Saturday, October 30, 2010

The Changing Chinese Mindset Towards Product Quality: How China Is Looking for Its Place in This World

Given my love for sushi, the prediction that saltwater fish will be extinct by 2048, and the poor reality that we suck at protecting the natural habitat of seafood, I am left with two questions.  Firstly, how do I gorge on as much safe yummy sushi as I can while I still can?  My short-sighted rationalization tells me that it's OK, future generations wouldn't know what they'd be missing anyway; in fact, they'd just be very sad and upset if they did.  Those stupid ancestors!!!  All kidding aside, a second actually important question is: will anything fill the gap?  Maybe, maybe not.  So it was with great interest that I read this article about how China could take over the global (or at least the US) fish market by using landlocked fish farms.

For the record, I've eaten luofeiyu (or tilapia, as it is termed in English).  In fact, I had one for lunch a couple of days ago.  My first experience with luofeiyu was in 2005 in Xichang, Sichuan.  Xichang is perhaps most famous for being the location of China's spaceport.  It's the capital of the Liangshan Yi Autonomous Prefecture in Sichuan.  They happen to love their luofeiyu and seem very proud of it.  They have restaurants that are dedicated to luofeiyu.  So this article is a tad incorrect when it seems to say that Chinese in general hate the fish.  The fish itself is fantastic when barbecued with Sichuan spices.  However, when I ate it for lunch recently, it was broiled and not very seasoned. As such, I could see what the article was saying when it described the fish as bland.  I much prefer it barbecued on a stick on a street or lakeside in rural Sichuan.  Seasoned correctly, it's unlike any fish I can eat in Vancouver, and ranks among my favourites.  It's just too bad that it doesn't have any omega-3 oils.

But this blog post isn't about fish, is it?  It's about Chinese products and what Chinese people are starting to look for.  I want to talk about quality standards in China, and what I think it means for the world.  Two passages from the fish article really struck me as being the dichotomy for how western folks view Chinese products.

The view that Chinese products suck and are dangerous (i.e. why countries should import less from China):
A report last year from the U.S. Agriculture Dept.'s Economic Research Service called into question Chinese safety standards for farm-raised fish and seafood. "Fish are often raised in ponds where they feed on waste from poultry and livestock," the report said. Meanwhile, environmentalists are concerned about the impact of China's fish farms, as water filled with tilapia feces is flushed from the ponds. They also worry about the invasive nature of the species in the U.S. (Last year in Louisiana's Plaquemines Parish, for example, officials used poison to kill off tilapia in the area's canals and ditches.) "In theory there is quite a lot of regulation in place," says Pete Bridson, aquaculture research manager at the Seafood Watch program in Monterey, who traveled to China last year to visit tilapia farms. "But the environmental side of the regulation is not enforced very well."

A global aquaculture industry dominated by China worries Mike Picchietti, president of Regal Springs Tilapia, a company based in Bradenton, Fla., that operates tilapia farms in Indonesia, Honduras, and Mexico, and is a supplier to Costco (COST). For instance, he says Chinese farmers save money using fish feed only when the tilapia are bigger. When they're still young, he says, farmers toss animal waste in the ponds and allow the tilapia to feed on the algae bloom that follows. "They're able to cut their feed costs because they're able to use manure," he fumes. Raised-in-China tilapia are therefore much cheaper, according to Picchietti. "The Chinese are able to use cowshit," he says, "and I can't." Chinese tilapia growers deny Picchietti's claim.

The view that Chinese products strike an excellent balance between cost and quality (i.e. why everyone manufactures everything in China):
Other plants follow similar procedures. At the one operated by HQ Sustainable Maritime Industries, an Evergreen rival with offices in Seattle and Hainan, the clean suits are color-coded: Visitors wear white; assembly-line workers, blue; managers, red; quality-control supervisors, yellow. On a recent visit to the factory, plant manager Wang Fusheng points to a yellow-suited officer roaming the fluorescent-lit room. "That guy is powerful," he explains. "He can stop anything right away." Before HQ's fillets go into cold storage, the fish pass through a metal detector, just in case any stray flecks of a filleting knife have made their way into the product. "Every day we account for how many knives we've given to workers," he says. "If one knife is missing, you check everything."

Executives with tilapia processors in China point to such requirements as examples of their determination to maintain product safety. Chinese government labs regularly inspect for melamine and other banned additives; some Western buyers have their own quality inspectors or rely on third-party auditors to test the fish. Given the frequent inspections by Chinese officials and Western nongovernmental organizations, HQ Sustainable Chief Executive Officer Norbert Sporns rejects accusations that Chinese tilapia is substandard. "China is the most scrutinized export market in the world," says Sporns. He's a six-foot-seven former immigration lawyer from Montreal who got involved in Chinese aquaculture in the late 1990s; his wife, HQ Chairman Wang Li, is the daughter of a former chamber of commerce chairman in Hainan. Sporns compares Chinese tilapia farms favorably to catfish farms in Louisiana, where he calls conditions "despicable." "Our standards," he says, "are way, way better."

Despite the fact that China manufacturers most of the electronics, clothing, and everything else consumed by the rest of the world, China still has a global reputation of manufacturing and consuming shoddy products.  How's that work?

Honestly, it's more correct to say that Chinese brands have a poor reputation worldwide.  The products that get manufactured by China for western brands are fine.  So China is trying to change their image as they look to move up the value chain.  One of the big topics that kept coming up again and again at this year's APCAC conference in Beijing (organized by the American Chamber of Commerce in China) was how China wanted to move up the value chain.  China wanted to stop being viewed as a white-label manufacturer used for outsourcing and start flexing its muscle as both a consumer and designer of products.  Manufacturers are servants.  The customer is king and the designer is the king's prime minister.  The servants are still servants.  If you get my drift.  And I would argue that being a major consumer and being a major designer are very symbiotic subjects for China.

China becoming a heavy-duty designer is an audacious goal.  But China becoming a heavy-duty consumer is now very viable.  In fact, it may even be necessary, simply because the economy is being squeezed on three sides to go in this direction.  Firstly, as the economy has grown, so has the wealth per capita.  There is a growing middle class that has discretionary income to spend on nontrivial luxuries.  And these people demand quality.  Secondly, as wealth per capita has grown, so has labour cost.  While labour is still relatively cheap in China compared to western nations, it's increasingly more expensive.  Thirdly, as China has grown to become more of a player in the global scene, there's this ferocious hunger in China to be recognized and considered among the world's elite.  Elites aren't forced to serve.  Elites are the ones being served.  The difference between China and other Asian elite-aspiring nations like Singapore and South Korea is that China has the mass and momentum to be taken seriously.  The four horsemen are BRIC: Brazil, Russia, India, and China.

Evidence for the ability to consume is in the people.  One day while looking for a restaurant where we could eat lunch, a friend pointed out a shop where I could buy some cheap stuff if I wanted.  But she also said the quality is so bad that she doesn't buy anything there herself.  Some other friends told me they were going to Hong Kong this weekend to shop, mainly because Hong Kong had better quality for the kind of stuff they wanted.  Just today, I went happily to a big outlet sale organized by my bank for a customer appreciation day.  Thousands of people thronged an exhibition hall browsing racks of Hugo Boss suits, Gucci bags, Nike microfibre windbreakers, and the like.  I didn't buy anything because the cheapest pair of pants I could find cost about $25 (that's Canadian currency); I saw suits on sale that came to about $2000.  I was disappointed because I thought I'd be able to find a ton of name-brand stuff cheaper than I would in Canada.  I was wrong, it was the exact same price.  And thousands of people filled the exhibition hall buying this stuff.

Clearly, this growing middle class cares more about what they buy; it's no longer about the cheap fake knock-offs.  The big light bulb moment came when I saw all these photos of people lining up to purchase iPads at the new Apple stores in China.  So how's that iPed doing, eh?  Yeah, iPad may be designed and sold by Apple, but it's manufactured by Foxconn right here in Shenzhen.  Two products manufactured in the same city, but only one is viewed as a product that people aspire to have.  People in China are starting to have money and want to strut their stuff.  This is both good and bad.  It's bad because maybe too many little emperors (a social effect of the one-child policy) will may end up feeling way too entitled about everything, making for a society that is unable to meet the expectations of its population.  As well, you only see this kind of consumer behaviour in the major urban centres.  In the rural areas, it's much less developed, and the economic disparity poses risk for civil unrest.  This is definitely also a cause for concern.

But it's also good because it demonstrates economic progress.  And in a strange way, I think this demand for high quality global brands is good for China, because it will force Chinese companies to get their act together in order to compete.  If Chinese citizens are demanding high quality products, then Chinese companies will not be able to compete with shoddy products.  This is the link.  This forces China to think more like an original designer than a cheap me-too copycat.  Chinese brands are going to need to figure out how to increase quality and customer service, eliminate all the product safety scandals, earn consumer trust, and develop noteworthy brands.  Once they are able to achieve this, only then will Chinese consumers be able to jump for joy when purchasing an iPed instead of an iPad.  And when Chinese brands are able to win over consumers on their home turf, that's when Chinese brands can start trying to compete on the global market as respected players.  In the worst case, they'll be pushed back and remain #1 only in China like Baidu and Tencent's QQ.  That's still a step forward because it's better than seeing BMW and the like slap around Chinese luxury autos in their own backyard.  Quality and market success needs to start at home before similar achievements can even be contemplated worldwide.

So things are changing in China.  In fact, wages are rising so much that it was discussed plentifully at APCAC 2010 whether it was viable for China to retain its manufacturing strength, with companies even starting to choose Vietnam instead of China for manufacturing facilities.  The general response from American business leaders was that although Vietnamese labour may be cheaper, Chinese labour is more productive.  As well, China has the opportunity to increase its industry out west, a region that has not seen a lot of attention until now, since the government wanted to modernize the major urban centres out east first.  So despite the higher wages, China is somehow maintaining its luster and may be able to have its cake and eat it too.  And get seconds.  With the higher wages and consumer demand for higher quality comes a correlated societal demand for respect.  The Foxconn suicides did well to highlight important issues about business practices in China.  Many people cried out against Foxconn and decried the "sweatshop conditions" allegedly typical of Chinese manufacturers.  I agree that this was an issue for sure in the past, and can still be.  But people don't understand the significance of this quote:

Hon Hai and the Hong Kong-based Foxconn unit have struggled this year with the fallout from a series of suicides that focused international attention on labour practices in the region.

The issues prompted the company to raise wages and were a trigger for a series of labour disputes over working conditions in a region dubbed the world's workshop.

The practices of manufacturing companies in China is one thing.  However, the work conditions are far greater influenced by a single factor: western consumerism.  Western consumers have only been able to have such a nice life because they've outsourced all the nasty bits to cheap labour in other nations, including China.  Fake Steve Jobs said it best:

We all know that there's no [bad word] way in the world we should have microwave ovens and refrigerators and TV sets and everything else at the prices we're paying for them. There's no way we get all this stuff and everything is done fair and square and everyone gets treated right. No way. And don't be confused — what we're talking about here is our way of life. Our standard of living. You want to "fix things in China," well, it's gonna cost you. Because everything you own, it's all done on the backs of millions of poor people whose lives are so awful you can't even begin to imagine them, people who will do anything to get a life that is a tiny bit better than the [expletive] one they were born into, people who get exploited and treated like [expletive] and, in the worst of all cases, pay with their lives.

You know that, and I know that. Okay? Let's just be honest here. Just for a [bad word] minute, let's all be honest.

China's got money now.  The world has been feeding it for years to get cheaper products.  All this huge investment and growth happened despite the fact that the social infrastructure may not have been ready.  They still may not be ready.  There are still a lot of issues.  But now China has scale and resources, so they're coming for the rest of the world.  It's payback time and China wants some recognition; they are flexing muscle.  They already have the most foreign ownership of US debt and according to some were instrumental in saving the euro from collapse.  And fortunately for China (and unfortunately for other nations), China is seen as a huge growth market where everybody wants in.  This gives China ridiculous leverage to negotiate deals that allow Chinese industry to accelerate its progress in the goal to become a house of globally respected brands and designers, not simply manufacturers used for outsourcing.

Japan and South Korea traveled the same road in trying to build their products into globally respected brands.  The story of how Samsung grew its brand in the US is a fascinating story; I heard it firsthand from the consultant who headed up the market entry strategy on Samsung's behalf.  It was just too difficult for Samsung to establish a noteworthy beachhead in anything until these consultants came in and recommended attacking cell phones, which was still a nascent market in North America at the time.  All the incumbent players in mature markets were too strong to displace.  After they established themselves in cell phones, the Samsung name was more recognized and acceptable in consumer eyes.  Then they started being taken seriously in other electronics.  Meanwhile, Sony is spelled with a Y because it made the brand name look more non-Japanese, an important factor back when Sony was trying to enter the US market.  I remember seeing old 80s newscasts of American rallies against Japanese products, even smashing and destroying Japanese-made cars in an exuberant rage of America patriotism.  Now we're seeing similar rhetoric in the US against China and Chinese products, though I don't know if it's to the same degree.  But if South Korea could create globally respected brands in the last few decades, I see no reason why China cannot within the next few decades.  Japan is special in terms of culture and creative output, so it cannot be compared.

So.  Is China going to be the next superpower or is it a house of cards being built ever higher and higher just waiting to be knocked flat?  Japan never did fulfill its hyped potential against the US.  But then again, did the US face as many problems back then as it is suffering now?  Fun times, where's a guy supposed to put his money for safekeeping?  Last quote:

VK: Sure, the growth you see today in China is there, but it's not a sustainable growth. It's not a growth that you'll see a few years from now. That is an important point for readers to understand.

TCR: Why is it not sustainable?

VK: Because the growth is being induced by government spending, by a misallocation of capital.

I'll give you an example. The vacancy rate on commercial real estate in China is fairly high, but they still keep on building new office buildings because they think they will always grow. So therefore as long as they keep building, that activity will be registered as growth, until they stop. And when they do stop, they'll drown in overcapacity, and they won't be building new skyscrapers for a very long time.

TCR: We read that note you sent about the South China Mall, which is pretty stunning. It's the second largest mall in the world but is mostly empty.

VK: That's right. But as outrageous an example as the South China Mall is, there's an even more outrageous example – namely that the Chinese built an entire city, Ordos, in Inner Mongolia for 1.5 million residents and it is completely empty. These are classic examples of the sort of excesses going on in China.

TCR: The equivalent of building bridges to nowhere, but on a very large – Chinese – scale.

VK: Exactly. There are no shortcuts to greatness. As long as they keep building new bridges, the economic numbers will register that there is growth, but at some point the piper will have to be paid, and these projects have a negative return on capital.

It would be a pity for China if the Chinese economy comes crashing down before Chinese companies are able to figure out how to create good products and establish good global brand presence.  Remember, for South Korea, it was a multi-decade process.  Or maybe that's when we'd see China's best.  The greatest stories are always built in the midst of adversity.

Monday, October 25, 2010

Wednesday, October 20, 2010

And this is why I read TechCrunch. And this is how I know I'm in China

There are several reasons I love reading TechCrunch for all my web/tech news.
  1. Breaking news.  They seem to be often the first to break a significant story.  And if they're not, they're very on the ball to catch up.
  2. Great roster of internationally-focused writers.  Whether it's guest authors from other continents, international beat reporters like Sarah Lacy, or diversity-conscious academics like Vivek Wadhwa, there's great content that's open-minded, insightful, and always strutting to their own tune.
  3. Overall, despite all the haters and accusations of bias (which sometimes admittedly does come out), I usually find the content quite fair and level-headed.
And then every now and then, someone writes a piece that is completely awesome in its points.  Wow.  This one coming from the writer who is perhaps the most vilified of all the staff.  Well written.  I have nothing to add to it, and it made me realize the limitations of my own brain.  I should have been able to think of everything that was written there, but I didn't.  Read it, it's well written.

Well, want to write lots of posts, but no time.  So here's another list of various things that make me go "hmm" in China.  :)

5.  I bought a wardrobe/closet today.  It's a steel frame covered by a cloth exterior.  I've never seen that in Canada.  And it cost only 69RMB.  That's crazy.  Maybe I should go buy one more.  You can never have too many closets when you want to protect your clothing from the nasties on the floor, right?  Right?

4.  The air here is full of static electricity or something.  There's nothing else to explain how all the hairs on my body can feel all prickly.  At first, I thought it was bugs crawling on me, and then I realized there were no bugs.  It's such a weird sensation.

3.  Did I mention this one already?  The sidewalks can double as parking lots, so you have cars and people walking on the same sidewalks.  Really, I think it's wrong to term them sidewalks; rather, they're just parking lots on which people happen to walk.  But parking lots are usually squarish or rectangularish, no?  These things are long and narrow, and separate from the roads, so they carry a lot more people than they do cars per minute.  Who has right of way?

2.  I can download all the music I want for free legally through Google Music.  But you have to be located in Shenzhen, China for this to work.  Yeah, like, seriously.  I just downloaded U2's Best of 1990-2000 album.  I am now listening to Beautiful Day.  You can listen to music streaming straight from the website as well, if you wish.  But since I have an 8mb ADSL pipe, it downloads blazing fast.  Might as well get the MP3s to put on my MP3 player.  If this isn't proof of the music industry's inability to hold on to its old model of making money, I don't know what is.  The music labels are being forced to innovate in the face of disruptive change that is chipping away at their power.  And hopefully, this will allow artists to thrive in the long run, as the power of traditional music labels diminishes such that those same labels are forced to work within new realities.  Will other nations also see similar innovation in the music industry?  We're seeing some interesting things like Spotify, Pandora, and iTunes, but it seems you need a very special consumer demographic, national legal framework, and market environment to be able to force something like unlimited advertising-based downloads to be agreeable to the labels.  The question is... is it sustainable?

1.  My mom made a comment while visiting.  It's easy to clean the floor here.  You do it with your feet.  Just walk around barefoot, and your feet will pick up all sorts of dust.  Then you hold your feet over the garbage can to rub all the dust and whatever else off.  This is when you haven't swept the floor for a few days.  I guess she saw me cleaning my feet over the garbage can a lot.

Thursday, October 14, 2010

Rules for living life

Hey, this is just a great read by Clayton M. Christensen, the man who is THE thought leader on technological disruption thanks to his Innovator's Dilemma model.  :)  It's his speech to the 2010 graduating class of Harvard Business School.  He talks about how to live life.  Check it out.

And for all you techies out there, this story at the beginning is really fun.

Before I published The Innovator's Dilemma, I got a call from Andrew Grove, then the chairman of Intel. He had read one of my early papers about disruptive technology, and he asked if I could talk to his direct reports and explain my research and what it implied for Intel. Excited, I flew to Silicon Valley and showed up at the appointed time, only to have Grove say, "Look, stuff has happened. We have only 10 minutes for you. Tell us what your model of disruption means for Intel." I said that I couldn't—that I needed a full 30 minutes to explain the model, because only with it as context would any comments about Intel make sense. Ten minutes into my explanation, Grove interrupted: "Look, I've got your model. Just tell us what it means for Intel."

I insisted that I needed 10 more minutes to describe how the process of disruption had worked its way through a very different industry, steel, so that he and his team could understand how disruption worked. I told the story of how Nucor and other steel minimills had begun by attacking the lowest end of the market—steel reinforcing bars, or rebar—and later moved up toward the high end, undercutting the traditional steel mills.

When I finished the minimill story, Grove said, "OK, I get it. What it means for Intel is...," and then went on to articulate what would become the company's strategy for going to the bottom of the market to launch the Celeron processor.

I've thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I'd have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

That experience had a profound influence on me. When people ask what I think they should do, I rarely answer their question directly. Instead, I run the question aloud through one of my models. I'll describe how the process in the model worked its way through an industry quite different from their own. And then, more often than not, they'll say, "OK, I get it." And they'll answer their own question more insightfully than I could have.

Wow, great stuff or what?  :)  Here's the point that everyone needs to figure out their foundation (and make sure that it's capable of serving as a foundation) before they can build anything with their lives.

Over the years I've watched the fates of my HBS classmates from 1979 unfold; I've seen more and more of them come to reunions unhappy, divorced, and alienated from their children. I can guarantee you that not a single one of them graduated with the deliberate strategy of getting divorced and raising children who would become estranged from them. And yet a shocking number of them implemented that strategy. The reason? They didn't keep the purpose of their lives front and center as they decided how to spend their time, talents, and energy.

It's quite startling that a significant fraction of the 900 students that HBS draws each year from the world's best have given little thought to the purpose of their lives. I tell the students that HBS might be one of their last chances to reflect deeply on that question. If they think that they'll have more time and energy to reflect later, they're nuts, because life only gets more demanding: You take on a mortgage; you're working 70 hours a week; you have a spouse and children.

For me, having a clear purpose in my life has been essential. But it was something I had to think long and hard about before I understood it. When I was a Rhodes scholar, I was in a very demanding academic program, trying to cram an extra year's worth of work into my time at Oxford. I decided to spend an hour every night reading, thinking, and praying about why God put me on this earth. That was a very challenging commitment to keep, because every hour I spent doing that, I wasn't studying applied econometrics. I was conflicted about whether I could really afford to take that time away from my studies, but I stuck with it—and ultimately figured out the purpose of my life.

Had I instead spent that hour each day learning the latest techniques for mastering the problems of autocorrelation in regression analysis, I would have badly misspent my life. I apply the tools of econometrics a few times a year, but I apply my knowledge of the purpose of my life every day. It's the single most useful thing I've ever learned. I promise my students that if they take the time to figure out their life purpose, they'll look back on it as the most important thing they discovered at HBS. If they don't figure it out, they will just sail off without a rudder and get buffeted in the very rough seas of life. Clarity about their purpose will trump knowledge of activity-based costing, balanced scorecards, core competence, disruptive innovation, the four Ps, and the five forces.

I believe this is something that many parents don't teach their kids anymore: how to decide and remember what matters and give it priority above all else.

Wednesday, October 13, 2010

How companies can adapt for the future; skunkworks is cool

In my previous post on why I thought companies have difficulty adapting to unexpected competition and technological disruption, I mentioned the following:
Some companies like the telecoms are able to organically change themselves for future success, but many aren't so lucky.
How does a company organically change?  It's tough.  Sometimes it takes a complete housecleaning of executive leadership to set a new vision, culture, tone, and product focus in the company from the inside-out.  I had a chat once with the #2 HR guy (senior VP level) when I was working at TELUS; nice guy to give a lowly employee like me his time.  I asked him how a company sets its priorities and organizational structure to make sure that it's able to succeed in a turbulent changing market (eg. telecom).

He said that the organizational structure and culture is the responsibility of the CEO to create.  He builds out his top leadership team, and then they build out their leadership teams.  It trickles down until the vision hits every part of the organisation.  The key is creating the correct vision, and then choosing the correct leaders to implement that culture at a ground level, while also recognizing that the incumbent workforce intrinsically contains a lot of value, knowledge, and experience; the Venn diagram should be aligned whenever possible and beneficial.  OK, makes sense.  End of that guy's thoughts, back to my own.

Obviously, this whole change process is easier in a company with thirty employees than it is in a company with a few hundred.  And obviously, a company with a few thousand employees has an even tougher slog to go through this process.  A multinational corporation with tens of thousands of employees?  Chee, that could be a multi-decade process if you're not efficiently effective.  By the time you're done, your company could be dead because it's become irrelevant through technological disruption; the executives would of course get the blame (as they should, it's why they get paid the big bucks).

Sometimes the process is messy and some people just aren't able to adapt.  In these situations, a company has several options.  They can offer employees early retirement packages or move employees to functional areas where they won't hold back or poison the newly restructured operational environments that are deemed most critical for the future.  In sports, you have crazy cases like Wade Redden and Sheldon Souray who will be playing professional hockey in the AHL for a per game salary that is way over the league annual average salary because the New York Rangers and Edmonton Oilers couldn't find them spots on the team in the NHL (and in the case of the Oilers, didn't want him there at all).  Corporate restructuring stories can be just as wonky.  I recall one story where a large clerical team was divided into an A-Team and a B-Team.  The A-Team worked on all the critical products and orders, while the B-Team worked on all the products and orders that were being phased out by the company.  After all the old products and orders disappeared, the B-Team would be redeployed to get retrained or... who knows?  The company hoped that most of them would take early retirement.  It became a running joke among people that you had to be careful to not be put on the B-Team.

A quick aside, this can be emotional stuff.  You're dealing with people's livelihoods, and they probably have a right to feel betrayed if they've been loyal hard workers.  They probably have a right to complain.  Not that I condone it; heck, I've learned enough for myself through life's maturation process (especially recently) that complaining gets you nowhere.  But that doesn't mean there aren't valid reason for sour grapes, especially if the executive leadership demonstrates that they are truly incompetent (Dilbert is often based on real life stories).  People just shouldn't let it eat them up, that's all.  Easy to say, hard to do; the unfortunate difficult cases end up going postal and then committing suicide when the police arrive.  It's not a good thing, and it's a clear sign that something somehow failed.  But this post isn't about dealing with someone's emotional distress, which is a subject that deserves a series of posts all for itself.  Plus, I don't have much direct experience being the one to deliver and implement the hard messages and decisions.  The fact remains, real change is hard.

Back to surviving disruption.  Various strategies have been employed by various companies to create a continuous self-renewing cycle of change.  For example, 3M was one of the first to encourage their employees to devote a percentage of their time to whatever they thought was interesting, whether or not they thought the company would benefit.  Other companies focus entirely on pure R&D departments, which may even look and feel like academic institutions.  Still others will have skunkworks teams focused on inventing new things.  Skunkworks teams are often sheltered away from the rest of the company's environment and politics so that they can remain true to their vision.  However, they can be also be heavily involved in the rest company in the hope of enabling a rapid internal evolution (that was the focus of my skunkworks team when I was in telecom).  Most recently, there's more of a trend to use social media and crowdsourcing for R&D and product development, whether sourced from scientific experts or from consumers (or prosumers as some of them like to be called).  Finally, in some cases, leaders will somehow engage the entire company around a damn-the-torpedoes rally cry.  Such a singular focus only demonstrates that a company is taking a threat seriously, but could amount to an undesirable tunnel vision (see Nintendo's desire to defend their handheld gaming turf from Apple).  But I like the skunkworks stuff.  Those things are cool and they have the ability to subtly change a company's DNA significantly for the better if it's done right.  The term was originally created to describe the team that secretly made the Lockheed SR-71 Blackbird; the project was so secret and futuristic, it deserved its own category of R&D.  I want to offer two contemporary skunkworks examples that are really interesting.

First up, there's Google.  Google is also famous for telling its engineers to spend 20% of their time working on whatever they want, irregardless of whether or not it will make money.  Big skunkworks projects are different.  Big skunkworks projects can't simply fly under the radar within 20% of an employee's time, and thus are prey to corporate politics.  As such, you need really strong executive leadership support for a big skunkworks project to get corporate funding and resources.  Looks like Google has given a self-driving car project exactly that.  You can't get much higher up the Google leadership ladder than Larry Page.  Of course, any normal shareholder for any normal company would scream that this is a waste of resources, that Google shouldn't have these kinds of pet science projects.  Blodget correctly argues that a well-funded startup may be even better equipped to create a self-driving car.  However, Google may be better equipped to monetize it.  The best a new startup could probably do to monetize is license the technology to car manufacturers or charge users a monthly fee like OnStar.  These options aren't out of the question for Google, but Google can go one step further by integrating the technology with the rest of their products to make money (Google Maps, Latitude, Earth, reviews, search, advertising, etc).  That could change not only how people drive cars, but how people live life and plan their day.

In fact, given the difficulty that companies have integrating and profiting from acquisitions, maybe Google is better off trying to do some crazy R&D in-house.  Taking geo-location one step further in cars may possibly a way more interesting play than getting into geo-location in cell phones (not that Google isn't doing that either).  This is a crazy back door move that faked the socks off of almost everyone.  Let's be clear.  This isn't interesting because Google's making a self-driving car; that's science fiction stuff that various automotive companies have already been researching.  Rather, it's interesting because it's a non-automotive company doing something that can affect the automotive industry quite significantly from the outside-in, especially when combined with the other assets that the non-automotive company has already developed.  But my most important point is that this project may actually never have gotten to the place where it is now without Larry Page's personal heavy support.  It probably would have died due to corporate politics.  In a fight for corporate resources, logic dictates that the core business should always win over projects that have nothing to do with the core business because the core business is what drives the bottom line TODAY.

This whole thing demonstrates how a company can defend its core business by extending its core business with crazy skunkworks projects that entrench it into new markets (in fact, potentially disrupt those markets).  Other skunkworks teams focus more on internal tools and processes.  My second example is my own experience of being on such a team.  Here's what I wrote in answer to a LinkedIn question a few years ago on starting innovation initiatives in organisations.  The guy saw it fit to mark my answer the "Best Answer".  :D
I'm part of an experimental team at TELUS called Quick Win. The team has done some very good things for the company over the past couple of years, and has now been replicated by other business units throughout the company. Our team is responsible for bringing about positive system and process changes in the business from in a 2-day, 2-week, or 2-month timeframe, and help the business understand itself better so that it can innovate changes on its own. We're built on three core foundations: 
1. Grassroots engagement: we partner with the frontline to understand how their work is done at a granular level and deliver solutions that solve real problems, rather than simply address theoretical requirement documents. Projects are small and quick so that the business can taste immediate benefit and become enthusiastic. As well, small projects allow us the flexibility needed to change as everyone's understanding about the business changes. Iteration is a much more viable model than requirements documents for successfully innovating and changing the way a business operates.
2. Tangible benefits: everything we do has to have a tangible benefit, whether that is measured in cost savings, increased revenues, or reduced work cycle time. Through our frontline engagement, we're able to understand the business well enough to know that our projects are actually delivering real benefits. If there is no tangible benefit for a project, then the need isn't that pressing for the business. "Strategic" projects with no clearly defined benefit can often be rolled up into a project with benefit. Or sometimes you just have to take the jump; however, our team doesn't operate that way, as iteration works best for us as a transformational model.
3. Leadership development: our team uses the various projects to develop leaders who understand the business, how to change it for the better, and then graduate them from the team so that they can innovate in a different scope (i.e. leadership roles).
Because of the way we approach innovative change in our company, we've won the 2006 Stevie Award for Best Support Team, and were a finalist for the 2006 BCTIA Technology Impact Awards Team of the Year. On a personal note, I think that innovation needs to be sheltered and nurtured to do well, because people really do not take it seriously, and will actually even attack it. People are usually more afraid of change than comfortable with it, and I think that the below quote explains why quite well.
"Managing and innovation did not always fit comfortably together. That's not surprising. Managers are people who like order. They like forecasts to come out as planned. In fact, managers are often judged on how much order they produce. Innovation, on the other hand, is often a disorderly process. Many times, perhaps most times, innovation does not turn out as planned. As a result, there is tension between managers and innovation." -- Lewis Lehro, about the first years at 3M
On the other hand, I think this is why iteration is so good for innovation. With iteration, you can innovate in little baby steps, and change with the political winds when necessary, while still making little breakthroughs in your "innovation shelter". Don't try to go with a grand vision straight from the beginning, try to go with little small visions instead that clearly provide benefit, but can later collectively transform whatever you're trying to transform.
We did some crazy good things, including helping the company survive its 2005 5-month labour dispute, enabling it to get better visibility and metrics on its orders, cleaning up and aligning processes galore, etc, etc.  We made a lot of friends in both management and in the union to change culture for the better, for those of you who think we were only about lowering costs and automating people.  Where is Quick Win today?  I'm told it's been rolled into the rest of the company's operations.  It's been bureaucratized, institutionalized, and reorganized.  For skunkworks initiatives, that's either a mark of success or a mark of failure.

It's a mark of success if the initiative achieved its goals and whatever made the skunkworks initiatives special positively infected the rest of the company's culture, structure, operations, and sense of direction for the better.  It's a failure if the initiative died or became "just another initiative" due to political infighting, lack of executive support, and a distinct inability to prove that it was providing long-term positive impact.  Only those who are left at TELUS can say whether it was a success or a failure.  And believe me, we fought through a ton of political battles to survive and succeed to the point where the company was proud of displaying us to the public.  In both skunkworks scenarios, you need consistently strong executive leadership support and protection in order to stay pure to your mission.  Personally, I did sometimes fear that the team's success hurt that ability, precisely because we had a revolving door of directors and VPs who saw what we were doing and wanted to leverage us without understanding our core mission.  As we became larger and more successful, we couldn't get authority to do truly crazy innovative things independently anymore; all the low-hanging fruit for delivering real benefits had been picked, and various higher ups started to want to use us "strategically" for their own visions and gains, instead of let us fly on our own like we did previously.  That's fine if the visions are truly interesting and impactful.  But if it's not, things naturally become as this quote states:
Most 'new' business concepts are simply self-referring. They do not move beyond the rules of a certain way of doing capitalism, and therefore they cannot possibly alter the problems they target. Instead, just the opposite occurs — the status quo overpowers new ideas and turns them into variations on the same old themes. That is why every innovation from quality circles to reengineering to customer relationships turns out to be another road to cost reduction.
~ Shoshana Zuboff, retired Charles Edward Wilson Professor of Business Administration at Harvard Business School
So I left to try to do startups.  Gee, that was a fun ride.  :)

Tuesday, October 12, 2010

Sometimes you wake up and smell the roses to only find smog

You know, there are a bunch of cool things in China, like rapid growth, the novelty of living in a different culture, and cheap tasty street food.  But then there are bad things too, of course.  There's still a lot of corruption, poor attention to quality, and horrible humidity.  But some things seemed too good to be true.  Here are some of the letdown moments I've had recently.  I'm not exactly running for the airport, but you just knew that all the roses couldn't last?  :)

5.  Blue sky every day, no pollution, where's all the alleged smog that had me so worried?  Well, a few days ago, the smog came with a vengeance.  The skies were all gray, and you could just feel and smell the pollution in the air.  I don't know why on some days it's really nice, and on other days it's not.  Usually, it's easily ascribed to typhoons.  But this time, there were no typhoons, no storms.  Just a ton of smog.  Maybe there's usually a fair bit of wind that moves all the smog out?  Who knows?  But I made the mistake of opening windows in order to let the cool air in.  Later I realized, I was letting a ton of smog in.  And the smell wouldn't leave for a few days.  Lovely.  And even though the sky was blue today, I feel like the smog is still tangibly there.

4.  I finally bought a cell phone the other day.  It's an LG GD510, a cute little thing.  I don't think it can be called a smartphone, but it has a touchscreen, lets me make calls, text, take photos and video, play music, and add a microSD card.  It also comes with earphones and a solar charger so you can extend battery life.  You just clamp the solar charger onto the phone's back, it doesn't add that much to the phone's thickness; it's still tiny.  Altogether with a Bluetooth ear piece and an 8GB microSD card, it cost 1060RMB, after negotiation.  The kicker?  My co-worker told me that the salesperson said it had been smuggled in from South Korea.  The proof was in the power adapter plug.  It was clearly meant for Korean power outlets, not Chinese power outlets.  Funny, but what a damper.  Now I'm buying smuggled goods.  I promise this was an exception.

3.  We were at this restaurant eating hot pot.  Mother's visiting, and we went with friends because of birthdays.  One of the things we ordered was noodles.  So what happens?  The waiter brings some thick noodles.  Then he starts waving it around.  Oh, cool, it's one of those things where he has to stretch it, that's always fun to watch.  Then he starts... dancing with it!  That's the only way I can explain it.  It was like watching those gymnasts on TV running around waving their ribbons.  After he stretched the noodles to his desired length, he brought them all together and split them into thinner strands.  Then he dropped the whole thing into the pot.  It was amazing.  At the end of the first batch of noodles, we were all applauding.  Then he went onto the second batch.  And at the end, one end smacked into the floor.  Third batch.  Same result.  Fourth batch.  He tried to make up for it by doing some crazy limbo moves (which was admittedly amazing to watch as he stretched out the noodles above him in the air), but that ended up finally hitting the floor as well.  Finally, with the fifth batch, he played it safe and didn't pull off anything amazing.  The feeling at the end was... letdown.  Despite how amazing it had been at first to watch.  :(

2.  It appears that I must also pay for gas separately.  And here I thought that gas was integrated with my strata fees like my water utility fees.  Am I wrong about my water too?  Gee, better not be.

1.  Yogurt in China can make my poop all weird.  I don't know what else to say about that....  Use your imagination at your own risk.

Friday, October 08, 2010

Why it's hard for great companies to avoid death

In my previous post, I wrote some thoughts on what is really happening when a great big successful company dies.  I'm talking about the really good, long-term, successful, famous brands like Blockbuster, not the scandal-ridden Enrons that grabbed undeserved headlines galore in their heyday.  The scandal-ridden companies were doomed from the start because faking profits is not sustainable.  But great companies like Blockbuster, with real profits, fantastic operations, fantastic service, and locations galore?  Those are the kinds of companies I'm talking about.  And as promised, I now want to discuss why it seems so hard for great companies to change course and survive the things that get thrown at them.

Ultimately, the answer is seen in my previous post's example about ice companies.  The ice companies simply did not have the necessary skills to compete with refrigerator manufacturers, nor did they have the product to get customers to stop buying refrigerators; consequently, the ice companies became irrelevant.  Similarly, Blockbuster is now irrelevant (and declared bankruptcy), as more and more people opted to watch movies on cable TV pay-per-view, through Netflix, or rent from Redbox kiosks.  And of course, it's going to get even crazier with Google TV, Apple TV, Amazon, and a whole slew of startups you've never even heard of jumping into the game (and of course, the telecoms want a piece of the pie too).

So if a company can't reinvent itself, it won't be able to survive.  The case of the ice companies is special, because no matter what the companies tried to do, it never would have been able to reinvent itself.  When refrigeration came along, people didn't need to buy ice anymore.  Never mind keeping food cold so that it wouldn't spoil, they could just MAKE ice for the heck of it.  Just for fun.  How are you going to sell ice in that kind of market?  And what else could they have done with their capabilities?  Take all their ice saws and labour force and become a logging company?  Maybe.  But I bet you that the logging industry was already at equilibrium.  Most industries are, until something comes from left field and turns it upside down.  And you can bet the ice companies had nothing that could turn the logging industry upside down.

Sad to say, but there's no chance in hell for survival for cases like the ice companies.  Now what about companies that theoretically SHOULD be able to reinvent themselves?    Like Microsoft is a software company, right?  They're in big danger of losing their core bread and butter to companies like Google, Apple, and the like, just through the Internet and smartphone plays alone.  If Google and Apple truly are successful, there will be no need for us to use personal computers anymore, which is really how Microsoft makes all its money (selling Windows and Office).  But at the core, Google and Apple are also really just software companies, they just focus their efforts elsewhere.  OK, and Apple's also a hardware company, but it's not like Microsoft is lacking in this area, since they also have the XBox 360, the Zune, the cancelled Courier, and a bevy of hardware OEM partners with whom they can collaborate.  Why has it been so hard for Microsoft to turn the Internet and smartphones into profitable businesses, let alone dominate those industries?  They've been trying to reinvent themselves for almost a decade, why haven't they been succeeding?  Is it just too early to tell?  Will their efforts bear good fruit, or are they doomed?

Likewise, the questions about Google vs Facebook.  Why have all of Google's social efforts to date not found traction (see Orkut, Friend Connect, Buzz, Wave), while Facebook now looks like it has a real opportunity to make Google irrelevant by essentially integrating the entire Internet into their social network and potentially monetizing it better than Google ever did?  Aren't the two of them really just web companies with a lot of smart programmers?  Heck, Facebook has a ton of ex-Googlers working as employees!  Google was known for having the most PhDs per capita of any publicly traded company; if you work at Google, you're probably really smart.  So why does this seem so hard?

It seems to me that there are three things that prevent a great successful company from being able to reinvent itself and respond to oncoming threats, even if they're able to correctly see and identify the threat that's coming.  OK, there are no doubt more than three, but these three seem to be the biggest factors in my limited mind.

1.  We're making money!  What's the problem?
A company has a fiduciary duty to its shareholders to keep making money.  Especially in today's stock markets that are dominated by short-term traders and hedge funds, companies have huge pressure to keep growing profits in order to keep the stock price up and the shareholders happy.  Furthermore, a lot of executive compensation is focused more on short-term incentives, not long-term.  With that kind of pressure and motivation influencing the people at the helm, it's hard to allocate heavy funds towards investment into the future.  It's easier to invest the money into efforts that will increase market share immediately (eg. increase marketing spend, expand operations), rather than invest into research and development that may never see commercialization.

The fact is, a lot of R&D output never sees the light of day in the market simply because it's so risky and uncertain; nobody can be truly sure about what the market wants and whether the company is inventing a real winner.  Microsoft had major doubts about the Courier, so they cancelled it, despite a lot of excitement from the market.  The iPad actually was not Apple's first stab at tablets.  That honour goes to the Newton, which Apple developed in the late 80s.  It was not exactly a smashing success.  R&D is inherently risky, so the ROI is iffy.  If the ROI is iffy, that's not good for the share price in the short-term.  And short-term share price is what the traders care about, who tend to dominate the stock market much more than long-term investors these days.  This leads to the pressure to avoid investing into R&D unless a company is absolutely sure about what they're doing.  And they can only know what they're doing if they've done it before.

Look at Microsoft.  HUGE money into R&D every product cycle to make new versions of Windows, Office, and all their other products; the ROI is correspondingly huge on that stuff.  Microsoft has admittedly ridden this wave really well, but they can afford to do it because it's what they know and understand; they know how to succeed in making good operating systems and office suites.  Unfortunately, these stable franchises serve markets that may be bypassed and made irrelevant by web plays and smartphone plays.  The fact is, they haven't been able to do anything to reinvent themselves to stop relying so much on Windows and Office sales.  That's the key, isn't it?  If your core bread and butter is about to be destroyed, don't you want to start making something different instead before it's too late?

Stable franchise R&D is reliable and easy while the market lasts.  Meanwhile, innovative inventive R&D is hard, risky, and difficult.  But traders and shareholders don't understand this, so they simply punish Microsoft the way the only way they know how: they hate on the stock price.  It's easy for a business consultant or investment banker to throw around some numbers and make recommendations.  It's entirely another thing for the company to execute on those recommendations, when they're not only technologically complex, but also something the company has little experience doing.  The unfortunate thing is that while the trades and shareholders punish the company if it deviates from profit growth, severe deviation may be necessary just to invest heavily into changing the company's direction.  Shareholders want to have their cake and eat it too.  That's perhaps an unfair challenge, but also a fact of life for big successful companies.  Of course, all those traders end up jumping back on the bandwagon if a company manages to survive the fire and release something new that turns its fortunes around.  But they'll get off just as quickly, they're not there for the long-term.

2.  We just don't know how to do this!
Each company has its own strengths and weaknesses.  The challenge is when a threat hits a company's weakness so hard that they can't get back up, especially if the company's weakness was previously considered a strength.  Look at the ice companies again.  Completely flatfooted and unable to respond to Freon.  Everything that the ice companies were good at did nothing to help them compete against refrigerator companies.  Where the ice companies had large manual labour forces to harvest, cut, and transport large blocks of ice, refrigerator companies required quality chemists and engineers.

But what about companies that essentially hire the same kind of labour force and invest in similar capital infrastructures?  This is where I think the Google vs Facebook fight is quite interesting.  Both companies are filled with extremely smart people, both companies are primarily Internet plays, and Facebook even has a ton of former Googlers working for them.  So why does it look like Facebook really actually now poses a big threat to Google, and why does it seem like Google has failed at every attempt to respond?

Part of it is just how the company is structured.  For example, Microsoft is good at shipping and selling packaged software, but the big growth market that is the Internet isn't about packaged software.  But perhaps an even bigger part is culture.  Google's full of really smart people who have made a fantastic search engine that essentially operates by itself.  In fact, most of their products operate by themselves.  Most of their products sell themselves too.  There is very little visible effort on high-touch customer service or sales because it's not needed for most of their stuff.  The proof is in the disaster stories when Google has to deal with rare real customer problems:
The worst part is that once I realized that Gmail was failing, I quickly paid, but Gmail took a full 21 hours to restore my service, bouncing me off scores of social networks and mailing lists, and denying my inbox's existence to all of my friends and professional connections on Twitter, LinkedIn, Facebook, and email itself.

The awesome thing about this incident is that it showcases all of Google's weakest pointsas a creator of user-facing applications.

Google simply isn't structured to handle high-touch human interaction, because they've had all their super smart programmers create automated systems that rely on stable infrastructure, algorithms, and simple aesthetics to guide users and customers.  Customer service is simply not necessary, and as a corollary, it could perhaps be said that Google as a company does not understand the emotive aspects of humanity.

On the other hand, you have a company like Facebook that is built from the ground up to be all about human relationships:
"The naive solution is to do something like Friend Lists," Zuckerberg says. "Almost no one wants to make lists," he continues. He's noted this before. "The most we've ever gotten is 5 percent of people to make a list. It's pretty brutal to have to do this every single time." He then went into the algorithmic solutions. These are helpful, Zuckerberg says, but it's also really easy to get these wrong, he notes. There needs to be a social solution, Zuckerberg says.
This philosophy seems to have fulfilled Zuckerberg's original vision of taking real life and allowing it to proliferate and integrate online.  That's created a really sticky product that people keep coming back to, and they spend time there, both consuming and creating content.  There, inside the closed garden that Google can't access for indexing and monetization.  So Google is trying to build their own cooler and better garden with all the tools and tricks in their bag, but they've invested too much into their current operational model and ways to tear down the house and start from scratch.  Meanwhile, Facebook's closed garden turns out to be a Trojan horse for doing a reverse takeover of the entire Internet if they have their way with Facebook Connect, the Like button, and so on.

If a company's already been doing business a certain way for a long time, and that's how they've been successful in the past, how can you expect them to just reinvent themselves?  When professional sports teams perform poorly for too long, the only way to get it back on track again is to clean house, bring in new management and new players with a new philosophy, and grow them into a new cohesive unit.  But that's easier to do over a few years with a team that has maybe only 30 players and management personnel of maybe 10 people.  A company with thousands of employees spread around the world?  Tad more difficult, wouldn't you think?

3.  We hate change!
Don't believe any company that says that change is one of their core values.  This couldn't be further from the truth.  They might have the fancy plaques on the wall, but it's a myth.

Back when I quit my job to do startup stuff and run a software consulting company, I wanted to call the company Change Agent Solutions.  Catchy, no?  We'd be able to go into companies, align and streamline all their systems and processes, and turn them inside out for the better.  We'd have a cool James Bond chic feel.  My partner was adamantly against the name.  "People hate change," he emphatically stated.  I thought it was just that one company, after getting jaded with corporate politics and people's unwillingness to do crazy things.  After getting a ton more experience under my belt, I realize he was right.

People have jobs, like their jobs, and will fight tooth and nail for their jobs.  Even if they hate their jobs, they will do anything to keep their jobs because the jobs will put food on the table for their families at home.  Despite all the stress and politics that come with work, jobs are a source of self esteem, income, and fulfillment.  Furthermore, people are lazy, stupid, short on time and money, or just already enjoy what they are doing.  I can't see any other explanations for why retraining is so difficult for a lot of people.  You don't see salespeople becoming tradespeople.  You don't see financial analysts working to become actuaries.  You don't see assembly line workers deciding to become computer programmers.  People in general aren't good at mind-bending, inside-out, upside-down, revolutionary change.

Those who are unionized to have collective bargaining agreements with their employers are on a whole other level.  The unfortunate thing is that if a company is hit from left field by a competitive threat totally unexpected, and the company has no way to respond to it, the company has almost no ability to do what the union wants (i.e. guarantee jobs at a desirable wage rate).  If any ice companies had unionized (although I don't think unions were yet popular back then), those unions and employers would have been powerless to save the jobs of those employees.

With this whole attitude against change, which may exist for whatever reason, companies find it extremely hard to change, even if they see big threats coming. When I worked in telecom, one of the operations managers told me how they kept telling their employees since the 90s how the Internet was coming and was going to fundamentally change their business.  They hit the message home all the time every year.  Except it didn't happen.  I can only imagine how many employees eventually started tuning out the message.  But eventually it happened, and fortunately, a lot of telecom companies figured it out and successfully reinvented themselves to become broadband ISPs and wireless carriers instead of just traditional phone companies.  They were darn lucky that providing Internet service can use the same labour force as providing phone service.  And that cell towers need to run on telecom infrastructure.  And that so many wireless carriers were available for acquisition.

Some companies like the telecoms are able to organically change themselves for future success, but many aren't so lucky.  Other companies try to change by acquiring companies that will become the core of their new business.  That's how Nortel Networks was able to successfully transition itself from becoming a manufacturer of traditional telecom equipment to a manufacturer of high-capacity network switches.  They simply bought out Bay Networks, and they were no longer Northern Telecom; Nortel Networks was one of the new Internet darlings.  It was unfortunate that their customers over-invested in fibre and then could buy no more when the Web 1.0 bubble popped.  It was also unfortunate that Nortel ended up trying to fix the whole mess through financial manipulation scandals.  But it's a good case study on how a single acquisition was able to transform an entire company for a better future.

Other companies are not so good at acquisitions.  If a company acquires another company, it's not simply a case of crunching spreadsheet numbers and estimating a positive ROI.  If there is no place for the acquired company in the acquiring company due to poor cultural fit, politics, or operational structure, the acquirer will experience no value and end up vomiting the company back out (see eBay's purchase of Skype) or swallowing the bitter pill of wasted money (see Google's purchase of Jaiku to compete with Twitter).  Even worse is if the acquired company feels they aren't given a fair shake, so they leave the company to try on their own again (see Google's purchase of location startup Dodgeball, the founder's frustration with making it work inside Google, and his eventual departure to found Foursquare).

Real change is hard, and that's why big successful companies can't respond well to unexpected threats that come out of left field.  In fact, the bigger the company, the harder it is, simply due to the company's size and momentum.  Complexity for anything increases with scale, and that especially includes large, complex, set-in-their-ways organizations, operations, and labour forces.

UPDATE:  My final post on this subject.  Well, for now anyway.  :)

Monday, October 04, 2010

Why great companies die

In these instances, although this “attacker’s advantage” is associated with a disruptive technology change, the essence of the attacker’s advantage is in the ease with which entrants, relative to incumbents, can identify and make strategic commitments to attack and develop emerging market applications, or value networks. At its core, therefore, the issue may be the relative flexibility of successful established firms versus entrant firms to change strategies and cost structures, not technologies.
(Christensen, 1997, p. 55)
----------
Gates thinks Christensen’s Innovator’s Dilemma thesis is plain wrong. For starters, he says, Christensen chose to study the wrong industry for his thesis. In the disk drive industry, Gates says, “Every breakthrough in disk drives – every single one that really counted – was done by IBM.” In the boom and bust world of providing for the massive storage needs of digital systems, IBM has retained the edge in both technology and profitability. The new guys come in and go out, but IBM remained the leader.
“The large organization, that took the long-term approach, that did the R and D, they won every time,” Gates said. “Every single time.”
The bigger problem with the Innovator’s Dilemma book, Gates says, is that it doesn’t say what large companies should do. “Yes, a company needs to pick some revolutionary thing and bet its life on those things,” Gates said. “That’s all you get” out of Christensen’s thesis, he said.
...
“It’s more fun from the outside to think that there is. Company XYZ failed because of – One Sentence Description,” he said. “No. Unless there are a bunch of morons running that company, that is not what is happening.”
(Bank, 2001, pg. 41 – 42)
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Certainly, Microsoft is not unstoppable. We have to earn our leadership position every day. If we stop innovating or stop adjusting our plans, of if we miss the next big turn in the industry’s road, we’ll lose out. Because Microsoft isn’t immune to failure, we’re careful not to dismiss the doomsayers. We heed their warnings, and we ask: “Why are they saying that? Are we being critical enough of ourselves? Are we missing a new technology?”
(Gates, 1996, p. 69)
These three quotes, from the books The Innovator's Dilemma, Breaking Windows: How Bill Gates Fumbled the Future of Microsoft, and The Road Ahead, adorned the first page of my university paper on organizational theory concepts applied to Microsoft's business.  It's been fascinating to watch the industry as Microsoft attempted to reinvent itself with various degrees of success.  Ever since Ray Ozzie's landmark services memo, Microsoft has attempted to change direction multiple times.  He was clearly anointed as the new technical visionary for Microsoft, releasing his much hyped mesh memo a few years later.  If that's not enough, Ballmer made sure that the message was delivered: Microsoft had to change its core technical philosophies in order to survive and thrive, and was therefore going all in on cloud tech.

But if Microsoft is truly facing these huge threats that could sink their business, why aren't we seeing them respond in the market?  Why did it take so long to get an online version of Office operational, as various institutions transitioned in greater numbers to Google Docs?  And now that Office is operational online, why is the online version so handicapped?  Why has it taken so long for them to get competitive in the mobile phone space?  Microsoft was in the smartphone game WAY earlier than both Apple and Google, and yet they've seen themselves get overtaken by both companies.  And only time will tell if Windows Phone 7 will sink or swim; it's far from a sure thing.  Microsoft was into tablets first years ago.  But they failed, and tablets were seen as a fad.  Now tablets are big again with the iPad.  Why is Microsoft always failing or late to the party?  Hey, but Microsoft is still doing just fine, right?  What's the worry?

I think these various examples are evidence that Christensen's Innovator's Dilemma concept is worth taking seriously.  Basically, the Innovator's Dilemma says that if a company has a successful business centred around a big technology, they are loathe to invest resources into technologies that perform poorly in comparison and have no clear immediate benefit or ROI.  The problem is that new entrants can attack the market from a different perspective, identify where there is value, and create and market a new technology (with both similar and different features) to a different niche.  It may not perform as well as the dominant technology, but it has a distinct advantage.  The dominant technology serves a stale market that has plateaued or is in decline.  The new poorly performing technology serves a new growth market that will eventually eclipse the other market.  And as that market becomes bigger, it will attract more and more R&D investment until the new technology outperforms the old technology.  As such, personal computers in the world where 64kb of memory was both laughable and yet enough for any normal consumer grew to eventually outperform mainframes, even to the point that servers started being manufactured with basic personal computer components.  Webmail that originally had only 2mb of storage and could never compete with your desktop's Outlook now have gigabytes of storage available; who do you know who really uses Outlook at home anymore?  How many people do you know who'd rather use Gmail for work, rather than Outlook?  Well, many companies now can and do, thanks to how Google Docs can integrate with your work systems.

And now maybe we're seeing another Innovator's Dilemma disruption with smartphones vs personal computers.  If everyone can do their email, edit their documents, and do whatever on their phones, connecting to a big screen and keyboard and mouse when necessary, why would anyone want to buy normal computers anymore?  Bam!  The end of Microsoft's bread and butter right there.  No more Windows sales, and if no more Windows sales, for sure no more Office sales (unless Office Live online really gets up to snuff as a rental model).  This is why it's so important for Microsoft's Windows Phone 7 to be successful.  Because maybe, just maybe, we're starting to get to the point where one would rather just use a phone than a computer.  Already, the Japanese have proven that the consumer behaviour is possible.  A whole generation of Japanese kids are growing up who don't know how to type because all their digital lives are spent on their phones (OK, I can't find the original news article about the typing, boohoo, but I really did read it, and it does seem plausible).

This is how disruption happens and how companies die.  Big successful companies don't die because a competitor went head to head with them and took them out.  Big successful companies die because a new entrant figured out how to make money with the side-effect of making the original dominant player irrelevant.  The best example of disruption I've ever read is found in a book called Blindsided, recommended by a former mentor of mine when I was working for the Quick Win Team at TELUS.  In the book, Jim Harris describes the ice industry.  Back in the day, companies would harvest huge blocks of ice from frozen lakes, transport them to warehouses, and cut, sell, and deliver them to households.  The ice would be used to keep food from spoiling in iceboxes.  Then along came refrigeration.  The skillsets required to run a refrigerator manufacturer were vastly different from the skillsets required to run an ice seller.  Where the incumbent ice companies needed a large labour force for harvesting ice, brute strength, and a warehousing system dedicated to inventorying, cutting, and transporting ice, the new refrigerator companies needed to have expertise on the chemistry behind Freon (CFCs), manufacturing processes, and making customer service calls for refrigerator repairs.

How does the original ice company compete?  It simply can't, it's not in the company's core DNA.  They can only fall by the wayside, unless they can pull off a miracle to reinvent themselves to be able to serve the same customer (almost impossible) or reinvent themselves to use their capabilities to serve a different customer (also very difficult).  Well, before they get blindsided, they can prepare for the onslaught, right?  That's what Microsoft's been trying to do.  But in cases like the ice company, they could never have seen Freon coming.  If the executive committees had brainstorming sessions about how to remain the leader in the industry, they probably would have said stuff like, "Research how to improve ice saws.  Better warehousing techniques.  Etcetera, etcetera."

Techcrunch wrote up the post about Facebook that I've been wanting to write for a while, but never found the time.  It's a fantastic teardown on how Facebook could potentially become much bigger than Google.  It's very well-written and a must-read.  Isn't that interesting?  Google, the king of the Internet, was seen as the big company that would make Microsoft irrelevant.  The biggest sign is when employees vote with their feet to join the enemy.  It still could happen, and Google played a classic disruption game, not competing with Microsoft head-to-head, but going about their business in a way that would eventually make Microsoft irrelevant as a side-effect.  But now, so soon into the game, Google is the one looking over its shoulder.

It's amazing to think that a company that has become so successful and influential can become irrelevant in such a short timeframe.  Google's CEO, Eric Schmidt, has acknowledged it's a big worry that Facebook is creating such a huge closed garden of content that they can't index.  If they can't index it, they can't serve ads against it, and they therefore can't monetize it.  That's the core of how their technology enables them to make money. And now with Facebook's more ambitious goals to seemingly integrate the rest of the Internet into Facebook using Facebook Connect and the like, Google could potential lose their bread and butter.  Of course, Google's now working to try to respond to the social onslaught and make sure that they don't become irrelevant.  Can they?  So far, all their attempts at social, from Orkut to Friend Connect, have failed.  Is there just something in their corporate DNA that disables them from being able to compete in social?  I still find all this amazing given that only 5 years ago, I thought Facebook would just be another Friendster, and no more than a fad.

I leave you with a lesson from history.  France didn't fall to Nazi Germany in World War II because the Nazis were able to push through France's defenses.  France was extremely proud of its Maginot Line, and was confident it could repel any German advance.  It probably could.  Except Nazi Germany never went through the Maginot Line.  They went around it.  It's the same for many big successful companies.  They often don't get defeated in head-on competition.  They die when someone takes them by surprise from an angle they never predicted.  Next time, I'll write about my thoughts on why it's so difficult for companies to respond successfully to disruptive change, even if they're aware that it's coming.

UPDATE: Browsing through some old blog posts, I found this one here; this Google AdWords fail is probably the best example of how Facebook's disruption play can eventually offer an ad platform much more capable of targeting customers than Google ever could with their current technology.

UPDATE 2:  Part 2 for this post is here.

UPDATE 3:  And my final post on this subject.  For now, anyway.  :)