by Adam Hartung | Oct 23, 2013 | Current Affairs, Defend & Extend, Food and Drink, Leadership, Lifecycle
On 11 October Safeway announced it was going to either sell or close its 79 Dominick's brand grocery stores in Chicago. After 80 years in Chicago, San Francisco based Safeway leadership felt it was simply time for Dominick's to call it quits.
The grocery industry is truly global, because everyone eats and almost nobody grows their own food. It moves like a giant crude oil carrier, much slower than technology, so identifying trends takes more patience than, say, monitoring annual smartphone cycles. Yet, there are clearly pronounced trends which make a huge difference in performance.
Good for those who recognize them. Bad for those who don't.
Safeway, like a lot of the dominant grocers from the 1970s-1990s, clearly missed the trends.
Coming out of WWII large grocers replaced independent neighborhood corner grocers by partnering with emerging consumer goods giants (Kraft, P&G, Coke, etc.) to bring customers an enormous range of products very efficiently. They offered a larger selection at lower prices. Even though margins were under 10% (think 2% often) volume helped these new grocery chains make good returns on their assets. Dillon's (originally of Hutchinson, Kansas and later purchased by Kroger) became a 1970s textbook, case study model of effective financial management for superior returns by Harvard Business School guru William Fruhan.
But times changed.
Looking at the trend toward low prices, Aldi from Germany came to the U.S. market with a strategy that defines the ultimate in low cost. Often there is only one brand of any product in the store, and that is likely to be the chain's private label. And often it is only available in one size. And customers must be ready to use a quarter to borrow the shopping cart (returned if you replace the cart.) And customers pay for their sacks. Stores are remarkably small and efficient, frequently with only 2 or 3 employees. And with execution so well done that the Aldi brand became #1 in "simple brands" according to a study by brand consultancy Seigal+Gale.
Of course, we also know that big discount chains like WalMart and Target started cherry picking the traditional grocer's enormous SKU (stock keeping units) list, limiting selection but offering lower prices due to lower cost.
Looking at the quality trend, Whole Foods and its brethren demonstrated that people would pay more for better perceived quality. Even though filling the aisles with organic
products and the ultimate in freshness led to higher prices, and someone nicknaming the chain
"whole paycheck," customers payed up to shop there, leading to superior
returns.
Connected to quality has been the trend, which began 30 years ago, to "artisanal" products. Shoppers pay more to buy what are considered limited edition products that are perceived as superior due to a range of "artisanal quality" features; from ingredients used to age of product (or "freshness,") location of manufacture ("local,") extent to which it is considered "organic," quantity of added ingredients for preservation or vitamin enhancement ("less is more,") ecological friendliness of packaging and even producer policies regarding corporate social and ecological responsibility.
But after decades of partnership, traditional grocers today remain dependant on large consumer goods companies to survive. Large CPGs supply a massive number of SKUs in a limited number of contracts, making life easy for grocery store buyers. Big CPGs pay grocers for shelf space, coupons to promote customer purchases, rebates, ads in local store circulars, discounts for local market promotions, sales volumes exceeding commitments and even planograms which instruct employees how to place products on shelves — all saving money for the traditional grocer. In some cases payments and rebates equalling more than total grocer profits.
Additionally, in some cases big CPG firms even deliver their products into the store and stock shelves at no charge to the grocer (called store-door-delivery as a substitute for grocer warehouse and distribution.) And the big CPG firms spend billions of dollars on product advertising to seemingly assure sales for the traditional grocer.
These practices emerged to support the bi-directionally beneficial historically which tied the traditional grocer to the large CPG companies. For decades they made money for both the CPG suppliers and their distributors. Customers were happy.
But the market shifted, and Safeway (including its employees, customers, suppliers and investors) is the loser.
The old retail adage "location, location, location" is no longer enough in grocery. Traditional grocery stores can be located next to good neighborhoods, and execute that old business model really well, and, unfortunately, not make any money. New trends gutted the old Safeway/Dominick's business model (and most of the other traditional grocers) even though that model was based on decades of successful history.
The trend to low price for customers with the least funds led them to shop at the new low-price leaders. And companies that followed this trend, like Aldi, WalMart and Target are the winners.
The trend to higher perceived quality and artisanal products led other customers to retailers offering a different range of products. In Chicago the winners include fast growing Whole Foods, but additionally the highly successful Marianno's division of Roundy's (out of Milwaukee.) And even some independents have become astutely profitable competitors. Such as Joe Caputo & Sons, with only 3 stores in suburban Chicago, which packs its parking lots daily by offering products appealing to these trendy shoppers.
And then there's the Trader Joe's brand. Instead of being all things to all people, Aldi created a new store chain designed to appeal to customers desiring upscale products, and named it Trader Joe's. It bares scance resemblance to an Aldi store. Because it is focused on the other trend toward artisinal and quality. And it too brings in more customers, at higher margin, than Dominick's.
When you miss a trend, it is very, very painful. Even if your model worked for 75 years, and is tightly linked to other giant corporations, new trends lead to market shifts making your old success formula obsolete.
Simultaneously, new trends create opportunities. Even in enormous industries with historically razor-thin margins – or even losses. Building on trends allows even small start-up companies to compete, and make good profits, in cutthroat industries – like groceries.
Trends really matter. Leaders who ignore the trends will have companies that suffer. Meanwhile, leaders who identify and build on trends become the new winners.
by Adam Hartung | Apr 20, 2012 | Current Affairs, In the Swamp, Lifecycle, Lock-in, Television, Web/Tech
Who can forget what a great company Sony was, and the enormous impact it had on our lives? With its heritage, it is hard to believe that Sony hasn't made a profit in 4 consecutive years, just recently announced it will double its expected loss for this year to $6.4 billion, has only 15% of its capital left as equity (debt/equity ration of 5.67x) and is only worth 1/4 of its value 10 years ago!
After World War II Sony was the company that took the transistor technology invented by Texas Instruments (TI) and made the popular, soon to become ubiquitous, transistor radio. Under co-founder Akio Morita Sony kept looking for advances in technology, and its leadership spent countless hours innovatively thinking about how to apply these advances to improve lives. With a passion for creating new markets, Sony was an early creator, and dominator, of what we now call "consumer electronics:"
- Sony improved solid state transistor radios until they surpassed the quality of tubes, making good quality sound available very reliably, and inexpensively
- Sony developed the solid state television, replacing tubes to make TVs more reliable, better working and use less energy
- Sony developed the Triniton television tube, which dramatically improved the quality of color (yes Virginia, once TV was all in black & white) and enticed an entire generation to switch. Sony also expanded the size of Trinitron to make larger sets that better fit larger homes.
- Sony was an early developer of videotape technology, pioneering the market with Betamax before losing a battle with JVC to be the standard (yes Virginia, we once watched movies on tape)
- Sony pioneered the development of camcorders, for the first time turning parents – and everyone – into home movie creators
- Sony pioneered the development of independent mobile entertainment by creating the Walkman, which allowed – for the first time – people to take their own recorded music with them, via cassette tapes
- Sony pioneered the development of compact discs for music, and developed the Walkman CD for portable use
- Sony gave us the Playstation, which went far beyond Nintendo in creating the products that excited users and made "home gaming" a market.
Very few companies could ever boast a string of such successful products. Stories about Sony management meetings revealed a company where executives spent 85% of their time on technology, products and new applications/markets, 10% on human resource issues and 5% on finance. To Mr. Morita financial results were just that – results – of doing a good job developing new products and markets. If Sony did the first part right, the results would be good. And they were.
By the middle 1980s, America was panicked over the absolute domination of companies like Sony in product manufacturing. Not only consumer electronics, but automobiles, motorcycles, kitchen electronics and a growing number of markets. Politicians referred to Japanese competitors, like the wildly successful Sony, as "Japan Inc." – and discussed how the powerful Japanese Ministry of Trade and Industry (MITI) effectively shuttled resources around to "beat" American manufacturers. Even as rising petroleum costs seemed to cripple U.S. companies, Japanese manufacturers were able to turn innovations (often American) into very successful low-cost products growing sales and profits.
So what went wrong for Sony?
Firstly was the national obsession with industrial economics. W. Edward Deming in 1950s Japan institutionalized manufacturing quality and optimization. Using a combination of process improvements and arithmetic, Deming convinced Japanese leaders to focus, focus, focus on making things better, faster and cheaper. Taking advantage of Japanese post war dependence on foreign capital, and foreign markets, this U.S. citizen directed Japanese industry into an obsession with industrialization as practiced in the 1940s — and was credited for creating the rapid massive military equipment build-up that allowed the U.S. to defeat Japan.
Unfortunately, this narrow obsession left Japanese business leaders, buy and large, with little skill set for developing and implementing R&D, or innovation, in any other area. As time passed, Sony fell victim to developing products for manufacturing, rather than pioneering new markets.
The Vaio, as good as it was, had little technology for which Sony could take credit. Sony ended up in a cost/price/manufacturing war with Dell, HP, Lenovo and others to make cheap PCs – rather than exciting products. Sony's evolved a distinctly Industrial strategy, focused on manufacturing and volume, rather than trying to develop uniquely new products that were head-and-shoulders better than competitors.
In mobile phones Sony hooked up with, and eventually acquired, Ericsson. Again, no new technology or effort to make a wildly superior mobile device (like Apple did.) Instead Sony sought to build volume in order to manufacture more phones and compete on price/features/functions against Nokia, Motorola and Samsung. Lacking any product or technology advantage, Samsung clobbered Sony's Industrial strategy with lower cost via non-Japanese manufacturing.
When Sony updated its competition in home movies by introducing Blue Ray, the strategy was again an Industrial one – about how to sell Blue Ray recorders and players. Sony didn't sell the Blue Ray software technology in hopes people would use it. Instead it kept it proprietary so only Sony could make and sell Blue Ray products (hardware). Just as it did in MP3, creating a proprietary version usable only on Sony devices. In an information economy, this approach didn't fly with consumers, and Blue Ray was a money loser largely irrelevant to the market – as is the now-gone Sony MP3 product line.
We see this across practically all the Sony businesses. In televisions, for example, Sony has lost the technological advantage it had with Trinitron cathode ray tubes. In flat screens Sony has applied a predictable, but money losing Industrial strategy trying to compete on volume and cost. Up against competitors sourcing from lower cost labor, and capital, countries Sony has now lost over $10B over the last 8 years in televisions. Yet, Sony won't give up and intends to stay with its Industrial strategy even as it loses more money.
Why did Sony's management go along with this? As mentioned, Akio Morita was an innovator and new market creator. But, Mr. Morita lived through WWII, and developed his business approach before Deming. Under Mr. Morita, Sony used the industrial knowledge Deming and his American peers offered to make Sony's products highly competitive against older technologies. The products led, with industrial-era tactics used to lower cost.
But after Mr. Morita other leaders were trained, like American-minted MBAs, to implement Industrial strategies. Their minds put products, and new markets, second. First was a commitment to volume and production – regardless of the products or the technology. The fundamental belief was that if you had enough volume, and you cut costs low enough, you would eventually succeed.
By 2005 Sony reached the pinnacle of this strategic approach by installing a non-Japanese to run the company. Sir Howard Stringer made his fame running Sony's American business, where he exemplified Industrial strategy by cutting 9,000 of 30,000 U.S. jobs (almost a full third.) To Mr. Stringer, strategy was not about innovation, technology, products or new markets.
Mr. Stringer's Industrial strategy was to be obsessive about costs. Where Mr. Morita's meetings were 85% about innovation and market application, Mr. Stringer brought a "modern" MBA approach to the Sony business, where numbers – especially financial projections – came first. The leadership, and management, at Sony became a model of MBA training post-1960. Focus on a narrow product set to increase volume, eschew costly development of new technologies in favor of seeking high-volume manufacturing of someone else's technology, reduce product introductions in order to extend product life, tooling amortization and run lengths, and constantly look for new ways to cut costs. Be zealous about cost cutting, and reward it in meetings and with bonuses.
Thus, during his brief tenure running Sony Mr. Stringer will not be known for new products. Rather, he will be remembered for initiating 2 waves of layoffs in what was historically a lifetime employment company (and country.) And now, in a nod to Chairman Stringer the new CEO at Sony has indicated he will react to ongoing losses by – you guessed it – another round of layoffs. This time it is estimated to be another 10,000 workers, or 6% of the employment. The new CEO, Mr. Hirai, trained at the hand of Mr. Stringer, demonstrates as he announces ever greater losses that Sony hopes to – somehow – save its way to prosperity with an Industrial strategy.
Japanese equity laws are very different that the USA. Companies often have much higher debt levels. And companies can even operate with negative equity values – which would be technical bankruptcy almost everywhere else. So it is not likely Sony will fill bankruptcy any time soon.
But should you invest in Sony? After 4 years of losses, and entrenched Industrial strategy with MBA-style leadership focused on "numbers" rather than markets, there is no reason to think the trajectory of sales or profits will change any time soon.
As an employee, facing ongoing layoffs why would you wish to work at Sony? A "me too" product strategy with little technical innovation that puts all attention on cost reduction would not be a fun place. And offers little promotional growth.
And for suppliers, it is assured that each and every meeting will be about how to lower price – over, and over, and over.
Every company today can learn from the Sony experience. Sony was once a company to watch. It was an innovative leader, that pioneered new markets. Not unlike Apple today. But with its Industrial strategy and MBA numbers- focused leadership it is now time to say, sayonara. Sell Sony, there are more interesting companies to watch and more profitable places to invest.
by Adam Hartung | Nov 3, 2011 | Innovation, Leadership, Lock-in, Web/Tech
How much access do your employees have to Facebook, Twitter, Linked-in, GroupOn, FourSquare, and texting in their daily work, on their daily technology devices? Do you encourage use, or do you in fact block access, in the search for greater security, and on the belief that you achieve higher productivity by killing access to these “work cycle stealers?” Do you implement policies keeping employees from using their own technology tools (smartphone or tablet) on the job?
In 1984 the PC revolution was still quite young. Pizza Hut was then a division of PepsiCo (now part of Yum Brands,) and the company was fully committed to a set of mainframe applications from IBM. Mainframe applications, accessed via a “green screen” terminal were used for all document creation, financial analysis, and even all printing. The CIO was very proud of his IBM mainframe data center, and his tight control over the application base and users.
In what seemed like an almost overnight series of events, headquarters employees started bringing small PC’s to work in order to build spreadsheets, create documents and print miscellaneous memos. They found the new technology so much easier to use, and purchase cost so cheap, that their productivity soared and they were able to please their bosses while leaving work on time. A good trade-off.
The CIO went ballistic. “These PCs are popping up like popcorn around here – and we have to kill this trend before it gains any additional momentum!” he decried in an executive meeting. PCs were “toys” that lacked the “robustness” of his mainframe applications. If users wanted higher productivity, then they simply needed to spend more time in training.
Additionally, if he didn’t control access to computing cycles, and activities like printing, employees would go berserk using unnecessary resources on projects they probably should never undertake. He was servicing the corporation by keeping people on a narrow tool set – and it gave the company control over what employees could do as well as how they could do it making sure nothing frivolous was happening. For all these reasons, plus the fact that he could assure security on his mainframe, he felt it important that the CEO and executive team commit with him that PCs would not be allowed in Pizza Hut.
Retrospectively, he looks foolish (and his efforts were unsuccessful.) PCs unleashed a wave of personal productivity that benefitted all early adopters. They not only let employees do their work faster, but it allowed employees to develop innovative solutions to problems – often dramatically lowering overhead costs for many management tasks. PCs, of course, swept through the workplace and in only a decade most mainframes, and their high cost, air conditioned data centers, were gone.
Yet, to this day companies continue to use “best practices” as a tool to stop technology, and productivity improvement, adoption. Managers will say:
- We need to control employee access to information
- We need to keep employees focused on their job, without distractions
- We must control how employees do their jobs so we minimize errors and improve quality
- We need to control employee access externally for security reasons
- We need consistency in our tool set and how it is used
- We made a big investment in how we do things, and we need to leverage that [sunk cost] by forcing greater use
- We need to remember that management are the experts, and it is our job to tell people how to do their jobs. We don’t want the patients running the hospital!
It all sounds quite logical, and good management practice. Yet, it is exactly the road to productivity reduction, innovation assassination and limited growth! Only by allowing employees to apply their skills and best thinking can any company hope to continuously improve its productivity and competitiveness.
But, moving from history and theoretical to today’s behavior, what is happening in your company? Do you have a clunky, hard to use, expensive ERP, CRM, accounting, HR, production, billing, vendor management, procurement or other system (or factory, distribution center or headquarters site) that you still expect people to use? Do you demand people use it – largely for some selection of the 7 items above? Do you require they carry a company PC or Blackberry to access company systems, even as the employee carries their own Android smartphone or iPad with them 24×7?
Recently, technology provider IFS Corporation did a survey on ERP users (Does ERP Mean Excel Runs Production?) Their surprising results showed that new employees (especially under age 40) were very unlikely to take a job with a company if they had to use a complex (usually vendor supplied) interface to a legacy application. In fact, 75% of today’s users are actively seeking – and using – cloud based apps or home grown spreadsheets to manage the business rather than the expensive applications the corporation supplied! Additionally, between 1/3 and 2/3 of employees (depending upon age) were actively seeking to quit and take another job simply because they found the technology of their company hard to use! (CIO Magazine: Employees Refusing to Use Clunky Enterprise Software.)
Unlike managers invested in historical decisions, and legacy assets, employees understand that without productivity their long-term employment is at risk. They recognize that constantly shifting markets, with global competitors, requires the flexibility to apply novel thinking and test new solutions constantly. To succeed, the workforce – all the workforce – needs to be informed, interacting with potential new solutions, thinking and applying their best thoughts to creating new solutions that advance the company’s competitiveness.
That’s why Fast Company recently published something all younger managers know, yet shocks older ones: “Half of Young Professionals Value Facebook Access, Smartphone Options Over Salary.” It surprised a lot of people to learn that employees would actually select access over more pay!
While most older leaders and managers think this is likely because employees want to screw off on the job, and ignore company policies, the article cites a Cisco Connected World Technology Report which describs how these employees value productivity, and realize that in today’s world you can’t really be productive, innovative and generate growth if you don’t have access – and the ability to use – modern tools.
Today’s young workers aren’t any less diligent about work than the previous generation, they are simply better informed and more technology savvy! They think even more long-term about the company’s survivability, as well as their ability to make a difference in the company’s success.
In other words, in 2011 tools like Linked-in, Facebook, Twitter et. al. accessed via a tablet or smartphone are the equivalent of the PC 30 years ago. They give rapid access to what customers, competitors and others in the world are doing. They allow employees to quickly answer questions about current problems, and find new solutions. As well as find people who have tried various options, and learn from those experiences. And they allow the employee to connect with a company problem fast – whether at work or away – and start to solve it! They can access those within their company, vendors, customers – anyone – rapidly in order to solve problems as quickly as possible.
At a recent conference I asked IT leaders for several major airlines if they allowed employees to access these tools. Uniformly, the answer was no. That may be the reason we all struggle with the behavior of airlines, I bemoaned. It might explain why the vast majority of customers were highly sympathetic with the flight attendant that jettisoned a plane through the emergency exit with a beer in hand! At the very least, it is a symptom of the internal focus that has kept the major airlines from pleasing 85% of their customers, while struggling to be profitable. If nobody has external access, how can anybody make anything better?
The best practices of 1975 don’t cut it in 2012. The world has changed. It is more important now than ever that employees have the access to modern tools, and the freedom to use them. Good management today is not about telling people how to do their job, but rather letting them figure out how to do the job best. Implement that practice and productivity and innovation will show themselves, and you’re highly likely to find more growth!
by Adam Hartung | May 25, 2011 | Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership, Lock-in, Openness, Transparency, Web/Tech
Nobody admits to being the innovation killer in a company. But we know they exist. Some these folks “dinosaurs that won’t change.” Others blame “the nay-saying ‘Dr. No’ middle managers.” But when you meet these people, they won’t admit to being innovation killers. They believe, deep in their hearts as well as in their everyday actions, that they are doing the right thing for the business. And that’s because they’ve been chosen, and reinforced, to be the Status Quo Police.
When a company starts it has no norms. But as it succeeds, in order to grow quickly it develops a series of “key success factors” that help it continue growing. In order to grow faster, managers – often in functional roles – are assigned the task of making sure the key success factors are unwaveringly supported. Consistency becomes more important than creativity. And these managers are reinforced, supported, even bonused for their ability to make sure they maintain the status quo. Even if the market has shifted, they don’t shift. They reinforce doing things according to the rules. Just consider:
Quality – Who can argue with the need to have quality? Total Quality Management (TQM,) Continuous Improvement (CI,) and Six Sigma programs all have been glorified by companies hoping to improve product or service quality. If you’re trying to fix a broken product, or process, these work pretty well at helping everyone do their job better.
But these programs live with the mantra “if you can’t measure it, you can’t improve it. Measure everything that’s important.” If you’re innovating, what do you measure? If you’re in a new technology, or manufacturing process, how do you know what you really need to do right? If you’re in a new market, how do you know the key metric for sales success? Is it number of customers called, time with customers, number of customer surveys, recommendation scores, lost sales reports? When you’re trying to do something new, a lot of what you do is respond quickly to instant feedback – whether it’s good feedback or bad.
The key to success isn’t to have critical metrics and measure performance on a graph, but rather to learn from everything you do – and usually to change. Quality people hate this, and can only stand in the way of trying anything new because you don’t know what to measure, or what constitutes a “good” measure. Don’t ever forget that Motorola pretty much invented Six Sigma, and what happened to them in the mobile phone business they pioneered?
Finance. All businesses exist to make money, so who can argue with “show me the numbers. Give me a business plan that shows me how you’re going to make money.” When your’e making an incremental investment to an existing asset or process, this is pretty good advice.
But when you’re innovating, what you don’t know far exceeds what you know. You don’t know how to meet unment needs. You don’t know the market size, the price that people will pay, the first year’s volume (much less year 5,) the direct cost at various volumes, the indirect cost, the cost of marketing to obtain customer attention, the number of sales calls it will take to land a sale, how many solution revisions will be necessary to finally put out the “right” solution, or how sales will ramp up quarterly from nothing. So to create a business plan, you have to guess.
And, oh boy, then it gets ugly. “Where did this number come from? That one? How did you determine that?” It’s not long until the poor business plan writer is ridden out of the meeting on a rail. He has no money to investigate the market, so he can’t obtain any “real” numbers, so the business plan process leads to ongoing investment in the old business, while innovation simply stalls.
Under Akia Morita Sony was a great innovator. But then an MBA skilled in finance took over the top spot. What once was the #1 electronics innovator in the globe has become, well, let’s say they aren’t Apple.
Legal – No company wants to be sued, or take on unnecessary risk. And when you’re selling something, lawyers are pretty good at evaluating the risk in that business, and lowering the risk. While making sure that all the compliance issues are met in order to keep regulators – and other lawyers – out of the business.
But when you’re starting something new, everything looks risky. Customers can sue you for any reason. Suppliers can sue you for not taking product, or using it incorrectly. The technology could fail, or have negative use repercussions. Reguators can question your safety standards, or claims to customers.
From a legal point of view, you’re best to never do anything new. The less new things you do, the less likely you are to make a mistake. So legal’s great at putting up roadblocks to make sure they protect the company from lawsuits, by making sure nothing really new happens. The old General Motors had plenty of lawyers making sure their cars were never too risky – or interesting.
R&D or Product Development – Who doesn’t think it’s good to be a leader in a specific technology? Technology advances have proven invaluable for companies in industries from computers to pharmaceuticals to tractors and even services like on-line banking. Thus R&D and Product Development wants to make sure investments advance the state of the technology upon which the company was built.
But all technologies become obsolete. Or, at least unprofitable. Innovators are frequently on the front end of adopting new technologies. But if they have to obtain buy-in from product development to obtain staffing or money they’ll be at the end of a never-ending line of projects to sustain the existing development trend. You don’t have to look much further than Microsoft to find a company that is great at pouring money into the PC platform (some $9B, 16% of revenue in 2009,) while the market moves faster each year to mobile devices and entertainment (Apple spent 1/8th the Microsoft budget in 2009.)
Sales, Marketing & Distribution – When you want to protect sales to existing customers, or maybe increase them by 5%, then doing more of what you’ve always done is smart. So money is spent to put more salespeople on key accounts, add more money to the advertising budget for the most successful (or most profitable) existing products. There are more rules about using the brand than lighters at a smoker’s convention. And it’s heresy to recommend endangering the distribution channel that has so successfully helped increase sales.
But innovators regularly need to behave differently. They need to sell to different people – Xerox sold to secretaries while printing press manufacturers sold to printers. The “brand” may well represent a bygone era, and be of no value to someone launching a new product; are you eager to buy a Zenith electronic device? Sprucing up the brand, or even launching something new, may well be a requirement for a new solution to be taken seriously.
And often, to be successful, a new solution needs to cut through the old, high-cost distribution system directly to customers if it is to succeed. Pre-Gerstner IBM kept adding key account sales people in hopes of keeping IT departments from switching out of mainframes to PCs. Sears avoided the shift to on-line sales successfully – and revenue keeps dropping in the stores.
Information Technology – To make more money you automate more functions. Computers are wonderful for reducing manpower in many tasks. So IT implements and supports “standard solutions” that are cost effective for the historical business. Likewise, they set up all kinds of user rules – like don’t go to Facebook or web sites from work – to keep people focused on productivity. And to make sure historical data is secure and regulations are met.
But innovators don’t have a solution mapped out, and all that automated functionality is an enormously expensive headache. When being creative, more time is spent looking for something new than trying to work faster, or harder, so access to more external information is required. Since the solution isn’t developed, there’s precious little to worry about keeping secure. Innovators need to use new tools, and have flexibility to discover advantageous ways to use them, that are far beyond the bounds of IT’s comfort zone.
Newspapers are loaded with automated systems to collect and edit news, to enter display ads, and to “Make up” the printed page fast and cheap. They have automated systems for classified advertising sales and billing, and for display ad billing. And systems to manage subscribers. That technology isn’t very helpful now, however, as newspapers go bankrupt. Now the most critical IT skills are pumping news to the internet in real-time, and managing on-line ads distributed to web users that don’t have subscriptions.
Human Resources – Growth pushes companies toward tighter job descriptions with clear standards for “the kinds of people that succeed around here.” When you want to hire people to be productive at an existing job, HR has the procedures to define the role, find the people and hire them at the most efficient cost. And they can develop a systematic compensation plan that treats everyone “fairly” based upon perceived value to the historical business.
But innovators don’t know what kinds of people will be most successful. Often they need folks who think laterally, across lots fo tasks, rather than deeply about something narrow. Often they need people who are from different backgrounds, that are closer to the emerging market than the historical business. And pay has to be related to what these folks can get in the market, not what seems fair through the lens of the historical business. HR is rarely keen to staff up a new business opportunity with a lot of misfits who don’t appreciate their compensation plan – or the rules so carefully created to circumscribe behavior around the old business.
B.Dalton was America’s largest retail book seller when Amazon.com was founded by Jeff Bezos. Jeff knew nothing about books, but he knew the internet. B.Dalton knew about books, and claimed it knew what book buyers wanted. Two years later B.Dalton went bankrupt, and all those book experts became unemployed. Amazon.com now sells a lot more than books, as it ongoingly and rapidly expands its employee skill sets to enter new markets – like publishing and eReaders.
Innovation requires that leaders ATTACK the Status Quo Police. Everything done to efficiently run the old business is irrelevant when it comes to innovation. Functional folks need to be told they can’t force the innovatoirs to conform to old rules, because that’s exactly why the company needs innovation! Only by attacking the old rules, and being willing to allow both diversity and disruption can the business innovate.
Instead of saying “this isn’t how we do things around here” it is critical leaders make sure functional folks are saying “how can I help you innovate?” What was done in the name of “good business” looks backward – not forward. Status Quo cops have to be removed from the scene – kept from stopping innovation dead in its tracks. And if the internal folks can’t be supportive, that means keeping them out of the innovator’s way entirely.
Any company can innovate. Doing so requires recognizing that the Status Quo Police are doing what they were hired to do. Until you take away their clout, attack their role and stop them from forcing conformance to old dictums, the business can’t hope to innovate.
by Adam Hartung | Jan 12, 2010 | Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
Do all good ideas originate outside the organization? Of course not. Motorola understood all the critical technologies for smart phones, and taught Apple how to use them in a joint development project that created the ROKR. That's just one example of a company that had the idea for growth, but didn't move forward effectively. In this case Apple captured the value of new technology and a market shift.
On the Harvard Business Review blog site one of consulting firm Innosight's leaders, Mark Johnson, covers two stories of companies that had all the technology and capability to lead their markets, but got Locked-in to old practices. In "Have You Already Killed Your Next Big Thing" Mr. Johnson talks about Xerox and Kodak – two stories profiled in my 2008 book "Create Marketplace Disruption." Both companies developed the technology that replaced their early products (Xerox developed desktop publishing and Kodak developed the amateur digital camera.) But Lock-in kept them doing what they did rather than exploiting their own innovation.
One of the causes is a fascination with metrics. Again on the Harvard Business Review blog site Roger Martin, Dean of the Rotman School of Management at the University of Toronto, tells us in "Why Good Spreadsheets Make Bad Strategies" that you can't measure everything. And often the most important information about markets and what you must do to succeed is beyond measuring – at least in the short term.
Measurements are good control tools. Measurements can help force a focus on short term improvements. But measurements, and the concomitant focus, reduces an organization's ability to look laterally. They lose sight of information from lost customers, from small customers, from fringe customers and fringe competitors. Measurement often leads to obsession, and a deepening of Defend & Extend behavior. It's not accidental that doctors often find anorexia patients measure everything in (liquids and solids) and everything out (liquids and solids).
Measurements are created when a business is doing well. In the Rapids. Like Kodak during the 1960s and Xerox in the 1970s. Measurements are structural Lock-ins that help "institutionalize" the behavior which makes the Success Formula operate most effectively. And they help growth. But they do nothing for recognizing a market shift, and when new technology comes along, they stand in the way. That's why a powerful Six Sigma or Total Quality Management (TQM) or Lean Manufacturing project can help reduce costs short term, but become an enormous barrier to innovation over time when markets shift. These institutionalized efforts keep people doing what they measure, even if it doesn't really add much incremental value any longer.
To overcome measurement Lock-ins we all have to use scenario planning. Scenarios can help us see that in a future marketplace, a changed marketplace, measuring what we've been doing won't aid success. And because we don't yet know what the future market will really look like, we can't just swap out existing metrics for something different. As we proceed to do new things, in White Space, it's about learning what the right metrics are – about getting into the growth Rapids – before we tie ourselves up in metrics.
Note: To all readers of my Forbes article last week – there has been an update. The very professional and polite leadership at Tribune Corporation took the time to educate me about the LBO transition. As a result I learned that what I previously read, and reported in my column as well as on this blog, as being an investment of employee retirement funds into the LBO was inaccurate. Although Tribune is in hard times right now, the very good news is that the employee retirement funds were NOT wiped out by the bankruptcy. The Forbes article has been corrected, and I am thankful to the Tribune Corporation for helping me report accurately on that issue.
