They’re doing what?

When I was young (40 years ago) GM and Ford made cars and trucks.  Harley Davidson made big, loud motorcycles.  Boeing and Cessna made airplanes. Briggs and Straton made the engines for lawn mowers and other yard equipment.  Today, you pretty much can make those same statements.

In the 1960s a company named Honda came to America with a little 50cc motorcycle.  No one knew much about this company or what it did.  But today, Honda does a lot.  Motorcycles, all terrain vehicles, personal watercraft (jet skis), automobiles, full size pick-up trucks, electric generators, lawn mowers and garden tractors, outboard boat motors, water pumps, scooters, snowblowers, robots and airplanes.  So, what market are they in? 

Honda eschewed the commonly held notions of "core market" and "core customer".  They don’t try to be #1 or #2 in their markets (they are the #3 Japanese auto company, for example).  You can’t define them in any easy way.  Just that they keep growing well above the market average, they keep making money, and they keep providing a doubling our tripling of value for their investors every 7 years or so (quite better than the market average.)

So what drives this success?  A focus on innovation as a tool to avoid Lock-in.  Let’s look at their recent move into jet airplanes (could you imagine GM, Ford, Harley Davidson or Briggs & Stratton announcing they intend to make and sell airplanes?)  The project is led by the V.P. of North American R&D – not the Marketing or Strategy head.  His approach has been to apply innovation.  Honda is using unique engine mounting (top of wing instead of on the fuselage), building with composite material instead of aluminum and implementing a unique wing shape which achieves a larger interior cabin, higher cruising speed and greater fuel efficiency. 

Of course, the competition is belittling this new Honda entry with statements like "It’s a brand new territory for Honda… It’s very different than the consumer market."  OK.  Sounds a lot like what the original players said when Honda entered the motorcycle market, the auto market, the lawn/garden market, the full-size pickup market and then the outboard motor market.  Yet, in each, the innovations Honda brought to market allowed them to attract customers for their products at a good price and a great margin.

Honda does not fixate upon its "core markets", it’s "core capabilities" or even its "core customers".  Instead, it constantly looks for new opportunities to innovate and add value.  It does not fear new markets, but rather sees each new market as an opportunity to Disrupt itself and create White Space for a new solution.  Then, they are merciless in their efforts to do what no previous competitor has done to create value for customers.  And now, they are far more successful than #1 or #2 in almost every market they compete. 

Creating the Evergreen Company

Everyone wants an evergreen company – one that is constantly growing and self-renewing, generating more revenues and profits year over year.  One such company is Illinois Tool Works.  Have you heard of it?  Do you know what they do?

One of the most important things ITW does is avoid Lock-in.  ITW has no fixation with core markets, core customers, core products nor core competencies.  In fact, the company is a collection of over 600 small businesses around the world, in a wide range of businesses.  They don’t seek imagined synergy and push for consolidations and mergers, instead allowing each business to each maximally develop their customer opportunities and markets.  Headquarters does not dictate the strategy or markets for these businesses.  ITW doesn’t even try to limit its businesses to being in similar markets, functions, technologies or product lines. 

What ITW does is consistently grow, and consistently make more money.  For 90 years.  Revenues grow at about 10%/year, earnings at about 15%/year and earnings per share about 14%/year.

How?  Like I said, the company first and foremost avoids Lock-in.  Leadership isn’t trying to follow fad definitions of new markets, or catch the latest wave of analyst hot buttons.  They disrupt themselves by constantly looking into new markets, new technologies and new product opportunities.  They don’t focus their acquisitions on cutting products or quickly generating more money with cost reduction, instead relying upon customers to help define how they can improve market performance leading to financial performance.  By not seeking "optimization" of their acquisitions (like Tyco), they remain constantly in a disruptive state of enquiry.  And each and every business is allowed to operate in its own White Space – free of dictates from a hierarchy or home office about how to succeed.  Results are what matter at ITW – not slavish response to structural or behavioral Lock-ins.

And the company lauds innovation.  Innovators are sought out, and rewarded.  ITW is one of American’s largest patent filers, and patent holders, and it works hard to maintain that position – even if you’ve never heard of them.  They want White Space projects in their businesses, and they reward the efforts as well as the results.

ITW defies all the rules of best management practice.  They don’t optimize.  They don’t "focus on the core."  Instead they live without Lock-in, constantly innovate and Disrupt, and allow White Space to flourish all over the company.  And for that they achieve innovation on the scale of an IBM, and returns like an old-fashioned (Jack Welch era) GE.  And the result is an Evergreen Company that grows beyond average and makes above average rates of return.

Will changing leaders matter?

There has been much written lately about Carlos Ghosn.  Some are thinking that with Kirk Kerkorian’s urging, this fellow is likely to be the next head of GM.  Of course, there’s a lot required for this to happen, but would it make any difference?

Mr. Ghosn is considered an auto industry turnaround expert.  How?  Does he ride in with a program to slash costs by cutting marketing and R&D and killing new products – vis-a-vis Chainsaw Al Dunlap of Scott Paper infamy?  Does he randomly implement across the board cost cutting? Hardly.

At Nissan, he quickly disrupted the company by killing off the Japanese keiretsu system of long-term relationships..  This opened the door for a dramatic series of actions which threw the company into White Space.  For example, new competitive bidding teams were created for sourcing, and a wave of innovation programs were started.  In one year, the company went from a loss to a record profit.  That has been followed with 6 years of record profits.

Never one to stop disrupting, Mr. Ghosn recently took the dramatic action of moving Nissan’s U.S. headquarters from Southern California – the legacy location of headquarters for all Japanese auto companies – to Nashville, TN, much closer to the company’s plants.  While this has upset a lot of industry watchers, there is no doubt he has used the move to change the leadership and the processes of Nissan U.S.A.

If he follows the same plans at GM, Mr. Ghosn could be a tremendously beneficial change for America’s largest car company.  Like Ed Zander when he arrived at Motorola, Ghosn is likely to Disrupt the status quo, and implement White Space.  Being a master disruptor is one of the most valuable traits of a good leader.  Especially one needing to turnaround a behemoth.  Just look at the Disruptions implemented by Lou Gerstner at IBM, which saved the company from the brink of disaster.

Given the incapability of GMs leadership to attack its Lock-in and create White Space for generating future opportunities, there is no doubt change is needed.  Given his record, Mr. Ghosn would make dramatic change in GM by attacking its Lock-in and implementing White Space.  And that would be good for everyone.  If Mr. Ghosn gets the top job at this venerable company, give investing in GM another long hard look.

(Link here for more information on Mr. Ghosn courtesy of the Chicago Tribune.)

When they do what you can’t

On July 12, McDonald’s announced it was cancelling its Hot ‘n Spicy McChicken sandwich.  "It’s not that it didn’t do well.  It just didn’t do well enough," according to McDonald’s spokesperson Bill Whitman (see Chicago Tribune article).  After 18 months of development, the product was pulled after just 6 months on the market.

On July 13, Wendy’s announced it was going to test market a new fiery, red-hot chicken sandwich even hotter than its Spicy Chicken sandwich – which it has been selling for decade.  "We have defended our Spicy Chicken successfully against competitive intrusion…now we see an opportunity to build on this effort…giving our customers additional options," said Wendy’s Chief Marketing Officer Ian Rowden (see article here).

Could it be that McDonald’s customers just don’t like spicy sandwiches?  Unlikely in the notoriously fickle fast food marektplace.  Practically every competitor (except McDonald’s) has a spicy product line today as the sales of chili peppers has doubled in just the last 4 years.  What’s at play here is good old Lock-in, once again.  We’d like to think that as the #1 fast food company McDonald’s would listen to customers and bring the very best talent to rolling out a product widely desired.  But, more likely, all new products in McDonald’s are vetted over and over until the challenge becomes distinguishing it from what is already on the menu! 

The more adaptable Wendy’s has demonstrated its ability to one-up McDonald’s for years.  Wendy’s brought us fast food chili, the baked potato with fixins’ bar, the fast-food salad bar, and Frosty’s.  By using disruptions to find new products, Wendy’s keeps the edge over McDonald’s in practically all categories but absolute size.

Wendy’s keeps growing its stores and customers, while McDonald’s remains almost flat on both counts.  By overcoming Lock-in, Wendy’s keeps doing what McDonald’s can’t – and that’s where Wendy’s creates competitive value.

Is GM ready to Change?

General Motors has seen its stock value grow almost 40% in the last 3 months.  Why?  Many analysts and investors believe that GM management has been Disrupted, and is moving into White Space for new solutions to its problems.

Is it for real?  Well, first the Disruption.  Kirk Kerkorian bought almost 10% of GM and then put his representative on the Board.  As outsiders, they have been screaming for change in how management leads the company.  And it has started making a difference, as GM has started doing several things differently.

GM has changed some of its approaches to workers.  Its recent employee buyout was 30,000 oversubscribed indicating a successful tactic for both the company and labor.  And, GM is working with Delphi (its largest parts supplier) and the union to create a unique solution to the bankrupt company’s problems.  Lastly, GM leadership is now entering talks with Renault and Nissan to possibly create a new merged company.

Successful White Space requires (1) permission to discover new solutions outside the historical Lock-in.  This seems to be happening in some of these fledgling projects.  Successful White Space also requires (2) committed resources in advance to develop the new Success Formula.  That we have not yet seen.  While there is progress being made to sell GMAC and raise additional cash, we haven’t yet seen the commitment to actually invest in White Space and create a more competitive future.  Until we see management internally Disrupt itself, following Mr. Kerkorian’s lead, we won’t likely see real investment or commitment to creating a new Success Formula. 

If the outcome of negotiations with unions, and other companies, is just more cost reduction in support of the old Success Formula then Mr. Kerkorian’s Disruptions will be for nought.  Combining GM, Renault and Nissan just to achieve additional "scale" will do no more to create value than combining KMart and Sears.  What’s required is the creation of a new company that is more attuned to customers, designs cars better, gets them to market faster and creates more profit on smaller unit volume.  And that will require lots of White Space projects with wide permission to change and extensive resources.