The following quote (courtesy of a blog post by Esther Dyson, savvy internet investor) should be posted on billboards next to every large company, especially in Japan where once-great electronics giants face the Herculean challenge of reversing an accelerating decline:
“Without order, planning, predictability, central control, accountancy, instructions to underlings, obedience, discipline — without these things nothing fruitful can happen, because everything disintegrates. And yet — without the magnanimity of disorder, the happy abandon, the entrepreneurship venturing into the unknown and incalculable, without the risk and the gamble, the creative imagination rushing in where angels fear to tread — without this, life is a mockery and a disgrace.” – E. F. Schumacher, Small is Beautiful.
Chico Harlan’s recent Washington Post column describes the “free fall” that Sony, Sharp, Panasonic and Toshiba are experiencing. They “once controlled the industry, outclassing and outselling their U.S. rivals. But now they represent the most alarming telltale of corporate Japan’s two-decade struggle to adapt, downsize and innovate….unable to catch on in the digital world of tablets and smartphones.”
Harlan’s article describing what happened to the Japanese electronics companies presents a terrific Economics 101 lesson. As the electronics industries matured, product quality shifted from being an advantage to a consumer expectation. As incremental improvements in quality added more to the costs of electronics than they added in benefits to the consumer, demand shifted to lower-cost producers (e.g., Samsung and LG) . At the same time, the industry profit pool shifted from the increasingly commodity-like products to solutions offering new-to-market benefits, like smartphones and tablets. Stuck in broken business models, the Japanese companies suffered the consequences.
So what are the lessons for us?
First, realize that in a maturing market you have three options: (1) master the lowest cost position, (2) design new business models that add value to maturing components, as Apple has done with its computers by making the computer part of an interactive set of electronic devices, or (3) exit the category, as IBM wisely did with personal computers. Imagine if instead of buying Compaq, HP had invested its money elsewhere.
Second, learn to manage two conflicting cultures. Even as you drive out non-value-added cost from operating processes and supply chains and restate performance measures, you must foster a culture of innovation that gives rise to truly innovative new business models. Achieving too little of either — efficiency or innovation — places you in the middle, which is where the Japanese electronics firms find themselves. Samsung, having mastered cost, is now trying to master innovation, lest it lose in court again to Apple. Many start-ups are innovative but never build the operational discipline to take their businesses to scale.
How do you achieve this yin and yang? You must have a strategy process that regularly assesses the strength of your business model portfolio. And you must pick the type of leader that each business needs: the person who can best drive for lowest cost, take a business to scale, expand market opportunities, reinvent a business line, etc.
Companies that “consolidate” functions to save money end up being penny wise but pound foolish in my book. Imagine a general manager in a matrix organization trying to shift to a service-based, customized product business model as its physical products mature. How can this leader and her team truly reinvent their business when the corporate head of operations is focused on pulling out manufacturing costs and the corporate head of sales refuses to invest in a consultative sales force? Self-contained businesses may be more expensive, but if the expense creates unique benefits that customers will pay a premium for, the extra expense is money well spent.
Third, recognize that we are moving from a time when mastery came from focusing on the parts of the whole to an era when understanding the whole and solving higher-level problems will lead to far greater success. As our world becomes more complex – filled with more interdependencies between parts— value is created by operating at higher levels of a system.
Here is an internal example: Companies should stop placing people in charge of recruitment and instead hold a team accountable for high 1-year retention rates. Great recruitment with terrible on-boarding will only lead to waste because potentially great employees will leave. Focused on a higher level of the system, HR leaders will align recruitment and on-boarding experiences to produce a higher-level result for their companies.
As for the external business model strategy, seek a value promise, offering and advantages—a combination referred to as the value proposition—that address higher-level benefits. One way to explain Kodak’s stellar fall is that it remained focused on a lower-level problem (capturing images) when digital technology more easily solved much higher-level needs such as easy storage, editing, sharing, etc. Kodak’s problem wasn’t a failure to predict the timing of the shift from film to a lower cost substitute, digital, it was not pursuing a higher-level solution for its consumers as soon as digital became feasible.
How does the Schumacher quote apply to your business?
Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. She was an economic advisor for former Wisconsin Gov. Lee Dreyfus.
