Grasping at “Big” Straws
Double Down on What Used to Work
Imagine a sailing ship company faced within increasing steam ship competition in the late 19th century. What steps should the company take to succeed? One solution would be to adopt the advanced steam technology and use it to increase speed and reliability of ships crossing the seven seas. Another approach would be to conduct additional research and invest in tooling to improve sails, sail placement, and hull shapes to ramp up the speed of ocean-going sailing ships. It is obvious in hindsight that the sailing-ship advancement strategy would be doomed to failure considering available new technology. While this may be true, the “doubling down on what used to work” strategy remains alive and well today.
One example of such “doubling down” involves an entire industry. In the 1980s and early 1990s, small “mom and pop” answering services and paging services were gobbled up by large investors. This activity was driven by the advent of digital paging protocols that could transform a single channel with several hundred paging subscribers to a cash cow with well over 100,000 subscribers. Small paging companies morphed into regional and nationwide paging companies. Millions of subscribers in this period encountered the wonder of typing in a number on a pay phone and have someone’s beeper go off and display a number on the other side of the country. In the telecommunications environment of the 1980s and early 1990s, no wireless telecommunication service could beat the battery life, the coverage, and the efficiency of digital pagers. During this period, cellular phones were gradually shifting from analog to digital protocols. They remained expensive in terms of purchase price and monthly fees. Battery life was such that cellular phones required daily charging—for those that did use batteries rather than permanently plug into a vehicle. Pager battery life by way of contrast typically lasted approximately 1 month. Few envisioned that the cellphone industry would soon catch up and surpass what paging services could provide. However, the growth of digital cellular that included text messaging and nationwide roaming began to drive a shift in the preferences of wireless consumers. In retrospect, the mid-1990s should have signaled the beginning of the end of paging and the rise of cellular. However, instead of shifts to new technologies, many companies seemed determined to double down on what previously worked. One wireless infrastructure purchased a device company to deepen their presence in the paging industry. Others who served both the paging and the cellular industry saw a bright future in paging and continued to insist that the role of the cellular phone would remain limited. It was common to hear statements such as “people will never do Web browsing on a mobile device” and “the killer application for the cellphone beyond voice is messaging” expressing the firm belief that the success of the cellular phone was contingent upon it adopting and reinforcing those features that made paging successful. Many players in the paging industry lined up to purchase frequencies from the FCC to offer a new service referred to as “Narrowband Personal Communications Services” or NPCS. The umbrella term “NPCS” referred to the offering of two-way paging services with somewhat higher transmission speeds. Two-way paging used receivers in the field as well as transmitters. The “return channel” required for two-way operation provided the capability for pagers to respond to messages, but at the cost of a higher monthly bill and significantly reduced battery life. At the same time, cellular phones, products that offered similar but more powerful features, began to offer significantly improved size, weight, coverage, and battery life. Ultimately, paging was replaced by the far more capable digital cellular services, and two-way paging never got off the ground despite hundreds of millions of investment dollars. It seems that history repeats itself, and once again, sailing ship manufacturers continued to envision a world in which steamships could never compete (Figure 7.1).
Figure 7.1 Doubling down
The act of “doubling down” can occur at a smaller scale at the product level. Japanese companies, for example, are known for their expertise at making small and lightweight hardware. However, they were beaten to the world “smaller and lighter” cellular phone market with the launch of the Motorola RAZR phone. Recall that Japanese companies tend to develop products from the bottom up using their own in-house components. Consider a real-life conversation between a Japanese executive and an executive from a major global wireless operator discussing the benefits of Motorola’s RAZR phone.
Wireless Operator Executive: “We love the RAZR phone. It is small, lightweight, and customers love it.”
Japanese Executive: “We will soon have our own small and thin product.”
Wireless Operator Executive: “Well—that’s good! But we already have one now.”
Japanese Executive: “Yes, but ours will be better. (The executive holds of a poster that features an array of tiny components.) Notice how Motorola “cheated.” They made their phone smaller by changing the orientation of the battery—making the phone a bit wider than it should be. Our new phone will feature all in-house developed small components!”
Wireless Operator Executive: “So what?”
The “doubling down” phenomena in this case is to respond to global change in the product market by making small components in-house. After all, it worked in the era of the Walkman and miniaturized transistor radios and TVs. This must be the time to “double down.” On an even smaller scale, “doubling down on what used to work” occurs frequently at the organizational and operational levels. Some examples observed over time include:
- “Let’s promote from within—it worked great last time we did it.”
- “Let’s bring in someone from outside—it worked great last time we did it.”
- Insisting on design rules in new product development that favored a functional area that was once the dominant player in the organization.
An actual example of enforcing legacy design rules involves a factory that will approve the transfer of a design to the factory so long as specific design rules are followed. Naturally it could be expected that the design rules would benefit the factory and help them achieve improved yields and consistently meet specifications. But, what if such design rules required the use of components that could not be serviced in the field, and that the current business model required field service to be carried out for the company to be profitable? Insisting on the adoption of such design rules paid dividends in the past, but will doubling down and doing it again still make sense during a time when the company is shifting to a services-intensive business model?
To Double Down or Not?
Jim Collins in “Good to Great” refers to the “flywheel effect” as an important factor contributing to the success of the business. The flywheel effect describes how a company “sticks to their knitting” and keeps plugging away at doing what they do best until the profitability and efficiency of the company takes flight and produces results exponentially better with runaway success. It would appear the Jim Collins suggests that “doubling down” is the path to success. However, it is observed in many cases that it is not. How then should change managers think about this principle when reflecting on “doing what worked before” rather than “doing something new”? Perhaps it is preferred to avoid narrowly defining what was previously done. In the wireless communications example, perhaps the public was willing to purchase simple and cost-effective products and services when alternatives were lacking. In the case of the demise of the sailing ship as well as the paging industry, perhaps it was not “sailing ship passage” or “paging services” that clients were purchasing, but rather “oceanic transportation” and “wireless communication services.” Conceptualizing a wider view of what was done in the past may lead to a successful “doubling down” of the principle of what was once executed, rather than the specific product or service.
Pointers for how to fail:
- Do what you know how to do rather than what the market requires you to do.
- Do exactly what you previously did that worked in another time and context, but this time only harder.
- Narrowly define what it is that your company does to limit opportunities to evolve.
- Fail to grasp the current means for attaining a competitive advantage in the marketplace.
GOBASH
A common saying that arose in the 1990s was “Go big or stay home,” leading to the acronym GOBASH. The idea expressed in this statement was that if a company were to be successful, it must be “all in.” It must ramp-up and scale-up or be left behind. This thinking was perhaps natural during the period characterized by both the telecom boom and the “dot-com bubble.” However, it did lead to companies looking ahead to see a future through rose-colored glasses. This was a future with nothing but expansion, and therefore companies needed to get ready for it or risk falling behind. This thinking led to change initiatives in many companies that were focused exclusively on the expansion of capacity. One such company involved a multioperation organization that was built from several acquisitions. Two of the sites included manufacturing of different products with each manufacturing operation, each managed by separate and different business systems. The different business systems featured different processes, and the process differences for placing orders, scheduling manufacturing, and ordering material were seen to be a limiting factor given the expected increased growth in the business. The process difference between the two manufacturing facilities caused additional bottlenecks in getting the product out the door. This was because clients typically purchased products from both factories and then integrated and installed them on site. Furthermore, orders placed for both facilities were taken at a third operation thereby complicating the job of order entry. It was therefore decided in the spirit of GOBASH to replace the different systems with a single enterprise resource planning (ERP) system that would provide consistent processes between the two factories as well as the order entry operation. The projected multimillion-dollar 18-month implementation project was considered a worthy investment because it paved the way for the company to deliver according to the expected increased market demand. To add to this investment, the company considered it prudent to expand development capacity and therefore broke ground on a $20 million new facility near one of the manufacturing sites. Did “going big” pay off? The multiyear ERP implementation began as the industry peaked and, once implemented, 2 years later provided a platform to support manufacturing and sales of less than half the original volume of product. The expected volume never materialized. To make matters worse, each operation sought to make the new system function similar to the legacy system when the new system was implemented. The new, advanced, and sophisticated ERP system functioned somewhat differently in each operation and operated very similarly to the old system. Had the market grown instead of collapsing, the limitations of the legacy systems would still remain. The new system would likely have acted as more of a bottleneck than the legacy system since employees at each operation would employ their own “workarounds” to make the new system function like the old one. The ERP investment to support capacity expansion was never needed and the money wasted. The new building was soon to follow as the operation remained in the old facility and sold off the new one (Figure 7.2).
Figure 7.2 GOBASH with ERP
It may also be tempting to “count one’s chickens before they hatch” when everyone else is counting theirs. One significant constraint on capacity to deliver in the dot-com boom was software development capability. Many high-tech companies sought software development resources in India, China, Eastern Europe, and anywhere in the world where software skills could be tapped. The rush was on to gobble up software resources. One common tactic in this war for skill sets was to drop recruiters into companies that were closing and laying off staff. One large company with a telecommunications division observed this happening several times but was late to the software skill acquisition game. A company in Canada with significant software expertise announced layoffs and the telecommunications division saw a chance to catch up at last. The company hired 50 people and set up a software development center. The company continued to hire and acquired a new larger building to house the developers in preparation for developing the software that would power the next generation of product. While this was happening, sales of the most profitable product line began to decline. Concerns about the cost of continuing to try to advance market share within the global market were raised at
the CEO level. What was the result? After finally getting a change to acquire an additional software team and develop it into a center of excellence, the declining market prospects forced management to take a hard look at the
business with the goal in mind of changing course. Within 6 months,
the brand-new software operation was shut down. Change that is proposed to address imagined future growth is a gamble. Winners of this gamble are heroes, likely because there are so few of them.
Pointers for how to fail:
- Overestimate future sales growth.
- Assume that a market that is growing today will continue to grow tomorrow.
- Go big with major fixed cost investments because others are doing it.
- Assume that an ERP system implementation will save the company.
Betting the Company on the Big Idea
A CEO from a major client visits the home country of a major manufacturer with significant operations in the United States. During this visit, the CEO observes a unique product that does not exist in the United States. The client CEO is intrigued by the product and upon returning home presents a vision to the board of directors of how this product can transform the company. The board agrees and the CEO calls for a meeting with the CEO of the sales, marketing, and manufacturing operations in the United States. After extensive discussions and negotiations between the client company, the CEO of the parent company agrees to develop a version of the product for the United States. The client ramps up a marketing campaign, customer training programs and materials, inventory capacity, and distribution capability for the new product. The manufacturer ramps up purchasing and increases component inventory and manufacturing capacity to meet the contractual requirement of 5,000 units per month for the first year. The U.S.-based operation of the manufacturer sets up alliances and partnerships to source local components and product support. It is “all systems go” for transformation upon the introduction of “the big idea.” After the first two shipments of the new product, the manufacturer is hungry for news of the “sell-through” of the product from the client to end users. The client company is very quiet. Eventually, the manufacturer receives formal communication requesting that all future shipments of the new product be cancelled. Unfortunately, a large percentage of the products were already made and in inventory, while the shipments for the next 2 months were already in transit and required to be redirected. What happened? It seems that there was a reason why the product was successful outside of the United States, but not inside. The use case for the product was completely different. This understanding did not become clear until the first few weeks of sales as well as significant returns (Figure 7.3).
Figure 7.3 The big idea
Countries outside the United States are not the only source of big ideas. Big ideas guaranteed to save the company often originate inside companies and require an internal champion to garner support for the idea. When a big idea reaches a critical mass of support, market studies are certain to follow. Skeptics of the new idea may be persuaded upon review of data from focus groups that signal the need for the new product in the market as well as the client willingness to buy. Such focus group data include videos of product demonstrations along with client reactions. Further, the positive product data can reach inches think reams of reports ready for senior management and marketing executive review. The big idea is adopted as a focus for change and transformation of the company. Significant investment follows and the product is launched accompanied with great fanfare. Then, nothing happens. The product fails and the company retrenches and is eventually acquired at a small fraction of its original valuation. What went wrong? It is one thing to have a member of a focus group offer a favorable response to a product and state that the product would be purchased at the price proposed by the focus group facilitators. It is quite another thing to have actual people in real life decide that a product has value, is worth purchasing, and results in customers taking money out of a wallet and making a purchase.
Finally, big ideas in change initiatives are not limited to product ideas. They can involve ideas for how an organization should be structured, how the workspace of all employees should be organized, or any other policy or process ideas that are in fact the pet big ideas of a senior executive who finally arrived at a position where he or she is able to pursue it. Such instances of big ideas are often promoted with the deeply seated belief that “if we only did _______, we would transform the company!” The challenge of this category of big idea is that they tend to only be “big” from the point of view of those promoting them. Some examples include:
- “We need to get rid of cubicles and create an open office environment to facilitate communication between functions!”
- “Going forward, all managers leading [fill in blanks] will be required to be certified in [fill in blanks].”
- New dress codes that may or may not include ties, sports coats, jeans, no jeans, casual Fridays, Hawaiian Wednesdays, to name but a few possibilities.
- We will reinvigorate the structure of the organization by (select all that apply):
- Removing levels of management
- Adding levels of management
- Implementing cross-functional teams
- Initiating a telecommuting program
- Cancelling a previously promoted telecommuting program
- We will institute forward-looking titles for each position (e.g., chief culture officer) and insist that everyone refer to each other by their first names only.
While it is good for executives to be passionate about change and fine-tuning of the organization, one person’s big idea can be another’s wrong turn. It pays for executives to remember that their ideas are not special. In fact, because executives and change agents enjoy positions of power by which they can impress their ideas upon, an organization requires that such leaders pay special attention to the vetting of big ideas by a management team who has the freedom to speak up. A leadership team who “shoots down” a bad big idea has provided a service for the executive. Further, tacit agreement or positive feedback about an idea that is bad makes it no less bad. Employees who fail to speak out about a bad idea leave the room with the negative impressions swimming around and festering in their heads. A skilled change manager will encourage employees to get those concerns out on the table in hopes of together developing a better, more practical, or perhaps smaller idea.
- Readily introduce popular foreign products who use case is not fully understood.
- Believe the following: “Runaway successes in other countries will lead to success, change, and transformation if introduced in a different country.”
- Trust rosy forecasts for the new product and prepare accordingly.
- Uncritically accept focus group data on proposed new products.
- Implement that pet “big idea” as soon as the opportunity presents itself.
The Savior from the Outside
Imagine the first day on the job of a new CEO brought in to save the company. There is a mixture of uneasiness as well as excitement. Those at
the top of the hierarchy are naturally nervous. Those at the bottom are hopeful that things will get better. Within 30 days, several key people are fired. Within 60 days, a retinue of friends of the CEO from the last place that they all worked join the company. Within 90 days, most employees shake their heads and sigh when they hear a meeting begin with “… well this is the way WE did it.” It becomes obvious at this point that members of the CEO’s new team are “in,” while the legacy staff are “out.” Key people begin to leave and are snapped up by competitors where they are more appreciated. The savior from the outside brings in many fresh ideas, but most are not achievable given the constraints presented by the new industry, which, in fact, the new CEO knows little about. There are some bright spots in the tenure of the new executive. Several new products are launched to the marketplace that are followed by strong sales. Many press releases and press conferences follow with the CEO taking full credit for the recent successes. The new CEO of course fails to mention that the new products were initiated under the guidance of the former CEO. Eventually, the sales of the new products taper off and few truly new products’ ideas and launches are forthcoming. All the “new” products that enjoy some success are updates to previous product lines. Those products that are new and the brainchild of the new CEO seem out of context for the industry and are not accepted by the market. The new CEO naturally prepared for the rosiest of market scenarios and therefore created a substantial inventory and addition fixed capacity cost problem. The board of directors after 2 years become frustrated with the new CEO, and the CEO’s contract, which includes a large “golden parachute,” is terminated. A legacy team member who was formerly in charge of engineering and manufacturing operations is promoted and the company is steered back to the right path. The former CEO (and his “retinue”) yet again moves to a different industry and provides several public interviews about how the company from which he just “resigned” lacked creativity and was not sufficiently advanced so that his vision could be fully realized. So ends a typical tale of initiating change by bringing in the “savior from the outside” (Figure 7.4).
Figure 7.4 The savior from the outside
It is said that the most risk of product launches are when companies attempt to launch new products into new markets. The reason for this is obvious—many unknowns exists about both the product to be delivered and the market into which it is delivered. Something similar could be said about bringing in a “savior” with a background that seems sufficiently like that of the market and culture of the new company, but in fact is very different. Although a company may bring in such an executive to seed the organization with new ideas, the new ideas may be bad ideas. For example, consider a company that manufactures wireless electronic telecommunications devices sold to end users. Such a company may reach out to an executive who formerly led a consumer electronics division of another company, but not a wireless device company. A prospective “savior” may be alternatively sourced from a wireless telecommunications company that manufacturer infrastructure rather than wireless consumer devices. What are the risks associated with changing a company by bringing in apparently similar yet very different executives? For starters, consumer electronics such as TVs and consumer audio are quite different in complexity from a wireless device such as a cellular phone. The level of interaction of a cellular phone customer with the device, the layers of software and middleware, and the multiple connectivity options make smartphones orders of magnitude higher in software and systems development complexity than an apparently related (yet unrelated) product such as a TV, computer, or consumer audio device. As an example of complexity, each keystroke on a smartphone engages multiple layers of software, multiple processors, and a radio channel connected from the phone to a nearby cellular antenna and switch. The challenge with such devices is that they are produced in quantities of millions, they cannot be easily upgraded, and are under intense cost pressure. Consumer electronics experiences price pressure but much simpler to develop and maintain. Wireless telecommunications infrastructure, by way of contrast, faces much less cost pressure, is less complex overall compared to smartphone development, and finally is easily upgraded and maintained. An executive moving from an infrastructure manufacturer may have little experience in intensive cost management. In addition, an infrastructure executive likely never experienced the pressure of recalling thousands of products in the field that could not be upgraded. Finally, a consumer electronics executive moving to a developer and manufacturer of smartphones may never have had to grapple with a $100 million development budget for a product that required 2 years to develop. Bringing in a savior who apparently knows the business well may end up being an executive who knows little about the nuts and bolts of the business he or she is being asked to manage. This may be an obvious point when considering executives from clearly unrelated industries, but may also be a sleeping factor with outside executives who are an apparent good fit—but are not at all.
Companies in need of a turnaround may be attracted to executives who were successful in unrelated businesses. It is natural for a company to hear about the success and consequently may seek to recruit one such executive to reenergize the company with some new ideas. Unlike an executive who originates from an apparently similar, yet quite different operation, an executive from an unrelated business will bring not only fresh ideas to the company but high risk as well.
Pointers for how to fail:
- Assume that the expertise of the outsider is a good fit.
- Believe that the outsider understands the company.
- Accept what the outsider tells you at face value during the recruiting process.
- Be attracted to the unfamiliar.
Successful Growth and Change by M&A
It is difficult to grow a business. It requires effort, focus, attention to detail, knowledge of the industry and customers, and finally a deep intuitive understanding of how to attain and maintain a competitive advantage. Not every leader can lead a business to successful growth and profitability, even when they are brought in for this express purpose. There are no shortcuts to business success. However, there is an apparent shortcut to dramatically increasing the revenue of the business, and this is through the acquisition of another company. The idea is instead of organically growing the business and its revenues, creating a step-function increase in revenues overnight by acquiring a major competitor. Like many failed change management approaches, acquisition-based revenue growth is a shortcut to success. Because it can be exciting and tempting, this change strategy is often undertaken. Unfortunately, the results of “change by M&A” prove illusory.
One such example involves a telecommunications infrastructure manufacturer holding approximately 80 percent market share within a niche market. Sales had slowed from peak growth in this market thereby making the fight to hold on to and possibly grow the business more frenetic. Increasingly, customers in this market made the safe choice and used the dominant manufacturer for the reduced remaining infrastructure needs. The business conditions made it difficult for the manufacturer holding the second-place position in the market. As sales declined for the second-place manufacturer, the argument for research and development investment for the next generation of products grew weaker. The company elected to instead “throw in the towel” and reached out to the first-place competitor to begin negotiations to be acquired. This gesture was viewed as a fantastic opportunity to significantly grow the company and its revenues. Further, it sent the message to the telecommunications world that a tough competitor had been defeated. The prospect of a quick turnaround in an otherwise slowing market was celebrated by senior management. The celebration was premature (Figure 7.5).
Figure 7.5 Acquiring a competitor
As it often happens in acquisitions, the expected increased revenues in this acquisition failed to materialize. There are many reasons for why this happens, but most of these reasons materialized in the telecommunication acquisition example. To begin with, most of the clients of the number one supplier appreciated having a second vendor in place for competitive reasons. Two significant vendors were observed to “battle it out” in the marketplace when it came to price as well as innovation. When this was replaced with a near-monopoly situation, customers naturally became concerned and began to seek out current vendors playing on the periphery of the market to build them up to be worthy vendors competing for business. Some customers also began to consider forms of vertical integration by attempting to piece together infrastructure with off-the-shelf components and in-house software. The net result was a reduction from expected additional acquisition-related sales.
A second intended goal of acquisition is cost reduction. When two competitors become a single company, factories and research and development may be consolidated. There are complications, however, that naturally arise in such consolidation. The acquired competitor is likely to employ different technologies and architecture in their products making it essential to retain key knowledgeable personnel. Also, the consolidation of factories naturally requires retooling, and this takes time and effort. Finally, one way to reduce cost is to eliminate products that once competed head-to-head with the acquiring company. While this is desirable for cost reduction purposes, it may not be desirable for customers who hold a large installed base of products from the acquired company. The ongoing repair, maintenance, and upgrades required by the customers with an installed base of equipment also require that a level of development, manufacturing, and technical support capability be retained. The anticipated cost reduction is not achieved within a short-term time horizon. Instead, costs increases are incurred for plant consolidation, manufacturing transfer, retention of key people, and finally termination of employees along with the closure of competitor operations.
The attempt to change the company through an acquisition in this case failed. The market continued to decline, the expected increases in sales did not happen as planned, and cost increased rather than decreased. Further, the exit of a major competitor in the business was viewed by customers as well as the investment community as a signal of industry decline. This was reinforced by the competitor who sold the business to the market share leader. The proceeds of the sale and the key people who remained in the company were shifted to newer and more forward-looking technology. The market leader left with serving a declining market was saddled with additional work as well as cost and was forced to focus its energies on a market quickly becoming obsolete. The apparent loser in the market went on to bigger and better things, while the acquiring company slid into oblivion as the market collapsed.
Growth by acquisition is also targeted by companies who seek to grow by acquiring organizations that do not compete directly, yet if acquired, could add additional geographical coverage to the company. Telecommunications companies, after the divestiture of the Bell System in 1982, created several regional operators referred to as the “Baby Bells.” Over the next 20 years as competing technologies evolved with the explosion of the Internet and wireless technologies, regional companies gradually began to merge with others as well as acquire other telecommunications service providers in other geographical areas. The addition of new coverage areas offered irresistible opportunities to grow revenue overnight and reduce costs where possible through consolidation. While such acquisitions did lead to additional revenue, the opportunity for cost reduction through consolidation proved more difficult than anticipated. The long history of the Bell Companies in the regions created insular cultures that were difficult to integrate. Each had unique processes and sought to influence the acquiring company by taking the lead on initiatives and processes that were implemented far outside of the original regional territory of the company. In the end, the attempt to change the company by acquiring what amounted to a step-function growth of revenue and territory enjoyed mixed results. The new company that resulted, instead of a larger company that was changed for the better, became a collection of “warring tribes.”
Pointers for how to fail:
- Acquire a major competitor during the final stages of market decline.
- Assume that customer buying patterns will not change in the absence of multiple competitors in the marketplace.
- Overlook the expense of maintaining and supporting acquired product lines.
- Build a larger company with a collection of smaller companies that seek to lead rather than follow the lead of the acquirer.