Thursday, July 28, 2005

Equine Management Tips

I recently learned that thoroughbred trainer D. Wayne Lukas has won more Triple-Crown races (13) than any other horse trainer, more Breeders’ Cup races (17) than any other horse trainer, and higher earnings than any other horse trainer (14 years), for a lifetime total of an astonishing $250 million. As a student of management, I learned something even more interesting: that he’s done this by challenging the conventional wisdom that a horse should always be raced in a location near its stable. Bucking conventional wisdom, Lukas shipped horses to tracks around the country, carefully picking locations and races that offered a given horse the best chance for victory, while also gradually increasing the level of competition for that particular horse over time. With this maverick and controversial, yet careful and disciplined approach, Lukas and his minions steadily built a horse’s confidence and ability. And because he did this with a number of horses simultaneously, Lukas also gathered hard data on which of his horses had the best chance to win the Kentucky Derby, Preakness and Belmont. After observing his methods, and results, other trainers began to mimick his approach, but they were playing some steep catch-up.

That got me thinking that Lukas is demonstrating what might well be called the twin foundations of sustained competitive advantage:

1. He didn’t merely “continuously improve” his business. He changed the rules of engagement, forcing everybody else to play catch-up with new rules. FedEx, Dell, Southwest Air, Amazon, Honda (light motorcycles), IKEA and Starbucks changed the game by disrupting the conventional wisdom in their industries—and prospered as a result. So did Lukas. When I work with CEOs, I try to get them to realize that in the theatre of business, the stage set doesn’t have to stay the same. The walls of have wheels—and successful leaders are always considering how the set might be rearranged for a more unique production.

2. A great idea is nothing without great execution. Unlike many leaders today, Lukas executed. He meticulously tracked the evolvement of each of his animals, he kept rigorous data, and he religiously followed up with each employee, each horse, each location daily. You examine these kind of “back end” operations of each of the companies cited above and you will be surprised at the fanatic discipline with which top executives approach the details of execution. But it’s that back-end obsession that allows them to breathe life into their radical ideas, and to build speed, cost-efficiency, flexibility, and profit margin in the process. I think it’s appropriate that Harvard Business Review entitled an interview with Lukas as “A Passion for Detail”.

I think it’s also appropriate to note Harvard Business Review’s observation that the very word "manage" has an equine origin. It comes from Latin, by way of the Italian word "maneggiare", meaning "to handle, to train horses." Seems to me that when the Triple Crown series rolls in next season, we might want to crown D. Wayne Lukas as a true management guru.

Tuesday, July 26, 2005

Inevitable

It was inevitable that the big wireless carriers like Verizon and Sprint, in the face of numerous consumer complaints and lawsuits, would have to give up their legal blockades to cellphone number portability. Now that you and I can switch from one carrier to another and still keep our phone number, the carriers will have to figure out fresh, compelling ways to build customer loyalty.

It was inevitable that the National Association of Realtors, under threat of a Justice Department lawsuit, would have to drop the practice of limiting the home listings that some discount online brokers could display on their website. Now, intermediaries like the NAR will have to figure out new ways to create value for their customers.

For the future, I can assure you that despite the huge lobbing muscle of the giant telco’s and cable companies, they will not be able to stop the growing movement towards allowing municipalities to provide ultra-cheap Wi-Fi wireless high speed internet to their citizens. It’s inevitable. I can also assure you that despite its armies of lobbyists, it's inevitable that American Airlines will not be able to preserve its long-haul flight monopoly against Southwest Air in the Dallas area. The old protectionist Wright amendment, which prevents Southwest Air from launching domestic long-haul flights from its Love Field hub in the Dallas area, will be repealed. That’s how things work these days.

What’s going on is that in the face of an increasingly transparent and elastic economy, protectionist and legal barriers will continue to melt, and companies will have to succeed on their own merits. Certainly, there remains an important place for lawyers and lobbyists. A company would be foolish not to judiciously use them. But the moral of the story is this: A company that is serious about achieving sustained competitive advantage proceeds “as if” there is no legal and government “protection” any more, because ultimately, in a global free-market environment, there isn’t.

Friday, July 22, 2005

How Do They Live With Themselves?

I’m totally disgusted. In my June 21 blog I wrote about the decline of Morgan Stanley under CEO Philip Purcell, and why I wasn’t surprised that even his docile puppydog board finally gave him the heave. But what I didn’t count on was his “punishment” for having decimated the morale of the company, for creating an environment that led to massive defections of top talent, and for destroying nearly half of the company’s market value. That punishment —are you ready for this—is a $113 million goodbye payoff, which includes $44 million in cash! And if that’s not sufficiently outrageous, his ally Stephen Crawford, who was promoted to be “co-President” (whatever that means) just three months ago, was given a $32 million payout even though he was never any sort of a rainmaker in the firm. To all those investor groups who have initiated legal actions against those decisions as well as proxy actions to remove the board, I can only say: Yes!!!

The utter corruption of governance is obvious: I can’t imagine why the Morgan Stanley board would act with such spinelessness or stupidity, any more than I can explain the weakness (or is it stupidity) of the HP board for having given Carly Fiorina a $21 million payoff for sabotaging a once-great brand and guiding the company, like Purcell did his, to a halving of market value during her five year reign.

But now I’ve got a different question. How can these people—Purcell, Fiorina, and so many other deposed CEO’s—even take the money in the first place? I know that sounds naïve, but can I at least ask the question? Their efforts have been disastrous, their ineptness has been publicly outed, and despite all their failures they’ve already received millions in total compensation which is theirs to keep. So since it’s not like they “need” the money, it would seem to me that if they had either a sense of integrity, or at least some conscience, or at least some fear of public disdain and ridicule, that they’d never accept a big fat multimillion dollar payout. I guess I am being naïve, because after Gil Amelio almost destroyed Apple, he not only took the $10 million severance but then had the gall to write a book explaining why he, the CEO, wasn’t at fault.

I know people can rationalize anything, but I like to believe I’d be way too embarrassed to take the farewell sums that Purcell, Fiorina, Amelio et al have taken. I suppose these people just view the world differently. I’m on the board of a couple companies and I can tell you that if there’s some test or interview question that can help me predict this mindset (or is it a personality trait?), I’d sure like to know it before we pick our next CEO. At the very least, I’d sure like to understand what makes these people tick.

Tuesday, July 19, 2005

Fat Nation?

I was visiting with a health care client when a startling statistic came up in one of our management meetings: 58% of the company’s employees were overweight—from slightly to hugely. Remember, this is a health care organization: hospitals, laboratories, health insurance, that sort of thing. One would expect a close-to-zero statistic. And one would be wrong, because it turns out that 30% of the staff are smokers too! That’s just too weird to comprehend.

Anyway, back to obesity. The CEO said that that 58% proportion pretty well mirrors the general population. The trend is impacting kids too. One hears different numbers—20%, 33%--but basically, the conclusion is that our kids are getting fatter. In fact, a cardiologist I talked to said that his office is now seeing 10 and 11 year old kids with arteriosclerosis.

Why? Crappy, high-fat, high-salt, high-sugar foods, of course. And, as USA Today just featured in a front page article, the fact that most kids nowadays prefer to stay home working their PC’s and playing video games and such rather than bicycling or climbing trees. Sedentary chubby kids tend to grow up to be more sedentary fatter adults.

I suppose this trend is great for some companies like Dell, Sony, and Electronic Arts. It’s also good for groups like Big and Tall retail stores, and the entire lose-weight-fast industry. It's good for drug companies which have plenty of goodies for obese people, and for the illnesses they'll undoubtedly contract in the future.

Does this trouble you as much as it does me? We’re spending $200 billion to liberate 24 million Iraquis from a destructive fate. Maybe we need to spend a little more money to liberate an increasingly fat nation from destructive lifestyles. It’s hard for me to believe that the U.S. can maintain a healthy, vibrant economy unless its workforce is filled with healthy, vibrant people. What do you think?

Friday, July 15, 2005

Is Piracy Inevitable?

I finally saw Star Wars III: Revenge of the Sith. Good flick, especially the final scenes showing the genesis of Darth Vader. But you know what really impressed me—other than the special effects? The fact that complete, unedited, low-priced downloadable bootleg copies of the film appeared on the Internet literally hours after its official release of the film in May 2005. Wow! On July 1, authorities arrested suspects in 11 different countries for controlling a copyright piracy supply and distribution chain. It’s clear that when it comes to pirating, prior barriers like time, space, distance, boundaries, and geography are becoming less and less relevant as the world shrinks and flattens from technologies that bind everyone closer and closer together.

My next book describes the ravages of legal, everyday imitation of products and services, but this is different. The counterfeit trade is the ultimate, albeit corrupt, expression of imitation, and grows by being fed and watered by transparency . Engineers and chemists in various countries can now reverse- engineer and copy patented molecules to produce illegal pharmaceuticals and sell them at a fraction of what a legitimate drug company charges. In countries like China, Vietnam and Ukraine, the production of amazingly authentic-looking but bogus Calloway golf clubs, HP inkjet cartridges, Louis Vuitton handbags, Nokia cell phones, and Intel computer chips hums away and seems to grow exponentially. I was once at a conference with Intel’s Andy Grove and the only time I saw him lose his temper the entire day was when the subject of Chinese counterfeiting came up. He insisted, with some heat, that “there are no ‘cultural differences’ that explain what they do; they know exactly what they’re doing!” But what can Intel do? 90% of DVDs and video discs in Chinese homes are counterfeit. What can Microsoft do? 90% of its products are counterfeit in China too. In fact, the Economist reports that the next Harry Potter books are also in Chinese homes, even though author JR Rowling hasn’t written them yet! The World Customs Organizations estimates that counterfeit products accounted for 7% of global merchandise trade, or $512 billion, in 2004 alone. None of this could occur without the breakdown of traditional barriers and concomitant expansion of total transparency that now defines the global marketplace.

What’s the solution? I wish I knew. Sure, we can all support the police crackdowns like those against the Star Wars pirates, but we all know that those efforts are episodic and inefficient. I was in Shanghai with some Microsoft officials a couple years ago and I said that ultimately, it’s only when Chinese firms develop their own intellectual property and patents that we’ll see some truly aggressive anti-piracy efforts in China. I still believe that. That’s why I support the efforts of many U.S. firms to set up joint ventures and R&D partnerships with organizations in Asian and east European countries. Ultimately, we’ll have to rethink the whole concept of intellectual property, from both a legal and fair practices perspective. Some firms—from Asea Brown Boveri to Proctor and Gamble—are beginning to take the position that licensing intellectual property and focusing on new innovations is more promising than trying to protect and hoard secrets. Others are calling for new collaborative efforts with international legal and regulatory institutions so as to develop some sort of internationally accepted ground rules and enforcement parameters. But perhaps ultimately we’ll all have to accept the possibility that piracy is just one of those unfortunate consequences that are inevitable in a world marked by extreme transparency, globalization and technological advance. What do you think?

Tuesday, July 12, 2005

The Price-Quality Trade-Off is Dead

Rich Walker is the Executive Director of the American Architectural Manufacturers Association (AAMA), whose members are in the business of commercial and residential windows. Here’s what he tells me: “Two years ago we didn’t anticipate that the Asian challenge would be as intense as it is today. Imports from China have changed everything. It’s not just that they’re cheap. What’s scary is that even though they charge 1/3 to ½ our price for window framing, they’re exporting good quality product.”

Switch gears now, to a senior manager at Morgan Stanley Dean Witter (MSDW), who wrote me the following: “Over the years institutional and retail commissions for stock transactions have come down dramatically. Online and discount brokerage firms continue to offer equivalent quality executions at lower and lower price points.”

What’s going on here? It used to be that if customers couldn’t pay a premium, they’d have to accept low quality in return. In other words, the low price vendor was by definition the low quality vendor. That’s not true any more, witness the success of companies as diverse as Dell, Jet Blue, Progressive Insurance, and Men’s Wearhouse—all recognized for good products and good customer service as well as low prices. Note the fact that in both the AAMA and MSDW cases, representatives of both organizations conceded that lower price competitors were offering, in effect, comparable quality goods and services.

Three implications for you. First, don’t get complacent and assume that the low priced competitors are offering cruddy products and services. Second, get serious about cleaning up your cost structure so that you can, when necessary, lower your price a little without sacrificing margin.

Third, and most important, focus on creating price-value. Remember that at the end of the day, your company’s capacity to offer a unique, “must have” breakthrough value package --whether the value is built into the features of the product, the aftersale service, the customization, the relationship, or the distribution-- is a much better predictor of competitive success than simply trying to imitate those whose strategy is built around commodity thinking and low-ball prices.

Friday, July 08, 2005

Is the Day of No Privacy Coming?

Remember George Orwell's classic book 1984, the "futuristic" story of a totalitarian society where you don't watch TV, the TV watches you? I sometimes wonder if we're edging towards that ourselves. And I wonder if I'm contributing to the process.

I am forever pounding on my clients to think in terms of market units of one rather than mass markets. “Use your technologies and databases to know each customer intimately, then try to personalize, customize, and build to order everything you do!” Those are the war cries I endorse, for it’s those actions that empirically yield sustainable customer loyalty and healthy margins. There's no doubt about it.

Nevertheless, I sometimes worry that with today’s technological advances, organizations’ capacities to peer into each of our private lives create troubling consequences, like privacy violations and nanny-state protectionism. As leaders, we need to aggressively pursue the potential of technology to cement deep relationships with customers, but at the same time we need to keep vigilant on the unintended consequences that might rear their ugly heads.

For example, I recently got this little vignette in my e-mail. What do you think?

The Day is Coming

Operator: "Thank you for calling Pizza Hut.”

Customer: "Hi, I'd like to order."

Operator: "May I have your NIDN first, sir?"

Customer: "My National ID Number, yeah, hold on, eh, it's 6102049998-45-54610."

Operator: "Thank you, Mr. Sheehan. I see you live at 1742 Meadowland Drive, and the phone number's 494-2366. Your office number over at Lincoln Insurance is 745-2302 and your cell number's 266-2566. Which number are you calling from, sir?"

Customer: "Huh? I'm at home. Where d'ya get all this information?"

Operator: "We're wired into the system, sir."

Customer: (Sighs) "Oh, well, I'd like to order a couple of your
All-Meat Special pizzas...

Operator: "I don't think that's a good idea, sir."

Customer: "Whaddya mean?"

Operator: "Sir, your medical records indicate that you've got very high blood pressure and extremely high cholesterol. Your National Health Care provider won't allow such an unhealthy choice."

Customer: "Damn. What do you recommend, then?"

Operator: "You might try our low-fat Soybean Yogurt Pizza. I'm sure
you'll like it"

Customer: "What makes you think I'd like something like that?"

Operator: "Well, you checked out 'Gourmet Soybean Recipes' from your local library last week, sir. That's why I made the suggestion."

Customer: "All right, all right. Give me two family-sized ones, then. What's the damage?"

Operator: "That should be plenty for you, your wife and your four kids, sir. The 'damage,' as you put it, heh, heh, comes $49.99."

Customer: "Lemme give you my credit card number."

Operator: "I'm sorry sir, but I'm afraid you'll have to pay in cash. Your credit card balance is over its limit."

Customer: "I'll run over to the ATM and get some cash before your driver gets here."

Operator: "That won't work either, sir. Your checking account's overdrawn."

Customer: "Never mind. Just send the pizzas. I'll have the cash ready. How long will it take?"

Operator: "We're running a little behind, sir. It'll be about 45 minutes, sir. If you're in a hurry you might want to pick 'em up while you're out getting the cash, but carrying pizzas on a motorcycle can bea little awkward."

Customer: "How the hell do you know I'm riding a bike?"

Operator: "It says here you're in arrears on your car payments, so you car got repo'ed. But your Harley's paid up, so I just assumed that you'd be using it."

Customer: "@#%/$@&?#!"

Operator: "I'd advise watching your language, sir. You've already got a July 2006 conviction for cussing out a cop."

Customer: (Speechless)

Operator: "Will there be anything else, sir?"

Customer: "No, nothing. oh, yeah, don't forget the two free liters of Coke your ad says I get with the pizzas."

Operator: "I'm sorry sir, but our ad's exclusionary clause prevents us from offering free soda to diabetics.

Tuesday, July 05, 2005

What Does 9-0 Mean for Music?

I was surprised that the Supreme Court ruled 9-0 that file sharing websites Grokster and Morpheus can be held liable when their users pirate music. (Frankly, given the composition of the Court, I was even more surprised that the justices could agree on anything 9-0). So now what? Will the technology stop evolving? Will file-sharers stop sharing music, legally or otherwise? Will armies of music industry attack lawyers arresting pre-teens for downloading unauthorized music act as a deterrent for those who are committed to getting their music any way they can?

I don’t think so. I have friends in the music industry, and I truly empathize with their predicament. Yes, I agree that intellectual property is being stolen, just like it is when people tape a TV show or copy a DVD, using a VCR, a PC, a TiVo or anything else that is somehow socially okay to do without fear of legal retribution. Perhaps we ought to start taking a similar mindset to music, because when it comes to music, the reality is twofold:

First, the advances in technology are relentless. No lawyer or judge or politician can stop them. Every time the industry sues one group or shuts down a website, ten new digital sources for file-sharing pop up that are more legally and technologically bulletproof. Besides, many of the sites are moving offshore, away from the long arm of U.S. law.

Secondly, imagine if the industry could accept that some people will always seek free goods, but that a vast number of current “underserved non-customers” would gravitate—with dollars-- towards any vendor that capitalized on the technologies rather than defied them, and made those technologies more user-friendly, hassle-free, and fun to use. The legal music platforms at Apple, Yahoo, Napster, Starbucks et al should be starting points in corporate innovations that capitalize on cutting edge file-sharing technologies and take them to new (legal) possibilities that excite and delight customers. Do that, and people will pay. Gladly. And more computer-phobic people will start downloading authorized music, and paying. Gladly. The alternative for the industry, regardless of the unanimous Supreme Court ruling, is pretty grim.

And you know, since I’m a big believer that leaders who make important decisions should never make them in an isolated, analytically detached vacuum, I can’t help but wonder how many of those Supreme Court justices have ever downloaded any music off the web, legally or not.