Managers understandably prefer continuity to discontinuity, evolution to revolution. But as Year 2000 approaches, what you prefer is becoming increasingly irrelevant. In discontinuous times, efforts to evolve at your own pace are doomed. Your internal thought and action must keep up with the pace of external change, or you will be unable to cope with external pressures that, equally, demand a revolutionary approach to strategy.
This consideration is so compelling that several speakers, at a recent IBC seminar on Strategy as Revolution, commented that the title should have been transposed: Revolution as Strategy - the argument being that, if strategy is not revolutionary, it is not strategic. Yet the harsh fact remains that, in the great majority of companies, strategic thinking, if it exists at all, is not truly aligned to the fast changing world outside. Revolutionary thought may be winning the battle for minds, but action still lags many miles behind thought.
For example, take downsizing. Even financiers now accept that cutting numbers and eliminating assets, either by closing plants or selling businesses, is not strategy. What Gary Hamel calls 'denominator management', cutting costs, is out of intellectual fashion. 'Nominator management', improving the top line by raising revenues, is seen, even in the City and on Wall Street, as the key to optimising 'shareholder value'. So much for words. As for deeds, Philips is closing one-third of its factories worldwide, Siemens is retreating from businesses with a turnover of $10 billion, Boeing is laying off 20,000 workers, Zeneca and Astra will eliminate 5,000 jobs by merging... and so on, and on.
EASIEST ALTERNATIVE
The last two, note, are engaged in the trendiest sector (life sciences) of the highly favoured pharmaceutical industry. Astra's management, moreover, had decried the mega-merger wave in its industry in most scornful terms - until the moment came when its organic growth prospects seemed insufficiently rosy to guarantee profitable independence and merger synergies (i.e., savings) seemed more attractive As Thinking Managers has often observed, you can improve the bottom line by cutting expenditure, increasing sales, or (preferably) both. Of the three alternatives, however, the first is much the easiest.
That's because the other two probably cannot be achieved without transforming the company and its management. That is a tremendous test of both will and skill. The struggles at giants like Royal Dutch-Shell, Siemens and Philips show how fruitless it is to attempt radical changes in behaviour unless you first tear down a conservative framework. Shell's new chairman, for instance, is now placing single chief executives in charge of the various businesses. That comes after several years of attempted management reform. The step - hardly revolutionary in most other companies - should have been taken in the first stages of reform. Even now, Shell hesitates to appoint a chief executive for the entire group world-wide, for no good reason.
You can see the bad reasons simply by visiting the Shell head office in The Hague, where directors and their flunkies occupy whole floors apiece. Thinking Managers reported earlier how some top executives in Silicon Valley, even a mega-rich mogul like Andrew Grove of Intel, were abandoning their private offices for desks on the executive floor. The dignity and privileges of the summit are among the first objects of revolutionaries in politics. They should be equally prominent targets in management transformation.
Reinforcement for this truth came in the recent turmoil over the top post at Marks & Spencer, the retail group thought by many to be Britain's best managed company. Commentators remarked, almost unanimously, that the chairman and chief executive, Sir Richard Greenbury, was too powerful, had a domineering style that subjugated other managers to his will, had stayed too long at the helm, and should not have held both roles. Those have now been separated, but only after an unseemly public battle in which Greenbury again won - getting the successor of his choice.
The case also illustrates how the concentration of power and privilege at the top goes hand-in-hand with conservatism in strategy. Recently, Greenbury told a public audience scornfully that he would believe in electronic commerce when he saw it. If he can't see it now, either the M&S chairman must be blind, or he sees only what he prefers to see. As Michael de Kare-Silver points out in the excellent book E-Shock (Macmillan), already some 15-20% of consumers say they would prefer to shop electronically, rather than visit shops.
BELOW BREAKEVEN
He quotes the managing director of a $2 billion-plus retail group: 'Even a 10% loss in consumers visiting our stores would be a worry. For many of our outlets, that would push us below breakeven'. The author's consultancy, CSC Kalchas, reckons from its own research that 'average retailer margins will be eliminated by a 15-20% reduction in consumer traffic through their stores'. Against this dynamic background, M&S is conducting a leisurely 18-month strategy review. In that time, usage of the World Wide Web, doubling every 100 days, will have multiplied over 30 times.
The IBC seminar mentioned above heard about many aspects of the only policy that can work in such circumstances: transformation. In starting that process, don't think about 18 months. A former chairman of ICI once told me confidently that 'you can't turn around a large company like this every 18 months'. He would not have recognised today's landscape in which, according to Alan Stevens, managing director of EDS in the UK, the time between corporate restructurings has generally halved - to 18 months.
ICI itself has in recent years disposed of its best business (the aforementioned Zeneca), shifted its entire focus from commodity chemicals to specialisms - and yet has still failed to crack its strategic growth problems. As Stevens went on to observe, you can't grow dynamically on the wrong structure. Just as information technology has progressed from high centralisation (the mainframe) to distributed processing (the mini-computer) to total decentralisation (the PC and the Internet), so freeing up corporate structures along the same route offers the same benefits in speed, responsiveness and flexibility.
In this process, the first 18 weeks are much more important than the first 18 months. A third of a year is quite long enough to prove that anything which requires changing will be changed, that no cows are sacred any more, and that the new technology will be embraced until it permeates every process in the business - from people management to customer satisfaction (two sides of the same coin), from 'knowledge management' to achieving radical and continuous change.
The precondition of successful transformation, as Terry Neill of Andersen Consulting told the IBC seminar, is to close the gap between management's perception of present reality and the truth. My own consultancy work in financial services shows how wide this gap can become. The large and rich companies concerned spend heavily on advertising and new products, and are convinced that they have established meaningful distinctions between themselves and their competitors. The reality is that the market can't tell them apart.
The featured speaker at the seminar, Gary Hamel, has a convincing explanation. Companies in the same industry tend to follow the same road. They even benchmark against competitors to ensure that they are doing the same things at least as well, preferably better. But no lasting advantage can be gained from marching in step. By far the most successful financial services firm today is Charles Schwab, which turned the investment industry upside-down by being wholly different. Schwab didn't emulate the established industry: it forced its rivals to follow its lead - too late to prevent Schwab's upsurge.
NO DIFFERENTIATION
In contrast, every car company in both East and West, to greater or lesser extent, has followed the strategic lead of Toyota, basing their programmes on reducing costs by improving productivity. As a consequence, their operating margins have converged to a low 3-4% cluster. By and large, there is no real differentiation in either product line, quality or methods. Innovation has largely been confined to doing the same thing better. In consequence, the performance of Ford Motor only looks good in comparison to the industry laggard, the giant and greatly troubled General Motors.
Here, too, attempts at transformation are being hamstrung by the survival and resistance of the old order. GM's market value has been running at half the dollar volume of its sales. In contrast, Microsoft and Intel, the microelectronic champions, have been selling at extravagant multiples of their revenues. Both, of course, have the advantage of near-monopoly positions in fast-growing markets where succulent profit margins are available - and even getting larger. But both companies, being agents of revolution as well as its beneficiaries, have shown the ability to engage in the new necessity: continuous transformation.
Bill Gates of Microsoft has expressed the driving force well: 'We're always two years away from failure'. The drawback for large established companies, like Shell, GM, Siemens and Philips, is that, no matter how strong the evidence of market failure, they refuse to believe in anything but their own permanence. They think that they are 'built to last', to quote the title of a book referred to in last month's article. Hamel points out, however, that several of the book's heroes have not lasted, in the sense that their shares have underperformed the stock market heavily: companies of high repute like 3M, Ford, Sony, Motorola and Hewlett-Packard.
The last three, until quite recently, were management superstars, and still are, in the minds of most people. Motorola has been greatly tarnished by its failure in the digital phone market, and Sony's reputation has suffered along with those of other stars of Japan's dead miracle. But H-P seemed particularly strong, as a company highly decentralised, yet strongly directed from the centre: which had exploited established positions, as in printers, with unrelenting drive; and which had even emerged as a powerful contender in the cut-throat battle in PCs.
'WE'LL CATCH THEM'
That last success, however, is relatively profitless. H-P has missed the big, rich plays in its industry - software, microprocessors, the Internet - and such opportunities, once missed, are gone for ever. Hamel tells how he was present at the launch of IBM's laptop PC. He observed to an IBM man that the product was more than somewhat late: five years behind Toshiba, in a market that was already worth $6 billion. The IBM man gave a lordly smile: 'We'll catch them'. To date that has not happened, and it may never happen. These days, forgoing an initial opportunity may mean permanent disadvantage and major loss.
Merely think of the billions in sales and profits that IBM lost through its tardiness. As Hamel remarks, any IBM executive who had lost a mere million would have been in deep trouble. But nobody costs the losses from what might have been, and wasn't. For that reason, it's easier for executives to reject great ideas than to turn them into reality. Forcing through a project exposes you to the risks of failure, which are measurable. Opposing innovation exposes the company to the risks of obsolesence. They may be far graver, but will not be laid at the door of any individual.
By much the same token, downsizing produces rewards that are measurable and relatively rapid. But the sums usually bandied about, involving billions of costs 'saved', are fraudulent. They take no account of extra costs incurred, through redundancies, plant closures, etc. Nor do they allow for the weakening of the firm's true asset base. In 1996, for instance, AT&T announced that it would reduce its workforce by 40,000 people. One consultant worked out that this write-off of 'human capital' was equivalent, at between $4 billion and $8 billion, to 'wiping out more than a third of the company's stock of property, plant and equipment'.
The quote comes from Thomas Stewart's Intellectual Capital (Nicholas Brealey), a fascinating study of the discontinuous present, in which intangible assets, which may have no place in the balance sheet, prove to be the overwhelmingly dominant source of wealth. The aforementioned Charles Schwab has grown to 5.5 million customers on the strength of ideas. Back in 1975, Schwab had no differentiation: it was like every other small brokerage house. But then the eponymous Charles (or Chuck) made pregnant decision: to become a discount broker. The key was the outlawing of fixed commissions. Revolutionary Moral 1: look out for major shifts in the conditions governing your marketplace, and transform the business to fit.
Schwab soon found that simply undercutting the full-service brokers was too easily imitated. So Schwab differentiated further. He invested in new technology and advertising to increase the value offered to investors, and moved to put their interests first - for instance, by putting salesmen on salary instead of commission, and advertised heavily. By 1988 he had a market share of 40% in discount broking, with revenues of $392 million. Moral 2: Be better, different and more dynamic.
As Adrian Slywotsky and David Morrison report in The Profit Zone, (Wiley), Schwab next turned his attention to independent financial advisers. They could stay independent, but Schwab would look after all their back office requirements. By end-1991 happy IFAs had helped Schwab's equity to rise to $1.2 billion of value. Moral 3: Look for allies to help you outgrow your rivals.
But why were the advisers doing so much business? Because they focused on helping customers, who were not well served by the big mutual funds. Schwab decided to become 'customer-centric', too. It pioneered acting as 'one source', through which they could buy many mutual funds with no front-end load and no transaction fees. This third transformation took Schwab to $1.07 billion of revenue by 1994, with $19.7 billion in fund assets. Moral 4: Let the customers and their needs really guide your strategy.
Schwab had already added on-line trading to a brilliantly efficient telephone service. But it saw the Internet as both promise and threat. To quote Fortune, 'all that their research told them was that lowering prices to compete on the Web would cost them as much as $125 million in forgone revenues'. But that price was worth paying for what Schwab's co-CEO, David Pottruck, calls 'the transforming event... the ability to deliver personalised information to the customer in real time, at virtually no cost'. Schwab now has 2 million active Web investors, who account for a third of $433 billion (that is no misprint) in customer assets. Moral 5: To buy the future, be prepared to cannibalise the present.
NO CORRELATION
This isn't a new concept. It has always made sense to scrap or sell a perfectly good machine if a new model offers much better performance. Revolutionaries like Schwab and Pottruck look at current riches as a source for future growth, and at current strengths as platforms for change. For others, that is very evidently easier said than done. Consultants A. T. Kearney looked at the non-financial companies in the FT-SE 100 share index between 1984, when it was launched, and end-1997. Total sales, corrected for inflation, were £260 billion in 1984, and only £2 billion higher at end-1997. Thanks to cost cuts, earnings before interest and tax had risen by 76%, and return on invested capital had practically doubled. But the researchers found no correlation whatsoever between individual profit performances and total returns to shareholders over the period. Why ever not?
The answer is that downsizing is one-off, and subject to sharply diminishing returns. Whatever Siemens, say, gains from $10 billion of sell-offs will be offset in time by loss of the growth potential of the sold capital, human and otherwise. Moreover, the downsizing knee-jerk draws attention away from two crucial issues. How and why did we get into this mess? How and where can we find the transformations that will re-grow the company? The answers to the first question begin and usually finish at the top. The answers to the second lie in strategic revolution. And that demands finding, promoting and retaining real revolutionaries.
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