Business

Friday October 30, 2009

The role of boards in rethinking market space

Whose Business Is It Anyway? - By John Zinkin


ONE of the biggest disadvantages boards can face in thinking about where to take their companies is where they came from – their history and the so-called legacy effect.

Start-up companies are not faced with the same problem and so, it is easier for them to create “Blue Oceans” in which to operate without having to face the debilitating battle for share that typifies “Red Ocean” strategies.

Past failure means future failure. Sometimes companies do things that damage their reputation or the reputation of their brands irretrievably. In these circumstances, there are only two possible solutions: withdraw or rebrand. The costs of overcoming the adverse legacy effects are too great.

In past success lies future failure. If the company has a track record of success, the very fact of its past success may be the cause of its future failure. This is because of the natural temptation to think that “If it ain’t broke, don’t fix it”. And yet the commercial environment in which the company operates keeps changing, so that what was right for the past may become a guarantee of failure in the future.

Ironically, one of the reasons General Motors (GM) went bankrupt in 2009 was a HR policy that had contributed to its success until the late 1980s – its superior pension and medical benefits – advocated by no less a business guru than Peter Drucker himself in 1946.

The resulting costs meant that GM was saddled with about US$1,500 a car in extra expenses compared with Japanese and German manufacturers who set up plants in the southern United States where no such benefits were on offer. Cutting production and employment did not help as the fixed costs of these entitlements for past employees were spread over fewer and fewer cars, making the problem worse.

Andy Grove of Intel is rightly famous for having recognised this problem when he stopped the company manufacturing memory chips and made it into the world’s dominant manufacturer of microprocessors at a time when it was still a leader in memory chips; he could see that past success was a recipe for future failure as a result of increased competition from Asia turning the memory chips market into a “Red Ocean”. He summarised this mindset in the memorable phrase, “Only the paranoid survive”.

At the heart of the problem posed by past success is the natural tendency to become complacent, reinforcing inertia. People and organisations do not like change and past success is used to justify the need not to change. It is the role of the board to challenge this thinking on a regular basis.

Companies that have failed to change with the times have either gone out of business or changed by hostile managements who have taken them over, for the only constant in business is the permanence of change – driven by politics, economics, competition, social change or improved technology.

Companies that were leaders in telex were replaced by companies that marketed facsimile machines, which in turn were put out of business by personal computers (PC), email and Skype. Now PC makers are potentially threatened by manufacturers of PDAs and smartphones.

Sometimes companies are imprisoned in the minds of their customers by their past claims to fame. Their brand and what it stands for is so firmly embedded that there is little they can do to change this perception.

A good example of this is Xerox. Ask anybody what does Xerox do, and the answer will be it makes copiers. Indeed the name has become shorthand for making copies. Yet Xerox is the inventor of the daisy wheel, the mouse, Ethernet, the PC, the pull-down menu and interface that Apple popularised; in short, everything that makes the modern office what it is. Xerox has spent hundreds of millions of dollars in advertising since 1985 telling the world it is not a copier company and yet we all still know that it is a copier company.

In past failure lies future success. One of the reasons why America has such an enviable track record of innovation is that failure is a mark of honour in places like Silicon Valley. Failure is the result of pushing the envelope so that people learn from their mistakes.

Such a mindset lies at the heart of American entrepreneurial optimism, where tomorrow will be a better day.

Thomas Edison, the founder of General Electric, said: “Results? Why, man, I have gotten lots of results! If I find 10,000 ways something won’t work, I haven’t failed. I am not discouraged, because every wrong attempt discarded is often a step forward ... ”

Boards must think carefully which of these three conditions applies to their company for the survival of their organisation will depend on getting the answer right.

● The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.

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