HARVARD PROFESSOR: What JCPenney And Facebook Have To Change If They Want To Be Like Apple

Cynthia Montgomery, Harvard Business SchoolCynthia Montgomery teaches strategy at Harvard Business School

Photo: Cynthia Montgomery / Harvard

One of the biggest threats to companies like JCPenney and Facebook is that they don’t have viable business models, according to Cynthia Montgomery, a strategy professor at Harvard Business School.Montgomery has worked with dozens of leaders — from Global 1000 executives to startup CEOs — on how to create successful long-term strategies, and compiled her insights into a new book, The Strategist: Be The Leader Your Business Needs.

We recently spoke with Montgomery about her book, and the biggest challenges executives face today.

We’ve highlighted the most interesting parts our conversation below, edited for clarity and brevity:

In your book you say leaders need to be strategists — but isn’t every CEO focused on strategy?
In word and theory, yes, but it’s not a role they identify with deeply enough. I’ve asked thousands of managers to name three words they associate with the word “strategy,” and they all come up with terms like “long-term competitive advantage” or “plan.” But no one has ever said strategist. Only a handful have said anything that has to do with leadership.

Leaders need to understand that the very most important thing you can do for a company is make good decisions about the value the company brings to the market. I ask senior leaders fundamental things — namely, “Does your company matter?” They understand it’s a legitimate question, and it gets them thinking more deeply.

Is there still a place for consultancies like BCG and McKinsey?
Yes, but it’s a supportive role. The problem is that people come in to analyse an industry, and make it a detached analytical exercise, divorced from the person who bears responsibility.

Consulting firms like BCG and McKinsey are great on the analytical side of strategy, and they can be very useful advisers. But there’s a lot more involved in leading strategy, and leaders and organisations have to embrace it more wholeheartedly. In vibrant companies, strategy is the animating force; it drives everything else. It needs to be championed; it needs to be executed well; and it needs to be owned by those who have responsibility to carry it out. Strategy has come to be associated with a “once-a-year” analytical exercise, but things inside and outside most firms change too often for that model. Strategy has to be thought of as something open, something evolving — not something that is solved and settled. It needs continual, not periodic, attention.

What companies have the most successful strategies?
I’ve been teaching for years about how Gucci, Ryan Air and Nike decided what they’re bringing to the market.

And look at Apple. Back in the 1990s, the company was completely irrelevant. The Apple strategy was about insanely great products. But the market didn’t want that. The company was becoming increasingly irrelevant as time went on —and Jobs over at his startup NeXT was trying to do the same thing. When Jobs returned to Apple in 1996, the company was nearly bankrupt.

So even great visionaries like Steve Jobs had to learn how to strategize?
Jobs learned through failure. Fortune called him a snakeoil salesman. He was trying to sell you on his grand vision. He didn’t have a business model that really worked.

At NeXT Jobs enacted a strategy that was much like Apple’s, and he had tight control over every aspect of the company — from the plant, to the offices, to the logo, to the beautiful sleek NeXT computer. The target audience for the NeXT computer was the educational market, but its price — about $10,000 with some standard add-ons — was outrageously high for students who were very price sensitive and cared about compatibility with other computers and the availability of application software. Compared to NeXT’s nearly $10,000 price tag, Windows-based alternatives were selling for around $1,500.

When Jobs returned to Apple he launched a major new strategy — the so-called digital hub strategy where Apple would use the personal computer as a “hub” to enhance the value of a host of other digital devices — from MP3 players, to cell phones, to digital cameras. The digital hub strategy worked really well for the company: it took them out of the dog-eat-dog PC industry that was very price competitive and into more attractive consumer markets. It opened the door for lots of product innovations that consumers valued highly and were willing to pay premium prices to get. And the execution of the strategy under Tim Cook was efficient — including the outsourcing of production — and Apple’s retail stores allowed Apple to reach consumers directly, versus having to rely on retailers to convey its magic. Many of the elements of the new strategy can be traced to Apple’s old strategy, but there were important differences.

Everyone’s talking about former Apple retail guru Ron Johnson. What’s going on with JCPenney?
We all knew this was going to be really tough. I would have bet on that guy because of what he had done at Target and what he had done at Apple. But they have a different model for going to market at Apple.

When I look at the execution and whether he’s actually pulling it off, I have grave doubts. So you have Martha Stewart — everybody has Martha Stewart. Ellen [DeGeneres] is cool, but is Ellen really bringing in a real difference? If you’re trying to make these stores vibrant places people want to go — and you’re conceiving of a different way of retailing — it can’t be about price competition, it has to be about something else. They have to redefine what retailing is. How are you attracting people? With a higher-value experience? Or lower prices? I think it’s really a mixed up strategy. The model is starting to become pretty inconsistent. I see Johnson doing a lot of knee-jerk reactions. He had a very appealing inspiration, but you have to go from having an inspiration to “what would the business model look like?” That’s where he didn’t have anything new or compelling to bring. An idea is just an idea. To win you need a lot more.

If you look at something like Starbucks, it’s about a lot more than the coffee. You pay for the barista, you pay for the experience. The real challenge for Johnson at JCPenney is really diving deep into what this entertainment can be and how he can fashion a profitable business model around that.

What about Mark Zuckerberg — does he have a viable business model for Facebook?
What worries me about Facebook is, does it matter enough economically? They went out for an IPO before the model was proven. You have the insight, you have the purpose, but then you need the business model that goes from idea to value creation. That’s where Facebook is really vulnerable. I don’t see a compelling economic purpose. I hope Sheryl Sandberg has it.

Compelling answers to the existential questions about a firm’s identify and why it will matter are the most important things a leader owes a business. Over the life of a business, and even over the life of any one leader in a business, they’re questions that need to be answered, again and again and again. It’s what Ron Johnson is grappling with. What Jeff Immelt is grappling with at GE. And, arguably, what the New York Times is grappling with. Without that clarity at the core, it’s impossible to build a system of advantage that will enable a firm to do anything particularly well.

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