William Dunk's 1999 Annual Report On Annual Reports

REVOLUTION FROM ABOVE:
INNOVATION, TRANSFORMATION,
AND THE NEED TO TURN THINGS UPSIDE DOWN


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The first rule of innovation is that the greater the need, the less likely it will happen. It’s relatively easy to put forward all-talk radio or 3-door cars. But campaign finance reform or the healthcare revolution, the lack of which are draining our society, are far from liftoff. To get them done, we will need some variation of Jesse The Body Ventura.

In our management consulting practice, we see the same inertia on big ideas. Of the 15 or so start-ups we advise, and the more than 30 incubator projects we assist at large companies, none is more gratifying and more frustrating than a Big Idea out of New England. It resides in a Boston-based healthcare seedling whose business is providing the absolutely best information about critical diseases in a patient-friendly manner to afflicted men and women across America. The promise is that it will cut healthcare costs and dramatically improve the treatment process. Those who’ve tried it love it. But the iron triangle of government, insurance companies, and healthcare providers, which have given us cripplingly expensive medical costs and declining treatment quality, is marvelously resistant to patient-biased improvement, so this patient-oriented system is expanding at a snail’s pace, rather than at a gallop as it should.

Innovation -- and sometimes the lack of it -- is what 1998’s leading annual reports are most about. After a couple of decades of downsizing and restructuring, companies began to turn to growth again in the early 1990’s, when they realized they could not grind out annual earnings gains through cost-cutting alone. This quest for growth has been the subject of our most recent annual reports on annual reports. To get revenues, companies have pursued overseas expansion (particularly in Asia), mergers, and partnerships with other companies. For a host of reasons, all of these still have not produced the kind of revenues major companies need for growth. So now, more and more, they are turning to innovation as their holy grail, looking for regeneration, not from external crutches, but from internal agility.

 

Innovation -- The New Religion
For now, as the Economist says in an impressive review of "Innovation in Industry," (February 20, 1999, following page 52), "Innovation has become the industrial religion of the late 20th century." In part, this is due to the current need to ramp up revenues. But, it appears, business opinion is also tracking economic theory. As developed nations shift to information and service and global-driven economic activities, it is perceived that growth is a function of applied knowledge (i.e., innovation), rather than a result of the traditional factors of production. Economists, particularly but not solely on the West Coast, have begun to say knowledge, innovation, and the like power nation’s economies to grow, much more than capital, labor, or natural resources.

As businessmen talk about innovation in this year’s annual reports, they wonder if they are spending enough time and money on it to stay competitive. Our business leaders secretly wonder whether we are falling behind innovation-wise. For instance, a report from the Council on Competitiveness in Washington shows we’ve been spending on the right stuff for innovation in the 1980’s and 1990’s, but we look like we might fall behind other nations in the decades ahead.

They realize, too, as we shall see in their reports, that innovation means much more than R&D. Innovation is manufacturing, marketing, and all the processes that drive business activity. As Amazon.com grabs market share from Barnes & Noble, and Nokia captures the wireless phone market, chief executives sense that changes in the world of commerce are leaving them in the dust. They are thinking how to rework their companies to at least keep up with the pace of change, if not to lead it.


Boston Brahmins Say "We Can"
"We can ..... innovate." When an old Boston carbon black company dedicates its report to its power to innovate, you can tell business is headed to a new place. Cabot’s 1998 report is perhaps the most explicit and clear statement from a major company on the current focus of business America. It says, "We can innovate. Innovation is change -- a change in the way of doing. But well before a change in doing, there must be a change in thinking. Conventional wisdom, preconception, custom -- all must be dismissed. At Cabot, we understand that breakthroughs begin in the imagination, and we are proving our ability to launch them into the world as new products and new businesses.... as a new organization." By innovation, Chairman Sam Bodman means total transformation of the enterprise.

Likewise, General Electric 1998. It talks of pursuing globalization, product services, and Six Sigma quality. But it is Sigma Six on which Chairman Jack Welch dwells, because it is remaking GE in his eyes. He notes, "After observing the transformational effects this science, this way of life and work, had on the few companies that pursued it, we plunged into Six Sigma with a Company-consuming vengeance just over three years ago." And he credits GE’s improved product innovation to "Six Sigma tools and methodology."

If Welch is more explicit than most about how he is pursuing innovation and transformation, Philip Knight of Nike is most open about his yearning for it: "Most of our troubles are really symptoms of a larger, more difficult problem. We are a very well-managed $5 billion company. Right now, though, we are a $10 billion company trying to get to $15 billion. Management has been stretched too thin. That’s how you get problems." Asia downturns and all, Knight knows that he can’t blame his bad results on the marketplace, but, in fact, that his company is a bit out of touch with his markets. He plans to get his company reconnected.

Of course, there were a host of companies that dwelt less on their efforts to remake their companies and more on their fine-tuning of their new product machines. Analog Devices comments on its 12% rise in R&D spending from 1997 (from 14% of sales in 1994 to 18% of sales in 1998), coupled with long lists of technology breakthroughs and product introductions. Merck, on its cover, states, "We introduced 14 new medicines in the past four years -- a productivity record for Merck research, manufacturing and marketing." It also includes its recipe for the legal/governmental climate that fosters "Pharmaceutical innovation: the enabling conditions." Adaptec, in an innovative newspaper format for its report, boasts "Record New Products Rate Boasts User Productivity" on page 1. In other words, plain vanilla product innovation still counts -- for some -- even in the new world of holistic corporate reincarnation.

 

Taking Giant Steps
Some companies, in communicating to us, want us to understand that they’re not tiptoeing into the millennium with incrementalism, but that they’re taking giant steps. Campbell, in its oversized report, talks about "Big Strides" and shouts that it has just completed "the most far-reaching portfolio reconfiguration in our history." Procter & Gamble, on its cover, features Maynard Danker who "knows a big idea when he sees one and Olean is a very big idea." Bluntest of all is Perkin-Elmer, an old instruments company: the word "decoding" on the cover announces that it suddenly has become the globe’s gene sequencing company. All are saying they have been remade by pursuing the big and different.

Through transformation or through big ideas, many corporate leaders -- worried about current revenues or their place in the world after 2000 -- are, like the leaders in China, trying to foment a revolution in their companies, without saying "revolution." A very few come right out with it. Richard A. McGinn of Lucent says there’s a networking revolution around the globe, and he intends to lead it: "These requirements play to Lucent’s strengths and make us uniquely qualified to lead this revolution." Goodyear claims, "Staying one revolution ahead means massive commitment to product and process technology." American Freightways in Arkansas proudly announces "its American Flyer .... the most revolutionary service in less-than-truckload (LTL) history. It does what the "experts" have consistently said cannot be done." At the end of the day, in 1998, a number of corporate chieftains think they are waging very quiet revolutions.

What we see in the 1998 reports is that companies are trying to get to 2000 before it arrives, afraid that it will pass them by. Some think they need a process (Six Sigma) to do the trick, others a quickened pace of new product introductions. Others think they need to focus on big ideas to get to fast forward, while those who have been in really slow moving industries think nothing short of a corporate revolution will get them where they’ve got to be. Clearly, however, none of them are quite sure whether they are breeding fleet-footed, sure-witted stallions or whether they still have nags that will get left at the starting gate. Perhaps this is because revolutions that come from the top rarely succeed, unless you are Bismarck.

Years ago, when I was teaching young college students in New York City the "whys" and "wherefores" of Colonial American history, I asked all the students (when we were discussing the American Revolution) how they’d start a revolution. One bright lady replied, "I’d hold a costume party." Intuitively, she knew that you can’t make big things happen in conventional ways. And this is what we should look for in annual reports -- something unconventional.


Investors Must Focus on Creativity
If all these chieftains are right and we need a business revolution, investors should focus on the unusual. Look for reports that are a tad revolutionary. Companies need an excess of intuition and creativity to seize the future. As never before, one is looking for reports that show companies have decisively broken with their pasts. And it suggests that wise investors look at the companies that currently show an excess of imagination in their annual reports and elsewhere.

Like Nike which features letters of all sorts and sizes in its report that have poured in from consumers in order to say it’s listening to its customers. Or Yahoo which shows us 1,000 ways to get connected to everywhere on the Internet and which calls its founders -- "Chief Yahoos." Or Vorwerk in Germany that speaks to human conditions and dilemmas in its report to interest many readers who aren’t fascinated by the specifics of its products. Or Adaptec or Campbell whose big reports and big graphics may suggest they embrace expansive thinking. If revolution is in the air, things better look, smell, and feel differently. Or as Campbell says, we’d better be "thinking outside the can."

 

William P. Dunk
April 1999

 

Footnote:
For years, one of my favorite annual reports has come from UICI, a great company in Dallas. Chairman Ron Jensen does not disappoint in 1998. He talks about a real revolution -- retiring himself: "Nor did I feel I was as capable as I once was of approaching the task with the intensity that was often demonstrated in the past. Thus, the biggest "fix" for UICI’s long term financial health was at the TOP." Still Chairman, he now has a new CEO. Read his report for straight talk and a heap of fun.

Companies cited in this report:

Adaptec
Amazon
American Freightways
Analog Devices
Barnes & Noble
Cabot
Campbell
Economist
Vorwerk
General Electric
Goodyear
Lucent
Merck
Nike
Nokia
Perkin-Elmer
Procter & Gamble
UICI
Yahoo

 

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