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Breakthrough
How Great Companies Set Outrageous Objectivesand Achieve Them

Bill Davidson
2004 Bill Davidson Adapted by permission of John Wiley & Sons, Inc. ISBN: 0-471-45440-0

Reviewed by Leslie Johnston

Introduction
Author Bill Davidson, a former USC management professor, and now a management and corporate leadership consultant, bases his 2004 book, Breakthrough on classic examples of high-profile, turnaround businesses such as IBM, Caterpillar, and American Standard. These companies illustrate successful breakthroughs. No matter how strong the performance, all corporate success cycles do, eventually, endunless a companys leadership has the foresight to plan for further innovation. The breakthrough principleand its potential for either success or failureis, surprisingly, not based on a companys size, resources, market position, or age. The secret that breakthrough companies share is the determined pursuit of what Davidson describes as outrageous objectives. Because most firms go through a success cycle only once, it can be to a companys advantage to look at other organizations for lessons that will make an inevitable process more efficient and more effective.
Business Book Review Vol. 21, No. 5 Copyright 2004 Business Book Review, LLC All Rights Reserved

Volume 21, Number 5 Copyright 2004 Business Book Review, LLC All Rights Reserved

Breakthrough

Bill Davidson

MANAGEMENT CAN HAVE ITS CAKE, AND EAT IT TOO

Breakthrough is, according to Davidson, an innovation that triggers superior performance and provides the transition from one success cycle to the next. It is a bridge to higher market positions, in terms of value share and market share. It is innovation that has to occur on an enterprisescale, significant enough to shape an emerging company, or to re-invent and redefine an established player. The result is a completely new business model that exhibits, according to Davidson, superior operating and The lofty positions of market and sector champions mark the profit performance, leading to both a peak of the success cycle. These orbits, once achieved, are new corporate profile and a new market not sustainable without further rocket thrusts. position for the breakthrough company. Although breakthrough can occur anywhere within an segment had triggered a series of forces that would reshape industrys structure, from start-up to market leader, the much of the insurance sector. Progressives innovative most common place for a company to break through is response to invasion by a larger inner-circle competitor at the entry point to the market. provides a classic example of the breakout niche strategy. An alternative to using breakthrough as a bridge to A number of the most successful insurgents in our research higher market positions is to use it to establish a company sample are breakout niche playersestablished, secondary in the position of niche master: to focus on securing competitors who use innovation and industry experience and defending a specialized success zone in which the to seize market leadership. company can compete successfully, thereby avoiding headWithin a market or industry, breakthrough innovations to-head competition with the larger primary players in an must fundamentally alter customer service standards, cost industry. A niche market master supplies a distinct market positions, cycle times, and value propositions. In doing need, and serves a distinct customer set with a distinct so, they lead to differentiated, disruptive offerings that supply and value chain. A number of companies, however, shatter the competitive equilibrium, creating space for the have also used breakthrough to make the niche switch. breakthrough company. To accomplish this, breakthrough Progressive Insurance, for example, which was the niche innovations must come from large-scale, long-term initiatives that make use of advanced technologies and radical process innovations to achieve leapsnot just About the Author advancesin operating performance, financial results, Bill Davidson was a tenured professor and market position. It is the nature of breakthrough of management at the Marshall School innovations that often results in multi-dimensional of Business at the University of Southern competitive advantagescost leadership, superior California from 1985 to 1998. He is the customer service, and increased market and value share. author of several other books on manageCountrywide Credit, for example, in its breakthrough in ment, including The Amazing Race and 2020 the home loan market became a cost leader by reducing the Vision (with Stan Davis), which was selected average transaction cost to $748, from an industry average as Best Business Book of the Year by Fortune of $2,357. It became a service leader by achieving dramatic magazine in 1992. He is currently chairman improvements in customer service, and by reducing loan of MESA Research, a strategy and leadership approval cycle times by 90 percent or more. It became a services group. product leader, as well, by adding product enhancements, For more information, please visit: such as the ability to lock in interest rates at any point in www.mesaresearchgroup.com the cycle. Improvements in quality, service, and product
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leader in substandard (high risk) auto insurance coverage, not only successfully defended a foray by Allstate, a strong number two inner-circle competitor in the standard auto insurance market, into its niche, but subsequently, as a result of employing a breakthrough strategy, turned the tables on Allstate by breaking out of its niche and storming into the standard auto insurance market. Many of the most spectacular examples of breakthrough innovation and subsequent success cycles originate in the niche master zone, says Davidson. Allstates foray into Progressives

Breakthrough

Bill Davidson

features, according to Davidson, offer superior value to the customers while cost and cycle time reductions drive improved margins. Market leadership comes to firms who can achieve these kinds of breakthroughs. The first step is to focus on a breakthrough strategy. Reality tends to favor new entrants, says Davidson, yet agile incumbents can seize sources of innovation . . . by thinking about their business from the perspective of a new entrant. First and foremost, breakthrough strategies focus on outrageous goals, goals that force companies to consider alternative processes and technology platforms. Breakthrough companies are early adopters of new technology, and are often involved in the developmental stage of new technologies, though they typically, according to Davidson, do not invest more than

developed at a cost of $30 million, paid for itself in less than two years because it did, in fact, streamline the claims process so well, and then served as a springboard for nextgeneration services for Progressive. Finally, breakthrough strategies drive increased benefits to all stakeholder groupsat the same time. To make these breakthrough innovations possible, an enterprise principle that both underlies and connects a strategic mindset and a leadership philosophy has to be at work. For large-scale initiatives to be implemented across an entire company, there must be a commitment to a single, integrated plan, or strategy, which is focused on innovation and outrageous objectives. Breakthroughs cannot be achieved in business environments where entrepreneurship, independence, autonomy, and decentralization are the defining core concepts of the company. This Progressive Insurance provides customer service that is was the task before Lou Gerstner when he profoundly superior to its peers while cutting the cost of auto took over IBM in 1993: he had to change repair at the same time. USAAs customer satisfaction and the companys strategic direction, business loyalty levels are the envy of its industry, as are its costs. model, culture, and management mindset. Gerstner approached the company from the average company; they concentrate their investments the customers standpoint, and he focused on integrating on leading-edge solutions that support a focused strategy. business units rather than dismembering them, as many In addition, they focus on great leaps forward, rather than IBMers advocated when Gerstner took over the company. on incremental improvements. Breakthroughs focus on He created a Strategic Leadership Council, in which senior creating tomorrows processes, not on improving todays. leaders met to develop, and then execute, a core strategy Breakthrough companies emphasize customer care over for the company, a strategy that would focus on solutions cost reduction, and they make creative use of their human and services. IBMs mainframe mindset had to change resources by providing the flexibility to fundamentally to a solutions-and-service centered approach. By 1995, redefine job descriptions and roles to make the best use IBM was reinforcing its integrated business model with of employees talents and skills. Breakthrough strategies innovations built around the power and reach of the Internet. create new business growth opportunities as a result of By 2000, Old Blue was once again Big Blue by virtue the technologies and processes the company develops. of being Breakthrough Blue. Progressive Insurance, for example, with its original innovation in claims settlement methods, not only repositioned itself in the market, it also dramatically redefined the auto insurance industry. It is Davidsons philosophy that breakthroughs smash traditional trade-off logic by offering radical gains in multiple dimensions in operating performance. Pursuing operating excellence in existing core areas leads, he predicts, to growth in new areas. And, the investment in infrastructure is paid back quickly from immediate operating gains, which then provides free platforms for new business development. Progressive Insurances investment in the automated claims management system (PACMAN),
IS YOUR COMPANY A CANDIDATE FOR BREAKTHROUGH?

A thorough knowledge of your companyits resources, current profile, core competencies, and core identityas well as knowledge of the external environment in which your company operates, are essential considerations before launching breakthrough strategy planning. Firms that have a decentralized management structure are poor candidates for breakthrough strategies, says Davidson. Key factors in pursuing a breakthrough strategy are the capacity to focus on a single, core strategy for three to five years, or longer, along with continuity in senior leadership. The
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Breakthrough

Bill Davidson

fundamental question is who has the insight and gumption says, Davidson, Dells breakthrough was more than just to shape and launch a breakthrough strategy in any market a sales channel innovation. Dell was the first to embrace and the persistence to stay focused as a team to execute mass customization of PCs. Dell was the first company to it. perfect a now-generic breakthrough strategy that combines Breakthrough strategies are not for all companies. mass customization; customer-specific product design; Competitive considerations are extremely important. just-in-time supply chain solutions; and rapid, remote Companies considering initiating breakthrough strategies fulfillment and service. The result was typical of successful must consider the core competitive positions, roles, breakthroughsrapid sales growth and rising margins. structures, and dynamics, beginning with the role played Struggles often arise between insurgent companies by the market leader vis--vis a particular companys (new entrants) and incumbents for market leadership. position, as well as trend lines for Few firms enjoy the luxury of being able to choose a mainteother competitors. In addition, it is nance strategy. In most settings, market trends will erode the also important to understand market effectiveness of even the most successful strategy foundations scope and boundaries. Is a business its sooner rather than later. own universe, or is it part of a larger market structure? Precise market definition depends To win these struggles, insurgent companies must have upon three factors: supply side differentiation, demand a breakthrough strategy that delivers results in the side differentiation, and competitive strategies. Focused marketplace. Incumbents, on the other hand, can innovate pursuit of a narrow market becomes hazardous, Davidson as well. Established market leaders can make the leap to says, if the market in question will be subsumed into a next-generation business models, reshaping themselves and broader business model. Understanding the dynamics their markets in the process, says Davidson. of globalization and shifts in market boundaries are also MARKET LEADERS ARE NOT ALWAYS AGILE essential to planning strategy.
INCUMBENTS THE PROCESS UNDERTAKEN

Once an organization determines that an outrageous goal or objective is appropriate for growth, for renewal, or for continued existence, planning a breakthrough strategy is the next step. Whatever the goal, says Davidson, profile initiatives and operating performance provide the key engines for reaching it. Gains in competitive position and financial results come from these two key drivers. Radical innovation in operating performanceprocess innovationsappears to be the single best driver of breakthroughs, according to Davidson. Toyota, for example, achieved great success with the introduction of Lexusa profile innovationthat allowed Toyota to expand the companys profile by entering the upscale, luxury auto market. However, the success of that breakthrough was due to Toyotas manufacturing system, including its Just-in-Time (JIT) inventory. Dell Computer is another powerful example of how innovations in operating performance carried what was once a marginal competitor to worldwide market leadership in PC sales. Breakthrough for Dell came in 1995 when founder Michael Dell focused his companys sales on the Internet. But,

However, many incumbents find themselves unable to keep pace with the changes that will inevitably take place in their market. For Davidson, the source of paralysis for market leaders is, generally, allowing existing processes and practices to become so deeply embedded that they limit the companys ability to adapt to newer, more effective models. This trend includes the inability to embrace new information systems technology. In addition, says Davidson, dedication to existing channels of distribution can also create resistance to innovation. To successfully innovate, an industry incumbent . . . must abandon its commitment to legacy channels, processes, practices, products, technologies, business models, and mindsets. Incumbents often have a choice to make: continue with a market model and profit generator that will eventually become pass (while slowly allowing market share to go to insurgent companies), or convert to the new order of business in the industry. The challenge for incumbents is to abandon their comfort zones, and their obsession with day-to-day operations and short-term financial results, and move into the new order of business. There is an interesting psychological underpinning to executives reluctance in
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Business Book Review Vol. 21, No. 5 Copyright 2004 Business Book Review, LLC All Rights Reserved

Breakthrough

Bill Davidson

moving forward with innovationa fear that the very practices and success strategies that built a companys success will in turn render it obsolete or relegate it to the role of a less powerful entity. It may, in fact, take a crisis to shake leaders out of their complacency. Market leaders who are agile incumbents must remain on the offensive against insurgent competitors. Market leaders must develop a mindset that is quick to embrace, and to introduce, innovations, and go even further by setting the vision and direction for change and innovation in the industry. They must always take the high road to ensure industry peace and prosperity, define the industrys borders and establish relationships with related industries. They must do all in their power to increase generic demand for the product or service. They must also look to the future, Davidson says, by continuously modernizing

provide implementation structure and resources, and manage execution in a focused and systematic manner. Davidson highlights one variation of this process. Occasionally, he says, breakthrough strategies emerge after an innovation has occurred. At that time, leadership can seize on a broader strategic potential that has resulted from the innovation to renew the companys business model and subsequently move toward more ambitious goals. This Davidson calls leveraging a discrete innovation into a broader breakthrough in profile, market position, and financial performance. He offers as example, Vons, a Southern California grocery chain, that pioneered point of sale (POS) scanners at checkout counters in the 1970s, introducing the technology years before other retailers. Investing in advanced technology not only led to multiple operating benefits (speed, efficiency, service level, and accuracy of the checkout Business engineering lies at the heart of breakthrough. process), it also created new business Corporate and market transformation requires a critical mass growth opportunities. The card readers of design and engineering effort. captured valuable customer information, for example, that was used to support a their offerings, and improving the customer value sophisticated mailing list business for the stores privateproposition. Market leadersincumbentsin short, must label products. Charles Schwab, another of Davidsons revolutionize, or be revolutionized. Optimization strategies, breakthrough companies, was the first in the brokerage such as those practiced by GE, says Davidson, are unlikely business to discover the power of the Internet and to to support sustained leadership. Nor should incumbents rely combine online technology with the companys hallmark on acquisition to renew themselves. Acquisitions, if entered dedication to customer service. into, says Davidson, should be component or point More typically, the breakthrough cycle begins of acquisitions, where specific elements of a future business necessity when the survival of the company is at stake, as model or market profile are brought into the organization in the examples of American Standard, Caterpillar, IBM, and integrated into the core business of the organization. and Mervyns. In these cases, as with most breakthrough Strategy should lead to acquisition, not the other way companies, the search for a core strategy that would not around. Internally generated endogenic growth has more only renew, but in reality, save the company started the new potential than out-of-body exogenic growth (growth by success cycle. Virtually all breakthroughs by incumbents merger, spin-off, joint venture, etc.). Endogenic growth will are in this category. It is not absolutely necessary for the create and nurture next-generation business. company to be facing disintegration, but leaders will need to find the weakest linkusually an emerging market AIM, READY, FIRE crisisand magnify it to create an atmosphere of crisis, From his study of seventy plus companies, Davidson as ADPs John Gaulding did with the companys automated identifies a generic pattern for successful breakthroughs: claim service, transforming the company before the crisis enterprise leaders establish a clear, actionable agenda and hit. focus the companys resources on an outrageous objective The aim, ready, fire process needed to transform a and a specific set of implementation priorities. The modus companyand its industrymust follow a highly structured operandi practiced by successful breakthrough companies framework in order to manage the transformation. The can be described as aim, ready, fire. They establish a aim phase allows the organization to collect, synthesize, clear target and specific initiatives, align the organization,
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Breakthrough

Bill Davidson

and focus market knowledge and self-knowledge. The outcome of Phase I, Aim, must be a single, integrated strategy with specific, actionable initiatives supported by the senior management team. In Phase II, Ready, the senior team bonds together in support of the strategy, and then engages the rest of the organization with a message that says, We are changing, here is why, here is what we are aiming to achieve, here is how we plan to do it, and here is your role and our expectations. Phase III, Fire, is the execution of the strategy. To assist in the successful execution, it is desirable for the organization to prioritize its portfolio of projects and clearly establish the projects critical to successful implementation of the breakthrough strategy. Likewise, an organization should establish a program and project management (PPM) function to structure, staff, start, support, and secure the projects as prioritized by the senior team.
THE LEADERSHIP FACTOR

an effective death sentence for breakthrough. Failure can also result from poor strategy, but strategy is ultimately the responsibility of the CEO. Any grand goal, says Davidson, especially those of a financial nature, are pipe dreams without grounded performance and profile innovations that convert into growth, improved margins, and enhanced market position. *** Endnotes by chapter and a subject index are provided.

Remarks
Davidsons greatest contribution in this readable, wellpaced book based on his observation and study of more than 70 companies is to stimulate, even provoke, thought about a companys readinessand commitmentto moving to the next level of corporate success. Davidson wants readers to askand be able to answerIs my company ready for breakthrough? Davidson defines and outlines what breakthrough isand is not. He balances the theory, and the practice, of breakthrough planning and strategy with specific case studies, so that the reader is not bored with too much theoretical text, nor overwhelmed with too much statistical data in support of the theoretical text. The book can also be used as a primer or checklist for would-be breakthrough companies and CEOs. It is important to note, however, that Davidsons focus throughout the book is on incumbents, rather than on start-up companies at the entry point to the market. Some of Davidsons most insightful comments involve the paradoxes inherent in breakthrough strategy. An obsession with core operations and marketsseemingly to the exclusion of diversification activityprovides powerful platforms for growth in new areas (chapter 1). Dig down deep enough into the details of your operations, apply radical approaches, and perhaps you will break through to the equivalent of Chinaa vast new market opportunity. Likewise, in chapter 6, Davidson shatters the almost universally accepted mantra that no revolution was ever led by the establishment. To illustrate this, he cites American Standard, the oldest, stodgiest company we could find, as perhaps the single best example of breakthrough, a company that, according to Davidson,
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No other single factor carries as much weight in determining the success of a breakthrough strategy as the senior leaders role. Davidson goes so far as to say: The question is not so much the quality of the individuals in the team: rather, it is a question of their ability to work together as a team. Working as a team requires a senior leader who has the personal capacity to oversee what often may seem like a superhuman effort. A part of this personal capacity is in-depth operating experience in the company, and in the industry. The senior leader must be multi-talented; he or she must play the combined role of general manager, coach, and quarterback of a professional football team. The senior leader must have a combination of what Davidson refers to as humanism and directiveness, a combination of boldness and humility, innovation and groundedness. The best breakthrough leaders are grounded visionaries, says Davidson. And, if senior leadership deserves the credit for a successful breakthrough, they must also answer for the failure. Davidson points to one single, deadlybut, as he says, quite commonfailure factor: an inability to align core members of the senior team around a common strategy. Other failure factors can include a lack of handson ownership and management of the strategy once the organization is into the implementation phase. Ironically, companies are often acquired during their breakthroughs, which often result in a loss, or transition of leadership,

Business Book Review Vol. 21, No. 5 Copyright 2004 Business Book Review, LLC All Rights Reserved

Breakthrough

Bill Davidson

set world speed records in corporate transformation. To achieve breakthroughand this is a key concepta company does not necessarily have to be the initiator of change, or innovation, within the industry, but it does have to embrace innovation, and integrate it into its core business. A breakthrough company is a leader, not a follower. Davidson has organized Breakthrough with an inductive approach. His outline of the specific components of breakthrough strategy planning and implementation, along with the accompanying case studies, are concluded in chapter 8 by reflection on the nature of senior leadership in breakthrough companies, which he has identified as the single most important factor in the success or failure of breakthrough. He contrasts his choice for best breakthrough leader, American Standards Mano Kampouris, with Ford Motor Companys Jac Nasser, whom he also describes as a superb breakthrough leader. What was the difference between American Standards spectacular success, and Fords potential transformation, which, in Davidsons words, slowed to a crawl? Nasser seemed to be doing everything right in terms of breakthrough planning. He had an in-depth knowledge of the companys operations, and he created an ambitious vision for the company, which he converted into a series of key initiatives to modernize and globalize Fords operations. He communicated with, prepared, and trained the organization. High-priority projects were launched with the appropriate staffing, resources, and senior support. At the same time, according to Davidson, Nasser also launched a performance culture program that called for forced performance rankings and mandatory retirement for the bottom 10 percent of the company. Fords traditional corporate culture began to view the transformation efforts as too harsh in their handling of people, thereby allowing an us and them schism to form, which led, ultimately, to Nassers replacement. Davidsons careful research over 10 years, and with more than 70 companies, has led him to believe that although directiveness (command and control) is essential, and that both high executive and high employee turnover are to be expected in the implementation of breakthrough strategies, humanism (as evidenced by CEOs like Mano Kampouris and Lou Gerstner with their respect for the individual, and their investment in the development of human capital) is a significant accelerator of breakthrough. A number of

Davidsons benchmark success stories (ADPs ACS group and Progressive Insurance, for example), employed high directiveness without a corresponding high humanism. But for a successful, sure, and swift execution of breakthrough, there seems to be no substitute for a combination of directiveness and humanism. Successful breakthrough, and the resulting market or niche leadership it brings will, eventually, bring a company once again to the need for yet another breakthrough. If a company has built a success cycle based on directiveness and humanism, it should be well positioned for the next breakthrough effort.

Reading Suggestions
Reading Time: 6-7 hours, 238 pages in book The author develops his basic premises and instructional guidance on creating a breakthrough strategy in four chapters: chapters 1, 2, 3, and 7. If you are not familiar with the concept of breakthrough, these are the essential, must read chapters. If you are familiar with the concept of breakthrough and with market definition, it is possible to read only chapters 1 and 7chapter 1 because it gives an overview, particularly of the success cycle and of breakthrough strategy principles, and the power of breakthrough as evidenced by four companies, Countrywide, Progressive, NBtel, and C.R. England, and chapter 7 because it details the processthe three important phases in the development of breakthrough. Chapter 4 provides moderately detailed examples of successful breakthrough companies. Appendix I also contains bite-size summaries of the core strategies of 50 companies, including those highlighted in the book. Davidson does not develop new concepts in chapter 4, but uses this chapter to highlight well-known corporate examples. Chapters 5 and 6 discuss market leaders/industry incumbents and their characteristics, and are recommended if your company is in that category. Chapter 8 contains the characteristics of a successful senior manager or CEO, as well as characteristics of those who will not be successful.
CONTENTS Chapter 1: Breakthrough Dynamics Chapter 2: The Enterprise Principle Chapter 3: The Strategic Setting
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Chapter 4: Champions of Breakthrough Chapter 5: The Mindset of a Market Leader Chapter 6: Advice to Incumbents Chapter 7: Aim, Ready, Fire Chapter 8: The Leadership Factor Followed by two appendices

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Business Book Review Vol. 21, No. 5 Copyright 2004 Business Book Review, LLC All Rights Reserved

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