Robert Heller - Managing revolution: The force for irresistible change - The recent fall of prominent CEOs marks a failure to spot sea changes in markets. Using the technology that caused the transformation is the salvation

Robert Heller - Managing revolution: The force for irresistible change - The recent fall of prominent CEOs marks a failure to spot sea changes in markets. Using the technology that caused the transformation is the salvation - Uneasier lies the head that w

Last Updated: 31 Aug 2010

Uneasier lies the head that wears the CEO's crown. At Xerox and Procter & Gamble, new brooms have been swept out only a couple of years after taking charge. Before them, Doug Ivester of Coca-Cola similarly lost his kingdom. These departures, and several others, are crucially related.

The link is failure in the face of industry transformation - what Intel chairman Andy Grove calls a 'strategic inflection point'. Missing the point also pushed Bill Gates upstairs at Microsoft. His anti-trust shambles stemmed from strategic failure: his refusal to see the internet as something that changes everything.

In Microsoft's radically altered situation, Gates is a lesser liability as chairman than as CEO, day-to-day master of a quasi-monopoly under siege, not only from trustbusters but from a '10x force'. That is Grove's phrase for irresistible change. The 10x force that created Intel's own stupendous surge was its microprocessor, an inspired invention that undermined every established computer company, from IBM downwards.

But Intel had itself missed the point in the 1980s, when it grievously underrated Japanese competition in memory chips. Gates was just as guilty over Netscape's browser. To catch up on a horrendous lag, Microsoft used blatantly predatory tactics with eventually horrible results: a public pillorying and tens of billions slashed from Gates's beloved 'shareholder value'.

The moral is no different at P&G and Coke - non-techies both, left behind by market forces. Every successful business creates a model that stands the company in excellent stead for years, even decades. At some point, though, every such model passes its peak. Nobody much notices, because the profits are still rolling in. But that is the point: management should notice nothing else because, without a change of direction, the company goes over the hill.

Xerox - a techie this time - missed the point (like Intel) in face of Japanese competition. By the time Xerox's belated reaction had righted some of the wrongs, near-monopoly had dwindled to single-digit market share. Having survived (it is the 87th-largest firm in the US) Xerox then missed the point again: the advent of very cheap computing and printing power.

A series of Xerox CEOs, including the recent unfortunate Rick Thoman, wrestled with a problem that may well be insoluble. The Parable of the Yokel applies. Asked the way to Cirencester, he replies: 'If I were you, I wouldn't start from here.' Who today would back a reprographic company, with no computers in its product range, against powerful and expert rivals, most of which are digitally blessed?

But the inertia of the past has virtues as well as vices. Xerox has an installed customer base, accrued brand strength and top-class products that generate dollars 19 billion in revenues. Even so, firms in its position survive in a twilight zone. They can never recover the dynamic growth rates of the glory days, and they are the victims, rather than the creators, of market forces.

Such a fate (or worse) looms for all companies. The internet is everybody's strategic inflection point, as Intel's Grove has emphasised. He believes every company will be an e-company within a few years. Either that or they won't 'be' at all: e-rivals will wipe the laggards off the commercial map.

A critical aspect of this universal threat has gone relatively unnoticed - heavy pressure on margins. When giants like the automakers pool their purchasing over web sites, the purpose and outcome is to squeeze lower prices from suppliers. Lower prices mean lower profitability unless the squeezed victims recoup their losses from higher volumes (which they cannot achieve) or lower costs - which are certainly feasible.

In many cases, they will seek to recover their margins from their suppliers, thus applying another twist to a vicious circle. The more promising strategy is to improve their internal efficiencies, lowering their cost-base faster than the online auctions bring down prices. This strategy has many components.

It cannot, however, be optimised without making full use of the original source of the problem - internet technology.

Big gains are available from using digital techniques to accelerate management processes, abolish paperwork, streamline value chains, revolutionise communications, mine information lodes, build a real learning company, and create entirely new customer relationships. No doubt there are other marvels, but that shopping list is more than enough for starters.

The trouble is that too many boards of directors have not yet started.

Like the displaced CEOs, they are fighting yesterday's battles with yesterday's weapons rather than using a new armoury to win tomorrow's world war. Even those that are reacting (like the record companies to the threat of downloaded music) face a deeply uncertain outcome. The non-starter CEOs are missing the point in both senses, and the results could be devastating, for them and their companies.

'Riding the Revolution' by Robert Heller and Paul Spenley is published by HarperCollins at pounds 24.99.

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