Category Archive

In boom times, when demand is growing, it is no trick for managers to boost their top lines (revenues) and bottom lines (net profits). But in bad times, when demand is contracting, that indeed is a great achievement.  Let us therefore look more closely at Honda.

In America, where high oil prices and the housing bust have mangled consumer spending, GM Ford and Toyota report large sales declines: 18 %, 14% and 7%, respectively. (International Herald Tribune, August 26, 2008, p. 11).

Honda? Its U.S. sales are up 3% this year and it is struggling to maintain inventories, as its cars ‘fly out of the showrooms’. Its U.S. operations remain highly profitable.

Why?

A brilliant combination of what Jerry Porras and Jim Collins, in their classic 1991 California Management Review article, call: “core values and purpose”, and “dynamic change”.

From the time Honda’s namesake founder Soichiro Honda built a fuel-efficient engine with his own hands decades ago, Honda has stuck to its core values of fuel efficiency. When GM, Chrysler and even Toyota chased the high-margin market for SUV’s and trucks, Honda stuck to its core values. Its new FIT hatchback, which uses only 7 liters of gasoline per 100 kms., is a huge hit, and its sales are up 79 % this year! Honda’s CIVIC and Accord models are also selling well. 

I sometimes use a yin-yang diagram to illustrate the key management dilemma, of retaining core values while implementing radical change. This is one of the toughest dilemmas in innovation management: What to keep, what to change. Some companies innovate away their core values. Invariably they self-destruct – GM, once the world’s largest industrial corporation, is diving toward single-digit ($ b.) market value and may be approaching bankruptcy. 

Honda innovates within its core values. And its bottom line proves why this is wise.

Urginea (“Hatzav” in Hebrew)

In large parts of Israel, a strange tall flower, whose botanic name is Urginea, is blossoming. Its Hebrew name is Hatzav. 

Wait. Run that by me again. Blossoming, during the driest season of the year, when no rain falls at all? In August and September? Flowers blossom in the spring, right?  

Not the Hatzav. Based on the principles discovered by Charles Darwin – natural selection, survival of the fittest — the Hatzav has discovered an evolutionary trick. If you blossom when no other flower does, you gain competitive advantages that help you survive and procreate. Bees and wasps fertilize your flowers, because there is little else around. When other flowers are more dormant, you get a bigger share of resources and groundwater.  

In innovation theory, we call this blue oceans innovation. Perhaps, viewing the fields of hatzavim, we should call it white oceans. 

Weird flower? Even Nature has discovered the value of being different, totally different – long long before human beings did.

Many years ago, Harvard Business School Professor Clayton Christensen developed the notion of disruptive technology: Technology that unobserved threatens the fundamental dominant technology in an industry, and quickly makes it obsolete. Now he and colleagues have applied this notion to education. In America, they note, faced with overwhelming constraints, schools are (under the radar, often unnoticed) innovating new models of schooling. 

The same, I believe, is happening in Israel. The vaunted “Ofek Hadash” (New Horizon) strategic innovation in Israel’s educational system was developed top-down, led by a consulting company, with little participation by teachers in the field. I spoke to some of those teachers. They showed glaring obvious flaws in Ofek Hadash, that could easily have been fixed had they participated in the formulation process. Despite this, innovative experimentation is going on in many schools. Problem is: There is a lack of a benchmarking process, in which great ideas spread rapidly from best-practice schools to mediocre ones.

Here is how Christensen (interviewed in Harvard Business School Working Knowledge) describes the process in America, whose schools are no less troubled than those in Israel:

…. on average, schools have done a better job adjusting to disruptions imposed upon them than have companies in the private sector. Our research shows that the classic signs of disruption are now occurring in the world of education, in the same ways they occur in the other contexts we have studied.

Computer-based or online learning is beginning to fill the void and plant itself and make inroads in the education system in classic disruptive fashion. Online learning has increased from 45,000 enrollments in 2000 to roughly 1 million in 2007, and shows signs of continuing to grow at an even more rapid pace.

Computer-based learning is an exciting disruption because it allows anyone to access a consistent quality learning experience; it is convenient since someone can take it virtually anywhere at any time; it allows a student to move through the material at any pace; it can customize for a student’s preferred learning style; and it is more affordable than the current school system.
 
In education, the tools of the software platform will make it so simple to develop online learning products that students will be able to build products that help them teach other students. Parents will be able to assemble tools to tutor their children. And teachers will be able to create tools to help the different types of learners in their classrooms. These instructional tools will look more like tutorial products than courseware initially. And rather than being “pushed” into classrooms through a centralized selection process, they will be pulled into use through self-diagnosis—by teachers, parents, and students who don’t have access to another tutoring option.

Can Israeli schools take up Christensen’s challenge and disrupt the misguided establishment’s “strategy”?

Here is a true mystery for our readers:

 • Ford has spent the last thirty years moving all its factories out of the US, claiming they can’t make money paying American wages.

 • TOYOTA has spent the last thirty years building more than a dozen plants inside the US. The last quarter’s results: TOYOTA makes 4 billion in profits while Ford racked up 9 billion in losses. Ford folks are still scratching their heads, and collecting bonuses. GM is essentially bankrupt.

Chrysler is dead in the water.

Why?

Simplify, Einstein counseled. 

What is the simplest of all explanations – which, according to the scientist’s principle known as Occam’s Razor (eliminate everything but the bare essentials from a theory), is generally the most powerful and accurate?

Success in making and selling cars rests mainly on making beautiful, appealing, sexy, lovely, and hard-to-resist cars. This is done by managers who love CARS, and the car business, not accountants who love bottom lines. The true bottom line is: Do you truly love cars? Do you have a passion for them? And do you know how to find people who share your passion and know how to design incredibly beautiful ones? 

Remember Chrysler? When bankruptcy loomed, along came Lee Iacocca, a true car man, who loved beautiful cars (he led development of the Ford Mustang, one of history’s most beautiful cars), and revived Chrysler, not with outsourcing and bean-counting but with design.

Toyota makes beautiful innovative cars that work, tailored to the needs and dreams and wishes of those who buy them. Low end, medium end, high end. Lexus trumps Mercedes. Corolla trumps Focus. 

Ford makes ugly cars tailored to the needs and dreams (as its managers perceive) of bottom-line quarterly-statement-focused shareholders.

Which company would you bet on, in the long run?   

And why does Ford simply not get it?

In 1990 the legendary rock band Deep Purple, a huge innovator, visited Israel during the first intifada. Soon they will return. Their leader, interviewed on Kol Israel, explains their vision.

Deep Purple was first formed 40 years ago, in 1968, in Hertfordshire, England. They have sold 100 million albums worldwide, and were once called “the world’s loudest band”. They refuse to label themselves as ‘heavy metal’ or any such tag. “We are musicians, not performers,” their leader says. “We play music on the stage, not put on a show”. This in part explains the huge and faithful following Deep Purple enjoys, decades after it was launched. They are real, they are authentic. 

In this, a key principle of innovation is revealed: Authenticity. Make sure your product is what it says it is, what it claims to be, and does what it claims to do. Today, there is so much fakery – the dubbing of the little Chinese girl’s voice at the Olympics opening ceremony is a tiny example, as is the revealing storm of protest that ensued — that people increasingly crave what is real.

In their new book, Authenticity: What Consumers Really Want (HBS Press, 2008), B. Joseph Pine and James Gilmour state the key principles of authenticity.

* The craving for authenticity is “getting more intense in an increasingly artificial world”.

* To be perceived as “fully authentic”, your company must “be true to itself and what it says it is to others”.

* Effective marketing today involves “placemaking experiences” which enable companies to be who they say they are.

* Authentic offerings should be rendered as: natural, original, exceptional, referential (referring to other authentic offerings) or influential. 

Even totally fake offerings, like Disneyland or Vegas, “can be perceived as authentic”, note the authors, if they are “honest about their fakery”.

So, innovators: Ask yourself – is your innovative product or service offering real, true, honest, or is their any element of dishonesty, hype, excessive claims, spin or deception involved? Is your marketing deceiving or honest? In the Age of Authenticity, you just cannot fool any of the people any of the time, despite what Abe Lincoln said. This is part of the explanation for Deep Purple’s abiding long-term success.

We all have read about Coopetition: how to collaborate with competitors.

Now we are beginning to learn about the opposite: How to compete with collaborators. Shall we call it: Collabetition?  

What happens when your strategy leads your organization to pursue what strategy expert Koby Huberman calls “more to same” – selling higher-value higher-margin products to your existing customers? What if that strategy brings you head-to-head with those with whom you collaborated, crucial strategic partners, because you are now supplying products that your partners once provided? 

This now seems the case with Google. Google is launching Knol, a user-written ‘wikipedia’, in which users write content. Google’s business model has until now been that of a ‘conduit’ – a search engine, the leading one, that brings users to content generated by others. When Google begins to generate ‘content’ by itself,  it becomes a competitor to some of its key collaborators, to whose sites Google’s search engine brings millions of eyeballs.

Google insists this is not the case, that it remains a ‘conduit’. But the launch of Knol, and what I believe will be Knol’s rapid growth in usage, belies this. It was probably inevitable that Google, in its search for growth, would have to move beyond the search business and into content creation. How it manages this ‘invasion’ will be crucial for Google’s future.

This has happened before. Years ago, there was tension within the “Wintel” community – the collaboration between Windows (Microsoft) and Intel (microprocessors), as Intel put more and more software onto its chips, threatening to move up the value chain and appropriate some of Microsoft’s revenues. A competitive war was averted, partly because Intel has now moved to seek value elsewhere, for instance in mobility, mobile devices and wireless. Collabetition has also pre-empted key strategic moves – Dell’s direct-sale model has not been embraced or copied widely in the PC business, partly because for HP or IBM to engage in direct sale would place them directly in competition with their collaborators, value-added resellers.    

Strategically, moving up the value chain is crucial for growth and profit. Often, doing so leads to collabetition –  head-to-head competition with those in the value chain with whom you closely collaborate.  How to manage this key transition takes wisdom and planning. A good example of a company that managed it successfully is Infosys… see the fine case study by D.V.R. Seshadri on how they did it*.  
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*See D.V.R. Seshadri and James Narus, “Value Chain Migration at Infosys” (A), Int. Journal of Technology and Innovation Management  Education, vol. 1, issue 1, 2006 (available on request from smaital@mit.edu)

Increasingly, in the media business, innovation is about a race in which the winner takes all. Movie studios seek blockbuster hits, and run business models similar to VC’s – 9 losing movies are paid for by one ‘winner’ that strikes gold. 

Benny Meyer, chairman of the film studio Warner Brothers, has proved it. Warner Bros’ innovative Batman film The Dark Knight [See July 26 blog, “The Dark Knight”] just broke box office records for opening day, grossing $66 m. in receipts. The film may come close to Titanic for overall lifetime revenues. As Warner’s parent company Time-Warner downsizes, Warner Bros. films make big bucks for its struggling ‘mothership’. When new movies launch, there is ‘buzz’ – word of mouth quickly decides which picture is worth seeing, and then everyone has to see it, so they can talk about with their friends who have also seen it. Great movies that come second fare badly; it is winner take all. 

Not long ago, DVD sales were a key part of movie business models, often grossing more money than box office receipts. DVD sales often rescued movies that did badly at the box office. Now DVD sales have slowed to a crawl. The same thing has happened to movies as happened to music – pirated downloads. Moreover, this was predictable! But movie studios missed it, just as music companies missed it. 

Time-Warner CEO Jeffrey Bewkes notes (in an International Herald Tribune article), “Around the world the consumption of entertainment products is growing rapidly. The question is, how do you offer it? And how do you get paid for it?”  
 
This, of course, is the eternal key innovation question. How do you create value? And how do you capture it in revenue and profit?

A key principle of benchmarking is, you learn more outside your industry than within it. Music is a separate industry from film, but closely related – both generate ‘content’. Had movie studios tracked the music business, as Meyer clearly did, they may have better grasped the sweeping changes occurring in the industry, and may have adapted to the ‘winner take all’ blockbuster model, in which again, box office receipts drive profits, rather than DVD sales.

Time Warner now appears to be asking the right questions, and coming up with at least some of the right answers, led by its movie productions.

Innovation is about breaking the rules. Or, as Oracle founder Larry Ellison said in a recent talk in Israel,  “innovation is finding the flaw in the conventional wisdom”. [He clearly found it – the proof is Oracle, #462 in the Fortune 500, whose $18 b. revenues in 2007 were up 25 % over 2006. The bottom line wasn’t that bad either: $4.24 b., in net income, up 26% from 2006.]

The question is: Which rule should you break? Answer: The one that seems most inviolable, most sacred.

Take, for instance, the holy of holies: Raising money. After all, the rules about money are set by those who write the checks. Want a check? Follow their rules and procedures religiously. 

Recently, Eli Reifman, entrepreneur and kabbalist, founder of Emblaze, spoke to TIM’s MPEC participants.   His topic: How he raised over $2 b. by breaking some of the rules while adhering to others. If results are the best proof-of-concept, Reifman has results. Emblaze Group had revenues of $387 m. in 2007, but has lost money for the past three years, partly because of interest payments that probably accrued through financing acquisitions. Yet Emblaze survives and grows, partly because of Reifman’s skill in raising money.

Rules not to break: The key rule never to violate, when you seek money, is this: Never fail to understand fully, and appeal to, the underlying motive of the investor. 

•  For venture capitalists, it is ‘exit’ and little else. When seeking VC funds, be sure to present a forceful and realistic model for a 10x (ten-times) exit, one that brings the VC investor 10 times his or her investment.  

•  For an investment fund manager, the motivation is the bonus. Bonuses are based on investments outperforming the industry – not the market. If your Earnings Per Share falls by half, but that of the industry falls by two-thirds, you have outperformed. The investment manager’s bonus is secure. So, in speaking to them – show how and why you will outperform the industry. 

Which money-raising rule can and must you break, according to Reifman?

•    Do It Yourself…  break the rule that says, you need experts (i.e. investment bank clerks) to do everything for you, including writing the prospectus. 

A prospectus is just a business plan, Reifman explains. It is written in sometimes obscure language. When floating Emblaze on the London AIM market, Reifman did the IPO paperwork in record time. He and his colleagues read the British securities law, word for word. They acquired the appropriate template, filled in the blanks, and reduced the accepted time for writing a prospectus from three months to three weeks. Keep in mind, he says, that the junior employees of investment banks who do the ‘grunt work’ often, perhaps usually, know far less than you do. 

Reifman says raising money is a key skill. Like any skill, it can be learned. Problem is, there are no courses.   MBA programs teach the economics of finance, the theory, not the minutiae of practical IPO’s. You have to learn this skill by learning-by-doing, Reifman says. Conquer your fear, tackle it – and you will have a skill that can give you and your company enduring competitive advantage.

Reifman used an effective analogy to drive his point home. Want to learn parenting? He asks. He and his wife did. Before their first child was born, they called a well-known parenting institute. We want to learn how to be good parents, they said. How old is your child? They were asked. Not yet born, they said. Come back in a few years, when you have a child, they were told. Reifman now speaks widely on parenting, based on experience and common sense, partly to those who do not yet have children.  

Want to learn how to raise money? There may be no choice but to overcome your fears and tackle it yourself.  Learn by doing. 

Reifman arrived for his talk on a motorcycle. He is known in his industry as a maverick, and among other things speaks to 3,000 people every week on kabbalah. He says that the set-in-stone maxim – businesses must maximize profit – is false. Not so, he says. And indeed, Emblaze is not profitable. But who cares? It has money to spare, while other startups with brilliant technologies die, because their oxygen supply – money – runs out. 

There is one last rule Reifman urges us to break, a small one. Avoid Powerpoint, he advises. In his ‘road show’ presentations, he did not use slides. Maybe your audience will say, what a jerk, he came unprepared.  So what… they will remember you. By not using 285 slides, you have already differentiated yourself. And, you have forced yourself to prepare, to put the knowledge into your own head instead of onto the slides.

When it comes to innovation, alas, Sony just does not get it. And this, despite its brilliant CEO Sir Howard Stringer, a UK citizen knighted by the Queen*.
 
Many years ago, Sony and JVC (Japanese Victor Corp.) raced head-to-head to develop a home video recorder. Sony should have won hands-down. And in fact, technologically, they did. They developed Beta-Max technology which gave a superior crisp picture. But business-wise, Sony lost. JVC’s VHC technology was designed-for-manufacture, and as JVC raced down the learning curve, costs fell, and with them, the prices of its VHS recorders. JVC triumphed. Sony’s superior technology lost to a far better business design. And Sony ultimately was humiliated, having to lease JVC’s VHS technology. When master recordings of videos were made, they used Betamax technology; but our home machines were VHS. 

Today, Sony is locked in a similar duel, this time over e-book’s, with Amazon. Sony’s entry in the race is the Reader, a neat portable device for reading electronic devices, launched by Sony two years ago. It has a great screen, and is restful and easier to read than a compute screen.

Against it, Amazon has launched Kindle. Kindle, with inferior technology, will win – in fact, it already has.

Why?

A superior innovation model. Kindle follows Jeff Bezos (Amazon founder and CEO) and his philosophy of avoiding “cognitive overload”, meaning “help people avoid thinking too hard when they buy something.”  Amazon pioneered ‘one click’ shopping. Now, with Kindle, you can easily link to Amazon’s on-line store and download 145,000 titles. Moreover, Kindle connects to a 3G mobile network, so you can download books and newspapers within a minute. Sony’s Reader does not have this feature. 

And Sir Howard? After being trounced by Steve Jobs’ iPod, he has now ordered that 90 per cent of Sony’s devices should be networked, connected wirelessly, within two years.

Two years? Amazon already did it. Too late, Sir Howard.
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*Based in part on: John Gapper, Why Sony Lost the e-book battle,  Financial Times,  Thursday August 7, 2008, page 7.

An enormous amount of innovative energy is now pouring into energy – alternative ‘green’ energy sources, wind, solar, etc. 

Here are 10 things energy innovators need to know about oil, still the world’s major source of energy.

1. American oil production peaked at 11,297,000 bbls/day in 1970, and has gone downhill since. In 2007 America produced only about half that, or 6,879,000 bbls/day.

2. Saudi Arabia is still the world’s largest oil producer, producing 10,413,000 bbls/day in 2007, down from 11,114,000 bbls/day in 2005. 

3. Russia ranks #3 in oil production, behind Saudi Arabia, and America, with nearly 10,000 bbls/day in 2007, very close to Saudi Arabia.  

4. Iran ranks fourth in oil production, with 4,493,000 bbls/day in 2007. 

5. Iraq (in which America placed great hopes for higher oil production)  produced just under 2,000,000 bbls/day in 2007, far below its production peak of 2,800,000 bbls/day in 1989, before the First Gulf War. 

6. Canada and Mexico produce, together, nearly as much oil as America, and supply most of it to their huge neighbor.

7. America consumes 20,600,000 bbls/day (2007), leaving it with a shortfall between production and consumption of more than 14,000,000 bbls/day. 

8. America’s oil imports have grown from a small 2,500,000 bbls/day in 1965 to a massive 13,800,000 bbls/day  today (2007). This increase was completely predictable, given forecasts of oil field discoveries, development and production history. So, America has had 43 years to prepare an energy policy to reduce or even prevent U.S. energy dependence on nations (like Iran) that are hostile to it.

9. Failure to build such a policy, and failure to invest sufficiently in innovation for alternative energy sources, must rank as one of history’s great innovation failures, and policy failures, of all time. Democrats and Republicans share the failure alike.

10. Total world production of oil in 1965 was 31,800,000 bbls/day; in 2007, it was about 81,533,000 bbls/day. So oil production has risen by 156%. So has oil consumption. The result can be seen daily – just look at your outdoor thermometer.