Strength as Weakness

“How could Countrywide Financial veer so badly off course? For years, the Calabasas, Calif., mortgage lender was considered the shrewdest, toughest player in the industry, with its No. 1 market share as proof. Yet in the past 120 days, the intensifying U.S. housing slump and related credit scares have sent Countrywide's stock tumbling and forced the company to scramble for liquidity.

“Such calamities aren't supposed to befall market leaders. Yes, they may falter a bit in tough times. But conventional wisdom regards the biggest company in any industry -- be it Intel Corp., Procter & Gamble Co. or Anheuser-Busch Cos. -- as practically indestructible. Such companies have the most customers, the largest sales forces and the broadest grasp of their industry's nuances. They are supposed to be like champion squash players holding center court and forcing weaker rivals to scurry in the corners.

“Jack Welch… saw market leadership as a reliable path to above-average profitability and growth. In most cases, he was right.

“But as Countrywide's affair shows, market leadership is becoming far more perilous than outsiders might think. New rivals keep trying to unseat the champ. Strategies that once fueled breakneck growth may backfire in hard times. And in some cases, market leaders focus so intently on what they know best -- production and sales -- that they get guillotined by unexpected changes in other arenas, such as regulation or finance…

“A case study developed at the Massachusetts Institute of Technology's Sloan School of Management analyzes Callaway Golf Co.'s missteps in the late 1990s, after its Big Bertha drivers helped it become the leading golf-club maker. Callaway kept expanding, but demand waned as Asian economies weakened and U.S. golfers balked at constantly buying fancier Callaway offerings. Inventory built up, profit skidded and a management shake-up ensued.

“Callaway is a valuable example because it makes clear to students that managements on a winning streak can misread market conditions, explains Rebecca Henderson, a Sloan professor. ‘People assume that more market share is automatically good,’ she says. ‘It's not. Sometimes firms focus so hard on building share that they build way beyond the true market for their products’."

(“Business: Countrywide Finds No. 1 Spot Isn't Easy.” George Anders. Wall Street Journal: September 5, 2007. pg. A.2)

SOMEDAY Google, Microsoft, P&G, Exxon-Mobil, Wal-Mart may hollow themsleves into magnificent shells of their former selves. Keep our eyes open and our hearts clear so that we may be taught.