Bigger Isn't Always Better

Toyota: bigness self-corrects

2009-11-26T10:17:00.002-05:00

Martin Zimmerman, in today’s LA Times, lays out the case:

Some say the Japanese company has sacrificed its legendary quality in recent years to reach the goal of becoming the world's No. 1 automaker.

The litany of quality and safety issues has led some industry experts to wonder if Toyota's rapid expansion in the 2000s, which enabled it to pass General Motors as the world's biggest automaker, came at the expense of the company's legendary engineering and quality control prowess.

Toyota executives have conceded as much, acknowledging as far back as 2005 that the company needed to get "back to basics."

And after a fatal August crash of a Lexus ES 350 in San Diego was blamed on runaway acceleration, Toyota President Akio Toyoda issued a public apology.

"Customers bought our cars because they thought they were the safest but now we have given them cause for grave concern. I can't begin to express my remorse," Toyoda said in a statement.

At risk, some say, is the very trait that made the automaker No. 1.

"There's nothing else to the brand," said John Wolkonowicz, an analyst with consultant IHS Global Insight. "It's not built on eye-catching design. It's not built on a cutting-edge driving experience. It's not built on performance. It's built on quality and low cost of ownership."

"Toyota has spent the last five or 10 years concentrating on being the biggest instead of the best, and that's a shame," said Jake Fisher, senior engineer at the nonprofit Consumer Union, which publishes Consumer Reports.

That kind of negative perception could ultimately erode the price premium that Toyota has long enjoyed in the U.S. because of its reliability, said Mark Oline, an auto industry analyst for Fitch Ratings.

A quest for bigness seems to have done-in both Toyota and its rival, GM. And created an opening for more nimble competitors:

Toyota's quality stumbles have helped open the door to competitors, particularly Korean automaker Hyundai. And domestic automakers such as Ford may also be able to attract former Toyota loyalists whose trust in the Japanese brand has been eroded.

Has Toyota lost it's way?

2009-10-15T08:35:00.003-04:00

My Jan 5, '07 post was about the folly of setting "being the world's biggest car maker" as a growth goal. Then GM held that mantle. Now Toyota does. Follow the link to see what Toyota has reaped.

Reinventing (intelligent) regulation

2009-04-15T10:43:00.001-04:00

The Washington Post’s Steve Pearlstein wrote another on-target column today outlining the roles of the financial regulators that will be needed to keep bigger-is-better thinking from causing future financial crises. He wisely warns of dangers of creating an intelligent regulatory system in a rush, and as a reaction to the current mood of populist outrage about Wall St et al. Outrage is great for stimulating awareness of a problem, but it’s a poor basis upon which to create something new and better.

What Steve misses in his analysis is the critical role the US congress must play in any regulatory overhaul. And there’s the rub. Congress has allowed itself to fund its election campaigns through private contributions rather than through public funds. Call it government-by-the-highest bidder. As long as this is the “American way” don’t expect smart and even-handed regulation of the economy.

If you want to see something saner, support groups like Common Cause who are working hard to take the influence of money out of government. It’s an uphill struggle. Most members of Congress got there because they were good at playing the current game. Incentives are few for game-changers, and those who are elected soon learn the ways of the game players.

Growth requires subtraction as well as addition

2009-04-12T11:06:00.002-04:00

Follow the link to a good Fortune case study about how Middlebury College (see Feb 2 '09 post) is coping with the economic downturn. There are lots of lessons for organizations - for-profit as well as non-profit - here.

"Especially in the private sector, higher ed has grown by adding new things without taking old things away. There's going to be a lot of soul-searching on campuses around the country, and colleges asking, 'What's essential?"

... comments Ronald Ehrenberg, a Cornell University economist who studies higher education.

The article also highlights Ron Liebowitz, who came to Middlebury as a faculty member in 1984 and is now its president, concern about a financial bubble:

"He watched the college's amazing growth with a mixture of awe and concern. 'I'd always thought the entire business model of higher education was a little suspect,' he says, 'especially for residential liberal arts colleges like Middlebury, because of what it assumes in terms of large endowment returns, large gifts from alumni, and tuition increases that go beyond inflation.' "

The dumbest idea in the world

2009-03-14T21:31:00.003-04:00

Bigger Isn’t Always Better is sharply critical of the shareholder value approach to running a corporation. It calls it a strategy built on dubious logic, flawed assumptions, and a belief in magic.

That book was published in 2006. Now, three years later, Jack Welch, ex-CEO of General Electric and celebrity poster-child for the shareholder value movement, publicly admits it was a dumb idea:

"Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was ‘a dumb idea’ for executives to focus so heavily on quarterly profits and share price gains.

The former General Electric chief told the Financial Times the emphasis that executives and investors had put on shareholder value, which began gaining popularity after a speech he made in 1981, was misplaced.

Mr Welch, whose record at GE encouraged other executives to replicate its consistent returns, said that managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company.

‘On the face of it, shareholder value is the dumbest idea in the world,’ he said. ‘Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers and your products.’"

- Financial Times, March 12, 2009

Salary (reduction) sanity

2009-02-02T10:31:00.002-05:00

My first book was about downsizing. It stressed ways to do it smartly and humanely. (See my website for its text). So it was encouraging to see the approach Middlebury College is taking to adjusting to the current economic crisis. Here is what it’s president, Ron Liebowitz, wrote about how he is distributing the pain:

"Though we are committed to competitive salaries for our faculty and staff, and recognize their importance in hiring and retaining the best faculty and staff, we believe it would be unwise to raise salaries this coming year as if it were business as usual, especially when the cost of living has not increased significantly (0.1 percent) since December of 2007.

We will provide a 2% raise for employees who earn $50,000 or less, but hold flat the salaries for those who earn above $50,000.

In addition, all members of President’s Staff, which includes 16 colleagues, will take at least a 2.5% reduction in salary.

Vice presidents will take a 5% cut, and my salary will be reduced by 10%.

This will be the second year in a row that the vice presidents and I have not received a salary increase."

Who says the non-profit world lags the private sector in intelligent business practices?

Follow the money

2009-01-01T10:38:00.002-05:00

The start of a new year is a good time to learn from the past. Easier to say than do, though. Stanford b-school professor Jeffrey Pfeffer offers some good thoughts in his blog on why this is so.

He zeroes in on poorly designed incentive systems as a key culprit.

"While pundits expound endlessly on how the current financial mess arose, the answers are, in virtually every case, quite simple. People did what they were paid to do—make (bad) loans, take excessive risks, package and resell worthless paper, leverage up the balance sheet, and so forth. Unless we get better at the seemingly simple task of predicting what reward systems are actually going to do, and unless we get smarter about designing rewards that don’t produce destructive behavior, the current bad news will just get recycled in the future. That’s because we don’t seem to learn anything from experience.

There are many, many instances of financial incentives driving behavior that then causes organizations major problems. This fact raises the question of why no one ever seems to learn anything—which explains why the current situation with home mortgages looks remarkably like the case of making bad loans to countries that couldn’t repay them about 25 years ago and a little like the savings and loan mess of the late 1980s."

The good news is that having identified the problem - incentives that don’t take account of consequences – we have the know-how to reshape them into something more functional. The issue remaining, though, is do we feel enough pain from the economic mess we are in to have the will?

I’m optimistic.

Happy New Year!

What fuels it all: Grandiosity

2008-12-10T09:23:00.002-05:00

[Excerpt from Chapter 2, Bigger Isn’t Always Better]

These [see last post] are all cognitive errors, not manifestations of greed. They drive bigness, and they are also reinforced by it.

What causes people (especially smart people, as Sternberg and Finkelstein like to point out) to fall into these traps?

We are all prone to distorted thinking from time to time, but when these become our modus operandi for dealing with the world, it is likely that we have become caught up in grandiosity.

This is an occupational hazard to which many leaders are vulnerable. Psychiatrist Roy Lubit notes that people in positions of power can become self-centered and grandiose when those around them treat them with excessive deference, fawn on them, feel reluctant to challenge their views, and fail to provide self-corrective feedback.

Observes Lubit: "If you have power you are probably not as smart, funny, or good looking as people say you are."

Many leaders have risen to senior positions because of their expressed self-confidence, ability to generate enthusiasm in others, and willingness to make tough decisions quickly. As they advance in the hierarchy, they run the risk of having fewer people nearby who are willing to intelligently challenge or add balance to their views, further inflating their sense of self-importance and fueling any tendencies toward arrogance that they have brought with them.

The tendency to provide rock-star-sized pay packages to senior executives reinforces all of this, putting additional distance between them and the others in their organization. Soon the stage is set for unrealistic optimism, egocentrism, omniscience, omnipotence, and invulnerability to take over, and the quest for bigness is primed to become the business's dominant driver.

The 5 Horsemen: Where do mistaken perceptions of reality come from?

2008-12-10T09:17:00.003-05:00

[Excerpt from Chapter 2, Bigger Isn’t Always Better]

Mistaken perceptions come from faulty thinking processes. Robert Sternberg identified five forms of flawed thinking that can lead to counterproductive actions:

Unrealistic optimism. Optimism is a powerful enabler of growth. Too much of it, applied in situations where it is unwarranted, can backfire by leaving people feeling so capable and on such a roll that they mistakenly think that they can achieve anything they set out to do. Samsung thought its great success with consumer electronics would carry over to a completely different business, automobile manufacturing. It invested $5 billion to enter a market that was already oversaturated and nearly profit-free. Exaggerating benefits and discounting costs is a great way to set a business up for failure, as Samsung soon learned after it was forced to turn over the direction of its ailing car business to a more experienced French company, Renault.

Egocentrism. Individuals who come to think that they are the only ones who matter are likely to make many perceptual errors. They will take personal credit for the good luck of having been in a buoyant economy or a market that has just taken off. Egocentrists act in ways that benefit themselves, often without a clue to what impact these behaviors are having on others. Their illusion of personal preeminence leads them to miss a lot that is going on around them. MIT systems researchers have spent several decades examining the dynamics behind growth. They have noticed that all growth initiatives involve two distinct processes—one that generates a self-reinforcing spiral of success, and another that attempts to balance this forward momentum with feedback from the rest of the world telling the grower to slow down a bit. The first process always runs up against, and sometimes causes, the second. Egocentrism (acting as if the world revolves around you) basks in the first of these, while ignoring the early warnings of obstacles ahead provided by the second process. Even as its sales declined, legendary Levi Strauss still thought of itself as the company that defined jeans and smart casual wear, and dismissed reports that young, fashion-oriented consumers saw its clothes as stodgy and outdated.

Omniscience. People who feel that they know all they need to know and do not need to seek or heed advice are the ones who are most likely to make decisions without considering all the ramifications of their actions. The chief executive of Rubbermaid in the mid-1990s, Wolfgang Schmitt, cultivated a reputation with his managers as a lightning-fast thinker who behaved as through he knew "everything about everything."24 He ran one of the then most admired companies in the United States. Rubbermaid had a dominant position in many categories of household products and containers—at least, dominant until Schmitt missed that decade's shift of market power from makers of products to their sellers. Rubbermaid ignored Wal-Mart's demands for lower prices and deliveries at Wal-Mart's convenience, and found its place on this retailer's shelves quickly taken by cheaper items made by companies with retailer-friendly, just-in-time delivery systems. Rubbermaid's sales declined, and by the end of the decade the company was sold to a turnaround specialist.

Omnipotence. Feeling like an all-powerful master of the universe leads one to push harder in the same direction when obstacles arise, rather than heeding the potentially useful feedback the world is trying to provide. Assumptions about reality get confused with reality itself. After Nokia became the world's leading cell phone maker, it came to think that it could shape the industry because its market position was so strong. It resisted following its smaller competitors, forgetting how motivated these companies were to keep up with changes in customer needs that could offer a way to topple Nokia's dominance. As a result, when preferences shifted away from candy bar–style handsets and toward sleeker, clamshell phones, Nokia stayed with the older models too long and lost market share. Ironically, one of the companies it lost customers to was Motorola, the former wireless phone leader whose business had been devastated by Nokia's digital phones a few years earlier when Motorola clung too long to analog technology. Executives caught up in omnipotence overestimate how much control they have over events and completely discount the role that chance and one-time occurrences have played in their past successes. Their response to obstacles becomes stereotyped—they just push harder.

Invulnerability. Once thought to be only an affliction of teenage boys, the idea of being able to do whatever one wants to without fear of harm or exposure has crept into some boardrooms. Sometimes expressed by ignoring the law and social norms, and other times by failing to protect a strong position in the marketplace by adapting to evolving circumstances, this thinking fallacy leads to underestimating how aware and clever ones' opponents (and regulators) really are.

Why otherwise smart executives do stupid things

2008-12-10T09:14:00.002-05:00

[Here is Bigger Isn’t Always Better’s take on what’s behind what Steve Pearlstein wrote about in the last post.]

Why do otherwise smart, alert, and forward-thinking businesspeople repeatedly engage in activities that usually prove counterproductive?

This is a subject that has received a lot of recent attention.

Robert Sternberg, a Yale psychologist, wrote a book to answer just that question. Why Smart People Can Be So Stupid pulls together the research of several leading behavioral scientists to identify factors beyond avarice that have driven the kinds of dumb business decisions discussed in this chapter.

A Dartmouth management professor, Sydney Finkelstein, also studied this phenomenon. His book, Why Smart Executives Fail, examines what was behind 197 instances of dramatic drops in market share and value.

Nobel Prize in Economics winner Daniel Kahneman and behavioral economist Richard Thaler have also weighed in on these issues.

The findings of all these scholars share a similar theme: Mistaken perceptions of reality can cause much more damage than willful misconduct. Self-serving behaviors have certainly played a part in many unwise business expansions, but they are far from the whole story.

A perfect storm - or lack of clear vision?

2008-12-10T09:07:00.003-05:00

Washington Post’s Steve Pearlstein has written another of his classic on-target columns about what’s behind the recent sinking performance of so many companies. He takes strong issue with the “perfect storm” defense being used recently by so many business leaders.

As always, he’s very direct:

“A bit of unsolicited advice to business executives trying to explain why their company or their industry is suddenly in the soup:

Please spare us the "perfect storm" metaphor.

It's hackneyed, for starters. It doesn't square with the facts. And for people who fancy themselves leaders, it's downright unbecoming.

The reason the perfect storm is such an appealing metaphor for these shipwrecked captains of industry is that it appears to let them off the hook. … It's an act of nature that nobody could have predicted -- or so the story goes.”

Pearlstein also notices that:

“…these guys actually buy into this nonsense.

The rest of us want desperately to believe that what brought us this economic crisis was some combination of greed, fraud and negligence -- and, no doubt, there was quite a bit of that. What the populist critique ignores, however, is that at the heart of any economic or financial mania is an epidemic of self-delusion that infects not only large numbers of unsophisticated investors but also many of the smartest, most experienced and sophisticated executives and bankers.

It's not that they don't see the excesses and dangers in front of them -- how could they not? But somehow they convince themselves that the world has changed, that the old rules no longer apply or that, because of competitive pressure, they had no choice but to run with the herd.”

He then goes on to observe how widespread victimology-thinking has become in executive suites:

“In recent months, I've had a chance to talk with half a dozen top business leaders whose companies have fallen into the soup and read published interviews with many more. And almost to a person, they say that they've been replaying the tape over and over in their minds and, even now, they still can't figure out what they might have done differently, given what they knew at the time and the various pressures they were under. Or put another way, they continue to think of themselves as victims of a perfect storm.”

The rest of Steve’s article shows how these executives are totally off-base in their analyses of what went wrong.

Being a journalist, he saves his greatest wrath for Sam Zell, head of the now-bankrupt Tribune:

“The only perfect storm to hit the Tribune was the one that resulted from the collision of Zell's ego, his arrogance and his utter ineptitude in running a media empire, along with a total disregard for the financial well-being of thousands of employees whose retirement assets he commandeered for a financing scheme that gave him control of the company while putting in very little of his own money.”

Pearlstein sees self-delusion and the herd mentality behind many of Wall Street’s and Detroit’s current woes. He sums things up saying:

“What capsized the economy was not a perfect storm but a widespread failure of business leadership -- a failure that is only compounded when executives refuse to take responsibility for their misjudgments and apologize.”

Booms and busts

2008-12-09T13:49:00.002-05:00

Richard Foster was a McKinsey director from 1982 to 2004, and is a coauthor of Creative Destruction. Here’s his take on the cyclical nature of growth cycles:

"During the boom times, when the equity premium goes way too high, everybody hocks everything to get in on the game, and this creates the conditions for a crash.

When the crash occurs, the politicians come in and say it was this or that person’s fault. Then they create regulatory institutions, and virtually every one of those institutions—starting with the Federal Reserve, in 1913, as a result of the crash of 1907—has been quite productive for the nation in the longer term. This includes the formation of the Securities and Exchange Commission, in 1934; the Investment Company Act, in 1940; the beginning of the end of fixed commission rates in 1970; and the Sarbanes–Oxley Act, in the early 2000s."

But happens in the aftermath of all the new regulations? Why don’t they seem to provide lasting relief?

“What do self-respecting entrepreneurs do when subjected to new regulations? They learn the regulations backward and forward and then vow never to start another business that falls within the scope of those regulations.

And so off the entrepreneur goes to find a new way. That’s one reason credit default swaps eventually took the form they did—the other options were regulated.

The new entrepreneur often seeks ways to innovate outside the scope of the newly established regulations. In the beginning, all that works out fine. We have innovations, we love the people who created them, they’re great heroes, the returns are strong, everybody says, ‘I’m going to be one of those guys.’

Eventually, all the truly good guys who are going to get into that business have done so. The opportunity starts drawing less savory figures—charlatans who overmarket, cut corners, establish usurious contracts, and do other clever things to generate profit for themselves. They end up bringing the system down.

Then guess what happens? At the end of that period, after the equity premium has soared and collapsed again, the government steps in and regulates the systems, this time focusing on the last wave of abuse.

And then we start over.”

Foster also thinks that our economy was “getting somewhat better at handling these cycles until 2000, but since then we’ve gotten worse.”

The key issue, of course, is: does it have to be this way? How can we move from a system that only fixes itself after another round of great pain to one that pulls us back way before we reach the brink? How can we cultivate the “good innovation” and minimize “the bad.”

Fighting over the steering wheel

2008-12-06T10:11:00.001-05:00

Micheline Maynard, in The New York Times, offers a perceptive account of the growth management failures that brought General Motors to where it is today. It’s a recap well worth reading because the tensions it describes are present in every organization.

Her bottom line:

"G.M.’s biggest failing, reflected in a clear pattern over recent decades, has been its inability to strike a balance between those inside the company who pushed for innovation ahead of the curve, and the finance executives who worried more about returns on investment.

The two views were rarely in sync — in effect, fighting over the steering wheel that controlled G.M.’s direction — and the internal battles distracted G.M. from spotting shifts in the marketplace.

Time and again over the last 30 years, G.M. has spent billions of dollars on innovative ideas like its Saturn small-car company in the 1980s and the EV1 electric vehicle in the 1990s, only to then deprive those projects of further financing because money was needed elsewhere or because they were not delivering enough profit."

Her article cites the pivotal decade of the 1960s as the time when GM’s DNA began to lose its innovation chromosomes.

When Microsoft got it right

2008-12-03T12:02:00.001-05:00

Parallel paths are often the best way to avoid the paralysis that frequently accompanies single, bet-your-business strategies. Improvisers acting along these lines have many balls in the air at once. Rather than rushing to implement any single solution, they mimic the experimenter and launch multiple attacks on each problem.

This is what Microsoft did at a critical stage of its development when it had to be open to the leadings and promptings of a market that itself didn’t know where it was going.

In 1988 Microsoft was not the certain winner in the desk top operating system wars. Smaller then than most of its competitors, its flagship product DOS had been the industry standard for six years in the PC market, but it was clunky and showing its age. It’s replacement product, Windows, was already in its second release and a near still-birth attracting more pundit criticism than loyal users.

Facing-off with Microsoft in the marketplace was a much loved, more elegant alternative - the Apple Macintosh operating system. AT&T, Hewlett-Packard and Sun Microsystems were touting a new graphical version of their robust Unix software. And IBM had just released OS/2, a product compatible with DOS, as strong as Unix and as easy to use as a Macintosh.

How did Microsoft respond? With a little of everything. A new, improved DOS was put on the market along with the latest version of Windows. Microsoft actually co-developed OS/2, so it would share its market success along with IBM. In case Apple’s Macintosh triumphed, Microsoft invested heavily in updated versions of Excell, PowerPoint and Word that would run only on it. And, to keep its flanks protected, Microsoft even partnered with a small software maker to create a version of Unix that was PC-compatible.

The business press had a field day criticizing the company from Seattle. “Microsoft was adrift, Gates has no strategy” shouted the articles. Rumors abounded of infighting among rival teams of his programmers. Gates, of course, was far from strategy-less. He had a clear plan of action in the face of massive uncertainty. He, as McKinsey consultant Eric Beinhocker noted, bet on every horse. Gates wanted Windows to pull ahead in the race, but he knew that past trends were not predictors of future results in the then still-amorphous PC market (otherwise we’d all be using Macintoshes today). So he flanked his favored product with an array of side bets. Even if Windows lost, Microsoft wouldn’t.

That was a good strategy for Microsoft in 1988. But less so now as it tries to find its place in the internet in 2008.

A common problem of successful companies is they keep repeating the strategies that led to their success.

Creating new products: Ford vs. Microsoft

2008-12-02T18:42:00.001-05:00

When Ford committed itself to building a gas-electric hybrid SUV, it faced the challenge of creating the most technically advanced product it had ever mass-produced.6 Even though the company has been making cars for over 100 years, these have all run with one motor. Hybrids have two, and they require a host of new-to-Ford technologies to make the two motors work together.

To develop this car, Ford pulled researchers out of its lab and sat them next to the design engineers who were building the car prototype. These and other members of the hybrid team stayed in close physical proximity throughout the project, and the entire team stayed together until the project was completed.

Just like the SUV they were creating, this group had two engines. One member of the team, Prabhaker Patil, was a Ph.D. scientist. His job was to inspire creativity and invention. Another group leader, Mary Ann Wright, a veteran of many successful Ford car launches, was is the feet-on-the-ground person. Her job was to keep things on schedule. She was the disciplinarian who forced the scientists, who naturally like to keep refining (and refining) their work, to wrap things up.

Ford's head of product development also ran interference for the group with the company's top management. He freed the team from the normal time-consuming management reviews and progress report requirements, allowing it to focus on the must-win technical battles of the project, not the needs of the bureaucracy.

Contrast the hothouse process Ford used to play a critical game of catch-up with its rival hybrid maker, Toyota, with the product creation system that Bill Gates designed for Microsoft.

There, responsibility for each new product passes from the "incubator" of an idea, usually a researcher in one of Microsoft's divisions, to the product "definer" (someone in marketing or a division manager), and then finally to the "owner," which is a development team, which supervises the programmers who do the real work.

Notice that the originator of the idea is not considered its owner and is not kept with the project through its completion.

A host of other Microsoft managers play varying roles throughout the development cycle. Some are participants; others have reviewer or approver/coach roles.

Microsoft calls this integrated innovation, although its emphasis seems to be more on fostering the integration than on fostering the innovation.

Complex matrix systems like this are almost guaranteed to destroy momentum and result in long-delayed product introductions — which, when you think about it, might make sense for a company like Microsoft, whose new products primarily compete with its established products.

[Excerpt from Bigger Isn’t Always Better, Chapter 10 “Master Momentum and Bounce.”]

Why can't Microsoft make money online?

2008-12-01T20:54:00.004-05:00

... asks Fortune magazine.

Answer:

"It's quite possible that Microsoft is going after the Internet with too much energy - or at least attacking in too many directions. Rather than carve out some element of the web where it can shine, Microsoft pursues everything.

Its Live Search competes head-on with Google. MSN and Hotmail do battle, unimpressively, with Yahoo's e-mail service and Google's smaller but innovative Gmail. With recent tweaks to its Windows Live product, Microsoft is mimicking Facebook, in which Microsoft itself invested."

Sounds like a problem of bigness vs. strategic focus:

"For a company that has long been known for the clarity of its message - the old mission statement, 'A computer on every desk and in every home, running Microsoft software' - Microsoft isn't all that clear about what it wants online.

'You've had Ballmer and [chairman Bill] Gates telling the world for years that online success is critical for Microsoft,' says Benjamin Schachter, an online-ad analyst with UBS. 'But they don't say what success is.' "

Real growth is driven by clear, precise goals.

Fortune goes on with the "fear" issue. Fear, fueled by a big bank account, seldom leads to good things:

"In part, that's because Microsoft is so busy playing defense against Google. Yet Microsoft hasn't done a great job with that either. Even as it has spent money on data centers and marketing gimmicks like giving cash back to users of its search engine - the online equivalent of banks handing out toasters for opening accounts - Microsoft continues to lose share to Google.

Microsoft's portion of U.S. search queries was 8.5% in September, according to comScore, down from 10.4% in January 2007. During the same period, Google's share rose from 53% to 63%. And Facebook, MySpace, Google's YouTube, and other, newer sites have reduced MSN to also-ran status in terms of web popularity."

... and there's also the issue of organizational clarity:

"That at least five high-ranking Microsoft executives have a piece of the online portfolio illustrates another part of the company's predicament. Microsoft doesn't speak with one voice when it talks about the Internet."

Mission-muddle

2008-11-28T13:09:00.002-05:00

President-elect Obama has named Harvard economist (and ex-Harvard president an ex-secretary of Treasury) Larry Summers to direct his National Economic Council.

Here’s Summer’s take on why Fannie Mae and Freddie Mac got so out of control:

"The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation.

When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations.

Government budget discipline was not appropriate because it was always emphasized that they were 'private companies.' But market discipline was nearly nonexistent given the general perception -- now validated -- that their debt was government backed.

Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe."

Summer’s solution: divide these firm’s activities into sharply focused components, some with a public purpose, other private. Then spin them off.

[See the August 23 post for more details on how mission-muddle provided cover for these organizations' unsound, bigger-is-better strategies.]

“Are unions killing the American auto business?”

2008-11-26T13:54:00.005-05:00

Carlos Ghosn, CEO of Nissan and Renault, was featured in Bigger Isn’t Always Better as a good example of an adaptive leader able to switch from “fixer” to “grower” orientations as the situation required. In a recent Business Week interview he displayed the mindset of a grower as he answered a question about labor’s role in renewing the US auto industry:

"Frankly, I don't think the question is unions.

The question is: Do you have the flexibility to operate and be competitive?

If a union helps you be flexible, then the union is an asset. If the union forbids or handicaps this flexibility to operate, then you have a problem. We have unions in France and Japan. If you can reach an agreement by which unions help you be flexible and [respond] to the market, in a certain way they become an asset."

Citigroup, and the limits of aggression-driven expansion

2008-11-25T10:50:00.005-05:00

The New York Times on Citigroup, November 21, 2008:

"To some extent, Citigroup’s fortunes have declined as the storm in the broader financial industry has grown angrier.

Many analysts argue that the globe-spanning conglomerate, largely built by Sanford I. Weill, had never really worked as a cohesive unit. Different divisions have consistently battled, and promised synergies between units have rarely emerged."

[See my December 13, 2005 post: "Does synergy scale?]

" 'They never spent the time, the money or the energy to integrate all of the businesses,' said Meredith Whitney, analyst at Oppenheimer. 'And so the credit card business speaks Mandarin while the mortgage business speaks Cantonese. It’s not a functional family. And because it’s not a functional family, it’s extraordinarily expensive to operate all the separate businesses, and you don’t get any of the advantages.'

Many of these problems were masked during the credit boom this decade. But with the financial crisis in full swing, the bank’s failure to unite its empire has become more exposed than ever.

'A lot of the issues facing Citigroup are not new issues, they have simply grown greater in severity,' said Michael Mayo, an analyst at Deutsche Bank."

Definitely not new issues.

Here’s what Bigger Isn’t Always Better said in Chapter One about Citi in 2006:

Citigroup fueled its ascendancy to the position of the world's largest bank by replacing an emphasis on controls and coordination with a hyperaggressive, push-the-ethical-envelope corporate culture.

Known by some Wall Street analysts as the bankers with claws and fangs, Citi's executives are now working overtime to repair the damage to its reputation caused by money-laundering scandals in Japan, questionable bond-market trading practices in London, and allegations of conflicts of interest during the tech-stock boom and bust.

Now facing a regulatory environment less tolerant of the behaviors that once drove Citi when it was one of Enron's top banking partners, this mega-institution may have reached the limits of aggression-driven expansion. Citigroup … set challenging profit-expansion goals, but failed to put in place a strong framework to guide how they were to be met.

Act II

2008-11-25T10:35:00.002-05:00

My September 5 post highlighted the next shoe to drop in the ongoing financial meltdown drama – credit cards. Follow this link to read a banker’s account of what’s behind it, including minimal income verification by card issuers, and:

"The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back."

Subprime mortgage lending, Part 2.

Some regulatory remedies are also offered for the government to consider in anticipation of a 2009 crunch in massive bank write-offs for consumer credit that never should have been offered.

A change of management

2008-11-22T13:11:00.002-05:00

What’s the alternative to the faith-based economic mindset that’s led to a burst-bubble economy?

Hopefully Obama’s.

"He really questions his advisors aggressively," says Harvard's [Jeffrey] Liebman [who is one of them]. "He wants to see disagreements aired in front of him. He likes to have the actual experts in the room."

Obama told Fortune Magazine last summer:

"I don't like ideology overriding fact. I like facts, then determining what we need to do. I believe in a strong feedback loop. Companies that are successful do that."

The alternative to faith-based management is evidence-based. Feedback produces evidence.

Feedback is sometimes labeled pushback. It can be fought. It can be made to disappear below the surface through manipulative “change management.” It can be ignored. It can be dissed in hopes of getting everybody on the same page by appeals to loyalty.

Or it can be listened to, interpreted, and used to guide to move forward.

Tuxes in a soup kitchen

2008-11-19T23:20:00.001-05:00

The CEOs of the Big Three auto companies all flew into DC in their individual private jets to testify about their companies’ need for a $25 billion loan bailout.

Didn’t look good to many in congress. One rep noted:

"It's almost like seeing a guy show up at the soup kitchen in high hat and tuxedo. It kind of makes you a little bit suspicious."

Let Detroit Go Bankrupt, says Romney

2008-11-19T09:55:00.001-05:00

It’s not just (off-and-on) liberal thinkers like Tom Friedman who are skeptical of a US automaker bailout. One-time Republican presidential candidate Mitt Romney’s op-ed published today is even blunter:

“If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.”

Instead, Romney offers a plan for a managed bankruptcy.

Perhaps somewhere between Friedman and Romney can be found some good ideas for getting Detroit back on a growth path.

Coming home to roost

2008-11-12T09:12:00.001-05:00

Here’s Tom Freidman’s take on why receivership, not a blank check, is needed for the US auto industry.

Since the early 1980’s I’ve had opportunities to work with the US and Japanese car builder’s senior execs. The contrast was – and still is – amazing. The Americans have been on a non-sustainable path for many years - they actively fought-off the constraints that could have guided them toward profitable growth. Business strategies are doomed to fail when they are shielded from reality.

Bigger Isn’t Always Better includes a chapter on facing reality and why this is seldom a natural act.

The issue now is not so much to assign blame for Detroit’s woes (there’s plenty to go around), but sort out what to do. Freidman offers a useful way to start thinking about this.

More details are not always better details

2008-11-10T13:16:00.002-05:00

Several years ago a stock broker tried to interest me in a complicated “structured” investment product his company put together. I asked to see the prospectus. It took over 100 pages to describe this “product.” I think I understand enough about finance to figure out what the document was saying, but reading it I could never figure out how the thing worked or was supposed to make money. I guess the broker expected me to rely on his judgment and that of his mega-firm (a recipient, since, of several bailouts). Anyway, I fortunately decided to pass on the opportunity. It was among those that lost a lot of its value recently, despite the lengthy verbiage about it being absolutely safe and liquid.

The moral of this episode is nicely summed up by something the artist Georgia O’Keefe said in 1922:

“Nothing is less real than realism…. Details are confusing. It is only by selection, by elimination, by emphasis, that we get at the real meaning of things.”

In other words, if it doesn’t boil down, it may not really be there.

[See the Sept 20 '06 post for more on this theme and how it plays out in Apple’s strategy vis a vis Microsoft.]

Optimization

2008-11-09T20:05:00.001-05:00

A week ago I gave a talk about the causes and implications of the current economic crisis. The audience was a cross-section of typical Washington-types – lawyers, federal regulators, an economist, NGO leaders, international development experts, and an academic or two.

I covered all the usual suspects – belief-based economics, under-regulation, dumb-regulation, the banking industry’s new business model, and a few others. I also got to (try to) explain CDS’s and CDO’s.

Lots of fun. Especially afterward when I was asked to summarize the message for future business leaders in one lesson:

“Time frames matter. You’ll make more profit in the medium and long run if you don’t always try to maximize it in the short run.”

Meet the “bigger-isn’t-always-better” consumer

2008-11-09T19:15:00.000-05:00

Harvard Business School professor John Quelch calls these new shoppers “simplifiers.” Their market segment will be among the fastest growing. Their emergence poses both threats and great opportunities for marketers. Businesses looking for sustainable growth ignore them at their own peril.

Would less be more if the financial services sector shrunk?

2008-11-09T19:14:00.000-05:00

Yes, says Edward Hadass of www.breakingviews.com

He’s right.

Dumb idea: letting bigness become a proxy for best

2008-11-09T19:12:00.001-05:00

Alex Edmans from Wharton and Jack Bao of MIT …

“…examined nearly 30 years of returns to shareholders from mergers and acquisitions, and found a strong negative correlation between a bank's market share and the returns of its acquirer clients. In other words, the more market share a bank has, the less value it is likely to deliver.”

Their perceptive report explains why otherwise smart companies keep patronizing places that don’t deliver what they were looking for. It also sheds light on why so many merger deals destroy, not create, value.

Mea culpa

2008-11-09T19:09:00.000-05:00

Alan Greenspan’s October appearance before a congressional committee investigating what went wrong.

Speaks for itself.

When in a deep hole …

2008-10-11T10:54:00.001-04:00

… the best thing to do is to stop digging. That’s Washington Post Pulitzer Prize winner Steve Pearlstein’s advice about what to do next.

He also reminds us:

“As we should have learned long ago, markets are not self-correcting. They require collective action to put them back into working order.”

Steve is a realist, not an ideologue:

“… at this moment what's most needed is to direct the capital toward the biggest institutions that present the biggest risk to the stability of the rest of the financial system, whether they are banks, investment houses, insurance companies or non-bank lenders like General Electric.”

“Wouldn't that be picking winners and losers? In a way, yes. But remember that the reason we are in this fix is because markets, at least for the moment, are broken and can't be relied on to allocate capital more wisely than Hank Paulson. A little bit of well-timed, well-crafted socialism is just the thing to save capitalism from itself.”

Greenspan vs. Buffett

2008-10-09T10:09:00.002-04:00

Was the US economy led down the wrong path by Alan Greenspan? Today’s New York Times weighs in:

"If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted."

“ 'He had a way of speaking that made you think he knew exactly what he was talking about at all times,' said Senator Tom Harkin, a Democrat from Iowa. 'He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?' ”

Read the full article for a good review of the dangers of faith-based economics – and the risks created when economists are treated as celebrities.

Fear and Fannie

2008-10-07T11:30:00.000-04:00

Bigger Isn’t Always Better argues that the emotion of fear often drives the quest for bigness. Fear is the biggest begetter of unwise mergers, flawed risk taking, and failed mergers.

Click the link to read how this emotion drove the actions that drove Fannie Mae over the brink.

Making credit safer

2008-10-07T11:28:00.000-04:00

If you enjoyed Elizabeth Warren’s spirited description of the current financial crisis (see Sept 28 post), you’ll want to read her case for smart credit regulation. Click the link below.

Putting ideas like hers in place are what will bring the credit markets back to sustainable growth.

A slow-motion train wreck …

2008-09-28T20:43:00.002-04:00

That’s how Harvard Business School’s dean, Jay Light, describes the Wall St. meltdown.

Last Thursday Harvard’s president assembled the university’s top economists and business thinkers. In 90 minutes they provided what is easily the clearest explanation-to-date of what went wrong, why, and what needs to be done. Not to be missed, especially Elizabeth Warren's contribution.

Follow the link to the watch the webcast (requires RealPlayer).

Leadership lapses

2008-09-18T23:03:00.002-04:00

The first two chapters of Bigger Isn’t Always Better explored the connection between executive compensation and flawed business performance. This link provides Wharton’s take on this issue, using the events of the week as a backdrop.

Among the examples Wharton cites:

“In 2006, the Office of Federal Housing Enterprise Oversight (OFHEO), which monitors the financial health of Fannie Mae and Freddie Mac, released a report describing an arrogant and unethical culture at Fannie Mae where employees manipulated earnings to generate higher bonuses for executives between 1998 and 2004. 'Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO,' said James Lockhart, the director of OFHEO when the report was released.”

Positive deviance

2008-09-10T09:11:00.002-04:00

Today’s lesson: when all those around you are crumbling, it pays to look hard at those few still standing tall.

My August 5 post about Hudson City Bancorp is one example.

Follow the link below to read about some federal mortgage success stories. Compare and contrast with Fannie Mae and Freddie Mac. Give special attention to how different ownership structures (government-owned and co-op vs. stock-option-fueled publicly-listed) drive different growth paths. Which structure is best in what circumstances?

Too big, too fast

2008-09-08T09:14:00.002-04:00

This morning, again, the front pages are doing the job of this blog. The New York Times
bottom-lines the situation in Washington DC:

“The downfall of Fannie and Freddie stems from a series of miscalculations and deferred decisions, both by their executives and government officials, according to company insiders, regulators, auditors and outside analysts. The companies expanded rapidly in recent years, initially playing down the risks posed by a housing bubble. Then, as the housing slump expanded nationwide, they resisted raising enough new capital that might have provided a financial cushion to weather the storm. Lawmakers, paralyzed by partisan infighting, delayed strengthening regulatory oversight of the politically powerful companies.”

While, in the "other Washington,” a similar story unfolds in the Times about the firing of the CEO of the country’s biggest saving and loan:

“Mr. Killinger is the latest chief executive in the financial services industry to lose his job as the credit crisis has worsened. Earlier on Sunday, the heads of Fannie Mae and Freddie Mac were forced out after the Treasury Department orchestrated a takeover of the companies. The chief executives of Citigroup, Merrill Lynch, Wachovia and Bear Stearns have also been dismissed as losses mounted.”

“Washington Mutual, based in Seattle, has been one of the lenders hit hardest by the downturn in the housing market. It has one of the biggest portfolios of so-called pay option mortgages, and had long focused its operations on lower-income urban borrowers. Losses at the bank have been devastating.”

The next shoe

2008-09-05T10:41:00.004-04:00

Steve Pearlstein’s article (last post) describes the subprime mortgage crisis fallout. Fortune’s
Geoff Colvin now warns us about the next shoe that’s about to drop:

“The next credit crunch: why our easy access to plastic is about to dry up.”

Many of the dysfunctional dynamics - and more-must-be-better bankers – behind the mortgage mess are also threatening the consumer credit market.

Past bubbles-and-busts (such as dot.com and telecom) primarily affected investors and industries. The current mortgage and upcoming credit card crunches go much deeper into the heart of the American economy. It’s an economy driven by more by consumers than businesses, which makes these bubbles much more explosive when pricked.

“A Con Game In Pinstripes”

2008-09-05T10:20:00.001-04:00

Steven Pearlstein is the Washington Post’s Pulitzer Prize-winning business columnist. Over the past few years he’s written some of the most perceptive accounts of the "bigger = better" dynamics that underlie the world’s current economic crisis. Today’s column is no exception:

“There would have never been a subprime mortgage crisis if Wall Street's underwriters had not been on the phone to bankers and brokers with incessant calls for more ‘product,’ by which they meant any loan for any amount to any borrower that could be packaged and sold off without even a pretence of due diligence and shopped around to the rating agency most likely to trade a triple-A rating for a triple-A fee.”

Steve goes on to warn:

“These people are not your friends. They have already racked up half a trillion dollars in credit losses, wiped out five years of shareholders' profits and taken the wind out of the sails of the global economy. Given the situation, you'd think the leaders of this industry would have stepped forward to acknowledge the extent of the damage and apologize for their deep complicity in it. Instead, they have pointed fingers at the media and short-sellers, offered lame excuses about unforeseen market forces and warned of dire consequences from increased regulation, as if things were not dire enough already.”

And he’s very clear about what needs to happen if things are to change for the better:

“This is an industry that has lost all credibility -- with investors, with corporate clients and with the public. Its fundamental problem is a corrupt culture that is shaped by inflated fees and excessive compensation that bear too little relation to the risk, skills and innovation involved. Until that excessive compensation is competed away and that culture is transformed, Wall Street will continue to serve up a steady diet of booms, busts and financial scandals.”

Read his full article – and check out his past columns for a heavy dose of the kind of clear thinking that’s been so missing on Wall Street and in Washington.

Is it time to rethink offshoring?

2008-09-05T09:51:00.001-04:00

For some industries, yes.

Recent McKinsey research supports the observation in my August 3 post: Global Supply Chains – Longer Isn’t Always Better.

“Soaring oil prices, a falling dollar, and rising wages are undermining some of the reasons manufacturers moved offshore,” says McKinsey.

“For managers of global supply chains, the question now is whether or not to consider scaling back offshore production by returning operations to, or closer to, the United States.”

The McKinsey analysis shows that for a number of high-tech products, costs have changed enough, in many instances, to significantly undermine the benefits of offshoring to Asia. They note:

“The wage differential between Mexico and China has also narrowed significantly. In 2003, Mexican workers made over twice what their Chinese counterparts did; today that gap has narrowed to 1.15 times.”

One of the 100 best blogs

2008-09-05T09:30:00.001-04:00

This blog has been selected by HR World as one of the "Top 100 Management and Leadership Blogs That All Managers Should Bookmark.”

I’m flattered to be in the company of other honorees including John Bogle, Marshall Goldsmith, Seth Godin, David Maister, Tom Peters, Daniel Pink, Fred Reichheld, and Bob Sutton.

Follow the link above to the Top 100 list which includes links to all these other great blogs.

Letting the stock analysts drive the business

2008-08-25T12:27:00.002-04:00

Bigger Isn’t Always Better describes how short-term stock prices are often poor measures of business performance. Excessive concern with them takes management’s eye off the real economics of the business, and often breeds failed growth strategies. One reason for this is that managing a company to stock analyst expectations delegates the business’ strategic direction away from management to Wall Street bystanders who have no real accountability for business performance.

Recently three Harvard Business School professors documented how this process of (mis-) influence works. Download their working paper (CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks by Rick Mergenthaler, Shiva Rajgopal, and Suraj Srinivasan) via the link above to see the details. Here’s the short version:

"We find that missing quarterly earnings benchmarks, especially the analyst consensus earnings number, is associated with career penalties in the form of a reduced bonus, smaller equity grants, and a greater chance of forced dismissal for both CEOs and CFOs during the period 1993-2004.

These results are obtained after controlling for the magnitude of the earnings surprise, operating and stock return performance, and are significant in a statistical and in an economic sense.

Career penalties for failing to meet the analyst consensus estimate are higher for firms that give quarterly earnings guidance and in the post-SOX period. Our evidence suggests that (i) boards appear to react directly to managers' ability to meet earnings targets or to the information that is reflected in meeting such benchmarks; and (ii) senior managers' preoccupation with meeting earnings benchmarks might be based at least partly on career concerns."

The wolf in sheep’s clothing

2008-08-23T19:04:00.003-04:00

Joe Nocera, in today’s New York Times, nailed two key enablers of the current economic crisis:

“Whenever the mortgage finance giants, Fannie Mae and Freddie Mac, find themselves in a tough spot — and boy, are they in a tough spot now! — they always seem to find a way to blame their problems on “the mission.” “We exist to expand affordable housing,” says Fannie Mae on its Web site …”

He makes a convincing argument about how this noble mission provided fig-leaf cover for a bigger-is-better approach to growth, one aimed at pumping up (alas, only in the short run) their stock prices (and the value of the stock options and executive bonuses they drove). A path to growth that, in the end, crippled both organizations and the mission they espouse.

The courses I teach on management always start with a discussion of mission - what it is, how it can be used and abused. This article will make for a great case study to discuss in class.

Faith-based economics buys its temple

2008-08-09T19:48:00.001-04:00

If economics has strayed from a scientific to a faith-based endeavor, the late Milton Freidman is surely one of its high priests.

This spring his old academic home, the University of Chicago, announced plans for a $200 million economics institute to be named after him.

Guess where the institute is to be housed?

Would you believe ….

…. the Milton Friedman Institute is taking over the space currently occupied by the Chicago Theological Seminary?

I kid you not. Follow the link above.

Faith-based economics

2008-08-08T10:30:00.005-04:00

Each damaged company – and sector of the economy – has it’s own story to tell. Many of these (the home mortgage crisis, the airline industry’s free fall, the Detroit automakers’ demise, Starbucks’ slump) have been well documented in the business press. But some of the underlying dynamics, less so.

Many accounts of the housing bubble/mortgage crisis/credit crunch focus on greed as the primary culprit. True, greed has been in ample supply throughout this mess, but there is another key contributor that is often overlooked – the rise of “faith-based economics.”

Economics should be an evidence-based behavioral science. But in recent past decades it has also morphed into a quasi-religious belief system.

Its main pillar is belief in the market. Markets are wonderful mechanisms for information processing and goods exchange. But they are things to observe, study and use - not deify. They can be manipulated and they do fail (an entire industry, social entrepreneurship, has been built around market failures).

A corollary to market-worship is an uncritical belief in the goodness of deregulation – the less fettered the market, the better for all concerned, or so goes the mantra.

Of course this is a pile of nonsense. Totally unregulated markets are at the mercy of bullies and thugs. And they make no economic sense in many types of industries.

My account of how constraints guide sustainable growth in Bigger Isn’t Always Better quotes a famous conservative British politician:

“We are for private enterprise, with all its ingenuity, thrift and contrivance …

“ … and we believe it can flourish best within a strict and well-understood system of prevention and correction of abuses.”

Excesses of self-defeating self-interest can’t be wished away by believing they don’t exist. They need to be channeled in constructive directions, and restrained when they can’t. This is something Winston Churchill, author of those words, understood well.

In addition to his call for a “strict and well understood system” I’d add intelligent. Too many regulatory regimes have been designed in dumb and thoughtless ways, leaving them open to well-justified criticism, thereby feeding proponents of deregulation-as-religion.

Combine the widespread rationalizing use of economics-as-a-belief-system with an unquestioned and popular Federal Reserve chief overfeeding the capital markets (possibly for reasons of political partisanship and personal ideology) and you have a formula for economic disaster.

Which is what we have on our hands.

Josef Ackerman, CEO of Deutsche Bank whose missteps and complex financial engineering helped propel the current crisis, also seems to have come around to this point of view in a New York Times interview:

“But it’s not only the banks that made mistakes,” he said. “Monetary policy was clearly very generous for a very long time, and helped to create these kinds of bubbles. The regulatory framework had deficits too.”

Ackerman is right. It required a near-impossible-to-summon degree of discipline for Wall Street to practice smart self-restraint when the belief-guided, chief federal regulator was talking temperance while continually refilling the drunkard’s glass.

A smart – and profitable – approach to banking

2008-08-05T09:11:00.001-04:00

Financial supply chains also become problematic when they become too long. Cause gets separated too far from effect. For details, look at any account of what’s caused the current mortgage mess.

Sometimes the best way to understand a problem is by looking carefully at an entity susceptible to it that didn’t succumb. This week’s Newsweek provides a good case study. Read it closely. It describes how Hudson City Bancorp’s second quarter profits rose over 52%, and its stock grew 50% in a year when many bank shares were in free fall – all by following a smart growth strategy.

Global supply chains – longer isn’t always better

2008-08-03T20:15:00.005-04:00

“Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago” says this New York Times article. So do “price-driven oddities like chicken and fish crossing the ocean from the Western Hemisphere to be filleted and packaged in Asia not to be consumed there, but to be shipped back across the Pacific again.”

Rising fuel prices cause rising shipping costs and make the flat world a little bumpier. In recent years the cost to ship an ocean-going container from Shanghai to the US has almost tripled in the past few years. To the extent fuel price increases are driven by increased demand from China’s fast-growing economy, they might eventually also drive the delivered price of China’s goods high enough to reduce it’s export growth.

It’s in the nature of all rapidly-growing systems to eventually self-correct. Mortgage-bubbles tend, after a time-lag, to beget credit-crises.

Welcome back

2008-07-28T11:20:00.005-04:00

It’s been a long year-and-a-half since the last post - time to catch up. Main reason for the lag – no extra time, driven in part by a long stretch of, mostly overseas, travel. I’ve been across the Atlantic six times and the Pacific eight since the last blogging, mostly on consulting assignments and speeches about the ideas in Bigger Isn’t Always Better. The book’s message seems to resonate well in parts of the world accustomed to thinking about growth as something more than just getting bigger.

To help anchor me closer to home this year I’ve accepted a faculty appointment at a nearby university. Teaching grad students strategy, organization, and leadership should be interesting; hopefully this will make it easier to get back to blog-writing, too.

In many ways, this blog really hasn’t been needed over the past 18 months. Its ideas have moved out of the blogsphere to the front page as reports of companies (and entire industries) that have overreached make headlines almost daily.

We’ve got a lot to explore.

Limit choice; maximize profit

2007-01-29T20:31:00.000-05:00

Are we better off when we have more choices?

Yes, but only to a point. After a while “choice paralysis” sets in. As the number of retirement investment options increase, the chances that employees will choose any decreases. Too many types of soft drinks in a convenience store reduce total drink sales. Too many possibilities (of anything) also increase the likelihood that buyer’s remorse will set in. Once you’ve repainted your room, don’t look back at the color chart.

This is probably why waiters take away the menus right after you place your order.

Customers seldom buy a product for what it can’t do. But that’s often what keeps them happy with it.

A trio of business school professors have even quantified the problem of “feature fatigue.” They (Roland Rust, Debora Thompson and Rebecca Hamilton) outline their analysis in the Feb 2006 issue of Harvard Business Review. Their bottom line is that even though consumers “know” feature-loaded products are harder to use, BEFORE a product is purchased capability is valued over usability.

AFTER purchase is when buyer’s values change. Usability then matters much more then than capabilities.

Remember that big Swiss Army knife you bought? The one that can do everything. The one you keep in your dresser drawer because it’s too heavy to tote around.

The profs found that loading a product with features can maximize its initial sales numbers. But repeat sales to the same customer are maximized by editing down the number of features. And somewhere between these points is a happy medium – the right number of features that will maximize a customer’s lifetime value to the business.

The folly of being the world's biggest

2007-01-05T16:05:00.000-05:00

Yesterday General Motor’s CEO, Rick Wagoner, announced GM has no intention of ceding the title of “biggest car maker in the world” to Toyota.

Real dumb move.

Fighting Toyota is a good idea. But “who is the biggest” is the wrong battlefield.

You get to be Number 1 in the auto business by selling more cars than anyone else. This does not necessarily mean these are profitable sales (usually a good indicator that you are making the things people value). GM, like other Detroit automakers, has been hooked on discounts and incentives to move vehicles off dealer’s lots. Toyota, Honda, et al rely on eager customers to do the job.

Wagoneer says he likes being Number 1. But he’s dangerously deluding himself. GM lost that position with the car-buying public long ago. It’s just taking the numbers a while to catch up with realities – realities GM risks missing as it clings to bigness as a source of pride.

In Bigger Isn't Always Better I told the story of how Kellogg’s economic performance was badly damaged by executives and systems that focused on tons of cereal produced, not on customer tastes. At Kellogg it took a new smart-growth-oriented CEO, Carlos Gutierrez, to dig the company out of this mess and focus it on what really matters. Wonder if he’d be available to take over a once-great American car maker?

A year-end merger

2006-12-31T18:45:00.000-05:00

2006 ends with announcement of regulatory approval of a large telecom merger: AT&T and BellSouth. All that’s missing in the new AT&T to recreate the old MaBell is Verizon and the equipment business of Lucent (now in French hands).

Does the recombination make sense? Only time will. But an analyst at Stifel, Nicolaus & Co., Blair Levin, has raised some important questions about how important it is to be such a large company. In filings with the FCC, he said:

“AT&T argued that it needed scale to compete, invest and innovate. Yet its competition amounts to 400 small Internet phone companies."

"If scale really is important, they are the only ones who are ever going to have it. Game over."

"And if there are other attributes that make a successful company, do you need scale?"

Good questions to end the year with.

3rd place may not be all that bad

2006-11-30T21:20:00.000-05:00

I don’t usually look for management advice in The New Yorker, but the Dec 4 issue has an article by James Surowiecki (p. 44) well worth reading. He charts the evolution of the video-game industry, once ruled by Nintendo, which in the early 1990s was Japan’s most profitable electronics company. One third of US homes had Nintendo devices.

That was then. Now the industry is dominated by Sony’ PlayStation and Microsoft’s Xbox. Nintendo is an also-ran, at least in market share.

Surowiecki’s article makes the case, though, that “bringing up the rear” can be a very lucrative position to be in. He demonstrates how the old logic of GE’s Jack Welch that a company should be number one or two in its market or it should quit doesn’t always make good sense. In this three-way competition, Nintendo is making more money and doing better in the stock market than either of its bigger rivals.

Why?

According to Surowiecki:

“Sony and Microsoft are desperate to be the biggest players in a market that, in their vision, will encompass not just video games but ‘interactive entertainment’ generally.”

“Sony and Microsoft’s quest to ‘control the living room’ has locked them in a classic arms race.”

“Nintendo has dropped out of this race….Because Nintendo is not trying to rule the entire industry it’s been able to focus on its core competence, which is making entertaining, innovative games.”

Companies that focus obsessively on competitors and market share, according to recent academic research, tend to have lower profitability and return on investment than those who pay attention to other important performance measures. High market share doesn't automatically drive high profitability.

Surowiecki sums up his argument by noting business isn’t the same as a sporting event (or warfare): victory for one company doesn’t have to mean defeat for everyone else, especially in huge markets like global video-games that are worth $30 billion. This is a wisdom often lost when companies quest for bigness as an end in itself.

“… companies can profit even when they are not on top, as long as they aren’t desperately trying to get there. They key is to play to your strengths while recognizing your limitations…Nintendo knew it could not compete with Microsoft and Sony in the quest to build the ultimate home entertainment device. So it decided, with the Wii, to play a different game entirely."

Not a bad decision.

The bloated sales force disease

2006-11-29T14:18:00.000-05:00

Only a day after Boeing was lauded for its new restrained approach to growth, the world’s largest drug maker, Pfizer, announced similar steps. In Pfizer’s case, the first step was a 20% cut in the size of its sales force.

Pfizer, like many pharmaceutical companies, sharply increased the size of its sales force and marketing budget to try to compensate for its labs inability to discover sufficient new drugs.

This misguided “put-more-feet-on-the-ground” strategy has been followed by other drug makers (and other industries such as banking) that have become caught in the bigness rat race. It papers over the real problems, providing only temporary relief along with a hefty dose of high costs. Worse of all it shifts the focus of the business leaders to sales and marketing issues, at the expense of paying attention to improving the flow of new and better drugs through the R&D pipeline.

Fewer Sales = Greater Sustainable Growth

2006-11-28T14:26:00.000-05:00

Airplane maker Boeing just said "no" to one of its best customers when Southwest Airlines asked to buy more planes. Boeing suggested they buy some second-hand aircraft instead.

What gives? The linked New York Times article describes the method to Boeing’s seeming madness – how Boeing has discovered that discipline and self-imposed constraints are the drivers of sustained growth. In sort: too much of a good thing is not a good thing.

“Boeing, which is based in Chicago, is trying to avoid mistakes of the past. In the last aviation boom, in 1997 and 1998, Boeing gorged itself on orders, but its production lines could not keep up and ground to a halt.”

“Nevertheless, the company flooded the market with too many planes and ultimately had to sell them at cut-rate prices. Boeing’s write-offs came to more than $4 billion in 1997 and 1998, executives were sent packing and 20,000 workers lost their jobs. Boeing’s stock plunged, as did profits, and many wondered whether Boeing would ever regain its footing.”

“Today, having learned its lesson, Boeing is adopting a polar opposite strategy as it faces a new wave of orders that, if not managed right, could swamp the company again.”

“ ’In this hot market, it would be easy to be consumed with the desire to sell anything to people walking through the door who want to buy and push our production system to the point where you could break it,’ said Scott E. Carson, the chief executive of Boeing Commercial Aviation. ‘It’s much harder to say, I’m sorry, we’re sold out.’ ”

“He added: ‘We have to communicate that openly with customers and suppliers to be sure they understand why this is good for the industry. The role of the industry leader is to demonstrate discipline and restraint in the marketplace.’ ”

Boeing made a tangible demonstration of this anti-bigness strategy when it cut in half the number of planes it offers and suppliers it uses. The company has also sharply reduced its workforce, outsourcing much of the plane manufacturing so it can focus only on the work of design and final assembly.

Building airplanes has always been a roller coaster industry. Hopefully flattening the peaks will also level-out the dips, and make for a longer and steadier ride. That's mature growth.

Clear Channel goes for focus

2006-11-17T10:34:00.000-05:00

Yesterday Clear Channel Communications – a longtime poster child for bigness and consolidation of the US radio industry – agreed to sell itself to a group of private equity firms in a $26.7 billion transaction. The first strategic move planned after the deal was announced: sell off one third of Clear Channel’s radio stations and all its TV ones.

This is just latest – and largest – example of media companies going private. Many, especially newspapers, originally were closely held, and issued stock to fund what often turned out to be uneconomical expansions. So moves like Clear Channel’s reflect an undoing of this strategy and a move back to their roots (although the intention of most private equity investors is to clean-up the clutter and take these businesses public again).

What all this illustrates is one form of the shift from bigness to focus. For folks who have been around the business world for a while, echoes of the LBO buyout boom of the 1980s are loud and clear.

Bigness is fueled by stock option-driven leaders in public companies. Consistent quarterly profit increases (something, as noted in Bigger Isn't Always Better, that defies the laws of economic gravity), ongoing incremental “water-torture” cost-cutting, emphasis on revenue increases, and unending pressures to expand are the hallmarks.

In contrast, the world of private equity is one of focus, spin-offs, sharp cost-cuts, short-term risk tolerance, and comfort from cash flow.

One model isn’t ultimately better than the other, just different. Both have serious flaws that can destroy real innovation and growth.

Ironically Clear Channel made itself more attractive to private investors by adopting a “less is more” approach to selling advertising 18 months ago. It reduced the total number of minutes devoted to commercials each hour on its radio shows and shortened their average length. Result: happier listeners, better ratings which led to more ad revenues for less air time, and constructive pressure on the advertisers to make their shorter commercials more engaging. Which led to more product sales for the advertisers – a win-win all around.

Small wonder

2006-11-16T16:34:00.000-05:00

Poorly managed auto companies aren’t an American monopoly. Volkswagen – one of the companies I criticized in Bigger Isn't Always Better for strategic sprawl – has made several recent moves to start mending its ways. Its chief executive was replaced by Martin Winterkorn, the head of its Audi division. And Winterkorn’s first decision was to rethink the way VW groups its car units.

His plan is simple – often a good sign. Put the brands aimed at the high volume, mass market in one bucket (VW, Skoda and Seat), and those targeted toward luxury buyers (Audi, Bentley, Bugatti and Lamborghini) in another.

This adds a sense of customer focus to a company that had organized itself into “oil and water” combinations of Audi and Seat in one division, and VW and Bentley together in another. These illogical groups were a result of inward-facing factors: history, company politics, and attempts to share core competencies that really weren’t very shareable. They also reflected the model of General Motors in the 1920s – try to offer customers a broad choice of cars from cheap to luxury, all under one umbrella. It may have worked 75 years ago, but…

The new organization shows more willingness to group businesses according to common customer needs – always a good start down a path to real growth. VW was once the highly successful builder of the Small Wonder, my first car. Let’s hope this logic returns.

Loosing sight of what the business is really about

2006-11-16T15:32:00.000-05:00

In yesterday’s Washington Post business columnist Steven Pearlstein used the experience of car rental giant Hertz to illustrate how the US car markers have been their own worst enemies, “careening from one strategic blunder to another for nearly three decades.”

His article is well worth reading. Here’s Steve’s bottom line:

"The important lesson here, however, isn't about the cravenness of Wall Street investment bankers, or the shrewdness of private equity firms. Rather, it is a lesson about what happens to companies when they lose their focus and rely on game-playing and financial manipulation. While the Big Three were dickering around buying and selling car rental companies, or getting into and out of the defense business and consumer finance, companies like Toyota and Hyundai and Honda were eating away at their market share by delivering great cars and value to customers. And it is that, more than any other factor, that has brought the Big Three to their current crisis and the car guys to Washington."

Growth involves subtraction, not addition

2006-10-11T10:50:00.000-04:00

Lao Tzu said:

“In pursuit of knowledge, every day something is acquired; in pursuit of wisdom, every day something is dropped.”

Expansion – the pursuit of bigness – is a lot like the pursuit of knowledge. Growth, however, has more to do with acquiring wisdom.

What needs to be chipped away from companies such as GM, Ford or Sony for them to them uncover the little jewels of wisdom that can drive their movement forward?

Philips, the Dutch electronics conglomerate, is still a work in progress in this regard. But it may offer some clues: it the past 15 years it has pared itself down from 30 divisions to 4 and been willing to walk away from market share in industries where it no long made sense to be.

Interview on tompeters.com

2006-09-24T19:54:00.000-04:00

Have your ever finished a good conversation, gone on to something else, and then immediately realized there was something important you forgot to say? That’s exactly how I felt a few days ago when I was interviewed for the “Cool Friends” portion of Tom Peter’s web site (thanks Tom!).

We got into quite a discussion of Harvard Business School’s Michael Jensen, and how he provided the intellectual underpinnings used to justify mega stock option grants and myopic focus on shareholder value. Both of these badly abused management practices are behind many companies getting bigger without the economic benefits they hoped would accompany size.

Jensen is a key character in the first part of Bigger Isn't Always Better where I lay out the downsides of bigness. But the real hero of that chapter is a lesser-known Vanderbilt economist, Margaret Blair. She had the courage, at a time when maximizing shareholder value seemed to be everybody’s mantra, to write about why a bigger stock price does not necessarily make for a better company. Next interview, she gets top billing.

Success is fleeting

2006-09-23T11:28:00.000-04:00

Good growers – like Apple’s Jobs & company – are often very intense folks. They are intense because they have a mindset that tells them nothing lasts forever. This includes today’s success and yesterday’s failure.

At Apple there is an appreciation that triumphs are usually fleeting. They know this - in ways that are way over the heads of many of their success-only, momentum-driven rivals - because they’ve lived this.

Take a look at David Pogue’s blog. He nicely summarizes the way most journalists saw Apple’s future in the dark years just prior to the second coming of Steve Jobs.

Of course, as you’ll see when you read Pogue, these press accounts are less about Apple than how we all tend to perceive (and misperceive) future possibilities.

Setting the context

2006-09-22T09:21:00.000-04:00

Lest my last post be misunderstood – it was not meant in any way to minimize the incredible contribution Steve Jobs has made to Apple, but only to underscore that Apple is not a one-man band. Jobs' most important role, from where I sit, is to set the context where people like Ive and the Johnsons can thrive, and Apple can get the most from their great talents. Jobs does this masterfully. And his reach goes beyond Apple. His speech at the 2005 Stanford Commencement should be required reading for every college graduate.

Growth leaders set the right context by focusing people on what really matters. Which generally has nothing to do with shareholder value or earnings per share. That’s what his speech is all about.

Apple’s under-sung heroes

2006-09-21T11:53:00.000-04:00

My previous post mentioned Jonathan Ive, Apple Computer’s industrial design guru. “Jony,” as he’s called at Apple, is the creative force behind the look of the iMacs, iPods and the Titanium Powerbooks. He’s been doing his thing there since 1992.

Ron Johnson is another of Apple’s under-sung heros. He’s the person behind the incredible success of its growing web of retail stores. There are 147 of these now and 40 new locations planned. These spare looking stores outsell the cluttered big boxes of Best Buy ($2459 revenue/square foot vs. Best Buy’s $971). Johnson likes to staff the stores with Mac-users; a practice some wags thought would limit their growth. Not so; 5000 of them applied for the 300 openings Johnson had when he launched his 5th Avenue shop in Manhattan.

Some key contributors to Apple’s growth don’t even work for the company. Another person named Johnson – this one’s first name is Gary – is the source of the chips and software that makes the iPod do what it does. He works at PortalPlayer Inc.

When I researched growers to write about for Bigger Isn't Always Better, I found (to my surprise), many of the key players weren’t the CEOs of their organizations. Some of those who had the biggest impact on their business’ future toiled in the middle or margins of their company’s hierarchy. This contradicts the impression a reader of most business magazines gets – that all success is the result of the wisdom of the person on top (and most failure results from everyone eles’s inability to “execute”).

This conventional wisdom doesn’t hold up under close scrutiny. I had a lot of fun in Bigger Isn't Always Better highlighting the MO’s of the real driver’s of organic growth. The practices of these under-sung heroes – Al Bru, Bill Greenwood, Jane Friedman, Debra Henretta, Darcy Winslow – offer more lessons about how to make growth happen than the more hyped stories of the Gerstners and Welches.

Dispatches from the front

2006-09-20T11:54:00.000-04:00

Fortunately not all enterprises succumb to the quest for bigness. Here are some reports from organizations trying to sustain past successes or turn-around bigness problems.

Microsoft is in the turn-around mode. Ray Ozzie, its new technology czar, says:

"Complexity kills. It sucks the life out of developers, it makes products difficult to plan, build and test, it introduces security challenges and it causes end-user and administrator frustration."

It will be interesting to see how he addresses what gets called the core Windows problem. According to Michael Cusumano, a professor at the Sloan School of Management at the Massachusetts Institute of Technology: “Windows is too big and too complex."

The MIT prof thinks that fixing windows will take a radical approach, a willingness on the part of Microsoft to walk away from its legacy.

Apple did this in 2000 when it walked away from OS 9, and again this year when it switched to an Intel-based processor.

(For more detail, see: New York Times March 27, 2006 “Windows Is So Slow, but Why?” by
Lohr and John Markoff)

Apple, whose legacy was not as massive as Microsoft’s, had an easier time walking away. Its big challenge now is sustaining its momentum. Apple’s Jonathan Ive has an interesting take on what’s been behind the company’s success:

“We don’t make very much stuff. That’s a very important part of our approach to what we do, which is not to do a lot of unnecessary stuff but just to focus and really try very sincerely to care so much about the few things that we do.”

Focus on a few things. Care about them a lot. Not a bad strategy for growth.

(For more on Ive see: Business Week September 25, 2006 IN pp. 27-33)

A land of bigger is always better (?)

2006-09-18T10:43:00.000-04:00

It’s great to know Bigger Isn’t Always Better is selling in Thailand (see August 22nd post). But I’m wondering whether it will be a big hit in Russia. A recent New York Times article called Russia a country where bigger is always better.

The article comments on President Vladimir Putin’s plans to create giant enterprises as a way to revive the country’s strategic industries. First step – next month’s rollout of the world’s largest aluminum company.

A few observers, however, are less sure about the logic of this strategy:

“Some Russians, recalling the Soviet boasts of having the biggest rockets, the biggest steel mills, the biggest ice-breakers, were cynical. ‘We had a joke in the 1980’s that our microchips were the biggest in the world,’ said Aleksei Venediktov, the editor in chief of Echo of Moscow Radio. ‘It’s that mentality of greatness, in the sense of size, even if it doesn’t make sense.’ “

Market capitalization seems to be Russia’s new standard of comparison with the West, though, as I pointed out in Bigger Isn't Always Better, it can be a counterproductive goal.

When otherwise smart business people go after not-always-economic-goals, there’s often something psychological going on. The Times article may have nailed it:

“The Kremlin is clearly hoping to sell the new gigantism not just as a business strategy, but as a balm for the wounded pride of Russians who endured the economic disasters of the 1990’s.”

“Mr. Venediktov of Echo of Moscow radio explained it this way: ‘We need to say we are the greatest somewhere, in something. Russia is suffering post-imperial syndrome, like England in the 40’s or France in the 50’s. But ah-hah! We are still the best someplace. We win more gold medals in gymnastics. And now in this: We passed America in aluminum.’ “

Dell digs deeper

2006-08-26T15:07:00.000-04:00

Knowing when and how to let go may be an acquired taste. It’s certainly one a number of once-stellar-performing companies, like Dell, have yet to acquire.

This weeks’ Business Week searches for the causes of Dell’s recent market decline:

“… its predicament may be intractable. Dell remained slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers, even as rivals have stepped up their game and markets have shifted to take away some of Dell's key advantages. Instead of adapting, critics say, Dell cut costs in ways that compromised customer service and, possibly, product quality.”

A Dell competitor is quoted saying:

"They're a one-trick pony. It was a great trick for over 10 years, but the rest of us have figured it out and Dell hasn't plowed any of its profits into creating a new trick."

Bigger Isn't Always Better describes how size and success conspire to do in many companies that reach the top spot in their industries. In Dell’ case, the same operational focus that made it so formidable when it was at the top of its game is getting in the way of finding its next big thing. Instead of cultivating imagination, the stock-in-trade of every successful grower, Dell seems addicted to the fixer’s strategy of ever improving execution.

Former Dell managers say that ideas that break from the "Direct from Dell" business model are discouraged. When your market has changed, doing more of the same with greater intensity usually digs you deeper into the hole you don’t want to be in.

Tom Peters on Bigger Isn't Always Better

2006-08-22T17:45:00.000-04:00

It’s nice to know that Bigger Isn’t Always Better is available in airport bookshops half a world away in Bangkok. But it’s even nicer to hear that Tom Peters saw it there, picked up a copy, and made some much appreciated comments about it in his blog:

"Now consider this from Simone de Beauvoir: 'Life is occupied in both perpetuating itself and in surpassing itself. If all it does is maintain itself, then living is only not dying.' I scrounged this marvelous [Marvelous = Abets my Life's Argument] quote from a marvelous book I picked up in the airport in Bangkok. It's Robert Tomasko's BIGGER Isn't Always Better."

"Tomasko makes a reasoned, data-rich argument that echos Simone Beauvoir. He does not, for instance, dismiss big mergers out of hand, but provides a strict definition of the few that work. This wee saving remnant uses the merger to help the enterprise perhaps "explode in a new frenzy of value creation," to paraphrase Nordström and Ridderstråle. (Immelt's unabashed aim at GE.) Tomasko, however, devotes the lion's share of the book to strategies and tactics for keeping energy and excitement going and growing in a corporation—this rarely or never encompasses growth-for-growth's sake or bigger-ness for bigger's sake. (Think Bo Burlingham's Small Giants, much praised in this Blog.) Typical chapter titles are: 'Growth Is About Moving Forward' and 'Are You a Fixer or a Grower?' "

I feel especially honored by Tom’s comments. He is a pioneer business-consultant-turned-business-book-writer who paved the way for many consultants (me included) to try our hands at reaching audiences beyond those who commissioned our reports and watched our powerpoints. His incredible success with In Search of Excellence convinced many book editors (including mine) to give us rookie writers a crack at getting published.

Read his entire blog entry. He makes some great points about the futility and foolishness of building something to last. Knowing when to let go and how to share the wealth are much worthier tasks.

Keep it simple. Stay focused. Avoid cross-selling.

2006-07-31T20:45:00.000-04:00

Bigger Isn't Always Better is the second book I’ve written that lauds the ING Group. Based in Amsterdam, it’s the largest bank in three of Europe’s smaller countries – Belgium, Luxembourg and the Netherlands.

When ING expanded operations to the US in 2000, it didn’t open a network of branches (or buy somebody elses). Instead it started ING Direct, a high-yield internet-only savings bank. In a June 3rd New York Times interview, Michel Tilmet, ING’s chairman, shared his formula for bloatless-growth:

“In every country where we are, we have competitors offering higher rates than we offer. But you've got to be very careful, because, you know, consumers are smart. We have a product offering that has no commissions, no minimum, no tricks. Does the competition offer any tricks, like ties to something else that you have to do to be there, or a minimum balance, or a minimum usage? We have to be better than the next most comparable alternative.”

“For us, cross-sell is not what we want to do, because we want to keep it simple. We know that out there, the largest pool of earnings in the retail banking world comes from savings and mortgage — those are the only two things that we want to do. If you try to cross-sell too many products, you confuse the clients about what you are and your costs escalate exponentially.”

The Times interviewer was surprised to hear a banker coming out against cross-selling:

“Well, it's unorthodox, yes, because when you talk about banking, you think about branch networks. And branch networks add a cost that can only be justified by cross-selling. But we have chosen another distribution alternative, which is much more cost-efficient but also requires that we focus on what we try to do.”

Keep it simple. Stay focused. Two good ways to avoid the bigger-is-better trap. Going after smart customers isn't a bad move, either.

Frank Gehry and Jeffrey Skilling

2006-06-03T17:24:00.000-04:00

From a Washington Post review of Sidney Pollack’s new documentary about one of my favorite architects, Frank Gehry:

“Here's a quote not in the film: ‘The uniqueness of Frank Gehry's work is the blending of the functional with the artistic to create an innovative product.’ “

“That was Jeffrey Skilling, Enron president and CEO, in 2001 -- when Enron was funding a huge Guggenheim show devoted to Gehry. Skilling, now a convicted felon, went on: ‘This is a quality Enron relates to every day as we question traditional business assumptions and embrace innovative solutions. We are pleased to help showcase Frank Gehry's genius.’ “

It's not fair to do guilt by association. The point is, Skilling's description of Enron parallels Gehry's architecture very closely. It always questions traditional assumptions; it always embraces innovative solutions. And to some, it suggests a giddiness that seduced many Enron investors: It seems to stay up, as if by magic, hiding its inner structure, glistening on the outside, exuberant and strong.

Real growth questions traditional assumptions.

Real growth embraces innovative solutions.

Real growth is more than technique, though. It’s something that takes places in a particular context and is driven by particular values. Gehry’s context and values have little to do with Skilling’s, just as businesses concerned with progress and forward movement have little in common with Enron’s quest for bigness and bubbles.

Tesco - the new Wal-Mart?

2006-04-26T10:21:00.000-04:00

Tesco is a UK-based retailer that has beaten Wal-Mart in its own game. It also has bold plans to expand to the US.

Today's London Times offers a cautionary commentary with an article titled "How Tesco Will Crumble and Fall." It lays out a rationale for the size and speed of this superstore's growth also being the seeds of its destruction.

The Times says:

"Over the years it has grown from being a simple, if enormous, grocer, into selling over-the-counter medicines, providing finance and banking services, running post offices and garages, selling clothing and hi-tech equipment, always undercutting the opposition. If there is a vacuum to fill, it will fill it."

Sound familiar?

That's the good news. The Times then goes on to observe:

"All this suggests that Tesco is unstoppable. And yet, like the alien invader in The War of the Worlds, its very size and the speed of its expansion may contain the seeds of its own demise. Consumers do not, in the end, take kindly to an overweening monopoly, especially when it squeezes out competition and dictates its own terms. In towns that face the massive intrusion of new superstores, opposition is mounting. A network of websites offers hostile evidence about Tesco’s tactics, its methods and its ambitions."

"Tesco is a formidable enterprise. But if it continues to ride roughshod over all opposition, to stifle competition, and to ignore the sensitivities of long-established communities, then, like so many imperial dynasties of the past, it too will crumble and fall."

The History of the Decline and Fall of the Roman Empire was written by an Englishman, which might be why they appreciate this dynamic better than some Americans. It should be required reading for all business strategists. That which the gods want to destroy they first make real big.

Man bites dog

2006-04-19T09:11:00.000-04:00

Could this be the start of a trend?

"William W. McGuire, the chairman and chief executive of the UnitedHealth Group, said on Tuesday that he had asked his board to stop awarding new stock options to senior executives."

Some critics have alleged this was done to allay concerns about back-dating of previous option grants. Regardless, it wouldn't be the first time the right thing was done for the wrong reason.

When I am interviewed about Bigger Isn't Always Better, I'm often asked why so many companies pursue uneconomic bigness strategies, especially those involving unwise acquisitions.

My one-word answer: stock options.

The more you dig into the kinds of behaviors encouraged by ongoing grants of large amounts of options, the clearer it is that they disalign the interests of the executives receiving them from the average shareholder.

The opposite of Wal-Mart (2)

2006-04-17T13:44:00.000-04:00

… involves differentiation.

Here’s an account of 3 retailers who feature happy employees and work hard to make grocery shopping fun for their customers.

The opposite of Wal-Mart (1)

2006-04-17T13:43:00.000-04:00

… involves focus.

Check out Aldi, a German discount food retailer that beats Wal-Mart at its own game.

Accenture asks: is bigger better?

2006-04-17T12:59:00.000-04:00

Two Accenture consultants have written an article well worth reading on “Is Bigger Always Better?”

They conclude:

Size comes with significant limitations
High performance businesses are rarely those who have sought success via scale and market position alone
Going after scale for its own sake becomes counterproductive
Large scale enterprises tend to be ones most vulnerable to disruption as they continue to expand.

Well said.

Amen.

Procter & Gamble on bigness

2006-04-15T19:18:00.000-04:00

P&G's latest annual report is full of optimistic references to "growth strategies" and "organic growth." But in a recent Economist interview its CEO, Alan Lafley, laments:

"It is so hard to grow. And the bigger you get, the harder it is."

Lafley's right. His company, still in the midst of digesting Gillette, its latest acquisition, maybe a prime candidate for rethinking what growth means. Expansion alone tends to be self-defeating.

Bloated pay drives bloated companies

2006-04-12T10:45:00.000-04:00

This is shareholder proxy season, a time when executive compensation tallies are reported. Business journalists are busy writing about stratospheric rises in executive pay, and how they are often poorly linked to performance. What is sometimes missed in these accounts is the connection between bloated pay and bloated companies.

Bigger, not better, companies are a direct result of paying leaders for the wrong things. When the size of an executive’s pay is determined by how big the business is - instead of how well it is performing economically or meeting customer needs – unwise expansion is seldom far behind.

That is what is behind so many recent, unsound mergers.

Executive compensation used to be an incentive and reward for good strategy. But in many companies the tables have been turned, and the compensation system is what’s creating the strategy. And the strategy is usually about bigness.

Expanding top management pay is also seldom accompanied by equivalent percentage increases down the ranks. The gap between top strata pay and everyone else’s used to be measured in double digit multiples. Now seniors frequently earn hundreds or thousands of times more than the people they rely on to produce business results.

Gaps like this over-value top-down strategy and diminish the importance of execution.

They also erect big barriers to information flow and candid back-and-forth debate between those at the top and everyone else. Free-flowing information and dialogue are important. They are what fuel real growth.

Detroit v. Toyota

2006-04-10T11:20:00.000-04:00

Harvard Business School professor Kent Bowen is a technology and operations management expert. Here’s his take on the struggling auto industry:

“Detroit has hobbled itself in two notable ways: Labor agreements, financially generous but tightly circumscribed regarding worker activity, have hindered innovative uses of the workforce, while in the executive suites, conventional wisdom mistakenly has held that sheer corporate size could ensure industry dominance."

"Toyota, shunning these approaches, took advantage of this Detroit ‘blind spot.’ While less generous in its compensation packages for workers, Toyota strives to use its labor force in flexible, creative, and collaborative ways,"

Bowen does raise an important concern about Toyota’s future. It’s biggest worry:

"… is getting too big, too fast, which they feel would make it hard to find enough good managers, thereby jeopardizing the company's legendary quality."

Macs run Windows

2006-04-08T16:15:00.000-04:00

... that was Apple's big news of the week.

What will really drive Apple's growth, though, is a headline next year or so reading:

MAC OS RUNS ON PCs

It could happen.

Growth at Ford

2006-04-07T20:37:00.000-04:00

Growth starts when people start telling the truth.

At a meeting of the Automobile Industry Action Group, William Clay Ford Jr., who was honored as the industry's executive of the year, said his priority was:

"... to get honesty on the table. Too often in corporate America, you sit around the table, everyone nods their head and agrees to stuff they know isn't true, and then they go out and the hallway talk starts."

GM’s forgetting curve

2006-04-04T15:10:00.000-04:00

In a recent interview General Motor’s chief executive, Rick Wagoner, said this about critics who observe he’s grown up in the GM culture and therefore unable to make the radical changes required to move the company forward:

"That is so simplistic. These are sophisticated problems with historical tails that run back 80, 90 years. The chance of someone coming in and not understanding our business, making the right calls and doing them in cooperation with key constituencies like dealers and unions, is absolutely microscopic. That would be the biggest risk I’ve ever heard of."

Wagoner is using the risk of the “steep learning curve” to protect his job. Of course, that wasn’t an obstacle for Louis Gerstner at IBM or Carlos Ghosn at Nissan. He’s forgetting that when the issue is renewal and growth, the forgetting curve usually trumps the learning curve.

Strategy drives ethics

2006-04-04T14:09:00.000-04:00

For a fun romp through the excesses of Arthur Anderson, Enron, Tyco and WorldCom don’t miss this 4-minute music video put together by Maverick, a Tampa-based group of business consultants. It should be required watching for anyone thinking of accepting a CEO job offer.

Sadly, examples abound of the conduct spotlighted in this creative streaming video. They were always in the background as I researched Bigger Isn't Always Better. One reason I wrote the book was to try to figure out what it is about business today that drives otherwise honest and ethical people into behaviors that end up making little sense for them or their enterprises.

Some corporate cultures foster unethical conduct; I wanted to get at what choices about a business' strategic direction lead to these cultures.

There is smart growth and dumb growth. One is sustainable and has favorable long-term economics. The other breeds bubbles and trips to the big house featured in this link. Improving the current state of corporate ethics is a lot more complicated than weeding out a few bad apples. It also requires making a few good choices about the direction forward a business should take.

The end of cheap labor in China

2006-04-03T15:25:00.000-04:00

David Barboza's article in today's New York Times begins:

"Persistent labor shortages at hundreds of Chinese factories have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods."

He's right. Read the article to see why the expansion of China as a low cost manufacturing base is starting to do what all expansion efforts eventually do - slow down. In Bigger Isn't Always Better I discussed the transitory nature of the feared "China price" and how currency valuation changes, labor shortages and increased social unrest would drive it northward.

There is an upside to all this. As China follows the paths of Japan and Korea from low-end to high-end industry, options will open for better working conditions, more equal wealth distribution, and development of its huge internal market. Whether the options are seized depends on how wise China's rulers are about managing their next great leap forward.

Reviews (cont’d)

2006-04-03T09:12:00.000-04:00

Today’s Harvard Business School “Working Knowledge” includes a review by Sean Silverthorne of Bigger Isn’t Always Better .

He got my main point about growth when he commented that:

"Both drive and balance belong in any executive's skill set, and this book is a useful counterpoint to those who favor the steroids approach to business."

I’m honored Harvard reviewed the book. It’s also a little ironic. Their publishing arm has put out books hailing the management practices of Enron, and more recently Hardball. This is an approach to competition that is macho-on-the-outside/brittle-and-unsustainable-within. It’s one that my book warns against.

Reviews

2006-04-02T22:26:00.000-04:00

One reason speaking about books is easier than writing them – for me at least – is that the feedback is a lot more immediate. It’s possible to change a presentation while it's being delivered, based on the smiles, frowns or dazed looks of an audience. The feedback cycle for book is longer. You toss something out, then wait and wonder.

My friends and colleagues are a supportive bunch of people, but their comments about Bigger Isn’t Always Better are those I’d expect to hear from them. Fortunately, reviews are starting to come out, and they’ve also been pretty positive. Here are a few.

Steven Pearlstein of The Washington Post (Feb 19) said the book is:

" ...a powerful antidote to Wall Street's poisonous fixation with gigantism and growth."

He also says I ramble a bit, but am best in:

" ...combining the insights of psychology with the lessons of corporate management and strategy."

Steve finishes with:

"The book is chock full of good tips and sound advice for managers of any sized operation."

Some other reviewers agreed with the Post. Tami Brady’s internet review called the distinction between fixers and growers “enlightening” and went on to say:

"There are quite a few gems in this book. I found the descriptions of the 21 mind bugs particularly useful. (Mind bugs are common ways that we think and things that we tell ourselves that distort reality and act as hurdles to healthy growth.)"

Robert Morris is one of Amazon’s top ranked reviewers. He was also very generous with praise:

"What we have in this volume is a brilliant explanation of what 'real business growth' is, and how to achieve and then sustain it."

To read his full review, click the "Buy the Book" link on the right.

Morris also commented on the book’s practicality:

"While re-reading this book, as is my custom, I highlighted key passages. In this instance more than 100 which caught my eye."

It feels great to be called brilliant, but I think I like the ring of “useful” even better.

Seminar link

2006-03-31T20:49:00.000-05:00

Here’s a link to my March 8th seminar on Bigger Isn’t Always Better. The words and the music are available in this Microsoft Live Meeting Archive. If you have trouble accessing any of this, contact me and I’ll send you a pdf of the slides.

AT&T and BellSouth: Is bigger going to be better?

2006-03-07T11:29:00.000-05:00

Ken Belson’s interesting article in today’s New York Times asks a good question:

"Is bigger necessarily better when it comes to running a telecommunications company?"

He’s analyzing the just announced AT&T (which used to be SBC which used to be Southwestern Bell which used to be AT&T) offer to buy BellSouth. Belson looks hard at how questionable the payoff from this deal really is. His headline suggests AT&T’s goal is to become all things to all customers. Sounds familiar.

Upcoming seminar on Bigger Isn’t Always Better

2006-03-01T14:00:00.000-05:00

Next Wednesday Microsoft will host, and the American Management Association (my publisher) will sponsor, a web-based seminar on the ideas in the front end of my book.

Wednesday March 8th
Noon to 1 pm (EST)

I’ll present for about 45 minutes with the remaining time for Q&A.

For more information, and to register, click on the link below.

There's no cost to you. All you need is a phone and a computer.

When you register, you’ll be sent a url to paste into your browser (do this about 11:55 am), and a phone number to hear me talk to the slides that will appear on your computer screen. You type in questions, IM-style. Works with Macs and PCs. All this uses Microsoft Office Live Meeting technology. And it’s totally free; the organizers even provide you with a (US) toll-free number.

Come join in!

Note: If you can't make the live session, you haven't completely missed-out. Microsoft archives all these. Slides and sound will be available to review whenever you wish.

Hardball in the hardware aisle

2006-03-01T10:13:00.000-05:00

Home Depot, says USC business professor Ed Lawler, “grew so fast the wheels were starting to come off.” Customers who once loved its great selection and incredibly helpful sales staff have been fleeing in droves for competitors such as Lowe’s. Some Home Depot managers feel their service ethic has been corroded by an atmosphere of fear that has accompanied the “hardball” approach to management associated with CEO-since-2000, Robert Nardelli.

Business Week’s March 6 issue includes a cover story praising Home Depot’s new military-style of management. It quotes one Home Depot store manager, an ex-Army squad commander who once hunted terrorists, as saying:

“In the military we win battles and conquer the enemy. At Home Depot, we do that with customers.”

I don’t know if I want to be one of the customers caught in his cross hairs. And it’s not just me. A customer satisfaction index released last week by the University of Michigan showed Home Depot in last place among major American retailers.

Hardball is an aggressive approach to management popularized by management consultant George Stalk. It’s a tempting fallback for a growth challenged business: do what you’ve been doing before, just harder. Play rough (with customers, suppliers, competitors, regulators) and never apologize. I took a hard look at it when I wrote Bigger Isn’t Always Better, and found research shows the harder a business strives to grow along these lines, the more likely it is to undermine its chances of achieving real growth. Hardball invariably melts into softball.

Business Week thinks Home Depot is thriving. I’m not so sure.

Growth is about focus, not expansion

2006-02-17T18:00:00.000-05:00

Steve Jobs, CEO Apple Computer and largest shareholder of the Walt Disney company:

"I'm as proud of what we don't do as I am of what we do."

No low-end products made for sale at Wal-Mart; no movement to markets that don't offer Apple a leadership position. Instead, growth through focus. Not expansion.

The bronze medal effect

2006-02-14T16:00:00.000-05:00

People who create real growth, rather than just free-riding on rising commodity prices (Feb 7 post), know how to look for opportunities, build support for seizing them, and then use momentum to move things forward. The Olympics provide some insight into the momentum generation part of all this.

Momentum comes from creating a series of small successes. But where does the first early win come from? By focusing time and resources growers find a way to accomplish something, however small, in the direction in which they want to move. Growers know that motivation does not precede action, but it comes from it. So the basic idea behind generating momentum is simple: do something, something easy if possible, but still likely to advance your cause from wherever it is now. This serves to prime the pump and motivate more action, which in turn further ratchets additional motivation.

The idea of initial “small successes” is important. Ironically, limited early success may be more useful for motivational purposes than an initial bigger win. Call it the “bronze medal effect.” Studies of Olympic game winners find that bronze medalists tend to be happier about their victory than those winning the silver (see James Shepperd and James McNulty, “The Affective Consequences of Expected and Unexpected Outcomes,” Psychological Science, Jan. 2002, p. 85.).

Olympians, like the rest of us, tend to compare what occurred with what might have been. For bronze winners, the most likely alternative is getting no medal, while most silver medalists focus more on having lost the gold than on their victory over the bronze holders. It is possible to be objectively better off than others, but feel worse about it - our minds work in strange ways. Expectation management is an important part of momentum creation.

Small wins are also safer. They are visible enough to establish an idea’s viability, but not so large as to arouse jealousy, or threaten already well-established activities. A string of small victories at the outset of a growth initiative can be more useful than one lucky big win. Bronze can trump gold.

Is a bigger executive paycheck a better one ? (part 2)

2006-02-10T13:06:00.000-05:00

This week New Yorker columnist James Surowiecki joins the chorus of concern about bigness (see Feb 7 post) in executive compensation. He cites a study by professors Gerald Garvey and Todd Milbourn:

“Executives are rewarded far more for good luck in their industry (like rising oil prices that they had no control over) than they are punished for bad luck.”

Overpaid CEOs may be more than just expensive, says Surowiecki. They are often downright destructive:

“One recent study of the market between 1992 and 2001 by economists at Rutgers and Penn State found that the more a CEO was paid, relative to his peers, the more likely his company was to underperform in the stock market.”

Another study, this one by finance professors Jarrad Hartford and Kai Li, concludes:

“Very highly paid executives are more likely than their peers to make acquisitions, and to receive major financial rewards for doing so, even when the acquisition ends up destroying corporate value.”

There are many populist arguments for reining-in executive pay, and relating it to performance, not position. There are also strong ones based on management theory – paying the top people hundreds of times more than those in the rest of the organization isolates them and destroys corporate cohesiveness. But some of the most compelling are those that show how bloated pay also makes poor economic sense.

Is a bigger executive paycheck a better one?

2006-02-07T17:15:00.000-05:00

It may be, provided the company's other constituents also fairly benefit. That's one way of looking at it.

But what if the pay lifts into the stratosphere because of something the executives had no influence over? Each dollar increase in the price of oil – from, say, the Iraq War and soaring demand in China - drives up Exxon Mobil’s earnings by 1.5%. And earnings growth drives many executive pay packages.

Gretchen Morgenson (in her Feb 5, 2006 New York Times column) observes:

“When a company does well mostly because of a rising commodity price rather than managerial genius, pay-for-performance becomes an unfunny joke.”

Free rides may be nice if you’re the passenger. Just don’t confuse them with real growth. The work-around for this is simple: don't base bonuses on absolute performance. Set them in comparison to how others in the same industry are performing. Pay for moving ahead of the pack, not just riding the rising tide. This might incentivize actual forward movement, not just sitting in the right place at the right time.

Coke vs. Pepsi: growing beyond the cola wars

2006-02-03T12:52:00.000-05:00

As happened with Dell and Apple (see Jan 16 post), the old Coke vs. Pepsi rivalry took a new turn last December when PepsiCo’s market capitalization surpassed Coca-Cola’s. According to Katrina Brooker, a senior writer at Fortune:

"Losing the cola wars, it turns out, was the best thing that ever happened to Pepsi. It prompted Pepsi's leaders to look outside the confines of their battle with Coke."

Why did Pepsi move forward, while Coke got stuck in the mud? Here’s how it’s explained in Chapter 3 of Bigger Isn’t Always Better:

PepsiCo does not have an iconic product like Coca-Cola. This lack of sentimentality about its core brands has made it easier to grow its business in directions led by changing consumer tastes – Aquafina, Gatorade and snack foods. Coca-Cola, on the other hand, runs the risk of its values hardening into dogmas and its icon becoming a millstone, keeping it from pursuing the expanding markets for New Age teas, gourmet coffees, performance drinks and health beverages. Sidney Finkelstein, a Dartmouth College management professor, warns his students of the danger of learning a lesson too well. He says many business leaders have a “defining moment,” a key decision or choice they once made that has made them famous and thereafter become what they are most known for. Unfortunately many find themselves so defined by that moment that they keep trying to repeat it throughout their careers, regardless of how well it fits current circumstances. It is not that they have not learned, their problem is they have learned one thing too well. Letting go of proven past practices is a struggle, but it is a prerequisite for moving forward. As University of Michigan’s C. K. Prahalad likes to say, the “forgetting curve” may be much more important than the “learning curve.”

The opposite of letting go is “momentum thinking” – assuming what prevailed in the past will continue. Sometimes it does. If the current formula works well, and the world in which the business operates shows no sign of changing anytime soon, it is time to optimize the formula, not to set out in quest of a new direction in which to grow. But when dominating ideas are out of sync with reality, all the operational improvement in the world will not help things. And an escalating commitment to the status quo, in that circumstance, only puts the future at risk.

Coke’s famous formula may have been the driver of its past glory. But it also may be a major roadblock to its future.

Better, not bigger @ Ford

2006-01-31T21:45:00.000-05:00

Ford's CEO, Bill Ford, told his employees in a televised address last week:

"For too long, we've used the advantage of size to avoid change.... [It's time to] think like a small company."

Buffett’s problem: too much money

2006-01-30T21:35:00.000-05:00

From Warren Buffett’s 2001 letter to his shareholders:

“In the future we won’t come close to replicating our past record. To be sure [we] will strive for above average performance and will not be satisfied with less. But two conditions at Berkshire are far different from what they once were: Then, we could often buy businesses and securities at much lower valuations than now prevail; and more important, we were then working with far less money than we now have.”

Will bigness botch LA’s best burgers?

2006-01-30T13:36:00.000-05:00

A boardroom – and court room – struggle is going on between top executives of In-N-Out Burger, home of the best fast-food burger in LA (and maybe the world). What’s behind it seems to be a misguided push to “unlock” the value inherent in this beloved regional chain by rapidly expanding the number of stores it runs.

If you've been to Southern California, and ordered from their secret menu, you know what's at stake.

A close observer of the food service industry says that In-N-Out's

"…secret is that they haven't tried to be all things to all people. They haven't tried to say they have items that are healthy and nutritious. They don't have a kids' menu. But they do have good burgers."

Can good burgers survive this quest for bigness? Look at the past 100 years of the U.S. beer industry for some clues. Or stop by your local McDonalds.

A tale of two cities: Detroit and Washington

2006-01-27T14:10:00.000-05:00

This past week’s business news has been dominated by bleak reports from Detroit’s fixers. All of America’s “big three” automakers announced deep cuts. GM posted a huge loss for 2005 - $8.6 billion. Ford announced plans to cut its workforce by almost a quarter. GM’s decline is even chronicled in the popular culture. This week’s Sundance Film Festival includes a movie critical of GM’s decision to shut down its promising and popular electric car line. Meanwhile, across the Pacific, South Korea’s Kia quarterly profits spiked by 84%, and Toyota may assume GM’s traditional position as the world’s biggest carmaker sometime this year. Obviously, people haven’t stopped buying cars,

Within the beltway, Detroit’s troubles are overshadowed by the unfolding Abramoff congressional bribery scandal. Washington’s reaction seems along the lines of a Detroit fixer’s: attack the problem, not with downsizing this time, but by upsizing the rules that limit what kinds of money can legally be given by lobbyists.

Fixes, like the ones being tossed out daily by both Republicans and Democrats, tend to inspire more creative ways to work around them. A real measure of progress would be draining the swamp: using equivalent creativity to remove the need for money by political campaigners.

Detroit, if it is to move forward, has to start building cars people need and want to buy. Easier to say than do, but it is far from impossible, though it’s unclear the road to this kind of growth will be paved with downsizings and cutbacks.

The second lesson

2006-01-27T14:03:00.000-05:00

I learned two big lessons when I wrote Bigger Isn’t Always Better. The first is neatly summed up by the book title. It’s the subject of many of the posts preceding this one.

The second may sound less punchy, but it’s just as significant:

Fixing an organization’s problems – as necessary as it might be – is not the same as setting it on a course for growth.

Many downsizings (and mergers) are billed as necessary prerequisites for future progress, but the record shows this is seldom the case. Instead of real growth, most downsizings beget only more downsizing (and most mergers, more mergers). Fixes like these may be necessary to insure an organization has a future, but they are not drivers of future progress. And, sadly, they are often offered as substitutes for having a plan for real growth.

It’s useful to make a distinction between the, sometimes vital, work of “fixing” a situation and the different activities that are required to "grow" beyond it. Go to the LINKS on the right and click on BOOK EXCERPTS for more details about these differences and the dueling mindsets that are behind them.

Do big bucks always mean a bigger bang?

2006-01-25T11:53:00.000-05:00

Researchers at Booz Allen Hamilton have joined the chorus of consultants-against-bigness spurred on by Marakon (see Jan 20 post). In what The Economist calls the most comprehensive effort ever to figure out if R&D spending really has an impact, Booz Allen concluded:

There is no relationship between R&D spending and the primary measures of economic or corporate success.

It’s how you spend the money, not how much money you have, that matters most. Knowing how to spot meaningful opportunities, develop plans to seize them, win supporters’ hearts-and-minds, create momentum, and bounce back from adversity drive innovation much more than a bulging research budget.

Does it pay to be number one?

2006-01-20T22:08:00.000-05:00

Not really, says Brian Hindo in “Tough Times for Leaders of the Pack,” an article he wrote in the Jan 30th Business Week. He cites research by consultants at Marakon Associates that shows:

… in recent years scale hasn’t delivered the advantage you might expect. In analyzing 3,260 public companies, Marakon’s Brian Burwell and Jeremy Sicklick discovered that between 1999 and 2004, the median total shareholder return was 1.8% for market leaders vs. 9.5% for non-leaders.

Wow - that's quite a performance gap! This was due in part, Hindo says, to an increasingly segmented consumer marketplace where companies that try to appeal to the masses have been having a harder time finding them. The customers are still there, of course. They just like to be treated as individuals, not as part of some big lump.