Posts

Management is Still Fighting the Industrial Revolution

Let’s think big picture today.

Ideas lead technology. Technology leads organizations. Organizations lead institutions. Then ideology brings up the rear, lagging all the rest—that’s when things really get set in concrete.

Doubtful? Think the Catholic church.

Or, think the history of capitalism. The Industrial Revolution, depending on who’s counting, ran roughly the 19th century. As sweepingly mapped in Alfred Chandler’s classic The Visible Hand, the development of management followed the development of industry.

In his view, by 1920 the major lines were laid down. From 1920 to 1960, the theory of management basically just caught up to reality.

From the 1960s to basically today, it hasn’t changed a whole lot more, except for new approaches to strategy and process engineering. Most approaches to ‘strategy’ just quantified and clarified pre-existing notions of corporations competing for dominance against each other. The advances were incremental, in the application of sharper theories, models, metrics and data-crunching.

Today, just like in 1920, the reigning ideology of business is competitive, linear, behavioral, measurable, and quantifiable. Set financial goals. Define organizations, processes and procedures in cognitive terms. Convert all resources to financially fungible terms. Define finer and finer levels of behavioral objectives. Put financial incentives in place. Install sensors to micro-measure results. Step back and watch the machine run, tweaking the cheese rations as necessary.

What this view of business is NOT is everything that’s happening at the front of the chain—the technology-to-organization reality that drives all else.

It does not recognize cross-corporate borders, fluidity, collaboration, transparency, humanism in any serious sense, community, ethics, politics and the economics of the commons. All of which are critical business issues today.

We are stuck with a belief system rooted in the late 19th century.

Segue-way to a most interesting article by Gary Hamel in the February 2009 Harvard Business Review, titled Moon Shots for Management. Hamel, when at his best, is arguably the most creative business strategist extant; and here he is very, very good.

He reports out the results of a 2008 group brainstorming exercise aimed at nothing less than re-inventing management. From Management 1.0 to Management 2.0.

The article lists the Top Ten ideas from the group, including the following:

• Ensure the work of management serves a higher purpose
• Reconstruct management’s philosophical foundations
• Reduce fear and increase trust
• Reinvent the means of control (less compliance, more shared values)
• De-structure and dis-aggregate the organization
• Create a democracy of information.

And so on.

These are indeed Big Ideas, and it’s about time. Our old ideology is not only behind the times, not only holding us back, it is positively destroying value going forward.

We cannot afford another Sarbanes-Oxley bill to prevent the next Madoff. We cannot afford billions to simply re-capitalize Detroit. We cannot afford to teach people competitive dogma in a world that demands collaboration. And we cannot enforce ethics through processes and controls.

People like Hamel (and me, in this regard) are trying to reform ideologies. That is not easy, since the very terms of discussion are of and from the reigning ideology. How do you talk about things that people cannot conceptualize, given the tainted nature of the very language we use?  (A simple example: how to free the word ‘strategy’ from the unconsciously inferred adjective ‘competitive’)? 

Say "higher purpose" and "philosophical foundations" and you get glazed looks in most companies.  That is not a meausre of its craziness, but a measure of the power of the reigning ideology.  Copernicus sounded crazy too; but he wasn’t.

These ideas are directionally very right. I won’t say they have to come true. But I suspect Hamel would agree with me that if they don’t, we will not progress very far, if at all.

 

Competing With Your Supplier is Not a Best Practice

Fortune’s Geoff Colvin writes in the July 21 edition about Gary Reiner, GE’s CIO, in Information Worth Billions: General Electric’s CIO Tells How He Makes Infotech Pay In a Big Way.

Reiner reports directly to Jeff Immelt, GE’s CEO. Immelt wants three things from him—one of which is sourcing. Says Reiner:

"…we were one of the first to do e-auctioning. Our job would be to commoditize the item as much as possible and then leverage IT to have our suppliers bid for the business.

Of course, Reiner says that though GE loves to buy through reverse auctions, it hates to sell that way.

"…the more commodity-like the part or service is, the easier it is to auction; and the more differentiated, the less easy it is to auction…we try to make more of our business portfolio be products and services that are non-commodity—that are differentiated. So we are not as auctioned on the sell side as we are on the buy side.

All well and good. And of course (insert here your favorite paragraph on the fabulous track record of GE, Jack Welch, etc.).

And yet, and yet…

I’m left with the inescapable feeling that Reiner—and Immelt, and GE—view business as being exclusively and exhaustively about competition. Including competing with your suppliers. And competing with your customers.

With suppliers, it’s about extracting the best price from an auction. With customers, it’s about extracting the best price by avoiding an auction.

In both cases, it’s about extracting maximum price in a zero-sum transaction whose boundaries are limited to product features, product quality, and price. What’s good for me is not good for you, and vice versa. We are inextricably opposed.

If that sounds perfectly obvious and normal to you, then think about what’s missing.

A relationship. An approach of collaboration. A view that this transaction isn’t a carefully negotiated one-night stand, but rather a joint journey. A view that gets beyond mere product characteristics and price. A sense of commitment to customers or suppliers. A feeling of responsibility for the health of both parties. A willingness to pool information, rather than use it as a wedge.

That’s some of what’s missing.

Let’s call GE’s view the “competition-centric” view. It was given intellectual expression and validity by Michael Porter in his 1978 classic Competitive Strategy. In that book, Porter laid out quite clearly the nature of business: it was to compete. And the nature of competition was equally clear. There were five competitive dynamics facing the firm: two of those five were the competitive struggle between the firm and its customers, and the firm and its suppliers.

In other words—business, by this view, is quite specifically about competing with your customers (and suppliers).

This view is not “wrong” per se. It helped a lot of companies—including GE—to survive and prosper.

But this is not your father’s business world. Nor Jack Welch’s. Not any longer.

Today’s "flat" business world—30 years after Porter—is about extended enterprises, not hard-walled corporations. It’s about supply chains, not about monolithic vertically integrated organizations. Best practices today are about collaboration, not competition; about influencing, not managing; about commercial relationships, not competitive ones. It’s about 1+1=3, not "do unto others before they do unto me."

Those who succeed today aren’t those who play “hardball,” but those who learned early on to play nicely in the sandbox with others. Because in today’s business world, there is no longer any separation worth the name; in a globally scaled world, everyone outsources pretty much everything. A competitor today is a collaborator tomorrow and a customer or supplier on alternate Tuesdays.

Exhibit 1: the auto industry. Toyota has a genuine cost advantage over Detroit because it has always treated its suppliers as an extended organization—not as enemies to be kept at bay and bled nearly dry. That collaborative advantage is the competitive truth—not the self-serving excuses (by Welch, among others) about health care and pension costs (which were after all freely signed into contracts by Detroit management without a gun to its head).

Yet the dominant business ideology in the West continues to be—competition. These antiquated belief systems are increasingly at direct odds with the horizontal, extended, diffuse, globally interdependent world we now live in.

And of course, that’s how it works. Beliefs die hard—well after the conditions that birthed them are long gone. Ideology is the last vestige of a changing world.

Competing with your customers? If that was ever a “best practice,” it should now be relegated to an increasingly bygone world. It’s not “bad” or “wrong”—it just doesn’t work as well anymore. And that trend is only increasing.

 

Hey! Your Company Just Turned Into a Supply Chain!

 What’s the biggest business change of our time? You might say it’s the Internet. Or globalization. Or outsourcing.

But let me make a case for something else. Something that incorporates those other ideas, but puts them all in a bigger context. Something Big but Simple.

We are moving from a world of Competition to a world of Commerce.

In the old competitive world, most business was transacted within companies, as part of a hierarchically-organized management process.

In the new commercial world, those same business transactions are happening increasingly between companies—not within them—as part of a horizontally organized commercial process.

Let me break that down:

• Business is now done between, not within, companies.
• Business is now done not hierarchically, but horizontally.
• Transactions are no longer managed within firms; they are bought and sold between firms.
• The people you transact with no longer work for you—now they sell to you.

When Tata Motors recently announced the $2500 car, the interesting fact was not the cheapness of the car, but the authors of the announcement. It was the Tata supply chain, not Tata the company, who would make the car. Tata is willing to outsource even the final assembly.

Companies still compete with each other: e.g., GM vs. Toyota, Citibank and Chase, etc. But the bulk of business transactions are no longer internal, they are external, and they are not between competitors, but between suppliers and buyers—collaborators, not competitors.  It’s not that competition doesn’t exist anymore, it’s that your company isn’t in charge of your competitiveness.  Your supply chain is.  And you have to get along with your partners to share in your collective success.

Those who persist in viewing the world through competitive lenses are marginalizing themselves. It’s a relationship world. You can’t go it alone. Those who see through collaborative lenses are, paradoxically, those who will win—not those who set out to "win" by competing.

GM no longer competes in the car business—they just add the final 10–20% of the cost structure in an automotive supply chain. The real “car business” is a whole bunch of companies, inextricably linked in a commercial web. Except for those who continue to believe their suppliers and customers are their competitors. To compete is, increasingly, to lose.

Those who work together well—those who can play in the sandbox nicely with others—are those whose supply chain will win, and them along with it. Those who still think they’re competing with their suppliers and customers are those whose supply chains will lose, dragging them along with it.

Competitive advantage doesn’t determine success anymore—collaborative advantage does.

It’s the external commercial relationships that dominate the value add in the new economy, not the internal ones.

Competition isn’t dead; it’s just not where the action is. Commerce—the ability to get along with others in a supply chain—is where the action has gone.

Hey! While you were sitting in a classroom reading about competitive strategy, your company just morphed into a supply chain!

Aristotle, Maister, and the Fat Smoker

David Maister has a new book out—Strategy and the Fat Smoker.

The title is personal—David once was heavy and smoked. And used both facts to explain something to his clients.

It was that people don’t change by being told why they should.

Alcoholics, smokers and foodies are not stupid. Nor are clients. Yet stupidity is the diagnosis implicit in the advice given by many doctors—and lawyers, and consultants, and accountants, et al.

Most strategic thinking is of this type, he says. It’s all about the decision—which, as Maister points out, is not that difficult, nor does the advice vary much. Quit smoking. Be number one or two in your market. Go on a diet. Outsource what you’re not best at. Drink less; cut back on fats; exercise. Globalize; decentralize; collaborate.

But talk is cheap: execution is rare. Brilliant strategies un-executed are worth less than the bytes they’re stored on. We tend to think that because we’ve thought something out, the hard work is done. Of course, it’s not.

Why is this? Because firms— like fat smokers—avoid the tough work of real strategy execution.

Maister works in professional services—but the issue he raises is universal.

He’s touching on the philosophic issue of moral weakness, called (confusingly to the modern audience) incontinence. The Greek term is akrasia.

Basically:

How can it be that someone can know the right thing, be capable of doing it and free to do it, even want to do it—and yet not do it?

The problem goes back to Aristotle and Plato. Read Duncan Davidson for more, but—crudely summarized—here’s the ancients’ views:

Aristotle basically says the problem doesn’t really exist. “Man thinks, and forthwith he acts,” is how he puts it.

So, if you didn’t do something you thought was right, it’s either because you really weren’t capable of or free to do what was right—or because you frankly didn’t want to do it. There’s no problem here, he says; an alcoholic isn’t hard to understand—either he’s addicted and therefore not free, or he just likes drinking more than not drinking—in which case, he drinks. Where’s the problem understanding that?

For Plato, the incontinent is either un-reflective, or of weak character. The fat smoker either doesn’t really understand how self-harmful he is—or he is just a moral weakling. Both are common among humans. Incontinence, says Plato, is unremarkable—it’s pretty much the human condition. (This is often the view of consultants—if only my clients were bright enough, they’d see my wisdom—and then the problem would be solved.)

Maister hews unconsciously to another philosopher—Karl Marx—who once said, “The point is not to understand the world, but to change it.” That’s Maister’s subject—how to change strategically.

Appropriately, his answers aren’t derived from theory or deduction, but from observation and reflection. And they are rich. Here are a few:

• The necessary outcome of strategic planning is not analytical insight, but resolve.

• Leaders in most organizations don’t really want to do what it takes. They are just fine with doing pretty well, and getting by. They don’t honestly, seriously, want to do what it takes to be great—though they prefer to avoid saying so.

• Emphasize the journey, not the goal. Whether it’s quitting smoking or becoming number one in the market, goal-focus makes the journey feel like punishment. But if you focus on the journey in small chunks (“just don’t drink today,” “just don’t lie to a client”), then progress can be felt and appreciated.

• Stop talking the language of destinations—it allows hiding out, fudging, and is intimidating. Instead, talk the language of principles and behaviors.

• Principles are more effective than tactics. Managers who get things done are those whose people believe their leaders believe in something.

• Motivation must be intrinsic, not extrinsic. The biggest barrier to change is the feeling that “it’s OK so far.”

• Strategy means saying “no.” Strategy execution is defined better by what you won’t do than what you will do—and then really not doing it. At all.

• There is a hierarchy of integrating concepts, roughly from purpose and mission, to vision and direction, to values and principles, and then to rules of behavior. All are required, and in roughly that sequence.

Maister goes on to explain that successful sellers, managers and leaders do not succumb to a reductionist view of the world, focusing on processes, data, systems and rewards, but instead are engaged—personally, deeply, in a genuine way—with the people they relate to.

And, he’s got data to prove it. He’s not at all saying “nice guys” finish first; he’s saying you can’t do business by the numbers alone. Business, done right, is a contact sport. It’s about relationships—mutual ones, honest ones. And very much about trust.

All his career, Maister has been fond of saying he’s not preaching morality, just practicalities. In this book, however, he comes close to squaring the circle, and says as much:

People who are acting on principle are much more likely to get done what they say they will do than will those who are doing those things solely in pursuit of future rewards…Whether people know your principles and trust you is a major determinant of how they are going to respond to you…The most effective organizations are those that are held together by shared and enforced principles, values and standards.

In the end, Maister touches both Plato and Aristotle. If you fail to execute your goals, in a sense it really is because you didn’t want them enough (Aristotle). And those who really are willing to do the hard work of living by principles are relatively few (Plato).

Most firms (and people) are in the broad middle: going through the moves, faking it with analyses and business processes, and telling ourselves “it’s OK so far.”

One thing’s clear: it’s a choice, and the choice not to choose is a choice as well.

 

(Full disclosure: Maister was my co-author, along with Rob Galford, of The Trusted Advisor, Free Press, 2000).

Faking It Doesn’t Make It

Remember Leave it to Beaver’s Eddie Haskell? Always nice to Mrs. Cleaver—but always working an angle. The unctuous, silver-tongued slickster—devious, always in it for himself.

Haskell played the role of evil in a morality tale—the black-hat guy of the adolescent crowd. When he got his come-uppance, Good triumphed (though of course we were titillated by his escapades on the way).

What Eddie Haskell did best was to fake sincerity. He couldn’t fool us, of course; though poor Mrs. Cleaver was a reliable sucker.

Haskell was TV’s tame version of Hollywood’s innocent; the rural rube with a pure heart, dazzled by the sophisticated city slicker/ hustler—until (s)he finds, as everyone had warned, that he’s a cad, a con, a hustler.

He was faking sincerity.

An Eddie Haskell phenomenon has been coalescing in business. Business is becoming adept at mouthing sincerities about relationships—but in service to itself, not to the nominal objects of those relationships—customers, suppliers, employees.

Have we succeeded in faking sincerity so well that we have fooled ourselves?

Some examples:

1. From an article by UC Berkely Business School professor Lynn Upshaw:

Marketers need to consider a new calculus: "return on marketing integrity"—that is, a new type of "ROMI"—which can lead to stronger business performance.

Traditional return on marketing investment is calculated using gross margin generated by marketing efforts (GM), minus the marketing investment (I), divided by that investment: ROMI = (GM – I) ÷ I. The calculation for return on marketing integrity is identical, except that investment is replaced with marketing integrity.

This language comes awfully close to suggesting that integrity is a virtue insofar as and to the extent it pays off on the bottom line.

 

2. From a Wall Street client seated next to me before my after-dinner talk on being a Trusted Advisor:

“Trusted Advisor? If it gets me greater share of customer wallet, I’m all for it.”

The implication: trust is a virtue—if you can make money on it.

3. From a posting by Steve Yastrow on Tom Peters’ weblog:

In an age of interchangeable products and easily duplicated services, customer relationships have become one of the most powerful competitive advantages available to a business—one of the best ways to keep the competition away from your customers.

I doubt Yastrow intends it—but the language can be read as suggesting that relationships are justified by their ability to competitively advantage a company. (Consider a parallel: "darling, the main reason I want to marry you is you’ll give me a competitive advantage in the business world").

 

4. Steven Covey, Jr., in an interview on branding, says

trust is a hard-edged, economic driver—a learnable and measurable skill that can give your business a competitive edge.

Covey doesn’t say the sole goal of trust is to provide a competitive edge; still, why does that phraseology come so easily to us? (And not just to Covey—I’ve said much the same myself on occasion).

 

5. From a Harvard Business School Publishing email advertising a seminar titled “Authenticity: Are you Delivering what Consumers Want?”

…your company must grasp, manage, and excel at rendering authenticity. Learn how to manage customers’ perception of authenticity by…

• Recognizing how businesses "fake it”
• Appealing to the five different genres of authenticity
• Charting how to be "true to self" and what you say you are
• Crafting and implementing business strategies for rendering authenticity

What does “manage customers’ perception of authenticity” mean? Is it the same as “be authentic?” And if not—isn’t it then inauthentic?

Is authenticity best “rendered” by “crafting and implementing business strategies?” Is authenticity-as-strategy the same as authenticity-as-values?

This is not just about a clash of values—the greedy vs. the needy. It’s deeper. It’s about two world-views of business.

One—the dominant ideology of the 19th and 20th centuries—says business is a Hobbesian place. The dominant relationship is competition—everyone against everyone, including you vs. your suppliers and your customers. The goal is to win, defined as sustainable competitive advantage, and measured by shareholder return on equity.

In this worldview, the role of relationships is as means to an end—winning.

In the other worldview, business is about interdependencies, linkages, networks. The dominant relationship is commercial collaboration. Those who prosper are those who play well with others.

By this worldview, relationships aren’t means to an end—relationships are the end. Successful businesses are the consequences, outcomes, byproducts of successful relationships.

The world is dragging us toward collaboration; but our belief systems are still rooted in competition.

The result shows in our language. We know the right words to say, but we can’t help sounding like Eddie Haskell, trying to fake sincerity.

After all, if your sole goal is to win, how can “relationships” possibly be sincere?

Lessons in Propaganda: What Politicians Learned from Business

I am hardly the first to note the application of PR principles to politics. Nor is it a new observation. Kennedy and Nixon had their communications advisors; Lincoln read books on rhetoric—ancient Greeks wrote them.

We now see it in mind-numbing three-word phrases printed, Louis Vuitton-like, on backdrops behind the Presidential podium; in the evolution of “talking points” from a novelty phrase during Monica-gate to commonplace today; and in the devolution of the Cabinet from advisory body to vehicle for staying “on-message.”

Many call this a failing of George Bush or of a Republican administration (though the Clintons know this material well too), or a misapplication or perversion of business principles.

But that’s not quite right. Politicians haven’t misappropriated business lessons—they borrowed directly, main-lining their Big Brother 1984 lessons from the very heart of what has come to be called business best practices.

The problem isn’t cynical politicians twisting business ideas; it is cynical business ideas themselves, granted mainstream legitimacy by business opinion leaders—the business media, business schools, industry associations, and business leaders themselves. Politicians are just following.

Take four common terms: “on message,” “brand,” “alignment,” and “communication.” Now think Marketing 101 (or any CEO’s speech), and see how familiar this sounds:

In this consumer-empowered, media-cluttered age, the company that understands customer needs and communicates its message the best is the one that will survive in this hyper-competitive market.

Consumers have less and less patience and attention span: companies need to develop a coherent branding message—the same on the web, in stores, and in ads—about who they are and what they can do for the customer.

A company not completely aligned around its core value proposition and the message it communicates about that proposition will fail. Sales collateral must be on-message with marketing’s branding; incentives must align with company strategy; measurements must track missions, aggregating to sustainable competitive advantage.

Even marketers—professional cynics—are taken aback by the success of a current ad campaign. You’ve seen it / heard it:

Apply directly to the forehead—apply directly to the forehead—apply directly to the forehead.

Blunt force repetitive trauma to the brain. Think Orwell. Goebbels. Big Brother. The Big Lie.

From there, it’s a quick trip to “we’re in Iraq to stop Al-Qaeda from invading Kansas,” with flight jacket and aircraft carrier backdrop.

Massive repetition works. Better than we like to admit. “Brainwashing” is just a value-laden term for what politely passes as “alignment” and “on-message” in the corporate setting. Even “shared values” brushes uncomfortably close to the same territory.

Reggae rapper Shaggy parodied this angle a few years ago in the song “It Wasn’t Me.” Seeking advice after having been caught in flagrante by his girlfriend, he’s told, “Just say ‘It wasn’t me’.” Repeat it often enough and you can get away with anything. Was he being ironic? Or just astute? (Did he help Larry Craig and OJ come up with “I’m not gay” and “it was my stuff”?)

Mainstream marketing and business 101 teach companies to simplify, refine, and focus on one message and mission, then design the whole organization to apply massive force to the fulcrum point of the customer.

The result is called “tuned,” “focused,” “aligned, “and—most chilling—a perversion of “customer-centric.” Apply directly to the marketing. Apply directly to the marketing. Apply directly to the marketing.

There is nothing “wrong” with these techniques per se—the means, in this case, are value-neutral. It is the ends to which they are put—the motives—that matter.

Unfortunately, Roger Ailes, Turdblossom et al didn’t have to translate the business play book to politics. They copied directly. Both have become about winning against other competitors/candidates—not about helping consumers/voters. Bombardment of the consumer/voter with simple messages is good for quitting smoking or announcing emergency traffic routes. For selling pharmaceuticals, wars and presidents? Not so much.

In business, it’s reach and frequency—in politics, it’s being on-message. Tax and spend. Support our troops. Apply directly to the amygdala.

The problem in business and politics is identical. Both have become all about competition and winning—not about consumers and voters. Both have turned the legitimate concept of “customer focus” from a goal into a tactic, linking it tightly to quarterly earnings and the two-year election cycle.

Business has turned "customer focus" into a codeword for tweak, massage and manipulate.

Modern marketing practices flaunt the dictionary, Shaggy-like, when they turn "communication"—formerly defined as "exchange of information"—into the one-way megaphone of "apply directly to the forehead."

At root, this is a failure of belief systems. We are teaching an ideology of short-term me-me-me-ism in business, and our politicians are drinking the same Kool-Aid. For those who think this brand of “competition” is what makes for a successful economy—take a look at the falling US dollar. A focus on commerce, not on competition, is what makes an economy great. We’ve gotten it backwards.

Don’t blame George Bush, Republican; blame George Bush, MBA President. Until the B-schools start preaching networks, collaboration, transparency and commerce in their strategy classes instead of in their so-called “ethics” classes, we in business have no right to complain about the politicians.
 

Customers and Strategy Part 2 of 2: Customer Centricity vs. Customer Vultures

In my last posting I talked about the weakness of current business strategic thinking when applied to issues like climate change, using the current issue of Harvard Business Review as an example.

The same HBR issue offers two object examples. One views customer-centricity as about the customer. The other exemplifies the customer focus of a vulture. It’s a snapshot of old strategy vs. new strategy in action.

First up—in this corner, the Vulture guys.

In How Valuable is Word of Mouth, by Kumar, Petersen and Leone, the authors critique the popular metric of Lifetime Customer Value—typically calculated as the present value of lifetime purchases by a customer. They suggest adding referrals, and introduce metrics and financial formulae to do so.

There are the usual MBA tools: 2×2 matrices with cute psychographic names, NPV calculations, and formulae featuring summation signs, multiple independent variables and exponents.

My aim is not to critique their point—it is to note the language and the mental frameworks of the article.  When it talks about "value," it means—but of course— the value of a customer to the seller—but not the reverse.  And the term “value” is purely financial. In this mindset, a customer is truly nothing more than a financial variable to be tweaked and optimized for the seller’s ends. Some flavor:

"Understanding how much value a customer brings in [from purchases and referrals can help companies target their marketing…enabling them to achieve superior marketing ROIs and reap the full value of all their customers.

"A year’s projected business gives a number that is normally half of a customers full lifetime value.

"If the cost involved in acquiring type-two referrals exceeds the cost of alternative acquisition methods, type-two customers can be a liability."

The authors launched a 1-year marketing campaign to test their ideas.  What do they consider of "value" to the customers?  Discounts on subscription fees; financial rewards for referrals; direct mail offering up-sell and cross-sell opportunities.  Price, price and price.

Did it work?  “Extending the campaign to 1 million customers would increase their total value by almost $50 million.”  In other words, it works very well.  For the vultures, I mean marketers, that is. 

Second Up—in this corner, Customer-Centricity for the customer’s sake.

In the HBR Interview, a CEO: can you guess the company?

"Some of the most important things we’ve done over the years have been short-term tactical losers

"We don’t make money when we sell things; we make money when we help customers make purchase decisions

"We’re not always asking ourselves what’s going to happen in the next quarter, and focusing on optics

"In the old world you devoted 30% of your attention to building a great service and 70% of your attention to shouting about it—in the new world that inverts.

"Whenever we face a “too-hard” problem, we ask what’s better for the consumer?

"Years from now, I want people to look back at us and say that we uplifted customer-centricity across the entire business world. If we can do that, it will be really cool."

Here’s a hint: it’s a publicly traded $13B company—up from $150M in 1997. Its stock price has tripled in the last year. Yet only a few years ago, analysts were calling it Amazon-dot-toast. That’s right; meet Jeff Bezos, CEO of Amazon.com.

It’s a stark contrast. One approach values customers only as means to the seller’s own ends—and only financial means at that. Customers are to be managed in the short-term, through—of course—price discounts and price promotions. What else do customers want, after all, besides price?

This is the classic form of customer centricity as a vulture: slick, smart, and born of an ideology that defines competing with one’s customers and suppliers as an integral part of business strategy.

The other approach builds businesses, communities and economies around customer relationships. The time-frame is long—Bezos probably agrees with the dictum “be a good ancestor." Its cornerstone is not competitive dynamics, but relationships.

 

The slowly emerging strategic ideologies of the future belong to the Jeff Bezos’s of the world, not the tweak-optimizing marketers or the competitive strategists. In a connected world, a knee-jerk belief in dog-eat-dog is no longer the "obvious" choice. It makes strategic sense to think big, long-term and customer centric. For the customer.

Just ask the folks who bought Amazon at 32 last year. Beat the heck out of the vultures.

Customer Strategy? Or Strategy vs. Customers? Part 1 of 2.

The October 2007 issue of Harvard Business Review is out; in snailmailboxes, anyway (at HBR, no early advantage is given to electronic subscribers, unlike most other publications.)

The issue provides such a juicy entrée to business thinking that I can’t cover it with one blog posting. Look for the Part 2, next posting, which will pit Amazon against credit card companies.

But first—let’s talk business and global warming. The entire Forethought section this issue is devoted to “the climate business and the business climate.”

No fewer than 7 articles address the issue, led by the reigning king of corporate strategy, Michael Porter, co-authoring with Forest Reinhardt. Porter’s life’s work has been to cement the link between strategy and competition. It’s hard to overstate the effect his work has had, even on those who don’t know him by name. The term “sustainable competitive advantage” is, in large part, his handiwork.

After cementing that worldview in business, Porter applied it to countries, then to non-profits; and now to global warming. What, you might ask, does corporate strategy have to do with global warming?

Porter gives a quintessentially Porterian answer. First, you might be able to make money on it (what with higher energy prices, green policies, et al).

But that can be just operational. The bigger reasons for companies to think climate, says Porter, are strategic. You might be able to stake out a position in an emerging market; or prevent a competitor from doing so. Walmart’s emission reduction programs don’t just save money; they “will be strategic if [Walmart can]…reduce emissions in a way that is difficult for its smaller rivals to replicate.”

As Porter and Reinhardt put it:

While many companies may still think of global warming as a corporate social responsibility issue, business leaders need to approach it in the same hardheaded manner as any other strategic threat or opportunity.

I submit there is something profoundly wrong with this logic.

There is something wrong with business thinking when the core guiding strategic concept is the pursuit of continued competitive domination by corporate entities. When the best thinking business can bring to bear on global warming boils down to the dictum to view it like "any other strategic threat or opportunity."

In a world that is networked, globalized, outsourced and inter-dependent, the last thing we need is an old ideology centered on companies “built to last” who are all about “playing hardball” to achieve “sustainable competitive advantage.” That mode of thinking has proven itself incapable of dealing with the economic issues of "the commons" time and time again, on a less-than-global scale. Why should it prove any better when the stakes really are global?

Is that really the best we can do for a guiding set of beliefs? I think not.

I am not suggesting that companies ought to be do-gooders. Nor am I suggesting that companies ought to calculate political pressure and react according tof the relative power of broader constituencies and their enlightened self-interest (an approach responsible for “business ethics” being perceived as an oxymoron). I am not suggesting “co-opetition” as a solution.

I am suggesting we need an entirely different business ethos—a logic as powerfully and concisely stated and as deeply embedded at the heart of business as competition was when Porter wrote in the late 70s—but an ethos based on relationships, networks, synergy, inter-dependency, collaboration, customer-supplier relations, and mutuality.

Do the other 6 articles in HBR’s forethought section offer that ethos? Not really. One talks about the stakeholder pressures that will be brought to bear on companies; another about the value of transparency. All are stuck in the same root assumption: business is about the sustained competitive advantage of companies.

Elsewhere in the same HBR issue, however, there lurks a clue about a viable alternative approach.

Stay tuned to this blog for Part 2.

 

The Cancer of Short-term Thinking

Western capitalism is fighting a form of business cancer. And the most virulent form of it is short-termism.

In physical cancer, some cells go haywire and turn viciously against the body. This is also what happens when certain core beliefs are perverted or taken to extremes. Some examples—the beliefs that:

• greed is good (Hollywood simplification)
• individual pursuit of selfish aims yields public good (mis-translated Adam Smith)
• pursuit of short-term corporate goals ends in long-term social success (what’s good for General Motors hasn’t been good for America for some time now).

Those and other beliefs have resulted in rampant short-termism. A few examples, “ripped from the headlines:”

1. The trend in private equity toward front-end deal fees. Gretchen Morgensen’s NYTimes article quotes Michael Jensen, emeritus of Harvard Business School and the “father of private equity:”
“…these fees are going to end up reducing the productivity of the model… People are doing this out of some short-run focus on increasing revenues."
In other words, private equity is good when it subjects bureaucratic managers to the pressure of markets, with say a 3-5 year timeframe. But when the privateers themselves succumb to the lure of instant front-end fees, the greed snake is eating its own tail.

2. The trend in the mortgage industry to convert relationships to transactions—from integrated loan-making and loan-holding, to separating the entire process into various stakeholders—most of whom get their money up front, now. Short term.

3. The IBGYBG mentality in investment banking during several market crashes detailed by Richard Bookstaber in his book A Demon of Our Own Design, that resulted in people making fast deals that would explode on investors down the road, but that paid off nicely up front for the dealmakers, who said not to worry, because—"I’ll be gone, you’ll be gone," it’ll be someone else’s problem then.

4. Young financiers opting out of an MBA because the opportunity exists to make so much more money in the short term:
“With the growth of hedge funds, you’re getting a lot of really smart people who are getting paid a lot very young,” says Arjuna Rajasingham, 29, an analyst and a trader at a hedge fund in London. “I know it’s a bit of a short-term view, but it’s hard to walk away from something that’s going really well.” Yup on both counts.

5. The current residential real estate recession, driven heavily by speculative buyers betting well beyond their means on continued high prices—“I’ll pay off the loan when I flip it.”

6. The longer term trend in business toward “alignment” of processes—which often assumes the only way to long-term profit is to ensure that every short-term measure is itself profitable.

7. Quarterly earnings pressure, which was one of the original drivers of private equity, back when PE was doing some good.

8. Private equity firms selling equity to the public: “a non sequitur in both language and economics,” according to Gretchen Morgensen’s paraphrase of Michael Jensen .
The private equity movement initially shook up stodgy companies that were permanently-funded by stock, where inefficient managers could hang out draining away value for decades. Private equity would buy them and insist on returns in 3-5 years; it left managers no place to hide, and produced real value returns. But when the 3-5 year people themselves start selling permanent stock to investors, they have become what they started out to fight. Which means they’re either stupid or venal. And while I usually opt for stupidity in explaining conspiracy cases, in this one I’d put money on venal.

Is there any relief? Or is this just another case of cheap hustlers exploiting weak human nature that goes with every business cycle?

Three antidotes can work against short-termism. One is pain. Suffering may not be a sufficient condition for social change, but it’s usually a necessary one.

Second is education. Awareness creation can help.

The third is leading thinkers, and there are some hopeful signs. Martha Rogers has begun talking about a lifetime financial perspective on customers:

"Creating maximum value from your customers involves optimization — balancing current-period profits against decreases or increases in customer lifetime values, to maximize your “Return on Customer.”

This isn’t new in finance, accustomed to present-value thinking in pricing financial assets. But it’s new to management thinking, accustomed to quarterly EPS. Robbing future customers robs enterprise value, says Martha. And she’s right.

The aforementioned Michael Jensen announced last month a paper he wrote with Werner Erhard (the controversial founding father of EST training, and more recently of Landmark Forum) on the subject of—get this—integrity.

Here’s a tasty quote from the abstract:

We demonstrate that the application of cost-benefit analysis to one’s integrity guarantees you will not be a trustworthy person (thereby reducing the workability of relationships), and with the exception of some minor qualifications ensures also that you will not be a person of integrity (thereby reducing the workability of your life). Therefore your performance will suffer. The virtually automatic application of cost-benefit analysis to honoring one’s word (an inherent tendency in most of us) lies at the heart of much out-of-integrity and untrustworthy behavior in modern life.

They are right too. You can’t fake trust; trust is a paradox; motives matter. The act of justifying trust by its economic value destroys not only trust, but its economic value. The best economic results come as byproducts, not goals.

Can clearer business thinking beat short-termism? It can’t hurt.

It’s a Dog Eat Dog World: Isn’t It?

My last posting—The Deeper Message of Financial Volatiilty—generated responses at The HuffingtonPost.com I also got a call from a TV interviewer, who posed the question:

How can you say competition is increasingly less relevant—it is, after all, a dog eat dog world out there—isn’t it?

This metaphor of cannibalistic canines needs a little deconstructing.

First, I think it’s pretty much only a metaphor. Outside Jack London, I doubt there are too many Donner Pass incidents in the history of dogs.

More seriously, I learned early on that if I rode my bike past a snarling, menacing dog and pedalled like crazy to stay away from it—the dog would chase me.

But—if I actually approached the dog and said, “good boy, come here,” the same dog would wag its tail and befriend me.

In my experience, this pretty much describes people too.

People often live up—or down—to others’ expectations of them. And if we can learn that about ourselves, then we have gained the keys to our freedom. We can see that we own our own oppression; that we empower what we fear. And escape it.

The parallel extends to business. If I expect the worst of my suppliers and customers, then I’ll throw lawyers at them, endlessly calculate their financial value to me, use need-to-know communications, and generally make sure I’m always in control.

At its best, this response gives us dynamics like union vs. management. At its worst, we get endemic inefficiency and cynicism.

Now add change to the equation. Decades ago, we had monolithic corporations with fixed boundaries, competing against each other. Now, as BusinessWeek describes in its August 20 & 27 cover story The Future of Work , we have something quite different:

The very idea of a company is shifting away from a single outfit with full-time employees and a recognizable hierarchy. It is something much more fluid, with a classic corporation at the center of an ever-shifting network of suppliers and outsourcers, some of whom only join the team for the duration of a single project…

The hard part for multionatinals is getting people to work well together…such pressures put a premium on recruiting staff who are globally minded from the outset…Nokia is careful to select people who have a “collaborative mindset…”

Exactly.

The playbook that business schools still teach from is the one labeled Big Monolithic Corporation—and the chapter heads are all about Competition.

The playbook that hasn’t been written yet is about the Fluid, Shifting, Morphing Entity that BusinessWeek describes—and the chapters are not about Competition, but about Collaboration—with customers, with employees, with partners.

Dog eat dog? Why? When dogs eat dog food instead of each other, and figure out how to work together, life gets better.

And in an emerging business world that throws everyone together in constantly permutating ways, that old competitive nature we prized decades ago is becoming a bit of a millstone.

Business doesn’t need, or want, competitors and competitive talents as much as it used to. The emphasis will shift from competition to customers. Business needs more collaborators. Not in order to become more “competitive” or to “win”—but to become more successful.