Chapter 4 Breaking the Rules Driving Forces First mover advantages Prophets and barbarians Outsiders required Rule Breaker's personality The dark side When Rule Breakers stumble
Typical Rule Breakers Apple Computer (in its early years) Club Med (1950s to late 1970s) Honda Mazda MCI (before the Bell System split) Minnesota Mining & Manufacturing People Express (before bankruptcy) Silicon Graphics Sony Southwest Airlines
Rule Breakers excel at: - Destabilizing entrenched competitors - Changing the basis of competition - Walking up sleeping markets - Turning adversity into advantage - Creating the industry's most innovative products
Rule Breakers organizations are: - Small and lean - Like constellations around a founder or powerful leader - Often clique like - Loose and flexible - Informal and chaotic - Weak in systems and procedures - Elastic and resilient - Tightly centralized - Exciting places to work
The Rule Breaker's Persona - Driven - Rebellious - Guerrilla fighter - Tenacious - Totally identified with its work - Inner directed - Attractive - Everybody's hero - Risk taker - Self destructive
Rule Breakers stumble when: - Others imitate their products - Their market grows so fast they loose prominence - Customers favor customization over innovation - Customers buy on price - Their vision runs its course - They try to reinvent their initial success - Attention to their internal administration takes their eye off the marketplace Rule Breakers can sustain growth by: - Staying in embryonic markets - Allowing a graceful exit for the founder - Providing generous incentives for newcomers - Choosing another growth path as its market matures
Breaking the Rules
Excerpt from Go For Growth
By Robert M. Tomasko
Every industry, every marketplace, has its accepted rules - assumptions about what customers want, when they want it, or how much they're willing to pay; Collectively they make up what are called the "industry standards."
The bigger, older and more prosperous an industry is, the more entrenched these rules of the game become.
For most businesses, the key to a strong competitive position - and the financial results that come from it - is the ability to conform to these rules, to play the game, to know what Peter Drucker calls "the theory of the business." At some point the rules even become so taken-for-granted that they disappear from conscious awareness.
That is the point when things start to become interesting. It is also when the industry is most vulnerable. When conditions change - market growth slows, competitors become deeply entrenched, customers seem less concerned with value and only look at price, the technology plateaus - the rules can always be broken. They can be walked around, abandoned, made obsolete, or just ignored.
A business that does so - and in the process of doing it conveys some special benefits on its customers - is in a great position to grow. But it takes a very unique kind of company to bring this about.
· Apple Computer, in the early 1980s, defied the conventional wisdom that computers have to be big and difficult to run. It created the pioneering Apple I and II and Macintosh computers - the first personal computing machines.
· Ford Motor Company, almost a century earlier, produced the first auto that didn't require great wealth to purchase.
· Kodak, at about the same time, put a severe crimp in the portrait painting industry with its introduction of the first consumer-friendly camera.
· Polaroid later developed a camera that eliminated the stop at the photo processor for a finished picture.
· Philips found a way to capture images electronically on a videotape - dispensing with the need for photographic film or paper at all.
· Federal Express found the shortest distance between any two points in the U.S. was to route every overnight package it delivered through Memphis, Tennessee.
· Nuccor found a way to take metal everybody else was throwing away and make it into first class steel.
Creating new expectations
driving Rule Breaking
· entrenched monopoly or ogopolist competition,
· ossified regulations,
· a just-over-the-horizon technological revolution,
· consumers that take for granted the they value receive from the existing products or services industry provides,
· company that take their customers for granted,
· blips in demographic or social trends, or
· another form of impending disaster.
Watch for imminent sea-changes
In industry after industry computers are bringing customers and suppliers together, without the need for intermediaries and the long, costly supply chains they breed. In businesses as different as health care and automobile windshield repair, consumers are being steered as well as served by information systems that guide them to "preferred providers." These suppliers pay for the privilege of doing business through the "network," and those that don't fear being cut off from their old customer base.
The quick access to information promised by computer networks will reshape forever many marketplaces. Change like this is capable of turning entire industries who are used to "pushing" products onto customers into ones regulated by the "pull" of customer demand. Some companies in these industries will adjust accordingly, others will disappear. And many opportunities will emerge for the new, rule-breaking, electronic intermediaries.
Kings of embryonic industries
Then Rule Breakers find themselves in a situation with potential as far as the eye can see. Growth may be exponential, partly because of all this potential, and partially because the Rule Breakers' sales started at zero. Few or no competitors may exist - which is good, because the real competition is the status quo. A Rule Breaker has done a good job of entering an industry when its tracks are covered carefully, making it hard for imitators to follow. The Rule Breaker's financials will be simple: assets will most likely be few, and the return on them negative. Cash will flow out much faster than it comes in.
Sales may rapidly grow, but profits are likely to be slow in appearing. Market share at this stage of an industry's development is a meaningless concept. Customers barely understand the new product, or their need for it, so purchasing patterns are completely up in the air.
of moving first
· Establishing customer loyalty - a successful Rule Breaker's product or service quickly becomes the standard against which subsequent offerings are judged. The market is their's to loose.
· Maintaining technology leadership - while competitors are struggling to learn how the Rule Breaker did it, the clever pioneer is busy perfecting the next generation of technology.
· Setting industry standards and seizing the most favorable position in the market. A revolutionary product can embett within it the standards the new industry that grows up around it will have to follow. The first player in a new market faces virgin territory. It can choose the image and position for itself that will play to its strongest advantages.
· Depending on the industry, pioneers may gain important patent protection, an opportunity to clog the channels of distribution to keep competitors away, and a crack at forcing customers to invest so heavily in a new product or service that they will be very cautious about switching suppliers.
prophet and the barbarian
Rule Breaking also requires someone with the drive to challenge the accepted order by converting that idea into a new service or product. When these two orientations are fused, a Rule Breaker is created, and the marketplace frequently is never the same again.
Author and consultant Larry Miller likes to refer to these
modes of operation as those of the prophet and the barbarian.
Prophets, he says, are more interested in ideas than results.
They may excel at vision, at creating new ways to meet customer
needs, but without the action-oriented impatience of the barbarian,
their visions tend to stay unsullied by the marketplace.
The real trick to Rule Breaking growth is keeping these orientations in rough balance while continually building momentum in the marketplace. Rule Breaking requires an organization whose employees appreciate the value each orientation provides, and a leadership with enough statesmen-like abilities to tilt toward one or the other, depending on the needs of the moment.
The power of ideas combined
· Apple's original Macintosh was a revolutionary product, innovative in both its hard- and software, but equally innovative was the highly automated facility in Fremont, California, that was invented especially to produce it.
· The original Xerox machine, the venerable Model 914, was a product that ushered an era of "copying for the masses," but it was the innovative approach Xerox took to leasing and pricing copies, not machines, that really put the product in the hands of its enthusiastic customers.
· Charles Schwab was one of the pioneers of the discount stock brokerage industry, but it was his heavy investment in customer-serving information technology that propelled the business ahead of other price-cutters.
· General Motors' Saturn and Nissan's Infinity cars both received rave reviews from their purchasers - but what brought many potential customers initially into the show rooms was the total redesign these companies did of the salesperson's role and the car buying process.
Rule Breakers that achieve mega- success are those that combine new ideas from several domains. That's often the difference between having an interesting new invention to sell and being sufficiently innovative to pioneer a new industry. Rule Breakers become innovative by building the kind of organization that allows these idea combinations to happen as naturally as possible.
Leaders who create new realities
In the early days of Federal Express Fred Smith, its founder, had little cash available for employee bonuses. Instead he gave his top performers coffee mugs with the words "Federal Express" printed on them. He promised that as the company prospered, the mugs would be replaced by stock options. It did, and they were. The awarding of these mugs - cheap, throw-away token in many companies - had incredible motivational value in Federal Express.
Because its early employees trusted Fred Smith and internalized a piece of his vision about the kind of business they were all working together to create. Smith's role in all this: behave in a trust worthy manner; articulate a clear vision able to attract and excite others ; and focus his and his employee's efforts on single mindedly achieving the vision. A simple formula - yes, but incredibly hard to pull off. There are many easier and less risky ways to make money. Skip ahead to the next chapters to read about some of them.
An all or nothing commitment
The risks and uncertainties that surround Rule Breakers could easily lead to paralyzing anxiety throughout the business. But it usually doesn't. Instead, the mood within many Rule Breakers is the kind of vigilant calm experienced by those in the eye of a storm. Successful Rule Breakers quell anxiety by absorbing it. These people are often called charismatic, though this is a different kind of charisma than that evoked by stirring speech making or an impressive physical presence.
People from many backgrounds, with many personalities, have led Rule Breakers. One thing they all have in common, though, is an incredibly strong attachment to a new way of doing business. They are not all in Silicon Valley. They can be found in some industries where they would be least expected.
takes an outsider to break the rules
No railroads have become successful airlines. No buggy whip manufacturers have transformed into auto part suppliers. Makers of mainframe computers have a hard time, at best, staying at the leading edge of the personal computer market.
Is a company whose revenues are driven by selling machines that copy documents likely to lead the charge to the paper less office?
Another observation about where Rule Breakers are likely to be found. Almost invariably they are stand-alone enterprises. The persona of those who start them seldom function well in anything but. They are seldom the products of "royal marriages": joint ventures, consortium or strategic alliances. These popular forms of corporate partnership have their place, but the compromise and accommodation central to their functioning make it hard for them to serve as vehicles to challenge the wisdom of their parents. Partnerships may be very trendy, but remember the earlier warnings about things trendy.
Lead, don't ask, the customer
Hal Sperlich is the former Ford manager who had to relocate
his career to Chrysler to
Avoid traditional market research
Rule Breakers know, at least intuitively, that polling customers has significant dangers. For one, it misses the opinions of those who don't buy from you (most every company with an impressive customer list can generate an even more impressive list: those that don't buy from it). A more serious danger is that it may easily miss detecting needs that customers don't know they have.
Edwin Land, Polaroid's founder, said his function was to sense a deep human need and then apply curiosity and knowledge of basic science to find a clever way to fulfill it. He enjoyed making only those products that other company's couldn't.
Although Rule Breakers such as Anita Roddick of Body Shop might fairly quibble with Shaw's masculine bias, the quality of unreasonableness is at the core of the Rule Breaker. They are rebellious, sometimes stereotyped as individuals that have a hard time accepting authority. If forced to chose, they would invariably prefer delinquency to conformity.
If successful Rule Breakers are delinquents at heart, at least they are socially useful ones. Their distrust and suspicions of authority figures motivates them to devise situations where they are in charge, exerting their own control and independence. Out of such behavior, new industries have been formed and countless jobs created.
Fusing the person with the business
Their identification with what they do is total. Rule Breakers resemble Ferdinand Porsche who enjoyed saying that all he did was to build his personal idea of a dream car. He refused to rely on sales forecasts or return-on-investment formulas. He was always certain he could find buyers who shared his dream.
Rule Breakers may be like a first born or an only child, strong and self-reliant. They might have lost a parent at an early age, but the remaining care giver more than compensated for the loss. Rule Breakers may have spent years serving their career-equivalent of Ghandi's or Mandela's prison time, or Moses years in the desert - but it only served to deepen their attachment to a vision, not to break their spirit.
Rule Breakers are attractive people. Others seem to need them more than they need others. Their proteges are often extremely loyal, often so much so they blind themselves to the Rule Breaker's faults.
Premonitions of failure, however, keep few Rule Breakers from trying something new. They do this because they are remarkably resilient when set-backs occur. One of their core competences is a tremendous ability to pick up the broken pieces and start again when disappointed. The conventional wisdom about risk taking is often reversed for these people. Not to take a risk is often a riskier choice than remaining safe, but uncomfortable.
Some of their failures are major public spectacles. Like John DeLorean's ill-fated attempts at becoming a rule breaking automaker, they are at times embodiments of Edna St. Vincent Millay's famous image of a candle burning at both ends, not fated to last the night, but capable of producing a spectacular light.
Behind all this pioneering excitement and committed activity lurks a dark side. Having a strong vision is great, but too much vision can be blinding.
When a business is being propelled by a sharp, narrowly focused mission, it is hard to make mid-course corrections. It's easy to create an "insanely great product" that no customer seems interested in. This is an occupational hazard of Rule Breakers, something that just has to be accepted. It's something very hard to hedge against, and still remain capable of creating a new industry. Compromise and consensus are not part of the rule Breaker's vocabulary.
It is possible to steer clear of these dangerous tendencies - especially if those working in a Rule Breaker do their homework and carefully study the histories of similar companies that have come before. Then the path is clear for what Rule Breakers excel at doing: creating change and uncertainty in a marketplace. Their greatest impact is often a permanent one (at least until another Rule Breaker comes along). At their best, they are able to change the rules of competition in a way that plays to their inherent strengths. This is essential. Most Rule Breakers are small, young and underfunded. To survive, they have to be adept at innovating their way out of resource limitations. This leads them often to being the first to profitably employ new know how.
It also leads some to innovative forms of financing. Part of Federal Express' lore includes a story about its founder, Fred Smith, meeting an early payroll through luck at Las Vegas' gambling tables. He is also reputed to have sold his much loved personal airplane to buy fuel to keep his package-carrying planes in the air. This kind of spirit is contagious. During the business's long start-up period a delivery truck driver pawned his watch to buy gasoline for his delivery truck when he discovered the corporate credit cards he was given had been canceled.
Changing reality, however, is not the same as distorting reality. Macintoshes, like other small computers, did get hot. Third-party manufacturers quickly produced awkward add-on fans. And eventually Apple faced up to the laws of thermodynamics; the fan-less Macintosh is now an object for computer museum display.
Avoid strategic myopia
Federal Express has experienced similar difficulties. Its success with an innovative hub-and-spoke system of air courier flights shaped its approach to designing a nationwide facsimile network - dubbed Zap Mail. This was an innovation that never took off. The emergence of ubiquitous low cost fax machines eliminated the need for Federal Express couriers to pick up documents and bring them to a central point for transmission. Bottom line: a multi-million dollar write-off.
Create - don't withdraw - from reality
Companies such as Polaroid, Rolls-Royce, Sun Microsystems and Wang Laboratories all followed initial profitable innovations with a stream of "ahead of their time" products. These emerged from loose organization structures, excessive decentralization and employee empowerment that was granted without reference to needs of their evolving marketplaces.
These four Rule Breakers continued to do all the right things to pioneer new markets - but they now had established customers and imitative competitors. The competitors needing watching and their customers, care and feeding. Instead, these companies retreated to their skunk works and adopted the faith of the ostrich ("all will be well if I can just get away from all these distractions.). And they all suffered serious business setbacks, with only Sun strongly rebounding.
Love your customers, not your products
Like Apple, many Rule Breakers have trouble sustaining growth. Their weak or repressed antennae miss signals from the marketplace. Their aversion to internal controls minimizes their chance of discovering they are off course until lit is too late to do anything about it.
Keep your eye on the ball
The conventional wisdom is that lack of attention to organization and administration kills off many Rule Breakers. This is seldom the case, though. Few file for bankruptcy because they forgot to file their income tax forms, or failed to have an up-to-date personnel manual. The real danger is that the up-and-coming Rule Breakers diverts so much attention and energy resisting encroaching bureaucracy, that not enough is left to develop new ideas.
Are all Rule Breakers doomed to this fate? Is self-destruction inevitable? Or is there a way to keep the vision of the prophet alive while the barbarian-part of the business matures?
Rule Breakers stumble
Companies on the Rule Breaking path to growth stand apart from other businesses. They have certain unmistakable characteristics, a unique persona. From these they derive great strength, but from these they also acquire a number of built-in weaknesses. They are the companies most likely to get to the future first, but are seldom the businesses that will reap its greatest rewards. In some situations they thrive, in others they are prone to stumbling. Sustained growth, for most Rule Breakers, requires an ability to transform themselves into something else.
Many more Rule Breakers stumble than succeed. The odds are just stacked against them. Too many things have to happen just so, and at just the right time, for a Rule Breaker to take off. It takes excellent timing to enter a market just as demand starts exploding. Constantly staying on the cutting edge can become a tiring and expensive position to maintain.
While being guided by a single, strong inner vision may seem like an admirable way to earn a living, it puts a lot of pressure on everyone to be sharing the right vision. Visions can be elusive and slippery. They can become outdated, they can be replaced. They can also succeed, but in an environment that then demands that all attention go to defending the success.
Rule Breakers face other dangers. By their nature, Rule Breakers operate in an "in your face" manner. This can become old quickly. Customers may tire of always being told what they need. Sleeping dinosaur-type-competitors may prematurely awaken, counterattack and overpower the often-weak Rule Breaker.
Not all markets are ripe for Rule Breaking
Industries that have reached the mature point can be equally inhospitable. They are often dominated by a small number of successful competitors, companies who watch each other and any potential entrant like a hawk.
The financial pressures on a company operating in late growth or early mature markets can be unbearable. These companies are expected to have either rapidly increasing earnings or sizable positive cash flow. Return on assets should peak as the unit cost of producing what ever is being made drops rapidly. Financial expectations like these do not allow much room for industry-defying experimentation and risk-taking.
The bottom line: size up the situation carefully before taking the plunge. Break the rules only if no other choice is available. Don't let the latest business fad lead you down a path where you don't belong.
Fine-tuning Hamel and Prahalad
They implore managers to gain foresight, to be equipped to debate with colleagues key industry trends for at least eight hours nonstop. This, Hamel and Prahalad feel, is the way to be in control of a corporation's destiny.
They are half right.
The necessity of choice
Not every manager is cut out to be a rebel. Not every industry is ripe for destabilization. Some orthodoxies offer, and will continue to offer, a variety of ways to grow profitably. Let's explore them next.
Hamel and Prahalad enjoy urging managers to "get to the future first." But getting there second has it rewards, too. For many companies, especially those we call Game Players, the benefits can be sweeter than those tasted by rule breaking pioneers.
© Robert M. Tomasko 2002