Robert Paterson's Radio Weblog
What is really going on beneath the surface? What is the nature of the bifurcation that is unfolding? That's what interests me.

OODA and Business (Chester Richards on Boyd)

Here's a Hint: The Tigers Are The Ones With Claws

The company that can identify what technologies are needed, introduce them quickly, and commercialize them will succeed.

Hiroshi Okuda, President, Toyota Motor Corporation (Business Week, June 15, 1998)

Ask any CEO, "Is your business philosophy reactive?" It's like asking if his marketing plan is to wait by the phone. Even the French of 1940, that wonderful source of what-to-avoid examples, liked to brag about how their élan would sweep away the Teutonic invaders. Of course, as they were soon to learn, talking a good fight was not the same thing as actually doing it. And so it is with the world of business. Policies are one thing, but companies that have the power to shape the market are structurally, as well as philosophically, different. Note 7 Stalk had noted this in his analysis of the H-Y War, where Honda could generate faster OODA speeds because it had instituted structural changes, for the most part simplifications, beforehand. Structure is so intimately bound up with strategy that it is difficult to imagine how one could make any lasting change in an organization's behavior without first making equally profound changes in its systems. To illustrate, let's look at two areas, interaction with the customer and innovation, where there is great temptation to promote change not by really changing anything, but simply by ordering the troops to "Get to know the customer!" and "Come up with some great new ideas!"

Predatory Eyes on the Customer

At the highest level of business strategy, meeting the needs of the customer should provide focus and direction to all activities of the company. Note 8 It is in this key area where we find perhaps the most visible differences between companies that claim to be proactive, and those that actually are. Reactive companies want to detect market opportunities. They engage in traditional market research, things like questionnaires, focus groups, and the like. Basic to their attitude is the idea that the customer is "out there" and we are "in here." To bridge this gap, they will put a lot of effort into going out to Customer Land and "finding out what they want."

One problem with this approach, of course, is that the customer often doesn't know. As marketing executive and author Alan Magrath points out, who in 1976 thought they needed a personal computer? In fact, few people did need the machines that were available back then. Anybody remember MITS? But along came Apple and the customer started to respond, then the IBM PC, laptops and notebooks, the Mac, Windows, and so on, to where today hundreds of thousands of these things are sold every month. (Hamel and Prahalad, "Imagination" 85; McGrath 47) With growth in PC sales beginning to level off, the big question now is "What next?"  I don't know - offer me something.

To get fast enough to lead the market, companies have had to, in the words of consultant Mack Hannan, "marry the customer." (77) This phrase certainly has the potential to sink into cliché, if not nausea, but whereas we all claim to put the customer first, the very structure of most companies limits how intimately involved with the customer they can become. One obvious example is a Marketing Department that jealously controls customer contact. Or a policy of basing sales and project people in a home office rather than with their customers. Or an accounting system that sees customer service as a cost, that is, an attractive candidate for cutbacks when times get tough.

Tom Peters' 1992 follow-on to Thriving on Chaos, the 800-and-something page Liberation Management, carries this thesis to its ultimate conclusion: Most of today's management systems and practices preclude the intensity of customer involvement that companies will need in order to survive. Therefore they must be eliminated. What's left is variously known as an "enterprise web" (Reich) or "virtual corporation." (William M. Davidow and Michael S. Malone, cited in Byrne, "Futurists" 41) The idea is that if hierarchies and bureaucracies aren't there, they can't slow things down or choke off initiative.

This is a radical prescription for most enterprises, and shifting to such a structure will be difficult, if not impossible for them. The reason is not lack of intelligence or even will, but the collective and understandable reluctance of managers to dismantle the system that has worked for them and their companies in the past. The amazing thing is that it has been done. At highly agile Nike, for example, which owns roughly one-third of the US sports shoe market, The Economist observes that "barriers between the firm, its customers, and its suppliers have almost disappeared." ("Networks") Interested readers will find pages (chapters) of examples in Peters' book. Just going virtual, however, does not guarantee that you will become a proactive market shaper: To explain the driving forces behind the new concept, for example, Business Week's cover story began with "Big companies can't react fast enough." (Byrne, Brandt, and Port)

Innovation and Initiative

If we stop innovating and stop bringing new electronic devices to the market, we'll die. We'll become just an ordinary, plain-vanilla company—Sony Executive. (Hamilton and Landro A1)

Another frequently mentioned attribute of a market-shaping company is its obsession with innovation. It should be obvious that to move the market in a new direction, you have to offer the customer a product or level of service or something that isn't there today. We noted in Section II that companies with rapid decision cycles are often good innovators. Partly this is because most innovations are actually incremental improvements on an original idea, what Hamel and Prahalad call "expeditionary marketing." ("Imagination" 86-92) The more rapidly that a company can sense how the customer reacted to its last offering and make changes accordingly, the better job of innovation it will do. Note 9 This was the core of Honda's strategy in the H-Y War.

This is fine, but does not disturb a reactive mindset. A more powerful reason that innovation is related to market shaping goes back to the military idea of the initiative. Companies take the initiative in the marketplace by offering a stream of new products and services. Where do new products and services come from? The only answer possible, discounting elves and gamma rays, is through the initiative of the people who work for and with the organization. A market creator uses the almost symbiotic relationship all of its people have with its customers to generate ideas for new features or capabilities or whatever. Stalk and Hout were dead on, when in the middle of describing how agile companies become entwined with their customers, they observed that "Sometimes it's difficult to know who's leading whom." (Stalk and Hout 264)

Incidentally, this is the same principle underlying maneuver warfare, where an army puts out tens or hundreds of small "feelers," then uses its fast OODA loop speed to identify and reinforce those that begin to penetrate. This remarkably successful concept has been used to great effect by such leaders as Erwin Rommel, George S. Patton, Vo Nguyen Giap, Moshe Dyan, and Norman Schwartzkopf. In industry we have 3M, which encourages its people to spend 15% of their time working on ideas outside their formal projects, and measures its managers against a formal goal of deriving 25% of sales from products less than five years old. (Jacobson 39). And one of the world's other premier innovators, Sony, holds "science fairs," where people with ideas for new products can show them off to top management. (Schendler) 

On the manufacturing side, "lean production," which is based on these same principles (and can therefore be considered as an implementation of the principles of maneuver warfare), has displaced mass production, which relies on synchronization and control, in every marketplace where the two compete. As of late 2002, lean producer Dell is the number one US PC manufacturer, Southwest Airlines is profitable while old warhorses like Delta, American, and United are losing billions, and Toyota is the world's most profitable car company as GM, Ford, and DiamlerChrysler continue to founder. Note 10  (Womack & Jones) 

Toyota, whose system is generally considered the foundation of lean production, expects initiative at all levels and in all processes.  Even on the factory floora "shut up and do it my way" purgatory in many companiesToyota puts the responsibility on employees for establishing such fundamental practices as standard work procedures. "The paperwork is minimal," reads the official Toyota description of the system, "the efficiency is maximal.  And the employees themselves are completely in charge." (Toyota, 29) In addition to establishing procedures and operating the famous kanban system for just-in-time production, shop floor employees give Toyota some 35 suggestions per capita per year for improving the operation. (Peters, Thriving 72) The typical US manufacturer would be lucky to get one, and you don't have to look far to find the reason—hierarchies are set up to "control" employees, not, as one of the fathers of modern maneuver warfare doctrine put it, to "unleash them" on their competition. (Wyly 18)

The Illusion of Defense

Still, the company hasn't come up with any blockbuster innovations as of late, long an HP hallmark ... Instead, current and former executives say that HP has become so focused on protecting its existing businesses that it has taken its eye off the critical job of creating tomorrow's new markets. (Burrows, 17)

Unfortunately for US competitiveness, initiative is often honored but not practiced. Far too many companies demonstrate the fatal flaw noted by Sybase co-founder Robert Epstein: An established company's true major goal is to defend what it did last year. (Deutschman 84; Hamal and Prahalad, "Imagine" 83) No company, of course, admits to such a philosophy, but you can usually detect a reactive mindset. For example, when you read their annual reports or listen to statements by top management, you might find such phrases as "barriers-to-entry" and "core competencies." Note 11 These are business versions of the Maginot Line.

Now remember the key fact, that the Maginot Line did what it was designed to do: It kept the Germans out of that part of France. However, France lost the war anyway, in large part because top French military leaders did not develop a doctrine of maneuver warfare, and failed to promote officers like DeGaulle who did. They did not understand the need—they had the Maginot Line. As strategist Basil Liddell Hart pointed out, the Maginot Line permitted, and the enormous expense of its construction virtually required, that the French retain the trench-warfare staff culture and procedures that shattered when hit by the Blitzkrieg. (Liddell Hart 131-132)

The same thing can happen to a company. Until very recently, for example, size was thought to be a barrier from attack. Large companies could get away with being "fast followers": They had deep financial pockets, extensive R&D efforts, and predatory legal staffs and so could duplicate the offerings of upstart competitors at lower costs or tie them up in a costly court battles. (Hamel and Pralahad, "Imagination" 86) Looked at individually, these are formidable weapons, but taken as a whole, they spawn a mentality that eventually destroys their own wielders:

Protected initially by its sheer size, GM was slower than Ford and Chrysler to react to the assault mounted by the Japanese. (Dickson 21) Note 12

One might at this stage glance back over the advantages the allies had at the start of the blitzkrieg. Taken together, they locked the allied leaders into outmoded patterns of thinking about war. On May 19th, for example, Churchill proclaimed that there was no way the combined army of three or four million men could be defeated by what he termed a "raid of mechanized vehicles."  The next day, the panzers reached the coast and the French who had survived, which was most of them, in a vast pocket to the north of the German thrust, had no choice but surrender.

The Maginot Line mentality is deadly and yet it is so appealing that it may not be recognized until it has sapped the company's competitive strengths. Consider, for example, what can arise when a company bases its strategy around the things it does the best—its "core competencies." Ideally, according to Hamal and Pralahad, these should be things the competition will find difficult to emulate. It's a comforting thought, a profitable meal ticket for consultants, and proclaimed by Business Week as the secret to survival in lean times. ("They Came") But while it is certainly true that at any given point in time a company has to do the best with what it has, this is the definition of "tactics," not strategy.  Basing a company's future on any particular resource is a business version of a stance, and so a false and fatal strategy.

Perhaps the most obvious objection to a core competencies strategy is that the market might not happen to be buying what you're good at.  In the 1970s and '80s, DEC grew fat on minicomputers, because it made an outstanding product and understood the customer for minis very well. As the number 2 computer company, it must have felt that it was too competentand too bigto fail.  Unfortunately, it lost $2.8 billion in 1992 alone as the overall market accelerated a move to a different set of customers, for PCs and workstations. (Madigan 48, Verity 36)  By 1998, it had become a division of Compaq and then disappeared entirely when Compaq was swallowed by HP. Note 13.

The lure of technology or some other internal "competence" as the source of fundamental competitive advantage is strong, even among observers who know better. Wal-Mart's ability to gather and process sales information so impressed Peter Drucker, for example, that he proclaimed it to be the bedrock of that company's success. (8) Actually, members of the late Sam Walton's family still occupy top spots on Forbes' richest list because the people in their stores greet you at the door, the places are clean and modern, they carry what their customers want, and you have a hard time beating the prices. Unarguably, computers and communication systems helped, and Wal-Mart was a pioneer. But these information systems today are all the results of Wal-Mart's highly agile management system operating over many years. Grafting any one of them, including the automated inventory and ordering processes, onto Sears or K-Mart is not going to change the bureaucratic mindsets that caused them to fall behind Wal-Mart in the first place. It is worth keeping in mind that Wal-Mart is a market shaper and creator, not merely a market responder, and thus agility—rather than the specific products of it—is its "core competence." Note 14

Suppose that you define "competence" not as a specific technology or mastery of an internal process, but as high up the strategic chain as possible, something like knowledge of the customer. Unfortunately the same dangers lurk: a belief that you have any type of unique capability is the siren song of complacency. In fact, a belief that you have some kind of difficult-to-emulate ability to know the customer is simply arrogance, which is even a faster-acting poison than mere complacency, and this tends to be true of all high-level business (as opposed to technical or physical) functions. You must assume that your competitors are just as good at the business basics as you are, and you would be better served to assume they are already ahead.

Former Intel CEO Andy Grove was right: Only the paranoid do survive. It is so tempting to believe that "we have these facilities" or "we have these great capabilities", and therefore we are safe.  You are never safe, and the first hint of a belief that you are safe marks the start of your decline. Only a management that can constantly challenge comforting beliefs, even if they are unstated, will lead its company to survive and grow year after year.  Remember when Enron used to proclaim itself "The World's Best Company"?

Reality Eventually Wins

According to the ancient warriors of the Sun Tzu school, the real situation is even worse than complacency-invites-decline.  That, at least, is well within our own tradition.  Musashi proclaimed that any manifestation of the stance mentality, even if assumed with vigilance and paranoia, will always generate a defensive spirit and so will open vulnerabilities. One might do better to emulate the Zen warriors who knew that the only resource that will ensure victory is resourcefulness itself. (Cleary, Japanese Art of War, 77)

So the bottom line is yes, you can prosper by restructuring your operations to become a fast reactor to market trends. You may have to prune things some, which it's probably time for anyway, but you won't need to do great violence to your underlying systems and culture. And everything will probably work out OK, unless, of course, you meet up with a competitor who is determined to shape the market and who is structurally able to do so. Then 2,500 years of experience say that you are going to have a problem. And word is getting out. "Boldness," writes Fortune's Rahul Jacob, "may very well be the preeminent competitive advantage in this slow growth decade." (74) After all, whom would you bet on, a fast sheep or a fast tiger?



© Copyright 2003 Robert Paterson. Click here to send an email to the editor of this weblog.
Last update: 08/02/2003; 2:47:14 PM.