January 31, 2006
Better, not bigger @ Ford
"For too long, we've used the advantage of size to avoid change.... [It's time to] think like a small company."
January 30, 2006
Buffett’s problem: too much money
“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.”
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.
January 27, 2006
A tale of two cities: Detroit and Washington
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
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.
January 25, 2006
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.
January 20, 2006
… 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.
January 19, 2006
Yesterday, after Apple reported its profit doubled last quarter, its stock price immediately dropped 7%.
That’s what I tried to do when I researched Chapter 2 of Bigger Isn’t Always Better. That’s the chapter called “A Bigger Stock Price Is Not Always A Good Thing.” Its bottom line is that (Wall Street folklore aside): stock prices often don’t reflect the underlying value of a business - especially in the short run.
This is not something Jobs needs my book to understand. He’s ignoring the stock market noise and listening to the voices in his customer market instead. And spending money this quarter to invest in new products and switch to a better processor for his Macintoshes.
January 18, 2006
American Vertigo, a just published book by French author Bernard-Henri Lévy, updates that earlier Frenchman’s travels and astute observations about U.S. values and behaviors. In a Newsweek interview he zeroes in on:
…a tendency in America to believe that the bigger the better for everything—for churches, cities, malls, companies and campaign budgets. There's an idolatry of bigness.
January 16, 2006
Jobs, of course, took a different tack. Which allowed him to send an e-mail to all Apple employees last week:
…it turned out that Michael Dell wasn't perfect at predicting the future. Based on today's stock market close, Apple is worth more than Dell. Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today. Steve.
Jobs noted, but didn’t gloat over, the event. He showed how he has a good grower’s appreciation of impermanence (see Jan 11 post on the iPod Mini). And a smart CEO’s wariness of the stock market.
January 15, 2006
The listing is complied by Robert Levering, who, like Maria Otero (see Jan 14 post) is one of the non-corporate growers profiled in Bigger Isn’t Always Better. Levering choose to work on companies, not within them. By setting up and maintaining a ranking system for positive workplaces he does what Rev. Leon Sullivan did with the Sullivan Principles in the 1980 - helps promote progress (what I like to call “real growth”) by creating incentives for it to happen. It’s the grower’s approach to dealing with what is wrong – drive out the bad with the good. This strategy tries to expand the number of things that are right in a situation by putting a spotlight on them, rather than devoting equivalent energy to trying to eliminate what is wrong.
In Levering’s case, it’s the do-gooders who come out ahead. Shareholder returns of the public companies on the 100 Best Places to Work list trump those of the S&P 500 average – over the past year, the last 5 years, and even the past 10. The Levering list is consistently about 33% ahead of the pack. Delivering above average employee satisfaction correlates with delivering above average stockholder satisfaction.
January 14, 2006
January 12, 2006
January 11, 2006
Think – and do – different
“Think different” is more than just a marketing slogan at Apple. In researching Bigger Isn’t Always Better I found a key attribute of successful growers is their ability to know when it’s time to let go. It’s what Jerry Seinfeld knew that his boss, Jack Welch, forgot. Last year Apple demonstrated this wisdom when they abruptly stopped selling the fantastically successful iPod Mini. Rather than let competitors obsolete the Mini, or extend it's market dominance by bulking it with unwanted features, Apple obsoleted it themselves, replacing the Mini with the wafer-thin Nano. Just how big might the Mini’s sales eventually have grown? We’ll never know.
Low prices are like cholesterol
Good ones are a result of things like technological innovation, creative use of IT to improve operations and marketing, and a rethinking of the nature of the product and the processes used to make and ship it.
Bad low prices come from diminished product quality, and clever efforts to push a business’ real costs of operating off onto others: unpaid overtime, sweatshop labor, advertising hard-to-collect rebates, and corporate socialism (expecting government incentives to locate in their regions; expecting public welfare programs to keep employees healthy). Bad low prices are also a result of business decisions that are unsustainable economically (Independence Air pricing its seats at below the revenues its fuel-inefficient fleet of planes needed to pay for their gas; Detroit automakers' failing struggles to hold on to their customer base by teaching them to expect deep discounts).
Before buying something cheap, be sure to ask: why is it cheap? Were costs actually eliminated - or did they just migrate elsewhere?
January 09, 2006
The high costs of low prices
Last month I saw the movie WAL-MART: The High Cost of Low Price. It’s powerful and worth seeing (though it’s also a little long for something organized more by bullet points than narrative). It makes a strong case for the argument that Wal-Mart’s low-price growth strategy has significant costs as well as benefits. That’s why Business Week has called it America’s most admired and most hated company. Many of the behaviors Wal-Mart is criticized (as well as sued and fined) for are direct consequences of the scale it achieved through this strategy.
Wal-Mart’s quest for bigness is a barrier to its economic performance as well as a lightening rod for its critics. Its economic returns have slipped as it expanded outside its original small and mostly rural markets. It hasn’t figured out how to replicate the economies of scale it once enjoyed as a regional merchant. These were the days when it had ample captive customers and contiguous markets. What it has found, instead, is that some economics – especially those inherent in the store-based retail business – just don’t scale very well. (The same is true of synergy – see my December 13 post.) In other words, past a certain point, economies of scale turn into diseconomies. In retail, the most money tends to be made by those having a big share of a local market.
The research Columbia Business School finance professor Bruce Greenwald has done (Harvard Business Review readers can find a good summary in the September 2005 issue, pp. 94-104) supports these conclusions and is well worth examining. Greenwald, and his colleague Judd Kahn, also say in that article:
…Enormous size alone does not deliver competitive advantage. If the purchasing power that comes with size were responsible for the company’s success, then Wal-Mart’s profitability should have increased as the company grew. Yet its operating margins (earnings before interest and taxes) have not increased since hitting their high watermark in the mid-1980s…. As Wal-Mart has grown, its profit margins have suffered in comparison with those of more geographically concentrated competitors, such as Target.
Growth strategies based solely on ever-lowering prices are inevitable dead ends. Eventually you run out of costs you can cut. This is what Independence Air found the hard way (and Wal-Mart’s shareholders are slowly starting to appreciate). Wal-Mart has become more of a power than a performer. It’s a business in need of substituting smart growth for unceasing expansion.
January 05, 2006
Independence Air's sad day
It announced the airline was ceasing operations as of tonight. While the Independence Air finale was handled with more class than Swissair’s demise (this one-time star performer one day abruptly canceled all flights leaving thousands of unsuspecting passengers stranded across the world), the root causes were similar. Both airlines tried – in the face of threatening business environments - to expand too fast and turn themselves into something they were not.
Swissair’s crash was accelerated by an ambition to be the leader of a cluster of (mostly troubled) smallish European airlines, and to diversify into a host of aviation services businesses. This is one of my examples in Bigger Isn’t Always Better of how a quest for bigness bites back. Other European airlines such as Austrian and Finnair chose to stay with their focused niche markets. They are still in business today.
Independence Air was originally an outsource-provider. Then called Atlantic Coast Airlines, it made money operating as a regional carrier for United and Delta. It owned and flew the planes; they sold the tickets and provided the passengers. But Atlantic Coast wanted independence and a chance to establish it own identity. It got both for all of eighteen months and a few days. Rather than follow the slow and steady approach to profitable growth championed by fellow discounters Southwest and JetBlue, Independence Air got big quick: serving 47 cities with 600 flights and rock-bottom fares. Flight crews were friendly and spirited, but saturating so many markets - already served by competing airlines - with so many flights led to half-empty planes. Skyrocketing fuel prices over this period didn’t help, but they affected Independence Air’s competitors as well. As times got harder, Independence Air clung to its low fares (“lose a little on each ticket, but make it up in volume …”).
Which gets to customer expectations. Do we only want perpetual rock bottom fares? Or do we want an airline viable enough to be around well into the New Year? Or as Washington Post columnist Marc Fisher, reflecting on the 2500 people unemployed as of tonight, put it so well in today’s paper:
Does our collective sense of entitlement to low prices consign our neighbors to lives of economic uncertainty and insecurity?
January 04, 2006
Bigger is no better (and may be worse)
Children are no safer riding in sport utility vehicles than in passenger cars.
Why? The doubled risk of SUV rollovers totally cancels out the safety advantages of their greater size and weight. (The higher cost of fueling them may also limit children’s educational attainment by forcing parents to dip into savings for the kid’s college tuition, too. The study didn’t consider this, though.)
Bottom-line on the SUV, according to the health researchers: Bigger = Safer is a myth. This is a lesson with some implications for businesses that feel a need to bulk-up to survive aggressive competitors. The side effects of all the extra bulk may provide no net advantage, and may even be counterproductive.
Bruce Aylward, the driving force behind the World Health Organization effort to eradicate polio from the planet (and whose management tactics are profiled in Bigger Isn’t Always Better) used this insight to pull his immunization effort out of a bad tailspin last year. He discovered the standard oral polio vaccine, designed to fight all three types of polio, wasn’t producing immunity as fast as a streamlined version that targeted only the most common virus. So WHO rushed into production doses of the more focused stuff. Thanks to this approach, polio has recently disappeared from Egypt and is about to be history in India.
January 03, 2006
A riff on Drucker
The idea that growth is by itself a goal is altogether a delusion. There is no virtue in a company getting bigger. The right goal is to become better. Growth, to be sound, should be the result of doing the right things. By itself, growth is vanity and little else.
Drucker always knew how to get to the point:
To use up more wood each year may be a rational objective for the Gypsy Moth. It is an inane objective for a paper company.
In many ways Bigger Isn't Always Better is essentially an extended riff on Drucker's ideas.
My writing has been influenced by his example as well as his ideas. He showed how it's easier to make sense of something when you're not caught up in its midst. He wrote about big business, but never had a career there. He did more to thoughtfully define what management is about than anyone has. But the only person he ever managed was himself.
This is the first New Year I can't count on reading new ideas being spun off by Drucker. I'll miss him. But I can still keep up my old habit. He's left behind a good three-dozen books and hundreds of articles and interviews. What a legacy!