Moving Forward vs. Moving Backward – Pepsi vs. P&G

"Pepsi Launches Own Music Label in China" is the BusinessWeek headline. Clearly, the Pepsi staff has some new ideas.  Recently Pepsi's Chairperson, Ms. Nooyi, made a trip to China for 10 days.  Apparently frustrated, she commented to the Wall Street Journal in July that she didn't see enough Disruptive thinking on the part of her folks in China.  She indicated the market was robust, but it was different and would take a different approach.  It now sounds like her China leadership got the message.

In addition to launching a music label, Pepsi is producing a "Battle of the Bands" show in China.  It's almost like a reformatted page from the aggressive growth years of Starbucks.  Instead of just expanding into a new geography (China) with the same old playbook (like the floundering WalMart), Pepsi is figuring out how to be a big success.  And that may mean producing television, producing music and making people into stars.  China's culture is unlike anything in the U.S. or Europe.  So doing new and different things will be critical to success.  When you see a business developing its own scenarios about the future, taking actions its competitors (Coke) are too hide-bound to try, acting Disruptively to compete and using White Space projects to test new ideas you simply have to be excited!

On the other hand, "Tide Turns 'Basic" for P&G in Slump" is the Wall Street Journal headline about the latest "new" product at P&G.  Please remember, the departing P&G CEO was lauded for creating an innovative culture at P&G.  But it appears the legacy is a culture of sustaining innovations intended to do nothing more than Defend & Extend the old P&G brands.  Now slumping, P&G needs to identify market shifts more than ever, and create new solutions that help it move with market trends.  Instead, the company is rushing into reverse!  Management not only seem to be driving the bus looking in the rear-view mirror, but actually driving it that way as well!

Tide has been around a long time.  Ostensibly a very good product.  For reasons explained in the article, managers at P&G felt the best way to sell more product was to make it less good.  Really.  They removed some of the chemicals that help you get clothes clean, renamed it "Basic" and launched the product at a lower price It's not "new and improved."  It's not even "better."  It's literally less goodbut cheaper.  Sort of like store brands, or private label – only maybe not as good?  Doesn't that sort of obviate the whole notion of branding? 

People don't ever like to go backward.  We like to grow.  To learn and get more out of life.  When we find a product that works, why would we want a product that works less well?  And the folks at P&G missed this.  Only by being insanely internally focused, terribly Locked-in, can you think this is a good idea.  Looking inside a person could say "well, we want to jam the shelves with more of our branded product.  We want to have the word 'Tide' smeared everywhere we can.  We think people so identify with 'Tide' that they'll take a worse product just to get the name brand.  We're willing to create a less good product thinking that we will get sales simply because it's cheaper than the stuff people really want to buy."  Seem a little mixed up to you?

When you want to grow you figure out new ways to Disrupt the marketplace.  You develop new solutions, new entry points, new connections with shifting market trends.  You figure out how to be the best at the right price.  You don't try to give people less, and tell them they are cheap.  And Pepsi clearly gets it.  They are willing to expand into music recording and TV production.  Stuff P&G did when it was really creative and innovative – after all, that's why we call daytime TV "soaps", because P&G produced them just to sell soap.  Now we see Pepsi applying that kind of scenario planning and competitive obsession, along with White Space, to develop new market approaches.  Unfortunately we can't say the same for P&G — clearly stuck on trying to cram more stuff with the word "Tide" on it through distribution.

Update on ereader – Wall Street Journal and iPhone

Today a colleague emailed me an article on Cisco.  He used the Wall Street Journal "send this article" function.  The email had his name, the article title, the link to the article and then this:

"The Wall Street Journal Mobile Reader for iPhoneTM
delivers the latest global news, financial events, market insights and
information to keep you ahead of the curve. Get the information you depend on
plus entertainment, culture, and sports coverage when, where, and how you want
it from the most credible source for news and information. Click below to
download the WSJ Mobile Reader for free from the iTunes App Store.
"

Another indicator of the trend – the shift – that is affecting publishers.  And increasingly affects everyone.  If you want to be "in the know" you'll be using different technology than ink on paper, or a laptop.  And if you want to be competitively advantaged today you are thinking about how you can use this to grow your business:

  • ads for the WSJ articles delivered to iPhone?
  • developing an app for your technical materials to be read on an ereader like iPhone?
  • creating a way for your customers to get updates on ereaders?
  • using ereaders to update your salesforce?  service force?

What ideas can you think of where this really cheap, real-time technology can help you beat the competition?  How can you put ereaders (iPhone, Kindle, Sony, etc.) into your scenarios about the future?  What are the leading edge competitors (like Pizza Hut's iPhone app) doing?  How can you Disrupt your old business model to start using this lower cost information dissemination technology?  How can you Disrupt the market to deliver higher value?  What White Space do you have for testing the use of ereaders, learning about their benefits and getting closer to emerging market needs?

Why you REALLY need to pay attention – Sony e-reader and Amazon Kindle

"Sony Unveils Pocket Size Electronic Book Reader" is the Los Angeles Times headline.  According to Silican Alley Insider the new Apple tablet is a GREAT book reader.  Although Steve Jobs thinks book publishers are incredibly screwed up and he's less optimistic about book sales than he was music sales when he launched iTunes.  And Amazon has sold out its Kindle e-readers since they started manufacturing them two years ago. 

With all these announcements, you'd think everyone knows about e-readers and the market shift happening in publishing – from books to magazines to newspapers.  Even I've blogged about this for months – and the positive impact this has had on book sales as well as Amazon's revenues and profits.  But:

E-reader share (Link to chart and Forrester Discussion here)

Half of all people surveyed in 2Q 2009 still haven't seen or heard about e-readers.

This is important.  Imagine it's 1983, and you weren't aware about personal computers and their benefits – even though the IBM PC was Time magazine's "Man of the Year" in 1982.  We now know that early adopters of PCs developed new solutions for many problems – from analysis to word processing to advertising development to commercial graphics to in-house publishing to communicating via email — on and on and on.  Those who understood this technology early, recognized the shift it demonstrated, had early advantages on competitors.  You didn't have to compete in technology, or be a technology officianado, to take advantage of this computing shift for your advantage.

Today, ereaders are another serious market shift that early adopters can leverage.  Soon newspapers and magazines will be hard to come by, or so thin (due to printing and distribution cost) that their content will be much less than desired.  But ereaders allow you to keep up with journals you've come to trust.  And advertisers need to be prepared to follow them onto this platform – to reach people they otherwise would miss.

If you've quit reading books because you don't have the money to spend (at $20+ apiece), desire to carry them, or the time to read them, ereaders allow you to buy and carry 350 or more books at a fraction of previous prices.  You even can buy pieces of books (chapters for example) that give you what you want.  Think of the shift from long-play albums/CDs to iTunes sales of single songs as an analogy.  You can get the benefits of books without many of the reasons you may have quit reading them.

Would you like a repository of information you can call upon for your daily work?  With e-readers you can carry an entire library, something you'll not do in paper.  Or on your laptop.

Speaking of laptops – this will all be on a laptop you say – so forget ereadersDo you really think we'll all be carrying these 7 pound monsters around in 5 years?  Look at college kids today.  How many do almost all their work on a phone?  They use the computer only when forced to – for typing papers or building spreadsheets.  Laptops are increasingly becoming much more than people want – too big, too heavy, too hot, too power hungry, too short battery life, too complicated, too much software, too many bugs, too many viruses, too expensive.  Laptops will soon be like mainframes.  Look at the trend.  Sales of big screen laptops have cratered as netbooks, with tiny screens, have taken off.  People are moving away from laptops to smaller and easier to use products – like ereaders. 

Why make your salesforce, or customers, or training techs carry a laptop when an ereader will give them everything they need?  They cost less, are easier to keep working, and don't get hindered with personal apps like MS Money that you didn't put on the laptop in the first place but couldn't stop.  Given ereader prices, you might be able to consider an ereader disposable in 5 years.  Literally, you could give a customer an ereader with all the training, specs, history, design elements, etc. of your product the way we now use a brochure.  It literally might be cheaper than a 10 page glossy brochure costs to print and distribute – but with everything they need to design in your product, or operate it, or service it.  Imagine an ereader in your car glove box rather than the owner's manual you never use – but the info will be catalogued, searchable, and linked to the internet so it's always current with service information.

Market shifts affect us all.  Too often we say "oh that shift is obvious, and I'm surprised the current competitors aren't jumping on that."  Then we ignore the shift ourselves.  Competitors that make higher rates of return, and prolong those rates of return, observe these market shifts and immediately build them into future scenarios.  They think about how to use these shifts to improve their competitive position, and create White Space to test the opportunities – even when they represent Disruptive change.  These are Phoenix Principle companies – and the kind you want to be – because they grow more, make more money and have longer lives.

Learn how to spot market shifts and leverge them for your advantage.  Don't end up like GM – out of touch and into bankruptcy.  Read the new, free ebook "The Fall of GM:  What Went Wrong and How To Avoid Its Mistakes." 

Reacting to Downturns – Honda vs. GM

"Honda's New CEO is Also Chief Innovator" is the recent Businessweek headline.  Think of the contrast with GM.  Both companies have seen their auto sales hurt this year.  Although the downdraft at GM is about 130% of that at Honda.  But the reactions to the weakness could not be different.

GM kept trying to sell more of its existing cars until it finally declared bankruptcy, dropping half its models and all its obligations. Then the same people that lead GM into bankruptcy remained in place.  While the Chairman was forced out of a job in order to obtain government loans to stay alive, he was replaced by his own #2 who is just as Locked-in as the old Chairman was.  Even worse, to me, was bringing back a 77 year old industry veteran to head marketing.  He may have been one of the more creative of the "old guard" but he was every bit as much "old guard" as anyone — to the point of belittling Tesla and those succeeding today with electric and hybrid vehicles. 

Honda reacted by replacing the CEO of Honda Motors.  But the person put into the job comes from a background in R&D.  Rather than trying to do more of the same, Honda's approach is to get product developers closer to customers — even at the very top job.  Honda isn't leaving the same people in charge, nor even people with the same backgrounds.  Honda is planning, from the outset, to use product innovation (rather than financial engineering) to get Honda Motors back on track.

And this aligns with Honda's approach to business.  Where GM was once a company with multiple businesses (IT in its ownership of EDS and aviation electronics in Hughes) GM leadership sold off those assets, using profits to subsidize the ailing auto businessComparatively, Honda has thriving businesses in robotics, factory automation, motorcycles, small yard equipment and new ventures in aircraft and elsewhere.  GM reacts to market shifts by ignoring them, and trying to do what it's always done better, faster and cheaper.  GM behaves as if its returns will do better if it can just do what it has always done – but more.  Honda reacts to market shifts by entering new markets, developing new products and getting itself aligned with market requirements.  Honda develops new solutions to changing market needs.

There is no doubt which approach is more sensible, and into which you might consider investing.  Honda uses its scenarios about the future to help it develop new products and solutions.  Honda obsesses about competition, offering new products for almost every niche opportunity and learning how to be profitable across the market spectrum.  Honda is very open to Disrupting its old Success Formula, getting into new businesses that will help it grow even when not "core" to the company's history or its current capabilities.  And Honda gives its new business leaders the White Space to succeed, with permission to do what the market requires even if different that the past and the resources to develop new solutions through ongoing market tests. 

If you have any doubts about who will grow share over the next 5 years, and who will lose share, check out the free new ebook "The Fall of GM:  What Went Wrong and How to Avoid Its Mistakes."  Pay attention to the results of America's "Cars for Clunkers" program to see who comes out a winner.  It will be important to see if this raises sales at the American companies – or elsewhere.

Doing it right – and growing – in a recession — Tasty Catering

I've had the good fortune recently to meet some companies that are doing an extremely good job of practicing The Phoenix Principle.  Although no company story can be told well within the shortness of a blog, some of these stories are so powerful I want share some of the good things I'm seeing. Especially now, when it seems bad news is dominating.  That's not true everywhere – and it's worth profiling a few winners (and hoping they'll excuse the brevity of these descriptions.)

Recently I met with Tasty Catering in suburban Chicago.  Tasty is by far not the largest caterer in the U.S. (or even Chicago), nor the smallest.  Nor is it the oldest, nor youngest.  You could easily miss it as "just another company."  One of those nearly faceless businesses crowded into the business parks around America.  But this company is by no means normal, and as a result

  • It's been named "Caterer of the Year" by top food magazines
  • It's been The Best Company to Work For in Chicago 3 times
  • It's been honored by Winning Workplaces and The Wall Street Journal as a top American business.
  • There were a lot of awards, these are just the ones that come to top of mind. 

When Tasty Catering created its vision – it's BHAG (in Jim Collins venacular) – nowhere does it say "caterer".  Their ambition is to be the best.  At whatever the company does.  The 50-ish founder told me that his employees were insistent about this, because they did not think Tasty would just be a caterer.  There are too many possibilities, according to the internal teams.  The people at Tasty want to go wherever the market leads them.  Their ambition is to GROW.

Everyone in Tasty is challenged to scan the horizons for new business opportunities.  .  And create business plans.  The CEO encourages his people to work with college professors and get school credit – but if the plans are good Tasty funds them.  And the business ideas don't have to be in catering, or even food.  Whatever has the opportunity for growth.  So Tasty now has a finance company, a "green" gift business, a supplier to large-scale retailers of packaged food, and a trucking company.  Again, those are just the ones I remember.  And at least one of these was created by employees who are first-generation immigrants with little formal education – employees another company might deride as "kitchen workers" – but with a massive desire to grow the business.  At Tasty, everyone is considered capable of seeing a market opportunity that can create profitable revenue, and everyone is encouraged to bring those market-based ideas to the table.

Tasty obsesses about competition.  Everyone in the company has internet access.  And manager after manager told me stories about using the web to track competitors.  Press releases, articles, anything that's on the web – they keep track of what competitors are doing.  When they see competitors do something, they want to know why – and if it works.  Tasty uses competitors as much as test beds for ideas – what works and doesn't – while simultaneously tracking their activities in traditional areas.  They track customer reactions to competitive ideas, and use that to bring out their own ideas.  As a result, Tasty finds new customers, finds new products to sell and finds new markets to develop

The CEO told me that when he started he had a bunch of hot
dog/hamburger joints
.  But it was an intern who told him he'd be
better off to sell those assets and change into catering
.  This was an
incredible distruption
, to change from a fast food operator to a
caterer, but with the growth of franchise fast food staring him in the face he made the
switch.  Now the CEO relishes the Disruptions his staff bring.  Wouldn't trucks make great rolling billboards – if painted for that purpose?  Time to change the trucks.  Wouldn't having a menu that's all healthy, and disposable products that are entirely eco-friendly, snare some accounts?  Why not try it?  If the kitchen isn't busy 24×7, couldn't we make packaged food for sale as retailer brands?  If we need financing for a new business line, can't we fund that from internal cash flow?  Why not start an internal finance company?  If restaurant and store operators want prepared food, why not start pursuing RFPs and see if we can win some retail business (even though it means we'd have to double our equipment overnight)?  Disruptions are so common at Tasty they don't even think aboout them as disruptions – they are the norm.

And as the last paragraph indicated, White Space is everywhere.  When an employee has an idea they can turn it into a business plan.  The people inside Tasty even help work on it.  Then the plan is vetted and reviewed.  If it looks good, Tasty will set up a separate company to implement the plan, and make the employee the CEO.  Now this person has the permission to go make it happen, and the money to do it.  There are goals, and report-backs.  And discussions about how to make the business grow.  And every project is visible for everyone in the company to see.  No "skunk works."  Everyone knows what's happening, and looking to see what works.  Everyone wants to learn and migrate toward a growing future so the business will succeed and they can succeed with it.

2009 started off with a sledge hammer for catering.  The recession caused companies to cancel events, big and small, and quit catering in food.  It would have been easy for Tasty to falter – because revenues went down for the very first time.  But instead, everyone met and put their heads into finding ways to get back on the growth track.  Resources were cut in the tradtiional business.  Belt tightening went around the board.  But resources were expended in new marketing – viral on-line campaigns for example – to find the customers who still have needs.  People put more energy into differentiation programs – like the non-plastic clear wrap and non-plastic disposable utensils – to make the business more appealing to those who still have events.  And new business opportunities – like the private label manufacturing – took on new urgency and more resources.  As a result, while many caterers have failed and others are in dire straits Tasty has returned to growth – and not just in catering.

Meanwhile, the employees at Tasty are some of the most gratified I've seen.  Here in this recession, they still are highly motivated and love their work.  Even though they could do other jobs, they stay.  They don't expect the CEO to find them work, or promise them a job, or guarantee their income.  But they do understand that if they keep growing, working at Tasty is great.  They tie their success to the success of the business – which they tie to identifying market opportunities and fulfilling them better than competitors.  They work at Tasty because they are connected to the market – and it is empowering.  It's not paternalism that keeps them satisfied (far from it, peer reviews assure paternalism is not allowed), it is seeing market results from the innovations they develop and implement.

If you have an event of any kind, go to the Tasty Catering web site and/or give them a call.  If you have a need for someone to supply you with muffins, cookies, baked goods or other foodstuffs private label – again, to the web site and/or give them a call.  This is one great companyGiven a little time, they just might give Sysco Foods (the country's largest supplier of food to restaurants) or another mega-company a run for their money.  This company is out to WIN – and all eyes are focused on the market, everyone pays attention to competition, Disruptions are the norm and new White Space is created every few months (regardless of the economy.)

Why Google isn’t like GM

Google is growing, and GM is trying to get out of bankruptcy.  On the surface there are lots of obvious differences.  Different markets, different customers, different products, different size of company, different age.  But none of these get to the heart of what's different about the two companies.  None of these really describe why one is doing well while the other is doing poorly.

GM followed, one could even say helped create, the "best practices" of the industrial era.  GM focused on one industry, and sought to dominate that market.  GM eschewed other businesses, selling off profitable businesses in IT services and aircraft electronics.  Even selling off the parts business for its own automobiles.  GM focused on what it knew how to do, and didn't do anything else. 

GM also figured out its own magic formula to succeed, and then embedded that formula into its operating processes so the same decisions were replicated again and again.  GM Locked-in on that Success Formula, doing everything possible to Defend & Extend it.  GM built tight processes for everything from procurement to manufacturing operations to new product development to pricing and distribution.  GM didn't focus on doing new things, it focused on trying to make its early money making processes better.  As time went by GM remained committed to reinforcing its processes, believing every year that the tide would turn and instead of losing share to competitors it would again gain share.  GM believed in doing what it had always done, only better, faster and cheaper.  Even into bankruptcy, GM believed that if it followed its early Success Formula it would recapture earlier rates of return.

Google is an information era company, defining the new "best practices".  It's early success was in search engine development, which the company turned into a massive on-line advertising placement business that superceded the first major player (Yahoo!).  But after making huge progress in that area, Google did not remain focused alone on doing "search" better year after year.  Since that success Google has also launched an operating system for mobile phones (Android), which got it into another high-growth market.  It has entered the paid search marketplace.  And now, "Google takes on Windows with Chrome OS" is the CNN headline. 

"Google to unveil operating system to rival Microsoft" is the Marketwatch headline.  This is not dissimilar from GM buying into the airline business.  For people outside the industry, it seems somewhat related.  But to those inside the industry this seems like a dramatic move. For participants, these are entirely different technologies and entirely different markets. Not only that, but Microsoft's Windows has dominated (over 90% market share) the desktop and laptop computer markets for years.  To an industrial era strategist the Windows entry barriers would be considered insurmountable, making it not worthwhile to pursue any products in this market.

Google is unlike GM in that

  1. it has looked into the future and recognizes that Windows has many obstacles to operating effictively in a widely connected world.  Future scenarios show that alternative products can make a significant difference in the user experience, and even though a company currently dominates the opportunity exists to Disrupt the marketplace;
  2. Google remains focused on competitors, not just customers.  Instead of talking to customers, who would ask for better search and ad placement improvements, Google has observed alternative, competitive operating system products, like Unix and Linux, making headway in both servers and the new netbooks.  While still small share, these products are proving adept at helping people do what they want with small computers and these customers are not switching to Windows;
  3. Google is not afraid to Disrupt its operations to consider doing something new.  It is not focused on doing one thing, and doing it right.  Instead open to bringing to market new technologies rapidly when they can Disrupt a market; and
  4. Google uses extensive White Space to test new solutions and learn what is needed in the product, distribution, pricing and promotion.  Google gives new teams the permission and resources to investigate how to succeed – rather than following a predetermined path toward an internally set goal (like GM did with its failed electric car project).

Nobody today wants to be like GM.  Struggling to turn around after falling into bankruptcy.  To be like Google you need to quit following old ideas about focusing on your core and entry barriers – instead develop scenarios about the future, study competitors for early market insights, Disrupt your practices so you can do new things and test lots of ideas in White Space to find out what the market really wants so you can continue growing.

Don't forget to download the new, free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes"

What’s the future for Chrysler? Fiat?

"Reborn Chrysler gets a European makeover" is the headline at the Detroit Free Press.  Now that Fiat is in charge, can we expect Chrysler to turn around?

There is no doubt Chrysler has been severely Challenged.  But that alone did not Disrupt Chrysler – you can be challenged a lot and still not Disrupt Lock-ins.  On the other hand, the new CEO appears to have stepped in and made significant changes in the organization structure, as well as the product line-up at Chrysler.  We also know that bankruptcy changed the union rules as well as employee compensation and retirement programs. These are Disruptions.  That's good news.  Disruptions precede real change.  No matter the outcome, the level of Disruption ensures the future Chrysler will be different from the old Chrysler.  Step one in the right direction.

But, the Fiat leadership under Sergio Marcchione appears to be rapidly installing the Fiat Success Formula at Chrysler.  The organization, product, branding and manufacturing decisions appear to be aligned with what Fiat has been doing in Europe.  So this makes our analysis a lot trickier.  Companies that effectively turn around align with market needs.  They meet customer requirements in new, better ways.  For Chrysler to now succeed requires that the American market needs are closely enough aligned with what Fiat has been doing to make Chrysler a success.

If this gives you doubts, you're well served.  It's not like Fiat has been a household name in America for a long time.  Nor have I perceived Fiat was gaining substantial share over its competitors in Europe.  Nor do I have awareness of Fiat being noticably successful in emerging auto markets like China, India or Eastern Europe.  They aren't doing as badly as Chrysler, but are they winning?

The new management is rolling in like Macarthur's team taking over Japan.  They clearly have already made many decisions, and are now focused on execution.  What worries me is

  • what if the product lineup isn't really what Americans want?
  • what if dealers don't make enough margin on the new lineup?
  • what if the cost/quality tradeoffs don't fit American needs?
  • what if competitors match their product capabilities?
  • what if competitors have lower cost?
  • what if competitors have measurably better quality?
  • what if competitors bring out new innovations, like electric, hybrid or diesel, change the market significantly from what Fiat has to offer?
  • what if customers simply have doubts about Fiat quality?
  • what if customers like the Charger, Challenger and 300 more than they like the new Fiat products?

I don't have to be right or wrong on many of these questions and it portends problems for the new Chrysler/Fiat.  And that's the problem with having such a tight plan when you start a turn-around.  What if you get something wrong?  How will you know?  What will tell you early you need to change your plan fast, and possibly dramatically?  Nowhere in the article, nor elsewhere, have I read about White Space projects being created that would produce an entirely new Success Formula.  Only how Chrysler is being converted to the Fiat Success Formula.

I want the best for the new owners, employees and vendors of Fiat.  I'm really happy to see the level of Disruption.  But until we see White Space, more discussion of market testing and experimentation, as well as greater discussion of competitiors, I'd reserve judgement on the company's future.

If you read about White Space at Chrysler/Fiat please let me know.  This is a story worth watching closely.  Americans have a lot riding on the outcome – good or bad.  So if you read about Disruptions or White Space share them with me or here on the blog for everyone.

PS – Don't forget to download my new ebook "The Fall of GM" for additional insight on managing Success Formulas in the auto industry.

PPS – There have been a lot of great comments related to recent blogs.  I appreciate the personal notes, but don't hesitate to blog directly on the site.  Also, keep up the comments.  I don't feel compelled to re-comment on them all.  Suffice it to say that the quality is excellent, and comments make the blog all that much more powerful.  So please keep up the responses.

Shift your Success Formula, or learn Chinese – GM, Hummer

How appropriate.  "GM strikes deal to sell Hummer" headlines a Marketwatch.com article.  A day after declaring bankruptcy, Hummer with all its branding and product drawings is going to China.  It seems everything about GM is iconic – including its movement of an operating auto businesses to China.

Is this bad for America, or good?  I'd rather say it's inevitable.  In a global economy, industrial production will move to the lowest cost location.  And with a low valued currency, a very lowly paid workforce, and access to very inexpensive capital that puts China at the top of the list.  Unless you want to bring back Chairman Mao and wall-in China, the population density and government programs make it inevitable that the country will be a leader in manufacturing.

But that doesn't equate to high value.

America is the world's largest agricultural nation.  But has that made America wealthy?  Not since the 1800s has it been true that land ownership for agricultural uses made Americans – and the nation – wealthy.  As the value of agriculture declined – largely due to dramatic increases in production – America's wealth shifted to industrial production.  It was by being the largest and most productive industrial nation that America prospered during the Industrial economy.

But now, industrial production has razor thin margins.  Much like agriculture.  Over-invest in capacity, and you can end up with under-utilized (or closed) plants and not much margin from other businesses to cover the cost.  Not since the 1990s has America operated anywhere near "full capacity" on its manufacturing base.  The "good" years of the last decade were unable to produce industrial jobs, or wealth for industrial companies (i.e. – GM's bankruptcy.)

In the great battle for economic leadership, the next wave is about informationHow to obtain, use and manipulate information is where value is now created.  Steel traders can make more than steel producers today.  If you want to improve your profitability, and your longevity, you have to change your thinking from "how do I make and sell more stuff" to "what do I know they don't know, and how do I turn that into value?" 

For somebody selling autos, it's becoming a lot more important to understand customer wants and preferences than to be good at making cars.  Toyota and Honda can identify opportunities first, and put products into the market faster than anyone else.  They can maximize their product development and short-run capability to reach targets fast, and gain advantages over competitors.  Don't forget, Honda made money not just on small, high mileage cars but on a full-size pick-up called the Ridgeline (and Toyota on the Tundra).  These companies are better at using scenarios to recognize early market shifts, and clearer about competitor moves so they can position products to fulfill unique customers needs.  Even if it means launching products not traditional to their "core" – like Honda's Ridgeline, it's manufacturing robotics, and its new jet airplanes.

In the industrial era, people sought scale advantages and tried to build entry barriers against competitors.  In the information economy flexibility is equally (or more) important than sizeRecognizing customer needs and competitor actions early is more important than catering to old, devoted customer groups.  Willingness to Disrupt, and do what you must do to change the market by using White Space test projects keeps you ahead of the competition – rather than trying to Defend & Extend your "core."

For the industry, having Hummer production in China could turn out to be a good thing.  It will lower product cost.  If the distribution in the USA can gain control of the market, by recognizing customer needs and directing the production, the distributors can grab all the value away from the Chinese manufacturer.  If, on the other hand, the dealers try to act like old fashioned dealers who merely keep stock and negotiate price — then they won't create value and margins will stink.  There are ways to make money in the information economy, even for traditional players, but it requires changing your Success Formula from industrial-era behaviors to the needs of an information-based economy.  You can follow GM – or you can try to be like Cisco.

From GM to Cisco – changes in the DJIA

June 1, 2009 will be remembered for a really long time.  As I last blogged, I think the iconic impact of GM as one of the most successful and profitable of all industrial companies makes its bankruptcy more important than almost any other company.

As GM loses its market value, it was forced off the Dow Jones Industrial Average.  In "What's behind the Dow changes?" (Marketwatch.com) we can read about how the Wall Street Journal editors selected Cisco to replace GM.  I've long been a detractor of GM for its slavik devotion to its outdated Success Formula.  For an equally long time I've long been a fan of Cisco and how it keeps its Success Formula evergreen.  Cisco reflects the behaviors needed to succeed in an information economy, and its addition to the DJIA is a big improvement in measuring the American economy and its potential for growth. 

What I most admire about Cisco is management's requirement to obsolete the company's own products.  This one element has proven to be critical to Cisco's ongoing growth – and the company's ability to avoid being another Sun Microsystems.  By forcing themselves to obsolete their own products, Cisco doesn't get trapped in "cannibalization" arguments Management doesn't get trapped into listening to big customers who want Cisco to slow its product introduction cycle Leaders end up Disrupting the company internally to do new things that will replace outdated revenues.  It sounds so simple, yet it's been so incredibly powerful.  "Obsolete your own products" is a statement that has helped keep Cisco a long-term winner.

Since even before writing "Create Marketplace Disruption" I've espoused that Cisco is a Phoenix Principle kind of company.  One that uses extensive scenario planning to plan for the future, one that obsesses about competitors in order to never have second-place products, willing to Disrupt its product plans and markets to continue growing, and loaded with White Space developing new solutions for new markets.  It's a great choice to be on the Dow – which will eventually have to replace all the outdated companies (like Kraft) with companies that rely on information – rather than industrial production – to make money.

Too big to fail? Overcoming size disadvantages – JPMorgan Chase

"The Need for Failure" is a recent Forbes article on why it is bad – really bad – to prop up failing institutions. The author is an esteemed economics professor at NYU. He says "too big to fail is dangerous.  It suggests there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business."  Rightly said, only it creates a conundrumLarge organizations are not known for taking risky actions.  Large organizations are known primarily for lethargic decision-making which weeds out all forms of risk – right down to how people dress and what they can say in the office.  When you think of a big bank, like Bank of America or Citibank, you don't think of risk You think just the opposite.  Of risk aversion so great they cannot do anything new or different.

What I'd add to the good professor's article is recognition that large organizations stumble into risk they don't recognize, by trying to do more of the same when that behavior becomes risky due to market changes.  My dad said that 100 years ago when my grandfather was first given pills by a doctor he decided to take the whole bottle at once.  His logic was "if one pill will help me, I might as well take the whole lot and get better fast."  Clearly, an example where doing more of the same was not a good idea.  Then there was the boy who loved jumping off the railroad bridge into the river.  He did it all the time, year after year.  Then one month there was a draught, the river level fell while he was busy at school, and when he next jumped off the bridge he broke his leg.  He did what he always did, but the environmental change suddenly made his previous behavior very risky.

Big corporations behave this way.  They build Lock-ins around everything they do.  They use hierarchy, cultural norm enforcement, sacred cows, rigid decision-making systems, narrow strategy processes, consistency in hiring practices, inflexible IT systems, knowledge silos and dependence on large investments to make sure the organization cannot flex.  The intent of these Lock-ins is to make sure that historical decisions are replicated, to make sure past behaviors are repeated again and again with the expectation that those behaviors will consistently produce the same returns.

But when the market shifts these Lock-ins create risk that is unseen.  Bankers had built systems for generating their own loans, and acquiring loans from others, that were designed to keep growing.  They designed various derivative products as their own form of insurance on their assets.  But what they did not recognize was that pushing forward in highly unregulated product markets, as the quality of debtors declined, created unexpected risk.  In other words, doing more of the same did not reduce risk – it increased the risk!   Because the company is designed to undertake these behaviors, there is no one who can recognize that the risk is growing.  There is no one who challenges whether doing more of the same is risky – only those who would challenge making a change by saying change is risky! 

Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG all created a much higher risk than they ever anticipated.  And they never saw it.  Because they were doing what they always did – and expecting the results would take care of themselves.  They were measuring their own behaviors, not the behavior of the market.  And thus they missed recognizing that the market had moved – and thus doing more of the same was inherently risky. 

(The same is true of GM, for example.  GM kept doing what it always did, refusing to see  the risk it incurred by ignoring market shifts brought on by changing customer behaviors, rising energy costs and offshore competitors.)

That's why big company CEOs feel OK about asking for a bail-out.  To them, they did not fail.  They did not take risk.  They did what they had always done – and something went wrong "out there".  Something went wrong "in the market".  Not in their company.  They need protection from the marketplace. 

Of course, this is just the opposite of what free markets are all about.  Free markets are intended to allow changes to develop, forcing competitors to adapt to market shifts or fail.  But those who run (or ran) our big banks, and many of our big industrial companies, haven't see it that way.  They believe their size means they are the market – so they want regulators to change the market back.  Back to where they can make money again.

So how is this to to be avoided?  It starts by having leaders who can recognize market shifts, and recognize the need for change.  In an companion Forbes article "Jamie Dimon's Straight Talk Has A Good Ring" the author takes time to review J.P. Morgan Chase's Chairman's letter to shareholders regarding 2008.  In the letter, surprisingly for a big organization, the JPMC Chairman points out market shifts, and then points out that his organization made mistakes by not reacting fast enough – for example by changing practices on acquiring mortgages from independent brokers.  He goes no to point out that several changes have happened, and will continue happening, at JPMC to deal with market shifts.  And he even comments on future scenarios which he hopes will help protect investors from the hidden risk of companies that take actions based on history.

Mr. Dimon's actions demonstrate a willingness to implement The Phoenix Principle.  For those who don't know him, Mr. Dimon has long been one of the more controversial figures in banking.  He is well known for exhibiting highly Disruptive behavior, yet he has found his way up the corporate ranks of the traditional banking industry.  Now he is not being shy about Disrupting his own bank – JPMC. 

  1. His discussion of future scenarios clearly points to expected changes in the market, from competitor shifts, economic shifts and regulatory shifts which his bank must address.
  2. He sees competitors changing, and the need for JPMC to compete differently with different sorts of institutions under different regulations.  Mr. Dimon clearly has his eyes on competitors, and he intends for JPMC to grow as a result of the market shift, not merely "hang on."
  3. He is espousing Disruptions for his company, the industry and the regulatory environment.  By going public with his views, excoriating insurance regulators as well as unregulated hedge funds,  he intends for his employees and investors to think hard about what caused past problems and how important it is to change.
  4. He keeps trying new and different things to improve growth and performance at the company.  It's not merely "more of the same, but hopefully cheaper."  He is proposing new approaches for lending as well as investing – and for significant changes in regulations now that banking is global.

Very few leaders recognize the risk from doing more of the same.  Leaders often feel it is conservative to not change course.  But, when markets shift, not changing course introduces dramatic risk.  People just don't perceive it.  Because they are looking at the past, not at the future.  They are measuring risk based upon what they know – what they've failed to take into account.  And the only way to overcome this problem is to spend a lot more time on market scenarios, competitor analysis and using Disruptions to keep the organization vital and connected with the market using White Space projects.