Business Best Practices

For many businesses, our current knowledge of computing technology, manufacturing processes, machine capabilities, and integrated information systems, will be outdated in a few years. “The only constant we face,” said an ancient philosopher, “is change.” For top management, success depends on more than merely being able to articulate a vision of where and what the organization needs to be. Top management must develop a solid approach and methodology that managers will use for fostering and implementing positive change throughout the organization. Process-oriented leadership is what organizations need today.

The clear delineation of a vision for the organization’s future is a key role for top management. But all too often, this vision has focused mainly on achieving certain financial results such as gaining market share, return on investment, and inventory to sales ratios. Envisioning what the business needs to be requires that the vision be aligned foremost with customer requirements and an assessment of the organization’s current status and overall ability to achieve its long term objectives. If top management is to successfully manage change, what needs to be developed is a description of issues such as:

• What the company will look like when working inventory turns are increased by 90%?

• What will be required of self-directed, small work groups to achieve throughput reduction targets?

• How will we interact differently with suppliers and distributors after integrating our information systems and business functions?

• How will management processes change?

• What skills will our workforce and managers need?

• How will people be measured and rewarded when goals are achieved?

Asking these kinds of questions will help top management better define the vision of what things the organization will need to do and how it will have to do them. This is the basis on which a solid methodology for managing change depends, and leadership rests.

Whether you are implementing Lean Operations, Six Sigma, Supply Chain Management (SCM), Enterprise Resource Planning (ERP), or some combination of these management philosophies, you are introducing a major change into your organization, and it must be consistent with—and support—the firm’s overall strategy. There are three steps–critical to achieving lasting performance improvements–that are preconditions to successfully bringing about any major change:

1) evaluate the environment

2) Develop the Organization’s mission

3) Originate a strategy

Southwest Airlines has followed the process, as described above. At its inception in 1971, Southwest surveyed its environment and targeted an underserved market segment: short hop flights in Texas.

Realizing that the firm had to keep its costs down to compete against its full service competitors, Southwest’s operations strategy included use of secondary airports and terminals, first come first serve seating, few fare options, smaller crews flying more hours, snack only or no-meal only fights and no downtown ticket offices.

As result of its experience in Texas, Southwest developed the capability to wring-out costs from its airline operations. This capability—competing on the basis of being the low cost provider—continued to fuel its growth. For example, Southwest designed a route structure that matched the capacity of the Boeing 737, the only aircraft in its fleet. The use of only one plane minimized the costs of pilot training and aircraft maintenance. Superior leadership, strategic planning and execution on the part of top management has enabled Southwest to be a consistent money maker while other airlines have lost billions.

Top management is ultimately responsible for the positive changes that can transform the organization. Regardless of the changes being undertaken, they ought to be understood clearly within the context of the organization’s strategy. In our next post, we will describe another ingredient that must be present for change to take root, namely, instituting a change management  process.

In his book The Innovator’s Dilemma, Harvard Business School professor Clayton Christensen popularized the term “disruptive innovation.” Products that fall into this category bring different value propositions to the market than what is currently provided by existing market participants. Although disruptive technologies underperform existing products in mainstream markets, they possess other features that new customers value. In the near term, because a disruptive technology results in worse product performance, their initial sales volume is low.

This definition of a disruptive innovation is an apt description of Apple’s first iPhone.  When it was launched in 2007, the iPhone underperformed against benchmarks that were standard in the smartphone industry. As a result, just 1.5 million units were sold in its first two quarters. Here is how the original iPhone stacked up against existing smartphone competitors, using measurements that were considered important at the time:

However, Steve Job’s creation was not just a cell phone; rather, it was the world’s first, handheld computer. Its data processing capabilities—not voice—are what disrupted the cell phone market. Although other smartphone manufacturers offered web browsers, they were clumsy and difficult to use. In contrast, Apple’s web browser made surfing the Internet easy. Compared to its rivals, the iPhone’s user interface was simple, intuitive and uncomplicated.  At the swipe of a finger on touch sensitive glass, one could get access to e-mail, text messaging, video, photography, maps, books, music, games and mobile shopping. The iPhone was a game-changer, the industry’s Swiss Army knife.

After having introduced a product that was revolutionary in some respects, but lacking in others, Apple began a structured process of enhancing features—and adding functionality—that satisfied customer needs. This is the essence of continuous improvement. For example, in 2008, iTunes was introduced, which solidified the iPhone’s role as a multi-function device that could seamlessly provide music and video on demand.

Unveiled on September 12, 2012,  the iPhone 5 is the current iteration of the iPhone. In his Wall Street Journal column All Things Digital, Walt Mossberg describes the differences between the iPhone 5 and its predecessor model, the 4S, which was introduced a year ago:

The incremental improvements described in the previous table are not radically new. In fact, some commentators have described the iPhone 5 as a catch-up device, adding features that are already resident on the leading Android and Windows phones. For example, many of the Android phones already feature larger screens.

In conclusion, Apple’s product development strategy does not involve releasing breakthrough technologies, year after year. Rather, disruptive innovations—such as the iPod, iTunes, iPad, and the iPhone—are unleashed, upending entrenched market competitors. Then, the worlds’ most innovative company improves upon its breakthrough product by implementing stable releases, adding features and functionality that delight its customers.

I need to bring this blog post to an end, because I have to go down my local store, and place my order for an iPhone 5. The current backlog is 4 weeks, and I don’t want to wait any longer than that!

The winters in Rochester, NY can be long and harsh. I know. My son attends college there. Situated on the southern shores of Lake Ontario, the yearly snowfall averages 92 inches. But the harshness that I am referring to relates to the demise of Kodak, which was born in Rochester in 1889, and died there on January 19, 2012, falling into bankruptcy.

Given that its name was once synonymous with photography, a Kodak moment, the disintegration of this iconic corporation is particularly poignant. As recently as 1976, the company held a 90% market share of film sales and 85% of camera sales. It was the Google of its day, attracting the best technical talent from across the country. During lunch, the company played movies for its employees.

©Kodak used with permission

A disruptive technology—the digital camera—killed off the film business. Ironically, Steve Sasson, a 25 year-old Kodak electrical engineer, invented the first digital camera in 1975. This fact begs the question: how could a great company like Kodak, flush in the 1970’s with abundant resources and some of the most talented people on the planet, fail to take advantage of a product that was invented in its laboratories?

A failed business strategy and management myopia both contributed to Kodak’s downfall.

Kodak’s Failed Business Strategy

When there is a disruptive technology, firms are often unable to capitalize on the invention for fear of cannibalizing existing product sales. Kodak’s primary strategy was to sell high margin film. Known as the razor blade strategy, the company developed inexpensive cameras as a means to an end: their purpose was to facilitate lucrative film sales. In summary, its digital camera invention was held back because of management’s concerns about the negative impact on film sales.

When Sony launched a filmless digital camera in 1981, fear permeated Kodak’s executive suite. Specifically, over the next decade, Kodak invested approximately “$5 billion—or 45% of its R&D budget—in digital imaging,” according to a 2005 Harvard Business School case study. Unfortunately, with disruptive technologies such as digital cameras, the first-mover advantage is too great for late entrants to overcome. By the time Kodak realized that their razor-blade business model was dead, the horses were already out of the barn. The company was unable to catch-up to the competition.

Earlier this month, Kodak’s announced that it was exiting the film and digital camera business altogether. Sadly, all that remains of this once august corporation is the intellectual value of its patents, resulting from decades of belated investments in digital technologies.

Management Myopia

Not only was the first digital camera unwieldy—it weighed over 8 lbs.—but it didn’t even save images. Instead, they were projected onto a TV screen. It is difficult to imagine how Kodak’s mainstream customers—Mr. and Mrs. Jones from Kansas—would have bought that first, clunky digital camera.

Conventional wisdom suggests that good management involves staying close to your customers. And that is what management at Kodak did. Rather than allocating resources towards the internal development of a risky, digital camera that their mainstream customers had little interest in, the company funded projects that enhanced its position within the lucrative film market. Management at Kodak was constrained by the needs of their established customers. That is fine when making incremental improvements to existing products, but it is fatal when dealing with disruptive technologies.

In retrospect, management ought to have spun off its digital camera business to an independent subsidiary. The small business unit could have focused on meeting the needs of the customers who would have embraced it, such as hobbyists and leading-edge photographers. Apple followed this strategy with its first, Apple computer. I remember buying mine from a Chicago-based, electronics shop that catered to technical enthusiasts (techies) who were far removed from the mainstream, consumer marketplace. Over time, Apple developed its product offerings, introducing features and functionality—such as the mouse and Graphical User Interface (GUI)—that made it attractive to Mr. and Mrs. Jones from Kansas.

In his book The Innovator’s Dilemma, Clayton Christensen describes numerous instances where companies have failed at internally developing disruptive technologies. In contrast, firms that set up separate subsidiaries have been able to grow game-changing innovations into full-fledged businesses. HP did this with the invention of the ink jet printer in the 1980s. It set up an autonomous subsidiary in Vancouver, Washington, far removed from the influence of corporate headquarters in Palo Alto, California. Initially, the ink jet printer market was small and limited; over time, the company turned it into a significant business.

Small is Beautiful

I worked as a product manager at a small company that manufactured food-processing machinery for the beverage industry. New product development was the key to its success. In 1980, a large conglomerate acquired it. Within 7 years, innovation, the life-blood of the firm, dried up, and the conglomerate sold off the business.

When it comes to winning the new product development race, small entrepreneurial-driven firms will usually beat the behemoth corporation, especially when dealing with disruptive technologies.

The Presidentof Toyota–Akio Toyoda–yesterday suggested that the company’s current quality problems stem from an excessive focus on gaining market share and increasing profits (WSJ). This is ironical, given that increasing market share and reducing costs (thereby increasing profits) has always been a goal of Toyota. In fact, this has been a dominant strategy of Japan, Inc. for quite some time. A brief review of history will be instructive.

Having been devastated by the effects of WWII, Japan Inc. embarked upon a mission to grow market share globally. As a result, in the 1950’s inexpensive products–for example, “cheap” transistor radios– flooded US retail stores. Japan, Inc.’s strategy was to grow market share by producing low cost products. However, due to the inferior quality of products that were being produced at the time, Japan, Inc.’s expansionist aspirations hit a brick wall. The “cheap” transistor radios became the butt of comedians’ jokes.

So, the country in general—and Toyota in particular—regrouped. Producing products right the first time actually lowers costs, in effect, better quality results in lower costs. Quality, then, became the means to lower costs, which in turn results in greater market share.

A Lexus 2-seater Sports Car from Toyota

The Japanese Scientists and Engineers (JUCE) disseminated twenty tools of quality in the 1960’s and 1970’s. These tools became part of a complete philosophy of management known as Total Quality Management (TQM). TQM is Japan’s significant contribution to the philosophy of management.

An executive at Toyota, Taiichi Ohno, further refined  the TQM philosophy into The Toyota Production System. Using this system, Toyota produced automobiles that were second-to-none in terms of quality and cost. It is what made brand-Toyota synonymous with quality. It is the means by which Toyota surpassed GM in market share in 2008.

Violating the tenets of TQM and the Toyota Production System  caused Toyota’s quality problems.  Ako Toyoda’s comments yesterday about the evils of gaining market share made for good public relations; but they did little in furthering our understanding of the real reasons that led to the Fall of the Toyota brand.