I’ve never been a fan of “what’s hot, what’s not†lists. However CNN money has a very interesting article about how the Jack Welch business dogma may be working its way over to the “not†list.
Now I will admit that Welch has probably forgotten more about running a business just this week than I’ll ever know. But I have to wonder if we’re nearing a sort of Copernican revolution in business. Has much of what we’ve held to be true, including Welch, only seemed true because of our limited perceptions? The west was quite sure the earth was the center of the universe before Copernicus and Kepler provided the theory with Galileo and Brahe providing the evidence that the sun and not the earth is the true center (of course with even a little more perspective we “know” that the universe’s center is everywhere and its circumference nowhere, making all of these guys right but for varying wrong reasons–but that’s a topic for another blog).
Daniel Scocco at Innovation Zen posted something that got me thinking about what the CNN articles really means, which reminded me of this chart from Barry Ritholtz.
I’ve looked pretty carefully, and despite Welch’s book being widely read, none of the stars from 89-99 continued to shine between 02-06. As Ritholtz says in an earlier post, old stars don’t lead new bulls.
Furthermore as Kaplan and Foster point out in Creative Destruction (and as Scocco points out in his post, and as you can read in this pdf):
In 1987, Forbes republished its original “Forbes 100” list and compared it to its 1987 list of top companies. Of the original group, 61 had ceased to exist. Of the remaining thirty-nine, eighteen had managed to stay in the top one hundred… They survived. But they did not perform. As a group these great companies earned a long-term return for their investors during the 1917-1987 period 20% less than that of the overall market. Only two of them, General Electric and Eastman Kodak, performed better than the averages, and Kodak has since fallen on harder times… Similarly, of 500 companies in the original S&P 500 list in 1957, only 74 remained on the list in 1997 and of these only 12 outperformed the S&P 500.
With this sort of long-term failure rate something must be wrong in our theories of prudent business management—as wrong as Ptolemy was about the sun going around the earth, and as wrong as the Catholic Church for adhering to such dogma for over a millenium despite centuries of glaringly obvious contradictory evidence. Scocco suggests what’s wrong: MBA programs are about administration, not innovation. And I’d go a step further by adding that administration and innovation are not just different but antithetical (like puzzle problems and wicked problems).
Taking your very insightful observation and attendant thoughts one step further, an interesting case we debated in Strategy class in my MBA program is Philips vs Matsushita: A new century, a new round from HBS. The reason was that (I can’t seem to find my copy, I’ll confirm) we learnt Matsushita had created a 100 year strategic plan. That was their version of long term. And we discussed that ‘long term’ was usually considered 10 years or so, medium term 3-5 years and the short term 1-3 years for corporate planning and strategy. I believe that these figures have changed dramatically in the past 5 or 6 years, particularly after the first internet boom, and general consensus seems to be everything is rapid, ‘move, move, move’ short term results. In fact this [just found] article says it better than I could have, http://www.westga.edu/~bquest/2004/thinking.htm and to quote their final paragraph:
At the end of the day, the success and even the survival of a corporation will depend on its ability to strike the right balance between short and long-term goals, and there is no scientific method to determine where this “right†balance would be at every point in time. On the other hand, market pressure may now indeed be increasing the weight of the short-term component in this magic mix, but the balance still needs to be there. A corporation that forgets this is like a marathon runner who, trying to impress the public, started sprinting at full speed from the very beginning of the race: he would most certainly rush well ahead of all the other runners for the first few hundred meters, but then he would never make it to the end of the race… just like Enron.
So coming back to the conclusion of your post, I’d say that it has less to do with the theories of prudent business management so much as just chucking them out the window and just responding to the market. And while I do agree with you that “administration and innovation are not just different but antithetical”, my question would be whether the crux of your problem as stated has more to do with the assumption that “innovation = good management ” – wouldn’t you say that innovation, like our old friend design, is but an example of operational effectiveness? If you throw out any long term goals and just focus on quarterly tactics, you’ll certainly pound the enemy in the short run but are you building anything of value for the long run?
ps. since there’s no preview, I’m hoping for the best that this comment is comprehensible.
Interesting take on the issue. However there is one point where I do not agree 100%.
You said “Has much of what we’ve held to be true, including Welch, only seemed true because of our limited perceptions?”
I think what we’ve held to be true WAS true indeed, but true for a specific time frame, the industrial age. It is no longer true because the environment has change and the pace of such changes is also accelerating dramatically.
That a good point, its very likely the case that the frame has started to change rather than us overcoming limited perceptions.
Of course the legacy or old frames do limit perception (I think we see what is in terms of what was rather than on its own terms). Six-sigma is my favourite whipping boy for such limitations from legacy frames.
I’ve been around the IT industry for 25 years; sales mainly and completed the MBA last year. My focus was predicting the unpredicatble….i.e. predicting disruptive innovation. I like the connection between physical laws and business behaviour and suggest there is some real mileage in this…. The 2nd Law of Thermodynamics is about the flow of energy through entropy. I suspect entropy plays a big part in destructive processes leading to the historical demise of these majors.
However, I think managing the risks of environmental innovation may be possible if we focus on value migration rather than invention and commercialisation per se. E.g. there is a revolution going on in IT driven by increments in broadband performance. The innovation effects are touching many industries entertainment more than most. But it is recognising the movement of value that remains the challenge. E.g. for Google is there more value in brokering digital IP than advertising? Does BSkyB need to vertically integrate to manage the threat of new distribution entrants?