From Aha to KaChing: Innovation, Business Performance, Challenges and Economic Prosperity

8/14/2019 From Aha to KaChing: Innovation, Business Performance, Challenges and Economic Prosperity

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From Aha to KaChing: Innovation and Business Performance

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Table of Contents

1. Sailing Into the Storm: From Execution to Innovation 3

2. Tech Industry: Commodization, Consolidation, Consequences 6

3. Tech Industry: Innovators, Survivors & Also-rans 7

4. Tech Industry: APPL vs. MSFT vs. YHOO Wars 8

5. Disruption vs. Innovation: Change, Response, Resilience 10

6. Bidding Review: Macro-environment, Disruptions, Business Performance 14

7. Run For Daylight: Innovation, Innovation, Innovation 20

8. About Llinlithgow Associates 24


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Sailing Into the Storm: From Execution to Innovation

http://llinlithgow.com/bizzX/2008/04/sailing_into_the_storm_from_ex.html Posted by dblwyo on April 27, 2008

Our normal sequence would call for taking up the market situation but that's not only too depressing, for severalreasons, but Sun. seems more suited to reflection on big issues. So we're going to focus on Innovation. Nowhopefully some previous posts have established the motivation for that, and they're listed below the break, but indiscussing sad, not so sad and good stores about business performance a couple of themes emerged. One ofcourse was good execution and another was balancing strategy with operations. But if you review some of thereadings sustainable long-term performance, by which we mean growth in revenue, profits and earnings, alsorequires adaptability and invention. Innovation in other words. And when you look at the examples from HPQ toP&G you can see where this is all born out. And conversely when you look at the sad stories where the counter-examples also support the argument.

But in case you need more convincing or, better yet, you'd like tosee it explained by somebody with a real track record of both

sustained performance and sustained change management we'llpoint you at the recent appearance of A.G. Lafley on CharlieRose. http://www.charlierose.com/shows/2008/04/23/2/a-conversation-with-a-g-lafley

IOHO this ought to be required listening in every MBA programand executive suite in the country. As well as by every analystmistaking this quarter for infinity and beyond. Another interestingexercise is look over the recently published list of the Fortune1000 and see who ranks where by revenue, profit and return.You'll have to do some eyeball work as the story behind theranking won't just jump out but a couple of themes emerge. Oneof course is energy and hot commodities. Another is folks who've

been franchises and moats, e.g. WMT and MSFT, who continueto enjoy the fruits of the legacy for now.

But you'll also find some of our exemplars moving up thoseranks as well. The other thing you'll notice is that ten years it was all about "technology" per se. Now it's aboutchanging the way you do business, bring products to market and is beginning to appear across leaders in allindustries.

There's a lot of confusion about innovation, especially as distinct from invention and raw R&D.

We define Innovation as the ability to create new products, services and business models that delivervalue to the customer profitably. And sustain that over a period of time. Enterprises that can do this arerare but they are the ones who'll do more than merely prosper in the coming storms. And notice some ofthe subtleties. Innovation is not number of patents, % of revenue spent on R&D or any of those similarmetrics. Heck, by those measurements Ford is an innovative company. But what has it to show for it ? Orthe Auto Industry in general.

We were happy to hear Mr. Lafley not only has a similar view but is very eloquent both on how hard it is and howimportant. But also on how becoming an innovative company requires a fundamental change in every aspect ofthe company. In other words this is NOT about what happens in the lab but the ability to look at the market,develop new products, make them and then delivery them. And then repeat.


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After the break we'll share some of the conceptual framework we've developed over the last several years forwhat's required, what the typical problems are and what an integrated approach to innovation should look like. Atthe end of the day this matters to investors, stakeholders, employees and any other related party because thecloser a company gets to these "Should-Be" ideals the more likely it'll be on the list in another ten years, or 20...or30 or....well you pick your horizon. One warning note - right now US companies have something of an advantagein this business "software" but our friends in China, India and elsewhere know that and are taking steps toimprove their own capabilities.

Product Development As-Is

The problem with most organizations is thatinnovation is viewed as an isolated, stove-piped process which occurs, to the extent itdoes, within the confines of the R&Dorganization. Which is itself isolated frommarketplace and customer realities anddisconnected from the downstream activitiesthat turn bright idea into invention intoprofitable innovation.

The picture of things as they are looks something like the chart at right. All to often the way products are improvedor created starts with a "bright" idea (or just history for that matter) which is thrown over the wall to Design andDevelopment. The result is then forced thru a manufacturing (make) and packaging process and then Marketingputs lipstick on the pig while Sales is handed the fun task of forcing it down the throats of the customers. In thosefew sentences we've just summarized, for example, the typical process in the Auto Industry. Which, sadly assome of the earlier readings, e.g. the story of the Taurus, show that they in fact know better. But don't do it on asustainable basis.

The Capabilities vs KnowledgeGap

The primary reason is that companies tend

to focus on what they've done, if for no otherreason than it's what they know, have thecurrent capabilities (here labeledtechnology) that've built up over years anddecades, it's what they've always done and,worst, have interests inside the companywho're invested in continuing to do things asthey've always been done.

Most of the bad performers on our previouslists suffer from this Customer Requirements vs. Inherited Capabilities Gap. Whether it's software companiesbuilding applications that don't meet customer needs, auto companies building cars that no one wants to buy orpharmaceutical companies making yet one more variation on old, tired drugs the inability to match marketspace

value to capacities is the most fundamental barrier to Innovation. We'd even go so far as to argue that thisdescribes the content generation processes (WRFest (Telemediatainment): The Content Who Would Be King)of the media and entertainment industries. Compare Disney and Pixar for example to the last bunch of multi-$Mbombs :)!


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The Three Gaps

That fundamental gap is composed of threemajor breakdowns. The first and most

fundamental breakdown usually lies in alack of understanding of how customersactually function. That is a lack ofunderstanding of how their businesses workin commercial and industrial sector or howcustomers live their lives in consumersectors. So the first thing to repair is thefocus on internally generated ideas withlearning those things. In other wordsreplacing "not-invented-here" with "how itworks really".

Related to that is the Marketing gap where

most enterprises go to market with the storythey want to tell rather than the story thatexplains how they'll benefit their customers.This btw is a great index that any outsideobserver can use to judge how trulycustomer focused any company that claims to be innovative is. Do they truly understand and talk to theircustomers the way those customers would like to be talked to ? The twin of the breakdown in Marketing is aparallel breakdown in Sales where yet another salesman shows up to talk about the latest brochureware. As afriend of mine said, "no matter how busy I am any salesman who's there to talk about solving my problems will gettime. But most of them are there to sell me another pig in the poke where I have to figure out what it's worth".Successfully innovative companies sell (and service and support) to their customers value propositions.

How It Should/Could Work

The chart at right shows how Innovationshould work if it's done right. Here whatyou see is an integrated, closed-loop andend-to-end view on Innovation. Whichstrangely looks more than a bit like whatMr. Lafley discusses in his interview.

It starts with analyzing the markets andcustomers, translating that into a deepdescription of the real needs andcharacteristics of those customers andthen turning those into high level productdesigns. That's then passed on tooperations in an integrated, not throw itover the wall fashion, where manufacturingand delivery requirements are incorporatedat the earliest design stages. Not as after-thoughts. In other words innovationinvolves putting all the relevant disciplines onto the same team and operating concurrently, with feedback andfeed forward. Not as one isolated stovepipe after the other. Again something Lafley emphasizes strongly.


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Finally, with this deep understanding of the customer, the entire Go-to-Market and Service/Support operationsinherit a basic of customer value propositions. The other thing that happens is that each stage is used as aninformation gathering and feedback mechanism to make sure that innovation is continuous and adaptive. Finally,as Lafley continuously emphasizes, you have to organize around these sorts of processes. Companies that putthese sorts of innovation capabilities in place, invest in them and maintain them will be the ones who will establishlong-term survivability and prosperity. These are the ones you want to invest in or work for or work with. Goodluck.

Previous PostsPerformance Assessment Basics: Five Fundamental Factors

Business Performance II (Readings): Performance, Pain and Prospects

Business Performance III(Readings): Sad Stories, Good Stories & "Fixes"

Tech Industry: Commodization, Consolidation, Consequences

http://llinlithgow.com/bizzX/2008/04/wrfest_30mar08tech_industry_co.html Posted by dblwyo on April 3, 2008

In case noone's noticed the Technology Industryas a whole has reached the point where it ismature, which we define as being able toprovide products and solutions who'scapabilities exceed customer requirements. Ifthat sounds a bit like Clayton Christiansen'sarguments in the "Innovators Dilemma" it shouldbecause it is. In fact we're on record as arguingthat the PC industry reached that point circa'98/'99 when speeds and feeds were adequatefor the software, e.g. Word, who's functionalitywas well beyond any reasonable cutoff point,say 60/40 and meandering around the 95/5 orworse. Unfortunately costs tend to go up non-

linearly as you add bells and whistles.

The chart at right traces out this industrydynamic. It's kind of simple but hopefully it getsthe point across. We show customerrequirements slowly evolving over time alongwith two products which have high demandinitially because the gap between requirementsand capabilities is large and negative, that iscustomers want more than can be delivered.

New products may have some special capabilityor vastly lower cost but not meet current

requirements and have to be introduced in a niche. So does a company keep investing in old products or gambleon new and jeapordize the franchise and cash flow ? You have to apply this thinking to each major businesssegment in the stack as well because their history, status and outlook are all different. But for the bottom layers ofthe stack, by and large, capabilities vastly exceed requirements. The top layer, applications and businessalignment are very different as the capabilities are vastly exceeded by requirements, especially in the SMB space.But NONE of the customers believes the industry can deliver value-enhancing, business-driven solutions. As yougo thru each of the readings below you might keep all this in mind because a lot is explained.

For example Dell is outsourcing much of its sourcing to China which it wouldn't do if innovation were still the maindriver. Similarly IBM has developed a reputation as the steady-goer but when you look at its' financials and


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investor presentations most of the earnings growth comes from buybacks and other financial engineering.Similarly Oracle's acquisitions sprees are hallmarks of a mature industry.

For a short introduction to how the industry changed and evolved in the '90s you can read and download thisshort note on industry evolution: Technology Industry Changes and Evolution. BTW just in case you'reinterested in understanding the history of the technology and consumer electronics industries, who the playerswere/are, how they did and why and how the ecology of the industry was shaped and evolved over decades wecan't recommend enough Inventing the Electronic Century: The Epic Story of the Consumer Electronics andComputer Industries, with a new preface (Harvard Studies in Business History) by Alfred D., Jr. Chandler. In orhumble opinion a great, insightful and well-written book that any serious student (investor, employment, marketplayer) would benefit from reading. For our prior posts on the stack, industry evolution, business vs IT alignment,et.al. issues see the industry archive where we've built up quite a "stack" of charts to help you with your analysisala Buffett'; that is understanding as best we can manage how the business works :).

Tech Industry: Innovators, Survivors & Also-rans

http://llinlithgow.com/bizzX/2008/04/wrfest_27apr08tech_ind_innovat.html Posted by dblwyo on April 29, 2009

Here's an interesting accumulation of Tech-related readings (after the break) that are worthwhile in their own rightbut also are perfectly illustrative of many of the themes we've tried to strike here. Both for the Tech Industry itselfand for it's inter-actions with the larger economy. Most of us, myself included, have this wonderful, romantic viewof the Tech Industry as being its' own thing running on an internal dynamic. Unfortunately most of the majornames are now mature companies struggling to find the NBT (next big thing). Worse many of them areexperiencing severe organo-sclerosis in their core disciplines. Tech is not the only industry driven by Innovationhowever. In fact it is more central to the Pharmaceutical and Aerospace industries than what we traditionally thinkof us tech. And, as I hope we've established, innovation is returning as a fundamental requirement for survival letalone prosperity. Put all this together and youhave two broad mis-conceptions to adjust:

1. Patterns of Innovation: Once a company orindustry matures it is no longer driven by internaldynamics, e.g. the famous "S-curve" of fame andfortune. Worse when a company is used to livingon the curve it gets both complacent and, withgrowth, harder to manage. Often its' coredisciplines deteriorate as well, so that one endsup with desperate gamble after desperate gambleto recover the glory years. There are however keyplayers who have managed, thru discipline,execution and insight, to find sources of renewal.

2.Business Cycles: once you're off the curvethen you become just another capital "equipment"supplier (or consumer supplier for those migratinginto the entertronics industry). Which means

normal business cycle consequences begin toshow up. In this downturn, which we've barelyseen the beginnings off, first consumer demandwill slow and turn down, likely severely. Andcompanies will cut their hiring and capitalexpenditure plans. All of which we're beginning tosee and more of which is coming. As IT budgetsare constrained what do you think happens to IT


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spending and tech industry outlooks? Wouldn't ask the analysts on the Street :)

The trick is to sort out the survivors from the also-rans who are going to struggle. And then sort thesurvivors into the so-so's and the real men. As you skim over the readings we think the portents for the future arepretty clear. Which means in terms of evaluating investment and performance we're back to asking Economy -Industry - Company questions. You're hopefully looking for the companies with the skill, chutzpah and resourcesto gain new high ground. And IOHO those are the folks who've re-made or are re-making themselves. Those willbe the buying opportunities after we get thru this current unpleasantness.

A perfect contrast is AMD vs. Intel. The former had a hit but failed to follow-up, sustain it or execute. Instead itmade an acquisition gamble looking for the easy fix. In stark contrast Intel transformed itself by building on it'sbase skills in chip design and manufacturing as well as operational excellence and is now extending thosecapabilities to whole new markets. (We can't recommend some of the last investor presentations highly enoughbtw). MOT is the perfect poster child for what we've called decliners in the charts. IBM on the other hand couldserve as the example, if not exemplar, for the sustainer.

The real interesting contrast is APPL vs. MSFT. There are a lot of readings below but consider what we think isthe most fascinating and powerful contrast. At it's heart MSFT is a software company and it's most fundamentaldiscipline should be product development. Yet it delivers Vista late, emasculated, bloated, missing an ecology and

buggy. What Longhorn was going to be and what Vista became reduces in large part back to Code Red - wheninternal development broke down almost completely and they had to do emergency surgery.

In contrast Apple made a decision to create a new, elegant, powerful and portable OS that not only drives MaxOSX but the iPod and iPhone because it's modular, componentized and scalable. (Shades of NEXT and it'sobject-oriented OS and application platform). That means that every product Apple makes runs the samesoftware base and therefore can share applications, within limits of course. So MSFT is wrestling its' own kudzuand Apple has created a self-sustaining, evolving and growing eco-system. Which holds the most promise for thefuture do you think ?

Of course there's many a slip 'twixt cup and lip and MSFT is still a huge, tightly run profit machine and Apple willneed to sustain it's innovations with the NBT on top of this wonderful foundation. Which merely makes it easierand more likely. But it's looking like Apple joins Cisco and Intel in that pantheon of folks who've made the

necessary cultural changes to embed innovation in their DNA. (Sailing Into the Storm: From Execution toInnovation)

Tech Industry: APPL vs MSFT vs YHOO Wars

http://llinlithgow.com/bizzX/2008/05/tech_industryappl_vs_msft_vs_y.html Posted by dblwyo on May 14, 2008

Let's take a look at the big tech news from the last week or so (deferring the HPQ/EDS discussion for now) andfocus on the APPL vs MSFT and MSFT vs YHOO campaigns. In both of which there was some big newseverybody covered and some that may have passed you by. In an earlier post/survey (WRFest 27Apr08(TechInd): Innovators, Survivors & Also-rans) we introduced some ways/weighs of thinking about innovation andtypical patterns. You may want to refer back to that as here we're going to build some more charts to dig into

some other patterns to set the stage for our discussion. You might also find reviewing the earlier discussion(Sailing Into the Storm: From Execution to Innovation) of innovation a worthwhile review, especially if you buythe argument that Innovation is not just an issue in the Tech Industry but is both a general requirement and thebiggest challenge beyond Execution facing all businesses. And one that most are failing at. We think theframework for analyzing what works and is required vs the typical barriers applies to P&G just as much as toMSFT...a view which, judging from public statements and observable behaviors, P&G agrees with.


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So consider the chart at right, which shows howmany companies face the "RenewabilityChallenge". Chrysler is almost the perfect posterchild, along with MOT, of a company who lurchesfrom breakthru hit to hit and hopes it survives thedownturn. That behavior is apparently deeplyseated in its' culture. What you'd like to do is havegood strategy, translate that into excellent and on-going execution and, on that foundation, build up arepeatable capability for innovation. And better yetembed that capability into the core of theCompany. A path that Lafley at P&G appears to bewell along on after close to seven years of hardand sustained effort.

There are two big questions. First, can you get theInnovation process going on a regular and speedycycle show that new products and offerings beginto take off before the old starts into decline. And

second, and as or more important, is the questionof what path is the Company on. That is areinnovations moving the company forward, markingtime or eroding despite apparent cleverness.

When you think about the Big Three here you reach very different conclusions. Apple appears to have created asustainable culture of Innovation with one hit following another. Admittedly largely due to Steve Jobs...yet none ofthe major innovations Apple has produced are from a one-man band but represent the efforts of entire teams. Andeven more interestingly, in a rather Disney-like fashion, Apple is beginning to see cross-feeds and synergies. TheiPod effort led to the iPhone, which was and is a major breakthru in the entire Telecom business model. Bothtogether are causing a rapid growth in Mac sales. Even more importantly big business is beginning to give seriousconsideration to Apple computers. A critical strategic enabler is a brilliant decision on the Operating System whichis modular and scalable. All Apple lacks now is a portfolio of small business applications along with a good

development platform. That would allow them to become a major player in the empty dumbbell space of ill-servedSMBs. (WRFest 2Mar08(Technology): Small to Large - IT Industry Structure)

In contrast MSFT has not only failed in its Yahoo acquisition - which you may recall we thought was a disasterfrom the get go.(B2C Wars:Yhoo/MS Merger - Disaster in the Making ?) But it really hasn't had any majorsuccesses in any of its' new endeavors in years. Instead it's milking the cash cows and monopoly positions itenjoys in OS share and Office Suites. And doesn't appear to have made much, if any, headway in the SMBspace. Largely we're given to understand because of a lack of cultural understanding of the applicationsdevelopment process. Now apps are different from middleware, culturally as well as technically. Yet at the end ofthe day MSFT's core competence MUST be software development. Yet we ended up with a new OS (Vista) thatwas grossly de-featured from the original innovations promised in Longhorn, has been rather badly received, evenresisted as it doesn't provide significant advantages over XP and throws open the door to competitors. Particularlyin the business marketspace.

How 'bout that YHOO ? Well after the initial breakout as the most successful portal, with a business built arounddisplay advertising it failed to find a way to grow that business. Terry Semel was brought into to provide a littleadult supervision, which he did and effectively, but his "new media" initiatives, which presumed that increasing theportal attractiveness and thereby number of eyeballs, both built on the display advertising theme and failed.Meanwhile of course GOOG's wild, and unexpected, success with search-based advertising blind-sided themcompletely. So what does Yahoo do now? So far it's failed to take its' huge footprint and sustain it, failed indeveloping its' own superb search engine (though admittedly with major improvements) and faces an incrediblydaunting uphill battle given Google's share, penetration and street cred. Nor can it tell us what it wants to be whenit grows up.


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Looking at the chart and the three different timepaths illustrated we could just about assign names to each path:Apple, Microsoft and Yahoo. These interesting times are really tough. From a stakeholders perspective you'dhave to argue that Apple has found a sustainable path that appears to make it a great place to work but one that'smore than fully valued in the markets. That MSFT is suffering from Red Queen syndrome with major investmentafter investment that have not succeeded in major incremental growth opportunities. Which makes it anintermediate-term value play and a long-term question mark. For Yahoo the future is now - they appear to belocked into downward path that may metastasize into a death spiral if they don't pull themselves together, executeenormously better and deliver value to existing users/customers and find new paths (visions, value props,strategies, business models) forward. At best this is a "turn-around" opportunity but it'd take time, money, bloodand enormous effort.

Disruption vs. Innovation: Change, Response, Resilience

http://llinlithgow.com/bizzX/2009/03/disruption_vs_innovation_chang.html Posted by dblwyo on March 15, 2009

On the "oh what an interesting, smallworld" topic a friend's post led me to an

HBR post which in turn led me to a seriesby John Hagel, John Seeley Brown andLang Davison on the coming "singularity" -a major, discontinuous disruption in thebusiness and geonomic environment. As ithappens their diagnosis of the reason hasto do with Technology - not a surprisegiven their backgrounds but a tad narrow.We happen to disagree with them on thetrigger, agree with them on the singularity,think it'll be even bigger than they say andinvolve more factors.

The nature of the singularity - the

appearance of continuous disruptionsthat will prevent a return to some sort ofpunctuated equilibrium will continuefor a long-time. Perhaps, and we think itlikely, forever.

Having spent the last six straight postsdiving deeply into the dimensions of theSingularity and documenting it with biginventories of readings we won't review it but you may recall this "kitchen-sink graphic" that was our MantraMandela...the mantra being Geo-politics/Economy/Industry/Company of course :). The accompanying graphictries to represent the scope and scale of these disruptions we've been documenting on a firm, industry, economicand geo-political level as well as relate it to our on-going concern with enterprise and organizational performance.

One of the interesting excerpts is a post by Irving Wladawsky-Berger on re-architecting the enterprise from aholistic perspective. Couldn't have put it better ourselves - in fact that's such a central concern of ours it shows upin most posts directly or in-directly and has it's own archive.

One of our key findings is that, with occasional exceptions, very few concerns are prepared for the changesthey're failing to meet now, let alone the singularity. Which, btw, is a matter of leadership among other things,which is why the readings start off with Cramer's recent startling Mea Culpa on the John Stewart Show. On theother hand there are the WMT's and MickeyD's of the world who have started and made serious progress on"whole enterprise" re-factorings (WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize); also a


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matter of leadership! The readings contain excerpts from a bunch of the key posts on disruption and responseand then another slew of carefully selected examples from just starting to profoundly well along. We'd also pointto P&G as another exemplar for resilience and innovation (Sailing Into the Storm: From Execution toInnovation) as well as a host of the Tech Industry archives that dove deeper into various models of change andinnovation. For the rest of this post, having discussed "big picture" and enterprise disruptions we'd like to focus onthe lower R.H. component of the Mandela and talk about industry innovation and the Next Big Thing (NBT), whichis a primary driver of all the rest and/or an enabler.

Innovation and Disruption

The History of the NBT: This littlegraphic illustrates the socionomic historyof the US, and to some extent alldeveloped economies depending onwhen and where they got on-board thetrain. As not quite a sidebar notice whenyou match these changes and theirdisruptions you get an amazingly goodmatch to the 18 year cycles that the

market mavens keep talking about. Acorrelation, and we think a causal linkage, which as far as we can tell hasn't been explicitly made elsewhere. Butone that explains an enormous amount about company, industry and economic performance as well as theassociated socionomic changes.

Post-WW2 Business Changes: if the previous chart tell us how technology, business and social change led toIndustrialization and the emergence of Mass Markets this one breaks down some of the more recent history forhow that evolved. Consider that post-WW2 we had four major new industries (Plastics, Pharma, Electronics,Transportation) that were based on pre-war invention, wartime investment and innovation and post-warimplementation.

The entire "golden" age of the '50s,which saw the rise of a prosperousmiddle class for the first time in humanhistory was built on these foundations.At the same time all these disruptionsmatured and at minimum leveled off orbegan to decay. For example thePharma industry has been pursuingmega-blockbuster hit derived from it'schemistry-based R&D strategy andassociated business models andstrategies. Yet we've known andnoticed that that model is beyondexhausted and there's no more major value being created. The industry is struggling with a disruptive shift to abiology-based model and clearly hasn't found the way forward as yet. They're not alone either, as the top barshows - between maturity, value saturation, a globalizing economy, et.al. you can sort and categorize the

headlines and business book titles and consulting gurus of the last four decades. So what happens next ?


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The Next Wave of Innovation: wellhere's where we think things are going.This isn't an entirely ill-informedprognostication but it's not cast inconcrete either. That said it's held uppretty well over the last few years whilewe've developed and used it. Basicallywe see three phases which are probablymore over-lapped and inter-dependentthan shown but still representative.

The current phase where enterprisesneed to re-invent themselves as WMT,et.al. have done, but few others; andwhich'll exponentiate in the next decadeas the foot-dragging and systemicdisruptions accelerate. The emergenceand evolution of new firms, worldwide competition and new industries and the morphing of old ones. For examplethis last two weeks has seen newspaper bankruptcy announcements galore but nobody has come up with aviable New Media business model yet. TBD and watch this space. ( Key Postings Vb (Technomediatainment):

Maturities, Barriers and Disruptions).

Putting It All Together

If you put all the pieces together intoone chart here's what we end up with.Disruption will indeed continue.Whether the Singularity will becontinuous small- to medium-scale on-going disruptions or drumbeats (Taikoanyone?) of major structural changeswe'll find out. But if you think there'ssome merit and evidence so far for thehistorical accuracy and currentassessment consider the last phase.

Right now we're trapped in anenvironment where there is no NBTbecause it takes years to go from ideato invention to innovation to investmentto market/industry development. Onthe other hand that means that youcan see a lot of it coming if you knowwhere to look. The other hugedisruptive force will be the need to faceup to the narrow window of bringing all

the world's people into a prosperousmiddle class in a stable and effectivegeo-political environment.

In other words this weekend's G-20 crisis conclave might just be a good rehearsal for the bigger changes comingdown the pike. And it's by no means guaranteed that we'll work our way thru with style and grace. But consideringthe alternatives let's hope so. On that assumption though think about the world we face from an opportunity pointof view - P&G circa the '50s except for billions of people and whole new sets of consumer products and all thatimplies for all the associated industries. Not to mention new biologics, energy and materials solutions and on and


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on. Future generations may look back on it as a great age of romance, discovery and innovation. After all they'llhave to won't they ? Or not care at all ! But when you dig back into the last great age of exploration you find outthat things weren't so easy and romantic at all !

Readings and Observations

The last part of the readings brings us full-circle back to the questions of enterprise response to these crisis(Risks + Opportunities, right ?). Stories cover the range from manufacturer's struggles with lean to Chrysler'sdesperate gyrations to get itself out of a terrible box to the Pharma industry's metastasizing shakeouts that'scrossing a cusp point this last week or so. Talk about punctuated equilibriums ! Or punctured as the case may be.On the other hand there's a great story on MickeyD's continuing renewal and adaptation efforts as well as thebeginnings of Yahoo's long postponed ones. And then two of our favorites. One on how that big old stick-in-the-mud Exxon has suddenly woken up - or was it carefully positioning itself ? :) And then a really interesting newinitiative from WMT in medical records that's startling and stunning in some ways but leverages existingcapabilities in others. In this era of needing to holistically re-think business management we'll close with two finalobservations.

One is that the ultimate arch-guru of managementPeter Drucker provided the single best bible for re-thinking the firm we've ever seen (Management:Tasks, Responsibilities, Practices by Peter F.Drucker). Sadly though he wrote it at the time andfound that the pre-war innovations and post-waradoptions had reached saturation and we needed tomove to a whole new level. Sadly ? Well he publishedthat book in 1973 and as far as we can tell none of hisbreakthru ideas and approaches has been tried. Thesecond is that, among all the other factors, you need tounderstand industry dynamics and structure (KeyPostings V: Industry Analysis - Enterprise, IndustryEcology, Evolution). For example one reason thatXOM is so brilliantly positioned is that it's built up hugecash reserves, vast technological and management

capablities and timed it just right. (Oil IndustryII(Analysis): LT Supply-Demand, Outlook and Disruptions)

You see when you look at the accompanying chart we're still in a world where, if growth resumes, demand will begreater than supply and then is not the time to invest in exploration, reserves or acquisitions. NOW is !


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Bidding Review: Macro-environment, Disruptions, Business Performance

http://llinlithgow.com/bizzX/2009/05/bidding_review_macroenvironmen.html Posted by dblwyo on May 19, 2009

Over the last several months we've beenhammering away at various aspects of businessperformance from individual companies to wholeindustries to structural trends and disruptivechanges in the macro-environment. Before goingon to finish some deep dives we figured it was timeto pause for an inventory and survey of some keyresults, findings and concepts. The graphic is ourTable of Contents - or more accurately a structuredinventory of the topics we repeatedly turn tobecause we think these are the key elements thatMUST always be kept in mind when evaluating a

business and it's performance. A downloadablePDF version is available by clicking on thehighlight.

When we inventory the actual posts in key topicsthe major themes are the series on CorporateGovernance and Social Responsibility - at whichso many have failed so badly, obviously includingthe Finance Industry which is worsening a bad situation by denial, the Auto Industry going down the Maelstrom itcreated and taking the livelihoods and lives of so many with it but also many others.

Which leads naturally to questions and assessments ofEnterprise Performance - which was the focal topic ofthe last post so we won't repeat our and BCG'sindictments. A key strategic issue is the scope andscale of disruption - not just within the firm but at theIndustry, Economy and Geo-political levels; and howbadly most are prepared or preparing for the multiplecusp points we're all going to be crossing over in thenext few years. The downloadable PDF version(http://llinlithgow.com/bizzX/BizzCharts/BizzPerform2KeyPostUpdate.pdf )of this inventory is alsoavailable by clicking on the highlight.

Sadly we confess that the blue-highlighted titles whichshould take you to a post don't since we haven't figuredout the technique/technology that well. In the inventory

though you'll find pointers back at key exemplars ofcompanies who are adapting (WMT, GE) andindustries who are struggling or worse. Including Autosand Finance but also, and perhaps surprisingly, Technology.


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Guidance From the Master

In the rest of this post we want to spend sometime focusing on key concepts and argumentsthat have accumulated in all those posts,starting with core principles that should guide

business performance but don't appear to. Forthose principles we've looked to our own workand techniques, Warren Buffett and, mostespecially Peter Drucker. When Prof. Druckerpassed a few years ago the WSJ had a nicereview of some recent survey work and gifted uswith this summary of his key arguments (fromwhich we think at least two key ones are missingbut we'll circle back later).

Now we've also taken the liberty of creating acollection of this and other principles as well as other key charts from these posts that is also downloadable. In ityou'll find major graphics on Principles (Drucker, Buffett, ours), the composite mantra of "situationally aware"

business management that monitors and acts on Geo-politics, Structural Changes, Economic Cycles andEnterprise Performance. Consider that a Table of Contents which has some key charts in each area. For exampleon industry structural change (Autos, Finance, Energy, Technology) and on a blueprint for analyzing businessperformance, based on our BizzXceleration Framework. That starts with simple questions and heads toward theengineering assessment tools. "Elements of Business Performance"(http://llinlithgow.com/bizzX/DloadFiles/BizzPerformElementsCollect.pdf )is downloadable - happy reading.

Situational Awareness: Monitoring the Environment

The accompanying graphic isprobably pretty terrible by EdwardTufte's standards let alone by Seth

Godin's. Sorry about that but our keymessage is not so much as thespecific content as trying to show allthe things in one ideographiccomposite that a business mustmonitor and act on.

The "Elements" download actuallyhas the separate components plusadditional ones so if you want todissect them, again, dload the file.After all if you actually hired aconsultant to do the work andcustomize it for your situation it'd costa lot of money :).

These are the major domains inwhich the world is under-going majorstructural changes, and only one ofthem is under the control ofmanagement. They are, movingaround the clock, the Geo-political


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Macro-environment, the Economic Crisis, Structural Changes in industries and the nature of business and the keycomponents of the integrated and performing enterprise.

Welcome to the Storm: Scope and Scale of Disruption

Just to put a point on it, flat-footed as most have been caught, you have to wonder how many executives,

investors or other stakeholders are really thinking about how many things are changing by how much.

We've tried to map out what's going on in this graphic to illustrate those points. Most management teams havegrown up with a lot of churn and turmoil inside their firms but it's been a long-time indeed since this many thingshave been disrupted this much, thisfast.

We've defined five levels of disruptionthat are going on simultaneously:

1) within the firm,

2) the need for treating the firm as awhole, not just piece-parts,

3) industry and sector changes,

4) worldwide economic changes and

5) geo-political changes.

It's a sad fact that most efforts, suchas they are, are confined to #1 andignore the other, and more importantfour! AT least IOHO!!

Business Performance and the Whole Enterprise

Like we said the key between things that can't becontrolled but must nonetheless be managed to isthe way the firm faces these changes. To wrap-upthe introduction let's return to the words of theMaster on what the primary tasks of managementshould be. It doesn't get any clearer than that, doesit? Management is charged with turning thecomponent parts of the enterprise into a wholethat's more than the mere sum of the parts. Askyourself, for example, why the USA OlympicBasketball Team did so well this last Olympics andso poorly in '04?

It's because the latter was a collection of individualstars who played their own game for their ownadvantage. The former was a team where everyplayer was focused on the performance of theentire time. The results tell the story. The same is true of the enterprise. But that was just one tournament - abusiness is much bigger than a sports team and exists for a lot longer. No decision taken today can exclusivelyfocus on today's best advantage, nor on tomorrow's. Each decision must act to maximize the sustainableperformance of the enterprise on a balance between the short- and long-runs. The fact that Detroit is now a black


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hole of subsidies, job losses and collapsing local economies as expedient short-term decisions bring home theconsequences of ignoring the long-term impacts would seem to prove the argument.

After the break you'll find some more key exhibits along with discussions on several of these key points, if not allof them. But the bottomline here is that we are crossing over the boundaries into an era of the biggest changes inthe macro-environment and performance requirements in many decades. A crossing which will impact us all andone for which we're seeing little concern or preparation.We hope you find this summary, wrap-up and interpretation helpful. It's the end-result of several months of workhere and, taken all together, we hope it provides a useful toolkit for evaluating business performance in turbulenttimes.

Environmental Changes: Geo-politics and Industry Structure

In the "changes composite" two of the quadrantswere concerned with geo-political factors andanother was concerned with industry and businesschanges. On the former we've used the 4-quadrant environment chart several times so wewon't go back into it but do want to review the

industry structure chart, at right. Now we went thrua detailed chunk by chunk discussion earlier[Disruption vs. Innovation: Change, Response,Resilience] so our apologies is if this brief.

The things to bear in mind here is that our moderneconomy has been shaped entirely by the rise oflarge business enterprises which have been thecreators of our present prosperity. How well theyfunction is crucial to the healt of society as awhole. Yet this position of structural dominancereally only dates from the 1870s or so, at best. Thecenter block shows the major evolutions in keyindustries and innovations along with the forms ofbusiness organization that went with them. The topchunk traces out the various sub-trends inbusiness operations over the last decades while the bottom one looks ahead to the kinds of environment andinnovations that are likely. Something very interesting to note but if you match up the periods of the industrychanges to major periods in the stock market they're highly correlated.

Business Cycle Outlook

As much time as we've spent dissecting the businesscycle, economic data and the economic outlook weprobably don't need to dive back in too heavily here,right? However here's a relative recent version of thebusiness cycle with the alternatives and likelypathways laid out. The rapid V for vapid recoveryscenario is one with the rest of the extinct memeswhile the 2nd Great Depression also appears to befading.

The lessons remain what they are and have beenthough:


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1) We haven't reached bottom, only starting slowing down,

2) there's a long-way to start growing again,

3) this will be a very weak, sustained and fragile recovery and

4) nobody's prepared for it because, for some reason, they don't see it this way or are locked intodenial.

Mindsets, Tactics & Resiliences

With so much changing so profoundly and rapidly it all boils down to howexecutive leadership responds to the changes around them; in otherwords how do they see the world and what filters do they use to interpretit. This is really a time for re-thinking business models, strategies andcore value propositions. And then translating those re-thinkings intofundamental changes in functional capabilities. The sad fact is that thenecessary mental re-building, which precedes the actual activities in the

real world, seems to be badly lagging behind events in all too manycases.

Case in point would be the results of recent BCG survey work, which wereviewed earlier, but is worldwide across all industries and manydifferent-sized companies and about six+ weeks old at this time. Judgingfrom these results the "proper" response was anticipation, preparationand execution. Actual response was ignorance, denial, panic, meat-axe and it's still going on. If you look at thesecond panel of this composite which traces out the response being prioritized by these companies the primaryemphasis is on short-term responsiveness, not long-term re-positioning. It'd be nice to have a little more detail buta survey doesn't lend itself to that approach. Necessarily cost cutting and revenue maintenance are high priorities.

From the results it would appear that re-prioritizing capital investments, continuingto support R&D, ensuring the viability ofthe supplier network and similar strategicpositioning initiatives are getting short-shrift.

Yet for those companies that have goneinto this crisis with strong operations,good controls, good balance sheets and,in the best cases, already been re-factoring themselves, this is anunparalleled opportunity to gain a majorjump competitively. Just as a case inpoint we'd suggest that, despite some

serious re-structuring efforts by Immelt atGE, he too long protected the Capitaldivision and became over-reliant on it butis now in a political position, internallyand with his board, to finally beginbuilding the GE he's have liked to.


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Of course he's spent most of the last decade un-doing Jack Welsh's legacies. Bear that in mind.

Thinking Whole Enterprise

If we translate Drucker's Principles into

specific guidelines that can serve as aninitial checklist of things to think about andtimeframes in which to think about themwe end up with something like thisconstruct.

HPQ just had its earnings announcementand call today. It'd be a very interestingexercise to go thru that call, line by lineand division by division and ask each ofthese questions for each timeframe. Forexample PCs are down - what are yougoing to do in the next 10 months to

maintain revenues, profits and marketposition?

That's essentially an operationalimprovement question. Then what are yougoing to do in the next 10 quarters? Gointo new geographies, explore newdistribution channels or introduce newproducts? And what about the next 10years? In other words where do you envision the PC business going in that timeframe? If the answer is that's tofar away to be clear and too hard and fuzzy to investigate what are you doing to dig into it? We'll offer up a gratisrecommendation even - the form factor and functionality of the PC needs to be radically changed! Are we right orwrong? We think we're right but that's not as important as the question of whether or not HP is investigatingalternatives.

One only has to look at the work that Apple did beginning with Jobs' return and the re-design of the Mac and thesubsequent iPod/iTunes to iPhone migration to get an example of how it should be done. Or consider whatLenovo has been exploring in the Chinese PC market. If you'd like to see this approach applied to the FinanceIndustry or the Auto Industry just click onthe highlighted names.

Final Word and Case Theory

Let's wrap this whole chain of argument up bycoming back to Drucker's basic principleswhich we'll summarize as: 1) create value byfocusing on innovation and marketing, 2)make the work productive and the workereffective, 3) set measurable and committablegoals and control to them, 4) be aware of andmanage your social responsibilities, 5)monitor and manage the impacts of theexternal environment and, finally, 6) act tooptimize the balance between the parts andthe whole along with the trade-off betweenthe long- and short-terms.


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We leads us to this little "Theory of the Case". If you'd like to see this approach applied to the poster child of non-performance and malfeasance, at least in a conceptual way, here's the chart for the Finance Industry.

Run For Daylight: Innovation, Innovation, Innovation

http://llinlithgow.com/bizzX/2009/07/run_for_daylight_innovation_in.html Posted by dblwyo July 5, 2009

We're going to focus on innovation - what it is,how it works, it's role in business performanceand broader trends and implications for theeconomy and society. Including the notion of howto judge it as a stakeholder. As it happens this isa theme we've been striking for some time andwe'll review the previous discussions later on.The gist of our hammerings are threefold:

1) Innovation is widely and broadly misperceived

- all to often being viewed as an isolated pocket ofactivity and not as the broad multi-function, multi-process and cross-enterprise set of inter-linkedactivities it needs to be.

2) Innovation is generally not well handled - mostbusinesses will give lip service to the need forinnovation but when push comes to shove they'llcut the resources devoted to it. Given that they'vealready been doing it badly that may not be such a bad short-term idea but it's going to leave them terriblypositioned for the foreseeable future.

3) Performance and competitive pressures are going to see an accelerating macro-scale series of on-goingdisruptions from the functional to the company to the industry to the economy-wide scales for decades to come.Failures to grasp the widespread disruptions that are entrain will lead to the kind of "penalties" that the AutoIndustry is paying, the Finance Industry paid and will keep on paying and will hit every other single industry in thedeveloped world. The times they are indeed a'changing.

Needless to say, with these recurrent themes in mind, we were absolutely tickled to see Business Week (long aloud and informed champion of good design and innovation) publishing a story a couple of weeks ago on thefailures of innovation over the last decade. The graphic is borrowed from that story and nicely illustrates the point;and if you have trouble believing it then ask yourself why 'ol Larry-boy at Oracle has been feverishly consolidatingthings, why MSFT hasn't made any major breakthrus or why the pharmaceutical industry suddenly tipped overinto hard times about 6+ years ago (again something we've been arm-waving about for a long time).


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Re-Imaging the Airstream:Imagination in Action

While we were contemplating this post weran across another TED Talk on the

designer who helped to re-imagine theAirstream Trailer for this century instead ofthe last one. His engagement started out asan exercise to showcase how laminatescould be re-thought for the interior.

What he found was that the Airstream,originally conceived as a forward-lookingicon of the open-road, freedom andinnovation had received the interior of a '50smountain-cabin. Not bad in and of itself butnot consistent with the supposed strategictheme; and not likely to appeal to new

markets, like active sports enthusiasts.

Thereby locking Airstream into its old anddying marketspace. By (literally) taking the trailer down to bedrock they were able to build a prototype thatreimagined the interior and then use to that to re-imagine a whole new and modern trailer with a completely re-thought interior that was consistent, appealing and which created new value for new markets. There are somereal lessons here that everybody who buys into our basis thesis needs to pay attention....or join the roadkill. ( ChrisDeam Re-imagines the Airstream)

Innovation As-Is vs. Should-Be: Going to the Movies

One of the interesting things the movieindustry has started doing is loading up theDVDs they sell with all sorts of special featuresgiving you the back-story on how the thing wasconceived, developed and delivered. The firsttime we really paid deep attention was listeningto all this was for Sky Captain and the World ofTomorrow but since then we've made a specialeffort for every major movie that interests us.

The preeminent example is Pixar and it's stringof hits. Two things we'd point out about all that,perhaps three. First, they've proven that theycan keep it up time after time. Second, do youthink it was an accident that (maturity aside)that after Jobs went back to Apple his long-

standing interest in good design and innovationtook a couple of quantum leaps?

And third (something we gleaned from listeningto the 2nd disc of the Ratatouille DVD set) therecent string from the Incredible to Cars to Upwas conceived years ago at a restaurant lunch meeting and sketched on napkins. A familiar process for anybodywho's ever had the joy and terror of playing on the bleeding edge. Of course from napkin to delivery to sales is along....long way.


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The graphic compresses the long discussions in a couple of prior posts and also captures 25+ years of sustainedexperience in trying to move from how it's typically done poorly to how it should be done well. Based on thatexperience we guarantee that anybody who manages to get this blueprint in place will start having some realimpacts and will, in fact, be able to create a sustainable habit of innovation. Contrawise you can use the blueprintas a diagnostic of failures. If you were to go back and re-visit the various movies that have been wildly successfulyou'll find these arguments supported. You might, for example, compare and contrast Lord of the Rings with KingKong with typical run-of-the-mill summer thriller. Or consider Pixar or the Harry Potter series as other examples.

All too often what you find in companies doing the lip service thing is that at some point in their history somebodyhad a bright idea that's thrown over the wall to Development and if it sticks (in the marketplace) all well and good.After the original idea is turned into a product more or less then Marketing is called in to put lipstick and ribbonson a pig and it's handed over to Sales to push into the customer base. Over a period of time this becomesembedded in the corporate culture and feature after feature that creates no appreciable new value from thecustomer's view is stuffed out there.

Two major problems exist on this level. First, invention is NOT innovation. Innovation turns invention into newproducts and services that create incremental new value, not move beyond the 80/20 cutoff point of death.Second, the transom-throwing is a Vegas crapshoot that's playing a numbers game. There's always going to beelements of uncertainty but you can change the odds in your favor dramatically by doing it right.

Doing it right starts with understanding customer and market needs, wants, desires, values and characteristics.Stop me when the failures of Detroit come to mind. Let me stop you if they don't but pick your industry. THEN theoriginal problem identification goes thru a Design phase where the market-based, problem-solving goals aretranslated into product characteristics. Think about the LofR - Tolkien had a magnificent concept based on his lifeexperiences and a lifetime of work in mythology and languages.

That got us into the Design stage with the books if you would. Then the script-writing team spent years, literally,taking the books down to the next level of developmental detail. The extended edition DVD discussions on thesubject are, IOHO, worth the price of the set for this alone. They're also worth it for the discussion of how specialeffects, weapons and fighting, horsemanship, filming, production design, etc., etc. etc. were all brought together ina synergistic blend of functions into a cohesive cross-functional development and delivery team. And serve as amodel for how real, deliverable innovation should be being done by business or any other organization that needs

to create new value.

Innovation Is A Team Sport

That highlights another major facet and thereview of the LofR DVD will flesh it out if you payattention and really think about what you'rehearing. Innovation is not the result of any singleinnovator or even a small core. It's the result of ateam scaled to the size of the problem with a wideand appropriate range of skills all workingtogether.

Before we run on we suggest you run out andread Car: A Drama of the American Workplaceby Mary Walton which discusses the design anddevelopment of the Taurus that save Ford when itfirst came out. A book that Ford tried to killeventually after providing unprecedented accessbut perfectly illustrating our points - large andsmall. As well as Twenty-First-Century Jet: TheMaking and Marketing of the Boeing 777 by Karl Sabbagh about Boeing's creation of the 777. Guess who theProgram Manager was for that and what he's doing now? Now the graphic is adapted from the Technology


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business and it's worked for us for a long time; and contrawise killed us when we couldn't get the requiredexecutive support. But if you check out those books you can map what Ford did and doesn't and what Boeing didand still does (consider the Dreamliner) to the framework.

A Closing Thought: Tsunami's of Disruption

Just a brief closing thought, having run on atgreat length longer than intended. As the worldcontinues to go thru massive re-alignments, newcountries enter the mainstream of the developedworld and make their own moves up the value-add ladder of innovation we're all going to facecontinuous disruptions. We can no longer counton the occasional miracle to save us, our jobs,our companies or our societies.

On the other hand we've coasted for almost sixtyyears on the innovations that came out of WW2.Isn't it about time to do it again? In any case the

choices are not to avoid the problem - only howwe deal with it. The graphic is from an earlier postthat walks thru all this in some detail ANDprovides the evidence to back it up. In thereadings below you'll find some are on generalprinciples and practices while others are onspecific cases. We recommend, highly, at leastskimmin them!


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About Llinlithgow Associates

Llinlithgow Assoc. is a managementconsultancy focused on evaluating

businesses to reduce risk, leverage under-developed opportunities in operations andincrease overall enterprise performance toimprove investment return.

Our approach is based on BizzXceleration, aproprietary framework with 25 years ofdevelopment, to review and analyzeBusiness Models and Strategy, keyoperating functions and supportinginfrastructure and management systems.From there we develop comprehensive,integrated operating plans that tie all the

components of the business into a high-performance enterprise.

Several years ago Michael Lewis publishedan interesting book on how the Oakland Astook a systematic look at how the game really works, and what investments in players, strategies and tactics weremost likely to result in the most wins for the lowest cost. Our approaches are similar in taking a systematic look atthe whole business, each of the major components and the best way to tie everything together into a high-performance system.

We start by looking at the basic core value proposition and its translation into the Business Model and Strategy.Typically we next examine Marketing and Sales operations, where it is possible to reduce operating costs by30%, shorten the sales cycle by 30% and increase the closure rate by 30%. This is primarily the result ofestablishing good processes and discipline.

BizzXceleration is comprehensive but integrated across the total reach and range of business activities andissues. And emphasizes a pragmatic, workable approach that results in a stepwise path to performanceimprovement. We believe that our approach mitigates business risks, improves operational performance and canlay the groundwork for 10-30% EBITDA improvements in post-deal execution.

If you would be interested in further discussions, more detailed descriptions or the review and testing of specificopportunities we would enjoy hearing from you. We can be reached at [email protected] .

Customer Problem

Value Proposition

Business Model

Strategy

Core Operating

Functions

Functional Efficiency

Inter-function

Integration

Value Alignment

Marketing, Sales &

Service

Customer value focus

Process Discipline

Business-driven

Management System

Budgeting system

Management Controls

Operating Plans

Resource Development

Customer Problem

Value Proposition

Business Model

Strategy

Core Operating

Functions

Functional Efficiency

Inter-function

Integration

Value Alignment

Marketing, Sales &

Service

Customer value focus

Process Discipline

Business-driven

Management System

Budgeting system

Management Controls

Operating Plans

Resource Development

From Aha to KaChing: Innovation, Business Performance, Challenges and Economic Prosperity

Documents