1.2 Know the Rules—Break Them When Necessary
If you want to win on the baseball field—or in the marketplace—you need to know the rules of the game. The rules define not just what you need to do to win—i.e., your strategy and value-added capabilities—but also your team’s composition. Rules, however, can and do change, disrupting industries and dethroning industry champions (think A&P, Compaq, and PanAm). Thus, it’s not enough to know the rules; you also need to pay attention to how they are changing. Spotting inflection points before rivals do—and responding effectively—can give you a competitive edge. Andy Grove modeled this reality, making the case for Intel to make the leap from RAM/DRAM to CPUs before the memory market crashed. Grove’s anticipation of a threat before it was widely discerned is a big reason you know the phrase “Intel Inside.”
Of course, sometimes the rules aren’t fair—a plus if they favor you, a travesty if they don’t. When you find your team disadvantaged, your job is to change the rules. This is the scenario Billy Bean, General Manager of the Oakland Athletics, faced in the early 2000s. The A’s $40 million payroll in 2001 couldn’t compete with the New York Yankees’ $115 million player budget. Not only did the Yankees beat the A’s in the divisional championship series, but they then signed the A’s Jason Giambi to a big-budget free agent contract. To compete on the field—or at least to have a chance—Bean needed to build a different type of team. He stepped away from traditional approaches to player evaluation and embraced sabermetrics—a novel statistical approach that became known as “moneyball.” His goal: Identify players that other teams undervalued. Bill Henry, the new owner of the Boston Red Sox, saw value in Bean’s approach, and offered him the Sox’ GM job. When Bean declined, Theo Epstein stepped in. Epstein levered Boston’s big payroll with sabermetrics to assemble a team that won the World Series in 2004. Epstein’s system delivered two more championships in 2007 and 2013.
Great companies do the same thing. They execute to the rules better than rivals, or they exploit opportunities to change the rules, whichever gives them the best advantage. Consider Amazon. Amazon.com—the poster child for e-commerce—launched its website in 1995 as the “Earth’s largest bookstore.” As a pure-play virtual retailer, Amazon possessed no inventory—and no bricks and mortar. It acted as a broker, linking customers to publishers. Amazon went public in 1997 and immediately began to rewrite the rules of online retailing, expanding its product line and investing in its own bricks-and-mortar fulfillment centers. By 2016, Amazon operated 383 fulfillment centers worldwide, supporting sales of $136 billion. Amazon had even begun to build out an in-house network of trucks and planes to “own” the delivery experience all the way to the customer door.
Today, Amazon sports a market capitalization of $400 billion. Amazon’s allure is its willingness to push boundaries and redefine rules. Amazon made two-day “Prime” delivery an industry standard that customers were willing to subscribe to. Amazon also enabled eager consumers and intrigued investors to envision the day when drones, predictive shipping, and checkout-free shopping will be common. The result: Amazon is forecast to reach half a trillion in sales over the next decade. More amazing, Amazon achieved this unparalleled success without ever making a meaningful profit on operations (which is the most pedestrian rule of public companies). According to the Economist, 92% of Amazon’s value is due to profits that won’t be earned until after 2020!
Amazon’s story stresses a point you need to remember. To build a winning team, you need to exploit prospects to change the competitive rules even as you execute the daylights out of existing rules. The remaining four Rs of supply chain design can help.