by Donald V. Potter

Baseball season has me thinking again about my favorite entrepreneurial idea: to open up the Whitey Ford School of Business Management. Whitey Ford is best remembered as a crafty lefthander, who won more than 200 games for the New York Yankees, but he was also one of the most profound, if unappreciated, business strategists of our time. A well-managed company succeeds the same way that Whitey Ford won all those games. Both have two basic ingredients for success. Whitey won with control and speed. A company succeeds with value and cost. Neither a pitcher nor a company can stay in the game long without both of its basic elements working together.

1. Control and Value

Control was Whitey Ford’s principal tool. There were pitchers who were faster, meaner, stronger, and more intimidating, but Whitey got the ball over the plate. Whitey threw strikes. In the language of business, he was a “value” pitcher.

Value is equally important to a winning company. Miss on value and you can forget everything else. Superb cost control alone, won’t win for you. Look, for example, at Howard Johnson (not the Mets’ third baseman, but the restaurant chain). The managers of Howard Johnson’s were highly effective cost containers, but they paid too little attention to value. While competitors like Denny’s improved their menus and tailored them to local markets, most HoJo restaurants offered inexpensive but dull food with poor service. By 1985, the average HoJo’s site had unit sales that were dead in its industry, with less than 70 percent of the sales of the average Denny’s outlet. Howard Johnson’s, once the country’s best-known franchises among coffee shop restaurants, was broken up in 1985.

The problem with value is that you need a disinterested party to define it. Since value is a relative term, it has meaning only in reference to some other company’s product or service. Whitey Ford always had an umpire to determine the value of his product. Some umpires liked a higher strike zone, some a lower one, and some umpires let Whitey scruff up the ball a little more, but the umpire was (and is) always right. Whitey’s masterful control was determined not by his managers in the dugout, nor by his competitors in the batter’s box, but by the umpire behind the plate.

Companies have umpires, too, who never miss a call and never lose an argument. These umpires are customers. They make their calls with their dollars. When a company offers its customers high value – defined as good performance for price – the customers buy more of the company’s products than those of its competitors. Over time, the customer’s cumulative judgements are expressed by a company’s relative sales growth. High sales growth, compared to the industry, is the customer’s way of saying that value is high. Customers have looked over the Ford Motor Co.’s new Taurus and called it a great pitch – a high value “strike” thrown right down the middle. Meanwhile, General Motors bought out Ross Perot’s contract in order to get him off the team, but GM still can’t convince the umpires, the American car-buying public, to buy enough of its cars to reverse the company’s declining market share.

2. Speed and Costs

Whitey Ford didn’t live solely on control. When he needed to get the batter off stride, or when a hitter started crowding the plate, Whitey could reach back for some heat and blow the fastball by him. Control remained his bread-and-butter, but Whitey’s control was complemented by his speed when he needed it.

In the corporate world, cost is like a pitcher’s speed. It is of secondary importance to value, but a company still needs good cost management to win over the long term, no matter how good its value is. Low-price companies like 47th Street Photo, Quick & Reilly discount brokers and Crown Books compete by having bare-bone costs. Most industry leaders, like IBM, Cummins Engine Co., and Federal Express, rely on cost management to keep the low-priced competitors from crowding the plate and taking too much market share. The best of the value leaders, who offer extra services and product features at premium prices, pay close attention to their cost structure as well. Compaq Computer is a value leader in the personal computer market. Its specialized products sell at a premium to other personal computers. Still, Compaq is cost sensitive, sending teams of people to pour over the manufacturing costs of their products in search of even small savings. But some value leaders ignore the need for tight cost management. They aren’t prepared to reach back for that extra heat when they badly need it.

Cost was not much of a concern with the early Xerox copiers or the first Apple computer. A high value product, like superb pitching control, covers a lot of mistakes. Costs can be high until the competition figures out what is going on. Sooner or later, the competition solves the puzzle and comes after the innovators like gangbusters. Do Xerox and Apple worry about costs today? You bet! Price reductions and imitation – like the personal computer “clones” – shift the focus of competition away from value to cost. Most large air carriers responded to People Express by dropping their fares. Big retailers, like Carter Hawley Hale and The Broadway, reduced prices in order to counter the share growth of off-price retailers like Loehmann’s, Ross Stores, and Filene’s Basement stores.

No matter what kind of leader a company wants to be, the long-term winner must win the cost battle, as have the well-managed companies such as H.J. Heinz, Piedmont Air, and General Electric’s Appliance Division. Occasionally a competitor will compete primarily on value. Treating cost as secondary, these companies pull up stakes and move on when their products come under competitive price pressure. They try to win on value alone by constantly introducing innovative products unavailable elsewhere. Digital Equipment Corp. seems to be following this strategy as it stresses its unique networking capability – but success with this approach is about as common as a 20-game winner turning into a home run champion (the last player to do that was Babe Ruth).

How can we recognize good cost management? Whitey Ford had an earned run average (ERA) to measure his efficiency per every nine innings. Companies have return on investment, the best measure of cost management because it measures the efficiency with which a company’s costs generate revenues. The price a customer pays for a product creates a flow of revenue and indicates the product’s relative value. The revenue that the price yields must cover all the costs of the product, including the carrying costs of capital employed (otherwise recognizable as interest on debt and net profits). Debt interest and net profits are what are “left over” after operating costs are subtracted from revenue. Thus, the company that has more “left over” as a percentage of the amount it has invested, as compared against its competition, has managed its costs better.

Maybe there will never be a Whitey Ford School of Business Management. But a shrewd combination of control and speed got Whitey into the Hall of Fame. By paying attention to value and cost, a manager just might achieve the same result for his or her company.

(Note: This Perspective was written in the context of the economy in 1987. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

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