Rivalry among furniture firms is intense, as shown by the high number of firms making similar furniture and by the ability of firms to copy innovations made by competitors.

Suppliers to the furniture industry, such as textile makers, dominate the vendor relationship because no furniture company buys enough textiles to be an important customer.

Customers in the industry are powerful because furniture purchases are highly postponable, products are long-lived and commodity-like, and customers are not brand sensitive.

Entry barriers are low, meaning that new firms can flood in and pull down prices if industry conditions ever become more attractive. On the other hand, the industry can be difficult to exit, especially for the many family firms that have few alternative options, making excess capacity slow to leave the industry.

Substitute products abound. New furniture must compete for the customer’s dollar with countless alternatives—including used furniture or hand-me-down furniture passed from user to user. Since many customers consider furniture a discretionary purchase, it must also compete with a plethora of products such as televisions and sound systems that customers are more excited about and consider to be a better value for their discretionary dollars. Even when furniture prices lagged increases in the consumer price index, sales did not respond.

How do you react to the existence of these forces?

It isn’t a happy lesson for many executives I teach. It seems to say, “Your prospects are predetermined—the game is up—or, if not up, a big chunk of it is out of your control.” Action-oriented executives, I find, prefer not to think of themselves as in the grip of outside forces. They prefer to believe in free will, not determinism. The possibility that their industries might drive or heavily influence their own performance isn’t near the top of their minds. As proactive leaders and believers in the power of management, they tend to focus on what they can control, while ignoring or underestimating what they cannot.

REJECTING THE MYTH

Ironically, the most successful and admired leaders, the titans of business, understand the profound significance of competitive forces outside their control. They know the crucial importance of picking the right playing field. They don’t buy the management myth that a truly good manager can prevail regardless of the circumstances.

Look at Jack Welch, Fortune magazine’s “Manager of the Century.” You probably don’t remember that when he took over General Electric, Welch sold off more than 200 businesses worth more than $11 billion and used that money to make more than 370 acquisitions. Why? He wanted out of industries where conditions were too negative, where he thought it would be too hard for GE to flourish. “I didn’t like the semiconductor business,” he said. “I thought it was too cyclical and it required too much capital. There were some very big players in it and only one or two were making any money on a sustained basis…. [Exiting that business] allowed us to put our money into things like medical equipment, power generation, all kinds of industries where we changed the game….”8

A comment from the Sage of Omaha himself, Warren Buffett, caps the point:

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.9

Buffett and Welch, two of the strongest managers on record, recognize that industry matters a lot. They understand that a significant measure of a firm’s success depends on competitive forces beyond a manager’s control, and they use that knowledge to their own advantage—by picking playing fields where they can win and, within those fields, carefully positioning their businesses to work with, not against, the forces.

BUT WHAT ABOUT …?

Despite such counsel, the myth of the super-manager lives on for many executives. It’s reinforced in practice just often enough to give it credence. Sometimes, even in the toughest lines of business, there is a plan that works. Individual firms on occasion have not only achieved great success in industries where most others have failed, but they’ve even changed the basic competitive context of the industries.

Such stories receive inordinate attention in business books and media, and executives are always quick to bring them up: Starbucks’s revolution in the coffee house business. Southwest’s triumphs in discount airlines. Cirque du Soleil’s reinvention of the circus business. Even Masco’s coup in faucets. Yes, it does happen.

But none of these strategies appeared out of the blue from the unfettered minds of super-managers. They came from a deep comprehension of the industries involved and the conditions at work in them. The founders of Southwest discovered a way to exploit a hole in the fare and route structures of established competitors. Starbucks succeeded not simply by brewing better coffee and creating an attractive coffee house experience, but by gaining scale and building the unique corporate skills needed to replicate that experience not tens or hundreds but thousands of times.

The founders of Cirque du Soleil, performers themselves, understood the essence of the traditional circus—that it was focused on children and that its economics were badly strained by the expense of transporting and caring for large, wild animals. By focusing on an adult audience, which let them drop many of the animal acts, they skillfully positioned themselves to avoid one of the industry’s greatest drains on profits while targeting customers with the highest willingness to pay.10 That’s not a cavalier disregard for industry forces: It’s surgical precision.

Look, too, at Warren Buffett’s portfolio. Most people don’t know he’s made significant investments in furniture. Like Masco, he also saw potential in the industry. But Buffett chose to invest in furniture retailing, not manufacturing, and bought several successful furniture sellers around the United States. He seems to be experimenting to see if these downstream retailers can benefit from the intensely competitive conditions upstream in furniture manufacturing—the very conditions that brought down Masco, Mengel, and all the others. In the long run, these may not turn out to be Buffett’s most brilliant ventures, but they reveal a real strategist playing his cards carefully with a deep appreciation of the forces at work in the industry.

No one can say that the decision to enter or remain in a tough industry is right or wrong on the face of it. Remaking a difficult business, as Masco set out to do, isn’t easy, but as we’ve seen, it can and has been done. When it works, though, it’s always a two-sided affair: It involves an industry, or part of an industry, that can be changed and a firm with a viable way to do so.

THE MISSING INFORMATION

What does all this tell you about Masco and its failed furniture venture?

For the full answer, we must look more closely at Masco’s actions and at how most of my students—people much like you, I suspect—saw only the upside potential of the opportunity.

After a class has voted for Masco to enter furniture manufacturing (and they always do), I ask the strongest proponents of the move how the firm should proceed. What specific actions should Masco’s managers take that will cause it to perform above the average in its new line of business?

Alongside the bold decision to enter, the proponents’ plans usually look surprisingly lackluster. Nearly all of them start with “Masco should acquire …” and go on to add some grand but vague statements about rationalizing production, improving efficiency, leveraging the company’s professional management, using “power marketing,” and so on. When I want to know what the company would do differently, how “professional management” would work here, or what would set the firm apart from others, the answers get progressively vague and superficial. They haven’t thought about all that.

What becomes clear is that their arguments are propelled by an enthusiasm for the company itself, for what it’s achieved in the past, and for the storehouse of capabilities it could bring to a new venture. What is missing is a specific plan that shows why all of that will matter in this industry, and how it will neutralize the long-lived forces that have broken so many other firms.

These discussions always remind me of how French generals after World War I responded to the fact that, in the previous half century, Germany had twice defeated French armies. The generals took a number of steps, including construction of the now-infamous Maginot Line, but a key reason, they said, that France would not be defeated again was the élan vital of the French soldier. Élan vital means “vital spirit” and the gist of French thinking was that the superior determination or attitude of the French army would defeat whatever the Germans threw at it. Of course, we know how well that worked. It was the military equivalent of the myth of the super-manager.

Masco’s vital spirit wasn’t enough, either. Its leaders hoped its superior management and manufacturing skills would lead it to victory on a new front, and that the same strategy that had brought it great success in faucets would do the same in furniture. But, while similar in some ways, the two industries were different in other ways that Masco either failed to notice or appreciate.

Masco’s purchases of furniture companies at three price points—low, middle, and high—reflected its belief that significant scope economies, or savings that come from producing a wide range of products, were possible in furniture. That approach had worked in faucets, where a range of products could be made in the same factory, sold through the same channels, installed by the same plumber, and often bought by the same customer for use in different locations in a house. In furniture, however, manufacturing, distribution, retailing, and customers differ dramatically from the top end of the market to the bottom, making scope economies much more difficult to achieve. Discount furniture is mass-produced and mass-marketed, while expensive furniture is largely handmade and distributed through specialty retail shops. Few customers buy furniture at both ends of the price and quality spectrum, and the products are almost never found at the same retailer.

Similarly, scale economies were difficult to come by in furniture. Even after it purchased its way to market leadership, Masco held only a paltry 7 percent of the market, compared with its 30 percent in faucets. Seven percent was unlikely to confer much, if any, economic advantage, particularly when spread across so many styles, so many manufacturing plants, so many channels, and so many price points.

Like other furniture manufacturers, Masco’s fortunes were hindered by the industry’s extreme product variety, high shipping costs, and cyclicality, which in combination make it extraordinarily difficult to manage a supply chain efficiently, or profitably substitute capital equipment for labor. Without a compelling way to address these issues, a manufacturer will always be at their mercy.

Above all, Masco failed to learn the biggest lesson of its success in faucets. Its one-handle and washerless products gave it unique advantages that addressed important customer needs. Everything else it did in that industry flowed from those key differences. In a market where functionality was crucial, Masco had a demonstrable product edge. In furniture, an industry ruled more by fashion than function, Masco had no such core advantage, nothing that was strong enough to counter the gravitational pull of the industry’s unattractive competitive forces.

Like those French generals, Masco failed to access its own battle readiness. It placed unwarranted faith in its superior management élan vital and underestimated the forces it was up against. One executive used a different but similar metaphor to describe what the company did: “Masco walked into a lion’s den and was unprepared to meet a lion.”

THE STRATEGIST IN REMORSE

Richard Manoogian, CEO-strategist and son of the company’s founder, took the outcome hard. At stake wasn’t merely a company he ran but the legacy his father had created and passed on to him. Father and son had strung together thirty-one years of consistently superior performance and created a superb reputation on Wall Street. All of that went up in smoke. In a story titled, “The Masco Fiasco,” Financial World observed: “The Masco Corp. was once one of America’s most admired companies; not anymore.” Though Manoogian promised to return the company to “its past glory,” he would have to regain the trust of his shareholders, many of whom felt “stuck in a nine-year nightmare of broken promises.”11

It was a case of the overconfident strategist. Along with many other companies that tried to crack the furniture industry, Masco believed a disorganized, competitive, low-profit business offered easy prospects for a disciplined, well-managed company. By some process of optimistic thinking, superficial analysis, and misplaced analogy, serious industry problems began to look like golden opportunities.

The same hopeful thinking reappears every time I teach the Masco case. In their initial analysis of the furniture business, my students—all seasoned executives—duly note how unattractive it is. Yet when the time comes to decide what Masco should do, they prefer to interpret every problem as an opportunity (an “insurmountable opportunity,” as some wag once said). Chaos, cyclicality, fragmentation? Great! No dominant player and low brand recognition? Wonderful! A difficult-to-manage supply chain with large, expensive items, and huge variety? Terrific! Seemingly, there was nothing Masco’s resources and prowess could not overcome or turn to their advantage. It is the myth of the super-manager in full force.

I suspect Masco fell into the same trap. In the face of deeply ingrained, long-lived industry problems, its leaders succumbed to a costly bout of irrational faith in the power of superior management.

THE POWER OF REALISM

Do the lessons of Masco resonate with you?

More than twenty years after the Masco fiasco, my students repeatedly approach me to say, “My industry is just like the furniture business! I’m working really hard and getting nowhere.” For them it’s a eureka moment. The issues they’ve been battling suddenly come into focus, and they understand the larger reasons for their struggles.

They, like Welch, Buffett, and other astute business leaders, grasp the lesson of the industry effect and its profound implications for firm performance. They recognize that, as in the famous serenity prayer, you must accept the things you cannot change, have the courage to change the things you can, and the wisdom to know the difference. It’s a lesson great strategists understand well, but it’s not an easy lesson to accept and master. The myth of the super-manager is hard to let go.

The fundamental lessons here are simple but of paramount importance for the strategist.

First, you must understand the competitive forces in your industry. How you respond to them is your strategy. That means if you don’t understand them, your strategy is based on luck and hope.

Second, even if you understand your industry’s competitive forces, you must find a way to deal with them that is up to the challenge. That may mean skillful positioning, deliberate efforts to counter negative forces or exploit favorable ones, or even a timely exit. But don’t be trapped by the myth into believing that your superior management skills will carry you to success.

Third, whatever you do, don’t underestimate the power of these forces. Their impact on the destiny of your business may well be as great as your own.

The story you will write as a strategist will be set against the backdrop of your industry. It must be true to its realities, while having a difference that’s all its own. It’s to the second of these challenges that we now turn.

BEGIN WITH PURPOSE

WE’VE LEARNED SOME painful lessons about the challenges that confront strategists in the face of unattractive industry forces. With this chapter, I begin mapping the path out of the wilderness: specifically, explaining how some astute strategists have managed to distinguish their businesses even in the face of such headwinds.

The journey starts with an individual: Ingvar Kamprad, the founder of IKEA who by all accounts built one of the world’s greatest fortunes. Like Richard Manoogian of Masco, Kamprad was in the furniture business, but his story couldn’t be more different. In 2010, his privately held company, which he started in 1943 at the age of seventeen, had sales of 23.1 billion euro, net profits of 2.5 billion euro, and gross margins of 46 percent.

And the numbers don’t even begin to capture IKEA’s powerful hold on consumers. As BusinessWeek put it, “Perhaps more than any other company in the world, IKEA has become a curator of people’s lifestyles, if not their lives. IKEA World [is] a state of mind that revolves around contemporary design, low prices, wacky promotions, and an enthusiasm that few institutions in or out of business can muster.”1

How did Kamprad succeed where Manoogian failed? He built his company by creating what I like to call a difference that matters. (The full meaning of this phrase will become clear as the story unfolds.) He did so, not by ignoring industry forces, as Manoogian did, but by creating a company that could thrive and add value in the midst of them.

If you’re one of the millions who have shopped at IKEA, you’ll likely have indelible memories of vast, bright, modern stores designed so that entering customers follow a winding path through a huge building filled with furnishings and a great miscellany of housewares. When you chose a piece of furniture—a simple Micke desk for 69 euro, or a ten-person Norden dining table for 269 euro—you noted the information on an order slip, continued on the path to a warehouse-like room, wrestled a flat box containing the item onto your shopping trolley, carted it home on the rooftop of your car, and assembled it yourself. If you brought the kids, you may have parked them in the on-site child care center; you may also have stopped at the restaurant to sample tasty and inexpensive food ranging from salmon to Swedish meatballs and lingonberry tarts. It’s almost a theme park: probably not a customer experience you’d relish if you’ve made your fortune, but when you were starting out, there was nothing that could match it.

RURAL ROOTS

One could say that Ingvar Kamprad was a natural-born entrepreneur. “Trading was in my blood” he told his biographer, Bertil Torekull.2 Kamprad was about five when his aunt helped him buy a hundred boxes of matches from a store in Stockholm that he then sold individually at a profit in his rural hometown of Agunnaryd, deep in the farmland of Smaland. Soon he was selling all sorts of merchandise: Christmas cards, wall hangings, lingonberries (he picked them himself), fish (which he caught), and more. At eleven, he made enough money to buy a bicycle and typewriter. “From that time on,” he recounted, “selling things became something of an obsession.”3

Before going to the School of Commerce in Gothenburg, Kamprad signed the paperwork to start his own trading firm, IKEA Agunnaryd [I for Ingvar, K for Kamprad, E for the family farm Elmtaryd, and A for Agunnaryd]. The mail-order business grew to include everything from fountain pens and picture frames to watches and jewelry. With a keen eye for value, Kamprad ferreted out the lowest-cost sources. Frugality was the norm in Smaland. Its farmers, eking their living from a harsh and spare environment, had to make every penny count.

Noticing that his toughest competitor in the catalog business sold furniture, Kamprad decided to add some to his offerings, supplied by small local furniture makers. Furniture quickly became the biggest part of his business; in the postwar boom, Swedes were buying a lot of it. In 1951, at age twenty-five, he dropped all his other products to focus exclusively on furniture.

Almost immediately he found himself in a crisis. Growing competition from other mail-order firms led to a price war. Across the industry, quality dropped as merchants and manufacturers cut costs. Complaints started to mount. “The mail order trade was risking an increasingly bad reputation,” Kamprad said.4 He didn’t want to join the race to the bottom, but how could he persuade customers that his goods were sound when they had only catalog descriptions to rely on? His answer: create a showroom where customers could see the merchandise firsthand. In 1953 he opened one in an old two-story building. The furniture was on the ground floor; upstairs were free coffee and buns. Over a thousand people came to the village for the opening, and a gratifying number wrote out orders. By 1955, IKEA was sending out a half a million catalogs and had sales of 6 million krona.

Kamprad understood his customers on a personal level. As he would later say, in explaining IKEA’s philosophy, “Since IKEA turns to the many people who as a rule have small resources, the company must be not just cheap, nor just cheaper—but very much cheaper … the goods must be such that ordinary people can easily and quickly identify the lowness of the price.”5

By following this philosophy, Kamprad became a force to contend with in the Swedish furniture industry—and, not liking his low prices, the industry struck back. Sweden’s National Association of Furniture Dealers began pressuring suppliers to boycott him and, with the support of the Stockholm Chamber of Commerce, banned him from trade fairs. Many of the suppliers stopped selling to him, and those that continued to do business with IKEA resorted to cloak-and-dagger maneuvers: sending goods to fictitious addresses, delivering in unmarked vans, and changing the design of products sold to IKEA so they wouldn’t be recognized. Soon Kamprad was suffering the humiliation of not being able to deliver on orders.

He counterattacked on several fronts—for example, he began paying suppliers within ten days, as opposed to the standard industry practice of three or four months, and he started a flock of little companies to act as intermediaries. These moves helped, but IKEA was growing rapidly and supplies were short. Without a reliable source of supply, Kamprad feared his business would be doomed.

Having heard that Poland’s communist government was hungry for economic development, Kamprad began scouring the Polish countryside. He found many eager and willing small manufacturers laboring in the shadow of the bureaucracy. Their plants were antiquated and the quality of their products was dreadful, so Kamprad located better-quality (though used) machinery in Sweden. He and his staff moved the machinery to Poland and installed it, working hand in hand with the manufacturers to raise productivity and quality. The furniture they turned out ended up costing about half as much as Swedish-made equivalents and Kamprad was able to nail down his costs on a huge new scale.

Thus the boycott turned out to be what I call an “inciting incident,” to borrow a phrase from screenwriter Robert McKee—an event that propelled a critical strategic shift.6 “New problems created a dizzying chance,” Kamprad said. “When we were not allowed to buy the same furniture others were, we were forced to design our own, and that came to provide us with a style of our own, a design of our own. And from the necessity to secure our own deliveries, a chance arose that in its turn opened up a whole new world to us.”7

To Kamprad, it wasn’t enough to simply source in developing countries. He also brought extraordinary determination and imagination to his drive for lower costs. For example, he wasn’t afraid to draw on unconventional sources. He turned the job of making a particular table over to a ski manufacturer, who could deliver it at an especially low price. He bought headboards from a door factory, and wire-framed sofas and tables from a maker of shopping carts. IKEA was also a pioneer in building “board-on-frame furniture,” comprised of finished wood on a particleboard core, which is both cheaper and lighter than solid wood.

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