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Turn around and face the market

Running through every business success story is a common theme: stay connected to customers; stay connected to your market; anticipate and expect change. This seems pretty obvious. It’s simple and it’s easy to understand. Customers, after all, are the one thing no business can do without. They are the key to every company’s survival.

Paying attention to customers seems like such a fundamental thing. So why do so many companies do it so poorly? How do companies lose touch with their customers, and lose their grip on the realities of the marketplace?

As any athlete will tell you:

Just because something’s fundamental, that doesn’t mean it’s easy.

With growth come distractions

Without question, customers are the single biggest factor in any company’s long-term growth and profitability. And yet, as companies grow, distractions multiply. Success can create such a dazzling array of opportunities that companies try to capitalize on too many of them, over-expanding and diluting their offerings. Internal efficiency and organization become paramount as companies struggle to maintain their growth trajectories and keep the factories and supply chain flowing. Political squabbles can erupt as people jockey for status, attempt to seize greater authority and control, or take credit for successes. Bureaucracies that emerge to handle increasing complexity and organizational challenges can also stifle creativity and innovation. Focusing on the complexities and intricacies of growth, many companies take their eyes off of the customer, their most important asset.

Ironically, a history of success may be the biggest reason companies lose touch with customers. Success can fuel enormous growth and even lead to market dominance. But it can also lead to over-expansion, blind spots, complacency, bureaucratic rigidity and risk-avoidant cultures.

Over-expansion.

Caught up in whirlwind growth, some companies become distracted by a landscape of opportunity and try to do everything just because they can.

Over-expansion

How Starbucks lost touch.

In the early 2000s, Starbucks focused on growth, expanding globally, opening new stores, and populating their stores with more and more products, like songs and books. New stores were opening every day, and a seemingly endless parade of new products entered stores, until every Starbucks seemed to double as a gift shop.

“Obsessed with growth, we took our eye off operations and became distracted from the core of our business” says Howard Schultz, Starbucks CEO, in Onward: How Starbucks Fought for Its Life without Losing Its Soul.

“Every new store increased the company’s profits, and every incremental product increased sales and profitability in each store. It wasn’t any single new store or new product introduction that hurt the company, but as these incremental changes added up, Starbucks slowly lost touch with what its customers cared about – fast, great service, great coffee and a place to enjoy it.”

Schultz recalls a day when he realized the need for change.

“Once, I walked into a store and was appalled by a proliferation of stuffed animals for sale. “What is this?” I asked the store manager in frustration, pointing to a pile of wide-eyed cuddly toys that had absolutely nothing to do with coffee. The manager didn’t blink. “They’re great for incremental sales and have a big gross margin.” This was the type of mentality that had become pervasive. And dangerous.”

Schultz called this “hubris born of a sense of invincibility.”

In 2008, Starbucks closed 600 stores, narrowed its product line, and closed stores around the world to retrain employees on how to make a great espresso.

Since 2008, Starbucks has refocused on its core business, profits are up, and most investors are bullish.

How Krispy Kreme flamed out.

It seemed as if Krispy Kreme had created the perfect business with all the right ingredients: a secret recipe, donuts that tasted so good they were addictive, and a media that had a crush on the company. Krispy Kreme had grown organically since its founding in 1937, and after going public in 2000 the company entered into a phase of aggressive growth, opening a flurry of new stores and selling their donuts in convenience stores, drug stores, gas stations and big-box retailers like Wal-Mart. The company’s stock more than doubled in the two years following its IPO. New store openings were heralded on local news stations and customers lined up outside stores for a first taste of the fantastical donuts. Krispy Kreme’s marketing plan boldly stated “Our market is everyone, everywhere.”

But the company grew too fast, and spread itself too thin. Donuts, it turned out, might not be so addictive after all. By opening so many franchises, so quickly, Krispy Kreme forced franchisees to compete for a limited market. In addition, franchisees were required to buy equipment directly from Krispy Kreme at marked-up prices. But by maximizing its short-term profits from franchisees, Krispy Kreme shot itself in the foot. Many stores struggled to make a profit and some went out of business or had to declare bankruptcy.

Sales dropped. One of its biggest franchisees defaulted on payments and later filed for bankruptcy. Other franchisees also declared bankruptcy and Krispy Kreme found itself saddled with more stores than it could operate profitably. Krispy Kreme’s troubles worsened when shareholders filed lawsuits, charging company executives with ignoring signs the company was expanding too quickly. The SEC launched an investigation – never a good sign.

Krispy Kreme stock fell from a high of $50 in 2003 to $3 in 2007.

Krispy Kreme retrenched, sorted out its finances, and settled with the SEC in 2009. Today the company is expanding again – more cautiously this time.

Blind spots.

While trying to do too many things can be a problem, a focus that’s too narrow can be equally problematic. As companies grow, they increase in expertise and efficiency as they attempt to increase profits and market share. But that expertise can narrow the company’s focus so much that it develops gaping blind spots. When new technologies and business models inevitably come along to disrupt the status quo, the company has stuck all its eggs in one basket.

Blind spots

How Xerox missed the PC revolution.

In 1970 Xerox set up its PARC (Palo Alto Research Center) to envision and develop the office of the future. To that end, the group was wildly successful and has been credited with the invention of laser printers, bitmapped graphics, the mouse, the graphical user interface, WYSIWYG (What you see is what you get) text editors, and Ethernet. But when it came to introducing these innovations to the marketplace, Xerox faltered.

Xerox PARC was based in Silicon Valley, a far remove from Xerox headquarters in Rochester NY. While this gave researchers great freedom to pursue new ideas, it also made it more difficult for them to convey the opportunities to senior executives. At the time, copiers were generating huge profits for Xerox, and Xerox still saw itself as a copier company.

In a recent interview, Gary Starkweather – inventor of the laser printer and former Xerox PARC researcher – told Malcolm Gladwell:
“They just could not seem to see that they were in the information business… Xerox had been infested by a bunch of spreadsheet experts who thought you could decide every product based on metrics. Unfortunately, creativity wasn’t on a metric.”

Apple founder Steve Jobs paid a visit to Xerox PARC in 1979. He was inspired. Xerox PARC engineer Larry Tesler reported to Gladwell:

“Jobs was pacing around the room, acting up the whole time. He was very excited. Then, when he began seeing the things I could do onscreen, he watched for about a minute and started jumping around the room, shouting, ‘Why aren’t you doing anything with this? This is the greatest thing. This is revolutionary!’”

Jobs went back to Apple, and the rest is history.

Xerox may have learned its lesson. Today the company is focused on moving from being a copier company to a services company. Since 2006, revenue from services, such as outsourcing its customers’ document management and other business processes, has risen from 25% to almost 50%. The jury is still out, but Xerox may be turning itself around.

How Sony missed digital music.

Sony invented portable music with the Walkman, introduced in 1979. Walkman led the portable music category for 20 years, and during that time the product evolved through many iterations. Sony engineering teams worked closely together to develop lightweight headsets and music players; they also worked closely with marketing and customer groups to create specialized products for niche markets. For example, they developed a rugged, sealed case for people who wanted to listen to music while jogging or cycling. During the 1980s they released 250 different Walkman models. Sony engineers were among the best in the world, but they were focused mainly on incremental improvement. The company’s deep history and expertise in mechanical devices became a fatal blind spot, and when digital music players entered the market, Sony was slow to react. Quipped one Sony engineer: “I don’t really like hard disks—they’re not Sony technology. As an engineer, they’re not interesting.”

Sony also owned a record studio, and a desire not to cannibalize record sales – digital music files were hard to protect – may have been a factor as well. But history has shown over and over that you can’t protect your customers from new, disruptive innovations, and if you’re not willing to cannibalize your business then someone else will.

Once again, Steve Jobs stepped in to fill that gap, redefining the music industry with the Apple iPod.

Sony has struggled to achieve and maintain profitability ever since.

Cultural rigidity.

When a company is large and successful, its size can be its worst enemy, especially when it is so dominant that it lacks serious competition. A company culture that drove success in the early days can become overly codified, rigid and ritualistic over time. Over time, bold new moves become much more risky; new business models may compete with existing businesses and cannibalize their sales. Even when it’s obvious that they will someday be necessary, it’s not hard to find excuses to put them off just a little bit longer. Slowly, great companies can lose touch with reality.

Cultural rigidity

How Kodak faded away.

Kodak introduced one of the first consumer cameras in history, in 1888, with the slogan “You press the button, we do the rest.” For 100 years, it sold cameras and film. Its highly profitable business was based on the classic “give away the razor and sell the blades” strategy: selling cheap, easy-to-use cameras and reaping profits from the film business over time.

In 1975, Kodak engineer Steve Sasson invented the world’s first digital camera, a prototype cobbled together using existing technologies, including a super-8 camera lens and cassette tape. After taking your photos with the camera, you could remove the tape and put it into a playback device to display the images on a standard TV. He and his colleagues demonstrated this “filmless technology” to Kodak executives throughout 1976. Sasson reports the executive reaction:

“Why would anyone ever want to view his or her pictures on a TV? How would you store these images? What does an electronic photo album look like? When would this type of approach be available to the consumer?”

Sasson and his team did not have the answers. But by applying Moore’s law the team came up with an estimate: In 15 to 20 years the devices would be available to consumers.

Kodak sold low-cost cameras but made the lion’s share of profits on film. The company’s core product was threatened, and Kodak had a 15-year head start to figure out what to do about it. What did Kodak do? Not much.

The predictions were right on. In 1988 the JPEG and MPEG formats were introduced. Consumer digital cameras followed in the 1990s. While Kodak’s film business slowly faded, the company struggled to find a strategy. One Kodak Senior VP and Director of Research said in 1985: “We’re moving into an information-based company… [but] it’s very hard to find anything [with profit margins] like color photography that is legal.”

In the early 1990s CEO Kay Whitmore vowed to “set the standard in film-based digital imaging.” You may ask, as I did, “what’s film-based digital imaging?” One example is the Photo CD. Customers could take film to a processor and get a CD instead of prints. They could then view the CD on their TV with a special player. Kodak executives met with technology companies, trying to find a way to partner. Bill Gates remembers Whitmore. He remembers him falling asleep in a meeting.

More “strategies” followed. First digital cameras, but it turned out the margins in that competitive industry were way too thin. Next, online services to help people manage their photos. Today it’s cheap inkjet printers.

No doubt, times are tough in the film business. But consider rival Fuji. As early as the 1960s they were producing videotape, computer tape and audio cassettes. In the 1970s they were selling VHS tapes and floppy disks. In the 1980s Fuji started an Electronic Imaging Division and introduced the first digital, computerized X-ray system and introduced the world’s first consumer digital still camera.

Today, Fuji is building on their experience and expanding into other industries, such as medical systems, digital imaging, optical devices and specialty materials like the thin films used in making flat-panel displays and solar cells. Fuji stayed in touch with customers and the changing market. Meanwhile, Kodak is talking to bankruptcy lawyers.

How GE revitalized its business.

GE was founded in 1890 by inventor Thomas Edison and over time it grew to dominate many industries, including power generation, turbine engines, electrical appliances and many others. When the Dow Jones Industrial Average was created, GE was one of the 12 listed companies (it’s the only one of the 12 that still exists).

Bureaucratic rigidity reigned supreme when young executive Jack Welch moved into GE headquarters in 1974. In his memoir Jack: Straight from the Gut, he remembers that “a set number of ceiling tiles signified one’s status in the corporation.”

There were as many as a dozen layers between the CEO’s office and frontline workers. All those layers insulated the company’s executives from its customers, like a person who was wearing too many sweaters: “When you go outside and you wear four sweaters, it’s difficult to know how cold it is.”
In GE’s power business, says Welch, “There was an attitude that customers were “fortunate” to place orders for their “wonderful” machines.”

“The bigger the business, the less engaged people seemed to be. From the forklift drivers in a factory to the engineers packed in cubicles, too many people were just going through the motions. Passion was hard to find.”

A mid-70s tour of Japanese manufacturing plants galvanized Welch into acting early and proactively, while the company was still healthy and profitable.
“The incredible efficiency of the Japanese was both awesome and frightening… And the Japanese, benefiting from a weak yen and good technology, were increasing their exports into many of our mainstream businesses from cars to consumer electronics. I wanted to face these realities.”

“I came to the job without many of the external CEO skills,” says Welch, “but I did know what I wanted the company to “feel” like. I wasn’t calling it “culture” in those days, but that’s what it was.”

Change wasn’t easy. In fact it was war. Welch declared war on the bureaucracy and entitled culture at GE. “I was throwing hand grenades, trying to blow up traditions and rituals that I felt held us back.”

He cut the levels of hierarchy in half and instituted a competitive, performance-oriented culture, insisting that top achievers were rewarded handsomely and low performers were fired. The strategy he laid out was to focus only on industries where GE could be number 1 or number 2. If they couldn’t be number 1 or 2, they would fix, sell or close the business.

In Welch’s 20 years as CEO, GE re-focused on customers and market realities, and grew revenue from $27 billion to $130 billion while increasing profit margins. GE has been consistently profitable since 1991.

How IBM rediscovered customers.

IBM was also founded in the 1800s. It’s early “business machines” included scales, electric tabulation machines, and company time clocks. As the company grew it continued to focus on its business customers and helping them process and manage the data it took to run their businesses. IBM successfully managed to stay ahead of the technology curve for most of its history, combining investments in R&D and innovation with customer service and support for its complex, leading-edge technologies.

But by the early 1990s the company’s culture had atrophied into an internally-oriented, ritualistic web of territorial fiefdoms. IBM’s sales and profits were falling at an alarming rate. They needed a change agent. In his book “Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change” Lou Gerstner remembers the culture he inherited in 1993:

“An institutional viewpoint that anything important started inside the company—was, I believe, the root cause of many of our problems… They included a general disinterest in customer needs, accompanied by a preoccupation with internal politics. There was general permission to stop projects dead in their tracks, a bureaucratic infrastructure that defended turf instead of promoting collaboration, and a management class that presided rather than acted.””

Gerstner didn’t come from inside the company. He was an outsider and former IBM customer as CEO of American Express. As a customer he had been enormously frustrated by IBM’s territorial geographic structure.

“The fact that American Express was one of IBM’s largest customers in the United States bore no value to IBM management… It was enormously frustrating, but IBM seemed to be incapable of taking a global customer view or a technology view driven by customer requirements.”

One of Gerstner’s first moves was “Operation Bear Hug,” where every member of the senior management team, and every one of their direct reports, visited at least five of their biggest customers in a three-month period, to listen, show the customer they cared, and initiate action as necessary. For every visit Gerstner wanted a one-to-two page report sent to him and anyone in the company who could solve that customer’s problems.

The prevailing plan when Gerstner came on board was that the company should be broken apart into individual businesses – so-called “Baby Blues” so they could compete more effectively. But Gerstner took a different tack.

Realizing that IBM’s strength with customers came from its global reach and broad, deep expertise, he reorganized the company from geographic territories global customer-oriented segments that cut across geographic lines. Like Jack Welch’s “hand-grenade” approach at GE, this was tantamount to a declaration of war. IBM regional managers were like powerful heads of state that resisted him at every turn.

“During a visit to Europe I discovered, by accident, that European employees were not receiving all of my company-wide e-mails. After some investigation, we found that the head of Europe was intercepting messages at the central messaging node. When asked why, he replied simply, ‘These messages were inappropriate for my employees.’ And: ‘They were hard to translate.’”

“One particularly stubborn—and inventive—country general manager in Europe… simply refused to recognize that the vast majority of the people in his country had been reassigned to specialized units reporting to global leaders. Anytime one of these new worldwide leaders would pay a visit to meet with his or her new team, the country general manager, or GM, would round up a group loyal to the GM, herd them into a room, and tell them, “Okay, today you’re database specialists. Go talk about databases.” Or for the next visit: “Today you’re experts on the insurance industry.” We eventually caught on and ended the charade.”

Changing the culture was the key to the transformation. Gerstner, like Welch, wanted a high-performance culture. “Culture isn’t just one aspect of the game — it is the game” he says.

But culture isn’t something any one person can control. It lives and breathes in the actions and behaviors of every person in the company, and it’s acted out every day. Culture is deeply embedded in the ongoing habits and routines that permeate any company. Changing a culture is a herculean task and it doesn’t happen overnight.

“You can’t mandate it, can’t engineer it. What you can do is create the conditions for transformation. You can provide incentives. You can define the marketplace realities and goals. But then you have to trust. In fact, in the end, management doesn’t change culture. Management invites the workforce itself to change the culture” says Gerstner.

“Frankly, if I could have chosen not to tackle the IBM culture head-on, I probably wouldn’t have”.

Luckily, he did tackle it, and persistent effort paid off. Between 1990 and 1993, when Gerstner took over, IBM lost $16 billion. In his first year he rescued IBM from its steep dive and returned it to profitability. The company has grown steadily ever since.

When in doubt, get in touch with your customers.

Name a company you love, a company you are loyal to, a company you buy things from all the time, and you will inevitably find a company that’s connected to its customers; that knows who they are and what they care about.

Focusing on customers doesn’t mean trying to please everyone. It’s about getting a deep sense of who your customers are and what they care about. Wal-Mart dominates retail by relentlessly focusing on price-sensitive customers. Everything in Wal-Mart’s culture is focused on squeezing one more penny of cost out of their operations, and sharing those cost savings with customers. Much smaller Nordstrom has only 2% of Wal-Mart’s revenue but generates higher profits by focusing on customers who prefer excellent service and selection over price. Wal-Mart and Nordstrom focus on two profitable but distinct market segments, while other retailers who try to be too many things to too many people, like Sears and JC Penney, get squeezed.

Some things don't change

The world is constantly changing, and so are customers. Customers won’t always want any one product or service. They won’t always want iPads.

But some things won’t change. Customers will always want great experiences, great service, convenience, selection, low prices and fast delivery. A customer-focused company knows what its customers care about and builds capabilities and strategies that reinforce its advantages over time.

GE, IBM and Starbucks turned their companies around by focusing on customers. Kodak continues to struggle – the company’s latest bet is using its patent portfolio to finance a line of cheap inkjet printers it hopes will save the company. Kodak investors are understandably skeptical, and the company’s stock today is trading at all-time lows.

There’s an old adage about making difficult decisions:

“When in doubt, go towards the fear.”

When you are facing a difficult decision, more often than not you know deep down what direction you need to take. But when that direction is risky, or difficult, or otherwise scary, people look for reasons to avoid the difficult road. So lurking within most difficult decisions is trepidation and fear about the road you must take.

We can only imagine what the decision-makers at Kodak must have felt when they realized the future of photos was filmless. The fear must have been palpable. But at the same time the imperatives must also have been evident: Start getting out of film and start preparing for the digital world.

Unfortunately we can also all-too-easily imagine the meetings and memos that rationalized away the fears, the people hanging on to near-term retirement, the desperate hope that by some miracle the world would not evolve.

When in doubt, don’t look inside your company for answers. Turn around and face the market. Get back in touch with your customers.

Today’s customers are more connected than ever. The rate of change in society is accelerating, as whole families – kids, parents and grandparents – join online social networks to keep up with each other and with friends, to share their interests and connect with new people. Social networks are where the people are going; that’s where the customers are. But most companies are slow to adopt these new, connected technologies.

Why? In some cases they don’t understand how social networks will impact the business. They can’t see a clear path or understand the implications. In most companies, however, there are a few people who do understand. But bureaucracy, corporate culture, blind spots, fear and risk-avoidant behaviors stand in their way.

Customers are connecting. Are you?

Jack Welch once said “I’ve always believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when.”

Can your company’s inside rate of change match the rate of change you see on the outside? If not, it’s time to take a good hard look at social technologies and start thinking about how they can help.

As always, your comments, thoughts and feedback are much appreciated.

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2 Comments

  1. Cliff wrote:

    This is looking terrific, Dave – I could see companies flipping through a series of your sketches and asking “where do we see ourselves now?” Overexpanded? In a blind spot? Rigid?

    Friday, November 18, 2011 at 10:34 am | Permalink
  2. dgray wrote:

    Thanks Cliff! How are you doing?

    Friday, November 18, 2011 at 1:20 pm | Permalink

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