop because there is no vision, investment, or support for
sustained, break-from-the-pack growth. ItÕs like the guy who says,
ÒIÕm training for a marathon race and need to lose 30 pounds fast, so
I cut off my right leg.Ó
A former MBA student of mine reported to me how this strategy
worked with her employer, a public policy institute that responded to
declining investment income with a sharp, across-the-board cost-cut-
ting program. ÒPromising projects were cancelled in order to save
money. Employee tasks were integrated, leading to overload. Fringe
benefits such as Christmas parties, employee farewell parties, and
annual company picnics were eliminated. In addition, employee
raises were reduced substantially, and new hires got lower salaries
than their predecessors. Within the first quarter of enacting the new
ÔleanerÕ policy, the number of research projects dropped, the scale
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(many of whom were the top researchers and rainmakers) left within
the first six months.Ó
As Frank Lorenzo showed in his emasculation of Eastern
Airlines, and ÒChainsaw AlÓ Dunlap demonstrated in his gutting of
Scott Paper and Sunbeam, a Òsavage cutsÓ approach often leads to
disasterÑexcept for a very select group of top executives and
investors. Most investors and employees lose. Eastern simply disap-
peared. Sunbeam wound up without the resources to build com-
pelling new products and provide acceptable service qualityÑand its
share price deteriorated accordingly. The result was a grotesque dis-
tortion of the idea of Òcreating shareholder valueÓ because, in effect,
certain shareholders were betting that Dunlap would eviscerate the
companies he ran to carve up the carcass and sell them off at the most
attractive prices. ThatÕs no way to prepare a company for competitive
advantage.
2. The Compulsion to Cut Prices
Desperately lowering prices to keep customers from boltingÑas
when GM, Ford, and Chrysler regularly slash prices with discounts,
interest deals, and rebates to woo buyers, keep volume up, and main-
tain market shareÑdecimates a companyÕs margins and trains cus-
tomers to wait for another round of price cuts before buying.
Moreover, when these companies offer zero percent financing,
theyÕre gutting their most lucrative source of profit: consumer financ-
ing. (GMAC Financial Services has been the most profitable staple of
GM for so long that one could argue that GM has become a bank that
1
uses cars as sales incentives. )
But the worst consequence is that by reflexively slashing prices
while competitors like Toyota and BMW donÕt, GM and Ford are
really conceding defeat. TheyÕre saying that the only way they can
differentiate their products from those of their global competitors is
not with higher quality, cooler design, better features, or great ser-
vice, but with lower price. This step not only stamps ÒIÕm a commod-
ityÓ on every car they make, but it also slowly strangles their capacity
to fund new product development and pay off a massive pension lia-
bility. It does nothing to address their enormous challenges: opera-
tional inefficiencies, legacy costs, unviable labor-management