Leadership: Your Most Important Strategic Resource?
By Darrell Dvorak - Feb 1, 2011
One fateful day in 2001, the General Electric Corporation lost the only strategic resource it could not afford to lose. As a result, GE’s stock price steadily declined until, as of mid-February, 2010, it was 52% below its 2001 level. Billions of dollars in company value were lost primarily because GE failed to replace its most important strategic resource.
That resource was former CEO Jack Welch. He had led GE for 20 years, driving a total strategic transformation of the company and a 40-fold increase in its stock price. He retired in 2001 and was succeeded by current CEO Jeff Immelt.
There are two important lessons from GE’s experience. First, certain resources of a business are distinctively critical to achieving strategic objectives. Second, among strategic resources, the single most important for any business is its leadership.
To determine what resources are strategic, it’s necessary to understand the fundamentals of business strategy. As cogently explained by the late, great management consultant, Peter Drucker, the only purpose of a business is to create a customer, and this requires providing that customer with some value that he cannot get elsewhere. Today, this is known as having a competitive advantage, and striving for competitive advantage is the core of business strategy.
In order to develop and execute its business strategy, a firm relies on a variety of resources, also referred to as assets and capabilities. These may be tangible, such as employees, cash, technology, intellectual property, business partners, facilities and so on; and they can also be intangible, such as employee skills, operating procedures, market reputation and so on. So, among all these resources, which are strategic?
The obvious answer is that the strategic resources of a business are those that are most important to achieving competitive advantage. But of course, different resources will be important at different times and in different circumstances. For example, a patent may provide a monopoly advantage for a certain period, but eventually it expires and competitors are free to copy it. As another example, technology is critical in developing new medicines, but is not critical in developing new clothing styles. This could mean that most if not all resources are intermittently strategic and not universally strategic across every business. For this overview, we need to understand those that are universal.
I believe that a strategic resource must have two characteristics in order to be universally strategic. First, the resource must be capable of creating customers over a very long period, thus enabling the strategic goal of sustainable competitive advantage. Second, the type of resource must exist in (virtually) all businesses, regardless of industry, size, age, profitability, etc. By these standards, there are at least two such universal strategic resources.
According to Drucker, “Because its purpose is to create a customer, the business enterprise has two – and only these two – basic functions: marketing and innovation…[These functions] produce results; all the rest [of a business’s functions] are ‘costs’”. This argues for considering marketing and innovation resources to always be strategic for every type of business. But this doesn’t mean that either is a firm’s most important strategic resource. Is there an argument that either or both are the most important?
Because business operates in an age of explosive growth in the scope and importance of high tech, it is tempting to believe that technological innovation specifically may indeed be the most important strategic resource for many firms. But this view isn’t always shared among those who know a lot about technology. For example, Don Dodge is a 25-year veteran in technology who has worked for tech startups and giants, including Microsoft and Digital Equipment, and currently works for Google. Dodge recently examined the history of several tech innovations and their more successful follow-on competition. He concluded that the original technology was surpassed not because it was inferior, but because its managers had made poor decisions. So much for innovation being the most important resource.
In fact, in the world of leading-edge and bleeding-edge technology, one key group recognizes that leadership is actually a firm’s most important strategic resource. These are the venture capitalists who invest in new high-tech firms. Invariably, among their criteria for investing, the quality of the entrepreneurial management team and its leadership is considered more important than the technology. In VC lingo, this is expressed as the jockey (management team and leadership) is more important to business success than the horse (the “idea” or technology).
Since the terms “management” and “leadership” are so important, let’s define them a bit further. For Drucker, management is “the organ of leadership, direction and decision” responsible for “directing vision and resources toward greater results and contributions.” In this view, leadership can emerge from throughout the management team, but it absolutely has to come from the top management team.
In this regard, Jack Welch was a highly successful leader who had, and still has, strong views about the crucial importance of the leadership qualities of his top management team and how to help build these qualities. His success, his leadership style and his leadership philosophy has been much studied and written about. To many analysts, Welch’s most striking characteristic was his willingness to sacrifice short term performance for better leadership. If any of his top performers did not “live” the open, informal, and trust-based values essential to being a good leader, that manager was likely to be terminated. In fact, this principle was not only promoted throughout GE, it was published in one of GE’s Annual Reports for the world to see. That’s called putting a philosophical business stake in the ground.
In sum, there are a very few business resources that are consistently strategic across every business. They include resources related to marketing and innovation, the nature of which will be unique to each business. They also include management and leadership, the nature of which are more likely to be identical or highly similar across every business. For those eager to know which strategic resources are most important, my vote goes to management and leadership, because I like to associate with winners like Jack Welch.
By Darrell Dvorak - Feb 1, 2011
One fateful day in 2001, the General Electric Corporation lost the only strategic resource it could not afford to lose. As a result, GE’s stock price steadily declined until, as of mid-February, 2010, it was 52% below its 2001 level. Billions of dollars in company value were lost primarily because GE failed to replace its most important strategic resource.
That resource was former CEO Jack Welch. He had led GE for 20 years, driving a total strategic transformation of the company and a 40-fold increase in its stock price. He retired in 2001 and was succeeded by current CEO Jeff Immelt.
There are two important lessons from GE’s experience. First, certain resources of a business are distinctively critical to achieving strategic objectives. Second, among strategic resources, the single most important for any business is its leadership.
To determine what resources are strategic, it’s necessary to understand the fundamentals of business strategy. As cogently explained by the late, great management consultant, Peter Drucker, the only purpose of a business is to create a customer, and this requires providing that customer with some value that he cannot get elsewhere. Today, this is known as having a competitive advantage, and striving for competitive advantage is the core of business strategy.
In order to develop and execute its business strategy, a firm relies on a variety of resources, also referred to as assets and capabilities. These may be tangible, such as employees, cash, technology, intellectual property, business partners, facilities and so on; and they can also be intangible, such as employee skills, operating procedures, market reputation and so on. So, among all these resources, which are strategic?
The obvious answer is that the strategic resources of a business are those that are most important to achieving competitive advantage. But of course, different resources will be important at different times and in different circumstances. For example, a patent may provide a monopoly advantage for a certain period, but eventually it expires and competitors are free to copy it. As another example, technology is critical in developing new medicines, but is not critical in developing new clothing styles. This could mean that most if not all resources are intermittently strategic and not universally strategic across every business. For this overview, we need to understand those that are universal.
I believe that a strategic resource must have two characteristics in order to be universally strategic. First, the resource must be capable of creating customers over a very long period, thus enabling the strategic goal of sustainable competitive advantage. Second, the type of resource must exist in (virtually) all businesses, regardless of industry, size, age, profitability, etc. By these standards, there are at least two such universal strategic resources.
According to Drucker, “Because its purpose is to create a customer, the business enterprise has two – and only these two – basic functions: marketing and innovation…[These functions] produce results; all the rest [of a business’s functions] are ‘costs’”. This argues for considering marketing and innovation resources to always be strategic for every type of business. But this doesn’t mean that either is a firm’s most important strategic resource. Is there an argument that either or both are the most important?
Because business operates in an age of explosive growth in the scope and importance of high tech, it is tempting to believe that technological innovation specifically may indeed be the most important strategic resource for many firms. But this view isn’t always shared among those who know a lot about technology. For example, Don Dodge is a 25-year veteran in technology who has worked for tech startups and giants, including Microsoft and Digital Equipment, and currently works for Google. Dodge recently examined the history of several tech innovations and their more successful follow-on competition. He concluded that the original technology was surpassed not because it was inferior, but because its managers had made poor decisions. So much for innovation being the most important resource.
In fact, in the world of leading-edge and bleeding-edge technology, one key group recognizes that leadership is actually a firm’s most important strategic resource. These are the venture capitalists who invest in new high-tech firms. Invariably, among their criteria for investing, the quality of the entrepreneurial management team and its leadership is considered more important than the technology. In VC lingo, this is expressed as the jockey (management team and leadership) is more important to business success than the horse (the “idea” or technology).
Since the terms “management” and “leadership” are so important, let’s define them a bit further. For Drucker, management is “the organ of leadership, direction and decision” responsible for “directing vision and resources toward greater results and contributions.” In this view, leadership can emerge from throughout the management team, but it absolutely has to come from the top management team.
In this regard, Jack Welch was a highly successful leader who had, and still has, strong views about the crucial importance of the leadership qualities of his top management team and how to help build these qualities. His success, his leadership style and his leadership philosophy has been much studied and written about. To many analysts, Welch’s most striking characteristic was his willingness to sacrifice short term performance for better leadership. If any of his top performers did not “live” the open, informal, and trust-based values essential to being a good leader, that manager was likely to be terminated. In fact, this principle was not only promoted throughout GE, it was published in one of GE’s Annual Reports for the world to see. That’s called putting a philosophical business stake in the ground.
In sum, there are a very few business resources that are consistently strategic across every business. They include resources related to marketing and innovation, the nature of which will be unique to each business. They also include management and leadership, the nature of which are more likely to be identical or highly similar across every business. For those eager to know which strategic resources are most important, my vote goes to management and leadership, because I like to associate with winners like Jack Welch.