A new model company is starting to emerge. Its nature is already visible in the electronics industry, which, because of the frenetic, hectic, heaving pace of change, is running through the stages of the managerial revolution well ahead of all others. But the underlying forces of change are the same everywhere. And the most forceful among those factors is unpredictability. Would you, for instance, have bet on any of the following events?
• In Europe, Mercedes-Benz markets a small car that proves so dangerously unstable that production has to be halted
• In the US, Eastman Kodak is so battered by Fuji's competition in films that it eliminates 10,000 jobs round the world
• In Japan, shares in Softbank, Asia's leading software conglomerate, fall by three-quarters on fears for its financial viability
Now that these events have taken place - and others no less dramatic happen every week - they make sense. Mercedes had tackled too many unknowns at once: very small dimensions, front-wheel drive, and (a consequence of the small size) an engine position that fatally raised the height of the passenger cabin and the car. Kodak had for decades pursued activities far removed from its base in film, and had steadily lost share to Japan without making an adequate response. Softbank had grown unsustainably fast: twelvefold since 1992, to sales of $4 billion, financed by monstrous debts and a peak price-earnings ratio of 117.
DEMANDS OF FORESIGHT
The awful events are logical only in hindsight. But foresight demands that, in a world of such shattering discontinuities, companies should not bet on a single outcome. Plan A must be backed up by Plan B - if not Plans C and D - to insure against unwelcome and potentially catastrophic events. But what about trends? Surely managers can be more certain about major developments which must, to a significant extent, already be under way? Asked by Andersen Consulting to predict the future of the network data structure in 2005, half of a distinguished bunch of electronic firms opted for intelligent terminals - and the other half for terminals that are relatively dumb.
In other words, nobody knows. How can you engage in intelligent, long-term strategic planning in these circumstances? You can't. According to the Andersen Research, the electronics leaders now plan 18 to 14 months ahead (against the conventional three to five years). They lay down an overall 'vision', an overview of the corporation's purposes, and delegate to their business units the task of developing and implementing strategies that are driven by the market. They regard forecasting errors as inevitable, which puts a premium on rapid recovery from the consequences.
Naturally, the Japanese have a word for it: meikiki, meaning 'foresight with discernment'. Meikiki is one of six central concepts that appear to be shaping the strategies of these new model companies:
1. Continually change the basis of competition
2. Seek multiple sources of competitive advantage
3. Adopt a new planning process (as above)
4. Organise to achieve new levels of agility
5. Achieve new heights of sophisticated collaboration
6. Focus on core capabilities to execute strategy successfully
Note that these aren't theoretical constructs, but are extrapolated from how top electronics managements actually behave. On the sixth point, for example, they are tackling three key areas in ways that flout the old conventional wisdom: product development, customer relationship management and supply chain integration. To give examples of the new wisdom:
• Take time over deciding to enter a new market: the best performers deliberated an average 5.7 months over both new products and new technology, while the low performers gave the decision process only 3 months
• Best performers name customer focus as the most important factor in seizing competitive advantage - though only 40% make it an integral part of their strategy (at 20%, low performers are markedly worse)
• To integrate the supply chain and achieve huge economies and increased speed, best performers re-engineer, make only against orders, rely on supplier-owned and managed inventories, employ third party logistics, exploit the Internet and engage in heavy outsourcing - including manufacture.
CHAOS AND INEFFICIENCY
It all sounds more orderly and well-planned than real life. In reality, the new kind of company tolerates chaos and inefficiency as part of the price of breakthroughs and making billions. Look at one such company in detail - Intel, say - and you hardly know whether to rejoice over its brilliance or cry over its incompetence. The former must far outweigh the latter. After all, this is the company that gave the world the memory chip, the dynamic random access memory chip (or DRAM), the erasable, programmable read-only memory chip (EPROM), and the microprocessor.
That not only represents unbeatable management of technological creativity, but a formidable straight business performance. Intel has used every available means to dominate its markets: hence its virtual monopoly in microprocessors, the most influential and indispensable devices ever made. Its hard-driving chief executive, Andy Grove, created that monopoly by ruthless methods like Operation Crush, which crunched the competition before the PC era - even though the Intel product was technically inferior.
So where has Intel failed? According to a new book, Inside Intel, by Tim Jackson (HarperCollins), the company ignored the potential of the mighty microprocessor for years and woke up to the prospects only when two of its best engineers set up in competition. Worse still, Intel lost so much of the memory chip market to the Japanese that it could have gone under. Instead, it abandoned its original business, and poured resources into microprocessors to fabulous effect.
The management lesson from this episode is powerful. When in trouble, ask yourself, what would I recommend if I were a stranger to this business, brought in to turn it round? Grove and his chairman, Gordon Moore, did exactly that before deciding to exit from memory chips. But other lessons are just as indicative of new model management. Early in the company's history, in 1968, a new recruit asked about the organisation chart. Co-founder Robert Noyce, an acknowledged genius of technology, smilingly 'picked up a piece of chalk and drew a small X' on a blackboard.
Around it, Noyce 'swept a circle, and along the circle he added six or seven more Xs. Then he drew a spoke connecting each of the Xs outside the circle to the X in the centre' - which represented the new recruit. The other Xs were Noyce, Moore and 'the other people you'll be dealing with. That's what our organisation chart looks like.' The new model company cares nothing for hierarchies and strict reporting relationships, and everything for swift access, accessibility and flexibility. Instead of the pyramid, Noyce had drawn a doughnut.
Whatever the cost in untidiness, the benefits are shown by constant examples of turning failure into success. For instance, the microprocessor sprang from a design done for Busicom, a Japanese calculator company. When its top engineer arrived to inspect the device, there was nothing to see (producing yells of 'You bad! You promised! You said design done! No design!', etc). The Intel engineers, led by a recent Italian import, calmed him down and produced a working design in record time.
At all times, the Intel culture produces people capable of such extraordinary technical feats, often taken on their own initiative. The basis is remarkable emphasis on recruitment. The high standard of a continuing inflow of people enabled Intel to escape from initial failures like the Busicom job and turn them to advantage. The Japanese market worsened during the delay, and Noyce, faced with the demand for a price cut, exchanged a $60,000 refund for the right to sell the device to other customers - hence the bulk of today's $20.8 billion of sales and $5.2 billion in profits.
NO WORTHWHILE MARKET
Typically, at first the Intel marketing people couldn't see any worthwhile market for the new product. This was a 'disruptive technology', in the phrase coined by Clayton M. Christensen. His book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, is described elsewhere in Thinking Managers. Had the mainframe makers looked at this market, given that only 20,000 computers were being sold in a year, they would have agreed with Intel. The first customers were screwballs like a young Seattle freak called Bill Gates, who used an Intel chip in a failed traffic light gadget. Then the PC boom, unforeseen, changed everything.
Just as the microprocesor had sprung from failure, so did EPROM. The phenomenon involved was spotted in correcting a design fault, and the eventual product was expected to have only limited sales for engineering purposes. But engineers started installing the costly device into high-tech equipment on a large scale - and another profitable monopoly was born. The whole process is the same one which Christensen observed in his newcomers, with their disruptive technologies:
1. Don't listen to customers, because you haven't got any
2. Know that functionality matters more than price
3. Don't rely on market research, because it's useless in face of an unpredictable future
4. Go after tiny, but emerging markets.
Note, too, how the above fits with the new model as described by the Andersen report. Inside a big, established company you manage as if you were a start-up brandishing a disruptive technology. That's why you break up the company into autonomous business units (as do 50% of the high performers, against only 29% of the low). That's why you don't ask those units to share resources - because you don't want, to quote one executive, 'to stifle creativity. The more people you have to ask permission from, the longer it takes to get things done.'
This doesn't mean that the new model company is undisciplined. Grove at Intel does push 'constructive confrontation': but managers are actually trained in how to fight over issues out in the open, with force but without animosity. There's also a tough budget process, whose detailed cost and revenue predictions are updated regularly, complete with explanations of the changes. Thanks to a consultant's contribution, management by objectives is also big at Intel. Everybody, including Grove, has medium-term aims, plus key results by which performance is judged.
ONE-ON-ONE MEETINGS
Then there are the meetings, starting with one-on-ones, in which every subordinate talks to a superior weekly or fortnightly, and key results and written performance reviews are discussed. Also, 'ranking and rating' rates you 'superior', or 'exceeds expectations', or 'meets expectations' or 'does not meet expectations' and ranks you against others doing similar jobs. Rewards, including stock options, are determined by ranking and rating. Woe betide the 'does not meets', by the way. They don't last long.
At MOMAR, the monthly management review, divisions run through a SWOT analysis (strengths, weaknesses, opportunities and threats) for the benefit of their peers. What Intel offers, therefore, is the musculature of a rather heavily managed, traditional company, with the brains and blood of a disruptive start-up. The tough discipline and the free-style creativity exist side-by-side. The new model company, in other words, is not so much paranoid (Grove's latest book is entitled, Only the Paranoid Survive) as schizophrenic. Chaos and order, success and failure, are built into the formula.
Another split of the mind is between fierce competition and close collaboration. Here the difference between high performers and low is startling. The former have almost three times the number of alliances than the low - or the medium, for that matter. Much of the partnering is that between customers and suppliers, on which the new supply chain economies are based. But 'complementors' and outright competitors are also being enlisted by high performers. They take their time over picking their partners, too, half as much time again as the low people.
The leading collaborative strategies are joint developments of new products, marketing alliances and licensing agreements, any of which can bring deadly rivals together. As another executive told Andersen: 'I would give equal emphasis to competition and collaboration. So it is as important for us to work with the competition as it is to beat our competition.' Intel and Hewlett-Packard, for example, have collaborated to produce a new wonder-chip which is their joint assault on the high-end of the market for client-servers, etc. If this technological leap succeeds, the partners will have obeyed another of the new model precepts: keep changing the rules of the game.
Intel is a past master at this strategy. For a striking example, it suddenly plunged into production of the motherboards into which its microprocessors were fitted. This not only won a greater share of added value, but got any new processor to market much faster than before. PC makers who wanted an early supply of the new chip (which meant all of them, since to lag was fatal) had little choice but to buy Intel motherboards. Output of the latter multiplied tenfold in two years, as all but 20 of Taiwan's 300 motherboard makers went to the wall.
In effect, every new generation of chip changes the rules, forcing the PC firms to dance to Intel's command. As Andersen puts it, 'best performers look to change the basis of competition by creating a new de facto technology or by significantly differentiating their products.' This isn't the prerogative of high-tech firms alone. As with all the other features of the new model company, it applies to every business: for example, razors.
Gillette rejoices in what a Harvard Business Review study calls a 'high-road brand', whose return on sales exceeds 20%. Gillette's initial reaction against cheap disposable razors was to descend into their arena. It switched, however, to changing the rules. By investing $200 million in the Sensor shaving system, it increased the desirability of its product, which established a 25% price premium over the most expensive brand on the market. Changing the rules successfully always depends on innovation, either in technology or the use of market power or both.
OUTSIDER BELLIGERENCE
The Americans are proving more adept at this strategy than the Europeans, for a simple reason: they use it more. Only some 25% of the European respondents told Andersen that they ever changed the rules. That compares with 90% of the North Americans and is plainly a disability in competition. It means looking at the industry and the business system with the eyes of a belligerent outsider. Which part of the system can you change to your advantage? Get the right answer and you may win a breakthrough. Don't ask, and you will be beaten by those who do.
The essence of the new model company is its drive for success. Everything is subordinated to outcomes, and the culture continually mutates to meet new circumstances. You have to question strategy and tactics all the time. Are we changing the basis of competition? Does our competitive advantage (if any) arise evenly from cost, technology and differentiation, and not just a single source? Are we planning for a disruptive, shorter-term future? Is the business organised into viable, agile units that run themselves? Does it form many effective partnerships? Is it focused on improving the supply chain, customer relationships and new product development?
All these questions lead to another. Can you find new customers for new products with new specifications, launched on hunch and faith outside the existing business? That's the ultimate test of the new model. More and more companies are learning how that test can be passed - not just once, but again and again.
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