On Being a Boiled Frog: the Strategic Outlook for US Industries
You've probably all heard the metaphor about boiling frogs - how do you boil a frog ? Slowly - it'll just sit there and not notice that the water temperature is rising until it's soup. Well there's a lot of changes going on in the worldwide economy and business pictures that are the same. But our companies, our industries and related decision makers are so trapped into dealing with the day-to-day crisis that the bears and alligators are winning and the swamp is rising higher and higher.
Some time ago I happened to take a general overview of the situation and pulled together some themes. Having just found and re-read it let me share it. Despite being a couple of years old it holds up pretty well. An assertion that I'm happy to have tested and countered by the way. Please feel free as it would make me feel better. Meanwhile here's (hopefully) some food for thought on the strategic prospects for industries in general with some examples from the steel, textile and airline industries.
There are critically important lessons here, that should now be applied to all other industries. To put a point on, as you skim over the rest of this, let me propose that every single industry will be forced to go thru a workout like the steel industry has and the airlines are beginning. As late as last year the residuals of that fight were still being played out but the net structural results are that the American steel industry put itself out of business, the firms have since been bought by new international owners, and different production methods and technologies have been put in place all more aligned with the new world. Unfortunately the failures to adjust and the lack of leadership ended up hurting the workforces worse than anyone else. Every single domestic industry needs to go thru this re-thinking, and will, one way or another.
UPDATE: Tim Walker at Hoover's Business Insight has just posted a fascinating comment on enterprise performance, lack of adaptation and adoption and business "disorganization". Extremely useful..
Disorganization Negates Talent. After yesterday’s entry, I was thinking more about the plight of Alcatel-Lucent and similarly challenged outfits that are trying to restructure their operations. The companies that spring to mind are Kodak (nearly done with its reformation), Ford (slimming down), and Countrywide Financial (no telling whether it will survive the mortgage mess). All of these companies face the challenge of dealing with large infrastructures that may no longer help them to address the needs of their customers. In some cases of restructuring, those customer needs — or even the entire customer base — changes quickly enough or radically enough that the company awakes to find itself in what is essentially a new marketplace. In each of these cases, changes in the prevailing conditions of business have upended the organizational quality of these large companies. What I mean is that they may have been rightly organized for earlier prevailing conditions in the marketplace — surely they were, considering the huge profits Kodak, Ford, and Countrywide have made at times — but whenever they can’t keep their organization evolving in pace with the evolution of the marketplace, they’re bound to end up looking disorganized. In fact, they are disorganized, as far as making steady, healthy profits is concerned.
There are several factors which should be carefully considered in investing and enterprise management over the next several years. First, the nature of this business cycle is different from any prior post-WW2 experience and as a result most analysis continue to be unduly optimistic. This problem is made much worse by growing worldwide competitive pressures that receives a lot of discussion but little actionable attention.
Unfortunately, antagonistic relationships are such that they're more likely to put themselves out of business as Eastern did big time. The mechanics and pilots hated, literally, management. I met Frank Borman over a cheap roadside lunch in Los Cruces, NM one time, his home town. He wanted to talk about Fedex and nighttime belly freight. I wanted to know why his militaristic management style killed Eastern. We focused on his questions - not least because mine were entirely greek to him (in several senses).Next, without exception, all domestic industries have reached a level of maturity and thereby market saturation that is still un-appreciated; and therefore when considering investments in particularly sectors or industries that needs to be a major consideration. As a result all industries are facing severe over-capacity that also increases the competitive pressures. In other words, that every industry can exceed customer requirements for capabilities and functionalities is a major fact of life. Furthermore, most enterprises’ business models are sclerotic and have limited capacities to renew themselves without major structural change.This combines with the continued inattention to key operating capabilities, especially in critical functional areas like sales and marketing, core operations, logistics and supply chain management, and business-aligned technology management to increase the inefficiency of most enterprises. In conjunction poor operating disciplines and a general lack of management systems means their abilities to be successful and profitable are being overestimated.
On the other hand though it also means that there are tremendous opportunities for improving the coupling of strategic innovation with operational effectiveness with improved enterprise operating systems. Put another way there is tremendous scope for private investment to leverage these operating changes into profitable investments.
The situation can be compared to that which faced the steel industry over the last 35+ years. In an environment of over-capacity and poor execution the industry took thirty years of denial to achieve a level of consolidation, operating workouts and re-structuring that has taken it back to potential profitability. The same situation now faces every major industry.
Within those umbrella statements the next level of detail is that one needs to understand the secular dynamics of particular industries and selected enterprises within industries.
For example, listening to Kudlow and Cramer discussing MSFT they and their guest really didn't understand the marketspace, the technology or the maturity and saturation effect. MSFT, like a lot of other firms has no new growth engine on the near or intermediate term horizons, and faces severe competitive and execution pressures. And the search for new major sectors to go after is difficult and problematic at best.
The keys to understanding current industry dynamics are the emerging and accelerating market saturation and the lack of a 'next big thing' to drive the economy. On a careful study of Am. economic history since the 1870s one can find major new sectors emerging around every 17-20 years; e.g. railroads drove steel and coal, the resulting transportation network enabled the emergence of mass production and distribution enterprises in the 1870s-90s and the rise of large enterprise where the production technology was suitable. Everybody from Pullman to Armor to Macy's and Wannamakers fits this model (and please notice how many of those names are still around to be used as examples !)
Industry Dynamics and Examples
Look back over the names of major firms and industries and one finds, not similar, but identical dynamics. Lots of small firms consolidated or put out of business as the industry converged on 3-4 or more large firms built around the most successful of the smaller firms, usually those run by the 'right' entrapaneurs. The next major round of new industries was/were the chemical and electrical industries from 1890 - 1920+. Then the automotive and related supplier industries emerged in the 20s or so. Post WW2 the keys were pharmaceuticals, materials(plastics), computing and consumer electronics along with another major change in transportation infrastructure with the rise of interstates and trucking and airlines.
- As another major example consider the airline industry. Most of the major airlines were built initially around early Postal airmail routes. Several of these have gone out of business but now the industry as a whole is about to go thru an enormous re-structuring. In a bigger way, for example, than freight transportation did after de-regulation. Better comparisons are the textile and steel industries. The latter reached a point by the 60s where domestic demand was flat though worldwide it grew. Unfortunately the domestic enterprises refused to change because of organo-sclerosis, being wedded to the past and lack of leadership. Meanwhile the developing economies built their own domestic capabilities. In addition the domestic steel firms had bought labor peace with far above market compensation and benefits. All this came back to haunt them for the next 30+ years.
- The textile industry faced similar problems which it first addressed by moving south and gradually offshore. A few select firms like Milliken Textiles attempted to fight back but the fundamental problem was that there was no l.t. sustainable technology, skill or other comparative advantage they had over worldwide producers. Textiles are just not that hard.
- Same situation with steel – the mini-mills came in with narrower focus, different technologies, lower breakevens and better customer value focus. They also used competitive pressures to not create long-term overhead obligations that were unsustainable or non-competitive. In other words they built business models around new core technologies and products and with radically lower cost structures. As well as more flexibilities in production size and product mix and staying closer to customer demands and values.
- Consider the airline industry further - costs are much too high, labor relations are terrible and executive leadership has been extremely self-serving. But that's not the fundamental problem - that lies in the deep network structure, which is based on a hub-n-spoke network architecture, which has advantages over a total point-to-point network. But only when average load factor AND cost/prices are competitive. Bad network architecture combined with 'milk-the-last-cent' yield management tactics set that became strategy, and in the process sacrificed customer value and good will. Any network solution is vulnerable when over-priced to pt-to-pt service cherry picking of major lane segments, one that offers lower prices and better service. Hence Southwestern – which is now btw reaching it's own maturities, including higher than workable labor costs. The airline industry as we know it is dead. There will be room for 2-3 majors with viable international network connections plus a few mid-tiers in heavily traveled segments and maybe a few smaller regionals. The only thing keeping the industry alive is romance, nostalgia and misguided access to the capital markets.
Readings
But don't take my word and arguments for all this. Instead for anybody trying to understand and plan on dealing with the general case and their own industry & firm's situation nothing is better than the work of Alfred D. Chandler and his disciples. In particular three works lay out the history of big business, the evolution of industries, the impact that evolution had indifferent countries and the specifics of particular industries and firms.
- Big Business and the Wealth of Nations
- Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Science Industries
- Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries