Tuesday, June 24, 2008
As far as I know, Clayton Christensen (innovation guru) has not publicly commented on Chrysler’s predicament (fifth place in US sales, sales down 25% in May, only 2 of 21 models listed among Consumer Reports’ recommended models – full disclosure, I own one of those models, the Chrysler 300 and I love it) but his research into the impact of disruptive technology in various industries can give us somewhat of a crystal ball look into Chrysler’s future – and its not pretty.
Chrysler’s migration up the sustaining technology curve in search of greater and greater margins and profits mirrors the actions of many other big players in different industries. It’s no surprise that Chrysler, along with GM and Ford, all fell in love with pick-ups and SUV’s for the primary reason of the bigger margins they commanded than smaller cars, leaving that market to smaller, start-up car manufacturers looking to gain a foothold in the US auto market. So while the Big Three went after these higher margin vehicle sales (wouldn’t you if your internal cost of capital forced you to look for more and more profitable vehicles?), the foreign car manufacturers focused on the smaller car market, honing their cost structure to be profitable in such a tight market.
Christensen’s research revealed that these disruptors started by offering an adequate product or service that met most of the needs of an underserved consumer population. Once the disruptor start-ups established themselves at the down market, they started working up the sustaining innovation curve, getting closer and closer to matching the established companies’ product offerings, all the while honing their cost structure to remain profitable in whatever market they were in. The established companies would end up competing by adding even more functionality to their up-market offerings in order to entice a shrinking, highly demanding customer.
So here is where Chrysler finds itself in the midst of a $4.00+/gallon US market – its big model debut this fall is the overhauled Dodge Ram pick-up with satellite TV, a carlike ride and a bin in the cargo box for hauling 10 cases of beer. I don’t know about you, but I can’t think of anyone who is looking to pay $40,000 to get 15 mpg in city driving. But it’s hard to get off that track of chasing greater and greater margins when you’re on it. So if I were to guess Dr. Christensen’s prediction for Chrysler, it would be the corporate equivalent of hospice.
All of which makes last week’s Wall Street Journal article (“Nardelli Tries to Shift Chrysler’s Culture”) that much more revealing. In it Mr. Nardelli blames Chrysler’s woes on its “Old Detroit mind-set” and he himself is leading the charge on building a customer-driven corporate culture. It’s hard not to see this as re-arranging the chairs on the deck of the Titanic because all signs point to the Principles of Disruptive Innovation (see Introduction in Christensen’s “The Innovator’s Dilemma”) winning again.
My Chrysler 300 is looking more and more like a Packard every day.
Clayton’s Crystal Ball on Chrysler
Somebody Get This Guy Some X-Ray Glasses
Thursday, June 19, 2008
Scott Olson of Ann Arbor SPARK recently recommended to me Keith McFarland’s book “The Breakthrough Company.” Using a similar research methodology as Jim Collins’ “Good to Great,” McFarland wanted to find the answers to the following questions:
- Why do most companies start small and stay that way?
- What is special about the handful of companies that successfully “break through” the entrepreneurial stage of development?
- What can a leader do to ensure that his company maximizes its chances for breakthrough?
Overall, I found the results of his research interesting and the time to read the book worthwhile (probably the biggest test of utility these days). Where I have some significant disagreements is with his chapter entitled “Building Company Character.” Being a self-professed culture guy, I was eager to hear what he had to say. Unfortunately, I think his insights don’t add up. Here’s why. This is his defining statement regarding the difference between corporate culture and character.
Some may wonder why we use the term “character” instead of “corporate culture” – it seems to us that the idea of a corporate culture brings with it too much baggage. Borrowing the term from the field of anthropology, many business observers have given the impression that culture is something largely beyond the control of individuals in an organization. Culture is viewed as something out there, to be studied and rectified by consultants. The idea of organizational character is different. Since character measures how we are as a group of individuals act, we are reminded that each of us has an individual responsibility for determining our company’s character. This point was driven home to us when, during our fieldwork, one executive told us, “There is no such thing as corporate culture, there is only how we treat each other.”
Putting aside the minor slam on consultants, here’s my beef. Just because culture is hard to get your arms around doesn’t mean it’s not relevant -- probably more so. Another thing, I don’t know who Mr. McFarland is talking with, but plenty of work has been done to measure the characteristics of corporate culture and link it to bottom-line results. For me, culture is all about behavior, specifically, patterns of behavior that are expressed in the absence of explicit expectations or that contradict explicit expectations or values. So it’s not just about how people act, it’s also about the way people behave that contradicts what the company espouses as its values or character, as well as what they say or don’t say depending on particular circumstances.
And then McFarland seems to contradict himself. Twelve pages later he is describing a case study featuring Shamrock Foods of Phoenix, Arizona:
A quick survey in early 2007 of the top thirty-five people in the firm identified one of the problems: People in the firm weren’t saying what they really thought. Perhaps owing partly to history (Shamrock is a 100-year old firm still owned by the founding family), people at Shamrock are nice, sometimes too nice. And in the interest of niceness, sometimes people avoided confrontation. It turned out the team didn’t agree as much as thought about what the firm’s key strategic imperatives should be, which caused a lack of focus.
Hello, that is culture! What was causing people not to speak up? Instead of brushing off this behavior as a family-owned business phenomenon (might be a big reason, might not be), McFarland needs some x-ray glasses to see through the actions to the underlying behavior and even further to the reasons behind these behaviors. This is the messy digging up process of an organizational anthropologist, Mr. McFarland. You might want to hang out with us for a while.
Intel’s Atom: Disruptive Innovation in Action
Tuesday, June 10, 2008
By watching for small hints of where the product might be difficult or confusing to use, the developers direct their energies toward a progressively simpler, more convenient product that provides adequate, rather than superior, functionality.
Clearly the computer manufacturers of Nettops and Netbooks, (Acer Inc. and Asustek Computer Inc.) recognize that the trajectory of focusing on the most demanding customers (computer geeks who demand more and more functionality) can distract a manufacturer from a market where adequate functionality would actually end up exceeding their expectations. As for Intel, I can only imagine the battles that ensued in its resource allocation process to justify going down-market where margins are low and markets relatively unknown. If Christensen’s research provides a crystal ball, the Atom chip will go through a series of sustaining innovations over time and eventually supplant the higher priced (and margin) chips as the chip-of-choice for established manufacturers.
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