Order out of Chaos II

Its not easy to hold this kind of quality leadership for three big reasons. 

Fleet operators look at differences of a fraction of a cent per mile in making purchasing decisions, and the swing in costs is mostly fuel and wages.  Because of this Kenworth pioneered low-drag aerodynamic truck cabs thirty hers ago as a way to cut fuel costs.

Its not easy to hold this kind of quality leadership for three big reasons.  First, no one will believe you have the longest lasting trucks until they have already lasted a long time on the road.  It's a reputation that takes a while to earn and can be lost quickly.  Second, designing a very high-quality piece of machinery is not a textbook problem.  Designers learn from other designers over time, and the company accumulates these nuggets of wisdom by providing a good, stable place to work for talented engineers.  Third, it is usually quite difficult to convince buyers to pay an up-front premium for future savings, even if the numbers are clear.   People tend to be more myopic than economic theory would suggest.

ACTION POINT: Design for the obstacles that confront you.

Order out of Chaos

The company prices accordingly, maintaining its strong market position despite premium prices.

One example of good strategy in which you can see the coordinated elements of design in the U.S. heavy-truck business.  Daimler AG is the market-share leader (38 percent).  It got that large by buying Ford's troubled heave-truck business in 1977.  The next largest produces is Paccar (25 percent), followed by Volvo (20 percent), and then Navistar (16 percent).  Plumb in the middle of a low-growth, mature, very competitive industry, Paccar nevertheless turns in a solid performance.  Even more important Paccar's profits have been remarkably stable in an industry plagued by strong upswings and downswings in demand.  Paccar has not lost money since 1939, and its profit roll continues despite the recession of 2008-09.  Its returns on equity over the past twenty years has averaged 16 percent, compared with an average return of 12 percent earned by its competitors. 

The driving element in Paccar's strategy is quality, with its Kenworth and Peterbilt brands widely recognized as the highest-quality trucks made in North America.  Paccar has received J.D. Power awards for its heavy trucks and for its service.   The company prices accordingly, maintaining its strong market position despite premium prices.

ACTION POINT: How can you sell a truck at a premium price? In theory it is simple--your trucks have to run better and last longer so that the owner's cost to operate the truck is lower.

The Arc of the Enterprise V

Success leads to laxity and bloat, and these lead to decline. 

A very powerful resource position produces profit without great effort, and it is human nature that the easy life breeds laxity.  It is also human nature to associate current profit with recent actions, even though it should be evident that current plenty is the harvest of planting seasons long past.  When the profits roll in leaders will point to their every action with pride.

Books will be written recommending that others immediately adopt the successful firm's dress code, its vacation policy, its suggestion-box policies, and its method of allocating parking spaces.  Of course, these connections are specious.  Were there simple, direct connections between current actions and current results, strategy would be a lot easier.  It would also be a lot less interesting, for it is the disconnect between current results and current action that makes the analysis of the sources of success so hard and ultimately, so rewarding.

Success leads to laxity and bloat, and these lead to decline.  Few organizations avoid this tragic arc.  Yet is is the fairly predictable trajectory that opens the door to strategic upstarts.  

ACTION POINT:  To see effective design-type strategy, you must usually look away from the long-successful incumbent toward the company that effectively invades its market space.  There you will find a tightly crafted and integrated set of actions and policies.

The Spirit of an Organization

"It’s the abilities, not the disabilities that count.”

Two sayings sum up the “spirit of an organization.”  One is the inscription on Andrew Carnegie’s tombstone:

                        Here lies a man

                        Who knew how to enlist?

                        In his service

                        Better men than himself

The other is the slogan of the drive to find jobs for the physically handicapped: “It’s the abilities , not the disabilities, that count.”  

A good example was President Franklin D. Roosevelt’s confidential adviser in World War II, Harry Hopkins.  A dying, almost a dead man for whom every step was torment, he could work only a few hours every other day or so.  This forced him to cut out everything but truly vital matters.  He did not lose effectiveness thereby; on the contrary, he became as Churchill called him once, “Lord Heart of the Matter” and accomplished more than anyone else in wartime Washington.  Roosevelt broke every rule in the book to enable the dying Harry Hopkins to make his unique contribution.

ACTION POINT: Figure out what each of your employees’ or colleagues’ strengths are and develop these strengths to help people perform better. 

The Arc of the Enterprise IV

Existing resource can be the lever for the creation of new resources, but they can also be an impediment to innovation.

The peril of a potent resource position is that success then arrives without careful ongoing strategy work.  Own the original patent on the plain-paper photocopier, or own the Hershey's brand name, or the Windows operating system franchise, or the patent on Lipitor, and there will be many years during which profits will roll in almost regardless of how you arrange your business logic.  Yes, there was inventive genius in the creation of these strategic  resources, but profits from those resources can be sustained, for a time, without genius.  

Existing resource can be the lever for the creation of new resources, but they can also be an impediment to innovation.  Well led firms must, from time to time, cast aside old resources, just as they retire obsolete machinery. Yet strategic resources are embedded deeply within the human fabric of the enterprise, and most firms find this a difficult maneuver.

ACTION POINT: Are their old resources or obsolete machinery, process or tools that are impeding innovation?