After the Recession, What Next?

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Copyright Alistair Davidson, 2001. All rights reserved.</I></div> <bR> <div> In the current recession, managers sometimes hope that a recovery will improve the performance of their business.</div> <bR> <div> However, the world is a complicated place. Reliance solely upon a general economic upturn to reap improved performance is probably a misplaced strategy. </div> <bR> <div> Improving performance is about setting goals for improvement and pursuing improvement in the best possible way. And in most cases, improving performance comes from better people, better exploitation of technology and careful selection of business initiatives and goals.</div> <bR> <div> This White Paper proposes ten ideas for performance improvement:</div> <bR> <div> <B>Ten Propositions</B></div> <div> 1.  Competition is more intense and comes in more varieties.</div> <div> 2.  Product life cycles are short and getting shorter.</div> <div> 3.  Strategic choices are more difficult to assess.</div> <div> 4.  Managers overestimate what they can achieve in a short period of time and underestimate the consequences of their decisions upon subsequent periods.</div> <div> 5.  No single manager has all the knowledge necessary to make a good decision; so, as a result, managing expertise is increasingly critical.</div> <div> 6.  Customers are unpredictable creatures and so knowing a lot about them is a significant advantage and reducer of risk.</div> <div> 7.  Competitive advantage comes from combining skill sets and managing across boundaries.</div> <div> 8.  Technology is a key component in all aspects of management.</div> <div> 9.  Great employees are orders of magnitude more productive than poor employees.</div> <div> 10. Measurement, training, improvements in sales, marketing, process and technical knowledge don't happen naturally in most organizations.</div> <bR> <div> <B>Proposition 1: Increased Competition. More Variety.</B></div> <div> There are two key drivers for this trend. </div> <bR> <div> First, over the latter half of the twentieth century, trade barriers essentially disappeared in many industries. </div> <bR> <div> Second, the improvement in transportation and telecommunication costs reduced the friction between markets. And while the impact of 911 may slightly increase the friction between markets, information technology is likely to reduce the cost of tracking and tracking containers and their contents in the same way that courier services have adopted “track and trace” technology.</div> <bR> <div> The consequence of this reduced costs and increased ease of communication is that regional and national markets have less protection than ever before. And a fundamental corollary of economic geography is that “Large markets support many niches. Small markets can only sustain few niches.” </div> <bR> <div> Globalization and the Internet mean you have orders of magnitude more competition than you dreamed about. Financial services in the US illustrates this phenomenon. In 1970, there were roughly 25,000 banks in the US. By 2010, it is unlikely that there will be as many as 5,000.</div> <bR> <div> <B>Advice Implications:</B> Increasingly the task of competitive assessment is too big and too complicated to be done in-house. Like other activities, it increasingly becomes a task of managing outsourced suppliers. Suppliers can develop deeper knowledge of competitors and allocate their costs over multiple industries who belong to the industry value chain. Custom research can be purchased to obtain proprietary information as a incremental cost and value on top of the purchased research.</div> <bR> <div> When competition is so diverse, refocusing upon customers, customer satisfaction and unmet customer needs becomes increasingly important. Customer leadership will increasingly be more important than product or process leadership in many industries.</div> <bR> <div> Tracking what competitors do <I>well</I> and looking for ideas internationally to beg, borrow and steal is also increasingly important.</div> <bR> <div> <B>Proposition 2: Product Life Cycles Shortening</B></div> <div> There are numerous examples in many industries of the need to shorten product development cycles:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In the car industry, the non-Japanese vendors are playing catch up with the Japanese ability to design and bring cars to market in the 18-24 month time frame.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In the notebook computer and cell phone industries, products are replaced every six months.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In financial services, it is increasingly hard to develop a product-based differentiation, because information technology makes imitation of a successful competitor easier.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In regulated industries, products are continually redefined by the onslaught of rapidly changing regulation. Consider the difficulty of publishing tax handbooks.</div> <bR> <div> And in many industries, not only are the product life cycles shortening, but the performance requirements are rapidly increasing. In the intelligent appliance market, one estimate suggests that the person-years required to launch a product has increased by a factor of 3 while the time available for development has dropped by a factor of 4. </div> <bR> <div> Cell phones now have PDA functionality. Automobiles incorporate microprocessors for sensing, management and control, networking, digital satellite-based radio, back seat VCRs just to name a few technologies.</div> <bR> <div> <B>Advice Implications:</B> Selecting what tasks are key and provide the basis for a sustainable competitive advantage is so critical that the wrong decisions will put you out of business. At the same time, selecting partners and suppliers and developing processes for making relationships successful is a new and critical management task.</div> <bR> <div> With shortening product life cycles, account control is critical. A gap in a product line such as Honda's lack of an SUV often needs to addressed quickly, if necessary by private labeling competitor's products.</div> <bR> <div> In most industries, there is a cluster of skills and a cluster of innovative suppliers that are needed for you to achieve success. Constructing these clusters means managing alliances and supplier relationships.</div> <bR> <div> <B>Proposition 3: Strategic Choices Are More Difficult to Assess</B></div> <div> Strategic theory used to suggest that your task as a CEO or strategist was to decided whether you wished to be a low cost producer or a branded product producer relative to a targeted market or segment.</div> <bR> <div> However, superior companies create value for their target customers in ways that go beyond cost control. They compete on the basis of faster learning and superior branding and can under some circumstances <I>offer both superior value and lower cost</I>.</div> <bR> <div> <B>Advice Implications:</B> The traditional view of the value chain that focused upon the five key cost drivers - scale, scope, experience curves, capacity utilization and complexity - are relatively static views of the business. The more complex the technology the more likely it is that the interaction between customer usage patterns and product development needs to be based on a cycle of fast learning and time-based competition. More sophisticated models, better management processes, performance breakthroughs are needed to claim the higher ground.</div> <bR> <div> As Michael Porter has pointed out, deciding what you are not going not do and making sure that the business system you construct is internally consistent becomes the method of generating competitive advantages, because operating advantages are increasingly shorter in duration and less easy to defend.</div> <bR> <div> Jack Welch, former CEO of GE, puts it a different way: make your backroom somebody else's front room. Don't have a printing department. Hire a business that focuses upon printing to handle your printing. They will live and die and be passionate about printing, where for your people, printing is never going to a road to success.</div> <bR> <div> <B>Proposition 4: The Dual Problems of Overestimation and Underestimation</B></div> <div> This observation, first made by Paul Strassman in the area of information technology, seems increasingly to be valid in a world where all business initiatives have an IT  component.</div> <bR> <div> If you see information management as an essential part of every business project, then a major risk in all business projects is the high rate of failure of information technology.</div> <bR> <div> The new product literature suggests that new product success runs around 65% and has done so consistently for years. However, the information technology literature suggests that roughly 80% of all IT projects fail, are late or get cancelled in a given year. In other words, only 20% of IT projects typically succeed.</div> <bR> <div> So in any business initiative, if IT is critical, you have a far higher chance of failing because of IT than you do because of new product problems.  So if your new product launch is highly dependent upon new or novel IT, you have  a 3X higher chance of failure due to IT.</div> <bR> <div> But even worse is the key insight that there is a difference between early stage prototypes and the third generation of IT. Companies that succeed in launching a product with a system cobbled together often find that their solution does not scale or that the information side of the project is not a source of <I>delight</I> to customers. </div> <bR> <div> As <A HREF="http://www.cooper.com" TARGET="_top" TITLE="http://www.cooper.com"><U>Alan Cooper</U></A>, designer of VisualBasic points out in his book “The Inmates are Running the Asylum”, merely satisfying the customer need is not the same as building loyalty. Novell died as a company when Microsoft entered the networking market, because it only met the customer need. Apple has survived its many tribulations because it built customer loyalty with its innovative and continually leading edge design.</div> <bR> <div> <B>Advice Implications:</B> If you are only evaluating business projects in isolation, you need to turn to a more integrated view of your business that includes information management projects. Combining the issues of project management, new product launch, product life cycle, and the total cost of ownership of the associated information management means evaluating what Gartner Group calls the Total Value of Ownership in a new way. It is more complicated and requires more skill.</div> <bR> <div> <B>Proposition 5: No Single Manager Can Know Everything</B></div> <div> I am tempted to joke that the <I>married</I> managers probably know a little more, but the key insight here is that increasingly making teams work together effectively is critical to strategic success.</div> <bR> <div> Bob Cooper's work on new product development suggest that the key predictor of time to market for companies revolve around doing your marketing homework, involving inter-disciplinary teams and treating time to market as important issues. But time to market should not be pursued at the expense of product quality. One McKinsey study suggests that time to market is roughly an order of magnitude more important than running 50% over budget on product development.</div> <bR> <div> Bob Cooper's work also suggests that drawing upon international sources for new products is also important. </div> <bR> <div> <B>Advice Implications:</B> Most firms are going to need help in bringing together information from multiple functional areas, information technology areas, suppliers and international competitors. </div> <bR> <div> <B>Proposition 5: The Importance of Customer Intimacy</B></div> <div> The bad news of increasing competition in the world is that you have to work harder. The good news is that your customers are increasingly overwhelmed and are looking for successful companies to integrate and brand solutions. And that requires knowing more about your customer than their mothers. </div> <bR> <div> Dell is a lovely example of a company that essentially brands other people's technology. While their strategy could best be characterized as a process leadership strategy, their strategy is driven by the simultaneous commoditization of technology and the branding of the services and processes wrapped around it.</div> <bR> <div> In my own life, I frequently buy extended warranties on my cars and computers. I would rather transfer the risk of failure to the supplier and I am prepared to pay a premium for it. I pay a premium for laptop computers from vendors who provide prompt knowledgeable service and I am indifferent as to whether they are a manufacturer or assembler.</div> <bR> <div> And increasingly businesses are buying <I>outsourced</I> and <I>out-tasked</I> services rather than purchasing software. The complexity is so great that it is worth paying for risk mitigation and expertise. And as technology becomes more complex, assembling technology effectively and quickly, training usage and monitoring customer feedback is the only available approach that permits building of competitive advantage in proprietary aras.</div> <bR> <div> <B>Advice Implications</B>: Measuring customer usage, non-usage, competitor product usage, customer support are increasingly key variables. Integrating customer and user feedback into the product development process is often a key source of creating competitive advantage.</div> <bR> <div> <B>Proposition 7: Competitive Advantage is Based Upon Managing Across Boundaries</B></div> <div> The idea of the importance of managing across boundaries is one that many writers have addressed. Some have called it the notion of a core competence. But with the increase in out-tasking, outsourcing, strategic alliances, standard setting strategies, technology licensing the skill sets of managers and the appropriateness of strategies involves analyzing not just your own markets, opportunities and cost structures, but also understanding those of your customers, partners and suppliers.</div> <bR> <div> <B>Advice Implications:</B> A strategy that does not look at suppliers, distributors and customer economics is potentially very high risk. Writing business plans and developing strategies is hard enough when you only have to focus on internal issues.  Get help</div> <bR> <div> <B>Proposition 8: Technology is a Key Component For Most Strategies</B></div> <div> If you want only one example of how technology is critical today, consider the Y2K problem. It is hard to imagine that senior management in firms could be so frightened or ignorant of technology that they would let this problem get away from them, but for thousands of companies, the Y2K problem was so severe that they had to spend excessive amounts of money purchasing consulting services and large replacement ERP systems of dubious economic value.</div> <bR> <div> <B>Advice Implications:</B> Spending money in a hurry on technology normally leads to overspending and wastage. Planning pays for itself many times over.</div> <bR> <div> Many information technologies offer the risk and the threat of dramatically changing the cost structures of activities in your value chain. It's important to model, understand and manage the emergence of different economies of scale and scope in your own value chain, those of suppliers, customers and supporting institutions.</div> <bR> <div> <B>Proposition 9: Great Employees are Orders of Magnitude More Effective</B></div> <div> The Dotcom boom of 1999/2000 demonstrates clearly that technical talent does not translate to commercial success. But it also demonstrated that there is wide variation in technical and technology management talent. Perhaps the rarest skill in business today is the ability to find employees who are knowledgeable in multiple areas.</div> <bR> <div> Harvey Gellman one of the authors of “Riding the Tiger” writes that there is nothing so valueless as improving a task that does not need to be done. Great employees focus upon what is important and then they do it well. Doing a task well is irrelevant if it is the wrong task.</div> <bR> <div> In my own experience of working in high tech firms, we were able in one firm to increase the productivity of our employees by a factor of 20 times over a three year period. We did so by (1) hiring great employees, (2) having a great technical strategy and supporting tools, and (3) we eliminated incompetent employees. Yet, it is rare for firms to focus on the quality of their people. </div> <bR> <div> <B>Advice Implications:</B> Moving towards a more balanced approach to business measurement, e.g. the balanced scorecard approach made popular by Kaplan and Norton can produce significantly better results.</div> <bR> <div> <B>Proposition 10: Improvement in an Organization Does Not Happen Automatically.</B></div> <div> If you accept the proposition that technology is a key variable in almost all business today, then a fundamental and challenging question for practically every organization from large to small, public and private sector is: “How should we use technology to improve our performance?”</div> <bR> <div> It turns out that the area of improvement sought or accidentally discovered is one of the most critical issues in technology. Why? Well there are five good reasons.</div> <bR> <div> 1. Some technologies are extremely difficult to evaluate. Consider an early developer of web sites prior to the emergence of e-commerce. How do you evaluate an emerging technology? For this class of technology, the “improvement sought” is to understand how the technology will change the economics and dynamics of your business. It is by its very nature an experiment with a limited life.</div> <bR> <div> 2. Some technologies are, by themselves, not sufficient to generate a positive return. A simple example is that of computer hardware. Computer hardware by itself, is typically only a source of increased expense. If Ford gives a computer to every employee, it is not immediately clear what the benefit is. But providing training and support along with the computer would probably provide a higher level of return. Without the complete supporting set of hardware, software and training, the critical success factors for improved performance are not present.</div> <bR> <div> 3. Technologies can be deployed in different ways. When developing software, you can focus on project cost, project quality or time to complete the project. Typically, you can only achieve two out of three.</div> <bR> <div> 4. Improvement in technology does not necessarily correlate with increased performance. Perhaps the best example of this is the comparison of the Japanese and US car companies. Japanese companies have historically had better quality, but have been less automated. Their focus has been on intelligent automation, employee involvement and training. The Japanese focus not just on quality but the rate of improvement in quality. It's an important difference. If you measure an organization on quality, stopping the line to catch a quality problem leads to measure that punish those who would improve quality. Measuring the rate of improvement in quality changes the rules of the game.</div> <bR> <div> 5. Improvement from investment in technology requires good people Good people with bad technology do a whole lot better than bad people with good technology. And most organizations are not very good at measuring their people.</div> <bR> <div> <B>Advice Implications:</B> One of the important messages of the balanced scorecard approach is that financial improvement is the <I>result</I> of measuring the important issues in an organization. Financial improvement is not something you can mandate without causing side effects in non-financial areas such as customer satisfaction, branding, process performance or personnel capabilities. You have to know why something improves quality or customer satisfaction or employee capabilities and how that triggers financial change over multiple periods. And that takes measurement and requires management systems that focus upon customer measures, process measure and employee measures of capability and performance.</div> <bR> <div> <B>Summary</B></div> <div> Improving the performance of your company requires making decisions about what you will and will not do. It requires making choices about which projects you are going to invest in, what kinds of performance you are seeking to improve. It requires better people, better practices and better information about customers, suppliers, alliances and competitors.</div> <bR> <div> And in an environment of doing more with less, selection of suppliers of all sorts (consulting, services, or manufacturing) that can leverage limited budgets is critical.</div> <bR> <div> <B>References:</B></div> <div> Davidson, Alistair, Gellman, Harvey, and Chung, Mary: <A HREF="http://www.amazon.com/exec/obidos/ASIN/1571120998/alistadavidsshom" TARGET="_top" TITLE="http://www.amazon.com/exec/obidos/ASIN/1"><U><I>Riding the Tiger</I></U></A>, Jist Publications, 1999.</div> <div> Chandler, Alfred<I>, </I><A HREF="http://www.amazon.com/exec/obidos/search-handle-form/002-9482136-8926437" TARGET="_top" TITLE="http://www.amazon.com/exec/obidos/search"><U><I>Inventing the Electronic Century</I></U></A>, Free Press, 2001.</div> <div> <A HREF="http://www.cooper.com/" TARGET="_top" TITLE="http://www.cooper.com/"><U>Cooper, Alan</U></A>: <I>T</I><A HREF="http://www.amazon.com/exec/obidos/search-handle-form/002-9482136-8926437" TARGET="_top" TITLE="http://www.amazon.com/exec/obidos/search"><U><I>he Lunatics Are Running the Asylu</I></U></A><I>m, SAMS, 1999.</I></div> <div> Cooper, Robert: <A HREF="http://www.amazon.com/exec/obidos/ASIN/0201563819/alistadavidsshom" TARGET="_top" TITLE="http://www.amazon.com/exec/obidos/ASIN/0"><U><I>Winning at New Products</I></U></A>, Perseus, 1993.</div> <div> Strassman, Paul: <I>The Politics of Information Management</I>, CT Information Economics Press, 1995.</div> <bR> <bR> <div>   <script> var page_name = ''; var invisible = ''; function sE(){return true;}window.onError=sE;var lp=0; function clr(){lp++;if(lp==1){document.ctr.src="http://64.49.222.57/0.gif";} else {clearTimeout(myT);return true;}} var myT=setTimeout('clr()',120000);var rn=Math.random(); document.write('<a href="http://www.web-stat.com/stats.shtml?alistairdavidson"'); document.write(' target="new"><img name="ctr"'); document.write(' src="http://www.web-stat.com/count.cgi?'); document.write('alistairdavidson::'+top.document.referrer); if (window.screen){ document.write('::'+screen.width+'x'+screen.height+'::'); document.write(screen.colorDepth+'::'+page_name+'::'+invisible+'::'+rn); }else{document.write('::::::page_name::'+invisible+'::'+rn);} document.write('" onError="clr();" onAbort="clr();"'); document.write(' onLoad="clearTimeout(myT);"'); document.write('border=0 alt="Web-Stat hit counter"></a>'); </script><noscript> <a href="http://www.web-stat.com/stats.shtml?alistairdavidson" target="new"> <img src="http://www.web-stat.com/count.cgi?alistairdavidson::NoJavaScript" border=0> </a> </noscript>   </div> <bR> </td> </tr></table></body>