Oren's blog

"Are Today's Leaders Naked?" by Oren Harari. June 25, 2009

So it’s mid year 2009. Let’s do a quick reality check on the recession. Most analysts ask questions like: Have we bottomed out? Are we on the financial upswing? Is the last segment of the “U” investment model finally emerging?

These are all valid questions, but my interest today is a little different: As managers and leaders, have we learned something from this debacle? What is the likelihood that we’re going to repeat our errors?

Let’s review. On some level, we’ve learned that financial business models built on continually ramping up risk, leverage, complexity, and pay-for-short-term-results are simply not sustainable. At least I hope we’ve learned. Have we?

Have we also learned that arrogance and complacency are deadly? The hubris of the “Masters of the Universe” in the financial sector has been well documented. Back in September 2008, Fortune magazine’s Shawn Tully described the economic collapse as “… the failure of an antiquated, risky strategy that depended on macroeconomic luck and that grossly overcompensated employees for being in the right place at the right time.” That kind of environment easily breeds megalomania, and we saw plenty of that during the go-go boom years leading up to the inevitable popping of the bubble.

But arrogance and complacency can easily contaminate any industry. Last year, in a series of lectures sponsored by the Australian Broadcast Corporation, Rupert Murdoch made the following comments about the woes of the newspaper industry:

"The complacency stems from having enjoyed a monopoly--and now finding they have to compete for an audience they once took for granted….. It used to be that a handful of editors could decide what was news and what was not. They acted as sort of demigods. If they ran a story, it became news. If they ignored an event, it never happened. Today editors are losing this power. The Internet, for example, provides access to thousands of new sources that cover things an editor might ignore. And if you aren't satisfied with that, you can start up your own blog and cover and comment on the news yourself….”

So once again, have we learned our lessons? Warren Buffet once said that “it’s only when the tide goes out that you see who’s swimming naked.” Well, the financial tide has been going out for a year. Excesses are being de-leveraged. Inflated asset prices have fallen. Free-flowing credit has shrunk. Consumer demand has cooled.

On the surface, it seems that leaders are responding to the outgoing tide by wearing the robes of fiscal prudence, personal responsibility, and corporate citizenship. But is it real? Or are leaders really naked? Once the tide returns (you know, macroeconomic stability, rising demand, easy credit), will leaders go right back to the distorted values and premises that got them—and us—into this mess? See, unless governments screw up the system, I know the markets will eventually correct. But the issue of leader nakedness (metaphorically speaking, of course) is the question that worries me for the long term.

"No More Mission Statements!" by Oren Harari. June 12, 2009

Repeatedly in my career, I’ve found myself reading singularly unimpressive corporate mission statements. Most of them are overgeneralized pieces of bland prose. They hang meekly and unobtrusively on walls, influencing few, inspiring fewer. Sometimes I think there’s a factory out there stamping out commodity, “me-too” mission statements that basically say that “we will be the best provider of widgets (or widget solutions) in the world, and we will delight our customers, and we will be the best place for employees who are our most important assets, blah blah blah.”

So I was particularly pleased to hear two individuals whom I respect lay out the same message I’ve been preaching to clients for several years. At the Milken Conference in April, high-profile pollster Frank Luntz called for an end to mission statements. Mission statements will not create, nor sustain, a compelling and differentiated brand, he noted. Luntz said the key for corporate success begins with the answer to two questions: One, what are you (and your firm) passionate about? Two, what will you (and your firm) do to drive a movement?

In early June, Colin Powell addressed the International Dairy Deli Bakery Association and argued that mission statements inspire neither soldiers nor businesspeople to take the bold actions that will yield extraordinary results. “Mission” per se is important, but all too often, it becomes synonymous with an oh-so-carefully-crafted “mission statement”. Powell suggested that the word purpose replace “mission” because the former is better able to reflect something that is deeper, more compelling, and more likely to inspire passion. Ah, there’s that word again—“passion”.

Well, it just so happens that for years I’ve been independently arguing that a collective “passion for purpose” is a key driver of competitive success. Companies as diverse as Whole Foods Market (we will change the way America eats), IKEA (we will help lower- income people feel wealthy), Google (we will harness all the information of the world for everyone), ING Direct (we will help build wealth through savings), and Harley Davidson (we will help ordinary people excite their lives) have a distinct underlying purpose that their leaders and employees are genuinely passionate about. That passion for purpose is what drives these companies’ strategic priorities, operational decisions, financial investments, performance metrics, and cultures of innovation. Maybe these companies have formal mission statements too, but those statements are less important than the deeper purposes that are continually articulated and provide a collective sense of “who we are”, “what we’re trying to do together”, “how we’re trying to change conventional wisdom”, and why.

In my book Break From the Pack, I cited the above companies, among many others, to argue that an authentic purpose represents a “higher cause” that can be a first step to drive profitable growth. Here’s what I wrote:

A higher cause defines a noble and honorable purpose. A higher cause aims to leave a positive mark. It aims to change an entire market; in fact, it aims to change the world for the better. It’s about somehow bettering the lot of human beings.

(In contrast to typical mission statements which focus on the organization and its products) higher causes focus on customers: how they benefit and how their life or business will be elevated, all in a way that’s fresh, unique, and perhaps most important—uplifting and virtuous. The most powerful higher causes lead people to see how the world will be a better place, and how humanity will benefit anew.

Lest you think that I (or Luntz or Powell) are urging you to hold hands and sing “Kumbaya”--think of the opportunities that higher-cause purposes open up for inspired teamwork, turned-on customers, and intrigued investors. Think about the opportunities for unique branding, for strategies that drive a profitable difference, and for high-margin customer loyalty

As Microsoft CEO Steve Ballmer once said: “What makes morale good or bad is the sense of the future. Are we working on something important? Are we changing the world? Is that an opportunity to benefit financially? Those are the kinds of things that make a difference to people.”

Yes indeed. Instead of plunging right away into formulating strategic plans and mission statements, leaders would be well advised to first consider questions like:

• What could we do profitably that would make a world of difference to our customers—including potential and future customers?
• What mark-on-the-market can we leave that sets us apart from everyone else?
• How can we significantly improve peoples’ lives, and change the world for the better?
• What is our legacy that we will be able to point to with pride?
• How will we all commit to, execute, and monetize our answers?

Yes, it’s about purpose, movement, higher cause, passion. Let those elements form the lifeblood and soul of your organization. Begin by burning your current mission statement.

"The New ‘WWW’ is Wild West Web 2.0" by Oren Harari

Okay, we’ve reached the tipping point on this social networking/Web 2.0 stuff. There’s the feeling of aged anachronism if one doesn’t have a Facebook account. There is the accelerating volume of cover stories in business magazines. There are the umpteen presentations about it in professional conferences. There is the fact that social networks and blogs today rank as the fourth most popular Web activity—with Twitter usage up 3000% since 2008. And in my case—yours too, I’m sure--there is a growing wave of new e-mails every day from people I don’t know asking me to join them in holy digital matrimony.

As I say, the momentum is upon us. With over 200 million Facebook users, the concept is no longer theoretical. Problem is—nobody is quite sure what it all means for business. Facebook’s $10 billion market cap has little to do with its $500 million revenue, a pittance. It has to do with the expectation (hope?) that one day, somebody will figure out how to really monetize it.

So I was particularly eager to join an informal discussion last week with two experts who might offer us some clues as to where all this is heading in business. MB Deans, the CEO of Douglas Partners, a career transition consultancy, is particularly interested in the possibilities of work-related social community sites like LinkedIn and Plaxo. Sherry Prescott-Willis, a high-tech marketing consultant and author of Market This, is interested in how marketers can best capitalize on the practical synergies among multiple sites like LinkedIn, Twitter, Facebook, hi5 and such.

Our initial conversation generated the following points:

• Networking technologies like Wiki have been around since the early 1990’s, but now the technologies are so ubiquitous, diverse and user friendly that your grandma could leap in without too much difficulty. (The fastest growing demographic in Facebook is the 40’s and 50’s age brackets)..
• The economic recession has accelerated usage. Job seekers need quick, cheap, scalable access to tips, referrals, and support. Companies need quick, cheap scalable access to available talent, sources of capital, employees’ ideas and customers’ attitudes.
• In contrast to impersonal blasts of information on the Web, social media offer people the possibilities of specialized, customized, trusted conversations and information exchange. In today’s financial crisis, that sort of intimacy is particularly appealing.
• As external partnerships and outsourcing arrangements mushroom, firms are using social media to track and improve progress in ventures around the world.
• Marketers, product-development and R & D folks are using social media to track beta users’ reactions to prototype products and projects.
• Marketers and advertisers are exploring how members of virtual communities do, and potentially can, influence each others’ purchasing decisions.
• Managers in all functions are using social networking tools to turbo-charge the unfiltered flow of communication and information within organizations.

Intel CIO Diane Bryant says that Web 2.0 is now the “wild wild west of corporate life.” Now that the tipping point has been reached, I’ll take her metaphor a step further and remind you of newspaper publisher Horace Greeley’s advice to ambitious readers in 1865: “Go west, young man (author’s note: and woman),” he said. It was good advice then. It’s good advice today.

"Pay for Public Sector and Union Leaders: Just as Dirty" by Oren Harari. May 28, 2009

In my May 14 blog called “A Cure for a Dirty Word” (see www.harari.com/blog ), I wrote about a Milken Conference panel I was on that was entitled “CEO: How Will It Stop Being a Dirty Word?” I argued that if CEO’s want their brand to suggest something other than—quoting the panel promo now—“greedy, incompetent, careless, uncaring…”, the first and foremost step is to fix top executive pay. In many companies, it’s obscenely large and obscenely uncorrelated with performance—a double whammy.

But I’m an equal opportunity offender. CEO’s of public sector and nonprofits are often guilty of the same sins. So are union leaders.

Let me cite one vivid example, courtesy of Phil Matier and Andrew Ross, two well-known investigative journalists in the San Francisco Bay Area. It concerns the Bay Area Rapid Transit, or BART. BART is a heavy-rail public transit system that connects downtown San Francisco with a variety of cities in the suburbs.

Like many public sector organizations, BART is unionized, so Mattier and Ross began their May 6 column with a catchy query:

“How many BART workers does it take to fix a broken train seat?

“Two—and that’s no joke.

“One to replace the bottom of the seat, and another to replace the back.”

They weren’t kidding. And if that’s not salacious enough, how about this?

“It also takes two types of janitors, at $28 an hour apiece, to clean one of the open-air BART stations.

“One sweeps up indoors, and another works outdoors—the boundary between the two defined by the ‘drip line’ where rainwater falls from the station’s roof.”

The top dogs of the five unions representing BART employees are enjoying very comfortable executive salaries—rewards, no doubt, for negotiating such lovely terms for their members. Unsurprisingly, within the transit industry, BART workers have some of the most enviable pay and work conditions in the country.

The fact that the union bosses are contributing to extraordinary inefficiencies, to growing customer dissatisfactions (ask riders), and to a looming $250 million shortfall is irrelevant. They met their narrowly-focused, short-term objectives, and accordingly, they are emulating many of their private sector CEO counterparts quite nicely.

But let’s not just pick on the unions. While the system rots and customers get steamed, 18 BART executives (who among other things agreed to the union status quo in the first place, don’t forget) took home $3.4 million last year. This, according to Maiter and Ross, makes them “the best paid transit system bosses in the country.”

Is this a great country, or what?

There’s one final example that puts it all together for both “management” and “labor”: mutual greed, stupidity, self-aggrandizement, lousy stewardship, customer contempt, and overall incompetence. Read it and weep:

Apparently, the work rules allow train operators a 15 minute break at the end of every run. When BART finally began running a much-needed five minute shuttle between the airport and Millbrae (a community near the airport), the drivers still took a 15 minute break—after each five minute run!

Well, this was too egregious even for BART management. By George, they had to do something to earn their salaries! So pooling their vast MBA credentials and their many years of valuable transit experience, they came up with a brilliant solution: They eliminated the shuttle.

Ratchet up this myopia and dysfunctionality to the state level, from the public sector unions to the state Assembly to the Governor, and you can begin to understand why the great state of California is now on brink of bankruptcy. With this track record, are you surprised that the $116,208.00 salary afforded each California legislator is the highest in the country?

Anyway, to address the current state financial crisis, the legislators desperately got together with the Governor and together they cobbled five quick-fix, unsustainable, cover-their-butts proposals for the recent May 19 special election.

California voters summarily rejected every one of them. We ain’t as dumb as we look to the rest of the country.

But there was a sixth initiative that somehow got on the ballot, and that one was passed with an overwhelming 74% majority. That’s the one that would prevent legislators and state elected officials from receiving pay raises when the state is running a deficit.

"A Cure for a Dirty Word" by Oren Harari. May 14, 2009

A couple weeks ago I was privileged to be a member of a panel discussion at the annual Milken Institute Global Conference. The title of the panel was “CEO: How Will It Stop Being a Dirty Word?” Titillating, eh? The title certainly attracted a hefty audience, as did the first sentence of the panel description: “’CEO’ has become a dirty word these days. Top corporate executives have been vilified as greedy, incompetent, careless, uncaring….” .

My colleague panelists, including author Sir Ken Robinson, executive coach Marshall Goldsmith, and Rafael Pastor, CEO of Vistage International, are all distinguished experts. They provided valuable insights on a number of ways to address the issue, including the need to formulate new perspectives on values, ethics, corporate culture, national policies, and even capitalism itself.

My contribution was less ethereal, I’m afraid. I argued that the best way to stop “CEO” from being a dirty word is to make significant and concrete changes in CEO pay. Period.

CEO pay is highly symbolic, and its value has been corrupted in many large, publicly traded companies, and particularly in many of the high-profile influential corporate cases that regularly appear in news flashes.

The corruption takes on two forms. The first is the sheer size of the CEO’s pay package relative to that of “underlings.”

Nobody begrudges an entrepreneurial founder of a business—say, Fred Smith at FedEx, Mark Zuckerberg at Facebook or John Mackey at Whole Foods Market-- becoming filthy rich due to the appreciating value of stock he or she owns. But when “professional managers” who become agents for owners in large, mature companies negotiate complex annual pay packages for themselves that are valued at 300-400 times that of their lowest paid employee (that number is now more the average than the exception), the symbolic implication of that yawning pay gap overwhelms any philosophical discussions about teamwork, collaborative cultures, vision, values, and the like.

It is interesting that John Mackey’s annual salary is no more than 40 times that of the front-line clerk at a Whole Foods facility. It is also interesting that hedge fund manager and venture capitalist Peter Thiel says that one of the most important factors he examines before deciding whether to invest in a startup is how much the CEO’s annual salary is. His conclusion is simple: The lower the CEO salary, the higher the probability of success. Here’s what Thiel said at a recent TechCrunch50 Conference:

“The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money….But (beyond that), it goes to whether the mission of the company is to build something new or just collect paychecks.”

Why shouldn’t this standard be held for every organization-- large or small, privately held or publicly traded, for-profit or not-for-profit?

The second reason for the corruption of CEO pay is that as obscenely large as it often is, it also has little to do with merit or performance. Every year prominent business publications like BusinessWeek and Fortune feature cover stories that detail the gargantuan bonuses and recalibrated stock options given to certain CEO’s whose firms have suffered every conceivable financial and market loss—and major losses at that. It doesn’t matter whether employees have been laid off, brands have been decimated, market shares have dwindled, earnings have shriveled, and market caps have plummeted—the total compensation package of these CEO’s isn’t appreciably impacted. Sometimes it actually seems to increase. Indeed, in some cases, the payout for a CEO who has left his or her company in shambles after having finally been “let go” is greater than if he or she had stayed on.

There are high-performing companies, like FedEx and Nucor, where executive salaries grow fat during the good years (nothing wrong with that), but during lean years are slashed by a greater percentage than the pay packages of lower-level employees. I have worked with a variety of CEO’s whose pay reflects Colin Powell’s principle of good leadership: “When the troops are cold, you’re cold.” So, I suppose, there’s reason for optimism.

But ultimately, who’s going to make the necessary changes to CEO pay across the board? Well, speaking of board--A few years ago I heard Jack Welch commenting on Robert Nardelli’s inexplicably huge pay package at Home Depot—one that, by the way, royally expanded to a $210 million severance after he was ousted for alienating a perfect trifecta of investors, customers and employees. Verbally shrugging, Welch said that it is Boards of Directors that will have to change. The fault lay not with Nardelli but the Home Depot board who offered Nardelli stratospheric sums of money in the first place (as if Nardelli and his attorneys didn’t come in with steroid demands in the very beginning).

Even so, if Welch is right, then two discouraging conclusions can be inferred. One, he’s implying that CEO’s are simply out for themselves, so don’t count on them to initiate any appreciable sense of integrity or fair play when it comes to their own pay. Two, he’s implying that boards, which have been remarkably docile and sheeplike when it comes to CEO pay, will suddenly grow spines and aggressively correct the corruptions that I’ve discussed.

Frankly, I question both implications: I’ve personally seen exceptions to the first one (which means that there are individual CEO’s who do embrace responsible, high-integrity pay) and I’ve seen insufficient evidence for the second (which means that the Corporate Library's regular rogue's list of very highly compensated CEO's at very poorly performing companies has not yet shrunk).

Bottom line: if we want to clean up the dirt on the “CEO” brand, we’d best start focusing on the thing sets the foundation and the stage for everything that follows. It’s called pay.

"Do Not Do What I Do" by Oren Harari. April 28, 2009

The year is nearly half over (hard to believe!) and I just read the best statement on leadership thus far in 2009. Mark Taylor, the chairman of the religion department at Columbia University, contributed an Op-Ed piece to the New York Times on April 26. The column was about the need to radically transform the way universities are structured (as someone who has worked in several universities, I say, dream on, Mark!), but a small sentence in his last paragraph held the gem. Here’s what he said:

For many years, I have told students, “Do not do what I do; rather, take whatever I have to offer and do with it what I could never imagine doing and then come back and tell me about it.”

Lovely. That short quote is packed with wisdom and practical advice for anyone in a leadership position. If leaders took Professor Taylor’s message to heart, here is what they would say, piece by piece:

1. Do not do what I do. I may be your “boss”, but I don’t want you to do what I’ve always done, or what everyone in your job has always done, or even what I would do if I were in your position. I’ve given you some broad parameters of your job, but I want you to use your brains and initiative to figure out alternative and better means of getting the job done. If I can get everyone on my staff to do the same, we’ll have a unit marked by continuous improvement and continuous innovation.

2. Take whatever I have to offer…..This presumes that I have something to offer you other than directives. And indeed I do. I want to offer you my philosophy of the business, my perspectives of where we need to go and why. I want to engage you in honest dialog about the future, including our vision and goals. I want to be as transparent as possible, opening your access to whatever data (financial, marketing, etc.) that you need to succeed. I want to provide you with whatever tools, technology, and training you need in order to “not do what I do” (see #1 above). And throughout, I want to offer you mentoring, coaching, and whatever wisdom I’ve accumulated over the years.

3. ….and do with it what I could never imagine doing…. Now we’re getting to the heart and soul of the matter. Ultimately, I hired you to help me create additional value for this organization. Stretch the meaning of your job. I want you to use your talent, initiative, imagination and collaborative skills to help take us in new directions. I want you (and whoever else you can enlist) to figure out uncharted paths—be they in operations, marketing, administration, product development, customer care, supply chain management—that I wouldn’t have. By doing so, you’ll not only help the organization (and me!), but you’ll also help your own compensation and career mobility.

4. ....and then come back and tell me about it. When we meet for your performance review, I want you to tell me not only how well you did your job, but how much you’ve changed it. In fact, don’t even wait until performance review. Keep telling me whenever you’ve accomplished something special. Not because I want to micromanage you or play “gotcha”. But because I want to stay engaged and support you. I want to applaud your successes. I want to offer you guidance and advice during the rough patches. I want to run interference for you. I want you to trust me enough so that when I point out warnings, or if I ever disagree, you’ll appreciate my input. But believe me, I want to celebrate your progress and let others know so they can learn something new. And most of all, I want to learn new things myself.

Throw away your leadership books. All you need is Mark Taylor’s sentence.

"Getting Back to Basics?" by Oren Harari. April 16, 2009

Over the past month, during a couple post-speech Q & A sessions, I received an intriguing question from the audience. It went something like this: Now that we’re in a recession, do you believe that leaders are de-emphasizing innovation by going “back to basics”? (A variant of this question is: Do you believe that too little risk is being taken in organizations now because leaders are going back to basics? Another variant of this question is: Should leaders go back to basics?)

It’s a very interesting question. There is no one single cause to the current financial crisis, but I think it’s safe to say that one of the major contributors was the fact that business leaders in the financial sector took on reckless and irresponsible levels of risk with incredibly complex, ridiculously leveraged derivatives, securitized loans, collateralized debt obligations, credit default swaps, and such. “Innovations” assembled around these exotic financial products built a house of cards that inevitably collapsed. Reckless innovations are deadly.

With that in mind, here is the answer that I’ve been giving to those who have posed this question.

Are leaders currently de-emphasizing innovation in favor of cautious “back to basics?” Yes and no. To the extent that leaders define “back to basics” as removing any toxic, bloated, confusing or overly complex assets in their own organizations, they’re doing the right thing. To the extent that leaders get rid of peripheral distractions and refocus on a few key growth priorities, they’re doing the right thing. Companies that simplify their plans and de-clutter their organizations are positioning themselves for more speed, agility, cost-effectiveness, and strong innovation. Leaders that clean up, streamline (and whenever possible, divest) whatever structures, processes, assets, systems, departments, functions, customers, businesses and ventures that consume management time and monies with little payback are doing themselves a huge favor. They are liberating precious resources that can be funneled into the kinds of innovations that will yield sustainable success-- even in a recession.

On the other hand, if going “back to basics” means going back to the old comfortable ways—often inefficient and uninspired—and old familiar business models—often commoditized, undifferentiated, and mature—then leaders are myopically de-emphasizing healthy risk and healthy innovation. If leaders take the perspective of “let’s hunker down and protect what we now have until this storm blows by”, they will wake up in a new world with new conditions (capital constraints, frugal customers, disruptive technologies, lean-and-mean competitors) that will simply overwhelm them. Hyper-caution and risk-aversion are no solutions in an environment that demands that an organization generate unique value in order to achieve competitive success.

One last thing that I repeat ad-nauseum to clients: Innovation is not recklessness. It’s about execution, sustainability, profitability and accountability. One cannot separate short- and long-term discipline from innovation. Entrepreneurs understand this, mainly because they have no money to waste. Over the past decade, the “smartest guys in the room” who defined innovation in terms of financial sleight-of-hand didn’t understand this, and didn’t care, because their concern was making a quick buck off an easy-credit, artificially growing “bubble” economy.

If getting back to basics means creating a leaner, more transparent, more focused climate where innovation occurs relentlessly and responsibly, I’m all for it. But if getting back to basics means going back to old worn-out practices and comfort zones, then it’s merely an excuse for wistful thinking.

"Nine Reasons Why Not Much Will Change In Healthcare--and What We Can Do About It" by Oren Harari. April 9, 2009

In the April 6 issue of the Washington Post, E.J. Dionne wrote: “Yes, this is the year Congress will finally give every American access to health insurance. Getting there won't be pretty. But for the first time since the passage of Medicare in the 1960s, the forces favoring action on health care reform are stronger than the forces of cynicism and obstruction.”

I understand Dionne’s reasoning. The millions of Americans who remain uninsured are an embarrassment to this country, and even the business sector is tired of being saddled with exorbitant health care costs that seem to have no end and no ceiling.

Yet other pundits, like Jennifer Rubin, disagree with Dionne. Writing on the same April 6 date, but in Pyjamas Media, Rubin suggests that the multi-trillion dollar Obama spending spree may yield “…a gigantic increase in domestic spending and debt, but no substantial progress on the president’s two main policy initiatives, global warming and health care. It is one thing to ‘get something’ for all that spending, it is quite another to run up the debt and wind up with, well, a lot of debt. “

Who’s right? I think Rubin might be, but for nine other reasons which were recently summarized by Debbie Comerford and me last week in Colorado. More on Debbie shortly, but first, here are nine reasons why any changes in health care in the near future are more likely be marginal than paradigm busting:

1. The political power of trial lawyers. Simple fact of life: the fear of litigation not only runs up malpractice insurance dramatically, but also causes doctors to be overly risk-averse while defensively running every conceivable test to cover their backsides from potential lawsuits. Yes, bad clinicians and terrible decisions should be prosecuted. But the failure to institute meaningful tort reform has a sizable impact on costs, MD retention, and clinical innovation.

2. The moral power of the first and last year of life. Check it out: Around 50% of health care dollars are funneled into severely afflicted youngsters in their first year and dying (often terminal) adults in their last year. Believe me, I’m not heartless: I’m not about to tell any parent that their baby doesn’t deserve million-dollar care for a 10% chance of survival. Nor am I about to tell grieving adults that their terminally ill mother doesn’t need million dollar care for the last three months of her life. This is a moral issue, and I’d feel the same pain that anyone else would. But as long as our moral perceptions remain the way they are, it'll be tough to make significant dents in health care costs.

3. The second class citizenship of preventative health. Here’s a little 2-question quiz. What’s significantly more cost- and health-effective? Question 1: Quarantining and screening out immigrants with contagious diseases like tuberculosis, or Letting many of them in under the guise of political compassion and treating the inevitable consequences afterwards? Question 2: Insisting that our kids and spouses—and we ourselves-- exercise daily and eat right always (no sugars, transfats, gluttony, etc.), or Seeking medications and surgeries for the inevitable complications afterwards? Enough said. Public health and personal responsibility often get trumped by post-hoc magic bullet medical treatment fantasies. The national costs are enormous. Follow the money.

4. The use of U.S. as a cash-motherlode market for drug companies. Why do drugs cost more in the U.S. than abroad? The reason is that Americans will pay more, thus subsidizing drug companies’ research and development costs and generating the bulk of their earnings. Somebody’s gotta pay for this stuff. Pharmaceutical companies charge more for their products in the U.S. , everyone knows it, and the entire American health care infrastructure, including government payers like Medicare, plays along. Until American payers and users exercise common-sense group purchasing muscle, the cost structure of health care will remain inflated.

5. The power of paper. Digitalizing management processes in hospitals will radically reduce health care costs. I mean radically. In most organizations, digitalizing the flow and resolution of a paper invoice or purchase order can reduce the internal costs of these processes by more than 50%. A Rand research study indicated that digitalizing medical records alone in the U.S. will reduce health care costs by $140 billion annually. Several studies indicate that digitalizing drug prescriptions will have a major impact on reducing costs, rework, and errors. But liquidating the paper pipelines and their supportive management infrastructure in health care organizations will take genuine leadership. Bold leadership. Courageous leadership. Long-view leadership. Until we see a lot of that leadership, the bloat of paper will rule.

6. The power of pass-offs. Among clinicians, pass-offs mean that one doctor doesn’t know (and sometimes doesn’t care) what other doctors know, have done, or have prescribed for a particular patient. The adverse aggregate cost and health consequences of this episodic, non-wholistic medical care is significant. In administration, pass-offs mean turfism and its resultant frictions and bureaucracy. Check out the empirical literature. Organizations with transparent, interdisciplinary management structures outperform their opaque, turfist counterparts by double digit percentages. Once again, until we see a lot of leadership among managers and clinicians, the bloat of pass-offs will rule.

7. The absurdity of many reimbursements. Those of you who are not in health care may not understand this, but as many health care managers will attest, boosting health and reducing costs will, under certain circumstances, actually generate less income because the way third party (insurance, government) reimbursement is set up. This is too big a task to explain in one little blog, but figure it this way: If patients get better more quickly with less care, and stay healthier longer, then hospitals and doctors charge less and receive less reimbursement. Blame loony laws and loonier legacies - like the classic "fee for service" revenue model. When external incentives are changed to consistently reward innovations in cost reduction and health quality, you’ll see a lot more of them.

8. The opaqueness of prices. I’ve spoken to and consulted with many health care groups, and I never cease to be amazed that unlike other industries, health care doesn’t seem to operate under normal rules of microeconomics. For example, in other markets, customers tend to know the prices of goods and services, and make purchasing decisions among competing vendors accordingly—based on price and other visible factors. Not in health care. Other than their minimal co-pays and deductibles, patients usually don’t know (and often don’t care) what things cost, and sometimes, doctors don’t either. (That’s why green visor payer intermediaries like insurers, who necessarily impose some level of hard nosed fiscal discipline into this weird system, are reviled by doctors and patients). Without price transparency, don’t anticipate the kinds of efficiencies and rational decision making that would lead to meaningful changes.

9. The power of entitlement. Can you imagine going to a Ritz Carlton hotel and saying “I’d like a deluxe suite and your top-of-the-line room service. I can’t pay for any of it, but since I’m an American, I deserve it.” The customer-friendly Ritz will throw your friendly customer butt out the door. Health care providers don’t have that option. Health care is considered a “right”. You want knee surgery? You want daily AIDS cocktails for the rest of your life? You want to give birth to a baby? You want your gunshot wound fixed? You want a new heart? But you can’t pay for most of the care, or any of it? No problem. You deserve the best care right away, costs and price be damned. Sorry to be so blunt, but that’s the way we Americans often feel, and many politicians find it expedient to fan those flames. I'm not arguing that it's wrong to see health care as a right. But let’s admit that as long as we do, and as long as our population grows and ages, we’re in for an uphill battle on costs, and an even more uphill battle on meaningful change.

These are nine reasons why despite all the sound and fury emanating from politicians and pundits, in reality we’re likely to see only marginal reform of health care in the foreseeable future—which means only marginal improvements in costs, quality and coverage. I remain an optimist for the long haul, however. Hopefully, the above nine barriers to change will eventually be overcome by authentic leaders in government and the provider base. That’s my mission, anyway, whenever I work with leaders in the health care environment.

One last thing. I told you that Debbie Comerford and I generated these nine issues, and you may wonder who Debbie Comerford is. Well, let me tell you.

She’s a chauffer with CME Premier car services, a limo company which transports travelers to and from Denver International and surrounding ski resorts. I was on my way to address a corporate audience at the Keystone resort, and Debbie was assigned to be my driver. My lucky break. Debbie is smart, well-read, and has had the benefit of transporting—and conversing with-- guests far more prominent than me. I’m talking Novel laureates, elite corporate chieftains, and high-profile government figures.

Well, Debbie and I got stuck in mountain traffic during a surprise spring snowstorm and over the span of three hours, we probed the complexities of health care. At the end, our conclusion jibed with Pyjama Media’s Jennifer Rubin, who opined:

“Democrats and media pundits are now hinting that….health care reform may simply amount to some ‘incremental’ changes but not the far-flung redesign once envisioned by the victorious Democrats.”

"Four Questions for Entrepreneurs" by Oren Harari. March 31, 2009

I had dinner last week with a serial entrepreneur—you know, the kind of restless, creative individual who lives to start businesses, has less interest in “managing” them, and typically moves on after bringing a new venture to speed. These are the people who drive our economy and carve avenues for real wealth creation, so I’m always interested in talking to them.

He told me about his latest vision for a new start-up and asked for my comments. He also asked me to be part of it. Well, I serve on a couple boards of startups and the demands on one’s time can be significant, so I usually turn down these kinds of requests. The reason is, as I told him, is because when all is said and done, visions and great ideas usually don’t translate into viable businesses. In evaluating the prognosis for any start-up, I ask if it meets four criteria. By the way, these criteria are good ones for any new venture in an already-existing firm, but they’re essential for startups:

1. Is the technology or business model really new? Is it disruptive? Is it a qualitative breakthrough from current practices and conventional wisdom? If it’s just an incremental improvement to the status quo, existing players will quickly imitate it, build it to scale, and market the hell out of it. A successful entrepreneurial venture has got to be really different, really forward-looking in a fresh compelling way, and it’s got to appeal to—even better, excite—customers and investors in a way they’re not excited currently. Bottom line: Is there a “wow!” factor?

2. How and when will this idea make money? I mean profit and cash flow as well as sales and market share. The days of racking in big venture capitalist or angel dollars based on non-financial factors like “eyeballs”, “stickiness”, “coolness” and such are long gone. Potential investors will ask questions like: Have you done a thorough due diligence? Have you vetted everyone and everything of importance? Is there really a market of real paying customers for this idea? Is it a growth market? Where will sales come from? Who will buy? Why would they buy? At what price? What’s the cost to make all this happen? What sorts of financials can be expected in what sort of timeframe? Is there an exit strategy or longer-term growth strategy that will yield a defensible return for investors, and what might that return (roughly) be? Unless one can actually monetize a great idea, the idea is simply a concept that sounds very cool over drinks at your local bar.

3. Assuming that uniqueness, specialness and the “wow!” factors exist, are they sustainable? Likewise, is the monetization of the idea sustainable? Obviously, having patents and proprietary intellectual property is very helpful. But even so, the main strategic question is: Once we launch, what do we have in place—like processes for next-generation product; talent and systems for new initiatives in product features and market penetration; or cutting-edge partnerships for collaboration of people and resources (etc.)—that will steer us clear of others’ duplication efforts, accelerate our forward momentum, and keep us ahead of the pack? One doesn’t need to get bogged down in too many of these details at the outset, but the outright failure to prepare for them has sunk many a startup that had one (and only one) great hurrah.

4. Is there a management team and organizational structure that can be counted on to perform with excellence and make #1, 2, and 3 really happen? This is a major concern of potential investors, and it ought to be. At the end of the day, they want to know who will be running the show and why would anyone feel a sense of confidence and inspiration knowing that. What is the execution plan, and what (and who) is the management structure to insure excellence in execution? Lots of questions will emerge: How will this company get product to market? How will it deliver services? How will it build sales? How will it build a "gotta-have-it" brand? How will it maintain rigorous financial oversight? And how will the company do all this with limited capital, budgets and manpower? Potential investors will be especially interested in questions about operational efficiencies, cost structures, supply chains, sales and distribution channels, and financial oversight. Unless the founders have some reasonable answers to these questions, they are unlikely to get funding, and for the good reason that without reasonable answers to these questions, they’re unlikely to succeed.

So these are the four questions that drive successful entrepreneurs—and, for that matter, successful “intrepreneurs” who work in established companies. They understand that innovation is not simply a neat idea, nor is it an excuse for recklessness. The guy who invited me to dinner understands that, which is one reason I’ll probably throw my hat in with him—as will many others, I’m sure.

"Here's One Way Amazon Kicks British Telecom’s Butt" by Oren Harari. March 21, 2009

Those of you who read my Spanish Armada blog last week (see www.harari.com/blog) know of my recent visit to England . Well, I suppose it’s small comfort to know that British banks are even more screwed up than ours: they bought up 40% of U.S. banks’ toxic instruments, they ramped up leverage even more than U.S. banks did, and they made absurdly large (and now mostly value-less) loans to emerging economies.

Another similarity: Apparently, British consumers suffer from “phone hell” as much as we do, especially when trying to get help from vendors in resolving a faulty product or service.

Case in point--Columnist Matthew Parris writing in the February 26 London Times about his experience with the phone company:

“….You will read no details here of my tedious struggle with British Telecom’s pesky ‘fault line’ service. But….aargh! The horror! The endless calls, the waits—if I hear Mendelssohn’s Fingal’s Cave overture one more time I shall scream—the automated multiple choices offered by faux-cheery recorded voices, the lies, the excuses…a nightmare in which my one slender thread to reality is a patient, intelligent lady in an Indian call centre: helpless witness from a distance of several thousand miles to a hopelessly dysfunctional corporate machine. I have wanted to fall on her neck, weeping. And the automated voice messages (‘Your fault has been rectified)—lies! And now the automated text messages (‘an engineer is attending on site’)—no, NO, he isn’t!”

Sound familiar? This is what happens (right here in the good ol' USA too) when green-visor i.t. and efficiency experts capitalize on knee-jerk short-term financial concerns of executives in order develop a system that saves the company a few immediate dollars while alienating masses of once-loyal-but-no-longer customers.

Contrast this mindset with the practices at Amazon, which has invested resources, manpower, and executive attention on using technology in order to create a faster, easier, and more hassle-free experience for complaining customers. What a radical idea.

Have you ever logged a complaint or concern online with Amazon? Try it. You may think—why bother? Millions of people are perusing site at any moment; how will my measly little problem register on that scale?

Well, as I say, try it. You’ll be astonished at how quickly you get a personalized (no canned template) digital reply. Within hours, at most. And frequently, the response will initiate a digital dialog that will wind up making you feel a weird glow, as in: Oh, you didn’t receive that iPod in a timely way? So sorry (even though it wasn’t even us that was responsible; it was a second party using our platform). We’ll see that you get the iPod immediately and we’ll throw in a free carrying case. Or: Oh, you finally received that book after numerous complaints to the small book vendor that advertised on our site? So sorry; please fill out the attached feedback form and we'll reimburse you the price of the book. (Implicit: We’ll deal with that vendor too, don’t you worry).

You need even faster response time? Okay, do this: Follow the “contact us” links till you get to the “phone us” option. And when you see the “We’ll call you. Now. Really.” button, press it. You’ll be blown away by the speed (literally seconds) with which a real human being connects with you. I tried it again right before I finished this blog, just to make sure that the system still works. It does. Yes, the pleasant young man who answered was from New Delhi, but I had no problems communicating with him. And he was fully prepared to handle my problem, which of course I didn’t have—other than to ask him how the whole system worked, which of course he didn’t know, other than to tell me it’s “very much automated”.

What truly astonishes me is how Amazon can actually deliver this extraordinary service when literally millions of customers roam the site 24/7. It just goes to show: the technology is available to make customer’s lives easier at the same time it makes organizational process efficiencies better. All that’s necessary is management commitment. When it comes to dealing with customer concerns, Amazon gets it. British Telecom, and the majority of larger companies today, don’t.

"Leadership Lessons from the Spanish Armada" by Oren Harari. March 12, 2009

I spent last week in London with a client. During my free time, I took a wonderful tour of the Globe Theatre where Shakespeare produced a number of his plays. I was so taken by the experience that I purchased Bill Bryson’s little book Shakespeare, which chronicles the Bard’s life and times with Bryson’s typical wry wit. I’d like to share one little segment of his book, because I believe that it has valuable implications for business leaders today.

The great invasion of England by the massive Spanish Armada occurred during Shakespeare’s lifetime. In 1587, Queen Elizabeth I executed Mary, Queen of Scots for allegedly plotting to overthrow her. Elizabeth was Protestant, Mary was Catholic, Spain was Catholic. Accordingly, Spain dispatched its mighty 150 ship navy to invade England, overthrow Elizabeth and bring the country under the Catholic rule of Spain.
Here is what Bryson writes:

“….The Spanish Armada looked invincible. In battle formation it spread over seven miles of sea and carried ferocious firepower: 123,000 cannonballs and nearly three thousand cannons, plus every manner of musket and small arms, divided between thirty thousand men. The Spanish confidently expected the swiftest of triumphs….”

MY COMMENT: So many leaders of companies with enormous size, mammoth payrolls, and giant balance sheets confidently assume that their scale, scope, marketing reach, and purchasing muscle will guarantee competitive success. But in today’s environment, it’s the lean, cost-efficient, knowledge-based, high-talent, agile, fast, and imaginative organizations that are more likely to win. They may be smaller in terms of tangible factors like sheer size, but they are huge in the intangibles listed above. Years ago, conventional wisdom would have confidently asserted that Blockbuster, Albertsons, Pfizer, Motorola, Citigroup, General Motors and Microsoft would have crushed pipsqueaks like Netflix, Whole Foods, Genentech, Nokia, Public Financial Management, Toyota, and Google, respectively. Not only didn’t that happen, but in fact the pipsqueaks—who were loaded with those intangibles—were the ones who enjoyed steady competitive success and booming profitable growth. Ironically, these latter companies now enjoy the benefits of tangible size (scale, scope, reach, etc.) while still focusing on the intangibles which brought them success in the first place. .

See if you note parallels with the English navy. Bryson continues:

“Things didn’t go to plan, to put it mildly. England’s ships were nimbler and sat lower in the water, making them awkward targets (for the Spaniards). They could dart about doing damage here and there while the Spanish guns, standing on high decks, mostly fired above them. The English ships were better commanded, too…It is only fair to note that most of the Spanish fleet were not battleships but overloaded troop carriers, making plump and lumbering targets.

MY COMMENT: How often have we seen large, entrenched, risk-averse, highly bureaucratic organizations give way to small, hungry, fast-moving competitors full of talented, passionate "commanders" who can attack the marketplace with radically different business models while quickly capitalizing on fleeting opportunities? Indeed, the most successful large companies today now “get” the fact that their continued success will be in no small part due to their ability to act like small companies. When they headed Microsoft and GE, both Bill Gates and Jack Welch stated that one of their top priorities was to maintain a small-company feel and soul within their companies’ ever-growing bodies. Small wonder that a McKinsey study determined that 80% of the real market value of the S & P 500 companies can be attributed to intangible factors like speed, agility, innovation, and such. Investors know that those factors are much better predictor of future earnings and cash flow than is size per se.

Bryson again:

“The English also enjoyed a crucial territorial edge: they could exploit their intimate knowledge of local tides and currents, and could dart back to the warm comfort of home ports for refreshment and repairs. Above all, they had a decisive technological advantage: cast-iron cannons, an English invention that other nations had not yet perfected, which fired straighter and were vastly sturdier than the Spanish bronze guns, which were poorly bored and inaccurate and had to be allowed to cool after every two or three rounds. Crews that failed to heed this—and in the heat of battle it was easy to lose track—often blew themselves up. In any case the Spanish barely trained their gun crews. Their strategy was to come alongside and board enemy ships, capturing them in hand-to-hand combat.”

MY COMMENT: Okay, here’s a simple quiz. As an investor, which firm would you bet on for the long run, all other things being equal. Competitor A, who boasts massive size and long-held market presence—or newer, smaller Competitor B, who boasts an intimate knowledge of the unique features of that particular market, comes to battle with the most advanced new technologies, and can point to exceptionally well-trained, committed employees? Sorry, this one should be a no-brainer.

Bryson then describes the rout of the Armada in more detail, concluding with:

“It took the English just three weeks to pick the opponent’s navy to pieces. In a single day the Spanish suffered eight thousand casualties….By the time the remnants of the Armada limped home, it had lost seventeen thousand men out of the thirty thousand who had set off. England lost no ships at all.”

MY COMMENT: For the same reasons that the Spanish Armada limped home, more than 50% of the 1980 Fortune 500 companies no longer even exist. And for enormous companies who still do exist, they might want to look at hemorrhaging institutions like Citigroup and GM today. Their casualties, while nowhere near as bloody as those in 1587, are still noteworthy. Philosopher George Santayana once remarked that those who forget history are doomed to repeat it. Maybe the sea battle between England and Spain should be required reading in management development courses.

"Does It Matter?" by Oren Harari. March 2, 2009

What does one say to a manager who insists: “You know, we tried all that innovation stuff, but our customers said that all they wanted was a lower price.”

Well, here’s what I said to said manager:

You can’t separate innovation from the customer, because the customer defines whether your innovation is creating value. If your products and services take the customer to a superb experience that he didn’t think was even possible, or if your products and services cause her to say “My life (or business) is better as a result of dealing with that vendor”, then the customer sees price-value in your innovations. That generates loyalty, partnership, and lowered sensitivity to pricing—nice correlates to solid financials. Ask vendors as diverse as Apple, Quest Diagnostics (lab tests for hospitals), and Anchor Wall Systems (retaining walls).

If that’s not the case—if despite all your attempts at innovation, customers perceive your offering as, more or less, a “me-too” product that’s of conventionally “good” quality, wrapped in conventionally “good” service and “good” turnaround time, all of which are taken for granted—then the result is predictable. Mike Robertson, President of the Specialty Graphics Industry Association, has seen it happen in the printing business, which is why he says “a slight difference in price is often the deciding factor between bidding companies.” Sam Palmisano, CEO of IBM, is blunter: “If you do what everyone else does (my note: as perceived by the customer), you have a low margin business.”

So what does all this mean? Your innovations have to matter to the customer. If they don’t, then what you do simply doesn’t matter. In other words, it doesn’t matter if your engineers and marketers and executives are wild about something that doesn’t matter to customers. If that’s the case, customers will go with price or they’ll gravitate elsewhere--especially in today’s economy. And you’ll wind up saying—“Well, we tried that innovation stuff, but all they want is price.”

A few years ago, Nokia's market share started to fray even as mobile phone use exploded. Executives finally got a handle on the problem. Nokia engineers were loading the products with a regular infusion of myriad features and functions that customers didn't use, found irrelevant, or saw as a hassle to operate. What excited customers was design--colors, clamshell styles, easy usage, the fits and feelings, the "coolness" factor. Without the design factor, even a lower price didn't matter. Customers moved to other vendors--until Nokia began to apply innovation in a way that actually mattered to the people who actually used the product.

Wrapping "me-too" and “so-what?” products and services with glowing marketing gauze won’t do the trick either. As Thomas Lifton notes in his January 26th piece in the American Thinker, when the New York Times dressed up some new digital services and related acquisitions with extravagant promises of “innovative products and services across media platforms”, customers didn’t find those initiatives compelling in practice, and hence, as Lifton observes, those “sweet words have proven to be blather.”

(One caveat: Some customers are strictly lowest-price scavengers, in any economy. For them, lowest price equals value, and there’s nothing you can do to change that. You need to decide if you want to keep such customers. Some companies—like Wal-Mart, Southwest Airlines, Dell, and such—do seek such customers. Their low-cost, low-price business models “fit” those customers’ aspirations. But for the majority of companies, lowest-cost-at-all-cost customers often yield a lousy return on investment, and I’ve urged some of my clients to fire them.).

Price is always an important factor in a customer’s buying decision, but if customers don’t see value in your innovations, then price becomes “the” issue. “Innovation” has little impact if customers aren’t as excited as you and your team are. Many companies (think Microsoft, for example) boast of numerous patents and product launches, but none of them is really a “gotta-have” hit with customers. The “does it matter?” quotient is low. (Contrast with Apple products!)

In the good old days before the financial sector imploded, a Morgan Stanley executive wrote me that high wealth individuals should (my emphasis) entrust his company with their portfolios because “the company spends over a billion dollars a year on equity, strategy, and economic research.” My response: well and good, but do customers believe that the billion dollar research is of unique, relevant and significant value to them? Does it truly matter to them? If yes, they will come. If not, it’s just whistling in the dark. There are no “shoulds” in the world of customers.

The good news: Most customers are receptive to genuine innovations in value in either products or services--even in today's economy (I just read that Amazon's first and second generation Kindle is still flying off the shelf at inflated prices). If your innovations truly matter to your customers, the love, buzz, margins and growth that you’ll get in return will truly matter to you.

"Good Clean Business" by Oren Harari. February 17, 2009

I like what Procter & Gamble is doing with Mr. Clean. It’s a good lesson on how to build a brand and grow sustained revenues sensibly. Mr. Clean, as you know, is a collection of cleaning products for homes and cars. And now, it’ll be a collection of car washes.

Car washes?! P & G makes consumer products. What does P & G know about car wash facilities? Or any services, for that matter?

Well, not much. But P & G, like most companies today, is under a lot of pressure to boost revenues in a down economy where consumers are carefully watching their expenditures. In that context, the Mr. Clean car wash story offers us several important lessons:

1. First and foremost, P & G is entering an un-crowded growth business. That’s smart. Why enter a market that’s saturated or mature? Believe it or not, the car wash business is a growth business—and, surprisingly, untapped on a mass basis. There’s no dominant national chain, time-strapped car owners are not interested in spending weekends with sponges and buckets, and in particular, 70 million aging baby boomers are less likely to wash their own cars than their parents did. Punch line: This is an aggregate $35 billion annual business right now, composed primarily of small companies and independent operators. Imagine what it could be with a little help from the P & G marketing machine.

2. The car wash business is familiar territory. While P & G didn’t know much about the car wash service business, it certainly knew a lot about cleaning cars. The Mr. Clean product line include car cleaners, and if you know anything about P & G, it never launches a product line without doing thorough due diligence on any new market. I bring this up to emphasize the fact that P & G didn’t jump into entirely alien ground like waste disposal or banking (with ads promising to “clean” up the environment and the financial system). On the contrary, the move into car washes is a natural, even synergistic extension of the Mr. Clean brand.

3. P & G started small. No enormous splashy acquisitions. No enormous outlay of capital. Rather, several prudent “beta” moves to test the waters. P & G owns two car washes near its Cincinnati headquarters, and recently purchased the regional Carnett’s Car Wash, which owns 14 locations in the Atlanta area. These locations bring in some revenues, but their real value is R & D and market experimentation right in the field.

4. There’s a genuine corporate commitment to this venture. There’s no “dabbling” going on. It may be small a la #3 above, but it’s not a fringe movement. Just because the company isn’t plunging recklessly into this market doesn’t mean it’s not serious about it. In fact, corporate resources and senior management attention are visibly focused on building this business.

5. It’ll be a franchise business. I’m not suggesting that franchising is a good option for everyone. But since car washes are basically small businesses, franchising is a sensible way for P & G to reduce costs, spread risk, localize services, and capture entrepreneurial external partners who want to run their own businesses.

6. The company is being built on talent: Get the best-fit people inside P & G to run this show, and go outside for more talent whenever necessary. In fact, the business will be led by outsiders, in this case Carnett co-founders Bruce Arnett and his son Bruce Jr., and Jim Amos, the past president of the International Franchise Association.

7. Enter the battlefield with the understanding that there are no guarantees. This is a basic credo at P & G under CEO A.G. Laffly: Try, experiment, and realize that it may not work, but the more swings you take, the more likely you are to get on base. In fact, P & G has already “failed” at service ventures like food retailing and laundry. So what? There are other ventures in the pipeline (like car washes), and a culture of innovation assumes there will be setbacks—as long as people learn from them.

8. Think big when it comes to goals. Dominating a multibillion dollar industry is a pretty substantial goal, and it sure helps drives managers’ attention, as well as their motivation to succeed.

Now that I think of it, it’s worth comparing what P & G is doing regarding innovation and growth with what Pfizer is doing (see my February 4, 2009 blog at www.harari.com/blog). Big difference. I’ll put my money on P & G.

"Can Innovation be Bought?" by Oren Harari. February 4, 2009

The giant pharmaceutical Pfizer, economically distressed (revenues down 4%, net income down 90% in 4th Q 2008), just bought Wyeth for a stupendous $68 billion dollars. Why? Primarily to gain access to Wyeth’s product line and revenues, especially since Pfizer’s blockbuster drug Lipitor will lose patent protection in 2011. And, oh yes, Pfizer plans to squeeze out $4 billion and 20,000 jobs in order to capitalize on “synergies” between the two firms.

Investors were not impressed. Neither was I. The already-struggling stock got hammered right away. And I think the reason is because investors know—intuitively if not explicitly—that a large, risk-averse, debt-ridden, ultra-bureaucratic, and sclerotic company (like, say, Pfizer) can’t simply buy innovation to replenish a steadily drying product pipeline. More “largeness” will not automatically lead to the steady innovation and entrepreneurship that will produce great new products tomorrow. On the contrary, largeness often smothers innovation and entrepreneurship under thick blankets of management layers, ballooning corporate staff, and pervasive analysis paralysis. There is no evidence of “economies of scale” in research and development because R & D is not about machine-like routine. Small wonder that small, underfunded firms in any industry so often get to market with groundbreaking products faster than their behemoth competitors do. Small wonder that an Accenture study shows that 90% of mega-mergers in the pharmaceutical space wind up having no positive effect or actually destroying shareholder value. Mega-mergers have consolidated product lines and by definition boosted revenues, but they have also bloated the companies’ costs, increased their complexities, frequently drained their earnings, and as I noted, often stifled the kinds of entrepreneurial activities that foster strong product pipelines.

Large companies can be innovative, but only when their structures and cultures literally “smell” of innovation: lean, flat, project-based, open, interdisciplinary, collaborative, transparent, informal, collegial, fast, agile, oriented around continuous learning and constant experimentation, audacious in spirit and goals, urgent and optimistic in tone, disciplined in execution and individual accountability, and downright exciting to the talent who seek nothing less than transformative results. (Do these traits describe your company’s culture?) As a matter of fact, these characteristics describe successful, profitable multi billion dollar pharmaceuticals like Genentech and Amgen more than they do the colossal empires like Pfizer and Glaxco.

Even before the Wyeth acquisition, Pfizer was a fusion of mergers, including the mega-acquisitions of American Home products and Pharmacia. In contrast, Genentech has grown its size and profits not via megamerger, but mainly organically with periodic help from relatively small and judicious acquisitions.

Wouldn’t it have been interesting if Pfizer CEO Jeffrey Kindler had embarked on a different strategy, like shrinking the company to prepare for a post-Lipitor revenue drop, and investing heavily in top talent, collaborative technology, entrepreneurial culture, and inspired leaders?

My point is this: As an executive, you can buy a lot of good things, like products, revenues, market share, real estate, and even cash hoards. But it’s pretty darn hard to buy innovation. Innovation has to be wooed, fostered, cultivated, nourished, loved, unleashed. With the acquisition of Wyeth, Pfizer got a lot bigger balance sheet. But did it get the innovation that would in any way justify a $68 billion price tag?

"The Fantasy Behind Citigroup and Bank of America" by Oren Harari. January 23, 2009

I’ve said it before, and I’ll say it again. If there’s one phrase I would eliminate from corporate strategy sessions, it’s “one-stop shopping”—the notion that any one firm can offer pretty much any product to any customer within a given industry. This idea that all activities for customers can be profitably subsumed under one roof is diabolical. It makes otherwise sensible executives salivate with infantile glee and pursue the most brain-challenged acquisitions and capital investments. Their eyes glaze as they visualize global waves of customers spending gobs of money and never even considering the prospect of leaving for another competitor because the company magically provides them with an all-inclusive, everything-they-need, A-to-Z menu of products and services.

Of course, this is a destructive fantasy. For one thing, customers don’t comply with it. As Phil Condit said when he headed Boeing a few years ago: “We don’t buy engines, auxiliary power units, and avionics on one purchase order, and we don’t expect to in the future.” One of my clients told me: “Just because I keep a couple checking accounts with Bank X, why would Bank X assume that I’ll let them finance my home and manage my retirement portfolio?”

Why indeed? Because another limitation of the “one stop shopping” fallacy is that the more a firm tries to offer everything to everyone, the less likely it is to lead or innovatively set the agenda in anything it offers. Too much on the plate. Too many distractions. Inevitably, what emerges is an ever-increasing menu of “me-too” products and services, often funded by serial acquisitions that create chronic integration problems, cost crunches and debt worries. The notion that sheer corporate size and endless diversity of products will guarantee perpetual corporate success is simply, empirically false.

That’s why I wasn’t too surprised that Citigroup is (finally!) dismantling its version of “one-stop shopping”, a.k.a. the mythical “financial supermarket”. When the dust settles we’ll have a Citicorp (traditional banking) and Citi Holdings (riskier and toxic assets, brokerage). I predict that this is just a first step, and that further restructurings, divestments, spin-offs, dislocations and general management chaos will follow. Maybe it took an $8.29 billion quarterly loss, the fifth straight quarterly deficit, to convince CEO Vikram Pandit that “financial supermarket” was a fantasy. Maybe it took a further 30% slice in the market cap in a one week period to do it. Maybe it took a drop of 90% of shareholder value over the last year to do it.

Or maybe Pandit still doesn’t get it. In a recent statement, he said “Our results continued to be depressed by an unprecedented dislocation in capital markets and a weak economy,”

Yeah, Vikram, but that’s not the real cause. The real cause is a flawed “financial supermarket” business model that spawned an organization that became so enormous, so complex, so debt-ridden and so costly that executives did whatever it took to “feed the beast”. Crazy-risk loans? No problem. Opaque, ridiculously leveraged subprime mortgage-backed securities? No problem. As long as the money rolls in and stock price goes up, however short-term, who cares if it’s actually a house of cards? Besides, Citi’s too big to fail. You’ve heard that one, right? Actually, Citi was too big to succeed. (And ironically, Citi’s failed adventures helped create the weak economy and capital markets that Pandit complained about).

Now here’s the insane punch line. Bank of America is apparently going down the same “financial supermarket” road to ruin. The recent acquisitions of Merrill and Countrywide are just part of CEO Ken Lewis’s explicit vision that includes everything: retail banking, investment banking, mortgages and real estate, credit cards, insurance, etc. etc.—you want it, they got it, and at mammoth scale.

And here we go again: a recent $20 billion loss in market cap in less than a week, a $2.4 billion loss in the last quarter of 2008, a 48% loss in shareholder value over the past 12 months, and an investment community that’s increasingly skeptical about a discredited one-stop-shopping business model. A recent post in www.msn.com describing Bank of America’s woes was aptly titled “Meltdown 101: The Fate of ‘Financial Supermarkets’”.

Both Citi and B of A are both desperately seeking more federal funding. Surprise, surprise.

There’s only two sure things. One, Pandit and Lewis will both retire with gazillions. Two, we taxpayers—having already partially nationalized both firms with federal bailout—will own the mess that Pandit and Lewis left behind.