Why you need understand the cost economics of strategy before you grow your business

By: Shane Blazer, Founder: Mentrabi

Is your company growing or declining?

Are you struggling with the strategy of your company today?

Do you want to understand the cost economics of strategy and how they can affect your business?

In this article we’re going to walk through some real life scenarios of major corporations and break down their strategies to discover how they fell from the top 100 (In the year 2000 to today) companies on the Fortune 500 list because we want you to realize how the cost economics of strategy can impact your business.

The Methodology

We dismissed companies that closed up or merged under another firm and we ignored any companies who are in industries where we felt we weren’t strong enough to dive into and talk about.

That left us with 4:

  1. Motorola
  2. JC Penny
  3. Time Warner
  4. Supervalu

What you’ll learn from the article is the unique strategies they employed to grow in their market and how those strategies failed them and then we’ll show you the true cost of not understanding the cost economics of strategy.

Motorola Fortune 100 Rank 37 in 2000

Motorola, the inventor of the mobile phone in the 1980s, had a very unique strategy towards developing a competitive advantage:

Internal teams were pitted against each other and tasked for coming up with the best inventions. The reward for doing so was obscene amounts of cash.

The company’s long time primary focus was technology in the public services sector but Motorola also had a smaller retail services sector working on other projects.

In the 1980s when the cell phone was released successfully to the public, the older more accomplished public sector brother on the other side of the office was enraged.

Each CEO, after the first cell phone launch, let this strategy continue on thereby eroding the very competitive advantage they built because the jealousy continued put up walls between the departments so high they no longer shared technology. Motorola broke into silos.

Two other decisions made by Motorola execs that were also detrimental for Motorola but actually became gifts for the world:

  1. Investing early in China when no one yet had, giving to China the Motorola trade secrets to technology manufacturing fostered competition against Motorola
  2. Partnering with Apple and giving away (whether on purpose or by accident) the secrets to Motorola’s cell phone technology; thus paving the way for the iPhone.

Motorola has since been split off into two companies: Motorola Solutions and Motorola Mobility. Motorola Solutions continues to serve public services in a big way and Motorola Mobility continues to struggle in the constant battle for affordable mobile technology.

Motorola eventually spun off its mobile division to Lenovo (through Google).

Strategy Recommendation:

Motorola Mobility needs to find its place in the market. Apple owns the premium tier of the cell phone marketplace, Samsung the mid-tier and there are several brands competing in the low cost tier. Leveraging Lenovo’s size and Google’s Android software, Motorola should seek to win the low cost tier of the marketplace by providing all the advanced tech solutions you can find in the uppers tiers at a cost that brings tech to everyone the world over.

  • 2000 Fortune 500 Rank: 37, Revenues: $30.9B
  • Peak Revenues: $37.5B 2001
  • 2009 Fortune 500 Rank: 78 Revenues $22B
  • 2015 Motorola Solutions Fortune 500 Rank: 363, Revenues $7.7B
  • Cost economics of strategy: $23B in revenues over 15 years

JC Penny Fortune 100 Rank 36 in 2000

JC Penney is well over 100 years old and it hit its prime in 1971. Since then it has struggled to find its footing as it has slowly declined into a $12B company off its peak of $32.9B.

It debuted on the Fortune 100 list in 1995.

Over the next 10 years the company struggled to find its footing before finding a new CEO to take over and try to reinvigorate the brand.

However, the arrival of Ron Johnson and his strategy simply added to the demise of this company.

Word to the wise; never alienate your existing customer base by making significant business changes without tell your customer what you’re doing. His strategy made sense for those shoppers who didn’t buy into the high / low game, but they weren’t existing customers and in no way did they show up in droves to make up for the loss of existing customers.

The high / low strategy by JC Penney allowed them to own the middle class segment; they may have had better luck at then by bolting on their now current strategy from new Home Depot addition Marvin Ellison:

  1. Solidify stability with an omnichannel strategy (buy online pick up in store same day)
  2. Intimate relationship with customers
  3. Leverage Sephora relationship.

Strategy recommendation:

When finances are right sized, systems optimized, and customer experience brought into the digital age through ominchannel implementation you’ve hit the basics. To differentiate further we’d look at expanding private label offerings, bringing in top talent designers and focus on connecting directly with Millennial and Gen Z consumers by providing both an online and in store experience that resonates with them.

  • 2000 Fortune 500 Rank: 36, Revenues $32B
  • Peak Revenues: $32.9B 2001
  • 2013 Fortune 500 Rank: 215 Revenues $13B
  • Cost economics of strategy: 19B in revenues over 13 years

Time Warner Fortune 100 Rank 45 in 2000

As a dominate player in the cable industry looking to expand into internet access; Time Warner was met head on with one very poorly timed business decision for two reasons.

  1. The acquisition by AOL happened at the peak of the .com bubble and only a short time later the resulting burst made AOL take a financial right off of epic proportions
  2. This was the exact time internet users were leaving the horrendous dial-up environment for the much faster cable connected world.

The merger was abandoned and a short time later Time Warner spun off its cable delivery service from their core service it has always provided: Content.

Strategy Recommendation:

Examine trends before betting the house and never lose focus from your core. Time Warner should look at the future of entertainment and understand that today humans expect immediate entertainment, on demand, and anywhere.

  • 2000: Fortune 500 Rank: 45, Revenues: 37B
  • Peak Revenues: $44.7B 2006
  • 2010: Fortune 500 Rank: 82 Revenues $26.8B
  • 2015: Time Warner Fortune 500 Rank: 104 Revenues 28.7B
  • Cost economics of strategy: 9B in revenues over 15 years

 

 

Supervalu Fortune 100 Rank 99 in 2000

This one is personal because I spent 10 years of my 16 year (so far) career there. Supervalu has a long history and has always been one of the nation’s largest grocery distributors.

In 2006 the company announced that it was acquiring portions of struggling grocery retail giant Albertson’s.

The new company tried to combine their respective strategies: one focused on distribution, the other on centralized retail.

There were 5 problems:

First the company was publically traded and as a result being strapped with ridiculous amounts of debt wasn’t a good thing. The debt was serviceable by the organization and default wasn’t a risk, to my knowledge, but the debt levels didn’t look good.

Second, two years after the merger the economy crashed and stocks were hit particularly hard. As a result the company had to take some accounting non-cash charges that started a downward spiral of many straight quarters of losses. While these were accounting losses and not cash losses, the market only saw the negative and shit their pants anyway.

Third, there wasn’t a clearly defined strategy for the company. The company was working under several different brand names around the country struggling to get the right products at the right price in the right locations because each banner was slightly different in each market. Some were high end grocers while others were EDLP.

Fourth, there was constant tension between the banners and the center. The new company was trying to organize itself in a way that created a central purchasing and marketing functions to create economies of scale and consistent messaging to the field. The banner offices and the center offices struggled at times to get on the same page thus making decision stick was a chore.

Fifth, the industry has extremely tight margins thanks to the long history of the commoditized food business. You have to sell a lot of yogurt cups to keep the lights on at a billion dollar organization and consumers know what the big box retailers pricing looks like. If you’re too far off from them you get called out and consumers leave.

Maybe I’m partial to wanting the company to succeed and being overly optimistic of its potential success because of the fact that the company and my family have a long history; but I think the events that happened created a perfect storm that in no way this deal would have worked. On the other hand, there could have been some moves internally by the company that were done differently to create a more cohesive atmosphere and success could have been achieved.

Supervalu has since divested Albertsons (and head count, me included). The two companies running separately appear to be doing well utilizing their own independent strengths again.

What’s interesting is at the end the strategy employed by Supervalu was similar to what Ron Johnson was doing at JC Penny. Trying to get away from the High / Low game and go EDLP to take the big box stores head on.

In this case I believe this is exactly what customers wanted, grocery shopping is a chore to many customers and as a result, customers want it done conveniently and cheaply. The high / low game here and at other chains made grocery shopping a bigger chore when customers had to shop at multiple stores in their market to get the best deals.

Strategy Recommendation:

Supervalu didn’t seek to win on price, they sought to win on value by having the rights brands and selection – that couldn’t be matched in the smaller grocery sections of big box stores – at the right price every day. It’s a strategy that will still work in this market, the perfect storm of economic conditions and internal tension would not allow it to happen for Supervalu. Supervalu should also consider advancing its technology and look to reducing the chore of grocery shopping by creating easy to use software and grocery deliver services.

  • 2000: Fortune 500 Rank: 99, Revenues: $17B
  • Peak Revenues: $44.5B 2009
  • 2013: Fortune 500 Rank: 86 Revenues $17.1B
  • 2015: Supervalu 500 Rank: 164 Revenues 17.8B
  • Cost economics of strategy: 0B in revenues over 15 years

The same story line rings true for all of the companies covered above:

After poorly timed and badly managed decisions, the firms always re-focused back to their core beginning and landed further behind in the market than its position once was.

If you want to grow and advance in a monopolistic fashion, focus on what you do best, your core business and win there.

Sources:

http://www.chicagomag.com/Chicago-Magazine/September-2014/What-Happened-to-Motorola/

http://www.fundinguniverse.com/company-histories/j-c-penney-company-inc-history/

http://www.cnbc.com/2015/07/31/jc-penneys-new-ceo-readies-for-its-next-challenge.html

http://www.nytimes.com/2010/01/11/business/media/11merger.html?_r=0