Google Gets Ready to Rumble With Microsoft
By STEVE LOHR and MIGUEL HELFT
Published: NYT, December 16, 2007

This excerpt is longer than my usual posting but the lessons and story are profound. I work with Microsoft and am hard pressed to believe that the people from Google are smarter or more creative. I also think Microsoft’s management team is as good as any. The fundamental issue, however, is reflected in this following chart.

Microsoft’s market cap is based on the success of their past business model while Google has very few if any legacy issues. This difference permeates the story.

I would like to highlight to our growing blog audience that our new executive ed class “Implementing Organic Growth Strategies” is being offered April 27 to 30, 2008 at the Allen Center and is beginning to fill up. We developed three new teaching cases for this class and have a world class set of faculty teaching it! http://execed.kellogg.northwestern.edu/programs/LEAD20/index.htm

Finally, I would like to wish everyone a great holiday season and Happy New Year!!

……... With its ample resources and eye for new markets, Google has begun offering online products that strike at the core of Microsoft’s financial might: popular computing tools like word processing applications and spreadsheets.

The growing confrontation between Google and Microsoft promises to be an epic business battle. It is likely to shape the prosperity and progress of both companies, and also inform how consumers and corporations work, shop, communicate and go about their digital lives. Google sees all of this happening on remote servers in faraway data centers, accessible over the Web by an array of wired and wireless devices — a setup known as cloud computing. Microsoft sees a Web future as well, but one whose center of gravity remains firmly tethered to its desktop PC software. Therein lies the conflict……..
………there was no thought of a Microsoft takedown when, earlier this year, Google introduced a package of online software offerings, called Google Apps, that includes e-mail, instant messaging, calendars, word processing and spreadsheets. They are simpler versions of the pricey programs that make up Microsoft’s lucrative Office business, and Google is offering them free to consumers….

.......“For most people,” he (Mr. Schmidt, Google’s CEO) says, “computers are complex and unreliable,” given to crashing and afflicted with viruses. If Google can deliver computing services over the Web, then “it will be a real improvement in people’s lives,” he says.

To explain, Mr. Schmidt steps up to a white board. He draws a rectangle and rattles off a list of things that can be done in the Web-based cloud, and he notes that this list is expanding as Internet connection speeds become faster and Internet software improves. In a sliver of the rectangle, about 10 percent, he marks off what can’t be done in the cloud, like high-end graphics processing. So, in Google’s thinking, will 90 percent of computing eventually reside in the cloud?
“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”

Mr. Schmidt clearly believes that the arcs of technology and history are in Google’s corner, no matter how hard he tries to avoid mooning the giant. Microsoft, of course, isn’t planning to merely stand still. It has spent billions trying to catch Google in search and Web advertising, so far without success. And the companies are also fighting it out in promising new fields as varied as Web maps, online video and cell phone software.

“The fundamental Google model is to try to change all the rules of the software world,”

says David B. Yoffie, a professor at the Harvard Business School. If Google succeeds, Mr. Yoffie says, “a lot of the value that Microsoft provides today is potentially obsolete.”

At Microsoft, Mr. Schmidt’s remarks are fighting words. Traditional software installed on personal computers is where Microsoft makes its living, and its executives see the prospect of 90 percent of computing tasks migrating to the Web-based cloud as a fantasy. (This is the big question where Google really ha nothing to lose and everything to gain while Microsoft maybe “betting the farm”)
“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,” says Jeff Raikes, president of Microsoft’s business division, which includes the Office products.

TO Mr. Raikes, the company’s third-longest-serving executive, after Mr. Gates and Mr. Ballmer, the Google challenge is an attack on Microsoft that is both misguided and arrogant. “The focus is on competitive self-interest; it’s on trying to undermine Microsoft, rather than what customers want to do,” he says. ( I am not sure about this)

Microsoft, Mr. Raikes notes, has spent years and billions of dollars in product development and customer research, studying in minute detail how individual workers and companies use software. What they want, he says, is the desktop programs and features of Microsoft Office, and the proof is in the marketplace. “I mean, we have more than 500 million people who are using Microsoft Office tools,” he says.

Indeed, Microsoft is the wealthy incumbent with a huge lead in the market for personal productivity software, with a share of more than 90 percent. But the Google challenge, industry analysts say, is not so much a head-to-head confrontation with Microsoft in its desktop stronghold as it is a long-term shift toward Web software, which operates with different principles and economics.
Analysts note that Google is a different competitor from others Microsoft has dispatched in recent years: it is bigger, faster-growing, loaded with cash and a magnet for talent. And the technology of the Google cloud opens doors. Its vast data centers are designed by Google engineers for efficiency, speed and low cost, giving the company an edge in computing firepower and allowing it to add offerings inexpensively.

“Once you have those data centers, you want to go out and develop complementary products and services,” says Hal R. Varian, a former professor at the University of California, Berkeley, who is Google’s chief economist. They can be offered free or at minimal cost to users, he says, because they bring more traffic to Google, generating more search and ad revenue.
Google, it seems, has a promising opening against Microsoft. But tilting at a giant and taking down a giant are very different things.

Microsoft, of course, isn’t standing still. Just as it squelched the first Internet challenge in the 1990s by linking Web browsing software to its mainstay products, it is now adopting a similar strategy for cloud computing by adding Internet features to its offerings. It is moving cautiously on this front, however, to avoid eroding the profitability of its desktop franchise. (This could be their undoing)

More than any other Google foray, providing Web-based software to workers for communication, collaboration and documents promises to be the acid test of how far Google can go beyond Internet search. Will two of its formulas — its distinctive, hurry-up model of building products and services, and its rapid-fire approach to recruiting and innovation — succeed in new arenas? …….
.
………VELOCITY does, indeed, matter, and Google deploys it to great effect. Conventional software is typically built, tested and shipped in two- or three-year product cycles. Inside Google, Mr. Schmidt says, there are no two-year plans. Its product road maps look ahead only four or five months at most. And, Mr. Schmidt says, the only plans “anybody believes in go through the end of this quarter.” (A sustainable growth engine is all about velocity and Microsoft’s business model does not drive it like Google’s)

Google maintains that pace courtesy of the cloud. With a vast majority of its products Web-based, it doesn’t wait to ship discs or load programs onto personal computers. Inside the company, late stages of product development are sometimes punctuated by 24-to-48-hour marathon programming sessions known as “hack-a-thons.” The company sometimes invites outside engineers to these sessions to encourage independent software developers to use Google technologies as platforms for their own products………
........MR. SCHMIDT readily concedes that cloud computing won’t happen overnight. Big companies change habits slowly, as do older consumers. Clever software is needed — and under development, he says — to overcome other shortcomings like the “airplane issue,” or how users can keep working when they find themselves unable to get online.

Yet small and midsize companies, as well as universities and individuals — in other words, a majority of computer users — could shift toward Web-based cloud computing fairly quickly, Mr. Schmidt contends. Small businesses, he says, could greatly reduce their costs and technology headaches by adopting the Web offerings now available from Google and others.

“It makes no sense to run your own computers if you are a small business starting up,” he says. “You’d be crazy to buy packaged software.”
Still, in order to succeed, Google needs to win a broad array of converts, including corporations. That effort is led by Dave Girouard, the general manager of Google’s enterprise business, who joined the company in 2004, shortly after it decided to move beyond its search business and consumer focus.

Gmail, introduced just after Mr. Girouard arrived, illustrates Google’s strategic evolution as well as its increased willingness to take on Microsoft…….
According to Compete.com, a research firm, Google Docs is gaining popularity. It had 1.6 million users in November, seven times as many as a year earlier. That’s a nice lift, but the Microsoft Office suite, containing programs like Word and Excel, is nearly two decades old and runs on some 500 million PCs. The reality is that even if Mr. Schmidt and Google are right about the potential of cloud computing in the workplace, Microsoft is still seen inside most companies as the safe choice.

Another crucial battleground for both companies is the university market, where the stakes are less about making money and more about winning the loyalty of students who might become valuable customers later in life. Google and Microsoft each offer free Web-based e-mail to universities, for example…….
……To be sure, Microsoft is not ceding cloud computing to Google. It is investing heavily in huge data centers and Web software. Inside Microsoft, there are engineers and product managers who sound a lot like Googlers…….
………The challenge for Microsoft is not the ability to do much of what Google does. Instead, the company faces a business quandary. The Microsoft approach is largely to try to link the Web to its desktop business — “software plus Internet services,” in its formulation. It will embrace the Web, while striving to maintain the revenue and profits from its desktop software businesses, the corporate gold mine. That is a smart strategy for Microsoft and its shareholders for now, but it may not be sustainable.

Assuming that competition heats up, Office may continue to be an outstanding product, but Microsoft may not be able to charge as much for it — just as low-cost personal computers eventually undercut the mainframe business, and traditional publishing and media companies have grappled with Internet distribution. The traditional products remain popular, but they become much less profitable………

………..Microsoft dismisses Google’s optimism as wishful thinking. Microsoft’s competitive tracking of the corporate market, says Mr. Raikes, the leader of the Office business, finds nothing like the momentum for Google that Mr. Girouard portrays. “It is not in any way, shape or form close to what he is suggesting,” Mr. Raikes says.

COUNTLESS decisions by corporate technology managers, office workers, university students and rank-and-file computer users of all kinds will ultimately determine Google’s success. How easy and inexpensive will it be to do e-mail, word processing, spreadsheets and team projects on Web software? Will high-speed network connections soon become as ubiquitous and reliable as Google seems to assume? Will companies, universities and individuals trust Google to hold corporate and personal information safely?

Growing Big, Staying Fresh
•
By PAUL B. BROWN, 53
Published: NYT, December 8, 2007


I would like to welcome the new alumni of our Driving Organic Growth Executive education program Kellogg’s Miami campus and the Indian school of Business (what an incredible place) in Hyderabad)
This is a great blurb on an issue facing most large companies. It is a profound challenge.
From India…….


The law of large numbers is frustrating for big companies.

A $100 million company whose sales climb by $50 million has increased revenue by 50 percent. A $10 billion company, with the same $50 million gain, has bumped up sales only one half of one percent.

As a result, argues Andrew S. Grove, the former chief executive of Intel, huge companies end up paying for their success.
“The reward is that they get big,” he writes in Portfolio magazine. “The punishment is that when they get big, it gets harder and harder for them to grow. And then their investors pile on the abuse.”
Mr. Grove, now a lecturer at Stanford’s business school and a senior adviser at Intel, suggests an antidote: large, successful firms can engage in what he calls “cross-boundary disruption.”

“Under certain conditions a firm can create a new growth spurt for itself by entering an entirely different industry,” he writes. “The target industry must be stagnant (I am not sure I agree with this) and populated with companies that cling to doing business the way they always have.”(This is inherent in Clayton Christensen’s work)


MANAGEMENT MODELS Is there a formal model that companies can follow to grow internally? Robert C. Wolcott and Michael J. Lippitz, both associated with Northwestern University’s business school, list in an article in the M.I.T. Sloan Management Review the following four models (These our guys at Kellogg and is a great article)


¶Opportunist. The company provides no formal process to follow. Various departments and individuals work on their own ideas and then seek corporate financing. This is what happens at Zimmer Holdings, a medical device company with more than $3 billion in sales.
¶Enabler. The company provides clear criteria for the sorts of things it would like developed, application guidelines for financing and support from senior management, then leaves it to employees to come up with new ideas. This, the authors say, is the model Google employs.
¶Producer. “A few companies such as I.B.M., Motorola and Cargill pursue corporate entrepreneurship by establishing and supporting formal organizations with significant dedicated funds or active influence over business unit funding.”
¶Advocate.(This was the model we used at DuPont where we developed and deployed the Market Driven Growth process) A company “strongly evangelizes” for corporate entrepreneurship but, as is the case at DuPont, leaves it up to the individual business units to provide financing and manage the process.


CHANGED FOR GOOD Radical transformation efforts inside big companies fail for any number of reasons, among them insufficient resources devoted to the task, a loss of interest by the chief executive or naysayer who are allowed to stay in place.


Two McKinsey consultants argue that focusing on two areas can improve the chances that a company will change for the better. The chief executive should set “an appropriate and inspiring aspiration” and then help mobilize “the flow of energy and ideas needed to drive the organization forward,” .(this is a critical leadership role) argue Josep Isern and Caroline Pung, writing in The McKinsey Quarterly.
Leaders must define the objective at the outset, delineating clear initiatives and painting a vivid picture of what success will look like, they contend.
“A good transformation story bridges the gap between top management and the rest of the organization,” they write. “Typically, using metaphor and analogies to explain what is at stake, it addresses three key aspects: the case for change, the challenges and opportunities ahead and the impact of change on the individuals.”
FINAL TAKE Marketers take note: Some 77 percent of Americans ages 49 to 55, Prevention writes — citing research from the McNeil Consumer Healthcare division of Johnson & Johnson — believe that “50 is the new 40.” PAUL B. BROWN, 53 (I prefer that “60 is the new 40”, Bob Cooper, 62)

Former Xerox CEO FundedFabled PARC but FailedTo Harvest Innovations
While He Focused on the Bottom Line, Researchers Departed With IdeasTo Build Modern Computing
By STEPHEN MILLERWSJ, December 23, 2006; Page A6


This is an extreme example of what I find over and over in dealing with companies who want to innovate. It is so much more than generating ideas – the role of senior leadership and the right corporate climate is so important. We had a debate in our last Driving Organic Growth class on whether large companies can grow through innovation. Our contention is they can but they must recognize there our critical elements that must be addressed and, if needed, changes must be made. This article highlights some of those critical issues……

Peter McColough (became CEO in 1968) never powered up a personal computer, but he helped unleash the digital revolution. Many of the technologies at the center of today's computerized offices and homes -- the mouse, the laser printer, the local area network -- were first developed in the 1970s at a Silicon Valley skunk works he chartered at Xerox Corp(THEY HAD THE IDEAS).


But Xerox never reached Mr. McColough's goal of being at the forefront of what he called "the architecture of information." The company still best known for copiers pioneered in the 1950s and '60s failed to develop many of the technologies into marketable products. Instead, a herd of start-ups, often headed by the very workers at Xerox's Palo Alto Research Campus who had invented them, rumbled in and created industries in personal computers, networking, office software and others.

"If Xerox had known what it had and had taken advantage of its real opportunities, it could have been as big as IBM plus Microsoft plus Xerox combined -- and the largest high-technology company in the world,(THE LOST OPPORTUNITY)" Apple Computer Inc. co-founder Steve Jobs is quoted as saying in "Joe Wilson and the Creation of Xerox," a book by Charles Ellis about the company and its early chief executive.

The reasons for Xerox's inability to take advantage of its own inventions are debated in business schools to this day. Jacob Goldman, Xerox's chief scientist at the time who founded PARC, blames short-sighted managers unwilling to take chances on small-scale, unproven technologies.(THE IMPORTANCE OF FOCUSING ON SHORT AND LONG TERM…..UNDERSTANDING HOW TO MANAGE UNCERTAINTY IS ALSO A IMPORTANT COMPONENT OF THIS SHORT SIGHTEDNESS—THE MANAGERS DID NOT KNOW HOW TO DEAL WITH THESE NEW OPPORTUNITIES BECAUSE OF THE UNCERTAINTY. OPTIONS THINKING IS CRITICAL!) "They managed the company quarter to quarter and looked at the bottom line," Mr. Goldman says. "They weren't thinking about the future really."(OVER FOCUS ON HORIZON 1 PROJECTS…FOR OUR ALUMNI, RELATE THIS TO OUR DISCUSSION OF MANAGING THE INNOVATION PORTFOLIO)

Others cite a culture clash. "The guys on the West Coast were just laughing at the uptight suits there in freezing Rochester," Mr. Ellis says in an interview, referring to Xerox's headquarters then in that N.Y. city. "The straight-laced guys couldn't stand the idea that these hippies were coming to work at noon."(THE CORPORATE CLIMATE FAVORING INNOVATION MUST BE ESTABLISHED TO COMMERCIALIZE INNOVATION)

And some say part of the blame should go to Mr. McColough, who succeeded the outgoing Mr. Wilson as CEO in 1968 after joining the company then called Haloid Co. 14 years earlier. The bottom-line-oriented Mr. McColough, a graduate in the storied Harvard Business School class of '49 that produced an unprecedented number of CEOs, "lacked the will to back bold initiatives with hands-on perseverance,"(THE ROLE OF SENIOR LEADERS IS ABSOLUTELY CRITICAL) wrote Robert Alexander and Douglas Smith, authors of "Fumbling the Future," a dissection of Xerox's management during the 1970s……………

Instead of marketing new technology being developed at PARC, Xerox was pushing electronic typewriters to compete with IBM's Selectrics and the massive 9200 model copier that spat out two pages a second and cost $300 million to develop (THE ONLY REAL FOCUS WAS ON PROTECTING THEIR CURRENT BUSINESS – HORIZON 1. A GREAT EXAMPLE OF THE "INNOVATORS DILEMMA"). At the same time, IBM and Eastman Kodak Co. began to compete with Xerox in high-end copying, and Japanese rivals like Ricoh Co. introduced copiers for small business, a market Xerox had ignored

Crisis is good!

Corporate Innovation Forum

http://www.managementlogs.com/2005/08/crisis-is-good.html

A key challenge of leaders who want to stimulate innovation driven growth is creating the “burning bridge”. By definition, innovation means change and change is threatening to most people. Hence, sustainable innovation can be difficult at best and very challenging when the current business is doing well. From my own experience, I will never forget the conversation at the dinner table in the mid 80’s with a future CEO of the Boeing Corporation. They just came off two of their best years yet he knew that Airbus was going to be a powerful force but could not get the attention of his organization.

A highly interesting article in the last issue of Fortune (Sept. 5, 2005, no. 15) explains how Jong-Yong Yun, CEO of Samsung, is relentlessly building a culture of perpetual crisis at Samsung Electronics.

The South-Korean powerhouse has become the worlds largest consumer electronics company.

Without a doubt, Samsung is also a leading company on innovation, registering 1600 patents in 2004 (more than Intel), and spending a whopping 9% of revenue on R&D. The company employs around 27.000 researchers, 40% of it's global workforce. It seems like Yun's strategy to control the core technologies of digital convergence simply ensures that the profits keep flowing in.

However, according to Yun, it is not the corporate strategy that made Samsung so successful. Rather, it is the corporate culture that support the execution of this strategy that's vital.

Yun actively and relentlessly spreads a philosophy which emphasizes that disaster is just around the corner:
• Markets for today's cash cows may implode overnight.
• Reinvigorated competitors such as Apple, HP, Intel, Microsoft, Motorola and Sony may bounce back.
• Chinese companies will inevitably and aggressively take away the electronics commodity market (a strategy that Samsung itself knows very well from its history). Product innovation is the only remedy.
• A constant obsession with cutting cost and complexity is needed to lead the innovation pace in consumer electronics and be first to market.
• Success only increases the danger of complacency and eventual failure.
Is this way, the cultural ability to deal with crises can indeed become a competitive edge over companies that are less agile in dealing with disaster.

Is Merck's Medicine Working?
Spurred by the Vioxx fiasco, CEO Clark is trying to revamp the drug giant's culture
Business week, July 30, 2007

This is a great article on the revamping of a major company faced with a crisis. I want to focus on the importance of “managing the cost, not the rate of failure” as part of the broader effort. I suggest going to the artcle: http://www.businessweek.com/magazine/content/07_31/b4044063.htm?chan=search



Richard Clark was flustered and unprepared when he was thrust into the CEO job at Merck & Co. (MRK ) on May 5, 2005. It was the darkest hour in the pharmaceutical giant's 114-year history. Merck was drowning in liability suits stemming from Vioxx, its $2.5 billion-a-year arthritis drug, which it had to pull from the market because of a link to heart attacks and strokes. Two other blockbusters worth a combined $7 billion in annual sales were facing patent expirations. And Merck's labs, which other companies once hailed as a bastion of scientific innovation, were crippled by a culture that buried good ideas under layers of bureaucracy. But in the morass, Clark saw opportunity. "A crisis is a terrible thing to waste," says the CEO……………

KILL FEE

If fraternizing with insurance executives sounds bizarre, consider this: Merck is rewarding scientists for failure. One of the hardest decisions any scientist has to make is when to abandon an experimental drug that's not working. An inability to admit failure leads to inefficiencies. A scientist may spend months and tens of thousands of dollars studying a compound, hoping for a result he or she knows likely won't come, rather than pitching in on a project with a better chance of turning into a viable drug. So Kim is promising stock options to scientists who bail out on losing projects. It's not the loss per se that's being rewarded but the decision to accept failure and move on. "You can't change the truth. You can only delay how long it takes to find it out," Kim says. "If you're a good scientist, you want to spend your time and the company's money on something that's going to lead to success."

Management consultants say rewarding misses as well as hits is the right idea, and one that the entire industry will need to adopt. "The earlier you determine when something should be killed, the better," says Charlie Beaver, vice-president at consultant Booz Allen Hamilton Inc. Still, he warns, changing a corporate culture from one that thrives on success to one that also accepts failure "is a very large hurdle to overcome."

While Clark is encouraged by the results of his changes so far, he's still haunted by the culture of complacency that left companies like his stuck in an innovation rut. "If you ever feel comfortable that your model is the right model, you end up where the industry is today," he says. "It's always going to be continuous improvement. We will never declare victory."

Western Union Empire Moves Migrant Cash Home
By JASON DePARLE
Published: NYT, November 22, 2007

http://www.nytimes.com/2007/11/22/world/22western.html?_r=1&oref=slogin&ref=todayspaper&pagewanted=all

Talk about an example of innovating across the whole business design (target customers; desired outcomes for these customers; value proposition in the context of competition; and value capture mechanisms including how to secure your position) to drive organic growth……..

WASHINGTON, Nov. 21 — To glimpse how migration is changing the world, consider Western Union, a fixture of American lore that went bankrupt selling telegrams at the dawn of the Internet age but now earns nearly $1 billion a year helping poor migrants across the globe send money home.

Migration is so central to Western Union that forecasts of border movements drive the company’s stock. Its researchers outpace the Census Bureau in tracking migrant locations. Long synonymous with Morse code, the company now advertises in Tagalog and Twi and runs promotions for holidays as obscure as Phagwa and Fiji Day. Its executives hail migrants as “heroes” and once tried to oust a congressman because of his push for tougher immigration laws.
“Global migration is the cornerstone of how we’ve grown,” said Christina A. Gold, Western Union’s chief executive.

With five times as many locations worldwide as McDonald’s, Starbucks, Burger King and Wal-Mart combined (a huge “hidden asset” to build from), Western Union is the lone behemoth among hundreds of money transfer companies. Little noticed by the public and seldom studied by scholars, these businesses form the infrastructure of global migration, a force remaking economics, politics and cultures across the world.
Last year migrants from poor countries sent home $300 billion, nearly three times the world’s foreign aid budgets combined.

Western Union’s dominance of the industry casts it in a host of unlikely new roles: as a force in development economics, a player in American immigration debates and a target of contrasting attacks.

Its unparalleled reach gives millions of migrants a safe way to transmit money, and may even increase the amounts sent. But critics have long complained about its fees, which can run from about 4 percent to 20 percent or more. And the company’s lobbying for immigrant-friendly laws has raised the ire of people who say it profits from, or even promotes, illegal immigration.
Western Union tracks migrants so closely that it has made pitches to illegal immigrants just released from detention camps. Its agent in Panama offered customers legal aid to keep them from being deported.

After settling a damaging lawsuit that accused it of hiding large fees, Western Union set out a few years ago to recast its image, portraying itself as the migrants’ trusted friend. It has spent more than $1 billion on marketing over the past four years, selectively cut prices and charged into American politics, donating to immigrants’ rights groups and advocating a path to legalization for illegal immigrants……….

………The Philippines requires each outbound migrant to attend a predeparture seminar. Western Union paid to offer migrants instructions on sending money home. “We tell them about the services of Western Union,” said Steve Peregrino, the marketing director in the Philippines, “with the basic idea of seeking out Western Union when they go abroad.” In and around the waiting room, reviews are positive…………
……….Western Union’s founders set out in 1851 to build the first telegraph giant. A decade later, they had linked the coasts, a feat celebrated in a Zane Grey novel and a Hollywood film, both called “Western Union.” Airmail and faxes left telegrams obsolete, and the company went bankrupt in 1992.

It emerged two years later with a focus on its money transfer service (its fundamental strength) and was acquired in 1995 by the Colorado corporation First Data. Flush times followed. Fueled by the surge in migration, international money transfers were growing by 20 percent a year.

Metrics for Innovation
Sheila Mello
May 22, 2007
Innovate Forum
http://www.innovateforum.com/innovate/article/articleDetail.jsp?id=428371

This article touches on a critical issue, how to measure success in innovation. This approach is particularly relevant when considering "option plays", i.e., when the level of uncertainty is too high to have "good" numbers—at this stage do not ask for a business plan but the potential value you can create for your target customers. Go to the complete article for the full impact.

Question: Why are financial metrics the wrong yardstick for evaluating potential products for a portfolio and what should companies use instead?

Mello: Hindsight clearly indicates which products and services you ought to have added to your product portfolio when you were doing last year's plan. Lacking a crystal ball, most companies currently rely on a frighteningly inaccurate mix of erroneous financial projections, analysis of past successes or failures, and strong emotion to decide which innovations are worthy of commercialization. The prevalence of an approach that often resembles the efforts of medieval alchemists to transform base metals into gold in part explains why the failure rate for new product introductions is so startlingly high (estimates range from 50 percent to 90 percent).

Instead of profit potential or ROI, companies should measure something else: customer value. So why aren't they? One reason companies don't use customer value as a metric in determining what goes into their portfolios is that they believe they can't measure value before a product is created. They wonder how to determine whether a customer will pay for a product or service that's not yet fully developed.

The starting point for measuring customer value is a documented, repeatable research process to collect information that represents the voice of the customer. A robust, fact-based system to clearly identify both expressed and latent customer needs also provides a common, unambiguous language to discuss projects with product development teams. Instead of arguing over unreliable financials or engaging in political one-upsmanship, teams can focus on getting done what's needed to meet customer needs.

Traditional approaches to gathering VOC data -- such as focus groups, customer surveys, and informal research by marketing staff -- fall short of providing the deep insights needed to reveal true (and often unarticulated) customer needs. In short, if you simply ask what customers want, you may never gain the insights into their needs that allows for true innovation. (Ken Olsen of Digital Equipment Corporation is reported to have said in 1977, "There is no reason anyone would want a computer in their home," and customer surveys probably would have proven him right.)

An effective VOC process involves interviewing techniques such as probing questions, digging down for the so-called golden nuggets, storytelling about customer problems, and structured first-hand observation followed by quantitative Kano analysis. (The Kano Method, developed by Dr. Noriaki Kano of Japan's Tokyo Riko University in the 1980s, is, at its simplest, a series of two-part multiple-choice questions about user needs.) Using these methods, companies can determine the functionality that products must satisfy, as well as those features that delight, disgust, or elicit indifference in customers. With this data in hand, companies can separate potential winners from losers before launching into product development. Taking this method of analysis up a level to executive management allows companies to evaluate entire product portfolios using customer value as a yardstick

Achieving Full Potential: How Companies Can Increase their Global Presence
Knowledge@wharton.upenn.edu
September 5 , 2007

The excerpt of this article discusses some important points on the basic challenge of sustaining growth....

Over the next decade, 25% of the companies that exist today will disappear, either because they will merge with others or go bankrupt. In an interview with Universia-Knowledge@Wharton, Chris Zook, director of global strategy at consulting firm Bain & Co., discusses the key factors that will allow companies to survive the challenges of increasing their presence in the global marketplace. His ideas are presented in a book titled, Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth. The book will be published in Spain this month.

UK@W: What are the main problems that companies face when they try to grow?

Chris Zook: Most companies aspire to aggressive growth targets, but very few --only one in ten worldwide -- achieve more than a modest level of sustained and profitable growth, which we define as: 5.5% real revenue and profit growth...

Bain’s growth research has shown that successful strategies naturally move through a cycle from focusing on the essence of their competitive advantage (I prefer competitive separation which implies that your competitive advantage/position is in part of the offering that is critical to your customer), their “core,” to expanding into new “adjacent” markets or businesses, and finally, the most difficult stage, to redefining their core. In my most recent book on growth, Unstoppable: Finding Hidden Assets to Renew the Core and Fuel Profitable Growth, [I discuss] the main problem that we see today, which is that industries are becoming more turbulent at a faster and faster pace. This means that the most profitable activities in an industry are shifting more quickly, and that competitive differentiations (separations) are becoming harder to maintain. Because the cycle is speeding up, huge risks emerge from misjudging where you are in the cycle.

UK@W: What have companies done to get to this point?

Zook: Companies are at different stages of their life spans and not every company is undergoing a crisis in the core that requires redefinition. One of the most difficult decisions a company can face is whether to remain focused on extracting full potential from the core business or, instead, to begin the search for hidden sources of new potential. Knowing your company’s coordinates on a Focus-Expand-Redefine (F-E-R) cycle is the first step when it comes to making correct and well-timed decisions that improve the odds of sustaining or renewing profitable growth.

Each stage of the F-E-R cycle requires a different set of strategic principles that companies must follow. Profitable growth starts by rigorously defining the core business -- knowing how it differs from your competitors. During the Focus phase, there are three keys to success: core business definition, consistently lowering your cost position and discouraging competitors from investing in your core. Doing these three things right results in what Bain calls “full potential.”

As companies begin to reach full potential in their current core, three new imperatives emerge in the Expand phase: first, developing a repeatable formula that allows you to replicate your competitive differentiation in businesses or markets that are outside your core; second, investing in bringing that formula to new geographies, new customer segments or new channels; and, third, avoiding over-expansion by recognizing that the odds for success decline when you try to expand too far from the core.

Finally, as the pace of turbulence and change continues to accelerate, companies will find their strategies for growth reaching a natural limit much earlier in their history. As companies expand globally, they become more established, but also more complicated. You accumulate customer segments, business platforms and capabilities whose value you do not immediately recognize.

UK@W: What are the solutions for each one of these main problems?

Zook: Successful redefinitions are based on “hidden assets” -- customer assets, growth platforms or underutilized capabilities which suddenly assume a center role in how you look at your business going forward. (Go the Wharton web site for a full description of “hidden assets)

Changing Direction

The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in growing their business organically. I will excerpt the article over the next few postings, highlighting issues I feel are critical to drive organic growth from a leadership perspective.

This is the last of the trilogy. I hope you enjoyed it!

At the end, I took some liberty to do some consulting to emphasize the role of leadership in driving organic growth

CHANGING DIRECTION


(Interview questions) You’ve got two other sets of customers: the third parties who are selling goods through your site and this new set—the developers who can benefit from the tools you’ve created over the years. What are some constants for those groups?

We’re still working on identifying them for the developer community, although we have some good guesses as to what they are. Reliability of the platform would be one, which is kind of a no-brainer. But then a lot of these things are no-brainers. No-brainers are no-brainers for a reason: They actually are important. As for the sellers, the number one thing that sellers want is sales.

Is that why the auction business didn’t work out for Amazon—because eBay already had a lock on the sales those sellers wanted?

Actually, no, it’s a little different from that. It’s that our customers who are buyers are very convenience motivated. We make it really, really easy to buy things. You can see that if you look at a metric like our revenue per click or revenue per page turn. It’s very high, because we’re efficient for people. If you’re a customer who wants that kind of quick service, you do not want to wait till an auction closes. An auction is more about playing a game. There’s some fun involved. You’re not necessarily just trying to get the job done. It’s a different kind of thing and a different customer segment. (This is VERY powerful “experiment” reinforced the true strength of their base. Convenience is one of their critical Decision Criteria and they have a metric for it—you get what you measure. They want third parties because it adds to the breadth of their “selection” criteria while not impinging on "convenience". Amazon customers did not find the auction process convenient!!)
That episode is actually one of the highlights of our corporate history—one that I tell over and over internally, because it speaks to persistence and relentlessness. The basic thought was: Look, we have this website where we sell things, and we want to have vast selection. One of the ways to get vast selection is to invite other sellers, third parties, onto our website to participate alongside us, and make it into a win-win situation. So we did auctions, but we didn’t like the results. Next we created zShops, which was fixed-price selling but still parked those third parties in separate parts of the store. If a third-party seller had a used copy of Harry Potter to sell, it would have its own detail page, rather than having its availability listed right next to the new book. We still didn’t like the results we got. It was when we went to the single-detail-page model that our third-party business really took off. Now, if we’re offering a certain digital camera and you’re a seller with the same camera to sell, you can go right on our own detail page, right next to our product, and underbid us. And if you do, we will put you in the “buy” box, which is on that page.

That can’t have been an easy decision—it gets you the seller customer but loses you the buyer customer, doesn’t it?

It was a very controversial decision internally at the time. Imagine being our digital camera buyer and you’ve just bought 10,000 units of a particular digital camera. Your boss says to you, “Good news: You know all those people you’ve been thinking of as your competitors? We’re going to invite them to put their digital cameras right next to yours on your detail page.” The natural reaction is “What?” A digital camera today is like a fish in a supermarket. It’s aging fast. You don’t want to get stuck with a huge inventory of five-megapixel cameras when customers will shortly want six-megapixel cameras. You’ll have to sell them for pennies on the dollar. So our buyers were extremely concerned—and rightly. They were saying, “Let me just make sure I understand this. I might get stuck with inventory of 10,000 units of this camera that I just loaded up on, and you’re going to let just anybody come in and take Amazon traffic on what is our primary retail real estate, which is the detail page, and I’m going to lose the buy box to this other person because they have a lower price than me?” And we said, “Yeah, we are.”

We talked about that a lot before we did it. But when the intellectual conversation gets too hard because of these potential cannibalization issues, we take a simpleminded approach. There’s an old Warren Buffett story, that he has three boxes on his desk: in-box, out-box, and too hard. Whenever we’re facing one of those too-hard problems, where we get into an infinite loop and can’t decide what to do, we try to convert it into a straightforward problem by saying, “Well, what’s better for the consumer?”

The reality is that we have a highly competitive cost structure and we’re very good at competing on things like digital cameras on that page, so it actually works out very well. But some of the most important things we’ve done over the years have been short-term tactical losers. In the very earliest days (I’m taking you back to 1995), when we started posting customer reviews, a customer might trash a book and the publisher wouldn’t like it. I would get letters from publishers saying, “Why do you allow negative reviews on your website? Why don’t you just show the positive reviews?” One letter in particular said, “Maybe you don’t understand your business. You make money when you sell things.” But I thought to myself, We don’t make money when we sell things; we make money when we help customers make purchase decisions. (We often talk about the Core Mission which defines the strategic space for a company or business. There are two components: the Core Value and Core Process; the former is the ultimate value a company/business can create for their customers while the latter is their fundamantal building block of value creation. My sense is that helping the customers make purchase decisions is Amazon’s Core Value while their Core Process is their incredible system platform that enables convenience, selection, lowest cost and fast delivery. Note, the Decision Criteria must support the Core Mission.

Let’s take a shot at defining Amazon’s Leadership Framing (the first step in our Market Driven Growth process), a critical role of leadership in driving organic growth:

CORE MISSION

TO: Help our target customers make purchase decisions

IN A WAY THAT: builds the breadth and efficiency of our e - platform

SUCH THAT: we continue to increase our competitive separation to sustain our growth and margin goals for our stockholders.

DECISION CRITERIA

Any initiative must satisfy at least one of these criteria without impinging on another. Relative project rankings will be determined by the overall enhancement of these criteria to our target customers:

MORE SELECTION
LOWER COST
FAST DELIVERY
CONVENIENCE

I hope you can see from this example how framing the growth effort for a company or business is a critical job of leadership. Everyone within Amazon will know what leadership will resource and what they will not. This sets the conversation in the company!

Making Decisions

The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in growing their business organically. I will excerpt the article over the next few postings, highlighting issues I feel are critical to drive organic growth from a leadership perspective.

MAKING DECISIONS

How do you have the confidence that an investment will ultimately pay off?

It helps to base your strategy on things that won’t change. (Potentially counterintuitive but very powerful) When I’m talking with people outside the company, there’s a question that comes up very commonly: “What’s going to change in the next five to ten years?” But I very rarely get asked “What’s not going to change in the next five to ten years?” At Amazon we’re always trying to figure that out, because you can really spin up flywheels around those things. All the energy you invest in them today will still be paying you dividends ten years from now. Whereas if you base your strategy first and foremost on more transitory things—who your competitors are, what kind of technologies are available, and so on—those things are going to change so rapidly that you’re going to have to change your strategy very rapidly, too.

What are some of the things you’re counting on not to change?

For our business, most of them turn out to be customer insights. Look at what’s important to the customers in our consumer-facing business.
They want selection, low prices, and fast delivery. (The fundamental decision criteria mentioned in the first posting. This is one of the most powerful things leaders can do in setting direction. Its very simplicity makes it powerful and compelling!) I can’t imagine that ten years from now they are going to say, “I love Amazon, but if only they could deliver my products a little more slowly.” And they’re not going to, ten years from now, say, “I really love Amazon, but I wish their prices were a little higher.” So we know that when we put energy into defect reduction, which reduces our cost structure and thereby allows lower prices, that will be paying us dividends ten years from now.(the application of processes like 6 Sigma create competitive separation in this context) If we keep putting energy into that flywheel, ten years from now it’ll be spinning faster and faster.

Another thing that we believe is pretty fundamental is that the world is getting increasingly transparent—that information perfection is on the rise. If you believe that, it becomes strategically smart to align yourself with the customer. You think about marketing differently. If in the old world you devoted 30% of your attention to building a great service and 70% of your attention to shouting about it, in the new world that inverts. A lot of our strategy comes from having very deep points of view about things like this, believing that they are going to be stable over time, and making sure our activities line up with them. Of course there could also come a day when one of those things turns out to be wrong. So it’s important to have some kind of mechanism to figure out if you’re wrong about a deeply held precept.

The Institutional Yes
How Amazon’s CEO leads strategic change in a culture obsessed with today’s customer.
An Interview with Jeff Bezos by Julia Kirby and Thomas A. Stewart

There was an excellent article in HBR’s October 2007 edition that interviews Jeff Bezos, the founder and CEO of Amazon. They have been hugely successful in driving organic growth. I will excerpt the article over the next few postings, highlighting issues I feel are critical to organic growth from a leadership perspective.
I would like to welcome our newest set of Driving Organic Growth alumni. We had a great program!

SETTING STRATEGIC DIRECTION.

Who is setting strategic direction for Amazon? At the very beginning it was just you, sitting in a car on the way from New York to Seattle, making all the plans. Are you still making them all?

Oh, heavens, no. We have a group called the S Team—S meaning “senior”—that stays abreast of what the company is working on and delves into strategy issues. It meets for about four hours every Tuesday. (Growth is constantly on their agenda) Once or twice a year the S Team also gets together in a two-day meeting where different ideas are explored. Homework is assigned ahead of time. A lot of the things discussed in those meetings are not that urgent—we’re a few years out and can really think and talk about them at length. Eventually we have to choose just a couple of things, if they’re big, and make bets.
The key is to ensure that this happens fractally, too, not just at the top. The guy who leads Fulfillment by Amazon, which is the web service we provide to let people use our fulfillment center network as a big computer peripheral, is making sure the strategic thinking happens for that business in a similar way. At different scale levels it’s happening everywhere in the company. And the most important thing is that all of it is informed by a cultural point of view. There’s a great Alan Kay quote: “Perspective is worth 80 IQ points.” Some of our strategic capability comes from that.

How would you describe that cultural point of view?

First, we are willing to plant seeds and wait a long time for them to turn into trees. I’m very proud of this piece of our culture, because I think it is somewhat rare. We’re not always asking ourselves what’s going to happen in the next quarter, and focusing on optics, and doing those other things that make it very difficult for some publicly traded companies to have the right strategy.

Do you know when you’re planting one of those seeds that it’s, say, an acorn and it’s going to turn into an oak? Do you have a strong vision of how things will materialize? Or does the shape emerge along the way?

We may not know that it’s going to turn into an oak, but at least we know that it can turn out to be that big. I think you need to make sure with the things you choose that you are able to say, “If we can get this to work, it will be big.” An important question to ask is, “Is it big enough to be meaningful to the company as a whole if we’re very successful?”(As you will see in later postings, they use a simple set of what we call Decision Criteria. In addition to potential size, if the opportunity enables Amazon to offer more selection, lower cost, fast delivery and convenience to their target customers better than competition, they will go after it. Bezos treats these as digital criteria, not cumulative – an initiative must have all three criteria in addition to potential size)
Every new business we’ve ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally. They’ll say, “Why are you expanding outside of media products? Why are you going international? Why are you entering the marketplace business with third-party sellers?” We’re getting it now with our new infrastructure web services: “Why take on this new set of developer customers?” (This is a typical reaction to expanding the addressable marketspace of your business) These are fair questions. There’s nothing wrong with asking them. But they all have at their heart one of the reasons that it’s so difficult for incumbent companies to pursue new initiatives. It’s because even if they are wild successes, they have no meaningful impact on the company’s economics for years. What I have found—and this is an empirical observation; I see no reason why it should be the case, but it tends to be—is that when we plant a seed, it tends to take five to seven years before it has a meaningful impact on the economics of the company. (This is NOT unusual when going to very new business designs and/or marketspaces)

As Its Stock Tops $600, Google Faces Growing Risks

By STEVE LOHR
NYT, Published: October 13, 2007

In two previous postings we discussed the challenges of iconic companies like Microsoft (2/3/07 posting) and Wal-Mart (10/8/07 positing) that are trying to maintain their strong positions after years of tremendous growth. This article looks at the challenges of a company that is trying to achieve iconic status……

Can anything stop the ascent of Google’s stock?

What could reset expectations about Google? What are the risk factors — short term and longer range — that could dim the aura of inevitable success that surrounds the company? What could slow the Google juggernaut?

The potential threats, according to industry analysts, fall into three broad categories: those from inside the company, those from rivals, and public policy challenges that could bring regulatory controls and tarnish Google’s reputation and brand.

Size

Any big, fast-growing company confronts the “law of large numbers” — that is, growth rates naturally tend to slow as a company gets bigger. (I see this over and over again. Leaders make pronouncements about desired growth rate target without ever doing the math). That should not be a real issue for Google, analysts say, until it gets to be about twice its current size.

In 2007, the company’s revenue is projected to reach $11.5 billion, a 58 percent annual increase. Google, they say, is riding a tidal shift in advertising onto the Web that is just getting under way. Today, only 5 to 10 percent of advertising budgets are spent online, even though most Americans now spend as much time on the Web as watching television.

But in the short term, the number to really watch is Google’s spending. Last quarter, expenses that came in higher than anticipated surprised Wall Street and temporarily hit Google’s stock price. “The biggest challenge to Google’s stock is going to be if it gets the rap of being an overspender and not rewarding shareholders fully,” said Scott Cleland, an analyst at the Precursor Group.

Google is hiring at a torrid pace. The company keeps doubling the number of engineers it hires each year, adding 4,000 last year. “You simply can’t maintain the quality at 4,000 hires that you had at 250 or 500 or 1,000,” said Edward Lazowska, a professor of computer science at the University of Washington.

Larry Page, a Google co-founder, said at a conference last week that hiring was a big concern. “We never have enough people to do what we want,” he said. “We always need to hire. But there are limitations to how fast you can recruit people.” (Wouldn’t a lot of us like to have this problem)
Google is hiring so aggressively to support its ambitious strategy, which now extends well beyond its core business in search and online ads. (Can they sustain this?)

It has begun offering Web-based software like word processing and spreadsheets — areas where Microsoft is the dominant supplier. Its coming mobile phone software will put Google in competition with telecommunications companies. With YouTube, which it bought for $1.65 billion last year, Google has become a major distributor of entertainment, which could put it in conflict with cable TV companies. (They are expanding their addressable market space to give the room to grow. As they do that, their target customer will expand as well as the number and types of competitors. You determine the addressable Marketspace for your business. You have to be aware of the consequences however and plan for them)
These moves are assaults on huge businesses that have entrenched competitors. Google’s management style, geared to nurture individual innovation, may not be suited to the task, analysts say. (This can be a huge change for the way Google does innovation. There was a great article by Wolcott and Lippitz in the Fall publication of MITSloan titled The Four Models on Corporate Entrepreneurship which describes among others the innovation process at Google that may come under fire)

“Google needs to make sure that its management culture is in sync with the strategy,” said Thomas R. Eisenmann, an associate professor at the Harvard Business School. “I’m not sure the bottom-up approach will do it.”

Competitors

“The great risk to Google is that someday it will face real competition in search,” said Jordan Rohan, an analyst at RBC Capital Markets.

Google looks so strong today in part because of the stumbles of its principal rivals, Yahoo and Microsoft. Both have invested heavily to catch up in search and online ad auctions, but without success so far. In September, Google’s share of Web searches in the United States was 67 percent, up from 54 percent a year earlier, reports Compete.com, a Web analytics firm. The Yahoo share was 19 percent, compared with 29 percent a year earlier. And Microsoft had 9 percent, up slightly from a year ago.

The company’s market lead is so large that advertisers tailor their technology to work best on Google ad networks, and Web publishers design their sites to best pull in more Google users.
Jim Lanzone, chief executive of Ask.com, the fourth-largest search engine with about 4 percent share, sees no “silver bullet” that could greatly shift market share. Ask.com is acknowledged as an innovator in using graphics, audio and video in its results. The search market, he said, is so large that Ask.com can thrive by gradually inching forward.

But Silicon Valley start-ups and venture capitalists are betting that there is room for major innovation in search. Powerset and Haika are two well-financed start-ups working on natural-language search, where a user types a question instead of keywords.

Google, too, is apparently pursuing disruptive new search technologies. Narayanan Shivakumar, a computer scientist who heads Google’s Seattle office, is being given 100 engineers over the next three years to try to come up with search technology that beats its current offering, according to an industry consultant told of the project.

Google’s rising market power could also slow it. George F. Colony, chief executive of Forrester Research, was visiting corporate clients across Europe this week. “Nearly every company I meet here, as in the U.S., sees Google as an enemy or a potential enemy,” he said from Paris. “That could close doors for Google and make it harder to do deals with potential partners.”

Regulation

Not only Google’s market power, but also its reach and influence on how millions of people navigate their digital lives invite scrutiny. Privacy advocates say Google’s dominance and practice of keeping search histories of users raise many dangers. Google’s vast databases and search tracking, they say, raise the prospect of a corporate Big Brother.

Google’s motto is “Don’t be evil.” But Privacy International, a London-based organization, ranked Google last among Internet companies and called it “an endemic threat to privacy.”
Search engines like Google identify the searches done using a particular computer, rather than actually knowing who is at the keyboard. Yet privacy advocates say that unless rules are in place to limit what kinds of personal data can be collected and how long it can be stored, Google can effectively know who you are without knowing your name.

The privacy issue, they say, will only increase as Google grows and extends into new markets. “Google underestimates how strongly people care about privacy and underestimates governments’ willingness to take action,” said Marc Rotenberg, executive director of the Electronic Privacy Information Center, a privacy rights group.

That group and others have urged the Federal Trade Commission and European authorities to block Google’s planned $3.1 billion purchase of the online advertising company DoubleClick, or to make privacy protections a condition of the deal.

History’s Pull

In technology, dominant companies look invincible for years until they are unseated by the next wave of previously unforeseen innovation. I.B.M. ruled the mainframe era and Microsoft the personal computer boom. Google has emerged as a power of the Internet economy. Huge profits and market power are the rewards for being a keystone company in each era. It is no surprise, then, that I.B.M. and Microsoft were the targets of landmark federal antitrust suits. (The classic Innovators Dilemma!!)

What the next technology wave might be is anyone’s guess. But what Wall Street will be looking for is a turn, a shift in momentum. One such shift, analysts suggest, could be a combination of slowing growth and declining profit margins. Google’s ad revenue comes mainly from two sources: text ads from its own search results and ads it places on the Web sites of other companies. On the latter, it pays 80 cents or so of each dollar to the Web site and keeps the rest. Increased competition in ad networks, especially from Microsoft, will drive the payouts higher, nibbling away at Google’s profits.

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Wal-Mart Era Wanes
Amid Big Shifts in Retail Rivals Find Strategies
To Defeat Low Prices; The World is Changing
By GARY MCWILLIAMS
WSJ, October 3, 2007; Page A1

This is a fabulous article delineating incredible learnings as to the traps that a dominant business model can have on stagnating growth. Wal-Mart’s obsession with scale, which built the behemoth, is now a key reason for their troubles on two fronts: more nimble competitors are grabbing share by offering more of what a changing,more fragmented market is demanding (selection, convenience, and service) and the internet has redefined what scale means.

The Wal-Mart Era, the retailer's time of overwhelming business and social influence in America, is drawing to a close.

Using a combination of low prices and relentless expansion, Wal-Mart Stores Inc. emerged from rural Arkansas in the 1970s to reshape the world's largest economy. (basically the current business model) Its co-founder, Sam Walton, taught Americans to demand ever-lower prices and instructed businesses on running a lean company. His company helped boost America's overall productivity, lowered the inflation rate, and strengthened the buying power for millions of people. Over time, it also accelerated the drive to manufacture products in Asia, drove countless small shops out of business, and sped the decline of Main Street. Those changes are permanent. (it has had an unbelievable impact on our society)


Today, though, Wal-Mart's influence over the retail universe is slipping. In fact, the industry's titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions to $4. But success is no longer guaranteed.

Rival retailers lured Americans away from Wal-Mart's low-price promise by offering greater convenience, more selection, higher quality, or better service.(this is the evolving model that is hitting them hard by smaller – although still large – competitors that can target key growth markets) Amid the country's growing affluence, Wal-Mart has struggled to overhaul its down-market, politically incorrect image while other discounters pitched themselves as more upscale and more palatable alternatives. The Internet has changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers. (a major game changer)

As a result, American shoppers are increasingly looking for qualities that Wal-Mart has trouble providing. "For the first time in a long time, quality has a chance to gain on price," says Lee Peterson, a vice president at Dublin, Ohio-based brand consulting firm WD Partners Inc.

Now, the big-name brands that fueled Wal-Mart's climb to the top are forging exclusive distribution deals with other retailers, or working to reduce their reliance on its stores. (really indicates their dilemma)PepsiCo Inc., which favored mass-market campaigns a decade ago, recently skipped Wal-Mart when launching a new energy drink in favor of Whole Foods Market Inc. Consumer-products giant Procter & Gamble Co. gets 15% of its revenue from Wal-Mart, down three percentage points from 2003.


Wal-Mart remains an enormous force in retailing, of course. (they are still huge!!)Its world-wide sales are almost three times those of France's Carrefour SA, the world's second-largest, publicly traded retailer. Wal-Mart's U.S. revenue is 4½ times that of discount-store rival Target Corp., and four times that of second-largest U.S. food retailer Kroger Co. Its clothing and shoe sales last year alone exceeded the total revenues of Macy's Inc., parent of Macy's and Bloomingdale's department stores.

The company's unquenchable thirst for scale has been the secret to its market-changing power. (as you will see, this drive for scale is a major driver in their lackluster growth) "What we are is a 'supercenter' with one-stop shopping," said Wal-Mart's Vice Chairman John Menzer at an investors' conference last month. The company expects each year to build another 170 to 190 of the 200,000-square-foot supercenters that are its hallmark and convert 500 smaller discount stores to the bigger format over the next five years. "We would love to wave a magic wand and [make] every one of our discount stores a supercenter," he says.

But that very focus on scale is now a weakness, for the world has changed on Wal-Mart. The big-box retailing formula that drove Wal-Mart's success is making it difficult for the retailer to evolve. Consumers are demanding more freshness and choice, which means that foods and new clothing designs must appear on shelves more frequently. They are also demanding more personalized service. Making such changes is difficult for Wal-Mart's supercenters, which ascended to the top of retailing by superior efficiency, uniformity and scale.

"All retailers have a formula. They grow as far and as fast as they can with that formula," says Love Goel, a former Fingerhut Cos. executive and now chairman and CEO of Growth Ventures Group, a Minnetonka, Minn.-based private-equity firm that invests in retail businesses. Wal-Mart has outgrown its supercenter recipe, but efforts to win growth from more affluent consumers have fallen flat, he says. "They have hit the wall."

Business history is littered with companies that grew to enormous size and used their girth to re-arrange the world to fit their strengths. Think International Business Machines Corp. in the mainframe business, General Motors Corp. in autos, or Microsoft Corp. in personal computers. For a time, their success bred an ecosystem that sustained their status. In the 1970s, independent software companies piggybacked on IBM's mainframes, resulting in greater demand for mainframe computers.

Such orchestration can produce solid growth for decades. But it can also produce corporate blinders. Over time, IBM's grip on the corporate data center left it unable to anticipate the decentralizing effects of personal computing. GM's knack at brand creation and frequent model changes left it vulnerable to the incremental quality approach of Japanese auto makers. Microsoft was so busy cramming features into its Windows operating software that it lagged others in the shift to the Internet. Each remains among the top in its industry; yet each has relinquished the role of industry definer -- IBM to Intel Corp., GM to Toyota Motor Corp., Microsoft to Google Inc. (Wal-Mart is not alone in hitting the wall)

Wal-Mart's great insight was perfecting the so-called "value loop" in retailing. At its most basic, the system works like this: Lower prices generate healthy sales gains and profits. Some of those profits went into further price cuts, generating more sales. The lower the price, the more consumers flocked to Wal-Mart.

But the value loop is beginning to unravel. For 10 years through 2005, Wal-Mart's sales gains at stores open at least a year averaged 5.2%. So far this year, its comparable-store sales, a measure of market share, is up just 1.3%. The pricing gap between Wal-Mart and rivals has narrowed, and more customers are now choosing convenience over wading through a supercenter.

That compares with comparable-store gains of 4.6% at Target, which markets itself as a trend-setting discounter, and 6% at membership-club rival Costco Wholesale Corp., which peddles $500 Bordeaux wines and $4,000 Cartier watches. While Wal-Mart has been portrayed as a ruthless employer, Costco has been praised for providing some of the best employee benefits in retail.

Wal-Mart's shares trade about where they were at the start of the decade, when the company produced less than half its current revenue. Shares closed yesterday up 40 cents at $44.87, and down 9.3% from the stock's year-earlier price. Earlier this year, Wal-Mart took the extraordinary step of ratcheting down its U.S. expansion plans because its new stores were stealing too much revenue from existing ones. That wasn't a concern in the 1980s and 1990s when Wal-Mart was regularly flattening competitors.

In some ways, Wal-Mart's loss of clout is a reflection of a more fragmented world. Retailing is a mirror to how we live and work. Big-box stores thrived by selling highly recognizable national brands, which themselves were fed by two phenomena: the growth of mass media and freeways, which encouraged large stores in remote areas. Stores and brands together achieved scale efficiencies that allowed them to overwhelm local chain stores and regional brands. (scale was king but……..)

But the Internet is transforming the retail definition of scale. The once-stunning compilation of 142,000 items found in a Wal-Mart supercenter doesn't seem so vast alongside the millions of products available on the Internet. At the same time, the cost of creating and sustaining a national brand is rising because of media fragmentation. Niche brands, created by Internet word of mouth, are winning shelf space and sapping profits required to fund big brands' advertising. Manufacturers such as Apple Inc. and Phillips-Van Heusen Corp., lacking the retail distribution or presentation they crave, are opening their own stores. One result is that retail giants hold less sway over their customers -- and over their suppliers.

And across the landscape, numerous rivals are using a form of competitive jujitsu to keep the Bentonville behemoth off balance. (strategies of their competitors)

Grocery-store chains such as Kroger are resurging on sales of prepared or semicooked meals, which people can grab on their way home. Cincinnati-based Kroger projects sales at stores open at least a year will climb between 4% and 5% this year, on top of a 5.3% increase last year…….

When Wal-Mart pushed heavily into consumer electronics earlier this decade, many industry observers expected it to flatten electronics chains. But five years ago, Best Buy Co. began aggressively marketing installation and other services alongside flat-panel TVs and PCs. Last year, Best Buy's total sales rose 16%. (the importance of service!!!) Wal-Mart, which has struggled to sell big-ticket HDTVs, has only recently begun selling installation services at a few stores using an outside supplier. It doesn't break out consumer-electronics sales, but analysts estimate sales last year rose 7.6% to $22.6 billion……

Wal-Mart has long sold prescription drugs, setting up its pharmacy business in 1978. But national drug chains CVS Caremark Corp. and Walgreen Co. reacted by redefining their role and selling basic health services, such as school physicals, diagnostic tests, and flu treatment, alongside drugstore wares. CVS and Walgreen each acquired in-store clinic operations, redefining the pharmacy business as basic health-care centers.

Same-store sales at CVS and Walgreen are running about double that of Wal-Mart this year. Wal-Mart has begun offering leases to clinic operators.

Then there's the host of new entrants. In apparel, smaller retailers with niche market appeal like Hennes & Mauritz AB's H&M, Inditex Group's Zara and Los Angeles-based Forever 21 Inc. are growing by offering consumers rapid style changes. Outside the U.S., Britain-based Tesco PLC is challenging Wal-Mart by cultivating the Tesco brand across five different formats, including convenience stores and urban stores as well as supercenters. This fall, Tesco will open its first U.S. outlets, stores that will offer fresh and prepared foods and staples

As Wal-Mart's influence erodes, so does its allure to manufacturers. Burt P. Flickinger III, managing director of retail consulting firm Strategy Resource Group, says Wal-Mart now takes a back seat to regional grocery and national drug chains when it comes to striking deals.

He says some manufacturers now sell their wares faster at other retailers. "Four of the top 10 consumer-products companies say they can move merchandise faster with Walgreen and CVS," says Mr. Flickinger, who came up with the estimate from his talks with consumer-products firms. Such retailers have been rewarded with lower costs and better sales gains.

The change is apparent at PepsiCo. Wal-Mart is PepsiCo's largest customer world-wide, accounting for $3.16 billion in sales of drinks and snack foods. But earlier this year, PepsiCo opted to launch Fuelosophy, a new energy drink, at Whole Foods, a high-end supermarket chain.

"We thought that was the best place to introduce and test it," says PepsiCo spokesman David DeCecco. Whole Foods customers'"health and wellness" profile better match that of likely Fuelosophy buyers than Wal-Mart's, he says. He declined to name which other retailers were considered for the rollout.

Wal-Mart's loss of influence can also be seen in logistics. In 1984, Wal-Mart's decision to embrace bar-code scanners in its distribution centers and stores helped quash the use of a less-efficient technology then used at Sears, Roebuck & Co. and other retailers.

In 2003, the retailer brashly jumped onto the next big logistics technology, called radio-frequency identification, and mandated big suppliers begin slapping RFID tags on products shipped to its warehouses. Wal-Mart installed tag readers at warehouses and stores, hoping to further automate warehouses and lower inventory costs.

Wal-Mart quietly dropped the mandate earlier this year and refocused its development after suppliers complained of the high costs and lack of a return on their investment in the new technology. While the company says it's pushing ahead, Wal-Mart says it realigned efforts to focus on areas where the technology offered the most promise, such as assuring vendors' promotional displays are properly deployed in its stores.

Wal-Mart wasn't able to demand big suppliers continue investing in a technology that was raising their operating costs, says Ken Rohleder, president of Rohleder Group, a Louisville, Ky., supply-chain consulting firm. "There was a time when they could have dictated anything," he says.

The Importnace of Leadership to Growth

The following graph was published in the WSJ on October 3. A picture is worth a 1000 words. The only fundamental difference between the American car manufacturers and Toyota is leadership – cumulative leadership over the last 25 years lead to bad decisions on labor, design, and strategies. Toyota’s workforce is not more talented than those of the “Big 3”… it is all about leadership!

Running G.E., Comfortable in His Skin
By JOE NOCERA
Published: NYT June 9, 2007

This posting is a bit longer than normal, but I think it offers great insight into the challenge of leadership from the individual’s personal makeup to the tough decisions that rest only in the corner office..........

“When you put your foot on the gas in this company,” Jeffrey R. Immelt said a few weeks ago, with just the slightest trace of a satisfied smile, “the car goes forward.”Skip to next paragraph
Mr. Immelt, 51, was leaning back in a chair in a conference room that adjoins his Connecticut office, his legs casually crossed, acting as if he didn’t have a care in the world. He seemed utterly at ease, like LeBron James shooting a jump shot, or John Pizzarelli playing guitar.

Then again, Mr. Immelt always seems at ease. Never mind that as the chief executive of General Electric, a position he assumed a week before 9/11, he presides over one of America’s most storied companies, an incomprehensively large industrial conglomerate that employs over 300,000 people, generated nearly $21 billion in profit on $163 billion in revenue last year and ranks sixth on the Fortune 500.

Never mind, too, that there were enormous expectations placed on him from the start: he won the job after a well-publicized bake-off with two other prominent G.E. executives, W. James McNerney Jr. (now the chief executive of Boeing) and Robert L. Nardelli (you know who he is, right?), while replacing perhaps the best-known businessman of the age, Jack Welch. He then had to deal with 9/11, with a power turbine business that fell off a cliff, with NBC’s fall from first to last place in the ratings, and with the realization that the company’s insurance business was under-reserved by $10 billion.

And never mind that once he got through that, he has spent much of his time reshaping the leadership culture within General Electric — messing around with one of the things that G.E. does better than any other company in the world. And he’s been making a series of very big bets, selling off parts of the company, while doubling down on others, with no guarantee that the profits he is seeking will ultimately be achievable.

Oh, and one other thing: the entire time he’s been chief executive, the stock hasn’t budged. (It closed yesterday at $37.32.) In April, Jeffrey T. Sprague, the Citigroup analyst, called for “a partial breakup” of G.E., arguing that the company’s “size and complexity is working against investor interest in the stock.” During Mr. Welch’s 20 years at the helm, G.E.’s stock had a staggering 7,000 percent total return, including dividends. If the company’s share price doesn’t start to rise soon, Wall Street is going to be agitating for more than a breakup.

Mr. Immelt seems pretty much at ease about that, too.

Let me put my cards on the table: I think Jeff Immelt is the prototype of the modern chief executive. And a large part of the reason is his unflappable personality.

I’ve argued before that the age of the authoritarian C.E.O. is over, and that chief executives today need to have the whole range of “softer skills.” They need to be good listeners, consensus builders, ambassadors to the larger world, and leaders who others follow not because they have to but because they want to.

They need to be able to do really hard things — change a strategic direction, sell a long-valued division, lay off employees — with such a deft touch that nobody revolts. Informality is important. Charisma is important. Empathy is important. Admitting mistakes is important. The modern C.E.O. has to be, in sum, utterly comfortable in his own skin. These days that quality — “authenticity,” the management gurus call it — is what gives employees confidence in the boss, and makes them willing to ask “How high?” when he wants them to jump.

Mr. Immelt has those qualities in spades. He is not a clone of the blustery, impatient Mr. Welch, just as Mr. Welch was not a clone of his predecessor, the statesmanlike Reginald H. Jones. But that’s an amazing thing about G.E.: it has an uncanny talent for picking exactly the right leader for each different era. In its 128-year existence, it has had 10 leaders , and only one — the founder Thomas Edison, of all people — was a bust. Mr. Immelt’s quiet charisma, his self-confidence and his “emotional intelligence” make him the right man to run General Electric in this era.

Noel M. Tichy, the co-author of the coming book, “Judgment: How Winning Leaders Make Great Calls,” and a longtime G.E. watcher, spoke to Mr. Immelt not long after 9/11. Mr. Welch had made G.E. “faster-moving and more entrepreneurial,” the incoming C.E.O. said. “But it doesn’t have the heart it needs, and it doesn’t have the context it needs. That is what I want to do in the next 20 years.”

An advantage Mr. Immelt has is that he does indeed expect to stay in the job for 20 years; that’s just the way it’s done at G.E. Jack Welch used to say that it takes a C.E.O. five years to learn the job, and General Electric is the rare company that wants its chief executives to be around for decades in order to leave their mark. There isn’t another C.E.O. in the land who has that luxury. Another advantage is that, as with every other General Electric chief executive, he’s been there his whole career. He understands the company in his bones. And he loves it, to use his own words, “completely and deeply.”

For instance, the grooming of leaders has always been a core strength of General Electric. But as Mr. Immelt rose near the top of the G.E. ladder, he came to believe that the company focused too much on individual leadership traits and not enough on team skills. So he began the process of instilling a better team ethos. How do they do that at G.E.? They institute a process, first teaching the skills, then rating the performance of up-and-coming leaders, and finally promoting those who show the attributes the company cares about. It’s a kind of enforced culture change, but somehow, at G.E., it works.

Mr. Immelt also felt that G.E. needed to do a better job at what is called “organic growth,” that is, growth that is not a result of acquisitions. So he had G.E. study companies that excelled at internal growth, like Apple and Toyota, quantified the qualities that those companies had in common, and began teaching them at General Electric. Now, Mr. Immelt has told Wall Street that he wants the company’s organic growth rate to be 8 percent a year, twice what it used to be.

“Eight percent may not sound like much,” he says, “but it means we have to grow the size of a company like Nike every year.”

A statement like that one, delivered by someone else, might have a feeling of helplessness about it — an admission that with $163 billion in revenue, the company is bumping up against the law of big numbers. But when Mr. Immelt says it, it is clear that he views it as an achievable goal. And that’s because he has a tremendous belief in the power of large industrial conglomerates — or at least his.

You see, the way he views it, G.E. is operating in a gigantic world economy that is currently growing at a rate, more or less, of 4 percent a year. So “all” the company needs to do is grow at double the rate of the world’s economy. And if he places the right bets — if G.E. expands in the right countries, and focuses on the right sectors — he is confident the company can pull it off.
Hence, his decision, for instance, to stress global infrastructure and health care, both businesses that G.E. knows a great deal about already, and which are growing much faster than the other parts of the world economy. And thus perhaps his most controversial bet: to build a huge business around the environment.

“The first time I brought the idea to the company’s executive council,” he said, “there was rapt silence. Some people saw it as wimpy, caving into the enviros. But I saw that we already had two-thirds of the company working in some way on environmental technology, like water scarcity. And I thought it was worth a swing.”

The day before I interviewed Mr. Immelt, I saw him speak to a group of G.E. customers. “It was not universally loved by our customers and even less by employees,” he told them, referring to the company’s environmental thrust. “I have made a couple of hundred mistakes in my business life, but this isn’t one of them.” From a standing start, the ecomagination line of General Electric products has become a $10 billion business, a number the company expects to grow to $20 billion within three years.

Wall Street, of course, doesn’t much care about the law of big numbers either. It just wants to see the stock go up. “Yes, there is a mood of impatience,” said David Bleustein, who follows General Electric for UBS. But Mr. Bleustein also told me that right now at least, he’s buying what Mr. Immelt is selling — and currently has a buy on the stock. “More often than not, he’s made the right moves,” Mr. Bleustein said. From the Street’s point of view, it’s payoff time.

Most C.E.O.s whose stock hasn’t moved in five years would be in a world of trouble, of course. And Mr. Immelt is not going to get his 20-year run if he can’t get the stock to move. But he’s still got plenty of time to show that his repositioning is working; Wall Street may be antsy, but no investor is crazy enough to call for his ouster. And he’s adamant that the solution is to wait for the market to catch up with the company’s changing nature, rather than to execute a partial breakup just to please the Street.
“Investors go through cycles where they don’t like conglomerates,” Mr. Immelt said. “But if you want to be a lasting company, you have to know how to be a multibusiness structure. If Google is going to be a 100-year-old company someday, it is going to have to learn to do more than search.”

At one point in our conversation, I asked Mr. Immelt how he balanced the need to be building consensus with the need to make a firm decision and, in effect, show who’s boss. It struck me as a tricky issue, and it was clearly one he had thought about a lot.

“When you run General Electric,” he said, “there are 7 to 12 times a year when you have to say, ‘you’re doing it my way.’ If you do it 18 times, the good people will leave. If you do it 3 times, the company falls apart. You want a team of leaders who are self-confident. But in the end it is not a democracy. There has to be clarity about decisions.”

Which helps explain why, if you’re Jeff Immelt, you can put your foot on the gas, and that amazing $163 billion car goes forward