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GP 10 May 2006: More Is Less

The Spanish Armada.  To bring down Elizabeth, the Infidel Queen, Phillip II of Spain sent out a vast armada of 130 ships in 1588 with the ultimate hope of putting his troops in England.  “The Spanish fleet, which consisted of more than 130 warships and converted merchant ships, was not entirely defeated by the English Navy but was scattered by an English fire-ship attack in the Battle of Gravelines in the English Channel off the coast of France.”  “The English plan was implemented by a new fleet, built by John Hawkins, consisting of light, maneuverable ships equipped with long-range cannon.  The English would then execute a “line ahead” or single-file formation, sailing by the enemy, landing broadsides, while remaining beyond the range of answering fire.”  By the time it returned home, after much difficulty, the Spanish fleet was a mere shadow of its former self. 

This gigantic effort was wrongheaded at every turn.  Phillip II muddled statecraft with religion and ideology.  The ships were heavy and unwieldy.  The plan was too complex by far.  “The Spanish put their faith in the tried and proven method of a combination of a single close-in ship-disabling cannonade with both heavy guns and anti-personnel weapons, followed by a boarding by their experienced marine corps.  This dictated heavier ships with traditional, higher castles to rain down fire upon their opponents.  It was hoped that by holding a tightly defended formation they could protect themselves and the invasion barges.”  Spain’s motivation, strategy, tactics, operations, and technology were horribly flawed, driven by a superannuated monarchy already in decline. 

The Shiveled Corporation.  America’s largest corporations are today much like the Spanish Armada—big and unwieldy.  In the 1980s and 90s, they generally went on an anorexia binge, relentlessly cost cutting and, in the process, cutting not just fat, but chopping right into the bone.  This cost-cutting addiction continues.  But in the late 90s, they began to realize they could not shrink their way to long-term success.  Chief executives have since adopted the mantra of growth, but have had a hard time fulfilling their appetites for revenues, given flat, tough markets and smaller, more agile competitors.  GE, which has been able to turn in revenue gains, states the new creed in its current annual report: “In a more complex world, GE’s size is an advantage.  GE dreams big ideas, tackles big problems and anticipates big growth now and in years to come.” 

Easier Said Than Done.  Companies have tried consolidation, strategic partnerships, global expansion, diversification into services and financing activities, a host of other things, but find it bumpy going in a global economy.  This is even true in the technology sector where we thought the sky was the limit.  On May 3, The Wall Street Journal (p. B1) looked at the strategic re-organization plans of 3 goliaths.  “Microsoft intends to spend its way out of its current strategic predicament; Intel plans on cutting and pruning; and Sun Microsystems, for now at least, is going to tread water.” 

Even semi-addictive consumer product companies are having trouble.  Coca Cola has lost its fizz in the United States, with its growth coming from overseas.  Basically it lacks a second strong product, and it has even badly tinkered with its core Coca Cola, such that the Spanish in this country are smuggling in Mexican Coke, which is still made right, with sugar instead of corn syrup.  Anheuser has been losing market share, has been trying to put a little taste back into its tasteless brew, and is reaching harder into global markets (see Wall Street Journal, April 26, 2006, pp.A1 and A14). 

Slowly it’s dawning on some that these big companies have the wrong organization, strategy, and, above all, the wrong products and services.  Just like Phillip II, they are sending out the wrong warships and making the wrong moves.  Chief executives know they need something different and are trying to innovate, something we detected back in 1999 when we wrote about “Revolution from Above: Innovation, Transformation, and the Need to Turn Things Upside Down.”  The trouble is that it’s a near impossibility to wage a revolution from the CEO’s corner office: innovation really comes from the ground up.  That’s why our Agile Companies section is dominated by smaller companies, such as Eclipse, which you will read about later in this letter. 

Systems on the Edge of a Nervous Breakdown.  In “Systems on the Edge of a Nervous Breakdown,” we explored the endemic breakdown that afflicts systems within our institutions and largest companies.  The flawed code is so pervasive that it’s nigh on impossible to do anything right within the confines of these large dinosaurs. 

Dropped Calls.  Cingular is one of the two behemoth wireless companies in the United States, virtually a subsidiary of BellSouth, now renamed AT&T.  A number of years ago, when some of our group took on Cingular service, they bought Siemens S56 phones from Cingular, Rube Goldberg equipment, they later discovered,  that simply would not work in some parts of the Boston region, dropping calls right and left.  Needless to say, Cingular did not come to grips with our problem.  Siemens, incidentally, has gotten out of phones, though it may come back in partnership with the Chinese.  Cingular, you will have noticed, has claimed that it has fewer dropped calls than other wireless carriers, a claim some have disputed.  In any event, the volume of dropped calls is in itself an embarrassing admission that the company is a broken system. 

Safe Shattering.  We always knew that the 365E Kitchen Aid Cooktop we had at one location was sort of a lemon.  During its history, we could never be sure every burner would come on, and the flames varied in intensity from day to day.  Its glass top recently cracked, with shards shooting around the kitchen in a 1,000 directions.  The euphemistic lady in Whirlpool’s safety office was fast to tell us that we had experienced “safe shattering,” which made us feel that she must have previously worked at FEMA.  This was just the beginning of a comedy of errors, so egregious that they even make Whirlpool’s own subcontractors shake their heads in amazement.  It’s hard to know how much of what went wrong stemmed from incompetence, and what was inspired by cupidity. 

Whirlpool, we learn, is now the world’s largest appliance company, having stitched together a bunch of acquisitions.  At Cingular and Whirlpool, both products and services seem blighted by flawed innovation, spawned by systems that are totally out of whack.  It’s a conundrum as to how large-scale enterprises in the States can get it right and  achieve the intense global collaboration that is the key to their survival. 

In “The Future of Japanese Business,” The Economist (December 17, 2005, pp.65-67) speculates that though  Japanese innovators struck out in software and biotechnology, they will probably do much better in the businesses of the future such as robots, aerospace, and alternate energy systems.  They are already making a dent in these areas, and it is thought that Japanese R & D culture will deliver a bonanza here.  Probably America must undergo some sort of cultural renovation before its giants can grasp the jujitsu the future demands. 

Waging Revolution.  In part, the problems of a Coke, or a Whirlpool, or an IBM stem from the fact that they are public companies.  It’s long been said that public companies have to think too much about next quarter, neglecting next year, the next decade, and the next century.  More and more, the business of business is being done in the private sector. 

It’s instructive to read “Private Enterprise” (Wall Street Journal, May 6-7, 2006, p. A8), which is all about Charles Koch and Koch Industries.  Koch, “a $60 billion, 80,000-employee empire,” “just … became the largest and most profitable privately held company in America.”  “The firm’s financial performance numbers have been positively gaudy, with a rate of return on investment that has outpaced the Standard & Poor’s 500 at least tenfold under Mr. Koch’s stewardship.”  His business system “enables every division of his business empire to operate as a separate, autonomous, profit-maximizing unit.  It is intended to reward employees who think like entrepreneurs.”  Koch makes us wonder whether entrepreneurial behavior is not punished in today’s public companies. 

“Revolution,” The Economist (March 11, 2006, p.68) points out, “Is a risky endeavor….  A rational manager will balk at” the odds.  “But the entrepreneur answers to his own dreams and demons.”  The very innovative economist William Baumol, professor at Princeton and NYU, thinks a “touch of madness” goes hand in hand with entrepreneurship—not standard fare at large institutions. 

Eclipse.  If our major companies are faltering, there are still plenty of highly focused individuals who are honing in on big American needs and doing something about it.  For instance, the Eclipse 500 has now taken wing, though doubters aplenty thought it would go down in flames.  Vern Raburn, a Microsoft executive who got out of Redmond with his originality intact, has put together a very light jet.  It “sells for about $1.5 million …is just 33 feet long, weighs half as much as a Chevrolet Suburban and can blast halfway across the country at 430 miles an hour.”  Its target market is air taxi services, but it’s an open question as to whether he can sell the 700 or so planes a year he will need to get on the profit runway.  See The Wall Street Journal, May 6-7, 2006, pp. A1 and A5. 

In “Ending Skylock,” we discussed the present absurd state of our airline network.  Today we crowd all our airline traffic into 50 overworked airports, passing over the 13,000 or so other available strips around the country.  This hyper concentration makes no sense at all, only subsidizing a host of major airlines which are largely going bankrupt anyway.  The biggest, American Airlines, is in permanent shellshock, despite its badly run but profitable, overpriced commuter subsidiary American Eagle.  Airline economics and the American economy promise to become a whole lot better if we can disperse traffic in the air and on the ground, since several forms of gridlock have become a drag on our economic system.  Microjets, of course, will be very upsetting to hub and spoke airlines systems, big jets, and heartland monster airports at DFW and O’Hare. 

Big, Unserved Markets.  Since America’s big companies have been slow growers, it’s tempting for them to look for a company to buy, or to set up shop in China, or to go badly into the wireless business, always looking for some greener grass.  But here, there, everywhere, there are plenty of unserved markets that the agile will discover.  Those not rooted in the past will come up with cheap jet air taxis or government offices that are open on weekends when average people can access them or modular-part automobiles that are not designed to wear out in 4 years or…. 

P.S.  John Kenneth Galbraith, Harvard economist and confidante of the Kennedys, passed away on April 29.  A few days later, Louis Rukuyser, who achieved fame as host of Wall Street Week, also took his leave.  Both did so much to put business and economics in America’s living rooms.  As importantly, both will be remembered as much for their wit, as their wisdom.  Better to exit laughing.  Both proved that economics does not have to be a dismal science. 

P.P.S. In his review of David Warsh’s Knowledge and the Wealth of Nations, Paul Krugman tells of the struggle between “the Pin Factory and the Invisible Hand,” a paradox Warsh develops in his book.  Through increasing scale and specialization, enterprises increase productivity and drive out smaller competitors, finally achieving monopoly.  The problem, of course, is that it is an assemblage of competitors that makes the market system work, letting new ideas, best practices, and better values rise to the surface.  Both scale and the lack of it can present problems.  The trouble with big-scale companies is that they can influence the economy all out of their proportion to their ability to deliver real economic value to a country’s citizens.  They can grow so large that they are only capable of sending signals into the markets, no longer sensitive enough to receive them. 

P.P.P.S.  Carlos Ghosn, head of both Nissan and Renault, may be the exception that proves the rule.  Toiling for 80 hours or so a week from Paris, his airplane, and Tokyo, he seems to be putting both companies through successful revolutions. 

P.P.P.P.S.  Another fascinating growth market in America is religion: there are now 1,210 churches with congregations larger than 2,000 souls, and many of the megachurches are bursting at the seams.  In a variety of ways, a host of companies and entrepreneurs are designing products to tap into the reservoirs of devotion, from the Walt Disney Company to Mel Gibson.  All this only proves that there are plenty of new markets around, but it takes a bit of looking.

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