Survival of the fittest

Companies must adapt to changing circumstances - and getting back in touch with their customers is the first step.

by Simon Caulkin for World Business
Last Updated: 23 Jul 2013

It is a given that in a changing environment, companies too must change to survive. More recently, it has become a given that change itself is changing. Globalisation, argues business and corporate strategist Kenichi Ohmae, has dramatically amplified the effects of change and with it the stakes involved. (Ohmae is known as Mr Strategy and has developed the 3Cs model, which says that a strategist should focus on three key factors: the corporation, the customer, the competitors.) Change on three levels - technological, personal and organisational - is so transforming business that "there are no longer any certainties in today's globalised world", he says. As camera manufacturers and the music majors (to name but two) have discovered, technological change creates huge opportunities and reformats whole industries overnight.

Personal change puts a premium on the ability of individuals to take charge of their lives and careers rather than remaining as spectators.

Coping with external change on this scale requires equally massive internal organisational change. Products, mission, strategy - all have to be rethought, says Ohmae, to the point of companies turning their back on their own ancestry and parentage, changing their very chromosomes. There is no core, just as there is no home base: "The new forms of corporation are homeless, at least in the traditional sense of having a base. They must be adaptive, focused on innovation and unencumbered by needless hierarchy or the psychological baggage of the past."

Only by managing all facets of change simultaneously, says Ohmae, can companies be successful. "Change occurs in many dimensions; all of them must be managed together."

This is a daunting prescription. The message is that companies must adapt faster, better and in more dimensions. Even if you don't know how, just do it. But that's not all. Other experts pile on more challenges.

In an article for Sloan Management Review in 2001, Peter Senge and Goran Carstedt called for companies to innovate their way to a new industrial revolution based on sustainability. For them, the key is a new environmentalism driven by innovation rather than regulation, yielding radical and sustainable new technologies, products, processes and business models.

Gary Hamel, CEO of Chicago-based management consulting firm Strategos and a visiting professor of strategic management at the London Business School, offers yet another dimension of innovation: management itself.

"What are the emerging challenges the future has in store for your company?

Try to imagine them: an ever-accelerating pace of change. Rapidly escalating customer power. Near instant commoditisation of products and services.

Ultra-low cost competitors. A new generation of consumers that is hype-resistant and deeply cynical about big business." In this situation, he argues, all the management principles inherited from the old order - specialisation, standardisation, planning and control, hierarchy, reliance on external reward - make companies less rather than more adaptive. Management itself must change.

Everyone, it seems, want companies to adapt and change on a scale never attempted before. What they don't explain is how. Faced with these pressures, what are managers to do? Rather than blindly change everything everywhere, it is sensible to step back and try to put things in context. How have we got to this spot? How is change different from before? And are there any clues as to where to begin?

When in a hole, the first thing is to stop digging. Many of the pressures for change are created by companies themselves. Let's start with customers.

After all, that's business's starting point: as Peter Drucker once said, all business is about creating a customer. Yet it's striking that customers barely figure as change agents in today's manifestos for the adaptive company. When they merit a mention, they sound more as though they are the enemy than the point of the activity.

The absent customer is both symbolic and revealing. If companies need to change, one reason is that they have lost touch with their customers.

In The Support Economy: why corporations are failing individuals and the next episode of capitalism (2002), Shoshana Zuboff and James Maxmin argue that over the last century, customers have changed but companies haven't.

Ironically, largely thanks to capitalism's prodigious ability to supply material needs, customers are no longer content to be mass consumers of products. Their priorities have shifted to less tangible wants such as self-actualisation and self-determination, requiring individually tailored services.

Meanwhile, companies remain in mass-production mode, "stuck in an inwardly-focused business logic that emphasises concentration, command/control, cost and efficiency", say Zuboff and Maxmin. This is centrally planned, managerial capitalism, whose momentum is 'push': managers decide what to give consumers and then foist it on them through advertising, promotions and bribes.

For all the talk of the new economy, the internet has changed nothing in the basic model. With a few exceptions, it just provides another medium for 'push'. Managers remain the centre of the business solar system with customers dimly distant planets. But the model is running out of steam.

It meets more and more resistance from people frustrated and angry at having to battle for their interests and requires ever more energy to keep the wheels turning. "The corporate response," writes Zuboff, "has been typical of institutions in crisis - they tend to reproduce old behaviours, only with more ferocity. Companies cut costs, lay people off and make consumers pay."

In other words, it's not fickle customers that make it harder for companies, it is companies that are making it harder for themselves. Stop pushing and they won't push back. Other pressures are similarly self-generated.

The London Business School's late Sumantra Ghoshal believed that companies were at an impasse of their own making. Approaching similar issues from a theoretical standpoint, he saw competition based on traditional notions of control and efficiency, leading not only to unhappy consumers but also exploited employees and a divided society. Today's predatory strategy models and their inevitable dire consequences, he argued, were based on a fatal confusion of the respective roles of companies and markets.

Conventional management theory, like the economic theory from which it derives, underplays the importance of innovation in economic advance and overplays scale, cost and operational efficiency. In fact, each is a different kind of efficiency; they are complementary and a vibrant economy needs all of them. Doing existing things faster and more cheaply is 'static efficiency' and is the property of markets, which excel at competing away the temporary advantage created by innovators, lowering prices and handing on the benefits to society.

On the other hand, innovation - using fresh combinations of resources to do new things - is 'dynamic efficiency', which takes the economy to a new level. Blind, impersonal, without intentionality, markets don't innovate. By contrast, companies are purposive entities that provide a refuge from market pressures within which members can exercise strategy and choice - for example, cutting people slack so that they can find ways of doing new things. In terms of static efficiency, 3M and Google's policy of allowing employees to spend a portion of their time on their own projects is a crime. But they gamble, so far successfully, that what they lose in static efficiencies will be more than offset by dynamic efficiencies - the creation of higher value through innovation.

Of course, all companies need to meet accepted standards of operational efficiency. But a strategy of competing only through operational efficiency is a losing game, one the market will always win. Worse, instead of creating new value, it condemns companies to compete for existing value not just with their nominal rivals but also with their own employees, suppliers and customers. As Ghoshal noted, it is not surprising that the latter are unhappy, just as companies despair at the instant commoditisation and ultra-low-cost competition noted by Ohmae and Hamel. This is merely what happens when companies play the value-appropriation game at the expense of innovation.

Indeed, many of these pressures are lifted, at least temporarily, when companies concentrate on innovating to create new value, pushing ahead where market pressures don't yet operate and buying time to set in motion another round of innovation. Think how Intel competes in the semiconductor industry, driving a cycle of innovation from the front in what Austrian economist Joseph Schumpeter characterised as capitalism's "waves of creative destruction".

Or consider personal computers. At one extreme, lack of differentiation and wafer-thin margins have persuaded IBM, which founded the industry 25 years ago, to sell its PC manufacturing arm to China's Lenovo. But it is still possible to compete in PCs through innovation rather than cost, as proved in different ways by the industry's two innovators, Apple and Dell. Although Dell seems to have lost its innovatory edge, it prospered over many years through its brilliant pioneering supply chain. Apple has quietly learned from this, but has far surpassed Dell in attention to the customer, consistently innovating through ease of use and style, allowing it to charge a premium even for 'commodity' desktop computers. No surprise that it is Apple, too, that created the iconic iPod, a one-product wave of creative destruction that has opened up an entirely new future for its parent, as well as redefining the music industry.

Actually, the iPod is much more than a music player. It is, says Zuboff, "a fragile embryo of the support economy", a tantalising pointer to the empowering products and adaptive companies of the future. Why do people love their iPods? Because beyond their sexy looks, they put the customer in control. To buy music, customers no longer have to brave the high street music store to pay for a CD, half of which they don't want. They can buy when they want, on impulse - having heard a song on a film soundtrack or at a concert. Better still, using Apple's cyberspace jukebox, they are no longer at the mercy of what the record companies want to give them.

They don't have to buy albums at all. They can put country next to classical, punk next to jazz, Barry Manilow next to Placido Domingo next to Beyonce next to Babyshambles.

There's more. By plugging the device into a pair of speakers, iPod owners can dispense with the traditional home hi-fi set-up altogether. The sound quality may not be quite as good, but for all but purists the gain in control and simplicity easily outweighs any disadvantages. So the iPod signals the end of not one but two producer hegemonies: hi-fi manufacturers and record producers. Let's not exaggerate: the iPod represents just a sliver of people's lives. But the mastery and control of their lifestyle that the iPod affords today's music consumers is a potent model for the more ambitious products and services of the future. It is individuals' unmet need for these qualities that Zuboff sees providing the momentum for "the next stage of capitalism" and fuelling economic growth for decades to come.

The secret of the iPod is that it reverses the logic of the business.

Instead of 'pushing' a producer-defined product to a reluctant audience (CD sales have been declining for years), it allows customers to 'pull' the value they define. The magic of 'pull' is that it makes the engines required for 'push' - the specialisation, standardisation, planning and control, and hierarchy identified by Hamel as the rigidities of yesterday's company - redundant. It's like using gravity instead of a motor to combat it.

Pull inherently uses fewer resources, tells managers directly what consumers want and, above all, delivers on customers' own terms. Pull doesn't just define the properties of tomorrow's products and services - it also provides the architecture of tomorrow's adaptive company.

Still the grandest, most important example is Toyota. In an article in Harvard Business Review, Hamel lists Toyota's ability to leverage its human capital - to turn its first-line employees into problem-solvers - as the reason it has outclassed its US rivals. In fact, although it's true that Toyota reaps a hugely greater return on human capital than its competitors, that is a consequence, not the first cause. And the secret is pull.

Toyota does not build a car until it gets an order. Like Apple with the iPod and iTunes, the Toyota Production System concentrates on making it easy for customers to pull exactly the product with exactly the specifications they want in the shortest possible time.

Building cars to order requires a different, more agile approach to production.

To make the system work, employees have to be decision-makers and problem-solvers. Pull also decrees that instead of planning and giving orders, the manager's job must be to work ceaselessly with front-line staff to make the system more responsive. A company such as Toyota, which generates millions of improvement suggestions from front-line employees and acts on a great many of them, is already an adaptive corporation.

So, yes, companies must change. And, yes, managers must change the way they think about change, too. But the wilderness that separates today's companies from the adaptive organisation of the future is perhaps not as trackless as it first seems. The first principle is to stop making matters worse - focus on the customer rather than on the opposition, and play the competition game on terms that they can win (innovation, value creation) rather than those that condemn them to ever-diminishing and more hard-won returns (cost, value appropriation).

The second principle is to use gravity rather than fight it. Let customers define the value they want and then tailor the system to give it to them as quickly and seamlessly as possible. When shortly before his death, Taiichi Ohno, the architect of the Toyota Production System, was asked what he was working on, he replied: "Shortening the period from taking an order to receiving the customer's money." That's what adaptive is.

Simple as an iPod, really.

TOYOTA'S PHILOSOPHY

The Toyota Production System (TPS) isn't just a clever method of gaining more value out of employees; it is part of a management philosophy that governs how the entire company works. In a radical break from the traditional 'command and control' approach to management, Toyota gives each employee the skills and tools to solve problems as they arise and head off problems before they occur, allowing the company to innovate from the bottom up.

Rather than asking each employee to come up with a specific number of ideas every year, Toyota is structured in a way that requires workers to think for themselves. Innovation and adaptation occur naturally during the production process, and the company says it receives more than a million ideas a year from its employees as a result.

The man responsible for creating TPS was an engineer named Taiichi Ohno.

In the early 1950s, he visited the US to study methods of car manufacture, but his most important discovery was the supermarket, which at that time didn't exist in Japan. Ohno observed the way American consumers could wander through a store and buy what they wanted, when they wanted it and in the amount they wanted. He believed that a manufacturing plant should be able to function in the same manner.

The system Ohno created, then known as 'just-in-time', allows the customer to 'pull' the product they want from the company, rather than having the company 'push' its products on to the market. Each stage in the production process becomes the customer of the preceding process, withdrawing parts and materials as and when required, in the amounts required. So instead of having a large amount of excess inventory, a just-in-time plant produces only the amount needed and requires each employee to be an active participant in the production process.

Largely as a result of TPS, Toyota has achieved an astonishing rate of growth. Between 2000 and 2005, the annual output of the global industry rose by 3 million vehicles to 60 million a year; Toyota accounted for half of that increase. The company is now threatening General Motors' position as the world's leading carmaker. But despite the undeniable success of Toyota's approach, other companies have been slow to catch on. Although some have introduced their own systems, none has enjoyed Toyota's success.

According to John Seddon, author of Freedom from Command and Control (2005) and an expert on 'lean management', this is because most companies still view TPS, erroneously, as a 'set of tools'. In fact, says Seddon, "it's a way of thinking. Toyota is an exemplar, an economic legend in its own lifetime and a fundamental challenge to accepted beliefs. It doesn't separate management from work, as most companies do. The problem other firms have is that they are unable to see Toyota's approach as a whole philosophy, not a set of tools to be applied."

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