2010-03-10T15:54:03Z

The New Paradigm of Advantage

Here's something you might not know. There's enough food in the world to feed pretty much everyone. So why are more than 1 billion people — nearly 20% of the world's population — either starving or malnourished? And why, over the last two decades, has global hunger steeply risen?

The answer has everything to do with the past — and future — of advantage.

Over the last few months, I've discussed in depth the tectonic shifts rocking the macro and micro economy. Let's put it all together. Here's what the 21st century demands from firms of all stripes: a paradigm shift in the nature of advantage.

The past of advantage was extractive and protective. The future of advantage, on the other hand, is allocative and creative. I made a little Prezi to illustrate it, below. Let's go through each category in turn.

The future of advantage:

Allocative. Google's advantage was built on allocating attention to content and ads better than its rivals. Google's real secret? Relevance, media's measure of how efficiently attention is allocated. Match.com is building an allocative advantage in, well, matching people with partners. Allocative advantage asks: are we able to match people with what makes them durably, tangibly better off — and can we do it 10x or 100x better than our rivals?

Creative. Apple's advantage is, of course, radically creative: built on creating insanely great stuff that turns entire industries upside down. Next month, the iPad promises to do what the iPhone and iPod did before it. The power's in the creativity, not just the technology: Apple's thinking different yet again. Creative advantage asks: is our strategic imagination 10x or 100x richer, faster, and deeper than our rivals?

And the past:

Extractive. Over two decades, Microsoft has honed its extractive edge, coming up with cleverer and cleverer ways to extract profits from customers and suppliers. But Microsoft's just a flea on Wall St's elephant — who mastered extractive advantage by finding ways to, ultimately, extract trillions from you, me, and our grandkids. Extractive advantage asks: how can we transfer value from stakeholders to us, 10x or 100x better than our rivals?

Protective. Think Microsoft's the master of 20th century advantage? Think again. Monsanto's Round-up Ready strategy protects genetically modified crops with proprietary herbicide that crops need to flourish. The result? A protective advantage: Monsanto's made sure that farmers are locked in to Monsanto as tightly as possible. Protective advantage asks: are buyers and suppliers locked in to dealing with us, 10x or 100x more tightly than to rivals?

These dimensions are mutually exclusive. When a company pursues an extractive or protective advantage, it cannot hone an allocative or creative advantage. The opportunity cost of protecting yesterday is creating tomorrow. The opportunity cost of extracting resources is allocating them in better ways.To extract or protect is to forgo finding better ways of allocating or creating.

Microsoft has achieved an extractive advantage — but what Microsoft hasn't done is allocate software production and consumption more efficiently, or, of course, create better software. Lately, Google seems to be making mistake after mistake — and the root cause is the placing an extractive over an allocative advantage. Apple's reportedly on the offensive, suing rivals — and that focus on protecting yesterday might just cost it its creative advantage.

Monsanto has locked farmers into crops — but what it hasn't done is create better food, supermarkets, or markets. But perhaps the steepest price of a protective advantage has that Monsanto, like all its agro-giant rivals, has turned a blind eye distributing the vast surplus of food to the poor and malnourished. Putting protective advantage above allocative advantage is why, though there's enough food to feed the poor, the poor don't get fed.

That's so 20th century, it hurts. Here's what's so obviously, painfully wrong with the picture of people starving in the face of agricultural giants thriving: The profits earned don't represent real value created — just a massive transfer of value from people, farmers, and communities to shareholders.

The future of advantage is radically different from the past for a simple reason: because it's economically better. 20th century advantage focuses firms on simply extracting resources from people, communities and society — and then protecting what they extract. 21st century advantage focuses firms on creating new resources, and allocating them better. The former is useful only to shareholders and managers — but the latter is useful to people, communities, and society. The old Microsoft was useful to shareholders, but a lot less useful to society — and that's exactly how Google and Apple attacked it, and won.

Those that are mastering allocative and creative advantage, in contrast, are learning to create thick value: authentic economic value, that's meaningful to humans. That's why allocative and creative advantage are the equivalent of economic superweapons. They are letting today's revolutionaries stun, stagger, and vaporize rivals, no matter how big, bad, or historic.

And that's never mattered more. An economy built on extractive and protective advantage is a giant, endless Ponziconomy. Value is transferred from one party to the next — but little is created anew. That's what we're finding out the hard way. Only through creative and allocative advantage can we rebuild a more meaningful economy.

Most companies can only achieve 20th century advantage. If you're one of them, kiss tomorrow goodbye. In the 21st century, advantage belongs no longer to the wealth-eaters and the misery-feeders, but to the constructive: those who can help fuel a more authentic prosperity from the ground up.

2010-03-10T14:22:46Z

The Cardinal Rule of Rules

I was in my home office, on the phone with a new client, when I heard a knock on the door. I looked at my watch: it was 4pm, the time my daughters Isabelle and Sophia come home from school. Generally I love taking a break at this time and hearing about their day.

But, I have a rule: if the door to my office is closed, they have to knock once. If I answer, they can come in. If I'm silent, it means I don't want to be disturbed and they have to wait until I come out.

Well, this time, not wanting my call to be unprofessionally interrupted, I remained silent. But they kept knocking and, eventually, just walked in. I was stunned! What about my rule? I signaled for them to be silent but let them stay in the room until the call was over.

After my phone call, I asked them why they had disobeyed my rule.

"But Daddy," Isabelle said, "you like when we just come in. We did it yesterday and the day before and you didn't say no."

I had broken the cardinal rule of rules: never break a rule.

I should know better. Just a few days earlier, after a speech I had given about time management to the top leaders of a large pharmaceutical company, one leader (we'll call him Sean) approached me with a question. How could he stop his secretary from interrupting him?

"I'll have the door shut and Brahms playing on the stereo — I mean, how much more obvious can I be? — and she'll walk in and ask me a question. It doesn't seem like a big deal, but it's a distraction and it throws me off. I tell her not to, but she does it anyway"

Sean is already ahead of the game. He realizes something most of us miss: it's hard to recover from an interruption. In a study conducted by Microsoft Corporation, researchers taped 29 hours of people working and found that, on average, they were interrupted four times per hour. That's not surprising.

But there's more and this part is surprising: 40% of the time they did not resume the task they were working on before they were disrupted. And it gets worse: the more complex the task, the less likely the person was to return to it.

That means we are most often derailed from completing our most important work.

"So," I asked Sean, "what do you say when she interrupts you?"

"I remind her that I told her I didn't want to be disturbed."

"Great. Then?"

"Then she tells me it will just take a second and asks me a question or talks to me about an issue."

"And?"

"Well, I already stopped doing what I was doing before and I don't want to seem mean or rude, so I give her what she needs and then ask her not to disturb me again."

That's Sean's mistake. And mine. And perhaps, if you find that people don't always do what you ask, yours too. We like being liked. We're too nice. We don't want to appear rude.

Unfortunately, it's a bad strategy. Because setting a rule and then letting people break it doesn't make them like you, it just makes them ignore you.

If Sean wants his secretary to listen to him, he needs to be consistent; no exceptions. On the other hand, he also needs to understand why she's constantly disturbing him. Sean travels and is often out of his office so his secretary is never sure when she will have the opportunity to connect with him. But when he's in the office, she knows she can reach him. She's not being obnoxious. On the contrary, she's being diligent.

To solve his problem and stop the interruptions, Sean needs to do two things:

1. Set a regular appointment — that he does not cancel — to meet with his secretary to address any questions or open issues.
2. When she does interrupt him (and she will) he needs to look at her without smiling and tell her that whatever it is, it needs to wait until their appointed time.

"And if it's a short question? Like: what time is your lunch appointment today?" Sean challenged me.

"I know it's hard. Silly even. But do not answer her. Just tell her you cannot be disturbed and let the silence sit there. If you want her to respect the rule she needs to see that you won't break it. Even if, maybe, in that situation, it makes sense to break it. It's a slippery slope."

As Sean listened to me he shuddered slightly at the thought. "That will be very uncomfortable," he finally said.

"That's the point," I told him, "You want it to feel uncomfortable. You want her to feel uncomfortable. That's what will prevent her from interrupting you again."

Later, if he wants, he can explain that his work requires total concentration and even a small interruption will cause him to lose his train of thought. But not at the time. Because an explanation at the time will reduce the discomfort.

Think of it this way: ultimately, people feel safer knowing what the boundaries are. It may seem harsh at the time, but in the long run it reduces their stress and uncertainty. People prefer to know where they stand.

"You're right," I told Isabelle after she called me on my inconsistency, "It's hard not to break my own rule because I love seeing you guys so much. But the rule really is important and I can't break it again."

The next day I was working on the computer when, as expected, Isabelle and Sophia knocked and then walked in without waiting for my response.

I turned to look at them. "Out," I said.

"But Daddy . . ."

"Out." I repeated.

"But, we just . . ."

"Out." I said once more, feeling like a jerk. I wanted to see them. I even worried for a second that they really needed me. What if one of them was hurt? What if there was a fire in the kitchen? But I didn't look up. My wife was home. If there was a fire, she would put it out.

A few days later they tried again but I didn't waiver. And they haven't broken the rule since.

2010-03-10T14:14:05Z

Strategy on the Morph

In 1966, Time magazine published a cover article posing the question, "Is God Dead?" Asked about the possibility, former President Eisenhower reportedly responded, "That's funny. I was just talking with Him this morning." Some of us are beginning to feel the same way about trendy assertions that strategy is dead.

You may have read one such proclamation in the Jan. 25 Wall Street Journal. "Strategy, as we knew it, is dead," argued Walt Shill, who leads Accenture's North American consulting practice. An article titled "Strategic Plans Lose Favor" goes on to quote him saying, "Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future."

If you believe strategy consists of predicting the future, or making plans, please feel free to take a chair next to Mr. Shill in the front row of mourners. On your seat you'll find a copy of Henry Mintzberg's 1994 book, The Rise and Fall of Strategic Planning, which should completely disabuse you of any residual hope you may have held out for the corporate planning process.

Meanwhile, a few of us who didn't get the sad news will be sitting around the roaring hearth, sipping wine and talking, not about strategy's death but about its future. Or so we did one evening last week in Manhattan under the auspices of the Association of Management Consulting Firms, sans hearth actually, but not sans wine. The conclusion there was that strategy was going to need to be faster of foot, smarter about picking its shots, and in general more "adaptive," to use my favorite new descriptor (which of course I cribbed from people smarter than myself, some of whom were at the event).

But it was not going to be dead. Darrell Rigby, a longtime partner at Bain & Co. and author of Winning in Turbulence, pointed out that we've gone through periods before when people said the world was moving so fast that companies didn't have the need for, or time to do, strategy. Like in the late 1990s. Something like 90% of the high-tech outfits from that era that thought they could do without the big S are no more. Rigby, who has been surveying companies on their use of management tools since 1994, also reported that strategic planning has ranked first or second on the list every year since then. (Maybe they didn't get the memo on the difference between planning and strategy, either, but it's also true that "have a strategy" isn't by itself a choice on the survey.)

As moderator of the discussion, without wine glass, let me try to distill what I heard into a few calls to action. By way of context I'd note that Accenture's Shill isn't wrong about companies wanting increased flexibility and accelerated decision making. Part of what these experts are wrestling with is how to root both of those in strategy, or, looked at from the other direction, how to rethink strategy to make it quicker and more dexterous.

1. Consider distributing the right to make strategy more widely throughout your organization. Martin Reeves, head of the Boston Consulting Group's Strategy Institute, had a wonderful phrase for what strategy will increasingly consist of: iterative empiricism. You learn something about a fast-changing market, reflect it in the actions you take, learn from how the market responds to that, boil that into your next steps, and so on. "But we've been saying that for years," partisans of the emergent, or learn-from-doing school of strategy may complain. True, but nowadays the action on the front-lines is moving so fast that you probably have to entrust the people there with decisions that heretofore would have been sent back to the company H.Q., where the great strategic wisdom supposedly was stored.

2. Understand that one process does not fit all decisions. Uta Werner, in a past life a partner at Marakon, now head of strategy at Xerox, noted that some strategy calls are of a scale that they can be left with folks out there in the organization. Others are so big, long term, and momentous in their potential implications that top management has to be involved. Knowing which is which, and having that knowledge widespread throughout the company, is critical to making strategy "adaptive." Such wisdom also does wonders for your flexibility.

3. Resources — corporate money and talent — will need to move as fast as decision making. Tom Stewart, chief marketing and knowledge officer for Booz & Co. — and a former editor of Harvard Business Review — has the banner inscription for this imperative: Fluidity. Don't think hydraulics. Think rather of the relentless, ever-morphing villains of the Terminator movies, the cinematic series where James Cameron made his bones (you should pardon the expression) as a director. Cameron may have lost out in the Oscar race this week, but his earlier creation could provide an image of what adaptive strategy — comin' at ya — will look like.

Walter Kiechel III is the former Editorial Director of Harvard Business Publishing, former Managing Editor at Fortune magazine, and author of The Lords of Strategy: The Secret Intellectual History of the New Corporate World. He is based in New York City and Boston.

2010-03-09T19:40:28Z

No Big Quality Problems at Toyota?

Jeffry Liker, in his recent HBR blog post, minimizes the scope of quality problems arising from Toyota's hyper growth over the last decade. He sees those who believe Toyota has serious quality/safety problems as uninformed. He accuses them of contributing to a "growing mythology," viewing their "faulty generalizations" as "laughable." It is hard to square his views with the following three statements.

In January 2008, Chris Tinto, then Toyota's Vice President for Technical and regulatory Affairs, in an internal presentation, warned "some of the quality issues we are experiencing are showing up in defect investigations (rear gas struts, ball joints, etc)." "Although we rigorously defend our products through good negotiation and analysis, we have a less defensible product."

In Sept 2006, Jim Press, then the company's President of North American Operations, at a Toyota Japan headquarters presentation, reported that the number of Toyota vehicles recalled had increased sharply from 2003 to 2005. Parenthetically, I note that complaints lodged against Toyota with NHTSA, increased in almost linear fashion from about 1,100 in the year 2000 to almost 5,000 in 2009. Mr. Press concluded that "as more of our customers experience recalls, customer loyalty will suffer."

Recently, President Akio Toyoda repeatedly attributed Toyota's quality/safety problems to its rapid growth which outstripped its human resources. He said the company could not train enough personnel to keep up with its rapid growth. He acknowledged that a misguided strategic focus at the company warped the "order of Toyota's traditional priorities" so that the stress on product safety and quality first, and sales volume and cost second, became inverted as Toyota began rapidly expanding a decade ago.

Company executives do not casually make such damning statements about their own firm. Are these executives uninformed as to their own company's problems? Does Prof. Liker know Toyota better than its own executives? Prof. Liker's concluding statement, "I am not suggesting that Toyota is perfect," seems light years away from the harsh reality captured in these statements. Prof. Liker's analysis limits the problem scope to what he sees as two isolated engineering incidents. He asks where is the data that indicates a trend toward greater quality/safety problems? Consistent with John Shook's (a former Toyota manager) observations, the three statements strongly suggest that while one can assign Toyota's current problems to specific causes, they are also part of a pattern, one that reveals growing quality problems.

Notwithstanding Prof. Liker's attempt to discredit opposing views, knowledgeable outsiders are also attributing Toyota's problems to hyper growth and the growing technical complexity of autos. These developments have stretched thin its cadre of engineers. This was the thesis in my earlier blog post, one quite parallel to that of Prof. Takahiro Fujimoto, the leading student of the Toyota production system in his Nikkei Business Online analysis (in Japanese).

Prof. Liker critiques use of recalls as a measure of quality "when you are trying to make inferences about operations strategy." He notes that one problem can cause 2 million car recalls, but it is only "one problem." From an operational perspective, he is almost right (it's two: first the original defect, and second, the failure of quality control to catch it before products were shipped). From a customer perspective, however, he is dead wrong. For 2 million customers, it is 2 million problems. Here, Prof. Liker fundamentally misunderstands Toyota's traditional guiding principle of Customer First.

Recalls are, in fact, a powerful measure of quality because they are an important determinant of customer trust. Customer trust, in turn, is a major factor in quality perception. A survey commissioned by Toyota found 30% of U.S. customers said "having a recall on their current vehicle would make them seriously consider not buying that automotive brand again." With quality, perception is everything. A recent USA/Gallup national survey finds that 31% of respondents now believe Toyota vehicles are unsafe. It doesn't matter if the media hyped the problem or the politicians politicized it. Customer perception is what it is.

Prof. Liker says Consumer Reports' (CR) evaluations are a better measure of quality than recalls. He claims that information from CR shows that "Toyota had one of its best years of the decade in 2009." Yet, if we examine the percentage of a brand's vehicles recommended by CR, the trajectory shows significant decline from 85% in 2007, to 73% in 2008, to 47% in 2009 (partially reflecting current recalls).

Prof. Liker vigorously denies that rapid growth led to problems with supplier quality. His assuredness is mystifying since the relationship between rapid volume growth and the emergence of quality problems is well recognized by both quality experts and practitioners.

The growing difficulty Toyota had with growth and complexity in relation to supplier management is three fold. They had to delegate more design work to suppliers, Toyota personnel found it increasingly difficult to closely supervise suppliers' detailed component design, and less experienced Toyota engineers increasingly came to evaluate supplier work.

The CTS brake pedal module is a case in point. No one at Toyota denies that the detailed design and material choice was done by CTS. Toyota, per its policy, however, had full responsibility for approving that design, including providing testing instructions. Given the problems that arose, it is hard to deny its monitoring of the design process and outcome was insufficient. For Prof. Liker to assert as "truth" that the sticky pedal was "one very specialized isolated design issue" appears questionable at best.

Prof. Liker doubts there is a "need to explain the failure of the Toyota production system based on the current recalls." No knowledgeable expert has made such claims. Many of us are saying, however, that Toyota stressed its production system beyond its capabilities. What resulted was not a failure of the Toyota production system, which is still deservedly the envy of almost every major manufacturing firm worldwide. Rather, it was a failure of management, letting its 15% global market share target overshadow its traditional priorities.

Robert E. Cole is Professor Emeritus, Haas School of Business and Dept. Sociology, UC Berkeley, Executive Director, and Visiting Researcher, ITEC, Doshisha University, Kyoto, Japan

2010-03-09T19:11:32Z

The Difference Between Political Journalists and B-School Profs

The other night I went to see Mark Halperin and John Heilemann talk about their 2008 campaign bestseller, Game Change, at Harvard's Kennedy School. They were very sharp and entertaining, and they persuaded me to buy the book (the $8.61 Kindle price was a factor, too). They were also touchier than I would have expected about the criticism their book has received for its focus on the trivial and the personal.

Their defense was that political campaigns turn on the trivial and the personal, so if you ignore it you ignore the essence of why one candidate prevails over another. As Heilemann put it (I wasn't taking notes so this is a bad paraphrase, not a real quote): Voters didn't choose based on the fact that Hillary Clinton wanted a health insurance mandate and Barack Obama didn't.

As a defense of the book, I thought this was valid enough. It was kind of funny when a student in the audience asked Halperin (a former colleague of mine at Time) what lessons could be learned from Game Change, and all he could come up with was: Candidates whose private and public personas are more or less the same (Barack Obama) tend to have fewer troubles than those with private doings and attributes that they try to hide or at least play down (John Edwards, Hillary Clinton). Gee, thanks, guys. That's really informative.

This is of course the core of a long-running and entirely valid criticism of how the mainstream media cover politics: The narrative is all about personal characteristics and fleeting controversies, and leaves those who consume it intellectually undernourished. That debate gets enough play elsewhere that I won't go into it here, other than link to this fine Ezra Klein post about the differing fortunes of political and policy journalists. But what struck me while listening to Halperin and Heilemann defend their approach were the echoes of a different debate that runs through a book I've been reading, Walter Kiechel's Lords of Strategy (it's an HBS Press book, so you can discount anything I say as biased, but it really is excellent).

Kiechel tells of the rise of gurus — from the consultants of Boston Consulting and Bain to Harvard professor Michael Porter — who cut through the messy realities of business with strategic abstractions that purported to explain why companies succeed and fail. By the 1980s, critics were beginning to complain that the whole strategy exercise was too abstract, that what mattered were people or quirks of history. Even these critics (Tom Peters, Richard Pascale, Jeffrey Pfeffer) were operating at level of abstraction that consumers of political journalism would find deeply foreign. But the basic question was the same: Are you better off learning the particulars of how a candidate won or a corporation made money, or focusing on more universal explanations that can presumably be applied elsewhere?

My general sense is that most of us could use more of the latter (I like Malcolm Gladwell's line that "People are experience-rich and theory-poor"). But, clearly, you can overdo it with the abstraction (a case in point that I've spent way too much time studying: the efficient market hypothesis). The real lesson may be that we always need to be mixing and matching the two approaches, taking caution not to go too far in one direction or another. Which is why I'd like to propose a job exchange: Michael Porter takes over Halperin's political site The Page for six months, and Halperin comes to HBS to teach strategy. Just think: campaign hacks poring over Porter's Five Forces of Political Competition; MBA students digging through Indra Nooyi's latest speech in search of gaffes. Wouldn't it be fun?