15 January 2013
Today’s WSJ Article “Want to Kill Innovation at Your Company? Go Public.” Was thought provoking. Who is the BEST Company today? Now the next question, would you want to work for them? The top graduates of Stanford, MIT are not exactly lining up for GE and Citi any longer. I’ve been in the software business so long I forget that many companies are very process oriented… doing the same thing each and every day, like Alcoa or GM. Their products have some small changes, perhaps on 10 year cycles (ex Corvette announcement), but these companies survive because of the asset intensive nature of their industry. Other Industries, such as Software and IT, have a much different asset intensity: HUMAN ASSETS.
As a college grad, big companies were a great place to build experience. In Adam Smith’s Wealth of Nations (1776), He outlined how productivity increased with the specialization of labor, and also how specialization led to a ‘mental mutilation’ of workers as their lives are confined to a single repetitive task. Senior managers work to orchestrate the various internal specialists, investing years of their lives to build a thorough understanding how their company gets things done, and the informal personal network to influence change. All this labor is imbued with the hope that Corporate “asset efficiency” overcomes the waste and friction of internal bureaucracy. Today established companies face competition, not by another major brand, but from a network of specialists which can create a better product at a much lower cost (see Li & Fung).
I’m struck by how difficult it is for large companies to change, to innovate, to execute on anything different than they did last year. Fortune 50 companies do a tremendous job maintaining accountability for financial performance. But few are adept at internal accountability, changes which would enable them to transform their business models…. Make no mistake, there are tremendous individuals in these Fortune 50 companies, with tremendous entrepreneurial energy, working endlessly in a complex bureaucracy. Finding these energized stars is a key to success, however like uranium fuel surrounded by far too many cadmium control rods… there is no way to achieve a sustained reaction. Control is a less risky proposition for big companies, it is also how execs are compensated.
For example, a Top 10 bank hired a one of the Valley’s most accomplished product managers. He wanted a small team of engineers to build prototypes and work with him to demonstrate opportunities. The Bank IT department offered him access to a few of their people, but he wanted a dedicated team reporting to him in his office. This was a no go approach for the IT department. Every one of his requests went into a giant prioritization queue.
What about industries that exist on “change” and “innovation”? For example, High Tech benefits from the specialization of many separate companies: Contract Manufactures, Designers, Fabs, Assembly, 3PLs, …etc. In this Consumer electronics world, it can take 18 months to design and build a product with a shelf life of only 6 months. With components evolving so fast, and the market so large, no one company can control: design, manufacture, assembly, sales, distribution of the components. Thus, all parties benefit from standards in “communication”. Yet even in this industry, manufacturing execution has excelled to such an extent (think six sigma) that device quality is becoming ubiquitous. Margins are collapsing in every area not key to competition.
In High Tech, integrated product companies, like Apple, had an enormous advantage when the nature of competition is focused on product feature/function, form, finish, quality. But what happens when all phones have the same screen resolution, camera, processor, battery life, …. Etc. What differentiates one phone from another? Where will future competition take place? (see my blog on Stage 4 value shift). The recent Apple maps fiasco was a hint at where consumers find value… and Apple’s iPhone 5 sales forecasts indicate where it is shifting.
Today companies no longer need to buy their own IT infrastructure, ERP applications.. they can buy by the drink from Amazon, Oracle and IBM. Companies can also build any device they want through contract manufacturers at a quality that matches Apple and Samsung. Consumers can have any product they want at the lowest cost available shipped to their door through Amazon. It seems the only thing left for Fortune 50 organizations are: Asset intensity, consumer relationships, distribution, regulatory protection, and a little brand.
Is it any wonder that smaller companies are the place to go for top talent? Sure the food is great at Google, but where are you more likely to be rewarded for great work? Where are you more likely to achieve something great? The benefits of being in a large company (assets, brand, safety, stability, “predictability”) seem to be changing in many industries. Perhaps it is because they fail in risk and reward… not because they don’t want to take risk, but because their business is incapable of consuming risk (executing on change).
My thought for today is: What businesses are ripe for change? Particularly industries where margins are decreasing and asset efficiency can no longer cover the costs of vertical integration. As the efficiency of information flow improves in the public domain, the economies of scale decrease, particularly in areas that are most dependent on information (as opposed to assets). In these information intensive areas, “specialists” will thrive as they execute more efficiently across organizations, than within them. Financial rewards, associated with small company formation and success, will reinforce this specialization dynamic.
As Mohanbir Sawaney and Daval Parikh said in their HBR article “Where Value Lives in a Networked World”.. [as the nodes become commoditized, value shifts to the orchestration role]. Where are the orchestrators? For example, major retailers have their most deadly threat in Amazon, after all it’s hard to compete on commodity products at a higher price. Why are we not seeing more custom products? This is what made Amancio Ortega the richest man in Europe (Zara).
I hope to see 1000s of private companies that don’t look for the quick exit, or IPO. Economies of scale are eroding as specialists and information flow have evolved. Their basis for vertical integration is breaking down with fractures as their core is brittle. Attempting to bolt on a speed boat to their Titantic will not get a speed boat (see previous blog). One of my favorite quotes on IPOs is from Scott McNealy, former CEO of Sun. When asked if he would ever go back to a start up.. he responded…
“It must be private, never go public. There will be no upside investors other than me and the employees. I will have enough of the voting shares – meaning more than half – so that the board will be hand-picked buddies that I know are smart. Nepotism will not be a bug but a feature, this will be a family owned and family-run organization. It also has to be cash-flow positive from day-one …”
“I hope we can pull it off under those condition because I would be thrilled to lead another group of smart engineers, without all the crap that goes into running a company today. I just don’t want Congress telling me how much I should be paid or firing me. I want to pretend I am back in the 1980s again.”
Well.. I’m certainly not a linear thinker.. sorry for not ending this cleanly. Thoughts appreciated.