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Surely A Large Human
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Discussion Starter #1
I've long recognized what Peggy Noonan of all people had recently cited in her WSJ op-ed piece. I had laid the blame for this trend at the feet of colleges which pump out nearsighted Gordon Gekko clones and the consumerization of investing (that means you, DP). It appears I was right, as Steve Demming notes.

Peggy Noonan On Steve Jobs And Why Big Companies Die - Forbes

We don’t usually think of Peggy Noonan as a management thinker. But she has an insightful paragraph on management in her Wall Street Journal column on Friday:

There is an arresting moment in Walter Isaacson’s biography of Steve Jobs in which Jobs speaks at length about his philosophy of business. He’s at the end of his life and is summing things up. His mission, he says, was plain: to “build an enduring company where people were motivated to make great products.” Then he turned to the rise and fall of various businesses. He has a theory about “why decline happens” at great companies: “The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.” So salesmen are put in charge, and product engineers and designers feel demoted: Their efforts are no longer at the white-hot center of the company’s daily life. They “turn off.” IBM [IBM] and Xerox [XRX], Jobs said, faltered in precisely this way. The salesmen who led the companies were smart and eloquent, but “they didn’t know anything about the product.” In the end this can doom a great company, because what consumers want is good products.​

Don’t forget the money men

This isn’t quite the whole story. It’s not just the salesmen. It’s also the accountants and the money men who search the firm high and low to find new and ingenious ways to cut costs or even eliminate paying taxes. The activities of these people further dispirit the creators, the product engineers and designers, and also crimp the firm’s ability to add value to its customers. But because the accountants appear to be adding to the firm’s short-term profitability, as a class they are also celebrated and well-rewarded, even as their activities systematically kill the firm’s future.

In this mode, the firm is basically playing defense. Because it’s easier to milk the cash cow than to add new value, the firm not only stops playing offense: it even forgets how to play offense. The firm starts to die.

If the firm is in a quasi-monopoly position, this mode of running the company can sometimes keep on making money for extended periods of time. But basically, the firm is dying, as it continues to dispirit those doing the work and to frustrate its customers.

As the managers find it steadily more difficult to make money playing solely defense, they become progressively more desperate and start doing ever more perilous things, like looting the firm’s pension fund or cutting back on worker benefits or outsourcing production to a foreign country in ways that further destroy the firm’s ability to innovate and compete.

There is another way

What’s interesting is that Steve Jobs lived long enough to show us at Apple [AAPL], in the period 1997-2011: what would happen if the firm opted to keep playing offense and focus totally on adding value for customers? The result? The firm makes tons and tons of money. In fact, much more money than the companies that are milking their cash cows and focused on making money. Other companies like Amazon [AMZN], Salesforce [CRM] and Intuit [INTU] have demonstrated the same phenomenon and shown us that it’s something that any firm can learn. It’s not rocket science. It’s called radical management.

Fifty years ago, “milking the cash cow” could go on for many decades. What’s different today is that globalization and the shift in power in the marketplace from buyer to seller is dramatically shortening the life expectancy of firms that are merely milking their cash cows. Half a century ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Now it’s less than 15 years and declining even further.

Why do managers keep on this path that is systematically killing their firm? For one reason, it’s more difficult to add value than to cut costs. For another, the executives have found ways to reward themselves lavishly. As Upton Sinclair has noted, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Administratoris Emeritus
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Quoting Steve Jobs, of all people? The guy who all but killed Apple from the get-go by stubbornly sticking to his fascist business model for years... It wasn't until he finally gave up that failed model and started using Intel processors that his vaunted business found enough oxygen to stop Jobs' asphyxiation.

1,583 Posts
Large companies like IBM became successful on innovation. IBM was the first company to build computers with compatible software: the 360 line, where software could be written to run on all models. Seems simplistic today, but back then, software had to be custom developed for each model. That is how IBM blew out the other major computer makers of the 1960's: Burroughs, CDC, NCR, etc... until then, IBM was known largely for their typewriters. IBM also pioneered the first practical computer to computer communications: CICS, to allow electronic transfer of data. That was a major change that speeded up business processes greatly.

But, very successful companies lose their hunger for new business. Managers and directors get promoted based on doing what already works, milking the monopoly, and the company ceases innovating. They don't necessarily lose quality, IBM never did, but they lose the willingness to advance beyond their success. IBM sowed the seeds for its own downfall by bringing out a personal computer and legitimizing the concept to business, then failed to capitalize on it.

Even Apple fell victim to this in the 1990's, cranking out the same old thing, or trying to foist off a half completed Newton that Jobs would have never released, and the company nearly died. When they brought Jobs back, he took the company in a radical new direction: the iPod and especially the iTunes store, followed by iPhone and iPad. That sort of major change would never have happened, were it not for Jobs being who he was, and having the prestige and power to get it pushed past the board of directors.

Microsoft has become so accustomed to playing the user base monopoly for the last 20 years, having their work accepted regardless of flaws, that they lost the ability to innovate, not that they every really had it. When Gates left, they lost the one person who could bark an order and make things happen, leaving the company to be run by a committee. MS blew out it's office competitors: Lotus, Word Perfect, by creating a better, more innovative product, and then proceeded to go into monopoly mode. As a result, they were ill equipped to take the fast moving mobile market seriously until it was too late. It's not mobile, but the lightweight operating systems and their minimal hardware requirements that threaten Microsoft, as PC sales plunge and pad sales skyrocket. And this time, they have no user base or backwards compatibility to lean on.

So I see major companies withering from a loss of hunger, passion, and singular vision, a natural byproduct of success. Ironically, it was the hunger, passion, and singular vision that led to success, and somehow most of them never realize this.
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