Strategy vs. Speed

Cristobal Conde is CEO of SunGard, a leading global software and IT company. In an interview with the Wall Street Journal, Conde was asked what has been the best move he’s made during the downturn. He answered, “We could have generated more earnings by having more layoffs. We wanted to protect R&D. We wanted products ready to go at the end of the cycle. I saw a huge competitive opportunity to protect programmers when others weren’t."

Conde’s perspective is smart, but rare. Our research shows that most companies overreact to a downturn and cut not just fat, but muscle. If they go beyond what’s absolutely necessary, that can easily compromise their future. Conde turns the fear on its ear by asking his employees “What is it you need to do now so you will remember the crisis as a gift?”

Chilean by birth, Conde has developed a taste for a uniquely American institution: NASCAR. Perhaps it’s because he sees in racing similar patterns to those of business. “Going into the crisis is not that different from going into a turn,” he says. “You slam on the brakes. In the turn, the most important thing is your position relative to other cars. I’ve been telling people, ‘Focus on our relative market shares rather than overall volumes you can’t control. What are we doing to improve our position?’ After the turn, you take that better position.”

Conde can’t guarantee that SunGard will come out of the recession a winner, just as even the best NASCAR drivers don’t know when they’ll cross the finish line first and when they’ll come up short. But races are decided by the strategy of the driver as much as the speed of the car.

Drive smart.

Kraft's Coming Indigestion

After months of intrigue, Kraft finally made a successful bid for venerable British candy maker Cadbury, leaving archrival Hershey’s on the sidelines.

Kraft management predicts that the $50 billion combined company will be able to save $675 million over three years, but that’s not the primary reason for the merger. It’s all about global distribution and access to developing markets. Cadbury has it, Kraft wants it. Makes sense on paper.

Most mergers do make sense on paper, yet many become spectacular failures. The reason? A lack of appreciation for just how difficult it is to integrate not only global operations, but two proud and independent workforces.

Kraft is going to face this problem in spades with Cadbury. Todd Stitzer, Cadbury’s CEO, said that Hershey’s would have been a better cultural and operational fit. The company’s Chairman, Roger Carr, took it a step further by saying Kraft is “an unfocused conglomerate” with “unappealing categories” and management that “underdelivers.” Carr went on to say, “There is no strategic, operational, managerial or financial reason" for the merger.

Sure, Carr’s statement may have been a bit of strategic bluster to raise the value of the offer (which he succeeded in doing), but it sounds pretty categorical to me. And it was telling that not a single Cadbury executive was present on the conference call with analysts to discuss the deal. Hmm.

Kraft estimates it will take $1.3 billion to “integrate Cadbury.” I’m not sure exactly what that means or who came up with the number, but I don’t know how anybody could forecast the costs associated with the fear, resentment and internal jockeying with which Kraft and Cadbury managers and employees are now having to deal. The fact that Britons consider Cadbury a national treasure that has been overrun by ugly Americans sure won’t help.

Let’s hope Kraft doesn’t end up with a stomachache.

Innovation vs. Commoditization

You can hardly turn around these days without running into some sort of reference to innovation. Dozens of books about the topic line the shelves at Borders and Barnes & Noble, from The Art of Innovation to The Myths of Innovation. Innovation is rapidly becoming the latest business buzzword.

But before you dump “innovation” into the jargon dustbin along with “reengineering”, “rightsizing” and “paradigm shift”, consider this: the need for innovation has never been greater than it is today.

Doug Hall is founder and CEO of Eureka! Ranch, an organization that helps companies define, refine and improve their new ideas. In an interview with SmallBiz magazine, Hall defined innovation as that which “moves companies and their offerings along a continuum from providing commodity products or services to having a monopoly that is extremely difficult to combat.”

Hall’s definition is spot-on, and made even more significant by the fact that no company’s position along that continuum is static. If you’re not actively moving your company away from commoditization, it’s destined for it. The extent to which any business proposition or value equation is achieving success in the marketplace is the extent to which it will attract competitors who want what it’s got. There’s simply no free pass to sustainable success.

If you’re making money you’re making noise, and competitors are bound to notice. They’ll deconstruct your products, mimic your pricing structure, duplicate your distribution system, infiltrate your customer relationships, and do anything else they can to take your margin and market share. In so doing, they’ll be creating acceptable substitutes for your products and services, which without intervention will inevitably lead to a price war in which no one wins. Unless you can stay ahead of the game through continuous renewal and change (i.e. innovation), your competitors will commoditize you right out of business.

As frightening as this prospect might be, many companies are intimidated by the concept of innovation. They somehow think it’s the purview only of organizations with massive R&D departments funded by equally massive budgets, not the typical small- or medium-sized business. But this reflects an incomplete and unrealistic understanding of what innovation is really all about.

One of the reasons executives think this way is because we tend to associate innovation with breakthrough leaps forward--advances that change the playing field, shift competitive dynamics, make the covers of Forbes and Business Week and end up as business school case studies. Certainly, big innovations can be big news, and for good reason (Doug Hall’s research shows that major breakthroughs are worth four times as much as minor innovations). Naturally, they’re the ones that get the most press.

But the systematic introduction of even small improvements along the commodity-monopoly continuum can compound to deliver just as much (if not more) impact as a single big breakthrough. Popular Science says of innovations, “The objects don't necessarily need to be beautiful. They don't have to be eco-friendly. They don't even have to be difficult to build. They just have to push past what we thought was possible just twelve months ago." To that I would add that they don't have to be big. They just have to be consistent.

If you spend just a few hours critically analyzing your industry from a customer’s perspective (perhaps even involving customers themselves), you’ll identify dozens of pain points about which somebody ought to do something. Airline seats should be comfortable. Take-out orders shouldn’t be wrong. Physician’s handwriting should be legible. The better you can anticipate what customers will be wanting/needing/expecting down the road, the more likely you can be the leader that first addresses the issue. No one, as they say, ever asked for a microwave oven. Or even a curved shower rod.

Want to keep commoditization at bay? Focus on innovation. No matter what size, shape or form your company is.

A Branding Lesson From Leno

The big news this week in Medialand is NBC’s decision to cancel The Jay Leno Show and move the eponymous comedian back to a late-night time slot. About the short-lived experiment, Jeff Gaspin, NBC Universal’s Chairman of Television Entertainment, said, “I don’t think it’s wrong to take chances…Sometimes they work. Sometimes they don’t.”

Fair enough. But with a little more imagination, NBC might have been able to predict the outcome. The much-hyped decision to launch The Jay Leno Show was made in part based on economics—it’s a whole lot cheaper to produce an hour of live TV than an episode of Law & Order. While the show was profitable for NBC, it’s not terribly surprising that it would lag its competition in the ratings—especially in its first season, when loyal viewers of competitive offerings were caught up in current storylines.

The Jay Leno Show’s low ratings created a “lead-in” problem for NBC affiliates, who rely on audience carryover to provide viewers for their late local news. Michael Fiorile, chairman of NBC’s affiliate board, said NBC’s Leno strategy “has been devastating for a number of late newscasts around the country.”

While that’s unfortunate, it also underscores an unhealthy dependency that too often blinds local news providers to their task. And it provides a valuable business lesson for us all.

Most people tend to think of the television industry as something “other” than the product and service sectors that comprise the rest of the economy. But in reality it’s no different. Television news is a “product” that consumers “buy” (we pay for free TV with our time), and competitors are called to offer their prospective customers an experience that is unique, relevant, and valuable, just like any other business.

When a local affiliate complains about the network not offering a good enough lead-in for its local news, it’s like McDonald’s complaining that the Burger King across the street has better access to traffic. While that may be true, it can also serve as an all-too convenient cop-out. McDonald’s job is not to complain about the way the street is designed, but to get people to cross it--by offering something intriguing and unique (a task the company has performed quite well in recent years).

That’s where TV news falls down. Local news directors too often live in a “be better” bubble. That causes them to overstate the impact of their slogans, overvalue being first on the scene of an accident, and overpromote their handsome/pretty/ smart/honest/capable/talented/sincere news anchors. If they instead applied their intelligence and intensity (the news directors I’ve met have both in abundance) to seeking new ways to truly differentiate their offerings from the competition, we could see some real innovation in how local news is delivered. I suspect most viewers—and most people in the industry—would agree that there’s plenty of room for improvement.

Jay Leno is proven product whose success is in part dependent on how well he’s packaged and distributed. Local news is no different, and as Gaspin said, it’s not wrong to take chances. If only more news directors would.

Some Truths Never Change

This little illustration is from the January 29, 1954 issue of the Cass City (Michigan) Chronicle. Fifty-six years old it may be, but it's a good reminder that the times in which we're living are not so special after all. Businesses throughout history have had to cope with rainy days.

While the tools of advertising continually change, the need for it never does. That's a lesson I learned the hard way through my own company's stall (which began the journey that ultimately resulted in When Growth Stalls). Consistency is just one of the principles critical to recovering from (or preventing) a stall.

My business partners and I took our own medicine in 2009, and our firm is the better for it now. We'll continue to keep it up this year, sluggish though the economy may be. I hope your company will too.

It's 2010. Now What?

The best thing about hope is that it springs eternal, especially at the beginning of a new year. 2009 is behind us, 2010 lies ahead and we have to believe that the coming year will be better than the last.

There is, of course, no telling. I recall in late 2008 looking forward to the calendar turning, hoping that with a new year the craziness of that fourth quarter would settle down and enable us to rebuild our economic prospects. Alas, the recession wore on. And on. The downturn has now lasted more that two years, and it simply has to be over. Doesn't it?

Time will tell. In the meantime, those of us who have any say over investment and job creation should go about our business with the intent of bringing about growth. We don't have any other choice, really--nor would we want to do anything else. As bad as last year was, we survived, and most of our companies are leaner and meaner for it. That's the silver lining.

So we get up, we go to work, we look ahead, we make decisions, we take risks. Just as we always have, and just as we always will. As I alluded to in my final FindYourNerve.com post, we are blessed to operate within the most productive, dynamic, and resilient economic system the world has ever seen. As each of us does our part, the whole will take care of itself.

The Worst Decade Ever. (Smile)

As 2009 draws to a close, I have bad news and I have good news.

First the bad news. According to the Wall Street Journal, stock performance in the decade now ending is the worst ever--worse even than the woeful 1930s. For the past ten years, the value of NYSE-traded stocks has declined by an average of 0.5 percent a year. Compare that to the 1990s, when the average annual increase was an incredible 17.6 percent.

Factor in inflation and it gets even more depressing, with the S&P 500 declining an inflation-adjusted 3.3 percent annually. During the 1930s, stocks showed an inflation- (deflation, really) adjusted annual gain of 1.8 percent. And the decade now ending saw many notable companies fall out of the S&P 500, for reasons of scandal (Countrywide, Enron), excess (Bear Stearns, Merrill Lynch, Lehman Brothers, Wachovia), misfortune (Circuit City, Lucent, Reebok) and just plain changing dynamics (AT&T, Compaq, Dow Jones & Co., Maytag, Wyeth).

Pretty discouraging, when you think about it. But here's the good news. The vast majority of American corporations found a way to move ahead during the turbulent ten years past, and all of them--all of us--are the stronger for it. We face challenges ahead, but having muddled through the most difficult decade in two centuries we'll face little that will surprise us. And those of us who have maintained our focus, kept our nerve and remained consistent throughout should profit all the more.

Here's to 2010, the dawn of a new decade. May the old one rest in peace.

[Note: Today marks the one-year anniversary of this blog. Prior to launching it last December I wondered--and worried--if I would have enough to write about. If there's any silver lining to the year now past, it's that it provided plenty of content for a blog called "When Growth Stalls." Let's hope next year is a little tougher on me.]