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The cost will be high: the loss of my job, possibly my career,
certainly my self-esteem and my health. The organization
I work for will also lose. By contrast, if I change the
way I deal with incoming information, in a heuristic manner,
if I scan, if I learn to decimate, to select the relevant
from the rest, then the flood of information, cleverly handled,
becomes an advantage. Three things have then happened: I
have created for myself a new defence against overwhelmingly
complexity and change, I have equipped myself with a new
competence, and I have secured an advantage that most others
may lack.
There
is a simple message here and it is the essential message
of this book, boiled down to one sentence. However, for
me as an individual and, by extension, for the organizations
we all inhabit, the world is never still. No one seriously
doubts that worldwide competition will not intensify,
nor that scale advantages will not encourage many industries
to condense still further, that international benchmarks
of quality or performance will not ratchet up under relentless
pressure and technology throw up bewildering and unimagined
marvels, nor indeed that each new idea or transformation
will not be disposed of when it has run its course.
Further
still, all this complexity is yet one thin layer of multiple
nets of complexity, coupled together by networked structures
of global proportions – economic, political, commercial,
market, professional and social. Even by themselves these
structures produce change. Together, they feed off each
other, producing fragmentation and dislocation in the
selfsame structures and of an order and direction which
is near impossible to foresee. Epithets such as revolutionary
and transformational seem barely adequate.
Faced
with the single difficult burgeoning Lotus notes on my
laptop screen, my response is probably not to transform
the way I work – no big change here . . . yet. Like most
organizational denizens I continue to adjust incrementally
and haphazardly. I focus on the regular messages I typically
come across each day. I partially read most, delete some,
and park those over which I cannot instantly make up my
mind. In three weeks’ time I still haven’t read them properly
and I convince myself they probably weren’t important
anyway. Like a paper in-tray, they accumulate in a growing
pile. In the end, prodded to action by a tart reminder
from the IT administrator that I am clogging system memory,
I delete them.
Strangely
(and deceptively), I am none the worse for this behaviour.
No dark consequences befall me. I am as effective as my
peers. In the main, they behave much like me. Moreover,
I am not dissimilar to my competitors in benchmark firms.
I know some of them: we chat over drinks from time to
time. And yet I feel under pressure. I feel the need to
improve to be better at what I do. And I am nervous about
being left behind. I put time into learning more about
the software available. I ask colleagues for advice now
and again. Frequently I ponder on the possibility of securing
extra resource to plough through all the incoming data,
but there is financial cost attached. Would it be justified?
And would it work effectively if I were not constantly
on the case? Occasionally, I dream wishfully of a kind
of Eureka moment when an idea leaps out at me and the
solution materializes shortly thereafter.
Of
course, there does come a moment when everything changes,
when the next great advance comes – at least as far as
my colleagues are concerned. Jane in Company XYZ has developed
and implemented an on-line editor that gives her automatic
scanning/ sorting/ prioritizing/ deleting for all incoming
electronic mail. I and my colleagues, who have all been
adjusting our performance at roughly the same rate and
in generally the same ways and by assiduous (if unconscious)
benchmarking against each other, are left behind. As far
as we’re concerned, this change has happened overnight.
It is a revolution. It is a catastrophe. Jane has an on-line
editor! How will we keep up? For Jane, however, the change
has not been instantaneous, though it is still transformational.
Jane is in this happy position because either (a) she
was in the right place at the right time (she was lucky)
or (b) she was innovative (she was thinking and acting
differently to the rest of us). If Jane triumphs again
by developing or using something that gives her a second
or subsequent distinctive edge, then we know she’s not
just lucky.
A
MAD RACE TO CONVERGE
Credit
Foncier de France had, for a 140 years, a government backed
monopoly on cheap home-building loans for low-income customers.
Technically a private enterprise but traditionally run
by government appointees, Credit Foncier had made huge
losses in the 1980’s chiefly through property speculation.
In 1995 Alain Juppe’s centre-right government started
to allow market forces to exert pressure on the bank by
abolishing its monopoly. The expected pattern soon followed:
splitting the business and refocusing as part of two other
institutions, with the threat of 1800 job losses. Employees
promptly took the bank’s governor and ten board members
hostage in doomed attempt to prevent the inevitable.
As
a result of the market forces we all know so well, corporate
executives worldwide probably ‘invested’ something in
excess of $90 billion in downsizing between 1993 and 1997.
It is hard, though not always impossible, to stand aloof
from this, as we shall see. The spiral of decline feeds
on itself. As it becomes more difficult for a firm to
show top-line growth, so pressure mounts to reduce costs
and utilise the assets base better. The two together are
likely to attract shareholder pressure to improve returns,
resulting in a shorter-term corporate focus and the search
for solutions such as liquidating assets. This in itself
might not undermine the capability of the business to
innovate and to grow, but it typically goes hand-in-hand
with a shift in the culture of the firm to one of cost-cutting,
bearing down on employee rewards and driving out those
employees who dislike the new culture, retaining those
who do (who then reinforce the new cost culture), and
making the organization relatively unattractive to new
joiners (and therefore shutting out one source of new
ideas). All these things, in the multiple layers we have
just outlined, will certainly reduce competitiveness,
contributing further to an acceptance of the cost-reduction
strategy and culture as the best way forward. Moreover,
this overall cycle creates signals in the market. Here
is a company struggling to sustain longer-term value growth.
Shareholders seek to protect their returns. Company executives
strike to extract greater value through cost reduction
but on a rapidly diminishing scale. The share price weakens.
The company comes under increasing competitive pressure
and an overwhelming focus on cost reduction has so eroded
its strategic sense, operational manoeuvrability and capacity
to innovate that it is even less able to defend its position.
The share price continues to weaken. It is therefore a
prime target for acquisition or may indeed fail.
The
concept of shareholder value, gaining in power now in
countries beyond just the USA and Britain, has driven
executives to demonstrate improved return on assets, usually
in the manner described above by hammering down costs
but also by continually adopting standards and ideas from
other organizations and accordingly reshaping, piece by
piece, their own firm. This process, viewed at a macro
level, is nicely encapsulated in the 1996 Chatham House
Forum Report, Unsettled Times (p.21);
Managers
set out to define their core business, selling non-core
activities to third parties and buying-in (‘Out-sourcing’)
anything which they can acquire from the open market
that they cannot make more cheaply or reliably themselves.
Having defined what it is that the firm is to do,
the individual steps or processes by which this is
achieved are scrutinised with a view to redesigning
each in order to take account of information technology.
This is often called re-engineering. Finally,
each component of the re-engineered company is compared
to that of other companies which carry out the same
activity, a process called bench marking, where
the aim is both to achieve a parity of costs and also
to ‘borrow’ useful ideas which others may have.
The
result of all this, viewed industrywide and over longer
time scales than many executives absorbed in corporate
change choose to consider, is that organizations engaging
in the same competitive war can end up looking like carbon
copies. Moreover, a desperate spiral is created when,
as shareholder pressure for capital to perform increases,
firms adopt even more defensive positions. The spiral
becomes:
Refocus
Redesign
Benchmark
Converge
Convergence
begins to happen at faster rates and the firms become
even more similar, losing distinctiveness and any hope
of differentiation. As the Unsettled Times report
argues, an industry becomes both more competitive and
less profitable. The despairing outcome is commoditization.
We see it all around.
In
the mid-1990s Europe’s car-making industry reflected this.
Over capacity was the prime evil. Peugeot, Renault, Fiat,
BMW, Volvo, Volkswagen and Mercedes were joined by General
Motors and Ford as well as the Japanese auto companies
in a scramble to survive. In spite of a growing market,
profits were wafer-thin because of a bloody price war
in many European countries – the surface manifestation
of industry convergence.
Renault’s
case demonstrates the problems of convergence and commoditization.
Louis Schweitzer, Renault’s head, had been very successful
in introducing new models but was rewarded with a staggering
loss of a shade over $1 billion for the fiscal year ending
1997. What had he been doing wrong? Well, nothing obvious.
Much of the loss was to cover downsizing (some 5500 job
losses and more to come) and he aimed to get in excess
of $3 billion per year saving out of the business by the
year 2000. But, in a market crowded by me-too businesses,
cost-competitiveness even of the most draconian sort is
never going to be enough. Nor, strangely, is product innovation
around new models and features, since these are things
that are not easily defensible: the lifecycle of apparently
innovative models or features in cars is very short, the
risk of investment high. In such an industry, further
cost-reduction, production streamlining and eventual consolidation
is unavoidable. Gaining a defensible advantage will only
occur through seizing the moment at the start of some
kind of massive dislocation in the industry (which would
have to be miraculously unanticipated by Renault’s competitors)
such as government policy intervention on car pollution,
or by a technology-driven remaking of the industry’s fundamental
structure and character. In the first instance, Renault
would have to be very lucky. In the second, Renault would
have to be thinking and acting differently to all the
other car-makers. And that would require a transformation.
Another
example, but one where the chief executive took early
action to pull his firm out of danger, is Schwab, the
stockbrokers - a business that, with compound growth of
20% per annum since its founding in 1974, had no obvious
reason to change. The firm and its competitors, known
as ‘discounters’, grasped the new potential of on-line
electronic share dealing via the Internet with some vigour
and, being smaller, faster and more flexible than their
bigger full-service rivals like Merrill Lynch, one might
have expected Charles Schwab, founder of the firm, to
intensively focus the firm’s efforts on carving out the
biggest share of this new electronic market. Far from
it. Although Schwab launched e.Schwab as a new electronic
service, he also began to shift strategic direction, away
from what is essentially a straightforward transaction-based
offering (and thus easily commoditized) towards other
value-added services like performance analytic and investment
advice. The knowledge ‘bought’ by investors is hard to
specify and therefore to replicate – such things strengthened
defensive capability against encroaching change.
The
convergence pattern (refocus-redesign-benchmark-converge)
might be considered to be confined to just the old industries.
Much is made of the market capitalization of the new high-tech
elite – Silicon Valley companies and their ilk worldwide
– in contrast to the old guard of Ford, General Motors,
Chrysler and the like. The Economist points to
the premium that the high-technology giants Intel, Microsoft
and Cisco Systems command over the long-established Detroit
big three. In spite of sales ten times greater than those
of the high-tech firms, the car-makers attract a market
capitalization only one-third that of the new kids (Table
1.1). Even Jack Welch’s General Electric, topping Business
Week’s 1996 league of the global 1000 most valuable
corporations with a market capitalization of $137 billion
on sale of $70 billion, has fallen short of their premium.
This
is remarkable, but not any guarantee for the future. In
the decade between the mid-1950s, and the mid-1960s, it
is as well to remember, the chemicals industry surged
along a tidal wave of growth and profitability not dissimilar
to the high-tech eruption of the late 1980s and 1990s.
A
‘paradigm shift’, to use Silicon Valley parlance, has
clearly occurred in the high-tech industry. It will be
winners and losers. Even Microsoft, with undisputed dominance
in the personal computer software market worldwide, found
itself in 1995 somewhat on the back foot, forced to re-evaluate
the popularity and the influence of the Internet and therefore
to swing the rudder of the Microsoft supertanker hard
over for a 180-degree change in strategic direction. Until
then Microsoft employees who publicly attached importance
to the Internet were rumoured to be risking censure from
on high. In fact, until 1995 the software giant’s strategy
was based on conventional windows-computing. What changed
all this was indeed a paradigm shift, what Gates himself
called the ‘Internet Tidal Wave’ in a memo to Microsoft
executives in May 1995 - a dramatic surge in the market
for electronic information sharing via the Internet. As
a result, Microsoft was then faced foursquare with the
challenge of shaping the future of the Internet, in practice
(through Microsoft’s usual approach) by striving to become
the industry’s technical standard for consumers and flattening
the competition.
Not
a few in the industry could be declared unhappy at Microsoft’s
discomfort. There are many whose teeth gnash at the mere
mention of Bill Gates and who have stood in active opposition
to his ambition to monopolize, in effect, any markets
he touches - not least upstart browser company Netscape,
database software supplier Oracle and work station maker
Sun Micro Systems.
But
for all the rumour and criticism about Gates, what is
really interesting about the (continuing) Microsoft story
is the fact that, with all its achievements, its executives
had not fallen asleep at the wheel. And, given the success
and undoubted arrogance of the company, that might well
have happened. Corporate history is littered with the
bones of dinosaurs that had become complacent while grazing
in their lush , fruitful valleys. IBM was nearly a case
in point, crumbling from $6 billion profits in 1990 to
a whopping $5 billion loss in 1992 but, more importantly,
letting slip its global pre-eminence despite the harshest
of cost reduction exercises. ‘Trimming’ 140000 IBMers
from its ranks has not been enough to stop its losing
a once impregnable high ground.
No,
hats off to Gates and team for (a) being aware of the
danger of the Internet at a still early stage and (b)
being willing and able to turn the supertanker around
as aggressively as they did. Critics will say that Microsoft
had no choice. This is true. Any other move would have
been to stand against the Internet tidal wave. Nonetheless,
the true marvel is the size of the organizational transformation
that Gates launched and his preparedness to see the opportunities
as well as the dangers. Here was a $9 billion, 18 000-person
business. Faced with the dawning realization of a huge
shift in its market, Microsoft was prepared to commit
(for commit read lose) the equivalent of 11% of annual
sales - a massive $1 billion - in the quest to be a major
player in the Internet game. Certainly, with cash reserves
in 1995 of over $4 billion ($9 billion by 1997) burning
a very large hole in his pocket, Gates’ investment was
not all risk . Beyond the staggering losses the firm was
willing to accept, however, we must think of the marketing
strategies retargeted, the projects and initiatives axed,
the programmers and other employees redirected to new
objectives, the overturning of investment plans, and not
least the learning of new knowledge and skills.
Bill
Gates and his team were engaged in not simply a readjustment
of their operations and a fight for continued dominance
but a defence against the sudden and rapid growth of the
small, innovative companies like Sun Microsystems which
did so much to develop the Internet and moved to consolidate
their strengths before Microsoft, IBM and Intel might
embrace them in an all-enveloping bearhug.
Survival,
and for the few high returns and dominance, will be determined
by the willingness and capability of such firms to avoid
the short-term draw towards churning out cloned technology
for countries racing to match America’s huge high-tech
consumption (for that way the dragons of commoditization
lie) and push both their products/services and organizational
capabilities to increasingly sophisticated levels in the
developed markets.
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