The problem with Hedgehogs – Dassault & Cessna vs. Tata

Two sides of a page, two sides of strategy.  Two different approaches, two very different sets of results.

That's what struck me when I was waiting for a meeting recently.  I picked up a print edition of Businessweek laying in the reception area.  On page 13 was "Public Flac Grounds Private Jets."  A soft economy has teamed up with bad impressions of executive perks to create a huge drop in orders for private jets.  French manufacturer Dassault had 27 more cancellations than orders in the first quarter.  U.S. based Cessna had 92 cancellations, and was bracing for 150 more by today (7/1/09).  In the meantime, the company has laid off 42% of its workforce and discountinued development of its newest jet aircraft.  And the market for used aircraft is flooded, boding poorly for future sales as the used inventory seeks buyers.

Here are two companies that definitely have their "hedgehog concept" as recommended by Jim Collins.  They set out to be leaders in private aircraft manufacturing, focusing on two different continents.  And they are leaders.  They know how to do be product leaders, and they do it well.  But look what happened when the market shifted.  In dramatic fashion, they go from record profits in 2007 to barely viable.  Being really good at making planes doesn't matter when nobody wants them.

Turn the page (literally), and on page 14 was "Now, the Nano Home."  In this short article we hear about how Tata Group, which has launched the Nano automobile for under $2,000, is entering the housing development market.  While builders in the USA are failing due to the real estate crash, Tata is creating entire apartment developments.  But not U.S. style.  These apartments sell for as little as $7,800 and come as small as 218 square feet!  (There are larger and more expensive units – up to $40,000).  While this may seem crazy to Americans, it fits the market where you're trying to convince someone to leave a squatters tenement and buy something legal to live in.  It's a market I've never heard of a single American company trying to develop, yet the opportunity is huge!

So here's Tata Group, the company that started as a trading company in the 1860s, that went on to become an industrial powerhouse making chemicals, steel and industrial products.  One of, if not the, largest IT services companies on the planet.  An auto manufacturer for India that expands into the global market with an entirely new product.  Now the company enters homebuildling, but not like other companies.  Instead uniquely doing what will fit market needs.  There is no hedgehog concept to Tata Group.  Just a company that keeps looking for market needs, then develops unique products to fulfill those needs.  And builds a 150 year history of growth in the process.

Anytime you have a narrow business, focused on a single market or product line, you are at risk of market shifts that can kill you.  These shifts can come from new technologies, or different production processes, or different attributes offered by competitors.  But the fact is, markets shift.  The better you are at focusing on your hedgehog concept, the more likely it is you will eventually fail.  Just look at the companies Mr. Collins claimed were the big winners in Good to Great – Circuit City and Fannie make are good examples.  You can be really, really good at something and you end up reaching the pinnacle of expertise only to be clobbered by a market shift that sends you toppling into failure.

Think like Tata Group.  Keep your eyes open for market needs.  Then figure out new ways to fulfill them.  Especially ways that competitors won't attack.  Forget about "focus."  No American car company is even trying to make a $2,000 car – despite the fact that the only big growth markets today are China, India and other emerging markets where a cheap auto makes the most sense.  And all those big U.S. real estate developers that are declaring bankruptcy, after building billion dollar malls, U.S. condominium projects, and office parks aren't even considering building and selling $8,000 apartments to the fastest growing middle class on the globeThey know their hedgehog concept.  But they don't know how to grow.  You'll do better to focus on growth and leave that hedgehog in his hole.

For more on how following its hedgehog concept led to the bankruptcy of GM download the free ebook "The Fall of GM".  Learn how to avoid the hedgehog mistake and keep your business growing.

“Cash Cows” are like unicorns, a myth – GM, Chrysler

"Chrysler delivers the bad news to 789 dealers" was yesterday's headline.  Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business.  Thousands are losing jobsChrysler is bankrupt, and GM looks destined to file shortly.  But wait a minute, GM was the market share leader for the last 50 years!!  These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows."  They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!

About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity.  The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix.   It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning.  Unfortunately, like a lot of  business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.

The idea was simple.  Growth markets are easier to compete in because people throw money at the companies – either via sales or investment.  So it's easier to make money in growing businessesMarket share was considered a metric for market power.  If you have high share, you supposedly could pretty much dictate prices.  High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost.  So, low growth and low share meant your business was a dog.  High growth and low share was a question mark – maybe you'd make money if you eventually get high share.  High growth and high share was a star.  And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.

In the 1970s/80s, looking at the industrial era, this wasn't a bad chart.  Especially in asset intensive businesses that had what were then called "scale advantages."  In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company.  Of  course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc.  The first part of the matrix has held up pretty well; the last part hasn't.  We now know that it's easier to make money in growth.  But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.

We know that having share is no defense of profitsThe assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true.  Today, companies build "scale" facilities overnight.  They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet.  Distribution systems are copied with third party vendors and web sites.  Even advertising scale can be obtained with aggressive web marketing at low cost.  And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).

Thus, all markets are overrun with competitors that drive down profits any time growth slows.  As GM learned, even with  more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing.  Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors.  When growth slows, the cash disappears into the competitive battles of the remaining players.  Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano).  Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.

Competition exists in all businesses except monopolies, and threatens returns of even those with highest share.  Today it might be easy to say that Google cannot be challenged.  That is short-sighted.  People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results.  People once said Sears could not be challenged in retailing.  Kodak in amateur photography.  And GM in cars.  Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler).  High share is no protection against competition. 

And thus, there is no "easy cash in the cow" to be milked It all gets spent fighting to stay alive.  Trying to protect share by cutting price, paying for distribution, advertising.  And if you don't spend it, you simply vanish.  Really fast.  Like Lehman Brothers.  Or Bennigans. 

The only way to make money, long term, is to keep growing.  To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace.  And that produces success more than anything else.  It's all about growthForget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.

Puma is NOT “an iPod on wheels” – GM, Segway

"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com.  The Puma is an enlarged Segway that can hold 2 people in a sitting position.  Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand.  Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.

The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music.  Instead of purchasing entire CDs, people could acquire one song at a time.  You no longer needed special media readers, because the tunes could be heard on any MP3 device.  And your access was immediate, from the download, without going to a store or waiting for physical delivery.  People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery.  The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music.  It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster.  The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following. 

Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience.  And that is what this GM/Segway announcement is trying to do.

Despite all the publicity when it was first announced, the Segway has not developed a strong following.  After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit.   Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers.  The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price.  Segway has never come close to achieving the goals of its inventor or its investors. 

This product announcement gives us more of the same from Segway.  It's the same product, just bigger.  We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity.  But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.

And worse, the product isn't being launched in White Space to answer these questions and build a market.  Instead, the announcement says it will be sold through GM dealers.  This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars? 

Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers.  Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist.  Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market.  And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.

This project does none of that.  It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear.  This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new.  The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation.  And the project is starting with most important decisions pre-announced – rather than permission to try new things.  And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.

The iPod and iTunes are brands that turned around Apple.  They are role models for how to use Disruptive innovation to resurrect a troubled company.  It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation.  The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.

Obsess about the Fringe – Tata Nano, GM

Forbes Magazine reviewed the new car from Tata Motors in "Nano Lives Up To The Hype."  Although we've known Tata Motors was designing and preparing this low-end car for a couple of years, most people were ignoring it.  But now it's here, and according to Forbes the $2,000 car exceeds expectations.  It's not a golf cart on wheels, it's "a proper car."   And it's about to go on sale in India.

So the world's largest car company, General Motors, is on the edge of bankruptcy – only able to stay out via the largesse of loans from the U.S. government.  Their sales are down 40%.  And at the same time, from far away in a country well known for poor roads, emerges a new competitor ready to sell cars at 1/5 the price of any car sold in America – or the rest of the western world.  Do you suppose the executives at GM or staying awake worrying about the Nano, or do you think they are ignoring this car altogether while trying to figure out how to sell more Chevy's?

Admittedly, the Nano comes from the fringe of competition.  People don't think of manufacturing when they think of India, they think of IT.  And they sure don't think of cars.  Powered rickshaws maybe.  And the car itself weighs only about 1,350 pounds – half what any other car weighs.  It's really designed for performance up to about 40 miles per hour, and it's not a great performer on the way to reaching the top speed of 65.  Although loaded with interior room, it has no back access – not even a fuel hatch.  It would be very easy to ignore.  It's easy to say this may be the next Yugo.  But, this one seems a lot more like the original Honda Civic in 1973.  Bare bones vehicle from a foreign country that's cheap, but otherwise "not up to American standards?"  Or is it a bare bones car from a new competitor with a strong desire to learn, improve and eat into the share of current competitors?

Any car executive who's smart is paying a lot of attention to the Nano.  Firstly, it demonstrates making a car at an unheard of price.  For much of the world, this offers people their first chance at an automobile of any kind.  So it brings in new users who would otherwise be left out.  It's price, alone, shows that in a global economy, auto production is headed toward lower prices due to lower world-wide cost.  If this vehicle is satisfactory to westerners, or can be made satisfactory over the next few years, it may never again be possible to pay American labor rates for producing automobiles.  For basic transportation, American labor may be too expensive.

Additionally, the Nano went from idea to car in about 3 years.  No 5 or 6 year cycle, like American car companies desire.  Tata has demonstrated it can design and manufacture a car in about half the time of the existing auto companies. So the cycle time is shortened even more.  And that this car can be profitable at volumes a fraction of the American production runs shows that markets need not be enormous – and old notions about tooling and other fixed costs of production may be things of the past.

Nano demonstrates why we HAVE to obsess about competitors.  Including "fringe" competitors.  Because these new competitors are figuring out how to do things differently.  They are shooting for future markets, not past markets (like India, China, eastern Europe, South America, Africa).  They are developing new Success Formulas that have different requirements, possibly obsoleting the old Success Formulas.  It's so easy if you're selling books to say "no one will buy books on the web" when you see the early interface and business model for Amazon – rather than think where this new competitor will be in a couple of years.  If you're selling land-line phone service it's easy to deride the quality of early cell phones, and project they will never move beyond niche users.  But smart competitors know that when a new product is introduced by a fringe competitor, it's best to pay really, really close attention.  You may need to be more like that competitor than you realize in a great big hurry.