Tag: Business

Simple Rules for Business Strategy

Reading Time: 5 minutes

The book Simple Rules by Donald Sull and Kathleen Eisenhardt has a very interesting chapter on strategy, which tries to answer the following question: How do you translate your broad objectives into a strategy that can provide guidelines for your employees from day to day?

It’s the last bit there which is particularly important — getting everyone on the same page. 

Companies don’t seem to have a problem creating broad objectives (which isn’t really a strategy). Your company might not call them that, they might call them “mission statements” or simply “corporate goals.”  They sound all well and good, but very little thought is given to how we will actually implement these lofty goals.

As Sull and Eisenhardt put it: 

Developing a strategy and implementing it are often viewed as two distinct activities — first you come up with the perfect plan and then you worry about how to make it happen. This approach, common through it is, creates a disconnect between what a company is trying to accomplish and what employees do on a day-to-day basis.

The authors argue that companies can bridge this gap between strategic intent and actual implementation by following three steps:

  1. Figure out what will move the needles.
  2. Choose a bottleneck.
  3. Craft the rules.

1. Moving the Needles

The authors use a dual needle metaphor to visualize corporate profits. They see it as two parallel needles: an upper needle which represents revenues and a lower needle which represents costs. The first critical step is to identify which actions will drive a wedge between the needles causing an increase in profits, a decrease in costs, and sustain this over time.

In other words, as simple as it sounds, we need an actual set of steps to get from figure a. to figure b.

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What action will become the wedge that will move the needles?

The authors believe the best way to answer this is to sit down with your management team and ask them to work as a group to answer the following three questions:

  1. Who will we target as customers?
  2. What product or service will we offer?
  3. How will we provide this product at a profit?

When you are trying to massage out these answers remember to use inversion as well. 

Equally important are the choices on who not to serve and what not to offer.

Steve Jobs once pointed out that Apple was defined as much by what it didn’t do as by what it did.

2. Bottlenecks

Speaking of inversion, in order to complete our goal we must also figure out what’s holding us back from moving the needles — the bottlenecks standing in our way.

When it comes to implementing a strategy of simple rules, pinpointing the precise decision or activity where rules will have the most impact is half the battle. We use the term bottleneck to describe a specific activity or decision that hinders a company from moving the needles.

You may be surprised at the amount of bottlenecks you come across, so you’ll have to practice some “triage” of your issues, sorting what’s important from what’s really important.

The authors believe that the best bottlenecks to focus your attention on share three characteristics:

  1. They have a direct and significant impact on value creation.
  2. They should represent recurrent decisions (as opposed to ‘one off’ choices).
  3. They should be obstacles that arise when opportunities exceed available resources.

Once we’ve established what the bottlenecks are, it’s time to craft the rules which will provide you a framework in which to remove them.

3. Craft the Rules

Developing rules from the top down is a big mistake. When leaders rely on their gut instincts, they overemphasize recent events, build in their personal biases, and ignore data that doesn’t fit with their preconceived notions. It is much better to involve a team, typically ranging in size from four to eight members, and use a structured process to harness members’ diverse insights and points of view. When drafting the dream team to develop simple rules, it is critical to include some of the people who will be using them on a day-to-day basis.

This probably seems like common sense but we’re guessing you have worked at least one place where all information and new initiatives came from above, and much of it seemingly came out of nowhere because you weren’t likely involved.

In these situations it’s very hard to get buy-in from the employees — yet they are the ones doing the work, implementing the rules. So we need to think about their involvement from the beginning.

Having users make the rules confers several advantages. First, they are closest to the facts on the ground and best positioned to codify experience into usable rules. Because they will make decisions based on the rules, they can strike the right balance between guidance and discretion, avoiding rules that are overly vague or restrictive. User can also phrase the rules in language that resonates for them, rather than relying on business jargon. By actively participating in the process, users are more likely to buy into the final rules and therefore apply them in practice. Firsthand knowledge also makes it easier to explain the rules, and their underlying rationale, to colleagues who did not participate in the process.

It’s important to note here that this is a process, a process in which you are never done – there is no real finish line. You must always plan to learn and to iterate as you learn — keep changing the plan as new information comes in. Rigidity to a plan is not a virtue; learning and adapting are virtues. 

***

There’s nothing wrong with strategy. In fact, without a strategy, it’s hard to figure out what to do; some strategy or another must guide your actions as an organization. But it’s simply not enough: Detailed execution, at the employee level, is what gets things done. That’s what the Simple Rules are all about.

Strategy, in our view, lives in the simple rules that guide an organization’s most important activities. They allow employees to make on-the-spot decisions and seize unexpected opportunities without losing sight of the big picture.

The process you use to develop simple rules matters as much as the rules themselves. Involving a broad cross-section of employees, for example, injects more points of view into the discussion, produces a shared understanding of what matters for value creation, and increases buy-in to the simple rules. Investing the time up front to clarify what will move the needles dramatically increases the odds that simple rules will be applied where they can have the greatest impact.

***

Still Interested? Read the book, or check out our other post where we cover the details of creating your simple rules.

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Jared Diamond: How to Get Rich

Reading Time: 0 minutes Less than a minute

We’re constantly asked for examples of the “multiple mental models” approach in practice. Our standard response includes great books like Filters Against Folly and Will Durant’s The Lessons of History.

One of the well-known examples of this brand of thinking is Guns, Germs, and Steel, a book that opened thousands of eyes to the power of leaping across the walls of history, sociology, biology, geography and other fields to truly understand the world. (If you haven’t read it yet, why are you still here? Go order it and read it!)

Jared Diamond, the book’s author, is a great master of synthesis across many fields — works like The Third Chimpanzee and Collapse show great critical thinking prowess, even if you don’t come to 100% agreement with him.

Lesser known than Guns, Germs, and Steel is a follow-up talk Diamond gave entitled How to Get Rich:

… probably most lectures one hears at the museum are on fascinating but impractical subjects: namely, they don’t help you to get rich. This evening I plan to redress the balance and talk about the natural history of becoming rich.

The talk is a great, and short, introduction to “multiple mental models” thinking. Diamond, of course, does not literally answer the question of How to Get Rich. He’s smart enough to know that this is charlatan territory if answered too literally. (Three steps to surefire wealth!)

But he does effectively answer an interesting part of the equation of getting rich: What conditions do we need to set up maximal productivity, learning, and cooperation among our groups? 

Diamond answers his question through the same use of inter-disciplinary synthesis his readers would be familiar with: As you read it, you’ll see models from biology, military history, business/economics, and geography.

His answer has two main parts: Optimal group size/fragmentation, and optimal exposure to outside competition:

So what this suggests is that we can extract from human history a couple of principles. First, the principle that really isolated groups are at a disadvantage, because most groups get most of their ideas and innovations from the outside. Second, I also derive the principle of intermediate fragmentation: you don’t want excessive unity and you don’t want excessive fragmentation; instead, you want your human society or business to be broken up into a number of groups which compete with each other but which also maintain relatively free communication with each other. And those I see as the overall principles of how to organize a business and get rich.

Those are wonderful lessons, and you should read the piece to see how he arrives at them. But there’s another important reason we bring the talk to your attention, one of methodology.

Diamond’s talk offers us a powerful principle for our efforts to understand the world: Look for and study natural experiments, the more controlled, the better.

I propose to try to learn from human history. Human history over the last 13,000 years comprises tens of thousands of different experiments. Each human society represents a different natural experiment in organizing human groups. Human societies have been organized very differently, and the outcomes have been very different. Some societies have been much more productive and innovative than others. What can we learn from these natural experiments of history that will help us all get rich? I propose to go over two batches of natural experiments that will give you insights into how to get rich.

This wonderfully useful approach, reminiscent of Peter Kaufman’s idea about the Three Buckets of Knowledge, is one we see used effectively all the time.

Judith Rich Harris used the naturally controlled experiment of identical twins separated at birth to solve the problem of human personality development. Michael Abrashoff had a naturally controlled experiment in leadership principles when he had to turn around the USS Benfold without hiring or firing, or changing ships or missions, or offering any financial incentive to his cadets. Ken Iverson had a naturally controlled experiment in business principles by succeeding dramatically in a business with massive headwinds and no tailwinds.

And so if we follow in the steps of Diamond, Peter Kaufman, Judith Rich Harris, Ken Iverson, and Michael Abrashoff, we might find natural experiments that help illuminate the solutions to our problems in unusual ways. As Diamond says in his talk, the world has already tried thousands of things: All we have to do is study them and then align with the way the world works.

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Ken Iverson: The Cure for the Common MBA

Reading Time: 4 minutes

We’ve written before about the legendary businessman Ken Iverson, the former CEO of Nucor Steel, who took it from a tiny steel operation to a true steel powerhouse in his own lifetime.

To recap, in Iverson’s tenure, Nucor:

  • Compounded its per-share profits at 17% per annum for over 30 years, in a dying industry (steel production) even while foreign steelmakers competed hard and with lower per-hour labor costs, severely harming most U.S. steel producers.
  • Engineered the lowest per ton of steel labor cost despite paying the highest wages.
  • Did not lay off any employees or close any facilities in his long tenure. (In the steel business!)

And so on. He was incredible.

His short business memoir, Plain Talk, describes a much different kind of company than most; one where a culture of teamwork and group winning trumped personal fiefdom. He also got the incentives right. Boy did it ever work.

Turns out Iverson had some thoughts on business education as well.

What are we really missing?

In his recommended curriculum, Iverson highlights just how different his thoughts are: No classes on grand strategy (Henry Singleton would agree), or sales, or marketing, or financial structuring. (Not that those can’t be useful. Just not enough.)

His idea? Teach aspiring managers how to truly interact with, understand, and lead the people who work for them by forcing young MBAs to take on an “internship” as a leader similar to the way doctors take up residence before being given the full leash. 

In the epilogue to Plain Talk, Iverson calls this the Cure for the Common MBA.

Here are some of the subjects that might form the core of first-year MBA curricula:

Earning Employees’ Trust and Loyalty

Far too many managers have no clue how their employees feel or even what their people’s work lives are like, day to day. Employees pick up on this lack of insight in a heartbeat, and that realization taints everything their managers say to them from that point forward. Conversely, employees clearly give the benefit of the doubt to managers whom they see as understanding “what’s really going on” and “what we’re really up against.” That’s only natural.

I’d suggest, then, that every MBA candidate be required to spend at least a few weeks engaged in manual, clerical, and/or other forms of non-management labor.

Further, they should be required to keep a journal of their experiences—the kinds of problems they encounter, their frustrations, their successes, and so forth. They will find that what seems a small thing to them as managers often takes on great significance to them as employees.

Developing managers should also contemplate the implicit and explicit commitments they will make to the people who work for them. They should understand their obligations under those commitments as well as the limitations of those obligations. And they should grasp the consequences of failing to be consistently trustworthy.

Active Listening

Listening is among the scarcest of all human skills, in and out of management. Listening requires concentration, skill, patience, and a lot of practice. But such practice is a very sound investment of the developing manager’s time.

Real listening enables managers not only to hear what people say to them, but to sense what may be behind what is said (i.e., employees’ emotions, assumptions, biases).

Better still, their reputation for competent listening will encourage others to bring them information. Listening proficiency is an immense advantage to any manager. No MBA should be sent forth into the business world without it.

The Hazards of Hierarchical Power

Inexperienced managers tend to lean heavily on formal, hierarchical sources of authority. This is understandable. They have not yet had the opportunity to develop other forms of authority such as experience, expertise, and seniority.

The problem is, young managers don’t often comprehend the hazards of hierarchical power. They do not understand that, by setting themselves above and apart from their employees, they may actually be digging themselves into a hole. I think it is only fair, then, that we warn inexperienced managers of the hazards of hierarchical power.

Principles of Equitable Treatment

Few managers receive much in the way of explicit instruction in the principles of equitable treatment of employees, either in business school or in the course of management development. All too often, managers fill that vacuum with their own self serving precepts of what is equitable. A few common- sense principles, clearly stated and strongly advocated in the business schools, could make the business world a better, more equitable place for employees and managers alike.

***

The notion of an internship for managers has a precedent in medical education, of course. Doctors intern for a number of years before they are turned loose on the world. There ought to be a comparable transitional step in completing the requirements for an MBA. Further, that transition should focus on providing the management candidate hands-on experience. Any MBA who ventures into business with the intent of managing people should first develop his or her skills under the watchful guidance of an experienced manager.

The fact is, few business school professors have ever managed anything, and their lack of hands-on experience shows in their students. Medical school faculties, in contrast, are comprised of the best and most respected practicing physicians.

MBA candidates should preferably complete their internships within relatively small, self-contained operations, so they can perceive the operation in its entirety and grasp the overall dynamics of a business.

People throughout the corporate world lament that other parts of their company don’t understand them or what they do. They’re usually right. It takes an extraordinary individual to understand aspects of a business to which he or she has never been exposed. We are expecting far too many managers to be extraordinary.

Still Interested? Check out Plain Talk, and our post on some of its main themes.

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Andy Grove and the Value of Facing Reality

Reading Time: 7 minutes

“People who have no emotional stake in a decision
can see what needs to be done sooner.”
— Andy Grove

***

What do you do when you wake up one day and realize that reality has changed, and you will either change with it or perish? Here’s one story of someone who did it successfully: Andy Grove, the former CEO of Intel Corp.

Here’s the long and short: As late as 1981, Intel Corp had massive dominance of the worldwide semiconductor business. They made memory chips (RAM), owning about 60% of the global trade in a business that was growing in leaps and bounds. The personal computer revolution was taking off and the world was going digital slowly, year by year. It was the right business to be in, and Intel owned it. They got designed into the IBM PC, one of the first popular personal computers, in 1981. Life was good.

The problem was that everyone else wanted into the same business. New companies were popping up every day in the United States, and in the late ’70s and throughout the ’80s, Japanese semiconductor manufacturers started nipping at Intel’s heels. They were competing on price and fast availability. Slowly, Intel realized its products were becoming commodities. By 1988, Japanese manufacturers had over 50% of the global market.

What did Intel do in response?

At first, as most all of us do, they tried to cope with the old reality. They tried running faster on a treadmill to nowhere. This is the first true difficulty of facing a new reality: Seeing the world as it truly is. The temptation is always to stick to the old paradigm.

What Intel really wanted was to be able to stay in the old business and make money at it. Andy Grove describes some of the tactics they tried to this end in his great book Only the Paranoid Survive, written in 1996:

We tried a lot of things. We tried to focus on a niche of the memory market segment, we tried to invent special-purpose memories called valued-added designs, we introduced more advanced technologies and built memories with them. What we were desperately trying to do was earn a premium for our product in the marketplace as we couldn’t match the Japanese downward pricing spiral. There was a saying at Intel at that time: “If we do well we get ‘2x’ [twice] the price of Japanese memories, but what good does it do if ‘X’ gets smaller and smaller?

[…]

We had meetings and more meetings, bickering and arguments, resulting in nothing but conflicting proposals. There were those who proposed what they called a “go for it” strategy: “Let’s build a gigantic factory dedicated to producing memories and nothing but memories, and let’s take on the Japanese.” Others proposed that we should get really clever and use an avant-garde technology, “go for it” but in a technological rather than a manufacturing sense and build something the Japanese producers couldn’t build. Others were still clinging to the idea that we could come up with special-purpose memories, an increasingly unlikely possibility as memories became a uniform worldwide commodity. Meanwhile, as the debates raged, we just went on losing more and more money.

As Grove started waking up to the reality that the old way of doing business wasn’t going to work anymore, he allowed himself the thought that Intel would leave the business that had buttered its bread for so long.

And with this came the second difficulty of facing a new reality: Being the first to see it means you’ll face tremendous resistance from those who are not there yet. 

Of course, Grove faced this in spades at Intel. Notice how he describes the ties to the old reality: Religious conviction.

The company had a couple of beliefs that were as strong as religious dogmas. Both of them had to do with the importance of memories as the backbone of our manufacturing and sales activities. One was that memories were our “technology drivers.” What this phrase meant was that we always developed and refined our technologies on our memory products first because they were easier to test. Once the technology had been debugged on memories, we would apply it to microprocessors and other products. The other belief was the “full product-line” dogma. According to this, our salesmen needed a full product line to do a good job in front of our customers; if they didn’t have a full product line, the customer would prefer to do business with our competitors who did.

Given the strength of these beliefs, an open-minded, rational discussion about getting out of memories was practically impossible. What were we going to use for technology drivers? How were our salespeople going to do their jobs when they had an incomplete product family?

Eventually, after taking half-measures and facing all kinds of resistance from the homeostatic system that is a large organization, Grove was able to convince the executive team it was time to move on from the memory business and go whole-hog into microprocessors, a business where Intel could truly differentiate themselves and build a formidable competitive position.

It’s here that Grove hits on a very humbling point about facing reality: We’re often the last ones to see things the way they truly are! We’re sitting on a train oblivious to the fact that it’s moving at 80 miles per hour, but anyone sitting outside the train watches it whiz right by! This is the value of learning to see the world through the eyes of others.

After all manner of gnashing of teeth, we told our sales force to notify our memory customers. This was one of the great bugaboos: How would our customers react? Would they stop doing business with us altogether now that we were letting them down? In fact, the reaction was, for all practical purposes, a big yawn. Our customers knew that we were not a very large factor in the market and they had half figured that we would get out; most of them had already made arrangements with other suppliers.

In fact, when we informed them of the decision, some of them reacted with the comment, “It sure took you a long time.” People who have no emotional stake in a decision can see what needs to be done sooner. 

This is where the rubber hits on the road. As Grove mentions regarding Intel, you must train yourself to see your situation from the perspective of an outsider.

This is why companies often bring outside management or consulting organizations in to help them — they feel only someone sitting outside the train can see how fast it’s moving! But what if you could have for yourself that kind of objectivity? It takes a passionate interest in reality and a commitment to being open to change. In business especially, the Red Queen effect means that change is a constant, not a variable.

And the story of Andy Grove shows that it can be done. Despite the myriad of problems discussed above, not only did Grove realize how fast the train was moving, but he got all of his people off, and onto a new and better train! By the late ’80s Intel pushed into microprocessing and out of memories, and became one of the great growth companies of the 1990s in a brand new business. (And he did it without bringing in outside help.)

What it took was the courage to face facts and act on them: As hard as it must have been, the alternative was death.

Here’s what Grove took from the experience:

Change is pain

I learned how small and helpless you feel when facing a force that’s “10X” larger than what you are accustomed to. I experienced the confusion that engulfs you when something fundamental changes in the business, and I felt the frustration that comes when the things that worked for you in the past no longer do any good. I learned how desperately you want to run from dealing with even describing a new reality to close associates. And I experienced the exhilaration that comes from a set-jawed commitment to a new direction, unsure as that may be.

A new reality doesn’t happen overnight

In this case, the Japanese started beating us in the memory business in the early eighties. Intel’s performance started to slump when the entire industry weakened in mid-1984. The conversation with Gordon Moore that I described occurred in mid-1985. It took until mid-1986 to implement our exit from memories. Then it took another year before we returned to profitability. Going through the whole strategic inflection point took us a total of three years.

The new reality may be preferable to the old one

I also learned that strategic inflection points, painful as they are for all participants, provide an opportunity to break out of a plateau and catapult to a higher level of achievement. Had we not changed our business strategy, we would have been relegated to an immensely tough economic existence and, for sure, a relatively insignificant role in our industry. By making a forceful move, things turned out far better for us.

So here is your opportunity: When a new reality awaits, don’t go at it timidly. Take it head on and make it not only as good, but better than the old reality. Don’t be the boy in the well, looking up and seeing only the sides of the well. Take the time to see the world around you as it truly is.

***

Still Interested? Check out Grove’s classic book on strategic inflection points, Only the Paranoid Survive. For another interesting business case study, read the interesting story of how IBM first built its monster 20th century competitive advantage.

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The HP Way: Dave Packard on How to Operate a Company

Reading Time: 8 minutes

In 1960, David Packard gave an informal speech that wasn’t originally intended for publication. In fact the speech only surfaced again during the debate over the merger between Hewlett Packard and Compaq. At the time the leadership of HP portrayed themselves as doing exactly “what Dave Packard would have done.”

As a rebuttal to this dubious use of language, David Packard Jr. published a full-page ad in the Wall Street Journal (March 15, 2002) reprinting a wonderful speech his father gave in the ’60s to a group of HP managers. Nothing could be better evidence of the philosophy than the words, delivered on the job from his father.

The speech, which can be found in The HP Way: How Bill Hewlett and I Built Our Company, dealt with a number of subjects including why a company exists, the difference between management by objective and management by control, how to manage people, the importance of financial responsibility and more.

Packard opens his speech by saying “I think this is going to be crucial in determining whether we are able to continue to grow and keep an efficient organization and maintain the character of our company”.

***

When discussing why a company exists in the first place, Packard writes:

I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile— they make a contribution to society (a phrase which sounds trite but is fundamental).

[…]

So with that in mind let us discuss why the Hewlett-Packard Company exists. I think it is obvious that we started this company because Bill and I, and some of those working with us in the early days, felt that we were able to design and make instruments which were not as yet available. I believe that our company has grown over the years for that very reason. Working together we have been able to provide for the technical people, our customers, things which are better than they were able to get anywhere else. The real reason for our existence is that we provide something which is unique. Our particular area of contribution is to design, develop, and manufacture electronic measuring instruments.

…

[T]he reason for our existence and the measure of our success is how well we are able to make our product.

***

As for how the individual person fits into these efforts, Packard hits on the difference between management by objective and management by control:

The individual works, partly to make money, of course, but we should also realize that the individual who is doing a worthwhile job is working because he feels he is accomplishing something worthwhile. This is important in your association with these individuals. You know that those people you work with that are working only for money are not making any real contribution. I want to emphasize then that people work to make a contribution and they do this best when they have a real objective when they know what they are trying to achieve and are able to use their own capabilities to the greatest extent. This is a basic philosophy which we have discussed before— Management by Objective as compared to Management by Control.

***

Continuing, Packard hits on the notion of what it means to supervise someone:

In other words when we discuss supervision and management we are not talking about a military type organization where the man at the top issues an order and it is passed on down the line until the man at the bottom does as he is told without question (or reason). That is precisely the type of organization we do not want. We feel our objectives can best be achieved by people who understand what they are trying to do and can utilize their own capabilities to do them. I have noticed when we promote people from a routine job to a supervisory position, there is a tremendous likelihood that these people will get carried away by the authority. They figure that all they have to do now is tell everyone else what to do and quite often this attitude causes trouble. We must realize that supervision is not a job of giving orders; it is a job of providing the opportunity for people to use their capabilities efficiently and effectively. I don’t mean you are not to give orders. I mean that what you are trying to get is something else. One of the underlying requirements of this sort of approach is that we do understand a little more specifically what the objectives of the company are. These then have to be translated into the objectives of the departments and groups and so on down.

***

While Steve Jobs famously said that focus is the ability to say no, Packard approached focus from another angle:

The other objective which is complementary to this and equally important is to try to make everything we do worthwhile. We want to do our best when we take on a job. … The logical result of this is that as we concentrate our efforts on these areas and are able to find better ways to do the job, we will logically, develop a better line of general purpose measuring instruments.

***

Getting the product to the customer is only half the job.

In engineering, there are two basic criteria that are uppermost in the definition of what we hope to be able to do. As we develop these new instruments, we hope they will be creative in their design, and they will provide better ways of doing a job. There are many examples of this— the instruments our engineers have developed this last year give us some good examples. The clip-on milliammeter, the new wave analyzer, the sampling scope— all are really creative designs. They give people who buy them methods of making measurements they could not make before those instruments were available. However, creative design alone is not enough and never will be. In order to make these into useful devices, there must be meticulous attention to detail. The engineers understand this. They get an instrument to the place where it is about ready to go and the job is about half done. The same applies in the manufacturing end of the program. We need to produce efficiently in order to achieve our slogan of inexpensive quality. Cost is a very important part of the objective in manufacturing, but producing an instrument in the quickest manner is not satisfactory unless at the same time every detail is right. Attention to detail is as important in manufacturing as it is in engineering.

***

It’s not about what you sell, it’s about the problems you solve.

We certainly are not anxious to sell a customer something he does not want, nor need. You may laugh, but this has happened— in other companies of course, not ours! Also, we want to be sure that when the instrument is delivered, it performs the function the customer wanted.

***

Packard, ever the financial conservative, offers a timeless lesson on financial responsibility:

Financial responsibility is equally important, however different in nature. It is essentially a service function to see that we generate the resources which make it possible for us all to do our job.

These things translated mean that in addition to having the objective of trying to make a contribution to our customers, we must consider our responsibilities in a broader sense. If our main thought is to make money, we won’t care about these details. If we don’t care about the details, we won’t make as much money. They go hand in hand.

***

On the company’s responsibility to employees:

We are not interested only in making a better product. We feel that in asking you people to work for us, we in turn have an obligation. This is an important point and one which we ask each of you to relay to all the employees. Our first obligation, which is self-evident from my previous remarks, is to let people know they are doing something worthwhile. We must provide a means of letting our employees know they have done a good job. You as supervisors must convey this to your groups. Don’t just give orders. Provide the opportunity for your people to do something important. Encourage them.

***

On the contentious question of whether a manager needs to understand the realities of their people, Packard offers a clear rebuttal of the argument that management skills are sufficient.

Some say you can be a good manager without having the slightest idea of what you are trying to manage, that the techniques of management are all important. There are many organizations which work that way. I don’t argue that the job can’t be done that way but I do argue strongly that the best job can be done when the manager or supervisor has a real and genuine understanding of his group’s work. … I don’t see how a person can even understand what proper standards are and what performance is required unless he does understand in some detail the very specific nature of the work he is trying to supervise.

***

As to what traits management should exhibit …

Tolerance is tremendously significant. Unless you are tolerant of the people under you, you really can’t do a good job of being a supervisor. You must have understanding— understanding of the little things that affect people. You must have a sense of fairness, and you must know what it is reasonable to expect of your people. You must have a good set of standards for your group but you must maintain these standards with fairness and understanding.

***

Lest you think Packard was a socialist, he argues that profits are the only path towards achieving the management philosophy he laid out.

I want to say that I have mentioned our primary objectives, but none of these can be accomplished unless the company makes a profit. Profit is the measure of our contribution to our customers— it is a measure of what our customers are willing to pay us over and above the actual cost of an instrument. Only to the extent that we can do something worthwhile, can provide more for the customer, will he year in and year out pay us enough so we have something left over. So profit is the measure of how well we work together. It is really the final measure because, if we cannot do these things so the customer will pay us, our work is futile.

 

If you liked this you’ll love:

11 Simple Rules For Getting Along With Others — More timeless advice from David Packard deepening our understanding of his philosophy on work and life.

The Four Types of Relationships and the Reputational Cue Ball — Thinking about the fundamental lesson of biology — the need to survive — offers a potent lens through which we can view our relationships.

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Luck Meets Perseverance: The Creation of IBM’s Competitive Advantage

Reading Time: 8 minutes

On Monday October 28, 1929, the stock market took one of the worst single-day tumbles anyone alive might have seen, with the Dow Jones averages falling about 13%. The next day, October 29th, the market dropped yet again, a decline of 12%. By the end of the year, the Dow Jones average was down more than 45% from its high of 381. Market historians are familiar with the rest of the story: The sickening slide would not stop at 45%, but continue until 1932 to reach a low of 41 on the Dow, a decline of about 90% from peak to trough.

American business was in a major Depression. But at least one businessman would decide that, like General Erwin Rommel would say years later, the path was not out, but through.

***

International Business Machines, better known as IBM, was created from the ashes of the Computing-Tabulating-Recording Company (C-T-R) in 1917 by Thomas J. Watson, who’d learned his business skills at the National Cash Register Company (NCR). Before Watson’s reorganization of C-T-R, the company was basically in three businesses: computing scales (to weigh and compute the cost of a product being weighed), time clocks (to calculate and record wages), and tabulating machines (which used punch cards to add up figures and sort them). Watson’s first act of genius was to recognize that the future of IBM was not going to be time cards or scales, but in helping businesses do their work more effectively and with a lot less labor. He set out to do just that with his tabulating machines.

The problem was, IBM’s products weren’t yet all that different from its competitors’, and the company was small. IBM’s main tabulating product was the Hollerith machine, created by Herman Hollerith in Washington D.C. in 1890 to improve the Census tabulating process, of all things. (It sounds mundane, but he saved the government $5 million and did the work in about 1/8th of the time.) By the late 1910s, the Hollerith machine had a major competitor in the Powers Accounting Company, which had a similar product that was easier to use and more advanced than the Hollerith.

Hollerith_Punched_Card
Hollerith Punch Card

 

HollerithMachine.CHM
Hollerith Machine

 

Watson knew he had to push the research and development of his best product, and he did, hiring bright engineers like Fred Carroll from NCR, who would go on to be known for his Carroll Press, which allowed IBM to mass-produce the punch cards which did the “tabulating” in the pre-electronic days. By the mid-1920s, IBM had the lead. The plan was set in late 1927.

Watson then pointed to where he wanted IBM to go. ”There isn’t any limit for the tabulating business for many years to come,” he said. “We have just scratched the surface in this division. I expect the bulk of increased business to come from the tabulating end, because the potentialities are greater, and we have done so little in the way of developing our machines in this field.”

Underneath that statement lay a number of reasons—other than the thrill of new technology—why Watson zeroed in on the punch card business. When seen together, the reasons clicked like a formula for total domination. IBM would never be able to make sure it was the world leader in scales or time clocks, but it could be certain that it was the absolute lord of data processing.

[…]

Watson had no epiphanies. No voice spoke to him about the future of data processing. He didn’t have a grand vision for turning IBM into a punch card company. He got there little by little, one observation after another, over a period of 10 to 12 years.

(Source: The Maverick and his Machine)

Watson’s logical, one-foot-at-a-time approach was reminiscent of Sir William Osler’s dictum: Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand. And with a strategy of patenting its proprietary punch-cards, making them exclusively usable with IBM tabulators and sorters, IBM was one of the market darlings in the lead-up to 1929. Between 1927 and 1929 alone, IBM rose about four-fold on the back of 20-30% annual growth in its profits.

But it was still a small company with a lot of competition, and the punch card system was notoriously unreliable at times. He had a great system to hook in his customers, but the data processing market was still young — many businesses wouldn’t adopt it. And then came the fall.

***

As the stock market dropped by the day and the Depression got on, the economy itself began to shrink in 1930. GDP went down 8% that year, and then another 7% the following year. Thousands of banks failed and unemployment would eventually test 30%, a figure that itself was misleading; the modern concept of “underemployment” hadn’t been codified, but if it had, it probably would have dwarfed 30%. An architect working as a lowly draftsman had a job, but he’d still fallen on hard times. Everyone had.

Tom Watson’s people wondered what was to become of IBM. If businesses didn’t have money, how could they purchase tabulators and punch cards? Even if it would save them money in the long run, too many businesses had cut their capital spending to the bone. The market for office spending was down 50% in 1930.

Watson’s response was to push. Hard. So hard that he’d take IBM right up to the brink.

IBM could beat the Depression, Watson believed. He reasoned that only 5 percent of business accounting functions were mechanized, leaving a huge market untapped. Surely there was room to keep selling machines, even in difficult times. Watson also reasoned that the need for IBM machines was so great, if businesses put off buying them now, certainly they’d buy them later, when the economy picked up. His logic told him that the pent-up demand would explode when companies decided to buy again. He wanted IBM to be ready to take advantage of that demand.

He’d keep the factories building machines and parts, stockpiling the products in warehouses. In fact, between 1929 and 1932, he increased IBM’s production capacity by one-third.

Watson’s greatest risk was running out of time. If IBM’s revenue dropped off or flattened because of the Depression, the company would still have enough money to keep operating for two years, maybe three. If IBM’s revenue continued to falter past 1933, the burden of running the factories and inventory would threaten IBM’s financial stability.

[…]

Watson’s logic led him to make what looked to outsiders like another insane wager. On January 12, 1932, Watson announced that IBM would spend $1 million—nearly 6 percent of its total annual revenue— to build one of the first corporate research labs. The colonial-style brick structure in Endicott would house all of IBM’s inventors and engineers. Watson played up the symbolism for all it was worth. He would create instead of destroy, despite the economic plague.

(Source: The Maverick and his Machine)

Most companies pulled back, and for good reason. Demand was rapidly shrinking, and IBM’s decision to spend money expanding productive capacity, research, and employment would be suicide if demand didn’t return soon. All of that unused capacity was costly and would go to waste. Watson took an enormous risk, but he also had faith that the American economy would recover its dynamism. If it did, IBM would come out on the other side untouchable.

Somehow, Watson had to stimulate demand. He had to come up with products that companies couldn’t resist, whatever the economic conditions. Again, thanks to Charles Kettering’s influence, Watson believed that R&D would drive sales. (ed: Kettering was chief engineer at General Motors.) So Watson decided to build a lab, pull engineers together, and get them charged up to push the technology forward.

Throughout the 1930s, IBM cranked out new products and innovation, finally getting its technology ahead of Remington Rand or any other potential competitors.

[…]

Within a few years, Watson’s gamble of manufacturing looked disastrous. As IBM pumped increasing amounts of money into operations and growth, revenue from 1929 to 1934 stalled, wavering between $17 million and $19 million a year. IBM edged toward insolvency. In 1932, IBM’s stock price fell to 1921 levels and stayed there—11 years of gains wiped out.

(Source: The Maverick and his Machine)

By 1935, IBM was still stagnating. Watson made the smart move to get out of the money-losing scale business and use the money to keep the remaining businesses afloat, but he was drowning in excess capacity, inventions be damned.

Then IBM got a stroke of luck that it would ride for almost 50 years.

After all of his pushing and all of his investment, after the impossible decision to push IBM to the brink, Tom Watson was rewarded with The Social Security Act of 1935, part of FDR’s New Deal. It was perfect.

No single flourish of a pen had ever created such a gigantic information processing problem. The act established Social Security in America—a national insurance system that required workers to pay into a fund while employed so they could draw payments out of it once they retired, or if a wage-earning spouse died. To make the system work, every business had to track every employee’s hours, wages, and the amount that must be paid to Social Security. The business then had to put those figures in a form that could be reported to the federal government. Then the government had to process all those millions of reports, track the money, and send checks to those who should get them.

Overnight, demand for accounting machines soared. Every business that had them needed them more. An officer for the store chain Woolworth told IBM that keeping records for Social Security was going to cost the company $250,000 a year. Businesses that didn’t have the machines wanted them. The government needed them by the boatload.

Only one company could meet the demand: IBM. It had warehouses full of machines and parts and accessories, and it could immediately make more because its factories were running, finely tuned, and fully staffed. Moreover, IBM had been funding research and introducing new products, so it had better, faster, more reliable machines than Remington Rand or any other company. IBM won the contract to do all of the New Deal’s accounting—the biggest project to date to automate the government…

This period of time became IBM’s slingshot. Revenue jumped from $19 million in 1934 to $21 million in 1935. From there it kept going up: $25 million in 1936, $31 million in 1937. It would climb unabated for the next 45 years. From that moment until the 1980s, IBM would utterly dominate the data processing industry—a record of leadership that was unmatched by any industrial company in history.

(Source: The Maverick and his Machine)

By combining aggressive opportunism and a great deal of luck, IBM was forged in the depths of the Great Depression. Like John D. Rockefeller before him, who bought up refineries during periods of depression in the oil industry, and Warren Buffett after him, who scooped up loads of cheap stocks when the stock market was crumbling in the 1970s, Watson decided that pushing ahead was the only way out.

History certainly didn’t have to go his way — FDR might not have been elected or might not have been able to enact Social Security. Even if he’d done it two years later, IBM still might never have made it.

But Watson’s courage and leadership did open the possibility of serendipitous fortune for IBM if the world didn’t end. Like oxygen combining with fuel to create internal combustion, those elements forged a monstrous competitive advantage when the match was finally lit.

Still Interested? Check out the excellent The Maverick and his Machine by Kevin Maney, where the excerpts above come from.

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